Chapter 3 Vocab (Notes)

Question 1

Risk Management

Answer 1

process that identifies loss exposures faced by an organization and selects the most appropriate techniques to treat exposures

Question 2

Loss Exposures

Answer 2

any situation or circumstance in which a loss is possible, regardless of whether a loss occurs

Question 3

Loss Frequency

Answer 3

refers to the probable number of losses that may occur during some time period

Question 4

Loss Severity

Answer 4

refers to the probable size of the losses that may occur

Question 5

Maximum Possible Loss

Answer 5

is the worst loss that could happen to the firm during its lifetime

Question 6

Probable Maximum Loss

Answer 6

is the worst loss that is likely to happen

Question 7

Risk Control

Answer 7

refers to techniques that reduce the frequency and severity of losses

Question 8

Avoidance

Answer 8

means a certain loss exposure is never acquired or undertaken, or an existing loss exposure is abandoned

Question 9

Loss Prevention

Answer 9

refers to measures that reduce the frequency of a particular loss

Question 10

Loss Reduction

Answer 10

refers to measures that reduce the severity of the loss after it occurs

Question 11

Risk Financing

Answer 11

refers to techniques that provide for the payment of losses after they occur

Question 12

Retention

Answer 12

means that the firm retains part or all of the losses that can result from a given loss

Question 13

Retention level

Answer 13

the dollar amount of losses that the firm will retain

Question 14

Single Parent Captive

Answer 14

insurer is owned by only one parent

Question 15

Captive Insurer

Answer 15

an insurer is owned by a parent firm for the purpose of insuring the parent firm’s loss exposures

Question 16

Association or Group Captive

Answer 16

an insurer owned by several parents

Question 17

Self Insurance/Self Funding

Answer 17

special form of planned retention by which part or all of a given loss exposure is retained by the firm

Question 18

Risk Retention Group (RRG)

Answer 18

a group captive that can write any type of liability coverage except employers’ liability, workers compensation, and personal lines

Question 19

Noninsurance Transfer

Answer 19

a method other than insurance by which a pure risk and its potential financial consequences are transferred to another party

Question 20

Deductible

Answer 20

a specified amount subtracted from the loss payment otherwise payable to the insured

Question 21

Excess Insurance Policy

Answer 21

the insurer pays only if the actual loss exceeds the amount a firm has decided to retain

Question 22

Manuscript Policy

Answer 22

is a policy tailored to the firm

Question 23

Underwriting Cycle

Answer 23

in a “hard” market, profitability is declining and underwriting standards are tighten, premiums increase and insurance is hard to obtain. in a “soft market” profitability is improving, standards are loosened, premiums decline, and insurance becomes easier to obtain

Question 24

Risk Management Policy Statement

Answer 24

outlines the firms objectives and policies, educates top level executives, gives risk manager greater authority, provides standards for judging the risk manager’s performance

Question 25

Risk Management Manual

Answer 25

describes the risk management program and may be used to train new employees

Question 26

Cost of Risk

Answer 26

A risk management tool that measures certain costs in a risk management program, including insurance premiums paid, retained losses, outside risk management services, financial guarantees, internal administrative costs, taxes and fees, and certain other expenses

Question 27

Personal Risk Management

Answer 27

the identification of pure risks faced by an individual or family and to the selection of the most appropriate technique for treating such risks