mid term revision

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Third Year Third Year Third Year Third Year ––––2015/20162015/20162015/20162015/2016

(Accounting and Business Majors)

INSURANCEINSURANCEINSURANCEINSURANCE

Mid-term Revision

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Chapter Question (1) Question (2) Question (3) Question (4)

One From Q. 1 to 33 From Q. 1 to 35 From Q. 1 to 8 Problem (1)

Two From Q. 34 to 46 From Q. 36 to 63 From Q. 9 to 12 -------

Three From Q. 47 to 50 ------- From Q. 13 to 14 -------

Four From Q. 50 to 78 From Q. 64 to 70 From Q. 15 to 20 Problem (2) & (3)

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(1) Risks may be unknowingly retained because of ignorance, indifference, or laziness

A. Loss reduction B. Passive retention

C. Retention D. Active retention ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(2) A financial loss that results indirectly from the occurrence of a direct physical damage or theft

loss, e.g., the additional living expenses after a fire:

A. Direct loss B. Active retention

C. indirect of consequential loss D. Passive retention ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(3) The cause of the loss:

A. Pure risk B. Peril

C. Hazard D. Risk ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(4) A situation in which there are only the possibilities of loss or no loss (earthquake)

A. Risk B. Peril

C. Other risks D. Pure risk ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(5) An individual is aware of the risk and deliberately plans to retain all or part of it

A. Loss reduction B. Passive retention

C. Active retention D. Retention ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(6) You can avoid being mugged in a high crime area by not going there

A. Peril B. Hazard

C. Avoidance D. Risk ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(7) Involve the possibility of losses associated with the destruction or theft of property

A. Liability risks B. Pure risks

C. Property Risk D. Other risks ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(8) The extra expense incurred by a business to stay in operation following a fire is an example

of a(n):

A. Fundamental risk. B. Speculative risk.

Question (ONE): Multiple Choice

Select the most correct answer for the following sentences

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C. Direct loss. D. Indirect loss ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(9) Auto accidents can by reduced if motorists take drive training:

A. Retention B. Passive retention

C. Loss reduction D. Loss prevention ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(10) An individual or business firm retains part or all of the losses that can result from a given

risk.

A. Pure Risk B. Avoidance

C. Risk D. Active Retention ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(12) The probability that an event will occur

A. Liability Risk B. Chance of Loss

C. Direct Loss D. Financial Risk ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(13) Such as damage to buildings, furniture and office equipment

A. Other Risks B. Property Risks

C. Liability Risks D. Pure Risk ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(14) A situation in which either profit or loss is possible

A. Pure Risk B. Speculative Risk

C. Subjective Risk D. Objective Risk ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(15) A financial loss that results from the physical damage, destruction, or theft of the property,

such as fire damage to a home

A. Other Risks B. Direct Loss

C. Pure Risk D. Retention ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(16) Dishonesty or character defects in an individual that increase the frequency or severity of

loss

A. Physical Hazard B. Morale Hazard

C. Moral Hazard D. Legal Hazard ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(17) Install a sprinkler system to reduce the damage caused by a fire

A. Loss Reduction B. Retention

C. Passive Retention D. Loss prevention ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(18) Traditionally, risk has been defined as:

A. Any situation in which the probability of loss is one.

B. Any situation in which the probability of loss is zero.

C. Uncertainty concerning the occurrence of loss.

D. The certainty of a loss occurring. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(19) An earthquake is an example of a

A. Moral hazard. B. Peril.

C. Physical hazard. D. Objective risk. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(20) Dense fog that increases the chance of an automobile accident is an example of a

A. Speculative risk. B. Peril.

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C. Physical hazard. D. Moral hazard. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(21) Faking an accident to collect insurance proceeds is an example of a:

A. Physical hazard. B. Objective risk.

C. Moral hazard. D. Attitudinal hazard. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(22) All of the following are examples of direct property losses EXCEPT

A. The theft of a person's jewelry.

B. The destruction of a firm's manufacturing plant by an earthquake.

C. The cost of renting a substitute vehicle while a collision-damaged car is being repaired.

D. The vandalism of a person's automobile ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(23) All of the following are examples of personal risks EXCEPT

A. Poor health. B. Unemployment.

C. Premature death. D. Flood. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(24) Loss control includes which of the following?

I. Loss reduction II. Loss prevention

A. I only B. II only

C. both I and II D. neither I nor II ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(25) Which statement is true with regard to risk and insurance?

I. Most speculative risks can be insured. II. Insurance is a form of risk transfer.



(26) When an earthquake occurred in California, a studio was filming a number of movies. In

addition to the physical damage the studio sustained, the studio was forced to delay or cancel

release of some films. The lost profits because of delay or cancellation illustrate:

A. Consequential loss B. Direct loss

C. Subjective probability D. Objective probability ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(27) The variation between actual and expected results is known as:

A. Objective risk B. Objective probability

C. Subjective probability D. Subjective risk ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(28) Objective risk is defined as

A. The probability of loss.

B. The relative variation of actual loss from expected loss.

C. Uncertainty based on a person's mental condition or state of mind.

D. The cause of loss. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(29) Uncertainty based on a person's mental condition or state of mind is known as

A. Objective risk. B. Subjective risk.

C. Objective probability. D. Subjective probability ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(30) A peril is:

A. A moral hazard. B. The cause of a loss.

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C. A condition which increases the chance of a loss. D. The probability that a loss will occur ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(31) Carelessness or indifference to a loss is an example of:

A. Physical hazard. B. Objective probability.

C. Moral hazard. D. Morale hazard ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(32) A pure risk is defined as a situation in which there is:

A. Only the possibility of loss or no loss. B. Only the possibility of profit.

C. A possibility of neither profit nor loss. D. A possibility of either profit or loss ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(33) The premature death of an individual is an example of:

A. Pure risk. B. Speculative risk.

C. Fundamental risk. D. Physical hazard ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(34) Pre-loss objectives of risk management include which of the following?

