RMI 2302: Exam 1 Module- Questions

The frequency states that there is a 25% chance of 1 accident, a 50% chance of 2 accidents, and a 25% chance of 3 accidents. The severity states that it costs $10,000 per accident. What is the expected loss?

(.25 x $10,000) + (.50 x $10,000) + (.25 x $10,000) = $20,000

What are the two reasons that potential severity must be measured for?

(1) A notion of severity is necessary for classifying risks. Whether an exposure will be classed as critical, important, or unimportant depends on the potential severity of loss. (2) Severity must also be measured to determine the amount of insurance that should be purchased when the decision is made to transfer the risk.

As the manager of High Speed Records, you have signed a new artist to the label. There are three different outcomes for investing in the artist. What is the expected return on investment using the information below? Outcome Probability Return 1. .35 .20 2. .25 .36 3. .40 .10 *Make sure your answer is in a decimal format (.25, .90, etc.) and not a percentage (25%). Round to the nearest hundredth. (0.089 -> 0.09)

.20

As the Chief Investment Officer for "A Nyce Place to Work" you have been given the opportunity to invest in the Super-Tazer. It is a tazer, that when you push the button incapacitates everyone in a 10 foot radius of you. You have figured out that there are three potential outcomes for this investment: Outcome Probability Return 1. .25 .10 2. .50 .25 3. .25 .40 What is the expected return on the investment? *Make sure your answer is in a decimal format (.10, .55, etc...) not a percentage (50%). Round (if necessary) to the hundreths position (i.e. .089 = .09).

.25

Imagine a world where health insurance doesn't exist. On the upside, you don't have to pay any health insurance premiums! On the downside, if you become sick you're responsible for the full amount of your healthcare. What if you had children? The risk of unknown payments for healthcare would require all of us to save a much larger amount of money to set aside just in case we needed it. This burden would be in which of the following categories?

A. need for larger emergency funds B. less personal savings to spend on desired items C. loss of needed goods and services D. fear and worry Answer: A

What type of attitude is willing to pay more to avoid risk?

Adverse Risk

How do you figure out what is riskier?

Consider relative variation of actual from expected loss (aka variation aka standard deviation). "How far is it from what we expected to happen from what actually happened?"

What are examples of financial statements?

Dun and Bradstreet (credit reports), SEC 10-K report, annual report, balance sheet (point in time), and income statement (period of time).

Risk prevention methods are best applied to what?

Frequency of losses

On the risk profile table, what is the color green considered? What is the color red considered?

Green = Good, Red = Bad

What are the types of intangible hazards?

Moral, Morale, and Societal Hazards

What are the four sources of risk?

Personal, property, liability, and financial risk

What are the two types of hazards?

Physical (Tangible) and Intangible Hazards

What are the eight categories of risk?

Pure, speculative, static, dynamic, fundamental, particular, core, and secondary risk.

What is the last step in the risk management process that is often done first?

Review and Evaluate. The risk management process never stops; it is an ongoing practice among individuals and organizations.

What are the three attitudes towards risk?

Risk Neutral, Risk Averse, and Risk Seeker

Risk reduction methods are best applied to what?

Severity of losses

What do organizational charts depict?

The layout hierarchy of the organization. "Who reports to whom?" and "what are they responsible for?"

What do flow charts depict about a company?

The steps it takes to go from raw materials to finished products

What is the definition of risk on the individual level?

Uncertainty regarding loss

What is the definition of risk on the society level?

Uncertainty regarding loss and things that effect society as a whole. It has to effect a large portion of its constituents. Note - individuals and society have their own way of handling risk.

What is the definition of risk on the organizational level?

Uncertainty regarding loss and things that prevent the organization from reaching their objectives. It adversely affects the achievements of an organization's objectives. Note - risk management in organizations applies to the entire industry.

Do risk reduction methods have costs that are both monetary and nonmonetary?

Yes. It requires putting a value on human life. Consider how to balance risk/reward of how much it is worth spending to saving one life. What is the quality of life they would have if you did save them?

Risk prevention methods are best applied to?

a. High frequency losses. b. High severity losses. c. Both a. and b. d. neither a. nor b. Answer: A

Risk reduction methods are best applied to?

a. High frequency losses. b. High severity losses. c. Both a. and b. d. neither a. nor b. Answer: B

Which of the following is NOT a method of categorizing risk?

a. core versus secondary b. pure versus speculative c. static versus dynamic d. certain versus uncertain Answer: D

Risks affecting a large portion of the population at a given time are which of the following?

a. hazard risks b. fundamental risks c. core risks d. particular risks Answer: B

Donna has a home that is insured to its maximum value. She often leaves the door unlocked in case she forgets her keys. She knows that her insurance policy will pay for any losses if her home is robbed. Which of the following best applies to Donna?

a. moral/morale hazard b. physical hazard c. societal hazard d. none of the above Answer: A

Karen won't allow any of the neighborhood children into her yard because she has a large swimming pool and doesn't want anyone to fall in, resulting in her being responsible for the harm of a child. What type of risk is Karen trying to avoid?

a. property b. liability c. financial d. personal Answer: B

Why should we measure loss severity?

a. risk classification b. determination of transfer (insurance) amount c. loss severity is never measured d. Both a. and b. Answer: D