Points Awkarded

7/24/2019 Points Awkarded

1/31

Points Awarded 17.00

Points Missed 8.00

Percentage 68.0%

1.

When estimating property loss exposure, which of the following methods for valuing property isthe least relevant measure for risk managers?

A) book value

B) market value

C) firm specific value

) replacement cost

Points Earned: !"#$!"#

Correct Answer(s): A

2.

Which of the following pairs of random variables are likely to be uncorrelated?

A) total health care costs in %ew &ork City for !''( total health care costs in %ew &ork

City for !''*B) total property damage due to wildfires in Colorado in !''( total property damage due

to wildfires in California in !''*"

C) number of people who die from cancer in the + in !''( number of people who diefrom cancer in the + in !''*"

) worker in-uries at a shoe manufacturing plant owned and managed by .xodus/ncorporated worker in-uries at a different shoe manufacturing plant owned and managed by.xodus /ncorporated"

Points Earned: #"#$!"#

Correct Answer(s): B

3.


2/31

Which type of risk would you expect to have the most skewed probability distribution? 0Assumea time period of one year")

A) product liability claims for a drug manufacturer

B) shoplifting losses for a small bookstore

C) collision damage to vehicles for a delivery service

) employee in-uries in a grocery store



4.

1he graph above depicts the probability distributions for risks A and B" Based on the graph,which of the following statements is true?

A) 1he expected value of loss for risk A is larger than the expected value of loss for riskB"

B) 1he expected value of loss for risk B is larger than the expected value of loss for risk

A"

C) 1he standard deviation of expected losses for risk A is larger than the standarddeviation of losses for risk B"

) 1he standard deviation of expected losses for risk B is larger than the standarddeviation of losses for risk A"


3/31



.

Which of the following is not a key feature of loss distributions that would be considered by riskmanagers?

A) expected value

B) standard deviation

C) maximum probable loss

) least probable loss

Points Earned: !"#$!"#Correct Answer(s):

6.

1he magnitude of loss per occurrence is known as2

A) loss severity

B) loss fre3uency

C) total losses

) the loss distribution



7.


4/31

Which distribution has the highest expected value?

A) istribution 4

B) istribution &

C) Both have the same expected value

) 1here is not enough information to answer this 3uestion"


Correct Answer(s): C

8.

resden and 5organ both have the above loss distribution" /f resden and 5organ form apooling arrangement to share losses, what is the expected loss for each of them after the pool isformed?

A) 67##

B) 687#

C) 68##

) 69:#




5/31

!.

;ooling arrangements are less effective when the participant


6/31



12.

resden and 5organ both have the above loss distribution" /f resden and 5organ form apooling arrangement to share losses, what is the variance of expected losses for each of them

after the pool is formed?

A) 6*

B) 6*#

C) 6*##

) 68###



13.

1he formation of risk pools by insurers is the same, in principle, as2

A) reducing expected losses through the use of safety e3uipment

B) creating a welldiversified portfolio of stock shares

C) using the futures markets to hedge against fluctuations in the exchange rate of a

particular foreign currency) agreeing to an assessment premium




7/31

14.

According to the effect of the law of large numbers on a pooling arrangement, the greater thenumber of participants in the risk pool,

A) the less likely the actual average loss will approach the expected 0per participant) loss

B) the more closely the actual average loss will approach the expected 0per participant)loss

C) the greater will be the skewness of the pool


8/31

) the standard deviation will be overestimated



17.

5atCo is considering conducting safety seminars for its warehouse personnel" 1he cost of theseminars is 6#,###" 5atCo expects the seminars to reduce in-ury costs, on average, by 69,*##per year over the next : years" 0ue to employee turnover the effectiveness of the seminars willdiminish after : years") +sing a discount rate of :"7D, what in the net present value of thisproposed program? 0Assume the seminar costs are right now and the savings are at the end ofeach year")

A) 6,*##

B) 6!,!!:

C) 6!,:#8

) 6,##



18.

