FIN138 Exam 1 (HW Questions)
_____ reflect(s) the excess value a firm holds in assets over liabilities.
Capital
When an employer provides insurance for the benefit of employees (for example health or life insurance) this is known as _____ insurance.
Group
_____ is the quantity of insurance coverage that is available in terms of limits of coverage.
Insurance capacity
_____ is social device in which a group of individuals transfer risk to another party in such a way that the third party combines or _____ all the risk exposures together.
Insurance, pools
Hazards that are attitudes and cultural conditions that can affect the probability or the severity of a loss
Intangible
Group Insurance is _____ insurance provided for the benefit of the _____ by an _____.
Life/Health, employee, employer
Hazards that involve dishonesty.
Moral
Hazards that involve attitudes of carelessness that can increase the chances of a loss.
Morale
Rachel borrows her sister Marissa's wireless headphones for a vacation to the beach. During the trip, Marissa leaves the headphones lying unattended on her towel while she goes into the water with her friends. An hour later, when she returns, the headphones are gone. The loss to Rachel, resulting from Marissa's leaving the headphones unattended, is an example of which of the following?
Morale hazard
By contrast, _____ insurers are owned and controlled, in theory if not in practice, by their policyowners.
Mutual
Risk management matrix. High Frequency of Losses & High Severity of Losses
Risk Avoidance
What element of insurance uses the law of large numbers to reduce the possibility of missing future loss predictions?
Risk pooling
Risk management matrix. Low Severity of Losses & High Frequency of Losses
Risk reduction
Self insurance is a form of?
Risk retention
_____ is/are a method used to determine an insurer's minimum level of capital required to maintain its operations, given its size and the risk profile of its assets and products. It includes assets, such as _____, held as investments, with values that may vary widely over time.
Risk-based capital, equities
Investment Risk (Pure Risk or Speculative Risk?)
Speculative Risk
When there are two potential outcomes for an event or situation we have what?
Uncertainty
When there are two potential outcomes for an event or situation we have?
Uncertainty
_____ is the process of classifying potential insureds into the appropriate risk classification in order to charge the appropriate rate.
Underwriting
the dollar value loss that we expect to be exceeded over a specified time period with a specified probability distribution assumption and confidence level.
Value at Risk (VaR)
This organization encourages uniformity by creating model insurance laws for adoption by the states. a. National Association of Insurance Commissioners (NAIC) b. Insurance Services Office (ISO) c. State Insurance Alliance (SIA) d. Insurance Information Institute (III) e. National Insurance Agency (NIA)
a
What is the difference between an exclusive agent and an independent agent? a. While an exclusive agent represents a single insurer, an independent agent can represent multiple insurers. b. Average operating expenses and premiums for personal lines of insurance tend to be higher for exclusive agents than for those in the independent agency system. c. Only an exclusive agent can act as a broker as well as an agent. An independent agent cannot also be a broker. d. Unlike exclusive agents, independent agents, do not own the x-date. e. independent agents receive lower compensation than exclusive agents.
a
What is the relationship between the underwriting and actuarial functions within an insurance company? a. Underwriting selects which risks to insure while actuarial analysis determines what rates to charge b. Actuarial analysis classifies insureds based on their risk while underwriting determines what rates to charge based on past losses. c. Underwriting occurs on the front end while actuarial analysis occurs on the back end. d. Underwriting and actuarial functions are the same. The only difference is whether an actuary is employed or not. e. Life/Health insurers employ actuaries, while Property/Casualty insurers employ underwriters
a
Why can an insurer with a combined ratio over 100 percent still be profitable? a. The ratio does not include income from investments. b. The ratio does not include income from premiums c. The ratio is considered a poor measure of profitability. d. An insurer with a combined ratio over 100 cannot be profitable e. The ratio does not include reinsured risks.
a
Select all of the following which correctly describe premium elements a. They include the insurer's profits. b. They are adjustments for various factors in life insurance premiums. c. In calculating premiums, an actuary usually increases the premium to cover the insurer's risk of not predicting future losses accurately. d. The premium may be reduced so the insured can pay taxes e. The premium may be increased to cover the insurer's marketing and administrative expenses f. The insured can bargain with his/her agent to reduce premiums. g. The premium may be reduced because the insurer expects to earn investment income.
