risk and insurance final
Tim has an auto policy that provides for primary coverage of $300,000 for bodily injury liability. He also has a personal umbrella policy that provides excess coverage of $1,000,000. In the case of a $500,000 covered liability claim, how much will the personal umbrella policy pay?
$200,000
An insured purchases a $60,000 property insurance policy with an 80% coinsurance rate. At the time of a $50,000 covered loss, the insured property is valued at $100,000. How much can the insured collect from its policy for the $50,000 loss?
$37,500
Distinguish between a warranty and a representation.
a warranty is a condition of the contract. A breach of a warranty can void the contract. A representation is a statement made by the insured before the contract is written and only affects the transaction if it is material.
Which financial factor may be important when considering the appropriate level of risk retention for a firm?
all of the above
What new senior executive role have some organizations created to oversee enterprise risk management?
chief risk officer
Which selection below describes a specific method of reducing subjective risk?
d All of the above
The _________ page is usually the first page of the policy and provides information such as the insured's name, the premium and the coverage amount (if applicable).
declarations
Which of the following is a reason for subrogation in insurance policies?
it reduces the premium that would otherwise have to be charged in the absence of a subrogation provision
Installing a sprinkler system or burglar alarms are both examples of which risk management technique?
loss control
The principle of indemnity in insurance serves to reduce moral hazard.
true
An insured has the following four liability insurance policies: $300,000 with insurer A, $300,000 with insurer B, $700,000 with insurer C, and $900,000 with insurer D. Each policy apportions losses using the equal shares method.How much will each policy pay for a $200,000 loss?
$50,000 each
A property insurance policy is written with a 90 percent coinsurance clause and a policy limit of $60,000. The actual replacement cost of the structure, less depreciation, is found to be $100,000. What amount may be collected under this policy if a total loss occurs?
$60,0000
If a firm wants to have $1 million in cash available in three years, how much must it invest now at an 8 percent interest rate?
$793,832.24
A risk manager computed the NPV for several loss control projects. Based on these, match your recommended decision for each project.
-$85000 - do not make investment +$125000 - make the investment +24000 - make the investment
Using the Poisson probability formula above or the information in Table 7-4, what would be the probability of EXACTLY 1 loss when the average frequency is 5 losses per year? (use four decimal places in your answer
0.0337
An individual has two property insurance policies in force on property valued at $100,000. Insurer A provides $75,000 of coverage. Insurer B provides $25,000. If a pro-rata insurance clause applies and the property sustains a $20,000 loss that is covered by both policies, how much will Insurer A pay?
15000.0
A property insurance policy is written with a 90 percent coinsurance clause and a policy limit of $45,000. The actual replacement cost of the structure, less depreciation, is found to be $100,000. What amount may be collected under this policy in the event of a $50,000 loss?
25000.0
Which domino does Heinrich's Domino Theory suggest is the most important to focus on in reducing the frequency of workplace injuries (1-5)?
3.0
Prior to the loss control project at KFC, slip and fall injuries made up more than ________percent of workplace injuries and in the first year these injuries were reduced by_________ percent
50 , 54
What is risk avoidance?
A conscious decision not to expose oneself or one's firm to a particular risk of loss.
Which one of the following situations would represent a case of "natural hedging"?
A farmer grows two crops, one does well in wet weather and the other does well in dry weather
Which one of the following is a necessary element of true self-insurance.
A group of exposure units large enough to ensure accurate loss prediction.
Which selection accurately distinguishes between waiver and estoppel.
A waiver is a relinquishing of a known right and is based on consent and contract law. Estoppel prevents one from asserting right because of prior conduct that is inconsistent with such an assertion and is more closely associated with contact law.
An insured has the following four liability insurance policies: $300,000 with insurer A, $300,000 with insurer B, $700,000 with insurer C, and $900,000 with insurer D. Each policy apportions losses using the equal shares method.How much will each policy pay for a $2 million loss?
A. $300,000 B. $300,000 C. $700,000 D. $700,000
Which considerations should be analyzed by a business before it decides to use self-insurance? Select all that apply.
A. The firm should have sufficient number of units situated so that the units are not subject to simultaneous destruction b. The firm must have accurate records or statistics to enable it to make adequate estimates of expected losses c. The firm must make arrangements for administering the plan and managing the self-insurance fund d. The general financial condition of the firm should be adequate enough to be able to deal with large and unusual losses
What is adverse selection? Why is underwriting necessary to control adverse selection?
Adverse selection is the tendency of insureds who have a greater than average chance of loss to purchase more than the average amount of insurance. Underwriting is necessary because the insurance company does not want to write insurance only for these high risk insureds. Writing only this group would not spread the risk for the insurance company and would eventually casue higher and higher premiums. The company would eventually fail.
WPR Corporation owns 5,000 hotels and motels throughout the world. If you were the WPR risk manager, what risks might you suggest should be treated through the risk avoidance technique? Select the most appropriate answer.
