CISR Risk Management flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Pure risk

A situation with only two possible outcomes, loss or no loss, with no chance of gain. It meets a core insurable-risk criterion and is the traditional focus of risk management.

Speculative risk

A situation where outcomes can be gain or loss, such as a new product launch or a stock purchase. Generally not insurable because the loss is not accidental and may be intentionally taken.

Hazard versus peril

A hazard is a condition that increases the chance or size of a loss, such as worn wiring. A peril is the actual cause of loss, such as fire.

Cost of risk

The total spent on risk: insurance premiums, retained losses, loss control costs, administrative expenses, and transfer costs, less any recoveries. Used to compare programs over time.

Risk management process

Five steps: identify exposures, analyze and measure them, select control and financing techniques, implement the chosen techniques, then monitor results and revise the program as conditions change.

Exposure checklist

A standardized list of common loss exposures used to prompt identification. It catches typical property, liability, and personnel exposures but can miss unusual or emerging risks.

Financial statement analysis

A risk identification method that reviews balance sheet and income statement items to find unreported values, liability sources, and income exposures not visible from operations alone.

Flowchart identification

A method that maps each step of an operation to reveal bottlenecks, single points of failure, and exposures created where materials, people, or information move between steps.

Business income exposure

Loss of net income plus continuing expenses after physical damage slows operations. It also includes extra expense and contingent business income from a supplier or customer outage.

Personnel exposures

Losses tied to people: death, disability, retirement, resignation, and unemployment of key employees or large groups. They create both income loss and replacement cost for the organization.

Law of large numbers

As the number of similar independent exposure units increases, observed loss frequency converges on the true probability. This underlies insurance pricing and pooling.

Expected loss

Frequency multiplied by average severity. For example, 0.05 claims per exposure unit times a $20,000 average severity equals $1,000 expected loss per unit.

Probable maximum loss

The worst credible loss expected given that existing protective features function as designed. It is smaller than maximum possible loss, which assumes protections fail.

Maximum possible loss

The largest loss that could occur if all defenses and protections fail, such as a total property loss with no sprinkler response. Used to test financial capacity.

Standard deviation

A measure of dispersion around expected loss. Higher dispersion means greater uncertainty, which supports transferring risk rather than retaining it.

Risk matrix

A qualitative tool plotting likelihood against impact to sort exposures into low, medium, and high tiers. Useful for ranking and prioritization, not precise pricing.

Coefficient of variation

Standard deviation divided by the mean. It compares relative risk across exposures whose expected losses differ in size, allowing a fair ranking of uncertainty.

Loss prevention

A risk control technique that reduces the frequency of loss, such as safety training, inspections, and quality control. It does not reduce the size of losses that still occur.

Loss reduction

A risk control technique that reduces severity after a loss occurs, such as sprinklers, backup generators, or contractual limits. It lowers the size, not the frequency, of losses.

Avoidance

Eliminating an exposure by not undertaking the activity. It removes the risk but also the benefit, and is impractical for core operations or may create new exposures.

Separation and duplication

Separation spreads exposures across locations or time so one event cannot hit all units. Duplication keeps spare capacity, such as backup data or standby equipment.

Residual risk

The risk remaining after controls are applied. It must be financed and documented rather than assumed away, because controls rarely eliminate all exposure.

Risk transfer by contract

Shifting liability through hold-harmless agreements, indemnity clauses, or waivers of subrogation. The receiving party's financial ability to honor the obligation must be verified.

Retention

Funding losses internally, either planned through deductibles and self-insurance or unplanned by absorbing unfunded losses from operating cash.

Insurable risk criteria

Pure risk, many similar exposure units, accidental and measurable loss, definite time and place of loss, and a premium the buyer can afford.

Captive insurer

A subsidiary formed to insure the parent organization's risks. It formalizes retention and must meet capital, regulatory, and reinsurance requirements.

Noninsurance transfer

Shifting financial responsibility without an insurance policy, through leases, hold-harmless agreements, or surety bonds. The transferee's ability to pay must be assessed.

Facultative reinsurance

Reinsurance arranged for a single specific risk, with the reinsurer free to accept or decline each submission. Contrasts with treaty reinsurance, which covers a class automatically.

Treaty reinsurance

Reinsurance that automatically covers a defined class of risks under pre-agreed terms. The insurer cedes and the reinsurer accepts within the treaty's scope.

Implementation standards

Each chosen risk technique is assigned an owner, budget, timetable, and measurable standard, so execution can be audited against plan.

Loss runs

A record of past claims by date, cause, and amount. It supports renewal negotiation, retention decisions, and identification of recurring exposure patterns.

Program review triggers

Events requiring a risk program review: acquisitions, new products or locations, major claims, and coverage changes. Review is continuous, not only at annual renewal.