I. Preparing for potential losses in the most economical way.

II. Reduction of worry and fear.



(35) Sources of information that can be used by a risk manager to identify pure loss exposures

include all of the following EXCEPT:

A. Risk analysis questionnaires. B. Currency exchange rates.

C. Physical inspections. D. Past losses. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(36) Loss frequency is defined as the:

A. Probable size of the losses that may occur during some period.

B. Probable number of losses that may occur during some period.

C. Probability that any particular piece of property may be totally destroyed.

D. Probability that a liability judgment may exceed a firm's net worth. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(37) Which of the following conditions is (are) appropriate for using retention?

I. Losses are difficult to predict. II. The worst possible loss is not serious.



(38) All of the following are disadvantages of using insurance in a risk management program

EXCEPT:

A. There is an opportunity cost because premiums must be paid in advance.

B. Considerable time and effort must be spent selecting and negotiating coverage

C. It results in considerable fluctuations in earnings after losses occur

D. Attitudes toward loss control may become lax when losses are insured ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(39) Which of the following types of loss exposures are best handled by the use of avoidance?

A. low-frequency, low-severity B. low-frequency, high-severity

C. high-frequency, low-severity D. high-frequency, high-severity ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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(40) The first step in the risk management process is:

A. measure and analyze exposures

B. determining the risk management objectives

C. implementation of the risk management program

D. selection of the appropriate risk treatment technique ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(41) Self-insurance is an example of which of the following risk management techniques?

A. loss control B. noninsurance transfer

C. retention D. avoidance ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(42) Which statement about risk management is true?

I. Risk management is concerned with the identification and treatment of loss exposures.

II. Risk management is an on-going process.



(43) Jan purchased automobile physical damage insurance with a $500 deductible. This coverage

illustrates which two risk management techniques from Jan’s perspective?

A. loss control and avoidance B. retention and transfer

C. transfer and loss control D. avoidance and retention ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(44) All of the following are post-loss risk management objectives EXCEPT:

A. survival of the firm B. reduction of worry and fear

C. continued operations D. stability of earnings ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(45) All of the following are disadvantages of using insurance in a corporate risk management

program EXCEPT:

A. premium payments are not tax deductible

B. insurance coverage may be expensive

C. it may be time consuming to negotiate the coverages and terms

D. the presence of insurance may lead to reduced incentives to engage in loss control ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(46) The identification and analysis of pure risks faced by an individual or family, and to the (46) The identification and analysis of pure risks faced by an individual or family, and to the (46) The identification and analysis of pure risks faced by an individual or family, and to the (46) The identification and analysis of pure risks faced by an individual or family, and to the

selection and implementation of the most appropriate techniques for treating such risksselection and implementation of the most appropriate techniques for treating such risksselection and implementation of the most appropriate techniques for treating such risksselection and implementation of the most appropriate techniques for treating such risks

A. Risk Financing B. Risk Management

C. Risk reduction D. Risk Management Manual ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(47) The mean probability of loss occurrence is called:

A. Severity of loss B. Frequency of loss

B. Number of losses D. Average size of loss ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(48) The mean size of loss when risk occurs is called:

A. Average severity of loss B. Frequency of loss

B. Number of losses D. Average chance of loss ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(49) The net premium disregarding the expenses which each insured must pay:

A. Gross premium B. Frequency of loss

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B. Number of losses D. Pure premium ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(50) The office premium that considers the loading:

A. Gross premium B. Frequency of loss

B. Number of losses D. Pure premium ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(51) Involves spreading losses incurred by the few over the entire group:

A. Spread of Risk B. Fortuitous loss

C. Personal Lines D. Pooling of losses ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(52) Indemnification of loss, Reduction of worry and fear, Source of investment funds, Loss

prevention and Enhancement of credit

A. Casualty Insurance B. Social Cost of Insurance

C. Liability Insurance D. Social Benefits of Insurance ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(53) The greater the number of exposures, the more closely will the actual results approach the

probable results that are expected form an infinite number of exposures

A. Pooling of losses B. Risk Transfer

C. Personal Lines D. Law of Large Numbers ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(54) A pure risk is transferred from the insured to the insurer

A. Risk Transfer B. Personal Lines

C. Life insurance D. Insurance ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(55) The tendency of persons with a higher-than-average chance of loss to seek insurance at

standard rates

A. Expense Loading B. Personal Lines

C. Indemnification D. Adverse selection ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(56) Is one that is unforeseen, unexpected and occurs as a result of chance

A. Fortuitous loss B. Pooling of losses

C. Disability plans D. Spread of Risk ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(57) Careful underwriting and policy provisions

A. Adverse selection B. Social Cost of Insurance

C. Adverse selection can be controlled by D. Types of Private Insurance ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(58) All of the following are characteristics of ideally insurable risks EXCEPT:

A. losses must not be catastrophic B. losses must not be accidental

C. there must be a large number of exposure units

D. losses must be determinable and measurable ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(59) Which statement(s) is (are) true with regard to insurance?

