RMI3011 Chapters 1-4 Exam 1 Question
and answers correctly solved
Risk - correct answer ✔Means there is uncertainty about the outcome, and
there is a possibility of the outcome being unfavorable (an indeterminate
outcome & adverse consequence).
A condition in which there is a possibility of an adverse deviation from a
desired outcome that is expected or hoped for.
What are the 2 common elements of risk? - correct answer ✔1.
Indeterminancy- at least two possible outcomes are possible
2. Adversity- at least one of the outcomes is undesirable and results in a loss.
Textbook definition of risk - correct answer ✔A condition in which there is a
possibility of an adverse deviation from a desired outcome that is expected or
hoped for.
T/F? Risk can exist whether or not it is perceived. - correct answer ✔TRUE
T/F? The probability of an adverse event may not be measurable, but still
exist. - correct answer ✔TRUE
What is risk not subjective - correct answer ✔A state of the real world where
the probability of an adverse event is between 0 and 1.
T/F? Economists, statisticians, decision theorists, and insurance theorists all
use the same definition for risk. - correct answer ✔FALSE
,Risk for people in the insurance business - correct answer ✔Means either a
peril insured against (fire) or a person/property protected by insurance (young
drivers are not good risks).
Conditions of a risk: - correct answer ✔1. Combination of circumstances in
the real world.
2. Between zero and 1.
It is neither impossible nor definite.
3. No requirement that probability must be measurable but only that it must
exist. May not be able to measure the degree of risk.
Uncertainty - correct answer ✔A state of mind characterized by doubt based
on a lack of knowledge of what will/will not happen in the future (lack of
knowledge or doubt about the future).
Example: I am uncertain what grade I am going to get in this course.
Certainty (and example) - correct answer ✔The contrast of uncertainty.
Example: I am certain I will get an A in this course.
vs. I am uncertain what grade I will get in this course.
T/F? Risk exists whether or not the person exposed to loss is aware of the
risk. - correct answer ✔TRUE
Degree of Risk - correct answer ✔The likelihood of occurrence. Events with
a high probability of loss are considered as riskier than those with a low
probability of loss.
T/F? The degree of risk varies with the probability of deviation - correct
answer ✔TRUE
,from what is expected in case of aggregate data. & from what is hoped for (no
loss) in case of individual
How do insurance companies determine premiums? - correct answer ✔They
make predictions about losses that are expected to occur and charge a
premium based on their prediction. There is a risk that the prediction may be
inaccurate. They use standard deviation to know the range of what's possible
to occur.
Peril - correct answer ✔A cause of a loss.
Examples of perils - correct answer ✔Fire, windstorm, hail, or theft.
Hazard - correct answer ✔A condition that may create or increase the
chance of a loss arising from a given peril.
Examples of hazards - correct answer ✔Sickness (can cause economic loss
so it's a peril), but it is also a hazard that increases the chance of loss from the
peril of premature death.
3 categories of hazards (4) - correct answer ✔1. Physical
2. Moral
3. Morale
4. Legal
Physical Hazard plus examples - correct answer ✔Physical properties that
increase the chance of loss from various perils.
Examples that increase possibility of loss from the peril of fire: type of
construction, the location of the property, and the occupancy of the building.
, Moral Hazard plus examples - correct answer ✔The increase in the
probability of loss that results from dishonest tendencies in the character of
the insured person. Dishonest tendencies on the part of an insured that may
induce that person to attempt to defraud the insurance company.
Example: fraud
Morale Hazard plus examples - correct answer ✔Acts to increase losses
where insurance exists because of a different attitude toward losses that will
be paid by insurance. People buy insurance and have more of a careless
attitude toward preventing losses or a different attitude toward the cost of
restoring damage.
Example: Drivers have insurance and drive more recklessly since any
damage from a crash will be covered.
Legal Hazard plus examples - correct answer ✔The increase in the
frequency/severity of loss that arises from legal doctrines enacted by
legislatures and created by the courts.
Example: In building codes require that new buildings conform to statutory
requirements, the destruction of a building that does not meet the reqs may
force the owner to pay more costs fo reconstruction thus causing more loss.
Classification of Risks - correct answer ✔1. Dynamic vs. Static
2. Fundamental vs. Particular
3. Pure vs. Speculative
4. Systemic
5. Pure
Dynamic vs. Static Risk - correct answer ✔result from changes in the
economy like in price level, consumer tastes, income/output, and technology
that can cause financial loss to members of the economy.
and answers correctly solved
Risk - correct answer ✔Means there is uncertainty about the outcome, and
there is a possibility of the outcome being unfavorable (an indeterminate
outcome & adverse consequence).
