CAS Exam 9 key terms

The chance that actual outcomes differ from expected outcomes, whether the difference is favorable or unfavorable, measured in terms of uncertainty about future results.

A situation offering only the possibility of loss or no loss, with no chance of gain, such as fire damage to a building or liability from an accident.

A situation where outcomes may be a gain or a loss, such as investing in equities or launching a new product line, and which is generally not insurable.

The decision to absorb a loss exposure internally rather than transfer it, whether consciously chosen or arising by default because the exposure was never identified.

Shifting the financial consequences of a loss exposure to another party, typically through insurance, reinsurance, hedging, or contractual indemnification provisions.

Actions that reduce the frequency or severity of losses, such as safety programs, loss prevention engineering, and claims management, distinct from financing the losses after they occur.

The process of funding losses that do occur, through retention, insurance, capital markets, or other mechanisms, as opposed to reducing the losses themselves.

A condition that increases the likelihood or size of a loss arising from a peril, such as poor housekeeping, faulty wiring, or a moral or morale hazard.

The actual cause of a loss, such as fire, windstorm, theft, or collision, as distinguished from a hazard, which merely makes the loss more likely or severe.

The tendency of an insured party to behave less carefully, or to exaggerate claims, because insurance absorbs the cost, creating incentives that insurers must control through deductibles and monitoring.

The tendency for higher-risk individuals to seek or retain insurance more than lower-risk ones, which can cause premiums to rise and low-risk buyers to exit the pool.

The probability-weighted average of possible loss amounts, calculated as frequency times average severity, and used as the basis for loading and pricing decisions.

The number of loss events expected or observed in a defined period, often expressed as a rate per exposure unit such as per policy year or per vehicle.

The size or amount of an individual loss, typically measured as an average cost per claim or as the distribution of costs across claims.

The additional premium charged above the expected loss and expense components to compensate the insurer for bearing uncertainty and for the cost of capital tied up in the business.

A component of gross premium that provides for profit, taxes, and unexpected deviations in losses or expenses, distinct from the risk load reflecting capital cost.

The amount of a loss an insured must bear before the insurer pays, which reduces premium, discourages small claims, and mitigates moral hazard.

The framework showing that combining assets with imperfectly correlated returns reduces total risk for a given expected return, because firm-specific risk diversifies away.

Spreading exposure across many assets or insureds so that idiosyncratic risks offset, lowering portfolio variance without necessarily lowering expected return.

Risk that cannot be eliminated by diversification because it affects all assets, such as interest rates or economic cycles, and which is the only risk the market compensates with a premium.

Risk specific to a single firm, security, or insured that can be largely eliminated by holding a diversified portfolio, also called firm-specific or diversifiable risk.

A measure of a security's sensitivity to movements in the market portfolio, computed as the covariance of its return with the market return divided by the market variance.

A model stating that expected return equals the risk-free rate plus beta times the market risk premium, so only systematic risk is rewarded in equilibrium.

A graphical representation of the capital asset pricing model plotting expected return against beta, with the risk-free rate as intercept and the market risk premium as slope.

A standardized measure between negative one and positive one of how two variables move together, which drives the diversification benefit from combining assets or insureds.

The set of portfolios offering the highest expected return for each level of risk, or the lowest risk for each return, among all feasible combinations of risky assets.

A measure of a bond's price sensitivity to interest rate changes, approximated as the percentage price change for a small change in yield, weighted by time to cash flows.

The curvature of the relationship between bond prices and yields, capturing how duration changes as rates move and improving price estimates for larger yield changes.

The maximum loss expected not to be exceeded over a specified time horizon at a given confidence level, expressed as a single monetary amount.

The expected loss conditional on losses exceeding the value at risk threshold, also called conditional tail expectation, which captures the severity of extreme outcomes.

A firm-wide, integrated approach to identifying, assessing, and managing all material risks across an organization, aligning risk appetite with strategy and capital allocation.

The amount and type of risk an organization is willing to accept in pursuit of its objectives, expressed through limits, tolerances, and qualitative statements approved by the board.

A structured inventory of identified risks recording owners, likelihood, impact, controls, and status, used to monitor exposures and support reporting to senior management.

The amount of capital needed to absorb unexpected losses at a chosen confidence level and horizon, derived from the loss distribution rather than from regulatory formulas.

A governance model in which business units own risk, a risk and compliance function provides oversight, and internal audit provides independent assurance.

Insurance purchased by an insurer to transfer part of its risk to another company, protecting surplus, stabilizing results, and enabling it to write larger or more volatile exposures.

The proportion of premium or losses an insurer keeps for its own account, calculated as net retained divided by gross, indicating how much risk is transferred to reinsurers.

The risk of severe losses from low-frequency, high-severity events such as hurricanes, earthquakes, or pandemics, which is difficult to diversify and demands substantial capital.

Analysis of how a portfolio or insurer performs under specified severe but plausible scenarios, used alongside probabilistic measures to reveal vulnerabilities that models may miss.