question

hazard risk

answer

risk from accidental loss, including the possibility of loss or no loss

question

risk profile

answer

a set of characteristics common to all risk in a portfolio

question

systemic risk

answer

the potential for a major disruption in the function of an entire market or financial system

question

cost of risk

answer

the total cost incurred by an organization because of the possibility of accidental loss

question

value at risk

answer

a threshold value such that the probability of loss on the portfolio over the given time horizon exceeds this value, assuming normal markets and no trading in the portfolio

question

exposure

answer

any condition that presents a possibility of gain or loss, whether or not an actual loss occurs

question

volatility

answer

frequent fluctuations, such as in the price of an asset

question

law of large numbers

answer

a mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases

question

time horizon

answer

estimated duration

question

correlation

answer

a relationship between variables

question

pure risk

answer

a chance of loss or no loss, but no chance of gain

question

speculative risk

answer

a chance of loss, no loss, or gain

question

credit risk

answer

the risk that customers or other creditors will fail to make promised payments as they come due

question

subjective risk

answer

the perceived amount of risk based on an individual`s or organization`s opinion

question

objective risk

answer

the measurable variation in uncertain outcomes based on facts and data

question

diversifiable risk

answer

a risk that affects only some individuals, businesses, or small groups

question

non-diversifiable risk

answer

a risk that affects a large segment of society at the same time

question

market risk

answer

uncertainty about an investment's future value because of potential changes in the market for that type of investment

question

liquidity risk

answer

the risk that an asset cannot be sold on short notice without incurring a loss

question

risk management standard

answer

a document published by a recognized authority that includes principles, criteria, and best practices for risk management

question

framework

answer

a structure, including elements such as concepts, methods, procedures, and metrics, that supports the risk management process

question

risk governance

answer

integration of the management principles governing the organization with the risk management process

question

risk management framework

answer

a foundation for applying the risk management process throughout the organization

question

risk criteria

answer

reference standards, measures, or expectations used in judging the significance of a given risk in contest with strategic goals.

question

inherent risk

answer

risk to an entity apart from any action to alter either the likelihood or impact of the risk

question

residual risk

answer

risk remaining after actions to alter the risk's likelihood or impact

question

risk-based capital (RBC)

answer

amount of capital an insurer needs to support its operations, given the insurer's risk characteristics

question

modeling

answer

in data analysis, a system of calculating known outcomes based on current data and then applying these calculations to new data to predict future outcomes

question

frequency

answer

number of losses

question

severity

answer

the size of a loss

question

avoidance

answer

a technique that involves ceasing or never undertaking an activity so that the possibility of future gains or losses occurring from that activity is eliminated

question

separation

answer

a risk control technique that isolates loss exposures from one another to minimize the adverse effect of a single loss.

question

duplication

answer

a risk control technique that uses backups, spares, or copies of critical property information, or capabilities and keeps them in reserve.

question

diversification

answer

a risk control technique that spreads loss exposures over numerous projects, products, markets or regions

question

insurance

answer

a risk management technique that transfers the potential financial consequences of certain specified loss exposures from the insured to the insurer.

question

loss exposure

answer

any condition or situation that presents a possibility of loss, whether or not an actual loss occurs

question

hazard

answer

a condition that increases the frequency or severity of a loss

question

moral hazard

answer

a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss

question

morale hazard (attitudinal hazard)

answer

a condition or carelessness or indifference that increases the frequency or severity of a loss

question

physical hazard

answer

a tangible characteristic or property, persons, operations that tends to increase the frequency or severity of loss

question

property loss exposure

answer

a condition that presents the possibility that a person or an organization will sustain a loss resulting from damage (including destruction, taking, or loss of use) to property in which that person or organization has a financial interest.

question

personal property

answer

all tangible or intangible property that is not real property

question

tangible property

answer

property that has a physical form

question

real property (realty)

answer

tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land

question

intangible property

answer

property that has not got physical form

question

liability loss exposure

answer

any condition or situation that presents the possibility of a claim alleging legal responsibility of a person or business for injury or damage suffered by another party.