I. It involves the pooling of fortuitous losses.

II. It involves transfer of risk and indemnification of loss.



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(60) Spreading of losses incurred by a few persons over the entire group so that in the process

the average loss is substituted for the actual loss is called:

A. indemnification B. adverse selection

C. underwriting D. pooling ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(61) Insurance benefits society in all of the following ways EXCEPT:

A. it reduces fear and worry B. it provides indemnification when losses occur

C. it leads to inflated claims D. it provides a source of investment funds ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(62) All of the following risks are privately insurable EXCEPT:

A. the risk of premature death B. the risk of physical damage to your car

C. the risk of unemployment D. the risk of poor health ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(63) Which of the following is a characteristic of insurance?

A. pooling of losses B. avoidance of risk

C. payment of intentional losses D. certainty about specific losses that will occur ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(64) Which of the following is implied by the pooling of losses?

A. sharing of losses by an entire group

B. inability to predict losses with any degree of accuracy

C. substitution of actual loss for average loss

D. increase of objective risk ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(65) According to the law of large numbers, what happens as the number of exposure units

increases?

A. Actual results will increasingly differ from probable results.

B. Actual results will more closely approach probable results.

C. Nondiversifiable risk will decrease.

D. Objective risk will increase. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(66) Characteristics of a fortuitous loss include which of the following?

I. The loss is certain to occur. II. The loss occurs as a result of chance.



(67) From the viewpoint of the insurer, all of the following are characteristics of an ideally

insurable risk EXCEPT

A. The loss must be accidental. B. The loss should be catastrophic.

C. The premium must be economically feasible. D. There must be a large number of exposure units. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(68) From the standpoint of the insurer, which of the following is a characteristic of an ideally

insurable risk?

A. The loss must be intentional.

B. There must be a small number of unique loss exposures.

C. The chance of loss must be calculable.

D. The loss must be indeterminable. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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(69) Why is a large number of exposure units generally required before a pure risk is insurable? A. It prevents the insurer from losing money. B. It eliminates intentional losses. C. It minimizes moral hazard. D. It enables the insurer to predict losses more accurately. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(70) The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following? I. Decrease in moral hazard II. More accurate prediction of future losses A. I only B. II only C. both I and II D. neither I nor II ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(71) Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable? I. The loss must be definite as to place. II. The loss must be definite as to amount. A. I only B. II only C. both I and II D. neither I nor II ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(72) Which of the following types of risks best meets the requirements for being insurable by private insurers? A. market risks B. property risks C. financial risks D. political risks ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(73) Which of the following statements about the insurance industry as a source of investment funds is (are) true? I. These funds result in a lower cost of capital than would exist in the absence of insurance. II. These funds tend to promote economic growth and full employment. A. I only B. II only C. both I and II D. neither I nor II ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(74) Which of the following types of risks is normally uninsurable by private insurers? A. personal risks B. property risks C. liability risks D. political risks ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(75) Which of the following is a result of adverse selection? A. The insurer's financial results will be substantially improved. B. Persons most likely to have losses are also most likely to seek insurance at standard rates. C. It is unnecessary for the insurance company to use underwriting. D. Insurance can be written only by the federal government. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(76) The tendency for unhealthy people to seek life or health insurance at standard rates is an example of A. moral hazard. B. fundamental risk. C. attitudinal hazard. D. adverse selection. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(77) All of the following are benefits to society that result from insurance EXCEPT A. less worry and fear. B. elimination of moral hazard. C. indemnification for loss. D. loss prevention. ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Answers of Question (1):

No. Ans. No. Ans. No. Ans. No. Ans.

1 B 21 C 41 C 61 C

2 C 22 C 42 C 62 C

3 B 23 D 43 B 63 A

4 D 24 C 44 B 64 A

5 C 25 B 45 A 65 B

6 C 26 A 46 B 66 B

7 C 27 A 47 B 67 B

8 D 28 B 48 A 68 C

9 D 29 B 49 D 69 D

10 D 30 B 50 A 70 A

11 B 31 D 51 D 71 C

12 B 32 A 52 D 72 B

13 B 33 A 53 D 73 C

14 B 34 C 54 A 74 D

15 B 35 B 55 D 75 B

16 C 36 B 56 A 76 D

17 A 37 B 57 C 77 B

18 C 38 C 58 B

19 B 39 D 59 C

20 C 40 B 60 D

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1. Subjective risk is inversely related to number of exposure units.

2. The law of large number stated that when number of exposure units increases, the variation

between actual loss and expected loss increases.

3. Objective risk does not differ among insurance companies.

4. Peril is a physical condition that increases the chance of loss or the severity of loss.

5. Carelessness and indifference are indicators of moral hazard.

6. It is difficult to control physical hazards.

7. The chance of loss may be the same for two different groups.

Question (TWO): True or False

Determine whether the following sentences are true or false

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8. Insurers may provide some insurance policy to protect insured from both financial and non-

financial risks.

9. Only speculative risks are insurable by private insurers.

10. Natural disasters are example of particular risk.

11. Risk of unemployment is an example of personal risk.

12. Pure risk is classified into personal risks and property risks only.

13. Loss of property risks is always direct.

14. Extra expenses are example of direct loss of business firm destruction.

15. Renting temporary place for a business to keep customers is an example of indirect cost of

property loss.

16. There must be a direct loss before there can be an indirect.

17. Property insurance companies provide coverage for direct loss only.

18. Causing bodily injury of someone else is an example of personal risk.

19. Harming customers by providing defective products is an example of liability risks.

20. Risk avoidance is the best risk handling method.

21. Risk avoidance is recommended when chance of risk and severity of loss is low.

22. Individuals prefer using deductibles because of lower premiums.

23. In active risk retention, individuals have the intention to keep the risk.

24. Under franchise deductible, when loss exceeds deductible, the insurer will pay nothing and

the insured will bear all the risk.

