Economy of Operations - correct answer increase departmental and organizational efficiency, pre-loss risk mgmt. goal
Tolerable uncertainty - correct
... [Show More] answer provide an awareness of potential losses and an assurance of their effective management keeping the worry of accidental loss at a tolerable level (pre-loss risk mgmt goal)
Survival - correct answer resume operations eventually (post loss risk mgmt goal)
Continuity of operations - correct answer resume operations quickly (post loss risk mgmt goal)
Profitability - correct answer maintain at least a minimum profit level NO MATTER WHAT accident occurs. Post loss risk mgmt goals
Earnings stability - correct answer maintain a specified earnings level from year to year post loss rm goal
Minimize the effects of loss on society for moral and good public reasons - correct answer social responsibility
maintain the pre-loss growth pattern - correct answer growth post loss rm goal
6 STEPS OF THE RM PROCESS - correct answer1) IDENTIFY EXPOSURES
2) ANALYZE (MEASURE) LOSS EXPOSURES
3) EVALUATE ALTERNATIVE RM EXPOSURE TREATMENT TECHNIQUES
4) SELECT THE BEST COMBINATION OF RM TECHNIQUES
5) IMPLEMENT DECISION
6) MONITOR THE PROGRAM
4 methods of loss exposure identification - correct answer1) Document analysis
2) Compliance review
3) Personal inspections
4) Experts
Hazard analysis - correct answer under the experts method of loss exposures identification, reveals potential losses by IDing conditions that increase expected loss frequency and/or severity
Probability - correct answer measures the expected frequency of an event over time in a stable environment
Impossible events have a probability of - correct answer0
Certain events have a probability of - correct answer1
Theoretical probability - correct answer theoretical and constant, calculated without actual trials (coin toss)
Empirical probability - correct answer practical and changeable, the law of large numbers applies
Empirical probability - correct answer computed from historical data from study samples (mortality rates)
Factors that improve the reliability of empirical probabilities: - correct answer use of a large number of data, an organization with stable operations and loss patterns
The smaller the standard deviation, - correct answer the smaller the degree of dispersion and the greater the accuracy of predictions.
Risk managers use standard deviation to measure - correct answer the confidence in projecting losses
Coefficient of variation - correct answer compares the degree of dispersion between 2 data sets w/ substantially different means
equals the std dev/mean
2 dimensions of timing - correct answer when losses occur
when payments are made
The Prouty Approach - correct answer method of jointly analyzing the frequency and severity of a loss exposure
evaluates the significance of a particular loss exposure in terms of possible combinations of expected loss frequency and severity
Prouty's 4 categories of loss frequency - correct answer1) Almost nil- extremely unlikely to occur
2) Slight- could occur, but hasn't
3) Moderate- occurs occasionally
4) Definite- occurs regularly
Prouty's 3 categories of loss severity - correct answer1) slight- losses that can be retained easily
2) significant- part of the loss must be transferred
3) severe- the organization's survival depends on the transfer of loss
5 loss exposure treatment methods - correct answer1) avoidance
2) retention
3) transfer
4) prevention
5) control (reduce or prevent a loss)
Total claims distribution - correct answer1 of 2 methods of jointly analyzing the frequency and severity of a loss exposure
considers all possible combinations of the frequency and severity distributions.
Risk financing - correct answerprovides funds to pay for or to offset a business's losses
Central Tendency - correct answerThe single outcome that is the most representative of all possible outcomes included within a probability distribution.
