Insurance, Self-Insurance, Risk Management,
Risk Analysis and Financial Terms
The Aggregate Retention is the maximum total amount that the insured is responsible.
The Average (also described as the Mean) is the sum of the observations in an analysis divided by the number of observations.
Captive – Captive Insurance Company
Captive is the term given to describe a Captive Insurance Company, which is an insurance company that is a wholly owned subsidiary of a parent company or association or group of companies (public entity authority or authorities) designed and set up to assume particular risks of the parent(s). Captive insurance companies are governed by specialized laws which exempt them from certain general insurance law requirements, including participation in high risk pools. Leading Captive insurance company jurisdictions may be foreign or domestic, and include Bermuda, Cayman Islands, Vermont, Hawaii, Colorado, Guernsey, British Virgin Islands, Ireland, Barbados, Luxembourg, Isle of Man, South Carolina, Nevada, Arizona, Utah, Singapore, Switzerland, Washington DC, New York.
Coefficient of Variation
The Coefficient of Variation (CV) is the Standard Deviation divided by the Mean (aka Average) and is a generally accepted statistical measure of volatility. The CV ranges from 1 (one) – high volatility, to 0 (zero) – very low volatility.
Confidence Intervals (CI) are ranges within which values are expected to fall. Confidence Intervals have an upper bound and a lower bound. For a 95% CI, the values of the results of the analysis may be expected to fall between the upper and lower bounds 95% of the time. For a 78% CI, the values of the results of the analysis may be expected to fall between the upper and lower bounds 78% of the time.
The Correlation Coefficient (CC) is the degree to which changes in the dependent variable are explained or accounted for by changes in the independent variable. The Correlation Coefficient value ranges from 0 (zero) to 1 (one), where a value of 1 suggests that variations in the dependent variable are entirely accounted for by changes in the dependent variable. In a regression analysis, you would like to have a CC of .80 or higher (along with a CV less than .20) for the results to represent a reasonable credible projection.
Cost of Capital
The Cost of Capital is a weighted average of the cost of the debt and equity components of the overall sources of funds utilized in financing an enterprise’s operations..
Discounted Cash Flow
Discounted Cash Flow. also referred to as Present Value Cash Flow, is the calculation of a stream of future payments to which factors to account for the compounded value of money (cost of capital) have been applied so as to express the stream of future payments in Current or Present Value term
In Discounted Cash Flow Analysis, the Discount Rate is the Cost of Capital for the entity or enterprise for which the analysis is being performed.
In Discounted Cash Flow Analysis, the Discount Factors are derived from the Discount Rate and the timing of each future payment.
DF = 1/((1+CC)^(Months/12)), where DF=Discount Factor, CC=Cost of Capital=Discount Rate, and Months=Number of Months from Inception Date for this particular payment. ^ indicates exponential operation-calculation
In a number of alternative risk financing plans, the Escrow Account describes an amount of funds paid by the insured at the inception of the plan and held (usually in a non-interest bearing account) by an independent third party available to cover possible cash flow deficiencies for future payment of losses or other costs implicit in the plan. At the termination of the plan, the funds in the Escrow Account are returned to the insured, except insofar as any such funds may have been required and utilized under the plan to pay for fund deficiencies for losses or other costs in the plan not otherwise covered by other funds supporting the plan. Some risk financing plans may contractually require that, as the Escrow Fund amount may be applied to losses, that the insured is required to continually replenish the Escrow Account so as to maintain its contractually agreed value.
The Mean (also described as the Average) is the sum of the observations in an analysis divided by the number of observations.
Net Present Value (NPV)
In finance, the Net Present Value (NPV) of a future stream of payments is the sum of the present values of all of the individual payments.
Regression Analysis is a statistical methodology to find the line of best fit for a population of data. It does this by calculating that line for which the absolute distance between each data point and the line are at a minimum. In order to calculate the absolute distances, the value of each individual distance is squared and then the square root is calculated. When squared, negative distances become positive, since the product of two negative numbers is positive; so, all successive distances are given equal weight in the calculation of the line of best fit. The “line of best fit”may also be referred to as the “trend line” reflected by the data in the analysis. Where the data in the analysis produce high a high Correlation Coefficient (.8 or 80% or higher) and a low Coefficient of Variation (less than .2 or 20%) the trend line may be interpreted as providing credible estimates for future values for the data set.
Self-Insured Retention (SIR)
The Self-Insured Retention (SIR) is similar in concept to Deductible. In the Self-Insured program, where the insured has Excess Insurance, SIR is that amount that the insured is responsible for paying for each claim (per occurrence).
In an analysis of a number of observations, the Standard Deviation (SD) is square root of the sum of the squared differences between each of the actual observations and the average of all observations.
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