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249 Cards in this Set
- Front
- Back
Ch1; traditional risk
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possibility of loss or injury, peril. accidental loss, insurable losses |
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Ch1; evolution of risk to...
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ISO definition of risk
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coordinated activities to direct and control and organization with regard to risk |
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CH1; RISK MANAGEMENT ENVOIRNMENT
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recent risk management theory
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holistic approach, need to manage all risk not just easy ones to understand or quantify |
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4 High Level categories of risk
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Hazard (pure) Operational Financial Strategic |
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VOCAB: Hazard Risk
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VOCAB: Risk Profile |
a set of characteristics common to all risks in a portfolio |
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Evlution of RM occurred in part from
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failures of large organizations like Enron and other businesses at the turn of the millennia |
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Evolving Risk Management: 2002 Sarbanes-Oxley Act
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Spurred by Enron failure, requires companies and auditors to disclose risk management and financial statements
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Other evolutions in Risk Management
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S&P now requires implementations and monitoring of RM, US Securities and Exchange commission has new rules disclosing information |
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International RM reform
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What has changed the RM landscape
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trends in technology, globalization, finance. recognizing variety, number, and interaction of risks facing an organization |
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high level categories of risk
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Operationa Financial Strategic |
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VOCAB: Hazard Risk
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Risks from accidental loss, including the possibility of loss or no loss |
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VOCAB: Risk Profile
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a set of characteristic common to all risks in a portfolio |
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CH 1.2 BENEFITS OF RISK MANAGEMENT |
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VOCAB: Systemic Risk
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the potential for a major disruption in the function of an entire market or financial system |
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VOCAB: Cost of Risk
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The total cost incurred by an organization because of the possibility of accidental loss |
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Cost of Risk equals
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*insurance premiums/noninsurance ideminity *administrating RM activities |
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Risk Management's aim
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reduce risk cost long term without interfering with goals/activities. supports safety minimize financial effects of safety measures |
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fear of possible future losses
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make senior management not go into risky things, but also miss out on benefits |
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Risk Management
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mitigates uncertainty
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uncertainty reduction benefits (3)
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*increases profit potential by greater participation from others invested *makes organization safer environment, and more attractive to investors |
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senior management and investors both
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seek assurance. RM provides this |
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downside risk reduction
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use stop-loss limits, cant eliminate but can reduced. hedging is one way of doing this |
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intelligent risk taking
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make decisions based on company'ss risk appetite. RM provides framework to analyze and manage risk |
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Maximize profitability
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RM provides an organization information to evaluate the potential risk-adjusted return on its activities and to manage risks associated with activities
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Legal and Regulatory Reqs
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RM lets companies comply with recent regulations on risk
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Hollistic
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gives full view of everything that can harm or helpcompany |
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economic benefits
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Reduced wasted Resources Reduced Systemic Risk |
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Overview: Benefits of Risk Management
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a. Reduce Cost of Hazard Risk b. Reduce Deterrence Effects of Hazard Risk c. Reduce Downside Risk d. Manage the downside of Risk e. Intelligent Risk Taking f. Maximize Profitability g. Holistic Risk Management h. Legal and Regulatory Requirements 2. Economic Benefits a. Reduce waste of resources b. Improved allocation of productive resources c. Reduced Systemic Risk |
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Basic Risk Measures
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1. Exposure 2. Volatility 3. Likelihood 4. Consequences 5. Time Horizon 6. Correlation |
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VOCAB: Exposure
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any condition that presents a possibility of gain or loss, whether or not an actual loss occurs |
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VOCAB: Volatility |
Frequent fluctuations, such as in the price of an asset
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VOCAB: Law of large numbers
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a mathematical principle that states that as the number of similar but independent exposure unites increase, the relative accuracy of predictions about future outcomes (loses) also increases. this is why we use likelihood |
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likelihood
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organizations must determine to the extent possible likelihood of an event and then determine the potential consequences if the even occurs |
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consequences
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measure of the degree to which an occurrence could positively or negatively affect an organization. |
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low likelihood/minor consequences
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maybe no risk management is needed |
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high likelihood/minor consequences
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can handle through normal business procedures |
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major consequences
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low likelihood- still managed high likelihood - significant, well managed |
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VOCAB: Time horizon
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Estimate duration. the longer the time horizon, the more risky. |