The three most widely accepted measures of central tendency are... - correct answerThe expected value or mean, median, and mode
An insurance professional will use which of the three central tendency measures to best forecast the future - correct answermean
Calculating probabilities of losses equal to or less than a given number of losses or dollar amounts of losses individually and cumulatively can be helpful in selecting... - correct answerretention levels
Calculating individual and cumulative probabilities of losses equal to or greater than a given number of losses or dollar amounts can help in selecting... - correct answerupper limits of insurance coverage
The variation among values in a distribution. - correct answerDispersion
Describes the extent to which the distribution is spread out rather than concentrated around the expected value - correct answerDispersion
The less dispersion around the distribution's expected value, the greater the likelihood that... - correct answeractual results will fall w/in a given range of that expected value
Less dispersion means - correct answerless uncertainty about the expected outcomes
The more dispersed a distribution the .... the distribution and the larger the ... - correct answerThe more dispersed a distribution the flatter the shape and the large the standard deviation
Standard deviation is the average of the ... between the values in a distribution and the .... of that distribution - correct answeraverage of the differences (deviations) between the values in a distribution and the expected value (mean) of that distribution
Steps to calculate the standard deviation: - correct answer1) Calculate the distributions expected value (mean)
2) Subtract the expected value from each distribution value to find the differences
3) Square each of the resulting differences
4) Multiply each square by the probability associated with the value
5) Sum the resulting products
6) Find the square root of the sum
The coefficient of variation is used to determine - correct answerwhether a particular loss control measure has had losses more or less predictable (whether the distribution is more or less variable)
The distribution with the largest coefficient of variation has.. - correct answerthe greatest relative variability
The higher the variability within a distribution, the more difficult it is to accurately forecast... - correct answeran individual outcome
An organization's premises and operations liability losses have a severity distribution with a mean of $10,000 and a standard deviation of $15,000. What is the coefficient of variation for this distribution? - correct answer1.5
The coefficient of variation is calculated by:
Std dev. / mean
When should one consider using avoidance to manage a loss exposure? - correct answeruse avoidance with the expected value of losses from an activity outweighs the expected benefits of that activity
Risk control technique that reduces the frequency of a particular loss - correct answerLoss prevention
Identify which risk control technique is being used: Pressure relief valves on a boiler are intended to prevent explosions by keeping pressure in the boiler from reaching an unsafe level - correct answerThe valve is a type of loss prevention, not avoidance b/c the boiler explosion is still possible just not as likely.
Risk control technique that reduces the severity of a particular loss - correct answerLoss reduction
The intent of separation is a risk control measure - correct answerreduce the severity of an individual loss at a single location, however this may increase loss frequency b/c there are multiple units exposed to a loss
Diversification is more commonly applied to managing .... risks, rather than .... risks - correct answerbusiness risks rather than hazard risks
Installing a guard on a machine to protect against employee's injuring their hands is an example of which risk control technique? - correct answerLoss prevention b/c it reduces the frequency of a loss
A manufacturer relies on supplies of a key raw material which it obtains from a particular supplier. The manufacturer makes arrangements with a second supplier to provide the raw material if the primary supplier is unable to do so. The manufacturer is practicing which one of the following risk control techniques? - correct answerDuplication
Which risk control technique will reduce loss severity and make losses more predictable, without increasing loss frequency? - correct answerDuplication
Economy of operations, tolerable uncertainty, legality, and social responsibility are all - correct answerpre-loss goals
Continuity of operations, profitability, earnings stability, growth, and social responsibility are all - correct answerpost-loss goals
Disadvantages of cash flow analysis - correct answerweaknesses of the assumptions that often must be made to conduct the analysis and the difficulty of accurately estimating future cash flows.
Cash flow analysis works on the assumption that the organization's only goal is to... and does not consider... - correct answermaximize its economic value, doesn't consider any non-financial goals or selection criteria (legality and social responsibility are not directly considered in cash flow analysis)
Adhering to legal requirements becomes - correct answerpart of the cost of risk due to state's mandating certain safety measures such as protecting employees from disability or safeguarding the environment against pollution: implementing avoidance, loss prevention, and loss reduction
In addition to implementing effective and efficient measures, complying with legal requirements, and promoting safety, risk control should aim to - correct answerrisk control should aim to minimize or eliminate significant business interruptions, whatever their cause.
Which one of the following statements is correct with respect to evaluating the efficiency of alternative risk control measures?
A. Given a loss exposure and alternative risk control measures, the risk management professional can determine which is most efficient by using cash flow analysis.
B. The efficiency of various risk control measures is usually determined based on both quantitative and qualitative standards.
C. An advantage of using cash flow analysis to evaluate the efficiency of alternative risk control measures is that it considers nonfinancial goals and selection criteria.
D. A disadvantage of using cash flow analysis to evaluate the efficiency of alternative risk control measures is that the basis of comparison varies for each value-maximizing decision. - correct answerGiven a loss exposure and alternative risk control measures, the risk management professional can determine which is most efficient by using cash flow analysis.
