Principles of Risk Management & Insurance - Exam 1

Which job involves determining the likelihood of an event occurring and its potential impact on an insurance company? A) Risk manager B) Actuary C) Underwriter D) Loss control specialist

B) Actuary

How did Chinese merchants spread their risks in ancient times? A) By borrowing money for voyages with the understanding that the loan would not need to be repaid if the ship sank B) By forming mutual aid societies C) By swapping goods between ships D) By insuring their ships

By swapping goods between ships

Suppose you are comparing the degree of risk for the two firms, Cameron Inc. and Meghan Enterprises. From their respective loss frequency distributions, we have the following information concerning "inventory shrinkage" per month. For CAMERON INC. the mean is equal to 5 and the variance is equal to 9. For MEGHAN ENTERPRISES the mean is equal to 10 and the variance is equal to 16. Which company faces more risk and why? A) Meghan Enterprises because their coefficient of variation is higher than Cameron. B) Cameron Inc. because their variance is higher than Meghan. C) Cameron Inc. because their coefficient of variation is higher than Meghan. D) Cameron Inc. because their mean is higher than Meghan

C) Cameron Inc. because their coefficient of variation is higher than Meghan.

Which of the following accurately describes moral hazard: (I) It always involves an illegal act, most often insurance fraud. (II) It always involves some form of insurance such as life, health, or auto. (III) It always leads to increased frequency and/or severity. A) I B) II C) III D) A and B. E) A and C. F) B and C. G) All of the above. H) None of the above.

C) III

According to the principle of diminishing marginal utility of wealth, why are individuals generally risk-averse? A) The value each additional unit of wealth more than the previous one. B) They are indifferent to the level of wealth. C) They are more focused on short-term gains. D) They value each additional unit of wealth less than the previous one.

D) They value each additional unit of wealth less than the previous one.

A small business owner seeks property insurance in an area known for occasional but severe hailstorms. The insurer offers a policy with a variable risk charge that increases premiums after significant weather events. This arrangement: A) May encourage businesses to invest in hail-resistant infrastructure to mitigate potential increases in insurance costs. B) Could lead to adverse selection if businesses in less hail-prone areas choose cheaper policies, leaving only high-risk businesses with variable risk charges. C) Demonstrates an application of experience rating, adjusting premiums based on the changing risk environment. D) A and B. E) A and C. F) B and C. G) All of the above. H) None of the above.

E) A and C

What are the necessary factors for drawing a normal distribution curve? A) Standard deviation B) Average C) Range D) Skew E) B and C. F) A, B, and C. G) A and B. H) All of the above. I) None of the above.

G) A and B

Samantha has a health insurance plan with low deductibles and copays. After securing the insurance, she decides to skip her regular exercise routine and opts for a diet high in processed foods. The insurer predicts this behavior and charges Samatha higher premiums. This behavior exemplifies: A) Risk pooling B) Adverse selection C) Definite Risk D) Moral hazard E) A, B, and D. F) A and D. G) A, C, and D. H) All of the above. I) None of the above.

Moral Hazard

Mike is trying to decide whether or not he should purchase health insurance. He is young and healthy and knows he can always go to the emergency room if he truly needs care. He decides to go uninsured. This is an example of what? A healthcare provider increases the number of unnecessary tests and procedures for patients covered by government healthcare programs, knowing that reimbursements are guaranteed as the government can always pay. This is an example of what? A) Adverse selection; Adverse selection B) Adverse selection; Moral hazard C) Moral hazard; Moral hazard D) Moral hazard; Adverse selection

Moral hazard; Moral hazard

Past data on losses is useful for Static Risks vs. Dynamic risks. A) More. B) Equally as C) Less.

More

What did the coffee house patrons at Lloyd's Coffee House in London famously enjoy doing? A) Discussing politics B) Gambling on ships' voyages C) Offering Loans D) A and B. E) A and C. F) B and C. G) All of the above. H) None of the above.

Gambling on ship's voyages

To combat moral hazard, a health insurer introduces a policy with high deductibles and coinsurance rates. This policy is likely to: A) Dissuade policyholders from using unnecessary medical services, as they bear a greater portion of the cost. B) Eliminate the need for reinsurance by reducing the overall risk to the insurer. C) Encourage policyholders to engage in riskier behaviors since they have insurance coverage. D) Lead to adverse selection, as only the healthiest individuals choose to buy insurance.

A) Dissuade policyholders from using unnecessary medical services, as they bear a greater portion of the cost.

What was the initial reason for governments getting into the insurance business? A) To make money B) To support the growth of small businesses C) To fund wars D) To provide support for their citizens E) A, B, and C. F) C and D. G) A and C. H) All of the above. I) None of the above.