25. Self-insurance is misleading because it is not insurance.

26. Risk retention can be used in risks with high chance of loss and low severity.

27. Risk can be transferred by using contracts.

28. Insurance is one of the mechanisms used to transfer / shift risks.

29. Loss reduction reduces the frequency of loss.

30. Periodic inspection is an example of loss reduction.

31. In insurance, risk is transferred from insureds to the insurance company (insurer).

32. The risk associated with the purchase of common stock is a pure risk.

33. Indifference to loss because of the presence of insurance is called moral hazard.

34. Direct losses are the only type of losses associated with property risks.

35. There are only both property risks and liability risks associated with operating an automobile.

36. Risk management is a scientific approach to deal with all risks faced by individuals and

organizations.

37. Risk management deals only with insurable risks.

38. Risk manager depends mainly on insurance to manage the risks.

39. Risk management decisions haves greater impact on the firm than insurance.

40. Risk management process is a scientific approach consisting of 5 steps

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41. Analyzing the cost and benefits of safety program expenses is an example of the post-loss

objectives of risk management.

42. Reducing worry and fear should be conducted after loss occurred.

43. Meeting the legal and governmental regulations is an example of pre-loss objectives of risk

management.

44. Social responsibility is out of risk management since it is the main responsibility of the

government.

45. Risk manager should investigate all the operations and conditions of the firm to identify the

risks it faces.

46. It is not preferred to generalize risks because each firm may face certain types of risks.

47. Risk evaluation requires measuring frequency of loss and severity of loss.

48. Frequency of loss is more important than severity of loss because risks with high frequency

can destroy the firm.

49. Risks can be ranked as critical and important.

50. Important risks can lead to the insolvency of the firm.

51. Risk retention is an appropriate method in case of unimportant risks.

52. If the firm borrows in order to continue operations, this means that it faced critical risk.

53. Risk reduction represents one of risk financing methods.

54. Firms can control risk by using risk avoidance or risk reduction.

55. If loss frequency is high and loss severity is low, insurance will be the best method to handle

that risk.

56. Since loss frequency and loss severity are low, risk retention is ideal.

57. Insurance is impractical if the severity of loss is high because the premium will be high.

58. According to cost-benefit analysis, it is impractical to buy sprinkler system with a cost greater

than the loss reduction.

59. Insurance management and risk management are the same thing.

60. Passive retention occurs when you unknowingly retain a risk.

61. Risk management techniques can only be applied individually

62. The risk management function should be performed in isolation. There is no need for

interaction between the risk management department and other departments.

63. Self-insurance is a form of retention.

64. Indemnity is given to the victim of loss in form of payment only

65. Sharing of losses by the entire group means large number of heterogeneous exposure units

shares the loss of small number

66. One of the requirements of insurable risk is that loss must be accidental. This enables the

insurer to apply the law of large number.

67. The loss must be determinable in terms of time and place only.

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68. Uninsurable risks include market, financial, production, economic, political and natural risks.

69. Underwriting means the selection and classification of profitable stocks

70. In underwriting, equal rates should be applied to each insured class.

Answers of Question (2)

No. Ans. Correction No. Ans. Correction

1 F Objective 36 F All pure risks

2 F Decreases 37 F All pure

3 F May differs 38 F Many methods

4 F Physical hazard 39 T

5 F Morale hazard 40 F 6 steps

6 F Moral hazard 41 F Pre-loss

7 T 42 F Pre-loss

8 F Financial only 43 T

9 F Uninsurable 44 F One of main obj.

10 F Fundamental 45 T

11 T 46 T

12 F & liability also 47 T

13 F Direct & indirect 48 F Severity is more

14 F Indirect 49 F & unimportant

15 T 50 F Critical

16 T 51 T

17 F Direct & indirect 52 F Important risk

18 F Liability 53 F Risk control

19 T 54 T

20 F Most negative 55 F Vice versa

21 F Both are high 56 T

22 T 57 F Chance of loss

23 T 58 T

24 F Vice versa 59 F They differ

25 T 60 T

26 T 61 F Individuals and firms

27 T 62 F Should be integrated

28 T 63 T

29 F Loss prevention 64 F Payment, repair & replacement

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30 F Loss prevention 65 F Homogeneous

31 T 66 F Moral hazard

32 F Speculative 67 F Time, place, cause and amount

33 F Morale 68 T

34 F There is indirect 69 F Profitable insureds

35 F & personal 70 F Equitable

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(1) What are the losses associated with personal risk (Personal risk perils)

Personal risks are those risks that directly affect an individual. They involve the possibility of the

total loss or reduction of earned income. They include:

(1) Premature death (2) Old age (Disability)

(3) Poor health (Sickness) (4) Unemployment (Loss of income)

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(2) Explain the two types of losses associated with property risk

There are 2 types of loss:

(1) Direct loss: The financial loss that results from the physical damage, destruction or theft of

the property. For example: The loss of the home in case of fire or loss of car in case of theft.

(2) Indirect (Consequential) loss: The financial loss that results from the indirect consequences

of the physical damage, destruction or theft of the property. For example: The expense of

living in a hotel while the home is being rebuilt, Extra expenses to keep operating to avoid

losing the customer, the profits for several months while it is being rebuilt

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(3) Distinguish between “Chance of loss” and “Objective risk” (Give numerical example)

(1) Chance of loss is the probability or frequency that an even will occur.

(2) Objective risk is the relative variation between actual loss and expected or loss.

