FIN 341 Exam 2 UPDATED ACTUAL Questions And Correct Answers
C
Terms in this set (149)
Definition of Insurance the pooling of fortuitous losses by transfer of such risks to insurers, who agree to
indemnify insureds for such losses
Agents or Brokers Intermediary
Indemnification The insured is restored to his or her approximate financial position prior to the
occurrence of the loss
Pooling of losses the spreading of losses incurred by the few over the entire group, so that in the
process, average loss is substituted for actual loss
Law of Large Numbers As number of observations (N) increases, expected loss (X bar) stays the same,
objective risk (STDEV) goes down
Sample STDEV Pop STDEV/ square root of N
Fortuitous Loss one that is unforeseen and unexpected by the insured and occurs as a result of
chance
Risk Transfer A pure risk is transferred from the insured to the insurer, who typically is in a
stronger financial position
Characteristics of an Ideally Insurable Risk 1. Large number of exposure units
2. Accidental and unintentional loss
3. Determinable and measurable loss
4. No catastrophic loss
5. Calculable chance of loss
6. Economically feasible premium
Basic Characteristics of Insurance 1. Pooling of losses
2. Payment of fortuitous losses
3. Risk transfer
4. Indemnification
Reinsurance an arrangement by which the primary insurer that initially writes the insurance
transfers to another insurer part or all of the potential losses associated with such
insurance
Geographic Diversification • Increase in variety of markets / geographic regions
• Regional, national, or international markets
, Catastrophe Bond -corporate bonds that permit the issuer to skip or defer scheduled payments if a
catastrophic loss occurs
- usually issued by insurance companies
Fire is an insurable risk
Pandemic is not an insurable risk
Adverse Selection the tendency of persons with a higher-than-average chance of loss to seek
insurance at standard rates
Types of Private Insurance Personal Lines- Homeowners, personla auto Commercial Lines- P&L, D&O, K&R,
Cyber, BI
Types of Government Insurance Social insurance programs and other government insurance programs EX: Social
Security, Unemployment, NFIP - national flood insurance program
Coefficient Variation Standard deviation / the mean
What is the meaning of Risk Management? A process that identifies loss exposures faced by an organization and selects the
most appropriate treatment techniques.
What are the pre-loss objectives of Risk Management? Prepare for potential losses economically, reduce anxiety, and meet legal
obligations.
What are the post-loss objectives of Risk Management? Ensure the survival of the firm, continue operations, maintain stability of earnings,
and minimize the effect of loss on others.
What is the first and most important step in the Risk Risk identification.
Management Process?
What sources can Risk Managers use for identifying loss Risk analysis questionnaires, physical inspections, flowcharts, financial statements,
exposures? and historical loss data.
What is the difference between loss frequency and loss Loss frequency refers to the probable number of losses, while loss severity refers
severity? to the probable size of the loss.
What is the maximum possible loss? The worst loss that could happen to the firm during its lifetime.
What is the probable maximum loss? The worst loss that is likely to happen.
What does the law of large numbers state? as the number of policyholders increases, the more confident the insurance
company is its prediction will prove true (N increases, Objective risk decreases)
C
Terms in this set (149)
Definition of Insurance the pooling of fortuitous losses by transfer of such risks to insurers, who agree to
indemnify insureds for such losses
Agents or Brokers Intermediary
Indemnification The insured is restored to his or her approximate financial position prior to the
occurrence of the loss
Pooling of losses the spreading of losses incurred by the few over the entire group, so that in the
process, average loss is substituted for actual loss
Law of Large Numbers As number of observations (N) increases, expected loss (X bar) stays the same,
objective risk (STDEV) goes down
Sample STDEV Pop STDEV/ square root of N
Fortuitous Loss one that is unforeseen and unexpected by the insured and occurs as a result of
chance
Risk Transfer A pure risk is transferred from the insured to the insurer, who typically is in a
stronger financial position
Characteristics of an Ideally Insurable Risk 1. Large number of exposure units
2. Accidental and unintentional loss
3. Determinable and measurable loss
4. No catastrophic loss
5. Calculable chance of loss
6. Economically feasible premium
Basic Characteristics of Insurance 1. Pooling of losses
2. Payment of fortuitous losses
3. Risk transfer
4. Indemnification
Reinsurance an arrangement by which the primary insurer that initially writes the insurance
transfers to another insurer part or all of the potential losses associated with such
insurance
Geographic Diversification • Increase in variety of markets / geographic regions
• Regional, national, or international markets
, Catastrophe Bond -corporate bonds that permit the issuer to skip or defer scheduled payments if a
catastrophic loss occurs
- usually issued by insurance companies
Fire is an insurable risk
Pandemic is not an insurable risk
Adverse Selection the tendency of persons with a higher-than-average chance of loss to seek
insurance at standard rates
Types of Private Insurance Personal Lines- Homeowners, personla auto Commercial Lines- P&L, D&O, K&R,
Cyber, BI
Types of Government Insurance Social insurance programs and other government insurance programs EX: Social
Security, Unemployment, NFIP - national flood insurance program
Coefficient Variation Standard deviation / the mean
What is the meaning of Risk Management? A process that identifies loss exposures faced by an organization and selects the
most appropriate treatment techniques.
What are the pre-loss objectives of Risk Management? Prepare for potential losses economically, reduce anxiety, and meet legal
obligations.
What are the post-loss objectives of Risk Management? Ensure the survival of the firm, continue operations, maintain stability of earnings,
and minimize the effect of loss on others.
What is the first and most important step in the Risk Risk identification.
Management Process?
What sources can Risk Managers use for identifying loss Risk analysis questionnaires, physical inspections, flowcharts, financial statements,
exposures? and historical loss data.
What is the difference between loss frequency and loss Loss frequency refers to the probable number of losses, while loss severity refers
severity? to the probable size of the loss.
What is the maximum possible loss? The worst loss that could happen to the firm during its lifetime.
What is the probable maximum loss? The worst loss that is likely to happen.
What does the law of large numbers state? as the number of policyholders increases, the more confident the insurance
company is its prediction will prove true (N increases, Objective risk decreases)
