Glossary

Risk-adjusted return on risk-adjusted capital (RARORAC) is the combination of risk-adjusted return on capital (RAROC) and return on risk-adjusted capital (RORAC) in which both the numerator and denominator are adjusted (for different risks). This is a term used in the financial services industry and in enterprise risk management.

Risk-adjustment investment describes the funds, or capital, specifically identified to pay for the risk that is not transferred to a counterparty or an insurer. Such risk is commonly referred to as a retained risk. The difference between risk-adjusted investment yields and other normal business investments yields is known as the opportunity cost of risk.

Risk-based capital (RBC) requirements refers to a method developed by the National Association of Insurance Commissioners to determine the minimum amount of capital required of an insurer to support its operations and write coverage. The insurer's risk profile (i.e., the amount and classes of business it writes) is used to determine its risk-based capital requirement. Four categories of risk are analyzed in arriving at an insurer's minimum capital requirement: asset, credit, underwriting, and off-balance-sheet.

Risk refers to the uncertainty arising from the possible occurrence of given events. It also refers to the insured or the property to which an insurance policy relates.

The Risk and Insurance Management Society, Inc. (RIMS), is an industry association of risk managers that publishes several periodicals, lobbies, sponsors seminars, and conducts an annual conference.

Risk appetite is the degree to which an organization's management is willing to accept the uncertainty of loss for a given risk when it has the option to pay a fixed sum to transfer that risk to an insurer.

Risk-based pricing is an insurance practice involving the setting of premiums, rates, or other charges based on the insurer's assessment of the expected risk presented by the insured person, property, activity, or account. This assessment may look at loss history, location, use, coverage limits, deductibles, property characteristics, driving records, credit-based insurance scores, and other rating variables as allowed by law. The goal is to align the price charged with the likelihood of future claims. Higher-risk exposures generally pay higher premiums. That said, risk-based pricing is subject to actuarial standards, regulatory requirements, and restrictions, such as those on unfair discrimination.

Risk capital is the capital required to finance the consequences of business risks.

A risk charge is an amount identified in some reinsurance agreements as specifically to be retained by the reinsurer or assuming the risk under the policies reinsured; a share of the profits in excess of the risk charge is returned to the cedent as an experience refund.

Risk concentration is the underwriting of a number of like risks, where the same or similar loss events could involve multiple subjects of insurance insured by the same insurer.