G) A and C

Heather's car is stolen. When she files a claim with her insurer, Heather claims that she had purchased a new set of expensive golf clubs for her boyfriend and that these golf clubs were in the trunk of the car and thus were stolen as well. She is therefore attempting to claim a loss from her insurer of the car and the golf clubs. However, Heather does not have a boyfriend and did not purchase any golf clubs. This is an example of? A) Insurance Fraud. B) A catastrophic loss. C) Legal Activity. D) Moral Hazard. E) A and C. F) C and D. G) A and D. H) All of the above. I) None of the above.

G) A and D

Which of the following statements accurately describes challenges insurers face when insuring against catastrophic risks? A) Premiums for catastrophic risk insurance are typically lower due to the infrequent nature of such events. B) Risk pooling is particularly effective for catastrophic risks, as losses are spread out over a large number of independent events. C) Catastrophic risks often require government intervention, as private insurers may not have sufficient capital to cover extreme losses. D) The law of large numbers is less effective due to the correlation of losses across a large geographic area. E) A, B, and C. F) B and D. G) C and D. H) All of the above. I) None of the above.

G) C and D

In what ways does reinsurance contribute to the stability of insurance markets? A) By allowing primary insurers to transfer portions of their risk, reducing the likelihood of insolvency after major claims. B) By increasing the competition among primary insurers, leading to lower premiums for policyholders. C) By providing insurers with the capacity to cover larger risks, thus enabling them to offer policies to a wider range of customers. D) By directly reducing the premiums paid by policyholders for their insurance coverage. E) B, C, and D. F) B and D. G) A and C. H) All of the above. I) None of the above.

G) A and C

Image a food processing company, "DelightBites," located in a coastal area. The company has been operational for a decade and is known for its high-quality organic snacks. One summer, due to unusually high termpreatures and dry conditions, a wildfire started in the nearby forest and rapidly spread towards the industrial area where DelightBites is located. Despite efforts to contain the fire, it reached the premises, causing significant damage to the warehouse and disrupting operations. What is the peril (if any) here? A) Temperature and dry conditions B) Fire containment efforts C) Wildfire D) Coastal area E) B and C. F) C and D. G) B and D. H) All of the above. I) None of the above.

Wildfire

Which of the following explains an adverse selection death spiral in the context of insurance? A) A situation where insurance companies lose money due to low demand for insurance policies B) A situation where individuals with higher risks are more likely to purchase insurance, which leads to higher premiums and prices low-risk individuals out of the market. C) A situation where insurance companies experience high losses due to unpredictable risks D) A situation where individuals with higher risks are less likely to purchase insurance, which leads to higher premiums and prices low-risk individuals out of the market.

B) A situation where individuals with higher risks are more likely to purchase insurance, which leads to higher premiums and prices low-risk individuals out of the market.

Person A faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $4. Person B faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $4. Person C faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $8 Suppose Person A purchases full insurance for an actuarially fair premium and Person A is the ONLY person in the insurer's risk pool. Which of the following statements is (are) TRUE about this arrangement? A) The actuarially fair premium for Person A is $2. B) The amount of risk the insurer faces with Person A being their only customer is 2. C) The amount of risk the insurer faces with Person A being their only customer is 1. D) The actuarially fair premium for Person A is $4. \ E) A and B. F) A, C, and D. G) A and C. H) All of the above. I) None of the above.

G) A and C

The more that an individual does not like risk: A) The higher will be their PMAX. B) The lower will be their PMAX. C) The higher will be their worry value. D) The lower will be their worry value. E) C and D. F) A and B. G) A and C. H) All of the above. I) None of the above.

G) A and C

Why is moral hazard in lending bad? A) It creates a disincentive for borrowers to repay loans. B) It results in higher costs for borrowers. C) It increases the likelihood of risky behavior. D) It makes the market more efficient. E) B, C, and D. F) A and C. G) A, B, and C. H) All of the above. I) None of the above.

G) A, B, and C

Which of the following is an example of an objective risk measurement? A) The level of safety of a car, as determined by crash test results B) The risk of a flood in a particular area, as determined by meteorological data and historical records C) The danger of a new product, as determined by customer reviews D) The risk of heart disease, as determined by a study of genetic factors and lifestyle choices E) A and B. F) A and D. G) A, B, and D. H) All of the above. I) None of the above

G) A, B, and D.

Consider the concept of moral hazard. Which of the following statements are an example of moral hazard in health insurance? A) Individuals with health insurance engage in careless behavior causing them to get sick. B) Individuals file false claims and commit insurance fraud with health insurance. C) Individuals with health insurance use more health care goods and services than those without health insurance. D) A and B. E) A and C. F) B and C. G) All of the above. H) None of the above.