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VOCAB: correlation
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a relationship between variables. the higher the correlation, the greater the risk |
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RISK CLASSIFICATIONS: why |
*categories go by objectives and RM goals. * helps with administrative function |
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Risk classifications
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subjective and objective risk diversifiable andnondiersifiable quadrants of risk (hazard, operational, financial, and strategic) |
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VOCAB: pure risk
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a chance of loss or no loss, but no chance of gain
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VOCAB: speculative risk
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price risk, credit risk |
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VOCAB: Credit risk
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the risk that customers or other creditors will fail to make promised payments as they come due |
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distinguishing between pure and spec
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they are managed differently. pure can be insured while the spec managed |
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subjective vs objective
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subjective risk can be where objective risk isnt
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VOCAB: subjective risk
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the perceived amount of risk based on an individual's or organizations opinion |
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VOCAB: objective Risk
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the measureable variation in uncertain outcomes based on facts and data |
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reason for differences between objective and subjective
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consequence over likelihood "cant happen to me" or lightning striking twice. risk awareness - not being aware means you don't think itll happen |
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VOCAB: diversifiable risk
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a risk that affects only some individuals, businesses, or small groups |
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VOCAB: non-diversifiable risk
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systemtic risks |
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Quadrants of risk
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Operational Financial Strategic |
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Hazard Risk
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arise from property,liability, or personnel loss exposures and are generally subject of insurance |
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operational risk |
fall outside hazard and arise from ppl or a failure in process,systems, or controls, including IT |
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financial risk
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arise from the effect of market forces on financial assets or liabilities and include market risk, liquidity risk, and price risk |
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strategic risk
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arise from trends in ecnonomy and society. changes ine cnonomics, political, competitive environments, and demographic shirts |
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VOCAB: market risk |
uncertainty about an investment's future value because of potential changes in the market for that type of environment
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liquidity risk
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the risk that an asset cannot be sold on short notice without incurring a loss |
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quadrants: pure or speculative
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speculative: financial and strategic |
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focus of quadrants |
other classifications focus on some aspect of risk itself |
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ETERPRISE RISK MANGEMENT |
around since 90s adopted since 2008 financial crises traditional is hazard risks, pure risk ERM is looking at all risk RM and ERM are inter change able |
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ERM definition
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RISK: the effect of uncertainty on objectives all definitions speak on managing all risks to help meet objectives |
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Theoretical pillars of ERM
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correlation portfolio theory |
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interdependency
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traditional RM silos, look for dependence and interdependance
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correlation |
increases, uncorrelated can hedge |
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portfolio theory |
combination of risks, both individual and their interactions |
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organizational relationships |
in ERM, all of an organizations al all levels responsible for RM. |
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Dodd Frank Act
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CRO
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chief risk officer |
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SWOT |
CRO establishes RM goals and strategies in accordance with SWOT |
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CRO responsibility
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includes helping firm create a risk culture in which managers of the organizations divisions and unites, employees become risk owners. fully integrated ERM, RM is in every job description and project |
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Implementing ERM
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access to data from all areas must have authority to make and implement changes effective communication needed |
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impediments to ERM
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single largest obstacle is the traditional organizational culture with established silos. needs to be integrated throughout company |
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Chapter 2; Risk Management Standard and Guidelines
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Characteristics of RM standards guidelines ISO 31000 framework & process Committee of Sponsoring standard Solvency II & Basel II&III standard to insurance & banking |
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Intro to RM standards guidelines |
crafted with recognized standard to implement professionals should understand various standards |
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Regulation vs standards
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mandatory requirement by gov't of standards make it a regulation |
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VOCAB: Risk Management Stndard
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a document published by a recognized authority that includes principles, criteria, and best practices for RM |
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VOCAB: framework
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a structure, including elements such as concepts, methods, procedures, and metrics that supports the RM process |
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common elements of RM standards |
they all help organizations manage and asses risk |
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ISO 13000 and COSO definitions of risk |
COSO is traditional, pure risk. ISO has approach with positive and negative results possible
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similarities between standards and frameworks
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1. adoption of an enterprise approach 2. structured & processed steps 3. understand & accountable for defining risk appetite 4. formal documentation of risk in risk assessment 5. Goals and activities establish and communicated 6. monitored treatment plans |