Question (THREE): Essay Questions

(Explain briefly, compare…etc)

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Chance of loss may be the same for 2 insurance companies, but objective risk may be different

because of law of large number

Insurance Company (A) Insurance Company (B) No. of exposure units 1,000 10,000 Expected no. of losses 10 100

Chance of loss 10

1,000= 0.01

100

10,000= 0.01

Actual no. of losses 12 102

Objective risk 12 − 10

10= 0.20 = 20%

102 − 100

100= 0.02 = 2%

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(4) Explain briefly “Objective risk varies inversely with the number of exposure units” (Give

numerical example) (Or. How do insurance companies reduce objective risk?)

According to “Law of Large Numbers”, as the number of exposure units increases, the actual loss

will be close to the expected loss and objective risk decreases

Insurance Company (A) Insurance Company (B)

No. of exposure units 25,000 250,000

Chance of loss 1% 1%

Expected no. of losses 250

(25,000 x 1%) 2,500

(250,000 x 1%)

Actual no. of losses 260 2550

Objective risk 260 − 250

250= 0.04 = 4%

2550 − 2500

2500= 0.02 = 2%

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(5) Identify and briefly describe the five basic techniques available for risk manager for dealing

with the pure risks facing by the firm

(1) Risk Avoidance

It is not the best approach. It is considered a negative technique for handling losses. Such as a

person may not enter a certain business at all to avoid losing capital

(2) Risk Retention

An individual or a business firm may retain all or part of a certain risk by using 2 ways:

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(A) Active Risk Retention (Risk Assumption)

It means that an individual is knowingly aware of the risk and intentionally plans to retain all or part

of this risk using many forms such as:

o Deductible: It is a small amount of loss that retained by the insured (franchise or straight)

o Self-insurance: It is misleading because it is not insurance. However, it is a special form

planned retention whereby loss exposure is retained by the firm (using reserve).

(B) Passive Risk Retention

Certain risks may be unknowingly retained because of ignorance, indifference or laziness.

(3) Risk Transfer

Risk can be transferred by:

(1) Transfer risk by contracts: for example, the risk of defective computer can be transferred to

the seller by purchasing a service (maintenance) contract.

(2) Insurance: means specific payment (the premium) by one party (insured) to the second part

(insurer) who is responsible for paying indemnity when loss occurs.

(4) Loss Control

Loss control consists of certain activities undertaken to reduce:

(A) Loss Prevention reduces the frequency (chance) of loss such as using the periodic inspections

and safety training

(B) Loss Reduction reduces the severity of loss such as installing sprinkler system to extinguish fire

(5) Insurance

It uses commercial insurance companies that have 4 characteristics:

1. The pooling technique is used to spread the loss of the few over a large number of exposures.

2. Payment of unexpected losses

3. Risk is transferred from the insured to insurer

4. Insurance companies indemnifies for loss in whole or in part

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Loss Frequency Loss Severity The Appropriate Technique

Low Low Risk Retention

High Low Loss Control or Risk Retention

Low High Insurance or loss Control

High High Avoidance or may be Loss Control

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(6) Compare between the three types of hazard

(1) Physical Hazard

A physical hazard is a physical condition that increases the chance of loss or the severity of loss such

as defective wiring system that increases the chance of fire.

(2) Moral Hazard

A moral hazard is dishonesty or character defects in an individual that increases the chance or

severity of loss such as a person may burn down an insured building to collect the value of insurance

policy from the insurance company.

(3) Morale Hazard

A moral hazard is the carelessness or indifference to loss because of the existence of insurance.

Such as a person may leave his car unlocked and the car is stolen.

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(7) Explain (with numerical example) the difference between straight deductible and franchise

deductible

It is a small amount of loss that retained by the insured. There are 2 types of deductible:

(1) Straight deductible: In case of loss > deductible, the insured pays the deductible and the

insurer pays the remaining loss

(2) Franchise deductible: In case of loss > deductible, the insured pays nothing and the insurer

pays all the loss

Example: A driver can buy insurance policy with $300 deductible against collision.

Case (1): If collision loss is $250 (Less than deductible)

o The insurer pays nothing

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o The Insured pays all the loss ($250)

Case (2): If collision loss is $700 (More than deductible)

(A) Straight Deductible

o The Insured pays deductible ($300)

o The insurer pays $400 (700 – 300)

(B) Franchise Deductible

o The insurer pays all loss ($700)

o The Insured pays nothing

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(8) Explain the factors or considerations that a risk manager must consider when selecting the

appropriate method of handling pure risk

(1) Using the general guidelines about the relationship of the various technique and chance and

severity of loss as follows:






(2) The cost-benefit analysis

Risk manager should estimate the cost and benefits of any method for example, if the cost of

sprinkler system is $20,000 and this system will decrease the loss of fire. The decision will depend

on the saving in loss the system can make:

o If the system will reduce the loss by > $20,000 ($35,000 for example), the manager can

install the system

o If the system will reduce the loss by < $20,000 ($15,000 for example), the manager should

reject the installation of the system.

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(9) List and briefly discuss the six steps of risk management process

(1) Determination of Objectives Risk manager should determine the objectives of risk management in the firm. These objectives can

be classified as 2 types:

(A) Pre-loss Objectives o The Economy Goal: The firm should prepare for potential losses in the most economical way

o Reduction of Worry & Fear: Risk manager should minimize worry and fear associated with all

loss exposure.

o Meeting any externally imposed obligations

(B) Post-loss Objectives

After loss occurs, the risk manager has the following objectives: survival of the firm, Continue in

work, Stability of earnings, Continue in growth and Social responsibility

(2) Identification of Risks

o In this step, all risks the firm faces should be identified.

o One of the best ways to discover risks is to “Classify” them into 3 categories: personal,

property and liability.

o It is difficult to generalize risks because each firm has its operations and conditions that give

rise to different risks

(3) Evaluation of Risks (Measurement of Risks)

For each type of risk, risk manager should estimate: Frequency (Chance) of Loss and Severity of

Loss. Severity of loss is more important than frequency of loss because a single catastrophic loss

could destroy the firm.