G) All of the above

Person A faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $4. Person B faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $4. Person C faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $8 Suppose that Person C also purchases insurance and joins Person A in the insurer's risk pool. Note that the risk pool now contains Person A and Person C only. The insurer charges both person A and person C a premium of $3. Which of the following statements is FALSE? A) Person C will probably enter the risk pool depending on their PMAX. B) Person C is charged his/her actuarially fair premium. C) Person A may leave the risk pool depending on their PMAX. D) The expected loss faced by the insurer increases. E) A, B, and C. F) C and D. G) A and B. H) All of the above. I) None of the above.

B) Person C is charged his/her actuarially fair premium.

The distance of a private home to the nearest fire station or fire house could be considered a physical hazard because: A) Dynamic risk is higher. B) Severity of the loss could be increased. C) Frequency of the loss could be increased. D) The probability of the loss is higher. E) A, B, and D. F) A, B, and C. G) B, C, and D. H) All of the above. I) None of the above.

B) Severity of the loss could be increased.

How did the Alpine farmers in the 16th century handle risk? A) By analyzing and trading risk B) By insuring their farms C) By using government subsidies D) By forming mutual aid societies E) A, B, and D. F) A, B, and C. G) A, C, and D. H) All of the above. I) None of the above.

By forming mutual aid societies

Which of the following would result in an increased pure premium for an insurance firm who is selling auto insurance? [other things equal]? A) The insurer has less confidence in their estimate of expected loss. B) The insurer decides to only insure drivers who have excellent driving records. C) A rival insurer develops a telematics device and becomes better able to estimate risk. D) The insurer put more resources toward an expensive advertisement campaign. E) B and C. F) A, B, and D. G) A and C. H) All of the above. I) None of the above.

C) A rival insurer develops a telematics device and becomes better able to estimate risk.

How does experience rating address the problem of moral hazard? A) By charging more correct initial rates. B) By denying coverage to high-risk policyholders C) By encouraging policyholders to be more careful to avoid claims

C) By encouraging policyholders to be more careful to avoid claims

A restaurant location near a river experiences frequent flooding, leading to repeated property damage and business interruptions as the restaurant cannot be used. Identify the type/s of hazard/s in this scenario. A) Moral Hazard. B) Use hazard C) Location hazard D) Construction hazard E) B and C. F) A and B. G) B and D. H) All of the above. I) None of the above.

C) Location Hazard

While you are in class, your cat, Simon knocks over a bottle of cooking sherry and it breaks all over the floor. When you come home, your friend Lisa lights a cigarette and it accidentally falls into the sherry, lighting a fire. You run away because you do not have a fire extinguisher, and as you run you scream "Oh No!! The was the hazard and the was the peril!" A) Lack of renter's insurance, cat Simon. B) Cat Simon, cooking sherry. C) Fire, cooking sherry. D) Cooking sherry, fire.

Cooking Sherry, Fire

Removal of an insurance mandate will likely lead to which of following? A) Fewer people will buy insurance. B) Higher cost of insurance. C) Lowered cost of insurance. D) A and B. E) A and C. F) B and C. G) All of the above. H) None of the above.

D) A and B

How is the dollar value on the cost of residual uncertainty calculated? A) Through the insurance company's determination of the full insurance policy's price based on their risk analysis. B) By evaluating the insurer's fianancial stability and the likelihood of them honoring a claim. C) By calculating the difference between the insurance premium paid and the actual cost of a claim. D) By assessing the total amount that the individuals or firms are willing to pay for insurance coverage that exceeds the expected loss, known as the risk premium.

D) By assessing the total amount that the individuals or firms are willing to pay for insurance coverage that exceeds the expected loss, known as the risk premium.

Person A faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $4. Person B faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $4. Person C faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $8 Suppose that Person B also purchases insurance for an actuarially fair premium and joins Person A in the insurer's risk pool. Note that the risk pool now contains Person A and Person B only. Which of the following statements is TRUE about this arrangement? A) The amount of risk faced by the insurer is $4. B) The amount of risk faced by the insurer by adding Person B remains unchanged. C) The amount of risk faced by the insurer is $2. D) The amount of risk faced by the insurer is about 0.7. E) B and D. F) A, C, and D. G) A, B, and C. H) All of the above. I) None of the above.

D) The amount of risk faced by the insurer is about 0.7.

Which of the following is NOT an example of moral hazard? A) Dave is a bad, careless driver. He texts while driving. He does not have insurance on his car. B) Studies show people with health insurance use twice as many prescription drugs than people without insurance despite the same medical history. C) Joan likes to deep fry her thanksgiving turkey even though it is dangerous because she knows she has fire insurance. D) John can no longer afford his car payment so he sets his car on fire to collect the insurance money. E) B and D. F) A and D. G) B and C. H) All of the above. I) None of the above.

Dave is a bad, careless driver. He texts while driving. He does not have insurance on his car.