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standard to choose
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could be one for everything, could vary by function |
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Successful implementation criteria for a standard chosen
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1. alignment with organizational objectives 2. adherence to controls 3. compliance to regulatory reqs 4. risk governance |
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VOCAB: Risk Governance
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major standards/guidelines
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2. periodic self assessments with objective and consistent measuring tools (Risk Maturity Model RMM) |
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Risk Maturity Model framework's attributes
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1. ERM approach 2. ERM process management 3. Risk appetite management 4. Root cause discipline 5. Uncovering risks 6. performance management 7. business resiliency and sustainability |
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RMM scoring
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ISO 31000
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international standard to manage operational, financial, strategic, and hazard risk |
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ISO 31000 background |
developed by ISO, non-gov, in 163 countries, published this report. developed from Australian and NZ standard. contains princibles & framework for anyone . |
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ISO 310000 scope
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not intended for uniformity |
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ISO 31000 principles
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11 principles or RM used to make RM effective protect value, informed decisions, uncertainty dealings. qualities include structure, timeliness, transparency, inclusiveness, dynamism, response to change. should apply to all processes on best available info. considers human/culture factors |
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ISO 31000 framework
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includes a generic framework. must have management support
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VOCAB: RM framework
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a foundation for applying the RM process throughout an organization |
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tailoring the framework
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after understanding context, establish RM policy with appropriate resources. finally communication & reporting inside and outside |
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ISO 31000 process
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assessing risk, treating risks, monitoring and reviewing the process |
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VOCAB: Risk Criteria
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reference standards, measures, or expectation used in judging the significance of a given risk in context with strategic goals |
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Risk assessment
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risk treatment
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deciding on how to modify the risk and the leftover amount. avoid, retain transfer, |
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COSO ERM
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positive or negative result |
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COSO RM framework - 4 categories objectives
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operations - resource use reporting reliability compliance with laws |
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COSO interrelated items
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2. objective setting 3. event id 4. risk assessment 5. risk response 6. control activities 7. info & communication 8. monitoring |
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VOCAB: inherent risk |
risk to an entity apart from any action to alter either the likelihood or impact of the risk |
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VOCAB: residual risk |
risk remaining after actions to alter the risks likelihood or impact |
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RM serial process? |
no, it is multidirectional. anything can affect anything |
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Control activities
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Sarbanes Oxley Act makes you publish information on annual reports regarding the scope and adequacy ofreporting. assess the effectiveness, and attest to and report on the assessment of the effectiveness
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COSO on SOA
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they made their controls from the context of the SOA, so control activities are a key feature of this standard compared to other standards |
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most important function of a control
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the role in achieving its objective |
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control activities parts
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part 1: what should be done part 2: procedure to accomplish it |
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types of monitoring |
type 1: ongoing regular monitoring by an organizations management type 2: periodic evaluation, often by internal auditors |
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Solvency II and Base II & III |
regulatory standards many countries adopted Solvency II is EU RM Base III is banking trying to prevent systemic risk |
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Solvency II
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Solvency 1 in the 70s for capital adequacy amd did not include any standard for RM or governance |
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Solvency II
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all EU, should make it easier for firms to do work across EU, consistent standards |
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Consistency for Europe across |
1. Market Consistent balance sheets 2. risk based capital 3. Own risk and solvency assessment ORSA 3. senior management accountability 4. Supervisory assessment |
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Supporting pillars of Solvency 2 |
2. higher standards of RM and governance within an organizations and gives superviros greater power to challenge firm 3. greater levels of transparency for sups and public |
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Solvency 2
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change in insurer's risk culture, storng link between descisions and risk measurement US will be affected by subsidiaries in EU. long term the NIAC will have to better harmonize. |
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Basel II and III
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committee formulates stnadrads that member and other nations may adopt as regulation. |
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Capital Adequacy framework pillars |
supervisory - review of an institutions internal assessment disclosure |
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basel III |
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goals of Basel III |
improve RM and governance strengethn transparency |
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11 basel II princibles
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stuff on executive leadership
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Chapter 3: Hazard Risk
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main type insurance deals with. purerisk |
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definition of hazard risk
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no universal definition, just only a negative outcome is possible |
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actuarial definition of hazard risks |
2. windstorm and other natural perils 3. Theft, crime, personal injury 4. business interruption 5. disease and disability 6. liability claims |
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hazard risk is
