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CPCU 510

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Updated 2007-01-31 01:41

CPCU 510

Concepts for the Chartered Property Casualty Underwriter 510 exam

Chapter 1

Question Answer
What are the elements of risk?1.Uncertain outcome 2.Possibility of loss
Define probabilityThe proportion of times that events will occur in the long run
What is loss exposure?Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs
What is loss frequency?The number of losses within a specified time period
What is loss severity?The amount, in dollars, of a loss for a specific occurence
Define total dollar lossesThe total dollar amount of losses for all occurences during a specific time period
Define timingWhen losses occur and when loss payments are made
What is credibility?How reliably the frequency, severity, total dollar losses, and timing of a loss can be projected
memorize

Chapter 2

 

Question Answer
Define probability distributionA list of probabilities for a set of values that indicates how the probabilities are distributed
What is a descriptive statisticA number describing a characteristic of a data set
What are measures of central tendency?Descriptive statistics that indicate the middle or center of a set of values; include the mean, median and mode
What are measures of dispersion?Descriptive statistics that indicate the variability among the values; include the range, the standard deviation, and the coefficient of variation
What is a frequency distribution?A list that indicates the number of times each value in a data set occurs
What is an average (mean)?The numeric average; calculated by summing all observed values and dividing by the number of observations; when used to project a likely outcome, the average might also be referred to as the expected value
What is a weighted average?The average of the relative values in a data set
What is the median?The midpoint of a sequential set of values; For an even number of values, the median is the average of the two middle values
what is the mode?The most frequently occuring value in a data set
Define skewedA distribution that is asymmetrical, that is, has the bulk of values at either the distributions high or low end
What is dispersion?The variability or scatter, among the values of a data set
What is range?The difference between the lowest and the highest value in a data set; When the highest value is unknown, the range is open-ended
What is a standard deviation?A measure of dispersion that indicates the variability between each value in the data set and the data set's mean
What is a coefficient of variation?A measure of dispersion that compares two data sets with substantially different means (averages); The coefficient of variation is calculated by dividing the standard deviation by the mean
What is the law of large numbers?A mathematical principle stating that when the number of similar independent exposure units increases, the relative accuracy of projections about future outcomes (such as losses) based on these exposure units also increases
memorize