question

personnel loss exposure

answer

a condition that presents the possibility of loss caused by a persons death, disability, retirement, or resignation that deprives an organization of the persons special skill or knowledge that the organization cannot readily replace

question

personal loss exposure

answer

any condition or situation that presents the possibility of a financial loss to an individual or a family by such causes as death, sickness, injury, or unemployment

question

net income loss exposure

answer

a condition that presents the possibility of a loss caused by a reduction in net income

question

property-casualty insurance

answer

one of the two main sectors of the insurance industry, encompassing numerous types of insurance, most of which cover the financial consequences of damage to ones own property or legal liability to others.

question

property

answer

the real estate, buildings, objects or article, intangible assets, or rights with exchangeable value of which someone may claim legal ownership

question

liability

answer

a legal responsibility for the consequences of an act or omission

question

line of business

answer

a general classification of insurance, such as commercial property, commercial general liability, or commercial crime, or commercial auto.

question

commercial property insurance

answer

insurance that covers commercial buildings and their contents against various types of property loss

question

monoline policy

answer

policy that covers only one line of business

question

package policy

answer

policy that covers two of more lines of business

question

named peril

answer

a specific cause of loss listed and described in an insurance policy. also used to describe policies containing named perils

question

direct physical loss

answer

a loss that physical (not just financial) and results immediately from the occurrence

question

all-risk policy

answer

an insurance policy that covers any risk of physical loss unless the policy specifically excludes it

question

bailees' customer's policy

answer

a policy that covers damage to customer's goods while in the possession of the insured, regardless of whether the insured is legally liable for the damage

question

actual cash value

answer

a method in valuing property which is calculated as the cost to replace or repair property minus depreciation, the fair market value, or a valuation determined by the broad evidence rule

question

insurance-to-value provision

answer

a provision in property insurance policies that encourages insureds to purchase an amount of insurance that is equal to, or close to, the value of the covered property.

question

coinsurance clause

answer

a clause that requires the insured to carry insurance equal to at least a specified percentage of the insured property's value

question

business income insurance

answer

insurance that covers the reduction in an organization's income when operations are interrupted by damage to property caused by a covered peril

question

dependent property exposure

answer

the possibility of incurring business income loss because of physical loss occurring on the premises of an organization that the insured depends on for materials, products, or sales

question

principal

answer

the party to a surety bond whose obligation or performance the surety guarantees

question

surety

answer

the party (usually an insurer) to a surety bond that guarantees to the oblige that the principal will fulfill an obligation or perform as required by the underlying contract, permit or law

question

obligee

answer

the party to a surety bond that receives the surety's guarantee that the principal will fulfill an obligation or perform as promised.

question

breach of contract

answer

the failure, without legal excuse, to fulfill a contractual promise

question

tort

answer

a wrongful act or an omission, other than a crime or a breach of contract, that invades a legally protected right

question

insuring agreement

answer

a statement in an insurance policy that the insurer will, under described circumstances, make a loss payment or provide a service.

question

occurrence

answer

an accident, including continuous or repeated exposure to substantially the same general harmful conditions

question

indemnify

answer

to restore a party who has sustained a loss to the same financial position that party held before the loss occurred.

question

claims-made coverage form

answer

a coverage form that provides coverage for bodily injury or property damage that is claimed during the policy period

question

occurrence coverage form

answer

a coverage form that covers bodily injury or property damage occurring during the policy period

question

entity coverage

answer

coverage extension of D&O liability policies for claims made directly against a corporation (the entity) for wrongful acts covered by the policy

question

claims-made coverage trigger

answer

the event that triggers coverage under a claims-made coverage form; the first making of a claim against any insured during either the policy period or an extended reporting period.

