Flashcards
Risk and Insurance
Cards in this deck (85)
- 1Definition of Riska condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for.
- 2Definition of uncertainty (objective)variation between the present and the future outcome can be measured thus decision based on actual risk
- 3Definition of uncertainty (subjective)lack of knowledge as to real facts at a particular point in time to make a decision. It is not measurable; involves feeling or state of mind
- 4Degree of riskis measured by the likelihood or variation between the expected and the actual results
- 5Frequencynumber of times that a risk occurs
- 6Severitymagnitude/financial implications of the risk
- 7Risk combinationRisk is a combination of the likelihood (frequency) of an event and the extent of financial loss (severity) should the event occur
- 8Expected Valueprobability of the loss multiplied by the amount of the potential loss
- 9Physical hazardsphysical characteristics or attributes that increase the chance of loss from the various perils
- 10Moral hazardshuman aspects such as attitude or characters of the insured person, which may influence the outcome such as defrauding the insurer
- 11Morale hazardresults from the careless attitude on the part of an insured or uninsured person toward the occurrence of losses
- 12Legal Hazardthe increase in the frequency and severity of loss that arises from legal doctrines enacted by legislatures and created by the courts
- 13Perila cause of a loss
- 14hazarda condition that may create or increase the chance of a loss arising from a given peril
- 15Financial risksexposures whose outcome can be measure into monetary terms
- 16Non-financial risksexposures whose measurement in monetary terms is not possible. (the risk has no financial consequences)
- 17Dynamic risksresulting from the changes in the economy and normally benefit society in the long run since they are a result of adjustments to misallocation of resources
- 18Static riskslosses, which occur even if there are no changes in the economy. These losses are caused by perils such as dishonesty of individuals and nature
- 19Fundamental risksinvolve losses that are impersonal in origin and with wide spread consequences
- 20Particular risksarise out of individual events and that are felt by an individual rather than the entire group
- 21Pure riskssituations that involve only the chance of loss or no loss
- 22Speculative riskssituation where there is a possibility of loss as a gain or a break even
- 23Systematic riskin economics, the term is often used where a shock, such as the failure of a single entity, could cause cascading effects and severely disrupt the financial system
- 24Personal risksconsists of the probability of loss of income or assets as a result of loss of ability to earn income
- 25Property riskembrace two distinct types of loss, direct loss or indirect (consequential) loss.
- 26Liabilty risksarises from the unintentional injury of other persons, or damage to their property through negligence or carelessness as well as from intentional injuries or damages
- 27Risk arising from failure of othersThese risks are insurable. the risks arise out of non-performance of agreed contracts resulting in financial loss
- 28Cost of losses problems- uncertainty about the cost of losses
- human costs in terms of pain and suffering
- monetary cost or financial severity - 29Burden of risklosses that naturally occur
- 30Risk managementidentification, analysis and economic control of those risks which can threaten the assets or earning capacity of businesses
- 31Risk management conceptfocuses on reducing the cost of safe guarding against insurable and non insurable risks by whatever means are most appropriate and cost effective
- 32Market riskarising from adverse movements in market prices
- 33Credit riskthe potential that a borrower will fail to pay a debt
- 34Liquidity riskrisk that business will have insufficient liquid assets to meet obligations that come due
- 35Operational riskrisk of loss from inadequate or failed internal processes. E.g. failure in control and management, failure in it processes, human errors, fraud and jurisdictional and legal risk
- 36Reputational riskthe potential that negative publicity will cause a loss
- 37Strategic riskfailing to successfully implement the firms strategies
- 38Compliance riskrisk of failing to comply with laws and regulations
- 39Risk controlfocuses on minimizing the risk of loss which the firm is exposed and includes the techniques of avoidance and reduction
- 40Risk reductiondesigned to reduce the likelihood of loss or the potential severity of those losses that do occur through; loss prevention and loss control
- 41Risk avoidancewhen decisions are made that prevent a risk from coming into existence
- 42Risk financingguarantee the availability of funds to meet those losses which remain after the application of risk control techniques
- 43Risk transfera mechanism whereby in consideration of payment of a small certain amount (the premium) by the insured, the insurer contracts to indemnify the insured to a certain limit for the agreed losses, which may or may not occur
- 44Risk retention or assumptionwhere the person or organisation takes no positive action to reduce, avoid or transfer risk
- 45Intentional retentiona person recognises the existence of the risk but due to unattractive choices available he assumes the consequences impacted
- 46Unintentional retentiona person is open to the risk but does not identify its existence. E.g. the person takes out insurance to cover a risk but gets a policy which does not cover that risk
- 47High Severity/High Frequency methodsAvoidance and reduction
Reduction may be used when it is possible to lower the potential severity or the probabiilty to a manageable level; otherwise the risk should be avoided - 48High severity/Low frequency methidsTransfer - Insurance