What is the most common loss prevention measure to control hazards - correct answerloss prevention
Condition that increases loss frequency or severity - correct answerhazard
Liability loss reduction measures used to reduce the severity of a liability loss include: - correct answer1) consulting with a lawyer for guidance through the legal steps to resolve claims
2) properly responding to a liability claim and to the claimant in order to avoid feelings of ill will thus increasing the claimants demands
3) Participating in ADR
Placing restrictions on hazardous activities such as sky diving flying a personal aircraft, riding motor cycles, etc is an example of what risk control measure being applied to personnel loss exposures? - correct answerLoss prevention
Restricting the number of key employees on an aircraft is an example of what risk control measure being applied to personnel loss exposures? - correct answerSeparation
Emergency response training and rehabilitation management are measures that fall under what risk control activity? - correct answerLoss reduction- preventing and reducing workplace injury and illness
What are the two risk control measures that are directly aimed at reducing the severity of net income losses? - correct answerSeparation and duplication
Consulting with an attorney for guidance through legal steps necessary to resolve liability claims is an example of what risk control technique - correct answerLoss reduction
The first step in the business continuity process - correct answer1) identify the organization's critical functions
2nd step in business continuity process - correct answer2) ID the risks (threats) of the risks on critical functions
3rd step in the business continuity process - correct answer3) evaluate the effect of risks on those critical functions
4th step in the business continuity process - correct answer4) develop a business continuity strategy
5th step in the business continuity process - correct answer5) develop a business continuity plan
6th step in the business continuity process - correct answer6) monitor and revise the business continuity plan
When determining whether a loss is covered by a property insurance policy a professional must determine 2 things - correct answer1) whether the insured (who is claiming the financial loss) had an insurable interest in the property that was damaged or destroyed
2) if that claimant is an insured under the policy
Insurable interest in life insurance: - correct answerthe beneficiary of the insured must have an insurable interest in the life of the insured WHEN THE POLICY IS PURCHASED but not necessarily at the time OF THE INSURED'S DEATH
Insurable interest in property-casuality insurance - correct answerinsurable interest must be present at the time of loss
3 reasons insurance policies have an insurable interest requirement - correct answer1) support the principle of indemnity
2) prevents the use of insurance as a wagering mechanism
3) reduces the moral hazard incentive that insurance may create for the insured
Anthony doesn't pay his credit card debt, the credit card company can bring a claim against him for the outstanding balance on the card. But they don't have the right to repossess any of his property. This is an example of ... - correct answercontractual rights regarding people. Unsecured creditors do not have an insurable interest in debtors; property
legal basis of insurable interest: contractual obligations (1 of 2 types of contractual obligations)
Contractual rights regarding property example of insurable interest - correct answerAnthony obtains a mortgage loan in order to buy a house. The mortgage holder can repossess the house if Anthony fails to make his mortgage payments. This type of contract creates an insurable interest in the second property equal to the debt's remaining balance
A situation in which a party experiences an economic advantage if an insured event does not occur or, conversely, economic harm if the event does occur. - correct answerFactual expectancy
What is the focus of factual expectancy on the legal bases for insurable interest? - correct answerThe party need only demonstrate potential financial harm resulting from the event to be insured. This focus is on the insured's position rather than on a legal interest
3 examples that illustrate insurable interests based on representation of another party - correct answer1) agents
2) trustees
3) bailees
The party obtaining the insurance is not required to have an independent insurable interest in the property b/c the party... - correct answerderives its interest from its relationship with the party it represents
Concurrent ownership of property, in equal or unequal shares, by 2 or more owners. They .... have survivorship rights - correct answerconcurrent ownership of property by two or more owners do not have survivorship rights
Concurrent ownership by a partnership and its individual partners of personal property used by the partnership. - correct answerTenancy in partnership
Tenancy in partnership is similar to joint tenancy in that... Therefore, with a tenancy in partnership both the ... - correct answerthe partnership and all partners have rights of survivorship.
Both the partnership entity and the individual partners have an insurable interest in poerpty used by the partnership
The combined interests of tenancy in partnership could be... - correct answermany times the actual property value b/c each partner and the partnership could have an interest worth the entire insurable amount
In the base of a tenancy in partnership, if a loss occurred, the claim settlement would be paid to ... - correct answerthe first named insured, which could be the partnership entity or one of the partners
The need for insurance to value can be understood by first examining .... and .... - correct answerloss frequency and loss severity
Determine the insurance rate of the following:
An insurer assumes a simple frequency distribution that has 2 possibilities: 80% of the time no loss would occur, and 20% of the time one loss would occur-- calculate the expected loss. If the insurer had a 40% expense ratio, the premium it would charge would be: - correct answer[(0.8 x $0) + (0.2 x $2,844)] = $569
40% expense ratio, premium would be:
[$569 / (1 - 0.40)] = $948
An insurer charges a premium of $948 for a policy w/ a limit of $150K (the value of the property). What is the rate they are using per unit of coverage? - correct answer($948 / 1,500) = $0.63 while finding the rate for limits, remove the last 2 digits from the limit when calculating the premium (divide the limit by 100)
An insured evaulted the severity distribution and chose to retain the 1/5% probability that losses would be above $25K by buying a policy w/ a limit of only $25K. Would the insurer lose or gain money on the $25K limit if it charged a rate of $0.63? - correct answerIt would lose money on the 250 units of coverage b/c the premium would only be $158 and the lower premium wouldn't be sufficient to cover the expected losses under the policy
The need for insurance to value can be understood by first examining ... - correct answer1) Loss severity
2) Loss frequency
This makes the insured responsible for retaining part of any loss if the property is underinsured below some specified percentage of the property's insurable value. - correct answerCoinsurance clause
What is the coinsurance formula? - correct answer
What are the coinsurance percentages for business income and extra expense? - correct answer50,60,70,80,90,100, and 125
Spouses Ed and LeeAnn own a home. If Ed dies, LeeAnn will become the sole owner of the house. Both Ed and LeeAnn have an insurable interest in the property equal to the full value of the property. This is a - correct answerTenancy by the entirety.
