RMI 5017 Exam 1

An insurer sells a policy today for which the expected end-of-year claim cost is $200. It can invest the policy proceeds at a rate of 7 percent per year. What is the discounted expected claim cost?

$187 PV= $200/1.07

Y2K Inc. has estimated that 1/2 of their twenty workers will be injured in the coming year. The expected severity per occurrence is $1,000. What is the expected loss per exposure?

$500

Which of the following is true regarding net present value? A project should be pursued only if the net present value is positive. A project should be avoided only if the net present value is positive. A project should be pursued only if the net present value is negative. None of the above are true.

A project should be pursued only if the net present value is positive.

_____________ risks are risks remaining after management has taken action to alter its severity.

Actual residual

Empirical evidence suggests that ____________ is a determinant of ERM activities by insurers. volatility of earnings company size opaqueness All of the above are determinants of ERM activity by insurers.

All of the above

Risk reporting may include the following: Sensitivity analysis Trend analysis Analysis of emerging risks All of the above.

All of the above

Which of the following is NOT true? An ERM risk survey will almost never reveal more risks than an organization can tackle at one time. The model used to measure and identify risk should be modified over time, and risk interviews should be repeated at least annually. Interviews will provide a little useful information. None of the above are true.

An ERM risk survey will almost never reveal more risks than an organization can tackle at one time.

Which of the following is a barrier to ERM? Use of uniform metrics across the organization. Use of a formal process for the implementation of ERM plans. An organizational culture that thinks long-term. Lack of commitment by leadership.

Lack of commitment by leadership.

Operational risks include risks from all of the following EXCEPT... Availability of information technology. Liquidity of assets. Empowerment of leadership. Supply chain management.

Liquidity

Which of the following is not a characteristic of the normal distribution? Ninety-nine percent of the distribution lies within plus or minus 2 standard deviations from the mean. The mean is equal to zero. The standard deviation is equal to one. The curve of the distribution is bell-shaped.

Ninety-nine percent of the distribution lies within plus or minus 2 standard deviations from the mean.

ERM should add value to the firm for all of the following reasons EXCEPT: Integrated decision-making can avoid duplication of expenditures. Managing risks using the traditional approach creates inefficiencies. ERM provides better allocation of resources which can improve return on equity. Organizations with few investment opportunities can benefit from selecting investments based on non-risk-adjusted rates.

Organizations with few investment opportunities can benefit from selecting investments based on non-risk-adjusted rates

Which of the following statements is NOT true? risk identification and prioritization is not an important part of the ERM process. The risk identification and prioritization components are usually accomplished by surveying and interviewing employees and gaining consensus for key risks from senior managers and risk owners. If the measurement of appetite and identification/quantification of key risk is not used in a decision-making framework, the results will not drive action. ERM is an ongoing process.

Risk identification and prioritization is not an important part of the ERM process.

Which of the following is true regarding underwriting expenses? Commissions are not considered to be an underwriting expense. Underwriting expenses do not vary much by line of insurance. Underwriting expenses are higher in the first year for many types of insurance. Loss adjustment expenses are greater for property coverages than for liability coverages.

Underwriting expenses are higher in the first year for many types of insurance.

Action plans should contain the following information: list of risks. specific strategies for managing risks. key person responsible for specific mitigation steps. All of the above.

all of the above

A stream of income in which all payments are equal is called a(n)

annuity

Which of the following will have the longest claim tail? Homeowners Auto physical damage Auto liability Employee medical coverage

auto liability

Which distribution parallels the outcomes possible when dealing with pure risk exposures? Poisson distribution Binomial distribution Normal distribution None of the above

binomial distribution

When estimating property loss exposure, which of the following methods for valuing property would be the least appropriate measure? book value market value firm-specific value replacement cost

book value

Suppose that Scooby Doo, Inc., a dog snack manufacturing company, is exposed to the risk that a supplier will not deliver an order of beef byproducts on time. This delay would cause a temporary shutdown of production at Scooby Doo's plant. What type of risk exposure is this?

business interruption risk

All else being equal, if an insurer expects that rates of return on investments are increasing, the fair premium will be

decreasing

The addition to the fair premium that covers underwriting and loss adjustment expenses is called the

expense loading

The number of losses in a given period of time is known as

frequency

Which of the following is not a potential benefit to a firm from increasing retention? savings on the premium load increased moral hazard avoiding implicit taxes that arise from insurance price regulation reduced exposure to insurance market volatility

increased moral hazard

A hard market is characterized by

increasing prices

Which of the following is not an example of a direct loss from pure risk? loss of profit damage to assets cost of paying and defending liability claims injury to employees

loss of profit

If when A occurs, B cannot occur , these events are

mutually exclusive

A variable whose outcome is uncertain is called a

random variable

What impact does the routine inspection of aircraft for mechanical problems have on the risk of airplane crashes for United Airlines?

reduced frequency of crashes

If unexpected increases in losses from price risk are not offset by cash inflows from insurance contracts, hedging arrangements or other contractual transfers of risk, they will result in an increase in stock price. bankruptcy. an increase in firm diversification. a reduction in stock price.

reduction in stock price

The magnitude of the loss per occurrence is known as

severity

All of the following are types of price risk EXCEPT commodity price risk exchange rate risk stock price risk interest rate risk

stock price risk

The cost of risk may include all of the following EXCEPT the cost of insurance. the cost of raw materials. the cost of increased precautions to control losses. the cost of investments in information to reduce risk.

the cost of raw materials

The expected loss per exposure is

the expected frequency per exposure times the expected severity per occurrence.

Academic studies have found that the number of insurers engaging in risk management increased in the early 2000s. there is no relation between ERM and firm value. Both A and B are true. Neither A nor B is true.

the number of insurers engaging in risk management increased in the early 2000s.

Credit risk is

the risk that a firm's customers will not make promised payments.

The cost of pure risk is equal to the value of the firm with pure risk minus the value of the firm without pure risk. the value of the firm without pure risk minus the value of the firm with pure risk. the cost of loss control plus the cost of internal risk reduction. the cost of direct losses that will be incurred by the firm due to the risk.

the value of the firm without pure risk minus the value of the firm with pure risk.

The overall process of assessing the expected claim costs for buyers, determining the applicable rate, and deciding whether to offer coverage is known as

underwriting

Unidentified risk exposures will result in reduced insurance premiums. increased insurance premiums. unintentional retention. purchasing too much insurance.

unintentional retention

All of the following are measures of central tendency EXCEPT mode. variance. mean. median.

variance

A fair premium will take into account all of the following EXCEPT expected claim costs. what other insurers are charging. investment income. administrative costs.

what other insurers are charging