CRM Risk flashcards

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

Hazard versus peril

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

Risk appetite

The amount and type of risk an organization is willing to accept in pursuit of its objectives, usually documented in a formal risk appetite statement approved by the board.

Risk capacity

The maximum risk an organization can absorb before financial distress or insolvency; it sets the upper bound that a stated risk appetite cannot exceed.

Pure versus speculative risk

Pure risk offers only the possibilities of loss or no loss and is generally insurable; speculative risk offers gain or loss and is generally uninsurable.

Exposure identification tools

Methods for finding loss exposures include checklists and questionnaires, flowcharts, financial statement analysis, physical inspections, historical loss runs and contract review.

Enterprise risk management

A holistic, portfolio approach that identifies, assesses, finances and monitors all risks across an organization, aligning risk taking with strategy and stated risk appetite.

Four exposure categories

Assets (property), net income (business interruption and extra expense), liabilities to third parties, and personnel exposures are the four main categories risk managers identify.

Expected loss formula

Expected loss equals loss frequency, the probability of loss per period, multiplied by average severity; it is used to compare exposures and size retentions.

Coefficient of variation

Standard deviation divided by the mean; it expresses relative dispersion, allowing comparison of riskiness between exposures or investments with different expected values.

Value at Risk

The maximum loss that is not expected to be exceeded at a stated confidence level over a defined time horizon; it ignores the size of losses beyond that threshold.

Monte Carlo simulation

A probabilistic modelling technique that repeatedly samples from loss frequency and severity distributions to produce a range of possible aggregate loss outcomes and their probabilities.

Risk matrix limitations

A likelihood-by-impact grid uses ordinal scales, compresses ranges and cannot be aggregated or tied to capital, so it is a screening tool rather than a quantification method.

Credibility weighting

Blending an organization's own loss experience with industry or actuarial data, weighting each source by sample size and reliability when internal data are limited.

Diversification effect

Combining exposures whose results are less than perfectly correlated produces a portfolio standard deviation lower than the weighted average of the individual risks' standard deviations.

Loss prevention versus reduction

Prevention measures reduce the probability or frequency of a loss occurring; reduction measures lessen the severity of damage once a loss has occurred.

Recovery time objective

The maximum acceptable time to restore a business process after a disruption, derived from the business impact analysis and used to select recovery strategies.

Business impact analysis

A study that ranks business processes by the financial and operational impact of downtime, used to set maximum tolerable downtime and recovery objectives.

Franchise deductible

Once a loss exceeds the stated threshold the insurer pays the entire loss from the first dollar, creating a severity cliff that differs from a straight deductible.

Subrogation

The insurer's legal right, after paying a claim, to step into the insured's shoes and pursue the third party responsible for the loss.

Separation and duplication

Risk control techniques that split assets across locations or maintain backups, so a single event cannot destroy all of an organization's critical resources.

Claims management duties

Giving prompt notice, documenting and proving the loss, mitigating further damage, setting adequate reserves, and cooperating with the loss adjuster during investigation.

Captive insurance company

A licensed insurer owned by a non-insurance parent to finance the parent's retained risks, often gaining direct access to reinsurance and control over coverage terms.

Catastrophe bond

A security whose principal or interest is reduced if a defined catastrophic event occurs, transferring insurer or corporate catastrophe risk to capital market investors.

Total cost of risk

The sum of insurance premiums, retained losses, administration and claims costs, risk control spending and fees, typically expressed per unit of revenue.

Retention versus transfer rule

Retain high-frequency, low-severity losses where control and funding are efficient; transfer low-frequency, high-severity losses that could threaten solvency.

Parametric trigger

A contractual payout condition based on a physical index such as wind speed or earthquake magnitude rather than the insured's actual loss, creating basis risk.

Finite risk insurance

A multi-year contract that spreads losses and premiums over time with limited risk transfer, emphasizing financing and smoothing rather than full indemnity.

Three lines of defence

Operating management owns and manages risk, a risk and compliance function oversees it, and internal audit provides independent assurance to the board.

Chief risk officer reporting line

Placing the chief risk officer under the chief executive with direct board or risk committee access preserves independence from business-unit revenue pressure.

DIC/DIL coverage

Difference in conditions and difference in limits policies sit above locally admitted policies in a global program, filling gaps in scope and limits.

Political risk

Cross-border exposure to expropriation, currency inconvertibility, war, terrorism or government action, financed through specialized political risk and trade credit cover.

Executive risk exposures

Directors and officers liability, employment practices, fiduciary, crime and cyber covers protect the organization and its leaders from management-related claims.