Heather's car is stolen. When she files a claim with her insurer, Heather claims that she had purchased a new set of expensive golf clubs for her boyfriend and that these golf clubs were in the trunk of the car and thus were stolen as well. She is therefore attempting to claim a loss from her insurer of the car and the golf clubs. However, Heather does not have a boyfriend and did not purchase any golf clubs. This is an example of? A) A loss which is not definite in nature. B) Moral Hazard. C) A catastrophic loss. D) A loss which is not significant to the insured. E) A and B. F) A and D. G) C and D. H) All of the above. I) None of the above.

E) A and B

Person A faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $4. Person B faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $4. Person C faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $8 Suppose the risk pool does contain Person A and Person C. In this case, the risk pool is characterized by an income or wealth transfer between? A) Those who do not have a loss to those who do have a loss. B) Low risk individuals to high risk individuals. C) Those who have a loss to those who do not have a loss. D) High risk individuals to low risk individuals. E) A and B. F) B and D. G) B and C. H) All of the above. I) None of the above.

E) A and B

Andrew Garfield enters a building that has had it's floor removed but didn't have up any warning signs. He falls several stories and injures himself. In addition to medical costs, this prevents him from playing the role of Secretariat in a movie. Which of the following is the loss? A) Andrew's injuries. B) The lack of warning signs. C) Him missing out on the movie. D) The fall. E) A and C. F) A and D. G) B and D. H) All of the above. I) None of the above.

E) A and C

Meghan has a job located right next to her house and only drives about 10 miles for groceries and doggy daycare every week and always drives under the speed limit. On the other hand, her brother Sean has to drive on the highway for about 30 miles every day to get to work and always drives significantly above the speed limit. Currently, Meghan and Sean pay the same rate for auto insurance through State Farm. If they are both offered a usage based auto plan, which of the following statement(s) is (are) TRUE? A) The In-Drive device can reduce the degree of asymmetric information for State Farm. B) Sean would be willing to install the In-Drive device. C) Meghan would be willing to install the In-Drive device. D) A and B. E) A and C. F) B and C. G) All of the above. H) None of the above.

E) A and C

Which of the following incorrectly explains an adverse selection death spiral in the context of insurance? A) A situation where insurance companies experience high profits due to low demand for insurance policies. B) A situation where individuals with higher risks are more likely to purchase insurance, which leads to higher premiums and prices. C) A situation where low risk individuals are more likely to purchase insurance which leads to lower premiums and encourages high risk individuals to purchase insurance. D) A situation where premiums increase and quantity decreases. E) A and C. F) A, C, and D. G) B and C. H) All of the above. I) None of the above.

E) A and C

What is bottomry in the Code of Hammurabi? A) A type of agricultural insurance B) A type of maritime insurance C) A form of loan D) A gambling game E) B and C. F) A, B, and C. G) B and D. H) All of the above. I) None of the above.

E) B and C

Which of the following is an example of an objective risk measurement? A) The perceived danger of a new roller coaster, as determined by a survey of people's opinions B) The risk of getting a cold, as determined by a medical study of infection rates C) The likelihood of a stock market crash, as determined by historical data and economic analysis D) The level of danger of a haunted house, as determined by personal experience E) B and C. F) A and B. G) C and D. H) All of the above. I) None of the above.

E) B and C

Which of the following is NOT considered to be an example of moral hazard in insurance? A) A policyholder taking unnecessary risks because they know they are insured B) A policyholder failing to disclose relevant information to the insurer C) An insurer charging different premiums based on the level of risk D) An insurer denying a claim due to a policyholder's actions that contributed to the loss E) B, C, and D. F) A, B, and C. G) A, C, and D. H) All of the above. I) None of the above

E) B, C, and D

A community living in a flood-prone area faces increasing flood insurance premiums due to recent catastrophic flooding events. Given the discussions on risk pooling and the challenges of insuring against skewed losses, which statements are true? A) Increased premiums for flood insurance in this area could lead to a death spiral, where eventually no one can afford insurance. B) Residents may experience a form of adverse selection, with only those most at risk choosing to purchase flood insurance. C) The community's situation exemplifies the difficulty of applying the law of large numbers to insurance against catastrophic losses. D) Government intervention may become necessary if the market for flood insurance in this area breaks down due to unaffordably high premiums. E) B and D. F) A, B, and D. G) A and B. H) All of the above. I) None of the above.

H) All of the above

Consider the concept of moral hazard. Which of the following statements are NOT an example of moral hazard in health insurance? A) Individuals with health insurance engage in careless behavior causing them to get sick. B) Individuals file false claims and commit insurance fraud with health insurance. C) Individuals with health insurance use more health care goods and services than those without health insurance. D) A and B. E) A and C. F) B and C. G) All of the above. H) None of the above.

