RMI Exam 2 Latest Updated with
Complete Solutions
After all loss control that makes economic sense has been applied, what needs to be
done next? - ANSWER-Risk managers need to decide on the mix of risk retention and
risk transfer for the remaining risk
As a general rule, what two conditions should be met before choosing a higher
deductible? - ANSWER-You can afford the associated losses. That is, afford to pay the
deductible when you have a loss
AND
Sufficient premium savings will result
Business Income: Covered by? - ANSWER-Business interruption insurance when
property is damaged by a covered peril.
Can be added to Commercial Property Insurance.
Business Personal Property? Covered by? - ANSWER-Furniture/Equipment, Inventory.
Covered by- Commercial Property Insurance.
But then your property insurer will try to collect from the person who burned your house
down. What is that called? - ANSWER-"Subrogation"
But why are we squaring it in the next column (Xi - μ)2? - ANSWER-To account for the
fact that some of our "Xi - μ" are positive and some are negative.
What would happen if we did not square it?
They would cancel each other out and not be a good measure of variation.
Do the risk exposures units need to be "similar" for the LLN to work? - ANSWER-Yes
Does a higher standard deviation (σ) indicate higher or lower uncertainty? - ANSWER-
Higher uncertainty. Why? It means the actual values are more dispersed around the
expected value.
Does indemnity apply to parametric insurance? - ANSWER-No. Why? Because
parametric insurance does not pay you according to your loss, but according to some
external trigger that is expected to be correlated to your loss.
For claim to be paid for a property loss, when does "insurable interest" need to exist? -
ANSWER-To collect for a loss covered by your property insurance policy, you need to
have an "insurable interest" at the time of the loss.
,For life insurance to pay out for the death of an insured life, when does "insurable
interest" need to exist? - ANSWER-To collect for life insurance, "Insurable interest"
must exist at the time the policy was bought but does not have exist at the death of the
insured life
For what property does "insurable interest" exist? - ANSWER-For property insurance,
"insurable interest" exists for property you own and for property you don't own but have
lent money for the owner to buy the property.
For what type of insurance is indemnity especially important? - ANSWER-Property
insurance.
For what types of insurance is subrogation an important concept? - ANSWER-Property
and liability insurance.
Given the following:
• An insurer covers 12,785 houses.
• Each house is worth the same amount and has the same risk profile.
• Insurer estimates that total claims payments it makes each year is about $6.2M.
• All other expenses are typically 20% of total claims payments per year.
• Insurer wants to make $742,400 in profits in a year.
What premium should the insurer charge each homeowner per year?
A. $460
B. $582
C. $620
D. $640
E. None of the above - ANSWER-Correct answer:
D. $640
How are normal and lognormal distributions similar? - ANSWER-Just like a normal
distribution, the position and shape of a lognormal distribution are determined by the
expected value (mean) and the standard deviation.
How can an insurance company decrease its COV? - ANSWER-By increasing the
number of policyholders
How can loss control affect other risk treatments? - ANSWER-Loss control can lower
the cost of risk retention and risk transfer, so loss control decisions need to include how
it affects the other risk treatments.
How can you hedge risk such as stock price risk or currency or interest rate risks? -
ANSWER-By using derivatives, such as options, futures, and forward contracts.
, How do "Other Insurance" clauses support indemnity? - ANSWER-They are clauses in
the insurance policy that state how multiple insurance policies will divide payment for
the loss so that policyholder does not profit.
How do liability risks compare to property risks? - ANSWER-Much more complex and
uncertain. This slide shows common liability risks.
How does ACV support the principle of indemnity? - ANSWER-ACV is the depreciated
value of the property, which restores you to your previous position. But does not make
you better off.
How does insurance make the economy more efficient? - ANSWER-We individuals and
most companies cannot pool together a large number of exposures so that law of large
numbers does not work. Risk pooling allows insurers to bear risk more cheaply than
individuals can. Economy is more efficient if risks are transferred to those who can bear
the risks more cheaply.
How does risk pooling reduce risk? Why? - ANSWER-As the pool (number of PHs)
becomes larger, the aggregate losses become predictable within narrow limits.
Because of the law of large numbers (LLN)
How does subrogation support the principle of indemnity? - ANSWER-If you could
collect both from the insurer and the party that caused the loss, you could make a profit.
Subrogation prevents the policyholder from collecting more than the actual amount of
the loss, which supports the principle of indemnity.
How does the deductible work? - ANSWER-For each covered loss (claim), the
company pays the deductible first, then the insurer pays the claim.
How is a lognormal distribution different from a normal distribution? - ANSWER-▪
Lognormal distribution is skewed. Normal is symmetrical
▪ For lognormal, expected value is not at peak like for normal
distribution.
▪ No negative numbers for lognormal distribution. Makes senses for
severity because severity cannot be negative.
How might risk manager actions change for hard and soft markets? - ANSWER-▪If
insurance is in a soft market, that is, insurance prices are low, it makes sense for risk
managers to reduce risk retention and transfer more risks to insurers. How? By lowering
the deductible or reducing use of self-insurance and captive programs.
▪If insurance prices are in a hard market, meaning high prices, risk managers tend to
transfer less risk and retain more risk. How? By raising deductible or increasing use of
self-insurance and captive programs.