When a risk manager is choosing between two alternative 0mutually exclusive) methods offinancing losses that have different patterns of expenditures, but do not materially affect thevariability of any of the firm


9/31

1!.

Which of the following is an example of a capital shock?

A) a large change in insurer capital caused by adverse loss experience

B) a large change in insurer capital caused by adverse investment experience"C) both a and b are examples of capital shocks"

) none of the above



20.All else e3ual, if an insurer expects that rates of return on investments are increasing, the fairpremium will be2

A) unaffected

B) decreasing

C) increasing

) none of the above



21.

A EfairF premium will take into account all of the following except2

A) expected claim costs

B) what other insurers are charging

C) investment income) administrative costs




10/31

22.

1he overall process of assessing the expected claim costs for buyers, determining the applicablerate, and deciding whether to offer coverage is known as2

A) underwriting

B) classification

C) schedule rating

) retrospective experience rating



23.

/nsurers who are trying to classify insurance buyers into risk categories must weigh the benefitsof accurate risk classification against2

A) the societal cost of risk

B) loss of business from classifying high risks into more costly policy pools

C) the costs of collecting and evaluating information necessary for classification

) changes in buyer behavior that might result from classification



24.

A crosssubsidy in insurance occurs when2

A) different lines of insurance 0e"g" auto and homeowners) are priced so that those withhigher administrative costs subsidiGe those with lower administrative costs"

B) each risk class pays a premium that is appropriate for their level of risk"

C) buyers in different risk groups pay the same premium and lower risk buyers subsidiGethe higher risk buyers"


11/31

) insurance is designed to encourage a change in behavior of risky buyers"



2.

Capital shocks to insurers are likely to cause2

A) an increase in the demand for insurance

B) an increase in insurer capital

C) a reduced likelihood of insurer insolvency

) a reduction in the supply of insurance


Correct Answer(s):

1.

1he graph above depicts the probability distributions for risks A and B" Based on the graph,

which of the following statements is true?

A) 1he expected value of loss for risk A is larger than the expected value of loss for riskB"

B) 1he expected value of loss for risk B is larger than the expected value of loss for riskA"


12/31

C) 1he standard deviation of expected losses for risk A is larger than the standarddeviation of losses for risk B"

) 1he standard deviation of expected losses for risk B is larger than the standarddeviation of losses for risk A"



2.

Which of the following pairs of random variables are likely to be uncorrelated?

A) total health care costs in %ew &ork City for !''( total health care costs in %ew &orkCity for !''*

B) total property damage due to wildfires in Colorado in !''( total property damage dueto wildfires in California in !''*"

C) number of people who die from cancer in the + in !''( number of people who diefrom cancer in the + in !''*"

) worker in-uries at a shoe manufacturing plant owned and managed by .xodus/ncorporated worker in-uries at a different shoe manufacturing plant owned and managed by.xodus /ncorporated"



3.

When estimating property loss exposure, which of the following methods for valuing property isthe least relevant measure for risk managers?

A) book value

B) market value


) replacement cost




13/31

4.

Which type of risk would you expect to have the most skewed probability distribution? 0Assumea time period of one year")

A) product liability claims for a drug manufacturer

B) shoplifting losses for a small bookstore

C) collision damage to vehicles for a delivery service

) employee in-uries in a grocery store



.

/n which distribution is there a higher likelihood that the outcome will be close to the expectedvalue of 6!,###?

A) istribution 4

B) istribution &

C) 1he likelihood that outcomes will be close to the expected value is the same for both

distributions") 1here is not enough information to answer this 3uestion"




14/31

6.

5ultiplying each possible outcome of a random variable by its probability of occurrence, andthen adding up these results will be e3ual to the random variable


15/31

resden and 5organ both have the above loss distribution" /f resden and 5organ form apooling arrangement to share losses, what is the variance of expected losses for each of themafter the pool is formed?

A) 6*

B) 6*#

C) 6*##

) 68###



!.