H) None of the above

Risk aversion arises in most utility functions because people A) Tend to underestimate the probability of unfavorable outcomes. B) Prefer to invest in high-risk assets for potential high returns. C) Have diminishing marginal utility of wealth D) Generally believe that their personal skills can influence random events. E) B and D. F) A, C, and D. G) A and B. H) All of the above. I) None of the above.

Have diminishing marginal utility of wealth

1. An investor buys both a stock and a put option for the same stock to minimize potential losses. This strategy is called: A) Hedging B) Speculation C) Arbitrage D) Diversification E) A, C, and D F) C and D G) B and C H) All of the above I) None of the above

Hedging

What is the most important step in the risk management process? A) All are equally important B) Periodically re-evaluate chosen strategies C) ID of the loss exposure D) ID possible RM techniques

ID of the Loss Exposure

The use of pooling in insurance functions best when the loss exposures being pooled are: A) Mutually exclusive. B) Independent. C) Correlated. D) Skewed E) A and C. F) C and D. G) A, C, and D. H) All of the above. I) None of the above

Independent

John, a frequent smoker, purchases a comprehensive insurance plan. Shortly after acquiring the plan, he files several claims related to respiratory issues. What is the best option for the insurer to address this issue in this scenario? A) Experience rating B) An insurance mandate C) Individual underwriting D) Cost sharing

Individual Underwriting

Transferring risk to another party by paying a premium, in anticipation of receiving compensation in the event of a loss, is the principle behind: A) Insurance B) Diversification C) Derivatives D) Hedging

Insurance

Why might full insurance not remove the cost of residual uncertainty? A) Full insurance by definition fully covers all risk and therefore removes all residual uncertainty. B) Full insurance may not always make payment for claims. C) Full insurance guarantees payment for claims. D) Insurance companies are financially sound and will always pay. E) A, B, and D. F) B and D. G) B and C. H) All of the above. I) None of the above.

Full insurance may not always make payment for claims.

How does the Law of Large Numbers apply to insurance? A) The number of claims from policyholders will be close to the expected number of claims in a given time period B) The total premium income will be close to the expected premium income in a given time period C) The total cost of claims will be close to the expected cost of claims in a given time period D) The number of policyholders will be close to the expected number of policyholders in a given time period E) B and C. F) A and D. G) A and C. H) All of the above. I) None of the above.

G) A and C

You're baking cookies when you accidentally leave an oily kitchen towel too close to the stove. Later, your roommate turns on the wrong burner, igniting the towel. As you both scramble to put out the fire, you exclaim, "Oh No!! The was the hazard and the was the peril!" A) Kitchen towel, fire. B) Overheated oven, kitchen towel. C) Fire, kitchen towel. D) Roommate's mistake, kitchen towel.

Kitchen towel, fire.

A risk-neutral person has what shaped utility function? A) None of these B) Concave C) Linear D) Convex

Linear

A hiker is trekking through a remote mountain range. The trail is steep and rocky, and the hiker is carrying a heavy backpack. As he navigates a particularly treacherous section of the trail, the straps on his backpack suddenly break, causing him to lose his balance and fall. The hiker tumbles down the mountain, suffering multiple injuries. The multiple injuries are the A) Hazard. B) Loss. C) Peril. D) A and B. E) A and C. F) B and C. G) All of the above. H) None of the above.

Loss

Why might firms appear risk averse due to managerial actions? A) Managers have unlimited profit-sharing without any caps. B) Firms are risk neutral. C) Managers may be fired for poor performance. D) Managers prefer to invest in high-risk projects for higher rewards. E) C and D. F) B and C. G) A, B, and C. H) All of the above. I) None of the above

Managers may be fired for poor performance.

Risk aversion arises in most utility functions because people A) Tend to underestimate the probability of unfavorable outcomes. B) Generally believe that their personal skills can influence random events. C) Prefer to invest in high-risk assets for potential high returns. D) Consistently overvalue their future needs compared to their present needs. E) B, C, and D. F) B and D. G) A, C, and D. H) All of the above. I) None of the above.

None of the above

Which of the following is TRUE for risk-neutral people / firms? A) They will always purchase full insurance. B) Their cost of worry is negative. C) They love to gamble. D) Their cost of credit does not fluctuate with their risk. E) A and C. F) A and D. G) A and B. H) All of the above. I) None of the above.

None of the above

Consider a weighted coin flip with probability of heads being p = 0.8 and probability of tails being q = 0.2. If it is heads, you win $10, if it tails you win nothing. What is the coefficient of variation for this probability distribution? A) None of these B) $2 C) $16 D) $0.5

None of these

A hiker is trekking through a remote mountain range. The trail is steep and rocky, and the hiker is carrying a heavy backpack. As he navigates a particularly treacherous section of the trail, the straps on his backpack suddenly break, causing him to lose his balance and fall. The hiker tumbles down the mountain, suffering multiple injuries. The fall was the . A) Hazard. B) Peril. C) Loss. D) A and B. E) A and C. F) B and C. G) All of the above. H) None of the above.