a, b, c, e, g
How does insurance relate to pure risk and speculative risk? a. Speculative risks are not insurable b. All pure risks are insurable c. Only pure risks are insurable d. Pure risks can only be managed through insurance. e. Both pure and speculative risks are insurable
a, c
Select all of the following statements that accurately describe reinsurance: a. Reinsurance reduces transaction costs for both buyer and seller. b. Reinsurance reduces competition in the insurance industry c. Reinsurance can increase an insurer's capacity. d. Only large insurance companies are able to purchase reinsurance. e. Enable an insurer to protect itself from catastrophic losses f. Reinsurance increases the likelihood that the original insurer will be able to pay its claims. g. Reinsurance increases the financial stability of insurers. h. Reinsurance is not regulated.
a, c, e, f, g
The state insurance commissioner is empowered to do which of the following? a. Promulgate regulations that interpret insurance laws. b. Adjust claims for insurers. c. Establishes minimum and maximum insurance rates. Issue arrest warrants for unlicensed insurers and agents d. Decide whether to grant all, part, or none of an insurer's request for higher rates e. Grant, deny, or suspend licenses of both insurers and insurance agents. f. Determine what types of insurance the state regulates. g. Act as a liquidator or rehabilitator of insolvent insurers. h. Require an annual report from insurers.
a, d, e, g, h
How an insurer markets and distributes its products and complies with laws and regulations not directly related to financial solvency.
market conduct
If this number is over 100, it means that for every premium dollar taken in _____ than a dollar was spent on losses and expenses.
more
_____ is a highly specialized mathematical analysis that deals with the financial and risk aspects of insurance. it is used to project past losses into the future to predict reserve needs and appropriate rates to charge.
actuarial analysis
_____ are insurers formed in another country,
alien insurers
Identify the property/casualty rate regulation method in which an insurer or its rating bureau must file its new rates and have them approved by the state insurance commissioner before using them. a. Statutory accounting method b. Prior approval method c. Remittance method d. Twisting method e. File-and-use method
b
Why are life insurers subject to more stringent investment regulations than property/casualty insurers? A. Property/casualty insurance is more likely to be reinsured than life insurance. B. Life insurance contracts typically last much longer than property/casualty insurance contracts. C. Life insurers have a higher combined ratio than property/casualty insurers D. The expected return on investment of life insurance is higher. E. The expected return on investment of property/casualty insurance is higher.
b
Why do fire and allied lines and homeowner's insurance have the lowest break-even combined ratio levels? A. Expenses and claims are expected to be low. B. Investment income is expected to be low. C. Expenses and claims are expected to be high. D. Premium rates are high. E. Investment income is expected to be high.
b
Why is the law of large numbers necessary for insurance? a. It prevents discrimination b. It enables better prediction of future losses c. It allows risk pooling d. It is not necessary
b
In the United States, who regulates insurance companies? a. governors b. state insurance departments c. federal insurance agency d. no one e. insurance commissioners
b, e
Select all of the following statements that correctly describe the Independent (American) Agency System a. agents are paid by the insured b. agents represent multiple insurers c. agents can only sell policies to individuals d. agents represent the insured e. agents are independent f. agent has the right to contact insured to renew policy
b, e, f
The movement of insurance prices through time.
underwriting cycles
Premiums collected in advance of the policy period are known as _____ premiums.
unearned
Individual who solicits business from the insured and also acts as the insured's legal agent when the business is placed with an insurer.
broker
All of the risks to a firm's financial viability.
