Quiz 1 study guide - Lecture notes 1-3 PDF

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risk retention groups, p. 50 non-insurance transfers, p. 51 RISK basics Pt. 1 Interest rate risk – possibility of loss due to changes in the cost of borrowing money. Product acceptance risk – the possibility of risk due to lower-than-expected demand for the company product Product acceptance risk – uncertainty about whether customers will buy your product Chief Risk officer – CRO Risk manager – lower than CRO in finance department.

RISK basics Pt. 2 Loss exposure >>> Peril >>> loss $$ (if peril occurs) Example: Car >>>> fire >>>>> property damage Indirect losses are more difficult to estimate in advanced than direct losses

Risk Basics Pt. 4 Experience – past/actual losses Law of large numbers – the larger the sample the more accurate the percentage will be Insurance = expected loss + admin cost + selling cost + profit for the insurer – investment income

Intro to Risk Management Pt.1 Risk management process (program) – the process (program) of identifying loss exposures and implementing techniques for handling them Objective of risk management – to ensure the losses do not prevent the business from operating efficiently and maximizing the wealth of owners Financial management goal – maximize owners wealth Cost-benefit analysis – if benefits > cost --- implement the tool EPA – environmental protection agency (pollution control) OSHA – Occupational Safety and Health Administration (safe work environment)

DOL – Department of Labor MSHA – Mining Safety and Health Administration (safe work for miners) IRS – Internal Revenue Service (enforce federal tax laws) IRC – Internal Revenue Code (tax law/code) Intro. to Risk Management, Pt. II (limited to topic listed below) frequency of loss – how likely is it that the loss will occur during a given period? severity of loss – also called size of loss, with size measured in $. The larger the loss in $, the more severe it is. Risk Mgmt. Techniques (entire module) know which technique is appropriate for each of the 4 cells of the loss frequency-severity matrix (the cells are low frequency-low severity, low frequency-high severity, etc.) avoidance – avoid all risk loss prevention - prevent the loss, such as security loss reduction – how to reduce a peril, such as sprinkler system for fires. Physical separation is a technique loss control – overall category for the above 3. Loss control expertise – offered by insurance company insurance – transfer of risk – legal contract deductible (risk-sharing) – first dollars of loss paid by the insured before the insurance company pays for the loss. Higher deductible = lower expected loss for the carrier counterparty risk risk retention - hold onto risk. retention level – maximum loss company is willing to retain/incur captive insurer – carrier formed by a company to insure its losses (only insures that company) pure captive – owned by own parent company group captive – owned by multiple parent companies. Typically formed by trade associations for their member companies parent company - owns the other company subsidiary – company owned by another passive risk retention– unknowingly retain risk.

Active risk retention– knowingly retaining risk (best option or no insurance available.)know what a funded reserve is 2 requirements of self-insurance – 1) setting funds aside in advance to cover loss. 2) losses must be predictable and stable. know what stop-loss insurance is/how it is used- insurance that pays after the self-insurer has reached a specified limit on losses. Stop-loss insurance limits the self-insurer’s losses. be able to write out the formula for an insurance premium = premium = expected loss + admin cost + selling cost + profit for insurer – investment income acronym: LLC (be able to write it out, spelled correctly)- Limited Liability Corporation There will also be items from the text covering:...