Complete Solutions
After all loss control that makes economic sense has been applied, what needs to be
done next? - ANSWER-Risk managers need to decide on the mix of risk retention and
risk transfer for the remaining risk
As a general rule, what two conditions should be met before choosing a higher
deductible? - ANSWER-You can afford the associated losses. That is, afford to pay the
deductible when you have a loss
AND
Sufficient premium savings will result
Business Income: Covered by? - ANSWER-Business interruption insurance when
property is damaged by a covered peril.
Can be added to Commercial Property Insurance.
Business Personal Property? Covered by? - ANSWER-Furniture/Equipment, Inventory.
Covered by- Commercial Property Insurance.
But then your property insurer will try to collect from the person who burned your house
down. What is that called? - ANSWER-"Subrogation"
But why are we squaring it in the next column (Xi - μ)2? - ANSWER-To account for the
fact that some of our "Xi - μ" are positive and some are negative.
What would happen if we did not square it?
They would cancel each other out and not be a good measure of variation.
Do the risk exposures units need to be "similar" for the LLN to work? - ANSWER-Yes
Does a higher standard deviation (σ) indicate higher or lower uncertainty? - ANSWER-
Higher uncertainty. Why? It means the actual values are more dispersed around the
expected value.
Does indemnity apply to parametric insurance? - ANSWER-No. Why? Because
parametric insurance does not pay you according to your loss, but according to some
external trigger that is expected to be correlated to your loss.
For claim to be paid for a property loss, when does "insurable interest" need to exist? -
ANSWER-To collect for a loss covered by your property insurance policy, you need to
have an "insurable interest" at the time of the loss.
,For life insurance to pay out for the death of an insured life, when does "insurable
interest" need to exist? - ANSWER-To collect for life insurance, "Insurable interest"
must exist at the time the policy was bought but does not have exist at the death of the
insured life
For what property does "insurable interest" exist? - ANSWER-For property insurance,
"insurable interest" exists for property you own and for property you don't own but have
lent money for the owner to buy the property.
For what type of insurance is indemnity especially important? - ANSWER-Property
insurance.
For what types of insurance is subrogation an important concept? - ANSWER-Property
and liability insurance.
Given the following:
• An insurer covers 12,785 houses.
• Each house is worth the same amount and has the same risk profile.
• Insurer estimates that total claims payments it makes each year is about $6.2M.
• All other expenses are typically 20% of total claims payments per year.
• Insurer wants to make $742,400 in profits in a year.
What premium should the insurer charge each homeowner per year?
A. $460
B. $582
C. $620
D. $640
E. None of the above - ANSWER-Correct answer:
D. $640
How are normal and lognormal distributions similar? - ANSWER-Just like a normal
distribution, the position and shape of a lognormal distribution are determined by the
expected value (mean) and the standard deviation.
How can an insurance company decrease its COV? - ANSWER-By increasing the
number of policyholders
How can loss control affect other risk treatments? - ANSWER-Loss control can lower
the cost of risk retention and risk transfer, so loss control decisions need to include how
it affects the other risk treatments.
How can you hedge risk such as stock price risk or currency or interest rate risks? -
ANSWER-By using derivatives, such as options, futures, and forward contracts.
, How do "Other Insurance" clauses support indemnity? - ANSWER-They are clauses in
the insurance policy that state how multiple insurance policies will divide payment for
the loss so that policyholder does not profit.
How do liability risks compare to property risks? - ANSWER-Much more complex and
uncertain. This slide shows common liability risks.
How does ACV support the principle of indemnity? - ANSWER-ACV is the depreciated
value of the property, which restores you to your previous position. But does not make
you better off.
How does insurance make the economy more efficient? - ANSWER-We individuals and
most companies cannot pool together a large number of exposures so that law of large
numbers does not work. Risk pooling allows insurers to bear risk more cheaply than
individuals can. Economy is more efficient if risks are transferred to those who can bear
the risks more cheaply.
How does risk pooling reduce risk? Why? - ANSWER-As the pool (number of PHs)
becomes larger, the aggregate losses become predictable within narrow limits.
Because of the law of large numbers (LLN)
How does subrogation support the principle of indemnity? - ANSWER-If you could
collect both from the insurer and the party that caused the loss, you could make a profit.
Subrogation prevents the policyholder from collecting more than the actual amount of
the loss, which supports the principle of indemnity.
How does the deductible work? - ANSWER-For each covered loss (claim), the
company pays the deductible first, then the insurer pays the claim.
How is a lognormal distribution different from a normal distribution? - ANSWER-▪
Lognormal distribution is skewed. Normal is symmetrical
▪ For lognormal, expected value is not at peak like for normal
distribution.
▪ No negative numbers for lognormal distribution. Makes senses for
severity because severity cannot be negative.
How might risk manager actions change for hard and soft markets? - ANSWER-▪If
insurance is in a soft market, that is, insurance prices are low, it makes sense for risk
managers to reduce risk retention and transfer more risks to insurers. How? By lowering
the deductible or reducing use of self-insurance and captive programs.
▪If insurance prices are in a hard market, meaning high prices, risk managers tend to
transfer less risk and retain more risk. How? By raising deductible or increasing use of
self-insurance and captive programs.