business risks
A risk averse person is likely to select which of the following investment options? a. Mutual Funds b. Company Stocks c. U.S. Treasury Bonds d. Bitcoin
c
How might a financial planner be involved in a client's insurance transaction? a. By acting as a middleman in the insurance transaction b. By marketing insurance from the financial planner's parent company to the client c. By offering unbiased advice to the client on what product to purchase in exchange for a fee from the client. d. By offering advice to the client on what product to purchase in exchange for a commission from the insurer. e. By selling insurance directly to the client for a commission (paid by the insurance company)
c
In preparing a risk map for a retail store, where would you place inventory theft risk? a. low-frequency/low-severity quadrant. b. the low-frequency/high-severity quadrant c. the high-frequency/low-severity quadrant. d. high-frequency/high-severity quadrant.
c
The normal distribution or bell-shaped curve from statistics provides an example of a continuous probability distribution curve. While calculating the probability of the occurrence of an event, we find that the area under the curve in between the desired range of profitability values is 0.438. What does this mean? a. The probability of the occurrence can now be calculated by multiplying this number with the standard deviation. b. The probability of the occurrence of the event is 0.438 percent., , c. The probability of the occurrence of the event is 43.8 percent. d. The probability of the occurrence of the event is 0.562 percent. e. The probability of the occurrence of the event is 56.2 percent.
c
Which of the following characterizes a soft market? a. Insurance rates and insurance capacity are both low. b. Insurance rates and insurance capacity are both high. c. Insurance rates are low and insurance capacity is high. d. Insurance rates are negligible and insurance capacity is very high. e. Insurance rates are high and insurance capacity is low.
c
Why is rebating prohibited? a. It encourages discrimination against certain policyholders. b. It encourages rate competition between agents and brokers. c. Some knowledgeable consumers would buy a new policy each year when first-year commissions are larger than renewal commissions (higher lapse rates increase long-run cost). d. It is considered unfair competition among agents/brokers. e. More sophisticated consumers could negotiate larger rebates than the less informed, and this would be unfair. f. It enabled unlicensed insurers to undercut licensed insurers. g. Agents may be encouraged to engage in unethical behavior by selling new policies over renewal policies because of the larger first-year commissions. h. Agents or brokers get less money if they share part of their commission with a policyholders and this is unfair.
c, d, e, g
A claims adjuster's job includes all of the following except for: a. paying valid claims promptly b. deciding how much should be paid if the loss is covered c. determining whether the loss is covered or excluded under the terms of the insurance contract d. adjusting premiums following a loss. e. investigating the circumstances surrounding a loss,
d
What is the most important part of insurance regulation? a. Categorizing risk into appropriate categories. b. Ensuring that the government insures risks that are not insurable by private insurers. c. Preventing discrimination by insurers d. Ensuring the solvency of insurers. e. Taxing insurance companies.
d
Which of the following is an example of risk retention? a. Risk mitigation b. Reinsurance c. Safety training d. Self-insurance e. Cooperation
d
The underwriting cycle is expressed in terms of the industry's _____ which is a measure of the relationship between premiums taken in and expenditures for claims and expenses:
combined ratio
Analysis that looks at the amount of cash that will be saved and brings it into today's present value.
cash flow analysis
When the combined ratio is low, the insurance industry obtains more cash for investment by lowering its underwriting standards . This strategy is known as _____.
cash flow underwriting
Which of the following statement about life and health insurance is accurate? a. Life and health insurance is available only on an individual basis. b. Once an individual reaches age 65 they can no longer buy life and health insurance from private insurers, but only through the federal government. c. Life and health insurance is available only through an employer. d. Life and health insurance covers exposures to the perils of disability and old age. e. Property/casualty insurers do not sell health insurance
d
Which of the following statements is incorrect: a. Hazards may increase the frequency of losses b. Hazards may increase the probability of losses c. Hazards may increase the severity of losses d. Hazards may increase the uncertainty of losses
d
Injury or damage sustained by the insured.
loss
This includes _____, which is the calculation of how amounts paid for losses increase (mature) over time for the purpose of future projection. Actuaries use this calculation along with mortality tables to help them set premium rates and establish adequate reserves.
loss development
_____ are incorporated in the state where they are licensed.
domestic insurers
What does it mean that an independent agent owns the x-date on a policy? a. The agent makes all decisions about the insureds method of paying premiums. b. The agent makes all decisions concerning how the agency operates. c. The agent has the responsibility of collecting premiums in all circumstances. d. The agent pays all agency expenses. e. The agent has the right to contact the customer when a policy is due for renewal.