All of the above
Which of the following is a requirement of a legal contract?
All of the above
Which of the following reasons explains why life insurance policies are not cancellable by the insurer, although property insurance policies are?
All of the above
The mortgagee clause protects the lender's interest. Which of the following describes a way the mortgagee clause aids the mortgagee?
All of the above describe a way the mortgage clause aids the mortgagee.
What are the three steps for selecting among available risk management techniques?
Avoid risk when feasible bImplement appropriate loss control measures cSelect the optimal mix of risk retention and risk transfer
Explain why a hold-harmless agreement may not be legally enforceable.
Courts may not enforce a hold-harmless agreement if a transferor has superior bargaining power or knowledge in comparison to the transferee.
The purchase of required textbooks can represent a significant investment for college students. Which of the following is an example of risk to your textbooks.
Damage or loss by fire, flood, and other natural disasters.
How is diversification a form of risk reduction?
Diversifying creates a sharing of risk between business segments or geographic locations.
Explain how an investment in loss control may change the optimal mix between risk retention and risk transfer in a given situation.
Effective loss control can reduce the frequency and severity of expected losses. This reduction may provide the opportunity for a company to retain more than it would without the loss control techniques. The company may decide to take a higher deductible or self-insure.
What is the difference between an express warranty and an implied warranty?
Express Warranty- a specific circumstance that must exist as described in writing in the insurance contract Implied Warranty not in the contract but it is assumed to be - most commonly found in ocean marine insurance
In a named-perils insuring agreement, the policy states that it is the insurer's intention to cover risks of accidental loss to the described property except those perils specifically excluded.
False
In most cases, actual cash value (ACV) will lead to a larger loss settlement than replacement cost.
False
Self-insurance usually involves risk transfer.
False
The concept of enterprise risk management suggests that diversification has little relevance to risk management.
False
Which of the following accurately describes the effect of an honest mistake in an insurance contract?
If an honest mistake is made in a written insurance contract, it may be reformed if there is proof of mutual mistake or a mistake on one side that is known to be a mistake by the other party.
Which selection accurately explains the principle of adhesion?
In a contract of adhesion, ambiguities are construed against the insurance company.
Which of the following are social costs of insurance? (mark all that apply)
Intentionally caused losses Exaggerated losses
Name the requisites of insurable risk from the standpoint of the insurer.
Large enough number, accidental loss, determinable and measurable, and noncatastrophic in nature.
Dee has a house valued at $150,000. Dee takes out homeowner's insurance from two companies, each policy in the amount of $150,000. If the house is totally destroyed, can D collect in full from both companies? Why or why not?
No, because collecting in full from both insurers would violate the principle of indemnity.
Virginia expresses disappointment that a whole year has passed and, due to no accidents, she has been unable to collect anything from her car insurance policy, for which she had paid $700 in premiums. Is Virginia's disappointment based on sound insurance principles? Explain.
No. She would rejoice in not having loss. First, had an accident occurred, the policy would not have paid all her losses. Delay, inconvenience etc., would not have been reimbursed. Further, her rates might have been higher next year due to reclassification into a different rating group. Had the loss occurred, she would not have gained anything. The premium should be viewed as protection, not speculation.
Airlines face significant risk from increases in the price of jet fuel. The failure of their computerized reservation systems also can have a materially adverse effect on their operations. How could an airline use the concepts of enterprise risk management and alternative risk transfer tools to manage these risks?
Purchase a double trigger insurance policy
What are the potential cash inflows to be considered in a net present value analysis of a loss control decision?
Reduced costs, premium savings, tax savings resulting from depreciation for loss control equipment, and salvage value of the equipment.
Name the requisites of insurable risk from the standpoint of the insured.
Sufficiently severe so as to cause financial hardship and probability of loss not too high so as to drive the premium up beyond the means of the buyer.
Which of the following is NOT a situation where self-insurance would normally make sense for a business?
The business has faced some financial challenges and has low cash levels
What is the difference between the principle of insurable interest and the principle of indemnity?
The principle of insurable interest determines whether or not any loss is suffered by a person insured, whereas the principle of indemnity governs the measurement of that loss.
What are the roles of the transferor and the transferee in risk transfer?
The transferor pays or gives other valuable consideration to a transferee, who then bears the risk.
Coinsurance in property insurance serves to encourage the insured to purchase coverage to value.
True
It is usually easier to estimate the potential costs associated with a loss control project than the potential benefits.
True
Many policies exclude losses to aircraft and watercraft because coverage for those perils are usually covered elsewhere in specific policies.
True
True or False: The cost that companies incur when they set aside capital for losses instead of using it for working capital in the business is the opportunity cost of funds. The capital has a value. If the capital is used in the business, then the value is often more than if it is used for paying losses. The difference between these values (opportunity cost) could affect decisions to self-insure or not. As opportunity costs rise, so does the likelihood that there will be no self-insurance.
True
True or False: The risk from loss of a market that is captured by a competitor with a better product is likely uninsurable.