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generally insurable |
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Basel committee definition of operational risk |
the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events |
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operation risk and hazard risk |
some RM theories include hazard in operational risk category. this follows the Basel model |
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hazard risk categorized |
2. property risk 3. liability risk - financial responsibility from someone else getting hurt |
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net income losses
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organizations face net income losses with property and liability exposures. results from property losses that hinder or stops op from oping or reduces capacity to op. may not be independant |
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time period
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no definite time period for liability, unlike property |
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measuring and managing hazard risk |
must id and classify to manage and measure |
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two measures used |
frequency and severity |
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VOCAB: frequency |
number of losses |
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VOCAB: severity |
the size of a loss |
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measure freq and sev by... |
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techniques used to reduce freq/sev
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1. avoidance 2. seperation 3. duplication 4. diversification 6. prevention 7. reduction |
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VOCAB: avoidance
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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
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VOCAB: separation
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a risk control technique that isolates loss exposures from one another to minimize the adverse effect of a single loss
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VOCAB: duplication
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a risk control technique that uses backups, spares, or copies of critical property, information, or capabilities and keeps them in reserve |
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VOCAB: diversification
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a risk control technique that spreads loss exposures over numerous projects, products, markets, or regions |
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VOCAB: insurance |
a risk management technique that transfers the potential financial consequences of certain specified loss exposures from the insured to the insurer |
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most often used rm techniques
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prevention and reduction
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insurance insures generally
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high/high avoided low/low retained low/high some are retained |
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what percentage of operational risk is covered by insurance |
20-30. RM should include all coverage gaps and see if special insurance is warrented
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VOCAB: loss exposure
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any condition or situation that presents a possibility of loss, whether or not an actual loss occurs |
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3 elements to a loss exposure
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2. cause of loss (peril) 3. financial consequences of that loss |
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4 basic types of loss exposures |
2. liability 3. personnel 4. net income |
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asset exposed to loss |
anything from a person to property. anything of value |
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cause of loss |
fire, windstorm, explosion, theft, etc |
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VOCAB: Hazard
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a condition that increases the frequency or severity of a loss |
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4 types of hazards
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morale hazard physical hazard legal hazard |
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effect of a hazard
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they can compound and grow off one another |
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VOCAB: Moral Hazard
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a condition that increased the likelihood that a person will intentionally cause of exaggerate a loss |
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Vocab: Morale Hazard
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a condition of carelessness or indifference that increases the frequency or severity of a loss |
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Vocab: physical hazard
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a tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of a loss
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vocab" legal hazard
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a condition of the legal environment that increases the loss severity or frequency |
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financial consequences of loss
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these can be easy or difficult to determine
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types of loss exposures
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liability personnel net income exposure, cause, and financial consequence apply to each of these |
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VOCAB: property loss exposure
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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. |
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vocab: tangible property
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has physical form |
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vocab: real property
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tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land |
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vocab: personal property
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all tangible and intangible property that is not real property |
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intangible property |
property that has no physical form |
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VOCAB: liability loss exposure
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any condition or situation that presents the possibility of a claiming legal responsibility of a person or business for injury or damage suffered by another party |
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VOCAB: personnel loss exposure
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a condition that presents the possibility of loss caused by a person's death, disability, retirement, or resignation that deprives an organization of the person's special skill or knowledge that the organization cannot readily replace |
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VOCAB: personal loss exposure
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any condition or situation that presents the possibility of a financial loss to an individual or a family by such causes of death, sickness, injury, or unemployment |
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net income loss exposure
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a condition that presentsthe possibility of loss caused by a reduction in netincome |
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net income: direct or indirect
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indirect. an indirect is a loss that results from a peril, but not directly caused by that peril. |
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T?F insurance treats net income as a property loss
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true. liability net income losses and personnel net income losses have been up to traditional RM.