e
Nonlicensed _____ are permitted to sell insurance only if no licensed company is willing to provide the coverage
excess and surplus lines insurers
Agents permitted to represent only their company or a company in an affiliated group of insurance companies.
exclusive agent
Direct writers market insurance through:
exclusive agents
Uncertainty regarding the outcome of financial decisions.
financial risk
_____ are insurers organized in another state.
foreign insurers
In her annual report to the board of directors of Plum Manufacturing Co., the firm's risk manager stated: "We settled five product liability lawsuits last year." Which of the following does her statement refer to?
frequency of losses
An independent businessperson rather than an employee of the insurance company who is authorized by contract with the insurer to sell insurance in a specified territory.
general agent
Condition that occurs when insurance losses are above expectations and reserves no longer are able to cover all losses.
hard market
Agent who usually represents several companies, pays all agency expenses, is compensated on a commission plus bonus basis, and makes all decisions concerning how the agency operates.
independent agent
The causes of loss
peril
An arrangement in which an insurance company transfers all or a portion of its risk under a contract of insurance to another company
reinsurance
An insurance agent who acts as an intermediary between an insured and the insurance marketplace.
retail agent
The average square deviation of values in a distribution.
semivariance
Condition that occurs when insurance losses are low and prices are very competitive.
soft market
The Greek symbol σ2 (sigma squared) is used to denote:
variance
An insurance agent who acts as an intermediary between a retail agent and an insurance company.
wholesale agent
A cyber security risk study of data losses incurred by retail companies due to ransomware attacks, found that 40% of the firms in the industry had experienced security breaches and that the average loss per security breach was $50,000. A firm is contemplating spending money to decrease the likelihood of a ransomware attack. Assuming that the next year would be the same as this year in terms of attacks and that this firm is similar to other firms in the industry in terms of vulnerability to ransomware attacks, how much is the minimum that the firm should be willing to pay to eliminate security breaches (i.e., what is the expected value of their loss)?
20,000
A cyber security risk study of data losses incurred by retail companies due to ransomware attacks, found that 40% of the firms in the industry had experienced security breaches and that the average loss per security breach was $50,000. What is the probability that a firm will not suffer a ransomware attack?
60%
What models is used to explicitly show the trade-off between risk and return of assets in a capital market?
Capital Asset Pricing Model
When a a business buys this second type of coverage, it is considered ______ insurance.
Commercial
refers to activities that are taken to reduce or eliminate risks.
Hedging
_____ insurers are those not licensed to sell coverage in a state. They are only allowed to sell _____ which provides coverage not available from licensed insurers in that state.
Nonadmitted, excess and surplus lines insurance
If individuals or families purchase insurance to cover their risks, we call this: _____ insurance. It can include life, health, disability, auto, homeowner, and long-term care coverage.
Personal
Hazards that are tangible environmental conditions that affect the frequency and/or severity of a loss.
Physical
Jaden was severely injured while using a hoverboard manufactured by X-treme Fun Co. Which of the following liability best explains the situation if X-treme Fun is held liable for Jaden's injury?
Product liability
Accident Risk (Pure Risk or Speculative Risk?)
Pure Risk
Environmental Risk (Pure Risk or Speculative Risk?)
Pure Risk
Natural Disaster Risk (Pure Risk or Speculative Risk?)
Pure Risk
Risk management matrix. Low Severity of Losses & Low Frequency of Losses
Risk retention
When a company decides to self-insure against adverse contingencies out of its own cash flows, this process is known as?
Risk retention
Risk management matrix. Low Frequency of Losses & High Severity of Losses
Risk transfer
Regulatory Risk (Pure Risk or Speculative Risk?)
Speculative Risk
Reputational Risk (Pure Risk or Speculative Risk?)
Speculative Risk
_____ insurers are profit-making companies, created for the purpose maximizing the value of the organization for the benefit of the owners.
