RMI 2101 STUDY GUIDE 2026 EXAM QUESTIONS AND
ANSWERS RATED A+
✔✔2a. Losses should be definite - ✔✔Must be easy to verify that a loss has occurred.
To ensure this, independent verification of losses is used.
✔✔2b. Losses should be determinable - ✔✔Must be easy to place a dollar value on the
loss.
To ensure this:
1. Ensurers use loss settlement rules
2. Ensurers specify the amount of loss before it occurs.
✔✔3. Loss should be significant to the insurer. - ✔✔Loss should be worth ensuring
✔✔4a. The risk pool should be large - ✔✔Risk pools must take advantage of the law of
large numbers in order to receive accurate estimates of P*
✔✔4b. The risk pool should contain homogeneous exposure units - ✔✔Risk pool should
contain the same or similar risks
Risk adverse selection if violated.
✔✔5. Loss should not be catastrophic in nature to the insurer. - ✔✔A loss is
catastrophic in nature when a single random event causes multiple losses to occur at
the same time.
Issues with Cat losses include:
1. Breaks the law of large numbers (events arent independent)
2. it is difficult to predict P* (PI>Pmax)
3. Creates the risk of insolvency for the insurer (bankruptcy)
✔✔Solution to catastrophic losses (2) - ✔✔1. Financial diversification
2. Geographic diversification
✔✔Financial Diversification - ✔✔A firm spreads the loss among multiple insurers
through purchasing reinsurance.
✔✔Geographic Diversification - ✔✔A firm spreads out their exposure units
geographically so as not to encounter a catastrophic loss
✔✔Adverse Selection (4b) - ✔✔Arises when a homogeneous risk assumption is
violated
, Not an issue simply because high risk exposure units exist in the risk pool, but because
high risk exposure units are not paying their actuarially fair premium
Causes include:
1. the insured has more information about the risk than the insurer does.
2. The insured may be unwilling to share that information with the insurer
Solutions include:
1. Insurer gains more information through the passage of time.
2. Compulsory insurance (Social security, ACA)
✔✔TRIA (Terrorism Risk and Insurance Act) - ✔✔Taxpayer and federal government
financed program to finance catastrophic loss due to terrorism. Cannot be priced.
✔✔ The three sources of funding to pay for losses (3) - ✔✔1. Internal (Retention)
2. External (Risk Retentio)
3. Alternative Risk Financing (Self Insurance)
✔✔Risk Transfer - ✔✔Seek funds from unrelated third parties to pay for the losses.
Transfer the financial responsibility of the loss to a third party.
✔✔Types of Risk Transfer (2) - ✔✔1. Insurance
2. Non Insurance
✔✔Insurance (Risk Transfer) - ✔✔Transfer of the financial responsibility of a loss to the
insurer
✔✔Types of Non-Insurance (Risk Transfer) - ✔✔1. Leases
2. Hold-Harmless Agreement
✔✔Leases (Non-Insurance) - ✔✔Tenant is financially responsible for all property losses
that occur while occupying the property.
✔✔Hold-Harmless (Non-Insurance) - ✔✔To engage a contractor and make the
contractor financially responsible for all liability losses.
✔✔Risk Retention - ✔✔A firm assumes financial responsibility for the losses that do
occur. (They retain exposure to the loss)
✔✔Individual Retention Examples (3) - ✔✔1. Not buying insurance (Health Insurance)
2. Under Insured (Face Amount-Maximum an Insurance policy will pay)
3. Insurance with a deductible
✔✔E.g. Which risk management strategies are being used when you purchase
insurance with a deductible? (2) - ✔✔1. Risk Transfer (Insurance Policy)
ANSWERS RATED A+
✔✔2a. Losses should be definite - ✔✔Must be easy to verify that a loss has occurred.
To ensure this, independent verification of losses is used.
✔✔2b. Losses should be determinable - ✔✔Must be easy to place a dollar value on the
loss.
To ensure this:
1. Ensurers use loss settlement rules
2. Ensurers specify the amount of loss before it occurs.
✔✔3. Loss should be significant to the insurer. - ✔✔Loss should be worth ensuring
✔✔4a. The risk pool should be large - ✔✔Risk pools must take advantage of the law of
large numbers in order to receive accurate estimates of P*
✔✔4b. The risk pool should contain homogeneous exposure units - ✔✔Risk pool should
contain the same or similar risks
Risk adverse selection if violated.
✔✔5. Loss should not be catastrophic in nature to the insurer. - ✔✔A loss is
catastrophic in nature when a single random event causes multiple losses to occur at
the same time.
Issues with Cat losses include:
1. Breaks the law of large numbers (events arent independent)
2. it is difficult to predict P* (PI>Pmax)
3. Creates the risk of insolvency for the insurer (bankruptcy)
✔✔Solution to catastrophic losses (2) - ✔✔1. Financial diversification
2. Geographic diversification
✔✔Financial Diversification - ✔✔A firm spreads the loss among multiple insurers
through purchasing reinsurance.
✔✔Geographic Diversification - ✔✔A firm spreads out their exposure units
geographically so as not to encounter a catastrophic loss
✔✔Adverse Selection (4b) - ✔✔Arises when a homogeneous risk assumption is
violated
, Not an issue simply because high risk exposure units exist in the risk pool, but because
high risk exposure units are not paying their actuarially fair premium
Causes include:
1. the insured has more information about the risk than the insurer does.
2. The insured may be unwilling to share that information with the insurer
Solutions include:
1. Insurer gains more information through the passage of time.
2. Compulsory insurance (Social security, ACA)
✔✔TRIA (Terrorism Risk and Insurance Act) - ✔✔Taxpayer and federal government
financed program to finance catastrophic loss due to terrorism. Cannot be priced.
✔✔ The three sources of funding to pay for losses (3) - ✔✔1. Internal (Retention)
2. External (Risk Retentio)
3. Alternative Risk Financing (Self Insurance)
✔✔Risk Transfer - ✔✔Seek funds from unrelated third parties to pay for the losses.
Transfer the financial responsibility of the loss to a third party.
✔✔Types of Risk Transfer (2) - ✔✔1. Insurance
2. Non Insurance
✔✔Insurance (Risk Transfer) - ✔✔Transfer of the financial responsibility of a loss to the
insurer
✔✔Types of Non-Insurance (Risk Transfer) - ✔✔1. Leases
2. Hold-Harmless Agreement
✔✔Leases (Non-Insurance) - ✔✔Tenant is financially responsible for all property losses
that occur while occupying the property.
✔✔Hold-Harmless (Non-Insurance) - ✔✔To engage a contractor and make the
contractor financially responsible for all liability losses.
✔✔Risk Retention - ✔✔A firm assumes financial responsibility for the losses that do
occur. (They retain exposure to the loss)
✔✔Individual Retention Examples (3) - ✔✔1. Not buying insurance (Health Insurance)
2. Under Insured (Face Amount-Maximum an Insurance policy will pay)
3. Insurance with a deductible
✔✔E.g. Which risk management strategies are being used when you purchase
insurance with a deductible? (2) - ✔✔1. Risk Transfer (Insurance Policy)