Chapter 3

Question Answer
What are the pre-loss risk management objectives?The objectives that should be met even if no losses occur, generally relating to efficiency, tolerable uncertainty, legal requirements, and ethical conduct
What are the post-loss risk management objectives?The objectives that should be met after a loss occurs and that relate to survival, continuity of operations, profitability or earnings stability, growth, and ethical conduct
List the steps in the risk management process1. Identifying loss exposures; 2. Analyzing loss exposures ; 3. Examining the feasability of risk management alternatives ; 4. Selecting the best risk management techniques ; 5. Implementing risk management techniques ; 6. Monitoring results
What is the insurance survey questionnaire?A survey that identifies insurable loss exposures and that provides underwriting and ratemaking information
What is the risk management survey questionnaire?A survey that identifies both insurable and uninsurable loss exposures
What is loss analysis?The process of examining the records of past losses to identify loss exposures
What is hazard analysis?The process of identifying conditions that increase the estimated frequency or severity of loss
What is maximum possible loss (amount subject)?The total value exposed to loss at any one location or from any one event
What is exposure avoidance (avoidance)?The risk management technique used when a party decides not to incur a loss exposure or to elimate one that already exists
What is a risk control technique?A risk management technique that minimizes the estimated frequency or severity of accidental losses
What is loss prevention?A risk control technique that lowers the expected frequency of loss from a particular loss exposure
What is loss reduction?A risk control technique that lowers the expected severity of losses from a particular loss exposure
What is disaster planning?A specialized aspect of loss reduction; A disaster plan involves formally identifying possible crises that might occur and developing a detailed, formal response plan
What is separation?A risk control technique that isolates loss exposures from one another to minimize the adverse effect of a single event
What is duplication?A risk control technique that uses backups, spares, or copies of critical property, information, or capabilities
What is diversification?A risk control technique that spreads loss exposures over different categories of risk
What is a risk financing technique?A risk management technique that generates the funds to pay for or offset losses
What is insurance?A risk management technique that transfers the potential financial consequences of certain specified loss exposures from the insured to the insurer
What is non-insurance risk transfer technique?A risk management technique that transfers all or part of the risk of loss to another party, other than an insurer
What is a hold-harmless agreement?A contract under which one party (the indemnitor) agrees to pay specified types and amounts of losses on behalf of a second party (the indemnitee)
What is an indemnity agreement?A contract under which one party (the indemnitor) agrees to reimburse a second party (the indenmitee) for losses that the indemnitee has already paid
What is hedging?A financial transaction in which one asset is held to offset the risks associated with another asset
What is retention?A risk management technique by which losses are retained by generating funds within the organization to pay for the losses
What is planned retention?A deliberate assumption of a loss exposure that has been identified and evaluated
What is unplanned retention?An inadvertent assumption of a loss exposure that has not been identified and evaluated
What is complete retention?The assumption of the full cost of any loss that is retained by the organization
What is partial retention?The assumption of a portion of the cost of a loss by the organization and the transfer of the remaining portion of the cost of the loss
What is funded retention?The pre-loss arrangement to ensure that funding is available post-loss to pay for losses that occur
What is unfunded retention?The lack of advance funding for losses that occur
What is pre-funding?A funded retention arrangement that sets aside funds in advance of losses to pay for losses that occur
What is current funding?A funded retention arrangement that provides funds to pay for losses when losses occur
What is post-funding?A funded retention arrangement that provides funds to pay for losses sometime after losses occur, using borrowing (or some other method of raising additional capital) in the meantime
memorize

Chapter 4

Question Answer
What is a pool?An association of persons or organizations that combines their resources to economically finance recovery from accidental losses
What is reinsurance?An insurance contract in which one insurer (the primary insurer) tranfers to another insurer (the reinsurer) some or all fo the primary insurer's current or future loss exposures
What is a reinsurance pool?A reinsurance association that generally consists of several unrelated insurers or reinsurers that have joined to insure risks the individual members are unwilling to individually insure
What is facultative reinsurance?A reinsurance agreement to share premiums and losses on one specific risk
What is treaty reinsurance?A reinsurance agreement to share losses arising from more than one risk, usually a whole line or book of business; individual risks are automatically ceded to the reinsurer under the treaty's terms
What is a pro-rata reinsurance agreement?A reinsurance agreement that divides the amount of insurance, the premium, and the losses between the primary insurer and the reinsurer in teh same agreed proportions for each risk
What is an excess of loss reinsurance agreement?A reinsurance agreement that requires the primary insurer to pay losses up to the attachment point and the reinsurer to pay the amount of any loss exceeding the attachment point
What are the benefits of reinsurance?Reinsurance can help insurers remain financially sound by: 1. Increasing the primary insurer's capacity, especially for large accounts; 2. Stabilizing loss experience, thereby stabilizing the insurer's financial results; 3. Providing catastrophe protection
What is catastrophe reinsurance?A reinsurance agreement that protects the primary insurer against the adverse effects of catastrophes and limits the primary insurer's loss from catastrophes to a predetermined amount
memorize

