RMIN 4000 Edmunds Final Exam
Questions and Answers
risk - Correct Answers -uncertainty concerning the occurrence of a loss (or calculated
possibility of a negative outcome)
loss exposure - Correct Answers -any situation where a loss is possible (does not have
to occur)
loss frequency - Correct Answers -how often a loss occurs within a specific period
(probability)
formula to find frequency - Correct Answers -# of losses/# of exposures
loss severity - Correct Answers -how much does a loss cost when it occurs (a house fire
costs $x)
formula to find severity - Correct Answers -total losses in dollars/# of losses
Section I and II conditions - Correct Answers -cancellation and nonrenewal Provisions
similar to PAP
assignment condition - Correct Answers -You cannot assign policy benefits to another
party without insurer's consent
coinsurance in homeowners property insurance - Correct Answers -encourages the
insured to insure the property to a stated percentage of its insurable value
Section II coverages - Correct Answers -personal liability and medical payments to
others
Coverage E: Personal Liability - Correct Answers -Protects an insured when a claim or
suit for damages is brought because of bodily injury or property damage allegedly
caused by an insured's negligence (pays amount found legally liable up to limit and
defense costs) (EX: dog bites neighbor)
Peril - Correct Answers -cause of loss (fire, windstorm, flood)
Hazard - Correct Answers -an event that creates or increases the chance of a loss
without causing
,At what probability is risk highest? - Correct Answers -0.5
Do risk and chance of loss mean the same? - Correct Answers -No, chance of loss is
the probability that an event will occur
What are the four types of hazards? - Correct Answers -Physical, Moral, Morale, and
Legal
Physical hazard - Correct Answers -a physical condition that increases the frequency or
severity of loss
moral hazard - Correct Answers -dishonesty or character defects in an individual that
increase the frequency or severity of loss (using a hammer to create "hail" damage to
your roof to get a claim)
Morale (Attitudinal) Hazard - Correct Answers -carelessness or indifference to a loss,
which increases the frequency or severity of a loss (leaving car unlocked leading to
theft)
Legal Hazard - Correct Answers -characteristics of the legal system or regulatory
environment that increase the frequency or severity of losses (a jury in one district may
be more sympathetic than others)
pure risk - Correct Answers -a risk with a possibility of loss or no loss; no gain occurs
speculative risk - Correct Answers -A chance of loss, no loss, or gain
diversifiable risk - Correct Answers -a risk that affects only individuals or small groups
and not the entire economy
nondiversifiable risk - Correct Answers -a risk that affects the entire economy or large
numbers of persons or groups within the economy (war, inflation, business recession)
what makes a risk diversifiable or not? - Correct Answers -it is diversifiable if it can be
reduced or eliminated by diversification
enterprise risk - Correct Answers -encompasses all major risks faced by a business firm
systemic risk - Correct Answers -the risk that the failure of one financial institution can
bring down other institutions as well
What are the major types of pure risk? - Correct Answers -personal, property, and
liability
personal risk - Correct Answers -A risk that directly affects an individual or family (peril,
like unemployment, causes loss of income)
,property risk - Correct Answers -possibility of losses associated with the destruction or
theft of property (can be direct or indirect-financial loss result of direct loss)
legal liability risk - Correct Answers -financial consequences from injuries or damages
you caused to someone else (defense costs; liens on income or assets seized as
punishment)
What are the techniques of managing risks? - Correct Answers -risk control and risk
financing
risk control - Correct Answers -techniques that reduce the frequency or severity of
losses
risk financing - Correct Answers -techniques for funding losses
what are some risk control tactics? - Correct Answers -loss prevention (employee
training or safety equipment to reduce frequency), loss reduction (sprinkler heads for
fires to reduce severity) , duplication, separation, diversification, and avoidance (never
acquire loss exposure (proactive) or abandon loss (reactive))
what are some risk financing tactics? - Correct Answers -retention (retaining part or all
of losses from a risk), noninsurance risk transfer (risk is given to party other than
insurance company), and insurance (transfer risk to insurer in exchange for a premium
cost)
insurance - Correct Answers -pooling of accidental losses by transfer of risks to
insurers, who agree to compensate insureds for such losses, to provide monetary
benefits on their occurrence, or to render services connected to the risks
basic characteristics of insurance - Correct Answers -pooling of losses, payment of
fortuitous losses, risk transfer, and indemnification
pooling of losses - Correct Answers -spreading the losses of a few over an entire group
(reduces variation which reduces uncertainty)
payment of fortuitous losses - Correct Answers -insurance pays for losses that are
unforeseen, unexpected, and occur from chance
risk transfer - Correct Answers -A pure risk is transferred from the insured to the insurer,
who typically is in a stronger financial position
indemnification - Correct Answers -The insured is restored to his or her approximate
financial position prior to the occurrence of the loss
, What are characteristics of an ideally insurable risk? - Correct Answers -Large # of
exposure units, must be accidental and unintentional, determinable and measurable,
should not be catastrophic, have a calculable chance, and have a economically feasible
premium
Large # of exposure units - Correct Answers -enables insurer to predict average loss
based on law of large numbers
Loss must be accidental & unintentional - Correct Answers -Loss should be outside of
insured's control
the loss must be determinable and measurable. - Correct Answers -definite cause, time,
place, and amount of loss.