Stock
An ideal risk for an insurance company would involve a situation in which: a. losses that occurred would be accidental b. the number of similar risks was very low c. catastrophes occurred frequently d. premiums were very high e. There was no chance of a loss which is certainty
a
Miranda wants to purchase health insurance for her elderly dog Bones. After several inquiries, the lowest quote she receives is $100 a month premium for $1500 of coverage with a $300 deductible. Should she purchase this coverage? Why or why not? a. No, the insurance is not economically feasible. b. No, the insurer is subject to adverse selection. c. No, her dog is being discriminated against because of his age. d. Yes, her dog is old and needs the insurance. e. Yes, the insurance is economically feasible.
a
As the owner (and risk manager) of a small flower shop, you need to identify all potential risks. Select all of the risks that could apply to your business from the list below. a. Fire b. Power failure c. Foreign exchange risk d. Premises liability e. Secure cash box / safe f. Good balance sheet g. Intellectual property piracy h. Clean and dry floors (injury risk) i. Reputational risk
a, b, d, e, f, h, i
Which of the following statements about the risk management matrix are correct? a. It considers a single risk. b. It can also be referred to as a risk map. c. It includes on one axis, categories of relative frequency and on the other, categories of relative severity. d. It includes all of a firms risk exposures. e. It involves charting the entire spectrum of a firm's risk.
a, c
Which of the following statements are true about Vandalism? a. It is generally insurable b. It is generally not insurable c. It is a human peril d. It is a criminal peril e. It represents a fundamental risk f. It is a natural peril
a, c
Which of the following are speculative risk exposures? a. Foreign Exchange Risk b. Accident Risk c. Credit Risk d. Stock Market Risk e. Liability Risk
a, c, d
The law of large numbers holds that: a. the frequency of risk increases as the number of exposures decreases. b. risk decreases as the number of exposures increases. c. risk is independent of the number of exposures. d. the severity of risk increases as the number of exposures increases. e. Risk increases as the number of exposures increases.
b
The role of chief risk officer (CRO) expanded the traditional risk manager's role by: a. developing an new department specialized in risk management b. integrating all of a company's separate risks into a holistic framework. c. hiring specialized risk managers to professionals who are manage specific types of risks. d. dividing risks into categories. a. treating every one of the company's risks as independent.
b
What does it mean when a company is said to be "highly leveraged"? a. the company has a very high P/E ratio. b. the firm has taken many loans to finance its operations c. the company is waiting to receive money owed by customers (accounts receivables) d. the company has numerous risk exposures due to operations all over the world e. the firm has self-financed its operations (not taken any loans.)
b
Why have private insurers refused to provide flood insurance for homes in a flood plain? a. they are afraid of mold claims b. the possibility of catastrophic loss is too great. c. there is no demand because the federal government pays people who lose their houses in floods. d. There are not enough properties. e. It is too cheap.
b
Why would a cracked sidewalk be considered a physical hazard? a. It represents a human peril b. It increases the chance someone could trip and injure themselves c. Neighbors might complain because it looks unsightly d. It is constructed from concrete
b
Which of the following statements accurately describe stock insurers? a. They can convert to a non-profit company through the mutualization process. b. They are organized in the same way as other privately owned corporations. c. The board of directors is elected by policyholders d. They are expected to maximize the value of the organization for the benefit of the owners e. Their main purpose is making a profit f. Policyholders own stock in the company
b, d, e
Inaccuracies in our abilities to create a correct distribution arise from: a. our risk averse nature. b. the non-diversifiable nature of risks c. our inability to predict future outcomes accurately d. the inability of insurers to insure all risks.
c
Why does private insurance not cover the risk of war? a. the exposure units are independent of each other b. Too many similar exposures c. It is potentially catastrophic d. The probability distribution of losses is determinable e. It is accidental
c
Select all of the following statements that accurately describe risk mapping: a. It is a process in which each of a firms risks is considered individually, b. It presents a map of a single risk. c. It present multiple risks in one risk management solution chart d. It is a process which involves charting the entire spectrum of a firm's risks. e. It is useful both for identifying risks and for choosing approaches to mitigate them
c, d, e
Which of the following are measures of risk? a. probability b. frequency c. covariance d. uncertainty e. semivariance f. severity g. standard deviation h. coefficient of variation I. square root J. range
c, e, g, h, J
A _____ provides insurance coverage to its parent company and other affiliated organizations. It is type of _____.