Chapter 5

Question Answer
Equilibrium priceThe price at which the quantity supplied equals the quantity demanded in a free market that is operating without constraints
CapacityThe amount of insurance an insurer - or the entire insurance industry - is able to write
Adverse selectionThe process by which people with the greatest probability of loss are those most likely to purchase insurance
Actuarial equityThe development of insurance rates based on the actuarially calculated costs associated with the loss exposures that will be transferred to the insurer
Social equityThe development of insurance rates based on an insured's ability to pay; not allowing insurers to alter premiums because of factors outside an insured's control, e.g. gender
Stock insurance companyAn insurer owned by stockholders and formed as a corporation for the purpose of earning a profit for the stockholders
Lloyd's of LondonAn association (not an insurance company) that provides the physical and procedural facilities for tis members to write insurance
Mutual insurance companyAn insurer owned by its policyholders and formed as a corporation for the purpose of providing insurance to its policyholder-owners
Reciprocal insurance companyAn insurer owned by its policyholders, formed as an unincorporated association for the purpose of providing insurance services to its members, and managed by an attorney-in-fact
Captive insurance companyAn insurer, formed as a subsidiary of its parent company, organization, or group, that provides all or part of the insurance for its parent company or companies
Single-parent captiveAn insurer that is a subsidiary of only one parent company formed for the purpose of writing all or part of the insurance for its parent company
Group captive or association captiveAn insurer that is a subsidiary of its parent group of corporations
Risk retention groupA group captive or an association captive that provides liability insurance subject to limited state regulation under the Risk Retention Acot of 1986
Balance sheetA financial statement that indicates an organization's assets, liabilities, and owner's equity at a particular point in time
AssetsThe property (tangible and intangible) owned by an entity
LiabilitiesThe financial obligations, or debts, owed to another entity
Loss reserveA liability on an insurer's balance sheet that estimates the final settlement amount on all claims that have occurred but have not yet been paid
Unearned premium reserveThe insurance premiums prepaid by policyholders for insurance coverage that the insurer will provide in the future
Policyholders' surplusThe owners' equity of an insurance company calculated as assets minus liabilities
Written premiumThe total premium on all policies written, or put into effect, during a given period
Earned premiumThe amount of written premium recognized as revenue for the portion of the policy period that has already elapsed
Unearned premiumThe amount of written premium for the portion of the policy period that has not yet elapsed
Paid lossesThe losses that have been paid to, or on behalf of, insureds during a specific period
Incurred but not reported (IBNR) lossesThe losses that have occurred but have not yet been reported to the insurer
Incurred lossesThe losses that have occurred during a specific period, no matter when claims resulting from the losses are paid; Incurred losses for any given period are equal to paid losses plus or minus changes in loss reserves over that period
Loss adjustment expensesTHe expenses the insurer incurs to investigate, defend, and settle claims
Acquisition expensesThe expenses the insurer incurs to acquire new busienss, including marketing, advertisitng, and underwriting expenses
Net underwriting gain or lossThe earned premiums, minus losses and expenses, for a specific period
Overall gain or loss from operationsThe net underwriting gain (loss) plus investment gain (loss)
Loss ratioAn insurer's incurred losses (including loss adjustment expenses) for a specific period divided by earned premiums for the same period
Expense ratioAn insurer's incurred underwriting expenses for a specific period divided by written premiums for the same period
Combined ratioAn insurer's loss ratio plus its expense ratio; measures an insruer's underwriting performance, not its overall financial performance, because it does not include investments
Investment income ratioAn insurer's net investment income (investment income minus investment expenses) divided by earned premiums for a specific period; measures an insurer's investment performance
Overall operating ratioAn insurer's combined ratio minus its investment income ratio; measures financial performance for a specific period
Return on equityThe net income divided by average owners' equity for a specific period
Capacity ratio, or premium-to-surplus ratioThe written premiums divided by policyholders' surplus; used by insurance regulators to determine whether the insurer might experience financial difficulty
UnderwritingTHe process of evaluating insurance risks, accepting or rejecting them, classifying accepted risks, and determining an appropriate insurance premium
memorize

Chapter 6

Question Answer
FAIR planAn insurance pool, through which private insruers collectively address an unmet need for property insurance on urban properties, especially those susceptible to loss by riot or civil commotion
Beach and windstorm planAn insurance pool operated by property insurers in several Atlantic and Gulf Coast states to ensure that property insurance is available, in specified areas, for damage due to hurricanes and other windstorms
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