adverse selection - Correct Answers -the tendency of persons with a higher-than-
average chance of loss to seek insurance at standard rates (can lead to higher loss
levels than expected)
(typically results from asymmetric info where one party only has relevant transaction
info)
underwriting risks - Correct Answers -process of selecting and classifying applicants for
insurance (standards met, coverage items, and rates)
types of insurance - Correct Answers -private and government
private insurance includes: - Correct Answers -life & health and property & liability and
casualty
casualty insurance - Correct Answers -covers whatever is not covered by fire, marine,
and life insurance (usually includes auto and workers' compensation)
government social programs - Correct Answers -financed all or mostly by contributions
from employees and/or employers. benefits are weighted in favor of low income groups
risk management - Correct Answers -a process that identifies loss exposures faced by
an organization and selects the most appropriate techniques for treatment
Pre-Loss objectives of risk management - Correct Answers -efficient cost of risk,
permits better decision making, and meet legal obligations
Post-Loss objectives of risk management - Correct Answers -survival of the firm,
business continuity, earnings, & growth, and societal responsibility
What are the steps in the risk management process? - Correct Answers -1) Identify loss
exposures, 2) measure and analyze the loss exposure, 3) consider and select
appropriate treatment techniques, and 4) implement and monitor the chosen techniques
Questions and Answers
risk - Correct Answers -uncertainty concerning the occurrence of a loss (or calculated
possibility of a negative outcome)
loss exposure - Correct Answers -any situation where a loss is possible (does not have
to occur)
loss frequency - Correct Answers -how often a loss occurs within a specific period
(probability)
formula to find frequency - Correct Answers -# of losses/# of exposures
loss severity - Correct Answers -how much does a loss cost when it occurs (a house fire
costs $x)
formula to find severity - Correct Answers -total losses in dollars/# of losses
Section I and II conditions - Correct Answers -cancellation and nonrenewal Provisions
similar to PAP
assignment condition - Correct Answers -You cannot assign policy benefits to another
party without insurer's consent
coinsurance in homeowners property insurance - Correct Answers -encourages the
insured to insure the property to a stated percentage of its insurable value
Section II coverages - Correct Answers -personal liability and medical payments to
others
Coverage E: Personal Liability - Correct Answers -Protects an insured when a claim or
suit for damages is brought because of bodily injury or property damage allegedly
caused by an insured's negligence (pays amount found legally liable up to limit and
defense costs) (EX: dog bites neighbor)
Peril - Correct Answers -cause of loss (fire, windstorm, flood)
Hazard - Correct Answers -an event that creates or increases the chance of a loss
without causing
,At what probability is risk highest? - Correct Answers -0.5
Do risk and chance of loss mean the same? - Correct Answers -No, chance of loss is
the probability that an event will occur
What are the four types of hazards? - Correct Answers -Physical, Moral, Morale, and
Legal
Physical hazard - Correct Answers -a physical condition that increases the frequency or
severity of loss
moral hazard - Correct Answers -dishonesty or character defects in an individual that
increase the frequency or severity of loss (using a hammer to create "hail" damage to
your roof to get a claim)
Morale (Attitudinal) Hazard - Correct Answers -carelessness or indifference to a loss,
which increases the frequency or severity of a loss (leaving car unlocked leading to
theft)
Legal Hazard - Correct Answers -characteristics of the legal system or regulatory
environment that increase the frequency or severity of losses (a jury in one district may
be more sympathetic than others)
pure risk - Correct Answers -a risk with a possibility of loss or no loss; no gain occurs
speculative risk - Correct Answers -A chance of loss, no loss, or gain
diversifiable risk - Correct Answers -a risk that affects only individuals or small groups
and not the entire economy
nondiversifiable risk - Correct Answers -a risk that affects the entire economy or large
numbers of persons or groups within the economy (war, inflation, business recession)
what makes a risk diversifiable or not? - Correct Answers -it is diversifiable if it can be
reduced or eliminated by diversification
enterprise risk - Correct Answers -encompasses all major risks faced by a business firm