question

fiduciary liability insurance

answer

insurance that covers the fiduciaries of an employee benefit plan against liability claims alleging breach of their fiduciary duties involving discretionary judgement

question

perils of the sea

answer

accidental causes of loss that are peculiar to the sea and other bodies of water

question

root cause

answer

the event or circumstance that directly leads to an occurrence

question

key risk indicator (KRI)

answer

a financial or nonfinancial metric used to help define and measure potential losses

question

exposure indicator

answer

a metric used to identify risk inherent to an organization`s operations

question

loss ratio

answer

a ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses.

question

control indicator

answer

a metric used to identify an organization`s management of risk

question

risk optimization

answer

a state whereby risk and return are balanced so that a maximum return is achieved for the level of risk accepted by an organization

question

hedging

answer

a financial transaction in which one asset is held to offset the risk associated with another asset

question

systematic risk

answer

risk that is common to all securities of the same general class and that therefore cannot be eliminated by diversification

question

interest rate risk

answer

the risk that a security`s future value will decline because of changes in interest rates

question

swap

answer

an agreement between two organizations to exchange payments based on changes in the value of an asset, yield, or index over a specific period.

question

cash matching

answer

the process of matching an investment`s maturity value with the amount of expected loss payments

question

zero-coupon bond

answer

a corporate bond that does not pay periodic interest income

question

reinvestment risk

answer

the risk that the rate at which periodic interest payments can be reinvested over the life of the investment will be unfavorable

question

commodity price risk

answer

the risk associated with a change in the prices of commodities that are necessary to an organization`s operations

question

cash flow

answer

cash inflow minus cash outflow

question

commodity futures contract

answer

a contract either to make or to accept delivery of a specified quantity of a commodity on a given date

question

equity price risk

answer

the risk that changes in the price of a stock or another security will increase or decrease

question

call option

answer

an option to buy a set amount of the underlying security at any time within a specified period

question

put option

answer

an option giving the holder the right to sell a set amount of the underlying security at anytime within a specified period

question

price risk

answer

the potential for a change in revenue or cost because of an increase or a decrease in the price of a product or an input.

question

earnings at risk

answer

the maximum expected loss of earnings within a specific degree of confidence

question

conditional value at risk

answer

a model to determine the likelihood of a loss given that the loss is greater than or equal to the VaR

question

monte carlo simulation

answer

a computerized statistical model that simulates the effects of various types of uncertainty

question

capital

answer

the accumulated assets of a business or an owners equity in a business

question

equity capital

answer

preferred stock, surplus, common stock, undivided profits and capital reserves, and net unrealized holding gains (or losses) on securities that are not available for sale.

question

leverage

answer

the practice of using borrowed money to invest

question

generally accepted accounting principles (GAAP)

answer

a common set of accounting standards and procedures used in the preparation of financial statements to ensure consistency of presentation and reported results.

question

statutory accounting principles (SAP)

answer

the accounting principles and practices that are prescribed or permitted by an insurers domiciliary state an that insurers must follow

question

market value surplus

answer

the fair value of assets minus the fair value of liabilities

question

enterprise risk management

answer

an approach to managing all of an organizations key business risks and opportunities with the intent of maximizing shareholder value

question

tariff

answer

a tax that shields domestic producers from foreign competition

question

demographics

answer

the statistical characteristics of human populations

question

political risk

answer

any action by a government that favors domestic over foreign organizations or poses a threat to foreign organizations

question

risk owner

answer

an individual accountable for the identification, assessment, treatment, and monitoring of risks in a specific environment

question

key performance indicator (KPI)

answer

financial or nonfinancial measurement that defines how successfully an organization is progressing toward its long-term goals

question

risk control

answer

a conscious act of decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable

question

risk financial techniques

answer

risk management techniques, such as retention or transfer, that generate funds to finance losses that risk control techniques cannot entirely prevent or reduce.

question

risk register

answer

a tool developed at the risk owner level that links specific activities, processes, projects, or plans to a list of identified risks and results of risk analysis and evaluation and that is ultimately consolidated at the enterprise level.

