UGA RMIN 4000 SET QUESTIONS AND ANSWERS
SET A+
✔✔insurance vs. hedging (insurance) - ✔✔-risk is transferred by contract
-involves the transfer of pure risks
-moral hazard and adverse selection are more severe problems for insurers
✔✔insurance vs. hedging (hedging) - ✔✔-risk is transferred by a contract
-involves risks that are typically uninsurable
-fewer problems of moral hazard and adverse selection for entities who buy or sell
futures contracts
✔✔types of private insurance - ✔✔-property insurance: indemnifies property owners
against the loss or damage of real or personal property
-liability insurance: covers the insured's legal liability arising out of operate damage or
bodily injury to others
-casualty insurance: refers to insurance that covers whatever is not covered by fire,
marine, and life insurance
✔✔private insurance coverages two major categories - ✔✔personal lines: coverages
that insure the real estate and personal property of individuals and families or provide
protection against legal liability
commercial lines: coverages for business firms, nonprofit organizations, and
government agencies
✔✔social insurance programs - ✔✔-social security, unemployment, workers comp
-financed entirely or in large party by contributions from employers and /or employees
-In favor of low income groups
✔✔other govt' insurance programs - ✔✔-found at both the federal and state level
, -examples: federal flood insurance, state health insurance pools
✔✔social benefits of insurance - ✔✔-indemnification for loss
-reduction of worry and fear
-source of investment funds
-loss prevention
-enhancement of credit
✔✔social costs of insurance - ✔✔-cost of doing business:
an expense loading is the amount needed to pay all expenses, including commissions,
general administrative expenses, taxes, acquisition expenses, and for contingencies
and profit
-fraudulent claims
-inflated claims
✔✔captive insurer - ✔✔insurer owned by a parent firm for the purpose of insuring the
parent firm's loss exposures
-single parent captive
-association or group captive is owned by several parents
✔✔Retention advantages - ✔✔-save on loss costs
-save on expenses
-encourage loss prevention
-increase cash flow
✔✔retention disadvantages - ✔✔-possible higher losses
-possible higher expenses
-possible higher taxes
✔✔non-insurance transfer - ✔✔method other than insurance by which a pure risk and
its potential financial consequences are transferred to another party
example: leases, contracts, hold holdharmless agreements
✔✔non-insurance transfer advantages - ✔✔-can transfer some losses that are not
insurable
-less expensive
-can transfer loss to someone who is in a better position to control losses
✔✔non-insurance transfer disadvantages - ✔✔-contract language may be ambiguous,
so transfer may fail
-if the other party fails to pay, firm is still responsible for the loss
-insurers may not give credit for transfers
SET A+
✔✔insurance vs. hedging (insurance) - ✔✔-risk is transferred by contract
-involves the transfer of pure risks
-moral hazard and adverse selection are more severe problems for insurers
✔✔insurance vs. hedging (hedging) - ✔✔-risk is transferred by a contract
-involves risks that are typically uninsurable
-fewer problems of moral hazard and adverse selection for entities who buy or sell
futures contracts
✔✔types of private insurance - ✔✔-property insurance: indemnifies property owners
against the loss or damage of real or personal property
-liability insurance: covers the insured's legal liability arising out of operate damage or
bodily injury to others
-casualty insurance: refers to insurance that covers whatever is not covered by fire,
marine, and life insurance
✔✔private insurance coverages two major categories - ✔✔personal lines: coverages
that insure the real estate and personal property of individuals and families or provide
protection against legal liability
commercial lines: coverages for business firms, nonprofit organizations, and
government agencies
✔✔social insurance programs - ✔✔-social security, unemployment, workers comp
-financed entirely or in large party by contributions from employers and /or employees
-In favor of low income groups
✔✔other govt' insurance programs - ✔✔-found at both the federal and state level
, -examples: federal flood insurance, state health insurance pools
✔✔social benefits of insurance - ✔✔-indemnification for loss
-reduction of worry and fear
-source of investment funds
-loss prevention
-enhancement of credit
✔✔social costs of insurance - ✔✔-cost of doing business:
an expense loading is the amount needed to pay all expenses, including commissions,
general administrative expenses, taxes, acquisition expenses, and for contingencies
and profit
-fraudulent claims
-inflated claims
✔✔captive insurer - ✔✔insurer owned by a parent firm for the purpose of insuring the
parent firm's loss exposures
-single parent captive
-association or group captive is owned by several parents
✔✔Retention advantages - ✔✔-save on loss costs
-save on expenses
-encourage loss prevention
-increase cash flow
✔✔retention disadvantages - ✔✔-possible higher losses
-possible higher expenses
-possible higher taxes
✔✔non-insurance transfer - ✔✔method other than insurance by which a pure risk and
its potential financial consequences are transferred to another party
example: leases, contracts, hold holdharmless agreements
✔✔non-insurance transfer advantages - ✔✔-can transfer some losses that are not
insurable
-less expensive
-can transfer loss to someone who is in a better position to control losses
✔✔non-insurance transfer disadvantages - ✔✔-contract language may be ambiguous,
so transfer may fail
-if the other party fails to pay, firm is still responsible for the loss
-insurers may not give credit for transfers