True
True or False: The risk of a business losing money due to an economic recession is likely uninsurable.
True
Explain the relationships of expected loss frequency and severity in the use of risk retention and risk transfer.
When expected frequency is high or low along with low expected severity, retention makes the most sense because the entity can afford to pay for or can predict those losses. Only when the expected severity is high and the expected frequency is low should trasfer be considered. When both expected severity and frequency are high, risk avoidance is recommended.
Can one have an insurable interest in property and still not own the property? Explain.
Yes, one can be contractually responsible for nonowned property because he or she is renting it or has the property under his or her control.
A firm earns 25 percent interest on its invested capital. Interest available on assets that have a low degree of risk and are highly liquid is 10 percent. The firm is considering retaining a certain risk, but top managers believe that a loss reserve fund of $100,000 is necessary. Insurance against the risk is available for an annual premium of $10,000. On the basis of only these facts, do you believe that the firm should retain this risk, or do you believe that commercial insurance should be purchased?
a The commercial insurance should be purchase
An insurable interest likely exists in all of the following cases EXCEPT:
a friendly neighbor takes out a life insurance policy on his neighbor's life
Why must risk management decisions be reviewed regularly? Select all that apply.
aMany relevant factors change. bThe nature of an exposure may change over time cThe frequency and severity of losses may vary over time, causing estimates to become out of date.
What are the social values of insurance? (mark all that apply)
aReduces the need to accumulate funds to meet loss bIncreases the pool of investable funds, thus reducing the cost of capital cImproves credit dReduces losses through loss control fReduces worry
Select the major reasons for excluding certain perils from insurance contracts. Select all that apply.
aThey are not insurable bThey are covered by other insurance cAn additional premium is needed fi coverage is desired.
deductible applies for an entire year and represents the amount of loss that the insured must absorb before the policy pays.
aggregate
Risks that can be eliminated without an adverse effect on the goals of an individual or business probably should be
avoided
In selecting a deductible, how does the risk manager balance considerations of potential premium savings and the firm's ability to pay losses?
b The risk manager usually determines a targeted amount of losses to retain, but not exceed, such as $10,000. The risk manager is given a variety of choices of deductible levels and premium amounts from the insurance company. The objective is to obtain the optimal level of deducible and premium amount to avoid paying over that targeted amount for the policy year. The tradeoffs between higher deductible amounts and lower premiums are analyzed, and a decision is made.
Which of the forms of hold-harmless agreements are least likely to be enforced by a court?
broad form
For an insurance policy to be a valid contract, it must meet certain elements. The payment by the insured of a premium in return for a promise by the insurer to pay certain losses if they occur is an example of blank1 - Word Answer
consideration
All of the following are common insurance policy conditions EXCEPT:
earthquake
In property insurance, an insurable interest must only exist at the inception of the policy.
false
All of the following are reasons why transfer of risk by a corporation is valuable EXCEPT:
insurance is usually less costly than self-insurance
An insured's building is covered by the following three property insurance policies: $100,000 with insurer A, $300,000 with insurer B, and $600,000 with insurer C. Using the pro-rata method of apportionment, how much would each policy pay for a $100,000 loss? (Assume there are no applicable coinsurance or deductible clauses.)
insured A - 10k insured B- 30k insured C - 60k
One aspect of the value of risk management to a corporation is the fact that managing risk can increase the likelihood that the firm will meet its obligations to its debt-holders. Which of the following is an example of how lenders require individuals who buy a home or car to engage in some form of risk management?
lenders requiring borrowers to purchase property insurance coverage.
Insurance is usually best suited for addressing risks that have ______ expected frequency and _________ potential severity (hint: high or low).
low , high
The voiding of an insurance contract due to a misrepresentation is only possible if the misrepresentation is
material
One of the chief economic burdens of risk is the necessity of accumulating funds to meet possible losses. If an individual owned a $20,000 car and the car could be insured against property damage for $400 per year, how much of a reserve fund would the owner likely feel he would need to accumulate if the insurance was not available?
more than $400
Of the following requisites of an insurable, which one is the most important in explaining why life insurance policies are usually not available for issue above a certain age (such as 95)?
probability of loss not too high
Insurers use pooling within a large group of exposures to achieve blank1 - Word Answer
risk reduction
Which of the following would be an example of a pre-loss loss control method?
safety training of employees
A catastrophe bond is a financial tool that transfer insurance risk to the capital markets and is an example of
securitization
Storing inventory in two different physical locations is an example of
separation
In the calculation in Table 7-1, if everything else remained the same how would the NPV change if installation costs increased and the premium savings were decreased?
the NPV would be lower
Insurance contract are often considered "contracts of adhesion" which means that unclear language or ambiguities in the contract will be construed or interpreted in favor of
the insured
In the calculation of the present value of $500,000 available in five years presented above, how would the present value change if the interest rate was increased from 8 percent to 10 percent?
the present value would be lower