Peril

Image a food processing company, "DelightBites," located in a coastal area. The company has been operational for a decade and is known for its high-quality organic snacks. One summer, due to unusually high termpreatures and dry conditions, a wildfire started in the nearby forest and rapidly spread towards the industrial area where DelightBites is located. Despite efforts to contain the fire, it reached the premises, causing significant damage to the warehouse and disrupting operations. What is the hazard (if any) here? A) Temperature and dry conditions B) Wildfire C) Fire containment efforts D) Coastal area E) C and D. F) A, C, and D. G) B, C, and D. H) All of the above. I) None of the above.

Temperature and dry conditions

What does the height of a bar in a histogram represent? A) The distribution of a specific set of the data B) The number of occurrences in a specifc set of the data C) The average value of a specifc set of the data D) The standard deviation of a specifc set of the data E) C and D. F) A, B, and D. G) A and C. H) All of the above. I) None of the above.

The number of occurrences in a specifc set of the data

Residents in certain high-risk coastal areas find it increasingly difficult to obtain flood insurance due to the rising number of climate-related flooding events. Why might an insurance market not exist for flood insurance in these high risk areas? A) The risk is not determinable B) The risk is too large for the insurer C) The risk is too small to the insured D) The risk is not definite

The risk is to large for the insurer

A startup is looking to insure its commercial space flights, which involve carrying tourists to orbit the Earth. Given the novelty and high risks involved, traditional insurance companies are hesitant to offer coverage. Why might an insurance market not exist for the startup's commercial space flights? A) The risk is not definite B) The risk is not determinable C) The risk is too large for the insurer D) The risk is too small to the insured

The risk is too large for the insurer

Which of the following is an example of an objective risk measurement? A) The risk of an economic recession, as determined by data on GDP and unemployment rates B) The risk of a chemical spill, as determined by an opinion panel of experts C) The level of danger of a new hobby, as determined by personal experience D) The danger of a new food, as determined by customer reviews E) A and B. F) A, B, and D. G) B and C. H) All of the above. I) None of the above.

The risk of an economic recession, as determined by data on GDP and unemployment rates

A hiker is trekking through a remote mountain range. The trail is steep and rocky, and the hiker is carrying a heavy backpack. He didn't check the weather forecast and not prepared for the current snowstorm that hit the area. As he navigates a particularly treacherous section of the trail, the hiker slips on the snow and falls, suffering a broken leg. What is the peril? A) The hiker's lack of preparation. B) The slip on the snow. C) The hiker's heavy backpack. D) The snowstorm. E) A and B. F) B, C, and D. G) B and C. H) All of the above. I) None of the above.

The slip on the snow

Which of the following would cause a decrease in worry value for a company owner? A) The frequency of losses for the firm becomes more difficult to estimate. B) The size of the maximum possible loss increases. C) The probability of the maximum possible loss increases. D) The value of the company increases (holding potential loss constant). E) A, B, and D. F) A and C. G) A, C, and D. H) All of the above. I) None of the above.

The value of the company increases (holding potential loss constant).

What is the difference between the way underwriters of Lloyds viewed risk and the way mutual aid societies of the Alps viewed risk? A) Both underwriters and mutual aid societies viewed risk as something to be analyzed and traded B) Underwriters viewed risk as something to be shared, while mutual aid societies viewed risk as something to be analyzed and traded C) Both underwriters and mutual aid societies viewed risk as something to be shared D) Underwriters viewed risk as something to be analyzed and traded, while mutual aid societies viewed risk as something to be shared

Underwriters viewed risk as something to be analyzed and traded, while mutual aid societies viewed risk as something to be shared

You leave your bike unlocked outside a cafe in a safe part of town. While you're inside, a thief spots the bike and steals it. Watching from the window, you exclaim, "Oh No!! The was the hazard and the was the peril!" A) Theft, unlocked bike. B) Cafe location, theft. C) Unlocked bike, theft. D) Cafe location, unlocked bike.

Unlocked Bike, theft

Image a food processing company, "DelightBites," located in a coastal area. The company has been operational for a decade and is known for its high-quality organic snacks. One summer, due to unusually high temperatures and dry conditions, a wildfire started in the nearby forest and rapidly spread towards the industrial area where DelightBites is located. Despite efforts to contain the fire, it reached the premises, causing significant damage to the warehouse and disrupting operations. What is the loss (if any) here? A) Temperature and dry conditions B) Wildfire C) Fire containment efforts D) Warehouse damage E) C and D. F) B and C. G) A, C, and D. H) All of the above. I) None of the above.

