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Colleen Horner

33. A process that identifies loss exposure face by an organization and selects the most
appropriate techniques for treating such exposures.

34. Firm should prepare for loss in most economical way. Reduction of anxiety. Meet any
legal obligations.

35. Survival of the firm. Continue operating. Continued growth of the firm.

36. Identify loss exposures. Measure and analyze the loss exposures. Select the
appropriate combination of techniques for treating the loss exposures. Implement and
monitor the risk management program.

37. Risk control techniques that reduce the frequency or severity of losses.
Risk financing techniques that provide for the funding of losses.

38. Advantage: chance of loss is reduced to zero if the loss exposure is never acquired.
Disadvantage: may not be able to avoid all losses. May not be practical to avoid
exposure.

39. Retention. Noninsurance transfers. Commercial insurance.

40. Difficulty obtaining insurance. Favorable regulatory environment. Lower costs.
Formation of a profit center. Easier access to a reinsurer.

41. Tailored to fit needs. Lower fixed costs. Simpler and faster claims handling.

42. Advantages: Costs less. Transfer some potential losses that are not commercially
insurable. Potential loss may be shifted to someone who is in a better position to exercise
loss control.
Disadvantages: Potential loss may fail because contract language is ambiguous.
May be no court precedents. Party to whom the potential loss is transferred is unable to
pay loss, firm is still responsible for the claim. Insurer may not give credit for the
transfers, and insurance costs may not be reduced.

43. Uncertainty is reduced. Insurance premiums are income-tax deductible as a business
expense. Insurers can provide valuable risk management services (loss exposure analysis,
claims adjusting, etc.)

44. The identification, analysis, and treatment of speculative financial risks. (Commodity
price risk, interest rate risk, currency exchange rate risk).

45. Comprehensive risk management program that addresses an organizations pure risks,
speculative risks, strategic risks, and operational risks.

46. The underwriting cycle. Consolidation in the insurance industry. Capital market risk
financing alternatives.

47. Cyclical pattern in underwriting stringency, premium levels, and profitability.
Fluctuate between periods of tight underwriting standards and high premiums (hard
insurance market) and loose underwriting standards and low premiums (soft insurance
market).

48. Insurance industry capacity relative level of surplus (difference between insurers
assets and liabilities. Investment returns.

49.

50. That insurable risk is transferred to the capital markets through creation of a financial
instrument, such as a catastrophe bond, futures contract, options contract, or other
financial instrument. Immediate increase in capacity for insurers and reinsurers. Access
to capital of many investors rather than capacity of insurers only.

51. Option that derives value from specific insurable losses or from an index of values.
Example: weather option of insurance

52. An instrument used by companies to hedge against the risk of weather-related losses.
The investor who sells a weather derivative agrees to bear this risk for a premium. If
nothing happens, the investor makes a profit. However, if the weather turns bad, then the
company who buys the derivative claims the agreed amount. (Agriculture crop yield,
handling, storage, pests. Construction delays, incentive/disincentive clauses. Offshore
storm frequency/severity. Entertainment postponements, reduced attendance).

53. Cash flows in different time periods.

54. FV = PV x (1 + i)
n

55. PV = FV/(1+i)
n

56. Effort to reduce the frequency and severity of losses. Net present value (NPV).
Internal rate of return (IRR).

57. Risk management information systems (RMIS). Risk management intranets. Risk
maps. Value at risk (VAR) analysis. Catastrophe modeling.