systemic risk - Correct Answers -the risk that the failure of one financial institution can
bring down other institutions as well
What are the major types of pure risk? - Correct Answers -personal, property, and
liability
personal risk - Correct Answers -A risk that directly affects an individual or family (peril,
like unemployment, causes loss of income)
,property risk - Correct Answers -possibility of losses associated with the destruction or
theft of property (can be direct or indirect-financial loss result of direct loss)
legal liability risk - Correct Answers -financial consequences from injuries or damages
you caused to someone else (defense costs; liens on income or assets seized as
punishment)
What are the techniques of managing risks? - Correct Answers -risk control and risk
financing
risk control - Correct Answers -techniques that reduce the frequency or severity of
losses
risk financing - Correct Answers -techniques for funding losses
what are some risk control tactics? - Correct Answers -loss prevention (employee
training or safety equipment to reduce frequency), loss reduction (sprinkler heads for
fires to reduce severity) , duplication, separation, diversification, and avoidance (never
acquire loss exposure (proactive) or abandon loss (reactive))
what are some risk financing tactics? - Correct Answers -retention (retaining part or all
of losses from a risk), noninsurance risk transfer (risk is given to party other than
insurance company), and insurance (transfer risk to insurer in exchange for a premium
cost)
insurance - Correct Answers -pooling of accidental losses by transfer of risks to
insurers, who agree to compensate insureds for such losses, to provide monetary
benefits on their occurrence, or to render services connected to the risks
basic characteristics of insurance - Correct Answers -pooling of losses, payment of
fortuitous losses, risk transfer, and indemnification
pooling of losses - Correct Answers -spreading the losses of a few over an entire group
(reduces variation which reduces uncertainty)
payment of fortuitous losses - Correct Answers -insurance pays for losses that are
unforeseen, unexpected, and occur from chance
risk transfer - Correct Answers -A pure risk is transferred from the insured to the insurer,
who typically is in a stronger financial position
indemnification - Correct Answers -The insured is restored to his or her approximate
financial position prior to the occurrence of the loss
, What are characteristics of an ideally insurable risk? - Correct Answers -Large # of
exposure units, must be accidental and unintentional, determinable and measurable,
should not be catastrophic, have a calculable chance, and have a economically feasible
premium
Large # of exposure units - Correct Answers -enables insurer to predict average loss
based on law of large numbers
Loss must be accidental & unintentional - Correct Answers -Loss should be outside of
insured's control
the loss must be determinable and measurable. - Correct Answers -definite cause, time,
place, and amount of loss.
adverse selection - Correct Answers -the tendency of persons with a higher-than-
average chance of loss to seek insurance at standard rates (can lead to higher loss
levels than expected)
(typically results from asymmetric info where one party only has relevant transaction
info)
underwriting risks - Correct Answers -process of selecting and classifying applicants for
insurance (standards met, coverage items, and rates)
types of insurance - Correct Answers -private and government
private insurance includes: - Correct Answers -life & health and property & liability and
casualty
casualty insurance - Correct Answers -covers whatever is not covered by fire, marine,
and life insurance (usually includes auto and workers' compensation)
government social programs - Correct Answers -financed all or mostly by contributions
from employees and/or employers. benefits are weighted in favor of low income groups
risk management - Correct Answers -a process that identifies loss exposures faced by
an organization and selects the most appropriate techniques for treatment
Pre-Loss objectives of risk management - Correct Answers -efficient cost of risk,
permits better decision making, and meet legal obligations
Post-Loss objectives of risk management - Correct Answers -survival of the firm,
business continuity, earnings, & growth, and societal responsibility
What are the steps in the risk management process? - Correct Answers -1) Identify loss
exposures, 2) measure and analyze the loss exposure, 3) consider and select
appropriate treatment techniques, and 4) implement and monitor the chosen techniques