1he main 0economic) reason for the existence of insurance companies is2

A) individuals need to diversify risk

B) insurers< ability to predict individual lossesC) insurers< ability to form efficient risk pools with minimal contracting costs

) individuals inability to determine expected loss



10./nsurers that rely, to some degree, on exclusive agents to sell their policies are known as2

A) mutuals

B) direct writers

C) independents


16/31

) brokers



11.

Bilbo has -ust purchased an insurance policy 0and thereby -oined a riskpool)" Bilbo paid an exante premium and did not give the insurer ex post assessment rights" 1hese means

A) Bilbo does not have the right to collect losses greater than his ex ante premium

B) 1he insurer does not have the right to deny claims that are less than the agreed upon expost amount"

C) Bilbo is not re3uired to assess the insurer"

) 1he insurer cannot re3uest further premium from Bilbo should the riskpoolexperience a bad loss"


Correct Answer(s):

12.;ooling arrangements are less effective when the participant


17/31

A) the less likely the actual average loss will approach the expected 0per participant) loss

B) the more closely the actual average loss will approach the expected 0per participant)loss

C) the greater will be the skewness of the pool


18/31

) >ognormal distribution


Correct Answer(s):

16.

/f the normal distribution is used to estimate losses when the true loss distribution is in factpositively skewed

A) maximum probable loss will be underestimated

B) maximum probable loss will be overestimated

C) the standard deviation will be underestimated

) the standard deviation will be overestimated



17.

A probability distribution that is often used to approximate the fre3uency of accident losses is the

A) ;oisson distribution

B) %ormal distribution

C) amma distribution

) >ognormal distribution



18.

5atCo is considering conducting safety seminars for its warehouse personnel" 1he cost of theseminars is 6#,###" 5atCo expects the seminars to reduce in-ury costs, on average, by 69,*##per year over the next : years" 0ue to employee turnover the effectiveness of the seminars willdiminish after : years") +sing a discount rate of :"7D, what in the net present value of this


19/31

proposed program? 0Assume the seminar costs are right now and the savings are at the end ofeach year")

A) 6,*##

B) 6!,!!:

C) 6!,:#8

) 6,##



1!.

tate rating systems in which insurers can change rates without regulatory restrictions are called2

A) competitive

B) prior approval

C) strictly regulated

) experience rated



20.

A hard insurance market is characteriGed by2

A) increasing prices

B) stable prices

C) falling prices

) readily available coverage




20/31

21.

An insurer sells a policy today for which the expected endofyear claim cost is 6##" /t caninvest the policy proceeds at a rate of (D per year" What is the discounted expected claim cost?

A) 6##

B) 6!8C) 6!*(

) 6!8



22.Which of the following is not a common 0shortterm) outcome of temporary rate suppression?

A) insurers suffer losses

B) insurers reduce supply

C) insurers curtail investments

) insurers raise premiums


Correct Answer(s):

23.

/nsurers who are trying to classify insurance buyers into risk categories must weigh the benefitsof accurate risk classification against2

A) the societal cost of risk

B) loss of business from classifying high risks into more costly policy pools

C) the costs of collecting and evaluating information necessary for classification) changes in buyer behavior that might result from classification




21/31

24.

A crosssubsidy in insurance occurs when2A) different lines of insurance 0e"g" auto and homeowners) are priced so that those with

higher administrative costs subsidiGe those with lower administrative costs"






2.

Which of the following types of insurance will have the longest claim tail?

A) homeowners

B) automobile physical damage 0collision)

C) auto liability

) employee medical coverage



1.


22/31

All other factors e3ual, which distribution is the most risky?

A) istribution 4

B) istribution &

C) Both distributions have e3uivalent risk

) Both distributions have Gero risk"



2.

Which distribution has the highest expected value?

A) istribution 4

B) istribution &

C) Both have the same expected value

) 1here is not enough information to answer this 3uestion"




23/31

3.