Warehouse Damage

What is the width of the normal curve defined by? A) The standard deviation of the measurements B) The relative probability of observing someone with a specific height C) The central limit theorem D) The average measurement E) A and D. F) B, C, and D. G) B and D. H) All of the above. I) None of the above.

A) The standard deviation of the measurements

How many of the steps of the risk management process are "brainstorming" steps? A) 2 B) 1 C) 3 D) 4

2

How many of the steps of the risk management process are quantitative? A) 3 B) 2 C) 4 D) 1

3

What is a basic annuity? A) A savings plan for retirement B) A form of mutual aid society C) A form of insurance that pays in regular installments until the recipient dies D) A loan that pays in regular installments until it expires

A form of insurance that pays in regular installments until the recipient dies

What is a necessary condition for the Law of Large Numbers to apply? A) A large number of trials B) The trials must be independent C) The trials must be identically distributed D) A small number of independent trials E) A, C, and D. F) A, B, and D. G) A and B. H) All of the above. I) None of the above.

A large number of trials

What is the central limit theorem? A) A way to find the max (or limit) of a dataset B) A calculation used to find range C) A reason why normal distributions are common in nature D) A method to determine the average E) A and D. F) A and B. G) A, B, and D. H) All of the above. I) None of the above.

A reason why normal distributions are common in nature

An investor decides to invest in a highly volatile stock market and believes that higher risk leads to higher rewards. This behavior reflects a: A) Can't tell from information given. B) Risk-averse attitude C) Risk-neutral attitude D) Risk-seeking attitude

A) Can't tell from information given.

A hiker is trekking through a remote mountain range. The trail is steep and rocky, and the hiker is carrying a heavy backpack. As he navigates a particularly treacherous section of the trail, the straps on his backpack suddenly break, causing him to lose his balance and fall. The hiker tumbles down the mountain, suffering multiple injuries. The broken backpack straps were the A) Hazard. B) Peril. C) Loss. D) A and B. E) A and C. F) B and C. G) All of the above. H) None of the above.

A) Hazard

According to the law of large numbers, as the number of exposure units or the number of trials in an experiment or the amount of past experience is increased: (I) The probability of the loss decreases. (II) The probability of the loss increases. (III) The relative accuracy of predictions about future losses increases. (IV) The relative accuracy of predictions about future losses decreases. A) III B) IV C) II D) I E) B and D. F) A, C, and D. G) A, B, and D. H) All of the above. I) None of the above.

A) III

Assume the insurance market has hardened. Which of the following is now true of the insurance market relative to when you last made your decision? A) Insurers are very picky, prices are higher. B) Insurers want to sell, prices are higher. C) Insurers want to sell, prices are lower. D) Insurers are very picky, prices are lower.

A) Insurers are very picky, prices are higher

How does the cost of credit relate to the appearance of a firm's risk attitudes? A) Lower interest rates when less risky leads to the appearance of risk aversion. B) Higher interest rates when less risky leads to the appearance of risk aversion. C) Lower interest rates when more risky leads to the appearance of risk seeking. D) Higher interest rates when more risky leads to the appearance of risk seeking.

A) Lower interest rates when less risky leads to the appearance of risk aversion.

What should an insurer do in the event that they face the possibility of damage to a large number of buildings in a given geographic region as the result of an earthquake? A) Purchase reinsurance. B) Sell contracts that provide an unlimited coverage limit. C) Increase market share in that geographic region to form a larger risk pool. D) Write insurance contracts containing deductibles. E) A, C, and D. F) B, C, and D. G) A and C. H) All of the above. I) None of the above

A) Purchase Reinsurance

Individuals who know that they have chronic, costly medical conditions that are not apparent or known to the insurer may not disclose this to the insurer and therefore may be able to purchase health insurance for a lower premium than if they were to disclose this information to the insurer. This is an example of: A) Moral hazard due to asymmetric information. B) Adverse selection due to asymmetric information. C) Adverse selection that is a result of moral hazard. D) A loss which is not significant to the insured.

Adverse selection due to asymmetric information.

Meghan purchased long-term care insurance because she knew that she has inherited the ApoE4 gene, which increases the risk of developing Alzheimer's disease. Long-term care insurance would partially cover the cost of a nursing home. This is an example of what? Moira did not purchase flood insurance offered by NFIP because she knew that might be able to rely on taxpayer-funded disaster relief to recover any losses from flood damage. This is an example of what? A) Adverse selection; Adverse selection B) Adverse selection; Moral hazard C) Moral hazard; Moral hazard D) Moral hazard; Adverse selection

Adverse selection; Moral hazard

For which of the following risks does the US (federal or state governments) have an insurance 'mandate' of some form? A) Worker's Compensation B) Unemployment. C) Flood Risk. D) Auto Liability. E) C and D. F) B and C. G) B and D. H) All of the above. I) None of the above.