A condition in which there is a possibility of an adverse deviation from a
desired outcome that is expected or hoped for.
What are the 2 common elements of risk? - correct answer ✔1.
Indeterminancy- at least two possible outcomes are possible
2. Adversity- at least one of the outcomes is undesirable and results in a loss.
Textbook definition of risk - correct answer ✔A condition in which there is a
possibility of an adverse deviation from a desired outcome that is expected or
hoped for.
T/F? Risk can exist whether or not it is perceived. - correct answer ✔TRUE
T/F? The probability of an adverse event may not be measurable, but still
exist. - correct answer ✔TRUE
What is risk not subjective - correct answer ✔A state of the real world where
the probability of an adverse event is between 0 and 1.
T/F? Economists, statisticians, decision theorists, and insurance theorists all
use the same definition for risk. - correct answer ✔FALSE
,Risk for people in the insurance business - correct answer ✔Means either a
peril insured against (fire) or a person/property protected by insurance (young
drivers are not good risks).
Conditions of a risk: - correct answer ✔1. Combination of circumstances in
the real world.
2. Between zero and 1.
It is neither impossible nor definite.
3. No requirement that probability must be measurable but only that it must
exist. May not be able to measure the degree of risk.
Uncertainty - correct answer ✔A state of mind characterized by doubt based
on a lack of knowledge of what will/will not happen in the future (lack of
knowledge or doubt about the future).
Example: I am uncertain what grade I am going to get in this course.
Certainty (and example) - correct answer ✔The contrast of uncertainty.
Example: I am certain I will get an A in this course.
vs. I am uncertain what grade I will get in this course.
T/F? Risk exists whether or not the person exposed to loss is aware of the
risk. - correct answer ✔TRUE
Degree of Risk - correct answer ✔The likelihood of occurrence. Events with
a high probability of loss are considered as riskier than those with a low
probability of loss.
T/F? The degree of risk varies with the probability of deviation - correct
answer ✔TRUE
,from what is expected in case of aggregate data. & from what is hoped for (no
loss) in case of individual
How do insurance companies determine premiums? - correct answer ✔They
make predictions about losses that are expected to occur and charge a
premium based on their prediction. There is a risk that the prediction may be
inaccurate. They use standard deviation to know the range of what's possible
to occur.
Peril - correct answer ✔A cause of a loss.
Examples of perils - correct answer ✔Fire, windstorm, hail, or theft.
Hazard - correct answer ✔A condition that may create or increase the
chance of a loss arising from a given peril.
Examples of hazards - correct answer ✔Sickness (can cause economic loss
so it's a peril), but it is also a hazard that increases the chance of loss from the
peril of premature death.
3 categories of hazards (4) - correct answer ✔1. Physical
2. Moral
3. Morale
4. Legal
Physical Hazard plus examples - correct answer ✔Physical properties that
increase the chance of loss from various perils.
Examples that increase possibility of loss from the peril of fire: type of
construction, the location of the property, and the occupancy of the building.
, Moral Hazard plus examples - correct answer ✔The increase in the
probability of loss that results from dishonest tendencies in the character of
the insured person. Dishonest tendencies on the part of an insured that may
induce that person to attempt to defraud the insurance company.
Example: fraud
Morale Hazard plus examples - correct answer ✔Acts to increase losses
where insurance exists because of a different attitude toward losses that will
be paid by insurance. People buy insurance and have more of a careless
attitude toward preventing losses or a different attitude toward the cost of
restoring damage.
Example: Drivers have insurance and drive more recklessly since any
damage from a crash will be covered.
Legal Hazard plus examples - correct answer ✔The increase in the
frequency/severity of loss that arises from legal doctrines enacted by
legislatures and created by the courts.
Example: In building codes require that new buildings conform to statutory
requirements, the destruction of a building that does not meet the reqs may
force the owner to pay more costs fo reconstruction thus causing more loss.
Classification of Risks - correct answer ✔1. Dynamic vs. Static
2. Fundamental vs. Particular
3. Pure vs. Speculative
4. Systemic
5. Pure
Dynamic vs. Static Risk - correct answer ✔result from changes in the
economy like in price level, consumer tastes, income/output, and technology
that can cause financial loss to members of the economy.