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loss of good will
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income loss exposure. non-profit your good will is the same as reputation. companies will pay of things they are not liable for to preserve good will |
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failure to preform
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net income loss from product not working or contractornot finishing ajob |
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miss opportunities |
from not adapting to the market to being passive to abstaining |
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Commercial insurance policies
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good for RM to know what to insure and how. insurance developed through regulation, common use, and standardization |
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VOCAB: property casualty insurance
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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
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VOCAB: property
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the real estate, buildings, objects, intangible assets, or rights with exchangeable value of which someone may claim legal ownership |
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VOCAB: liability
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a legal responsibility for the consequences of an act or omission |
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VOCAB: line of business
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a general classification of insurance, such as commercial property, commercial general liability, commercial crime, or commercial auto. |
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VOCAB: commercial property insurance
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insurance that covers commercial buildings and their contents against various types of property loss |
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VOCAB: monoline policy |
policy that covers only one line of buisiness
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VOCAB: package policy
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policy covering two or more lines of business |
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VOCAB: Named peril |
a specific cause of loss listed and described in an insurance policy. also used to describe policies containing named perils |
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VOCAB: direct physical loss
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a loss that is physical (not just financial) and results immediately from the occurrence |
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VOCAB: all risk policy
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an insurance policy that covers any risk of physical loss unless the policy specifically excludes it |
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VOCAB: Bailee's customers policy |
a policy that covers damages to customers gods while in the possession of the insured, regardless of whether the insured is legally liable for the damage |
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VOCAB: replacement cost
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the cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation |
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VOCAB: actual cash value |
a method of 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 |
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VOCAB: insurance-to-value provision |
a provision in property insurance policies that encourages insured to purchase an amount of insurance that is equal to, or close to the value of the covered property
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VOCAB: coinsurance clause
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a clause that requires the insured to carry insurance equal to at least a specified percentage of the insured property's value |
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VOCAB: business income insurance
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insurance that covers the reduction in an organizations income when operations are interrupted by damage to property caused by a covered peril
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VOCAB: dependent property exposure |
the possibility of insuring business income loss b/c of a physical loss occurring on the premises of an organization that the insured depends on for materials, products, or sales |
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VOCAB: principle
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the party to a surety bond whose obligation or performance the surety guarantees |
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VOCAB: principle
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the party to a surety bond whose obligation or performance the surety guarantees
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VOCAB: surety |
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VOCAB: obligee |
the party to a surety bond that receives the sureties guarantee that the principle will fulfill an obligation or perform as promised. |
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VOCAB: Breach of contract
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the failure without legal excuse to fulfill a contractual promise |
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VOCAB: tort
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a wrongful act or omission other than a crime or break on contract, that invades a legally protected right |
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VOCAB: insuring agreement
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a statement in an insurance policy that the insurer will, under described circumstance, make a loss payment or provide a service |
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VOCAB: occurance
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an accident, including continuous or repeated exposure to substantially the same general harmful conditions |
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VOCAB: indemnify |
to restore a party who has sustained a loss to the same financial position that the party held before the loss occurred |
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VOCAB: claims-made coverage form
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a coverage form that provides coverage for bolidy injury and property damage that is claimed during the policy period |
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VOCAB: occurance coverage form
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a coverage form that covers BI/PD occurring during the policy period |
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Surety bond parties |
three party arrangements |
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surety bonds most common purpose
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construction operations |
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commercial auto |
excludes off road, evornmental liability. |
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Work comp insurance |
medical wage bennies for ppl hurt on job, so no suit happens |
