RM 395 - Exam 1 questions with verified
solutions already passed
What is uncertainty? - correct answer ✔✔Having two or more possible outcomes for an event or
situation, with the true outcome unknown until the event or situation occurs (unpredictable outcome).
What is risk? - correct answer ✔✔The negative potential outcomes of an uncertain event. Risk is not
synonymous with uncertainty, but it is linked to it (uncertainty is a precursor to risk). Where there exists
risk, there exists uncertainty; however, the converse is not necessarily true because if there are no
negative potential outcomes, then there is no risk.
What is the role of risk in decision-making? - correct answer ✔✔Risk is a component to be considered
within the general objective of maximizing value associated with undertaking a risky endeavor.
What is the basis of how insurance companies price risk? - correct answer ✔✔Pure Risk Cost
What is pure risk? - correct answer ✔✔The chance of loss or no loss. They do not have any chance of
gain.
How do you calculate pure risk cost? - correct answer ✔✔(severity/magnitude of negative outcomes in
$) x (probability of negative outcome occurring)
Why is pure risk cost referred to as "pure"? - correct answer ✔✔Because it does not incorporate
administrative costs and other non-financial costs. Actual insurance prices must add in commissions,
costs, taxes, marketing, etc.
What is an "exposure" in insurance terminology? - correct answer ✔✔the enterprise, property, person,
thing or activity facing a potential loss. (ex: Car listed on your insurance contract is the exposure unit.)
What are the two types of Property Loss Exposures? - correct answer ✔✔Real property and Personal
property
, What is the difference between real property and personal property? - correct answer ✔✔Real Property
is immovable property such as buildings, homes, and factories (same as real estate) and Personal
Property is moveable (jewelry, etc.).
Define Catastrophic Risk - correct answer ✔✔a concentration of strong, positively correlated risk
exposures. Risks that are too widespread in their damage shadow to be undertaken by insurers, and can
affect the whole economy. (ex: Acts of terror, fires in the north west, etc.)
What are considered particular risks? - correct answer ✔✔Non-catastrophic, accidental losses. (i.e. Fire,
strategic errors, accidental disclosure of protected data by a governmental agency/employee/business
entity)
Define Diversifiable Risk - correct answer ✔✔Risk that can have their adverse consequences mitigated or
reduced simply by having them pooled in well-diversified portfolio of risk exposure. (can also be called
Idiosyncratic risk)
Define Non-Diversifiable Risk - correct answer ✔✔A systematic risk shared by all that cannot be
diversified away by added more exposure units into the pool. The negative effect cannot diminish as you
add more exposure units to the portfolio. (I.e. geographically concentrated exposures to flood hazards, a
financial crisis, common vulnerability in Microsoft Windows.)
Define Non-insurable perils - correct answer ✔✔(Basically the same thing as catastrophic risk) Risks that
may be considered catastrophic to the insurer. The main criteria is the security of the financial standing
of the insurer itself, meaning if the insurer believes covering a certain peril at the presented price poses
excessive risk for their own financial well-being, they will not insure it.
What is an Intangible Hazard? - correct answer ✔✔Attitudes and nonphysical cultural conditions that
affect the probability and/or severity of loss. What is the hazard of the government having provided a
bail out to the banks? What is the hazard of FEMA providing flood assistance to those who do not buy
flood insurance?
What is Moral Hazard? - correct answer ✔✔Behavior that can be considered negligence, bordering
criminality.
solutions already passed
What is uncertainty? - correct answer ✔✔Having two or more possible outcomes for an event or
situation, with the true outcome unknown until the event or situation occurs (unpredictable outcome).
What is risk? - correct answer ✔✔The negative potential outcomes of an uncertain event. Risk is not
synonymous with uncertainty, but it is linked to it (uncertainty is a precursor to risk). Where there exists
risk, there exists uncertainty; however, the converse is not necessarily true because if there are no
negative potential outcomes, then there is no risk.
What is the role of risk in decision-making? - correct answer ✔✔Risk is a component to be considered
within the general objective of maximizing value associated with undertaking a risky endeavor.
What is the basis of how insurance companies price risk? - correct answer ✔✔Pure Risk Cost
What is pure risk? - correct answer ✔✔The chance of loss or no loss. They do not have any chance of
gain.
How do you calculate pure risk cost? - correct answer ✔✔(severity/magnitude of negative outcomes in
$) x (probability of negative outcome occurring)
Why is pure risk cost referred to as "pure"? - correct answer ✔✔Because it does not incorporate
administrative costs and other non-financial costs. Actual insurance prices must add in commissions,
costs, taxes, marketing, etc.
What is an "exposure" in insurance terminology? - correct answer ✔✔the enterprise, property, person,
thing or activity facing a potential loss. (ex: Car listed on your insurance contract is the exposure unit.)
What are the two types of Property Loss Exposures? - correct answer ✔✔Real property and Personal
property
, What is the difference between real property and personal property? - correct answer ✔✔Real Property
is immovable property such as buildings, homes, and factories (same as real estate) and Personal
Property is moveable (jewelry, etc.).
Define Catastrophic Risk - correct answer ✔✔a concentration of strong, positively correlated risk
exposures. Risks that are too widespread in their damage shadow to be undertaken by insurers, and can
affect the whole economy. (ex: Acts of terror, fires in the north west, etc.)
What are considered particular risks? - correct answer ✔✔Non-catastrophic, accidental losses. (i.e. Fire,
strategic errors, accidental disclosure of protected data by a governmental agency/employee/business
entity)
Define Diversifiable Risk - correct answer ✔✔Risk that can have their adverse consequences mitigated or
reduced simply by having them pooled in well-diversified portfolio of risk exposure. (can also be called
Idiosyncratic risk)
Define Non-Diversifiable Risk - correct answer ✔✔A systematic risk shared by all that cannot be
diversified away by added more exposure units into the pool. The negative effect cannot diminish as you
add more exposure units to the portfolio. (I.e. geographically concentrated exposures to flood hazards, a
financial crisis, common vulnerability in Microsoft Windows.)
Define Non-insurable perils - correct answer ✔✔(Basically the same thing as catastrophic risk) Risks that
may be considered catastrophic to the insurer. The main criteria is the security of the financial standing
of the insurer itself, meaning if the insurer believes covering a certain peril at the presented price poses
excessive risk for their own financial well-being, they will not insure it.
What is an Intangible Hazard? - correct answer ✔✔Attitudes and nonphysical cultural conditions that
affect the probability and/or severity of loss. What is the hazard of the government having provided a
bail out to the banks? What is the hazard of FEMA providing flood assistance to those who do not buy
flood insurance?
What is Moral Hazard? - correct answer ✔✔Behavior that can be considered negligence, bordering
criminality.