captive insurance company, self-insurance
Measurement of the probability that a value will fall between an upper and lower bound of a probability distribution, used to express the degree of uncertainty associated with a sample statistic.
confidence interval
An auto insurer offers a discount for young drivers (ages 18-25) who complete a driver safety course. This is an example of: a. loss prevention, which reduces the severity of loss. b. loss reduction, which reduces the frequency of loss. c. loss reduction, which reduces the severity of loss. d. loss prevention, which reduces the probability of loss. e. loss reduction, which reduces the probability of loss.
d
When insurers discriminate, they: a. distinguish among potential insureds b. classify exposures according to expected losses c. are able to create pools of similar insureds. d. all of the above e. none of the above
d
_____ Is a system of housing large sets of data for strategic analysis and operations.
data warehousing
When top managers of a mutual company decide they need to raise capital and become stock companies, they may go through a process called:
demutualization
When loss to one exposure unit affects the probability of loss to another.
dependent loss
Classification of exposures according to expected losses.
discrimination
James has to take an expensive prescription to manage a chronic medical condition. His employer offers several different health insurance plans with the more expensive "Elite" plan having the lowest annual deductible and prescription co-pays. Employees like James, who expect high medical expenses are more likely to select the Elite plan. If the insurer did not anticipate this outcome and price premiums accordingly, the result would be: a. imperfect information b. morale hazard c. inefficiency d. moral hazard e. adverse selection
e
Select the incorrect statement about insurance. a. A private insurer can be classified as either a life/health or a property/casualty insurer. b. Insurance provides risk reduction through risk transfer c. Insurers rely on the Law of Large numbers d. Risk pooling is essential for insurance e. All pure risks are insurable through private insurance
e
Conditions that increase the cause of losses.
hazard
The entire spectrum of risk exposures.
holistic risk
The individuals who transfer risk to the third-party are known as _____. They pay a _____ to the _____ in exchange for this third-party assuming the risk.
insureds, premium, insurer
As a sample of observations is increased in size, the relative variation about the mean declines.
law of large numbers
insurance that covers exposures to the perils of death, medical expenses, disability, and old age
life/health
An independent agent or broker who has the underwriting authority granted by an insurer, and can handle many insurance functions considered legally binding agreements.
managing general agent
Risks related to the ongoing day-to-day business activities of an organization
operational risks
Risk management professionals use _____ to refer to "the causes of loss and _____ to refer to "conditions that increase the cause of losses."
peril, hazard
Icy roads, which often increase the number of auto accidents are an example of _____ hazards.
physical
insurance that covers property exposures such as direct and indirect losses of property caused by perils such as fire, windstorm, and theft.
property/casualty
The ______ is the distance between the highest possible outcome value to the lowest possible outcome value in a distribution.
range
The distance between the highest possible outcome value and the lowest in a distribution. The distance between the highest possible outcome value and the lowest in a distribution.
range
The distance between the lowest possible outcome value and the highest possible outcome value in a distribution is the:
range
A poor online review exposes a restaurant to what type of risk?
reputational risk
The property, person, or entity facing a potential loss.
risk exposures
Sharing of losses by a large number of exposure units.
risk pooling
A process that evaluates all of an organization's risks and measures the frequency and severity of each risk.
risk profiling
_____ evaluates all the risks of the organizations and measures the frequency and severity of each risk.
risk profiling
When a company purchases liability insurance this is an example of:
risk transfer
the packaging and transferring of insurance risks to the capital markets through the issuance of a financial security.
securitization
A risk featuring a chance for either loss or gain.
speculative risk
Square root of the variance. Measures the deviation of outcomes from the expected value.
standard deviation