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employers liability insurance
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for when employees can sue |
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professional liability or E&O insurance |
not standardized forms, forms written by insurers claims made instead of occurrence made |
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management liability insurance
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employment practices fiduciary liability |
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D&O |
most common is securities class action law suit. insurers draft policy language |
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VOCAB: entity coverage
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coverage extentsion of D&O liability policies for claims made directly against a corporation the entity for wrongful acts covered by the poolicy |
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VOCAB: Claims made coverage trgger |
the event that triggers coverage under a claims made coverage form, the first make of a claim against any insured during either the policy period or an extended reporting period
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CH 4
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framework with 4 risk categories
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process systems external events |
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OPerational Risk in General
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traditionally organized by managers |
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OPerational Risk Definitions
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Financial defines as any not market or credit risk, including hazard |
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Othher than financial view operational and hazard as
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separate categories |
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People - organizational risk
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employees. can be insured in most circumstances. E&Oinsurance |
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Process - orgnaizationrisk
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risk occurs when practice departs from prcedure
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Systems - organizational risk
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technology and equipment. data breech. hazard or continued ops |
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external events |
storms, business interruption, loss or a key supplier, utility failure, changes in systems |
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Operational risk indicators
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develop key risk indicators KRI |
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Introduction to risk indicators
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wanna hit before loss occurs. looking at root causes. retroactive might be too later, need proactive |
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VOCAB: Root Cause |
the event or circumstance that directly leads to an occurence |
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more successful root cause is to
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look at near misses. all incidents |
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develop leading indicators of risk, or KRI
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A financial or non-financial metric used to help define and measure potential losses |
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indicators by operational risk classes
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people, classes, systems |
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VOCAB: Exposure indicators
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a metric used to identify risk inherent to an organizations operations. inherent indicators
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VOCAB: loss ratio
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a ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses
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VOCAB: Control indicators |
a metric used to identify an organization's management of risk
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FIANACIAL RISK |
market risk, credit risk, price risk |
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Financial Risk in general
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can be reduce with contracts such as derivatives |
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Goal or risk management
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risk optimization |
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VOCAB: Risk Optimization |
a state whereby risk and return are balanced so that a maximum return is achieved for the level of risk accepted by an organization |
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VOCAB: Hedging |
a financial transaction in which one asset is held to offset the risk associated with another |
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Market RIsk |
arises from chanes in the value of financial instrument
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vocab: sYSETMATIC rISK
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RISK THAT IS COMMON TO ALL SECURITIES OF THE SAME GENRAL CLASS AND THAT THEREFORE CANNOT BE ELIMINATED BY DIVERSIFICATION |
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Market Risk |
part systemic, park not. |
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Categories of market risk
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interest rate risk commodity price risk equity price isk liquidity risk |
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currency price risk
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risk in exchange rates |
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interest rate risk
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systemic and affects all organizations |
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VOCAB: Swap
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an agreement between two organizations to exchange payments based on changes in the value of an asse, yield, or index over specific period |
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VOCAB: cash matching
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the process of matching an investments maturity value with the amount of expected loss payments |
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VOCAB: zero-coupon bond
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a corporate bond that does not pay periodic interest income
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insurers are vulnerable for 2 reasons:
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income earned from investment returns on reserves before they are needed to pay claims |
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cash matching limitations
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only works with zero coupon bonds that matches exactly purchase enough to match claim payments |
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