question

risk map

answer

a template depicting the likelihood and potential impact/consequences of risks

question

optimum risk

answer

the level of risk that is within an organization's risk appetite

question

balance sheet

answer

the financial statement that reports the assets, liabilities, and owners' equity of an organization as of a specific date

question

income statement

answer

the financial statement that reports an organization's profit or loss for a specific period by comparing the revenues generated with the expenses incurred to produce those revenues

question

hold-harmless agreement (or indemnity agreement)

answer

a contractual provision that obligates on of the parties to assume the legal liability of another party.

question

indemnification

answer

the process of restoring an individual or organization to a pre-loss financial condition

question

hazard analysis

answer

a method of analysis that identifies conditions that increase the frequency or severity of loss

question

theoretical probability

answer

probability that is based on theoretical principles rather than actual experience

question

empirical probability (a posteriori probability)

answer

a probability measure that is based on actual experience through historical data or from the observation of facts

question

probability analysis

answer

a technique for forecasting events, such as accidental and business losses, on the assumption that they are governed by an unchanging probability distribution

question

probability distribution

answer

a presentation (table, chart, or graph) of probability estimates of a particular set of circumstances and of the probability of each possible outcome.

question

central tendency

answer

the single outcome that is the most representative of all possible outcomes included within a probability distribution

question

dispersion

answer

the variation among values in a distribution

question

expected value

answer

the weighted average of all of the possible outcomes of a probability distribution

question

mean

answer

the sum of the values in a data set divided by the number of values

question

standard deviation

answer

a measure of dispersion between the values in a distribution and the expected value (or mean) of that distribution, calculated by taking the square root of the variance

question

coefficient of variation

answer

a measure of dispersion calculated by dividing a distribution's standard deviation by its mean

question

normal distribution

answer

a probability distribution that, when graphed, generates a bell-shaped curve.

question

trend analysis

answer

an analysis that identifies patterns in past data and then projects these patterns into the future

question

regression analysis

answer

a statistical technique that is used to estimate relationships between variables

question

linear regression analysis

answer

a form of regression analysis that assumes that the change in the dependent variable is constant for each unit of change in the independent variable

question

loss prevention

answer

a risk control technique that reduces the frequency of a particular loss

question

loss reduction

answer

a risk control technique that reduces the severity of a particular loss

question

retention

answer

a risk financing technique that involves assumption of risk in which gains and losses are retained within the organization

question

risk financing

answer

a conscious act or decision not to act that generates the fund to offset the variability in cash flows that may occur as an outcome of risk

question

transfer

answer

in the context of risk management, a risk financing technique by which the financial responsibility for losses and variability in cash flows is shifted to another party

question

risk

answer

uncertainty about outcomes that can be either negative or positive

question

futures contract

answer

an exchange-traded agreement to buy or sell a commodity or security at a future date at a price that is fixed at the time of the agreement

question

accounting

answer

the classification, analysis, and determination of the appropriate method of reporting the effects of the bookkeeping records in an organization's financial statements

question

current assets

answer

a balance sheet asset classification that includes cash and other assets that are expected to be converted into cash, sold, or exchanged within the business's normal operating cycle, usually one year.

question

receivables

answer

an asset classification that consists of the amounts owed to a company by customers and other outsiders

question

marketable securities

answer

an asset classification that includes temporary investments that can easily be converted into cash

question

inventory

answer

an asset classification that consists of goods available for sale to customers; for a manufacturing company, also includes raw materials and finished goods

question

prepaid expenses

answer

an asset classification that represents the amount that has already been paid for services that have not been received or used

question

current liabilities

answer

a balance sheet liability classification that includes obligations whose payments are reasonably expected to require the use of cash or the creation of other current liabilities within one year

question

retained earnings

answer

the cumulative net income that an organization has retained, after payment of dividends, for reinvestment in the organization's operations

question

revenue

answer

the inflow of assets, usually cash or accounts receivable, resulting from the sale of products or the rendering of services to customers

question

gross profit

answer

an income statement value that represents sales or operating revenue minus the cost of goods sold

question

gross margin (gross profit margin)

answer

the percentage of sales remaining after deducting the cost of goods sold from sales, calculated by dividing gross profit by sales.