After measuring all the risks, risk manager should rank these risks as:

o Critical risks: All risks in which the losses would lead to insolvency

o Important risks: All risks in which the losses would require the firm to borrow in order to

continue operations

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o Unimportant risks: All risks in which the losses can be met from assets or cash (Risk

retention)

(4) Selecting the Appropriate Technique for Handling Risks

There are some important considerations such as:

(A) Using the general guidelines about the relationship of the various technique and chance and

severity of loss as follows:






(B) The cost-benefit analysis

Risk manager should estimate the cost and benefits of any method to ensure that the benefits are

more than the cost of each method.

(5) Implementing and Administering the Program

Risk manager should implement (apply) the methods he selected in the previous step.

(6) Evaluate and Review

Periodic evaluation and review is essential because things change and mistakes sometimes happen.

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(10) Why is it impractical for insurance to be written in cases where the possibility of loss is very

high?

It is impractical for insurance to be written in cases where the chance of loss is very high because

the premium will be very high

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(11) Why should you plan to retain certain risk?

Because the severity of loss is relatively small and the insured can bear it

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(12) Compare between risk management and insurance management

o Risk management deals with both insurable and uninsurable risks, while insurance

management deals ONLY with insurable risks.

o Risk management has many methods to handle risk, while insurance is only one of several

methods for handling risk.

o Risk management requires large number of individuals and department throughout the firm

than insurance.

o Risk management decisions haves greater impact on the firm than insurance.

o Risk management requires complete information system interactive within the firm

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(13) Explain briefly the factors affecting the property insurance premium

(1) Frequency (Chance) of Loss

It is the mean (average) probability of loss occurrence. It tells us “How often the event insured

against can be expected to occur?”

It can be calculated as:

� �� =��

�� !"�� #�$%� = ⋯ %

(2) Severity (Size) of Loss

It is the mean (average) size of loss when the risk occurs. It tells us “How much loss we can face?”

It can be calculated as:

'� ��$%� �� =()� ��% �� ** ��

�� = ⋯ $

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(14) Gross premium equation (Give numerical example)

Gross Premium = Pure Premium + (Gross Premium x Loading Ratio)

Pure Premium = Gross Premium ( 1 − Loading Ratio)

Gross Premium = Pure Premium

1 − Loading Ratio

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Example: If the pure premium is $400 and loading ratio is 25%. The gross premium will be


1 − Loading Ratio =

400

1 − 0.25= 533.3

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(15) Pure premium equation (Give numerical example)

Pure Premium = Average Frequency x Average Severity

Pure Premium =Number of Losses

�� !"�� #�$%�x

��% �� ** ��

Number of Losses

K�� K��$�� = ��% �� ** ��

�� !"�� #�$%�

Example:

Insurance company pays on average each year about $12,000,000 for car owners who their cars

damaged. The number of insured cars is 60,000 cars. The number of damaged cars is 600 cars.

The average loss per care is 20,000. The pure premium of automobile collision insurance will be:.

Pure Premium = Amount of All Losses

Number of Exposure Units =

12,000,000

60,000= $200

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(16) Explain briefly the four characteristics of insurance

1. The Pooling Technique: It is used to spread the losses of the few over the entire group so

that the premium (small) is substituted for actual loss (large).

2. Fortuitous Loss: A fortuitous loss is one that is unforeseen and unexpected and occurs as a

result of chance. This loss should not intentional and not happened in the past, but may

happen in the future.

3. Risk Transfer: A pure risk transferred from the insured to the insurer, which is in better

financial position.

4. Indemnification: Compensation is given to the victim of a loss, in whole or in part, by

payment, repair or replacement.

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(17) Explain the major requirements of insurable risk

From the insurer’s point of view, there are 6 requirements of insurable pure risks:

1. There must be a large number of homogeneous exposure units. This is to enable the insurer to

predict loss with a high degree of accuracy (based on the law of large numbers).

2. The loss must be accidental and unintentional. Loss must be due to chance (not intentional) and

may incur in the future. This can reduce moral hazard and consequentially reduce the

premium

3. The loss must be determinable and measureable. Loss must be determinable with respect to

cause, time, place and amount. The insurer must be able to determine if the loss is covered

under the insurance policy and how much the company will pay.

4. The loss should not be catastrophic. The loss should not occur for a large number of exposure

units at the same time. This is to protect the insurers from large amount of loss

5. The chance of loss must be calculated. The insurer must be able to compute both average

frequency and average severity of future losses with some accuracy to calculate the premium.

6. The premium must be economically feasible. The premium paid must be less than the face

amount of insurance and must be small with respect to the value at risk.

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(18) Why insurance companies concern about adverse selection?

As a result of adverse selection, the actual losses will be higher than expected. So, insurers should

protect themselves. The insurer can use underwriting to avoid the adverse selection problem. This

can be done using the following underwriting principles:

1. Selection of insureds according to the company’s underwriting standards

2. Proper balance within each classification

3. Equity among policy owners (equitable rates should be applied)

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(19) How insurance benefit society?