A listing of a random variable


24/31

+nidentified risk exposures will result in2

A) reduced insurance premiums

B) increased insurance premiums

C) implicit retention

) purchasing too much insurance



6.

When estimating property loss exposure, which of the following methods for valuing property is

the least relevant measure for risk managers?

A) book value

B) market value


) replacement cost



7.

arunee /nc" has estimated that ? of their twenty workers will be in-ured in the coming year" 1heexpected severity per occurrence is 6!,###" What is the expected loss per exposure?

A) 6!,###

B) 6!#

C) 6!#,###

) 67##


Correct Answer(s):


25/31

8.

resden and 5organ both have the above loss distribution" /f resden and 5organ form apooling arrangement to share losses, what is the expected loss for each of them after the pool isformed?

A) 67##

B) 687#

C) 68##

) 69:#



!.

1he formation of risk pools by insurers is the same, in principle, as2A) reducing expected losses through the use of safety e3uipment

B) creating a welldiversified portfolio of stock shares

C) using the futures markets to hedge against fluctuations in the exchange rate of aparticular foreign currency

) agreeing to an assessment premium



10.

Bilbo has -ust purchased an insurance policy 0and thereby -oined a riskpool)" Bilbo paid an exante premium and did not give the insurer ex post assessment rights" 1hese means


26/31

A) Bilbo does not have the right to collect losses greater than his ex ante premium

B) 1he insurer does not have the right to deny claims that are less than the agreed upon expost amount"

C) Bilbo is not re3uired to assess the insurer"

) 1he insurer cannot re3uest further premium from Bilbo should the riskpoolexperience a bad loss"


Correct Answer(s):

11.

+nder what circumstance will a pooling arrangement result in reduced risk 0standard deviation)to the participants in the pool?

A) only when losses are perfectly positively correlated

B) when losses are high

C) only when losses are negatively correlated

) whenever losses are less than perfectly positively correlated


Correct Answer(s):

12.

1he contracting costs incurred when an insurer investigates and attempts to determine the valueof loss claim made against the riskpool are called

A) distribution costs

B) premiums

C) underwriting expenses) loss ad-ustment expenses


Correct Answer(s):


27/31

13.

;ooling arrangements are less effective when the participant


28/31


16.When a risk manager is choosing between two alternative 0mutually exclusive) methods offinancing losses that have different patterns of expenditures, but do not materially affect thevariability of any of the firm


29/31

proposed program? 0Assume the seminar costs are right now and the savings are at the end ofeach year")

A) 6,*##

B) 6!,!!:

C) 6!,:#8

) 6,##



1!.

1he overall process of assessing the expected claim costs for buyers, determining the applicablerate, and deciding whether to offer coverage is known as2

A) underwriting

B) classification

C) schedule rating

) retrospective experience rating



20.

1he extra amount that policyholders must pay to compensate investors for providing capital tothe firm is called the2

A) expense loading

B) profit loading

C) administrative expenses) profit margin




30/31

21.

All else e3ual, if an insurer expects that rates of return on investments are increasing, the fairpremium will be2

A) unaffected

B) decreasing

C) increasing

) none of the above



22.

An insurer sells a policy today for which the expected endofyear claim cost is 6##" /t caninvest the policy proceeds at a rate of (D per year" What is the discounted expected claim cost?

A) 6##

B) 6!8

C) 6!*(

) 6!8



23.

Which of the following types of insurance will have the longest claim tail?

A) homeowners

B) automobile physical damage 0collision)

C) auto liability

) employee medical coverage


31/31



24.

1he tendency of buyers with high expected losses to buy more insurance coverage than buyerswith low expected losses is called

A) a capital shock

B) heterogeneity

C) the redistributive effect classification

) adverse selection

Points Earned: !"#$!"#Correct Answer(s):

2.

A crosssubsidy in insurance occurs when2

A) different lines of insurance 0e"g" auto and homeowners) are priced so that those withhigher administrative costs subsidiGe those with lower administrative costs"






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