question

operating income

answer

an income statement value that reflects income that results from the normal operations of the business during the period covered by the statement; calculated as the gross profit less selling, general, and administrative expenses

question

comprehensive income

answer

a measure of income that goes beyond that reported on the income statement by including items such as unrealized gains and losses

question

statement of changes in shareholders' equity

answer

the financial statement that explains any changes that have occurred in the organization's capital accounts during a specific period

question

paid-in capital

answer

the total amount invested in an organization by the owners

question

treasury stock

answer

a corporate stock issued as fully paid to a stockholder and subsequently reacquired by the corporation to use for business purposes

question

depreciation expense

answer

an accounting method that spreads out the expense of a purchase over the life expectancy of the item.

question

Sarbanes-Oxley act of 2002

answer

a federal statutory law governing corporate directors in the areas of investor protection, internal controls, and penalties, both civil and criminal

question

transparency

answer

in the context of financial accounting, the provision of sufficient detail regarding transactions to enable a prudent investor to understand the economic effect of those transactions on the company's financial statements

question

trend analysis

answer

a comparison of financial statement data across to or more periods

question

ratio analysis

answer

a financial analysis tool used to study the financial condition of an account; two or more data items from accounting records of a company are related to one another and the result is compared to results for prior accounting periods or for similar businesses

question

liquidity

answer

the ease with which an asset can be converted to cash with little or no loss of value

question

working capital

answer

a liquidity measure that s calculated by subtracting current liabilities from current assets. it is used to determine a company's ability to finance immediate operations (to buy inventory, finance growth, and obtain credit)

question

current ratio

answer

a liquidity ratio that indicates the company's ability to meet its short-term financial obligations; calculated by dividing current assets by current liabilities

question

acid-test ratio (quick ratio)

answer

a liquidity ratio that provides a measure of a company's ability to meet its current obligations if it cannot sell its inventory

question

LIFO method

answer

an inventory valuing method that assumes that the last items brought into inventory are the first items taken out

question

FIFO method

answer

an inventory valuing method that assumes that the first items purchased are the first items sold

question

return on equity (ROE)

answer

a profitability ratio expressed as a percentage by dividing a company's net income by its net worth (book value). depending on the context, net worth is sometimes called shareholders' equity, owners' equity, or policyholders' surplus

question

present value

answer

the value today of money that will be received in the future

question

discounting

answer

the process of calculating the present value of a future amount

question

discount rate

answer

the rate of return used in determining the present value of a future item

question

annuity

answer

a series of fixed payments made on specified dates over a set period

question

net present value (NPV)

answer

the present value of all future net cash flows (including salvage value) discounted at the cost of capital, minus the cost of the initial investment, also discounted at the cost of capital

question

capital budgeting

answer

the process of evaluating alternative capital investment proposals in terms of the cash outlays that the proposals require and the present values of the cash inflows that the proposals are likely to generate

question

operating expenditures

answer

disbursements for assets that will be consumed in a relatively short period, usually within one year or a single accounting period

question

capital expenditures

answer

disbursements for assets that will be consumed over a relatively long period, usually over multiple accounting periods

question

salvage value

answer

an amount that an insurer can recover by selling or otherwise disposing of insured property for which the insurer has paid a total loss or a constructive total loss

question

risk-return trade-off

answer

the tendency for the potential return to increase as risk increases

question

differential (incremental) annual after-tax net cash flow

answer

the change in an organization's aggregate annual net cash flows resulting from implementing a proposal

question

straight-line depreciation method

answer

an accounting method of calculating depreciation by taking an equal amount of an asset's cost as an expense for each year of the asset's expected useful life

question

sensitivity analysis

answer

a method to investigate the effect of a change in one or more variables on the results of a financial analysis

question

forward contract

answer

a contract that obligates one party to buy and another party to sell a specific financial instrument or physical commodity at a specified future date and price

question

Statement of Cash Flows

answer

The financial statement that summarizes the cash effects of an organization's operating, investing, and financing activities during a specific period

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