1. Indemnification of loss

2. Less fear and worry

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3. Source of capital for investment

4. Loss prevention

5. Enhances credit

6. Reducing the cost of capital

7. Insurance functions as an antimonopoly device

8. Invisible exports

9. The insurance industry provides employment to a number of workers

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(20) Explain: insurance companies may be considered as financial institutions

Insurance companies may be considered as financial institutions. Insurers are source of capital in

financial market. The supply of funds is increased and the cost of capital to business firms is

decreased.

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(1) Complete the following table:

Year 2013 2014

No. of buildings insured against fire 10,000 50,000

The probability of fire 1% 1%

Therefore, expected number of buildings may burn ? ?

But assuming actual No. of actual number of building burn 105 510

Therefore, the objective risk is ? % ? %

Thus, objective risk declines from ? % to ? % as the number of exposure units increases from

? in 2013 to ?% in 2014. This concept is known as the law of ……………

Solution

In 2013

Expected No. of Losses = (No. of Buildings Insured against Fire)X (The Probability of Fire)

Expected No. of Losses = 10,000 X 1% = 100 Buildings

Question (FOUR): Problems

(Solve the following problems)

Page | 24

Objective Risk = Actual No. of Losses (– ) Expected No. of Losses

Expected No. of Losses=

105 (– ) 100

100= 5%

In 2014

Expected No. of Losses = 50,000 X 1% = 500 Buildings

Objective Risk = Actual No. of Losses (– ) Expected No. of Losses

Expected No. of Losses=

510 (– ) 500

500= 2%

Therefore, the table will be as follows:

Year 2013 2014

No. of buildings insured against fire 10,000 50,000

The probability of fire 1% 1%

Therefore, expected number of buildings may burn 100 500

But assuming actual No. of actual number of building burn 105 510

Therefore, the objective risk is 5% 2 %

Thus, objective risk declines from 5 % to 2 % as the number of exposure units increases

from 10,000 in 2013 to 50,000 % in 2014. This concept is known as the law of large number

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(2) Assume that on the basis of past experience, an insurer is able to predict that 10 of 1,000

automobiles. On the average, destroy or damage by collision each year incurred losses of

$200,000. Each automobile is valued at $30,000. Calculate the following:

1. The average frequency of loss

2. Average severity of loss

3. The pure premium

4. The gross premium assuming that loading ratio is 20%

5. Indicate the equality principle

Solution

(1) Calculating the average frequency of loss

Average Frequency =Number of Losses


10

1,000= 1%

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(2) Calculating the average severity of loss

Severity of Loss =The Amount of All Losses

Number of Losses =

$200,000

10= $20,000

(3) Calculating the pure premium

Pure Premium = Average Frequency x Average Severity

Pure Premium = 0.01 x 20,000 = $200

OR



$200,000

1,000= $200

(4) Calculating the gross premium if the loading ratio = 20%



200

1 − 0.20= $266,7

(5) The Equality Principle

Insured Payments = Insurer Payments

(No. of Exposure Units x Pure Premium) = (No. of Losses x Avg. Size of Loss)

(1,000 x $200) = (10 x $20,000)

$200,000 = $200,000

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(3) Rewrite and complete the following table with respect to an insurer that sells 2 types of

insurance (Indicate your calculations).

Types of Insurance Fire Auto


Number of losses 20 (8) ?

The probability of losses (1) ? 0.02

Total losses (Paid claims) (2) ? (9) ?

Average loss $45,000 $30,000

Pure or net premium per unit (3) ? $600

Pure premiums (4) ? (10) ?

Loading ratio 15% (11) ?

Gross premium per unit (5) ? $1,000

Gross premiums (6) ? (12) ?

Expected profit (7) ? (13) ?

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Solution

(1) The probability of losses (Fire)

Average Frequency (Prob. of loss) =Number of Losses


20

10,000= 0.002

(2) Total Losses (Fire)


Number of Losses

45,000 =The Amount of All Losses

20

∴ The Amount of all losses = 45,000 x 20 = $900,000

(3) Pure Premium per unit (Fire)

Pure Premium = Average Frequency x Average Severity = 0.002 \ 45,000 = $90

OR



$900,000

10,000= $90

(4) Pure Premiums (Fire)

Total Pure Premiums = No. of Exposure Units x Pure Premium per unit

Total Pure Premiums = 10,000 x $90 = $900,000 … … … … . . (^_`abcde fgchicfbj)

(5) Gross Premium per unit (Fire)



90

1 − 0.15= $105.8

(6) Gross Premiums (Fire)

Total Gross Premiums = No. of Exposure Units x Gross Premium per unit

Total Gross Premiums = 10,000 x 105.8 = 1,058,000

(7) Expected Profit (Fire)

Expected Prolits = Gross Premiums − Pure Premiums

Expected Prolits = 1,058,000 − 900,000 = 158,000

(8) Number of Losses (Auto)

Average Frequency (Prob. of loss) =Number of Losses

Number of Exposure Units

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0.02 =Number of Losses

50,000 ∴ Number of Losses = 50,000 x 0.02 = 1,000 cars

(9) Total Losses (Auto)


Number of Losses

30,000 =The Amount of All Losses

1,000

∴ The Amount of all losses = 30,000 x 1,000 = $30,000,000

(10) Pure Premiums (Auto)

Total Pure Premiums = No. of Exposure Units x Pure Premium per unit

Total Pure Premiums = 50,000 x $600 = $30,000,000 … … … … . . (^_`abcde fgchicfbj)

(11) Loading Ratio (Auto)


1 − Loading Ratio

1,000 = 600

1 − Loading Ratio

1,000 (1 − Loading Ratio) = 600

(1 − Loading Ratio) = 600

1000= 0.60

Loading Ratio = 1 − 0.60 = 0.40 = 40%

(12) Gross Premiums (Auto)

