Assignment 5 - How Insurance Reduces Risk

In a probability distribution, the standard deviation is a measure of which one of the following? Select one: A. Probable loss severity B. Estimated amount of actual losses C. Uncertainty around expected value D. Expected loss frequency

C. Uncertainty around expected value

Julio and Emily are both equally good drivers with clean records, and they drive similar cars. When they marry, Emily adds Julio to her personal auto policy and cancels his old policy. Now that Julio has been added to Emily's policy, the potential loss severity of an accident involving Emily's car is Select one: A. Correlated. B. Increased. C. Unchanged. D. Decreased.

C. Unchanged.

Two individuals each have a 0.005 (or .5%) probability of suffering a total homeowners loss in a given year, and those two people pool their loss exposures. Assuming the loss exposures are independent of one another, which one of the following represents the probability of both individuals suffering a total loss with the pooling arrangement in place? Select one: A. .000025, or .0025% B. .00005, or .005% C. .0025, or .25% D. .01, or 1%

A. .000025, or .0025%

As the number of members in a pool increases, on a per member basis the Select one: A. Expected value of losses remains unchanged. B. Uncertainty regarding losses increases. C. Probability of making a payment increases. D. The standard deviation remains unchanged.

A. Expected value of losses remains unchanged.

When a loss at one loss exposure has no effect on the probability of a loss at another loss exposure, those exposures are said to be Select one: A. Independent. B. Separate. C. Unique. D. Correlated.

A. Independent.

An insurer has additional financial resources that enable it to provide a stronger guarantee that sufficient funds will be available in the event of a loss. Such additional financial resources are primarily derived from retained earnings and Select one: A. Initial capital from investors. B. Net earned premium. C. Policyholder surplus. D. Claim reserves.

A. Initial capital from investors.

Which one of the following statements is correct with regard to the concept of pooling? Select one: A. Pooling arrangements combine the loss exposures and financial resources of pool members for the purpose of sharing losses. B. As the size of a pool increases, the expected losses to each pool member become less predictable. C. Generally, a loss to one member of a pooling arrangement increases the chance of a loss to another member. D. Pooling arrangements reduce the most risk when the loss exposures being pooled are correlated.

A. Pooling arrangements combine the loss exposures and financial resources of pool members for the purpose of sharing losses.

In a typical pooling arrangement, as the number of members in the pool increases Select one: A. All members' expected cost increases. B. All members' expected cost decreases. C. The standard deviation per member decreases. D. The standard deviation per member increases.

C. The standard deviation per member decreases.

Two individuals each have a 75 percent probability of not suffering a homeowners loss in a given year. Assuming that losses involving these two homes are independent of one another, and that the two individuals enter into a pooling arrangement, which one of the following represents the probability of neither individual suffering a loss? Select one: A. .00 B. .56 C. .75 D. 1.5

B. .56

Through reinsurance, primary insurers pool or transfer risks, thereby Select one: A. Controlling and monitoring current loss exposures. B. Staying within capacity constraints and helping to ensure their solvency. C. Expanding the insurer's capacity to write surplus lines of coverage. D. Increasing net written premium while maintaining or decreasing policyholder surplus.

B. Staying within capacity constraints and helping to ensure their solvency.

Pooling is a fundamental risk management concept that is essential to the operation of insurance. Pooling arrangements Select one: A. Change the frequency of the individual loss exposures. B. Have no effect on frequency, severity, or the distribution of losses among members in the pooling arrangement. C. Change the probability distribution of losses facing each person in the pooling arrangement. D. Change the severity of the individual loss exposures.

C. Change the probability distribution of losses facing each person in the pooling arrangement.

One of the primary social benefits of pooling is that it Select one: A. Transfers risk from the individual to the pool. B. Decreases the members' expected cost. C. Helps to reduce risk in society. D. Acts as a loss control technique.

C. Helps to reduce risk in society.

Judy and Jake are neighbors who agree to enter a pooling arrangement for their houses. Each of them owns the same type of house and faces the same loss distribution. Which one of the following statements regarding their pooling arrangement is correct? Select one: A. The standard deviation of the pool has decreased since there are two members in the pooling arrangement. B. The expected losses of the pool are half the expected losses of either Judy or Jake. C. The expected losses of the pool are twice the expected losses of either Judy or Jake. D. The standard deviation has doubled due to having two members in the pooling arrangement.

C. The expected losses of the pool are twice the expected losses of either Judy or Jake.

Sylvia and her brother Bill bought houses in the same town. Sylvia's home is insured by Insurer A and Bill's home is insured by Insurer B. The home belongs to Sylvia's sister, Jean, and is also insured by Insurer A. In this scenario, the risk sharing occurs between Select one: A. Insurer A and Insurer B. B. Sylvia and her sister Jean. C. The insurers and the insureds. D. Sylvia, Jean, and their brother Bill.

C. The insurers and the insureds.

If in a pooling arrangement, the premiums charged are greater than the sum of expected average loss costs and expenses, and the insurer begins with initial capitalization, the insurer can be comfortable agreeing to accept the transfer of risks from its insured, provided the accepted risks are Select one: A. In compliance with state laws related to insurance products. B. Non-catastrophic. C. Within its capacity. D. Not excluded by the insurance policies it offers.

C. Within its capacity.

Jeff owns three storage facilities, all of which are located in the same coastal city. In terms of pooling hurricane loss exposures, Jeff's storage facilities Select one: A. Cannot be insured under a single insurance policy. B. Are speculative loss exposures. C. Are independent of one another. D. Are correlated with one another.

D. Are correlated with one another.

When loss exposures are pooled for loss distribution purposes, as members are added to the pool, the standard deviation Select one: A. Decreases at an increasing rate. B. Increases on a per member basis. C. Decreases at a constant rate. D. Increases at a decreasing rate.

D. Increases at a decreasing rate.

Every insurer's capacity is limited by its financial resources, and its ability to fulfill its obligations is based on Select one: A. Stable economic conditions. B. Sufficient initial capital from investors. C. Accurate claim reserves. D. Its ability to remain solvent.

D. Its ability to remain solvent.

Pooling is an arrangement that facilitates the grouping of loss exposures and the resources to pay for any losses that may occur. Pooling arrangements function best when the loss exposures being pooled are Select one: A. Related to one another. B. Severe but not frequent. C. Frequent and not severe. D. Not correlated with one another.

D. Not correlated with one another.

Pooling arrangements are essential to the operation of insurance. Pooling is a risk Select one: A. Transfer technique. B. Retention technique. C. Control technique. D. Sharing technique.

D. Sharing technique.

Pooling arrangements reduce the most risk to the group when Select one: A. The size of the pool is limited. B. The risk of loss for pool members is perfectly positively correlated. C. The loss exposures in the pool are geographically concentrated. D. The loss exposures being pooled are independent of one another.

D. The loss exposures being pooled are independent of one another.