High severity implies some catastrophic impact if the loss should occur, and the low probability implies a lower expected value and hence the low cost of transfer, which makes insurance the most attractive option - 49Low severity/High frequency methodsRetention and reduction
Retention because the high frequency implies that transfer will be costly and reduction to minimise the aggregate amount of losses that must be borne possible - 50Low severity/Low FrequencyRetention
Risks seldom occur and when the occur their financial impact is inconsequential, hence can be retained, without any financial strain to the business - 51Six steps in the risk management process1. Determination of objectives
2. Identification of risks
3. Analysing and evaluation of risks
4. Consideration of alternatives and selection of the risk treatment device
5. Implementation of the decision
6. Evaluation and review - 52Post-Loss ObjectivesSurvival
Continuity of operations
Earning stability
Continued growth
Social responsibility - 53Pre-Loss objectivesEconomy
Reduction in anxiety
Meeting externally imposed
Social responsibility - 54Objective-based risk identificationAny event that may endanger achieving an objective partly or completely is identified as risks
- 55Scenario-based risk identificationAny event that triggers an undesired alternative scenario is identified as risk
- 56Taxonomy-based risk identifcationa breakdown of possible risk sources based on the taxonomy and knowledge of best practices
- 57Critical riskslosses are of a magnitude that would result in bankruptcy
- 58Important riskslosses that would not lead to bankruptcy but would require the firm to borrow in order to continue operations
- 59Unimportant riskslosses that could be met out of the current income of the firm without imposing undue financial strain
- 60Social benefits of InsuranceIndemnification of loss
Reduction of anxiety
Source of investment funds
Loss prevention
Enhancement of Credit - 61Social Cost of InsuranceCost of doing business
Fraudulent claims
Inflated claims - 62Individual risk events should be _______independent
In practice we wont often get strict independence but a low correlation is desirable - 63Large numbers of similar risks should be _______pooled
This is in order to reduce the variance and hence achieve more certainty. They should still be independent. - 64The loss must be ______accidental
The probability of the event should be relatively small. In other words, an event that is nearly certain to occur is not conducive to insurance or may invite adverse selection behaviour. - 65Adverse Selectiona person whose exposure to loss is higher than average to purchase or continue insurance to a greater extent than those whose exposure is less than average
- 66There should be an ______ ______ on the liability undertaken by the insurerultimate limit
We must be able to tell when a loss has taken place and we must be able to set some value to the extent of it. - 67Moral hazards should be ______eliminated
as far as possible because they are difficult to quantify, result in selection against the insurer and lead to unfairness in treatment between one policyholder and another. - 68Indemnitythe exact compensation required to restore the policyholder to the financial position they enjoyed immediately before a loss occurred.
- 69Excessthe initial amount of each and every claim that is supposed to be borne before any indemnification
- 70Insurable InterestWhere you have a valid reason to insure and stand to suffer a direct financial loss if the event insured against occurs.
E.g. a person has an insurable interest in their own car but not their neighbours car - 71Utmost Good FaithWhereby both parties of the contract must disclose all the material facts truly and fully (whether requested or not).
- 72SubrogationSubrogation allows the insurer to pursue any rights which the policyholder may possess, always in the name of the insured.
- 73Proximate CauseAn insurance policy will define the perils or insured events that cover is provided for.
- 74ContributionAn insured party may have policies with several insurers for the same risk.
Contributions is the right of an insurer to call upon the other insurers to share the costs of such a claim payment. - 75Private InsuranceLife Insurance
Health Insurance
Property and liability insurance - 76Social InsuranceCompulsory protection for personal risks.
E.g. ACC - 77Public Guarantee InsuranceGovernment operated, compulsory, quasi social insurance programs.
E.g. EQC - 78General Insurance CharacteristicsCover is for a fixed period
Claims are not of fixed amounts
A claim occurring does not bring the policy to an end - 79General Insurance ProductsLiability
Property Damage
Financial Loss
Fixed benefits - 80LiabilityProvide indemnity where the insured, owing to some form of negligence, is legally liable to pay compensation to a third party.
- 81Employers LiabilityThis insurance indemnifies the insured against legal liability to compensate an employee or his/her estate for bodily injury, disease or death suffered, owing to negligence of the employer in the course of employment.
- 82Motor Third Party LiabilityThis insurance indemnifies the owner of a motor vehicle against compensation payable to third parties for personal injury or damage to their property
- 83Public LiabilityThe insured is indemnified against legal liability for the death of or the bodily injury to a third party or for damage to property belonging to a third party.
- 84Product LiabilityThis insurance indemnifies the insured against legal liability for the death of or bodily injury to a third party or for damage to property belonging to a third party, that results from a product fault.
- 85Professional IndemnityThe insured is indemnified against the legal liability resulting from negligence in the provision of a service.
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- Description
- Important information from lecture 1 of risk and insurance
- Created by
- Bianca Davis · Aug 2016
- Updated
- Nov 1, 2016
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