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Chapter 2 - Risk Assessment
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Methods used to identify loss exposures
Terms in this set (37)
Document Analysis
documents used and produced by an organization can be a key source of information regarding loss exposures
Risk Assessment Questionnaires & Checklists
-created by insurers to concentrate on identifying insurable hazards
-checklists capture LESS information than questionnaires
*disadvantages: too broad, timely/expensive, may not identify all possible exposures
Financial Statements & Underlying Account Records
-balance sheet (assets, liabilities, owner's equity)
-income statement (reports profit/loss for specific period revenues and expenses)
-statement of cash flows (summarizes cash effects of an organization's operating, investing, and financing activities)
*disadvantages: values/records based on accounting conventions, not risk management, depicts the past only
Contracts
analyzing a contract can generate a liability loss exposure by:
1) hold harmless agreement
2) if the organization fails to fulfill valid contract, then a legal claim can be brought against them
-an organization can reduce/eliminate liability loss exposure by transferring liability to someone else via contract
Hold Harmless Agreement
a contractual provision that obligates one of the parties to assume the legal liability of another party
Indemnification
process of restoring an individual/organization to pre-loss conditions
Insurance Policies
analyzing insurance policies to see if they are in effect
Organizational Policies & Records
-corporate by-laws, manuals, mission statements, risk management policies
-these documents may indicate impending changes in loss exposures
Flowcharts
depicts sequence of activities performed by particular organization
Organizational Chart
depicts the hierarchy of an organization's personnel
*disadvantage: the chart doesn't guarantee whether or not someone is a key employee
Loss Histories Analysis
-these are helpful if organization is small/new
*disadvantage: past losses will not identify loss exposures that HAVE NOT resulted in past/losses
Compliance Review
-determines an organization's local, state, federal regulations
*disadvantage: expensive/timely
Data Requirements for Exposure Analysis
-relevant
-complete
-consistent
-organized
Nature of Probability
the relative frequency with which the event can be expected to occur in the long run in a stable environment.
Theoretical Probability
-based on theoretical principles rather than actual experience (UNCHANGING)
ex. flipping a coin
Empirical Probability
-"posteriori probability"
-based on actual experience
-measure of central tendency
ex. probability that a 60 y/o will die in a particular year may change as new data is discovered (CHANGE)
Probability Analysis
-a technique for forecasting events, such as business/accidental losses, on the assumption that they are governed by UNCHANGING probability distributions
-effective for projecting losses in organizations that have:
1) substantial volume of data on past losses
2) with fairly stable operations
Law of Large Numbers
a mathematical principle stating that as the number of similar but independent exposure units increase, the relative accuracy of predictions about future outcome also increases
Law of Large Number Conditions
1) event occurred IN PAST as a result from unchanging conditions
2) event can be expected to occur IN FUTURE from unchanging conditions
3) event has and will continue to be numerous and independent of one another
Probability Distribution
a presentation of probability estimates of a particular set/circumstance and the probability of each outcome
Mutually Exclusive
-events cannot occur at the same time
-individual probabilities must equal 1
Collectively Exhaustive
-the only outcomes possible
-no matter what happens, at least ONE of the events will occur
Forms of Probability Distributions
discrete and continuous
Discrete
-finite outcomes
*frequency
Continuous
-infinite outcomes
*severity
Central Tendency
the single outcome that is the most representative of all possible outcomes included within a probability distribution
Expected Value
-weighted average of all of the possible outcomes of a probability distribution
-applies to theoretical discrete probability distributions (complex for continuous probability distributions)
*derived from theory
Mean
-the sum of the values in a data set divided by the number of values
-numeric average
-best guess as to forecasting future events
*derived from experience
Median
midpoint
Mode
outcome occurs most frequently
Skew
if distribution is skewed, the median is often a better guess than mean as to what is more likely to occur
Dispersion
-the variation among values in distribution
-describes the extent to which distribution is spread out rather than concentrated around the expected value
-affects shape of distribution
*less dispersion = more predictability = less uncertainty = small curve
Types of Dispersion
standard deviation and coefficient of variation
Standard Deviation
= square root of variance
-calculate mean
-subtract mean from each value
-square each answer
-multiply each answer w/ probability associated
-sum everything
-square root final answer
Coefficient of Variation
= standard deviation / mean
-used to determine whether a particular loss control measure has made losses more or less predictable
-underwriter should choose account with LOW coefficient of variance
Normal Distribution
-used to control losses that can be prevented/mitigated and to finance those that cannot
-generates a bell curve when graphed
Analyzing Loss Exposures
-loss frequency
-loss severity
-total dollar losses
-timing
THIS SET IS OFTEN IN FOLDERS WITH...
Chapter 1 - Risk
49 terms
Chapter 3 - Risk Control
27 terms
Chapter 4 - Risk Financing
41 terms
Chapter 5 - Enterprise-Wide Risk Management
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