Total Gross Premiums = No. of Exposure Units x Gross Premium per unit

Total Gross Premiums = 50,000 x 1,000 = 50,000,000

(13) Expected Profit (Auto)

Expected Prolits = Gross Premiums − Pure Premiums

Expected Prolits = 50,000,000 − 30,000,000 = 20,000,000

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Question (1)

Select the most correct answer for the following questions:

Rewrite the following table in your answer sheet

Question No. 1 2 3 4 5 6 7 8 9 10

Chosen letter

1. The relative variation of actual loss from expected is an example of:

A. Objective risk B. Subjective risk

C. Objective probability D. Subjective probability

2. A defective gas line that may lead to an explosion is an example of:

A. Physical hazard B. Moral hazard

C. Risk D. Peril

3. The extra expenses incurred by a person to rent a substitute car while his collision-

damaged car is being repaired is an example of:

A. A pure risk B. A speculative risk

C. A potential loss D. None of the above

4. Good health habits can be classified as:

A. Loss retention B. Loss prevention

C. Positive moral hazard D. Risk avoidance

5. All of the following can be classified as private insurance EXCEPT:

A. Ocean marine insurance B. Health insurance

C. Workers’ compensation insurance D. Burglary and theft insurance

6. Deductibles are used in all of the following types of insurance EXCEPT:

A. Life insurance B. Health insurance

C. Property insurance D. Automobile insurance

E. None of the above

7. All of the following are examples of direct property losses EXCEPT the:

A. Theft of a person’s stereo

B. Destruction of a firm’s manufacturing plant by a flood

C. Extra expenses of a business to remain in operation following a fire

D. Collision damage to a person’s automobile

E. None of the above

8. All of the following are requirements of an insurable risk EXCEPT:

A. There must be a large number of heterogeneous exposure units

Mid-term Exam

Nov. 2014

Page | 29

B. The loss must be accidental

C. The loss must be definite as to cause, time, place and amount

D. The loss should not be catastrophic

9. The risk associated with the theft of your stereo may be classified as:

A. A particular risk and personal risk

B. A particular risk, a pure risk and a static risk

C. A fundamental risk, a pure risk and a static risk

D. A particular risk, a speculative risk and a static risk

10. The differences between risk management and insurance management include all but

which of the following?

A. Risk management places less emphasis on the identification and analysis of loss

exposures than does insurance management

B. Risk management deals with insurable and uninsurable pure risks

C. Risk management provides for the periodic evaluation of all techniques for meeting

losses, not just insurance

D. Risk management affects a large number of persons in a firm than does insurance

management

E. Techniques other than insurance can be used in risk management program

Question (2)

Briefly explain the following:

1. Franchise deductibles (Give a numerical example)

2. Aviation insurance coverage

3. Social insurance characteristics (Give at least five characteristics)

4. Gross premium equation (Give a numerical example)

Answers and Solutions

Question (1)

Question No. 1 2 3 4 5 6 7 8 9 10

Chosen letter A A A B Canceled A C A B A

Question (2)

1. See question (7) in page (16) in this sheet

2. Canceled

3. Canceled

4. See question (14) in page (20) in this sheet

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Question (1)

State whether the following statements are TRUE or FALSE

1. The existence of insurance may reduce the frequency of losses.

2. Insurance is the most important method of handling risks that benefits any society.

3. The existence of insurance may prevent the occurrence of losses.

4. There is no need to insurance if an industrial firms adopting a loss control program.

5. The existence of insurance may increase the frequency of losses.

6. Underwriting in insurance may defined as buying stocks of a profitable company

7. Missing profit because of fire may be covered under fire insurance.

Question (2)

What are the factors that determine property insurance premiums?

Question (3)

Explain: “Insurance companies may be classified as financial institutions”.

Additional questions for those who did not attend Mid-term Exam

1. Identify and briefly describe the four basic techniques available to the risk manager for

dealing with the pure risks facing the firm.

2. Mention the basic functions of a risk manager (Risk management process).

3. In what ways do operating insurance system benefit society?

4. Explain the major requirements of an insurable risk.


Question (1)

Question No. 1 2 3 4 5 6 7

T or F F T F F F F T

Question (2): See question no. (13) in page (20) in this sheet

Question (3): See question no. (20) in page (23) in this sheet

Additional question

1. See question no. (5) in page (14) in this sheet




Final Exam of Jan. 2015 Questions on chapters: (1), (2), (3) and (4)

Page | 31

Question (2)

Rewrite and complete the following table with respect to an insurer that sells 2 types of

insurance (Indicate your calculations).

Types of Insurance Fire Auto


Number of losses 20 (6) ?

The probability of losses (1) ? 0.02

Total losses (Paid claims) (2) ? (7) ?

Average loss $45,000 $30,000

Pure or net premium per unit (3) ? (8) ?

Pure premiums (4) ? (9) ?

Loading ratio 15% (10) ?

Gross premium per unit (5) ? $1,000

Question (4)

Compare between the following:

1. Risk management and insurance management

2. Loss control and risk retention as methods to handle risk

3. Fundamental risks and particular risks


Question (2): See problem no. (3) in page (25) in this sheet

Question (4):



3. See page (8) in sheet (1)

----------------------------------------------------------------------My best of wishes-------

Exam of September 2015 Questions on chapters: (1), (2), (3) and (4)

mid term revision

Documents

passive retention

active retention

loss reduction

direct loss

theft loss

loss earthquake

possibilities of loss

financial loss