Brenda wrote a poem that she sent to her sister who sold the poem to a recording company. Learning of the sale, Brenda became upset. If Brenda has an insurable interest in the poem she wrote as a type of "property," the legal basis of her insurable interest arises out of - correct answerOwnership interest in property.
With insurance-to-value provisions under homeowners (HO) and businessowners (BOP) policies, the amount payable by the insurer will never be less than the...
A. Actual cash value (ACV) of the damaged property, subject to policy limits.
B. Repair cost of damaged property, subject to policy limits.
C. Policy limits less the deductible.
D. Replacement cost of the damaged property, subject to policy limits. - correct answerWith insurance-to-value provisions under homeowners (HO) and businessowners (BOP) policies, the amount payable by the insurer will never be less than the actual cash value (ACV) of the damaged property, subject to policy limits.
In terms of insurance to value principles applying to liability insurance policies, which one of the following statements is true?
Choose one answer.
A. It is not important for insureds to estimate the potential severity of their liability loss exposures because insurers do not seek insurance to value for liability policies.
B. The law generally limits the dollar amount of damages that a court can award to an injured party, allowing insurers to determine the maximum possible loss for most liability loss exposures.
C. Insurers generally seek insurance to value for liability policies.
D. Liability insurers seek to use insurance rates that are adequate for whatever "layer" of coverage they are insuring. - correct answerLiability insurers seek to use insurance rates that are adequate for whatever "layer" of coverage they are insuring.
If Barbara carried $120,000 of insurance on her home but to meet insurance-to-value requirements should have carried $160,000, how much would her policy indemnify for her for a $180,000 loss? - correct answer$120,000 -- the policy limit.
The important distinction about depreciation in calculating ACV is that the ACV calculation is based on ...... depreciation, not .... depreciation - correct answerACV is based on economic depreciation, not accounting
The difference between the replacement cost of property and its current market value - correct answerEconomic depreciation
..... depreciation is typically the result of physical or functional depreciation - correct answerEconomic
In accounting, if property is expected to be useful for greater than one year, organizations can depreciate the property over its ....... rather than expensing it in the year of purchase - correct answeruseful life
This type of depreciation is usually the result of technological advances b/c the function performed by the capital expenditure is no longer needed or can be performed better by other methods. - correct answerFunctional
Type of valuation that can be the most accurate way to determine the value of some older or historic buildings built with obsolete construction methods and materials. Useful when property of like kind and quality is unavailable for purchase such as antiques, works of art, and other collectibles. These types of property may be irreplaceable making calculations impossible. - correct answermarket valuation
Method sometimes used when replacing buildings or personal property with property of like kind and quality is not practical and when ACV doesn't match insurance needs - correct answerfunctional valuation method
Which type of loss exposures is most likely to be covered by a valued policy? - correct answerCommercial watercraft
Unlike property insurance policies, liability insurance policies (or liability coverage provisions) within a multiline policy) usually don't specify how the amount of a cover claim is determined. Under most circumstances, the maximum amount the insurer pays is the LESSER OF which 2 amounts? - correct answerLess of the:
1) compensable amount of the claim
2) the applicable policy limit(s)
An insurance premium and loss exchange in which the insured pays the insurer premiums for low value losses, and the insurer pays the same dollars back to the insured, after subtracting expenses. - correct answerDollar trading
An expensive and inefficient process of insuring small claims - correct answerDollar trading
Significant deductibles are common with some specialty policies, such as those covering professional liability or D&O liability. What purpose do deductibles serve w/ these policies?
A) Encourage risk control
B) Reduce moral hazards
C) Reduce morale hazards
D) Eliminate the insured's need to process small losses - correct answerencourage risk control
Unlike property insurance, credit card benefits are often paid on a - correct answerfirst dollar basis with no deductible [Show Less]