All of the above

A risk-loving person has what shaped utility function? A) Convex B) None of these C) Linear D) Concave

Convex

The more that an individual tolerates risk: A) The lower will be their worry value. B) The higher will be their PMAX. C) The higher will be their worry value. D) The lower will be their PMAX. E) A and C. F) A and D. G) B and C. H) All of the above. I) None of the above.

F) A and D

What is an example of experience rating in practice? A) A construction company who has had a high number of workers' compensation claims in the past will be charged higher rates for the insurance. B) A young adult who is a non-smoker, healthy and has no prior medical conditions will be charged lower rates for health insurance. C) A driver who has had multiple traffic accidents will be denied coverage by the auto insurance company. D) A business owner who has had no claims in the past, will get a discount on their liability insurance policy. E) A and C. F) A and D. G) B and C. H) All of the above. I) None of the above.

F) A and D

What factor/s does/do contribute to a firm's appearance of being risk averse? A) The financial impact of bankruptcy. B) The influence of credit costs on overall expenses. C) Managerial incentives. D) Shareholders' individual risk preferences. E) A and D. F) A, B, and C. G) B and C. H) All of the above. I) None of the above.

F) A, B and C

A single earthquake damages a large number of buildings in a given geographic region. This simultaneous loss to a large number of buildings insured by a single insurer illustrates? A) The Law of Large Numbers. B) Losses which are correlated. C) A reason for reinsurance. D) Pooling of independent loss exposures. E) A and C. F) B and C. G) A, C, and D. H) All of the above. I) None of the above.

F) B and C

You are on the final step of the RM process. Previously you chose insurance as a way to finance property risk (to your factory in Florida) as the market was very soft. What is an example of an event that may have caused the market to harden? A) Law changes regarding medical mal-practice B) A major hurricane making landfall in Florida C) Wild fires erupting in California D) A worldwide financial crisis E) B, C, and D. F) B and D. G) A, B, and C. H) All of the above. I) None of the above.

F) B and D

What is experience rating in the context of insurance? A) The process of denying coverage to high-risk policyholders B) The process of charging higher rates to policyholders who have had multiple claims C) The process of providing discounts to policyholders who have had no claims D) The process of adjusting insurance premiums based on a policyholder's past claims history E) A and B. F) B, C, and D. G) B and C. H) All of the above. I) None of the above.

F) B, C, and D

Risk aversion arises in most utility functions because people A) Tend to underestimate the probability of unfavorable outcomes. B) Prefer to invest in high-risk assets for potential high returns. C) Value their 1st dollar a lot more than their 1,000,000th dollar. D) Have diminishing marginal utility of wealth E) B, C, and D. F) C and D. G) A and B. H) All of the above. I) None of the above.

F) C and D

An investor refuses to invest in a highly volatile stock market based even though they believe that higher risk leads to higher rewards. This behavior reflects a: A) Risk-seeking attitude B) Risk-neutral attitude C) Risk-averse attitude D) Can't tell from information given.

Risk Averse Attitude

The maximum level of risk that an organization is prepared to accept before action is deemed necessary is known as its A) Risk Capacity B) Risk Aversion C) Risk Threshold D) Risk Tolerance

Risk Tolerance

You purchase a comprehensive home insurance policy to cover potential damages from natural disasters. This action exemplifies: A) Risk transfer B) Risk avoidance C) Risk retention D) Risk reduction E) A, C, and D. F) B, C, and D. G) A and C. H) All of the above. I) None of the above

Risk Transfer

Which of the following is TRUE for risk-neutral people / firms? A) They hate to gamble. B) Their cost of credit does fluctuate with their risk. C) Their cost of worry positive. D) They will never purchase full insurance. E) A and D. F) B and D. G) A and C. H) All of the above. I) None of the above.

Their cost of credit does fluctuate with their risk.

Which of the following is TRUE for risk-neutral people / firms? A) Their cost of worry is zero. B) They love to gamble. C) Their cost of credit does not fluctuate with their risk. D) They will always purchase full insurance. E) A and B. F) B and C. G) A and D. H) All of the above. I) None of the above.

Their cost of worry is zero

Why is jumping off a 1-story building riskier than jumping off a 50-story building? A) Jumping off a 1-story building is more physically challenging B) There is more danger in jumping off a 1-story building C) There is more uncertainty in jumping off a 1-story building D) Jumping off a 1-story building has a higher chance of injury E) B and C. F) C and D. G) A, C, and D. H) All of the above. I) None of the above.

There is more uncertainty in jumping off a 1-story building

How did the mutual aid societies of the Alpine farmers differ from other forms of insurance during the 16th century? A) They were only for farmers B) They were only available to wealthy farmers C) They focused on sharing risk rather than analyzing and trading it D) They were only available in the Alps region.

They focused on sharing risk rather than analyzing and trading it