RMIN 2005 Final Review Exam
Questions and Answers Graded A+
Insurance works because - Correct answer-Of the affect of the Law of Large
Numbers
Assume you are comparing the riskiness of two risks your organization faces:
employee theft and products liability. Looking at the past 30 years, the average
annual loss for employee theft is $25,000, for products liablility it is $7,000. The
variance for employee theft is $2,000 and for products liability, the variance is
$4,000. What two numbers will you use to most accurately compare the riskiness
of these two exposures? - Correct answer-.08 for employee theft and .57 for
products liability
Private insurance is NOT designed to effectively protect insureds against which
type of risk? - Correct answer-Fundamental
Frequency times severity is equal to - Correct answer-Expected loss
The presence of the law of large numbers is critical to the success of the business
of insurance. - Correct answer-True
©COPYRIGHT 2025, ALL RIGHTS RESERVED 1
,You are comparing two different exposures to risk that your business faces: your
building burning and your building flooding. Based on information you gather
from your history and that of similar nearby businesses, you calculate that your
expected loss for your building burning is $80,000 and the expected loss of your
building flooding is $12,000. The variance of your building burning is $10,000 and
the variance of flooding is $11,000. Which exposure is riskier and why? (Choose
the best answer) - Correct answer-Flooding because it has a higher relative
variance
Who generally pays for fundamental risks (directly)? - Correct answer-
Government
If you are risk averse about driving (select the best answer) - Correct answer-We
can say that you have a higher subjective risk when you drive
Which of the following IS TRUE of the law of large numbers in terms of loss
exposures? - Correct answer-It means that an insurance company can more
efficiently assume risk than individuals
Fundamental risk is diversifiable. - Correct answer-False
Making certain that a catastropic loss does not force your firm into insolvency is -
Correct answer-The post-loss objective of survival of the firm
©COPYRIGHT 2025, ALL RIGHTS RESERVED 2
,Which two requirements of an insurable risk does satellite risk most likely violate?
- Correct answer-Large number of homogeneous exposure units and chance of loss
should be calculable
Alex has a 5 year old car that was wrecked last month. He repairs his car and gets
indemnified from his insurer (less his deductible). But now he wants to get a new
car and sell his current one but he can't sell it for as much he thought since it has
been wrecked. However, he discovers he can actually get as much for it from the
insurance company as he could have gotten before it was wrecked. This most
clearly - Correct answer-Could result in a moral hazard loss
From the video, Dr. Berry noted that insurance companies have developed many of
these specifically to help risk managers and business owners identify loss
exposures for specific industries or types of organizations. What are they? - Correct
answer-Survey form
Considering how aggressive or conservative an individual or company is with
respect to risk should be part of which step of the risk management process? -
Correct answer-Setting your pre-loss objectives
The modern approach to risk management that focuses on managing not only pure
but also speculative risks is commonly known as - Correct answer-Enterprise risk
management
©COPYRIGHT 2025, ALL RIGHTS RESERVED 3
, Having your brakes inspected and maintained is, according to the video, an
example of which of the following? - Correct answer-a. Loss reduction
b. Loss prevention
Which method of identifying loss exposures can help the risk manager identify
specific property values of the firm and the ability of the firm to retain risk? -
Correct answer-Financial statement analysis
What type of loss exposure is the loss of business income that results from not
being able to continue running your business because of a fire? - Correct answer-
Property
To be the most conservative, companies would insure their property (as close as
possible) to what level of loss exposure? - Correct answer-The maximum possible
loss
Bobby works for a lone shark and he wants to buy liability insurance before going
to"put the fear" into his boss's client. He wants to protect himself from his boss's
suing him for his medical bills. His insurance agent tells Bobby that insurance is
not available for this risk because, in addition to the loss not being fortuitous, there
would not be - Correct answer-Legal purpose
©COPYRIGHT 2025, ALL RIGHTS RESERVED 4
Questions and Answers Graded A+
Insurance works because - Correct answer-Of the affect of the Law of Large
Numbers
Assume you are comparing the riskiness of two risks your organization faces:
employee theft and products liability. Looking at the past 30 years, the average
annual loss for employee theft is $25,000, for products liablility it is $7,000. The
variance for employee theft is $2,000 and for products liability, the variance is
$4,000. What two numbers will you use to most accurately compare the riskiness
of these two exposures? - Correct answer-.08 for employee theft and .57 for
products liability
Private insurance is NOT designed to effectively protect insureds against which
type of risk? - Correct answer-Fundamental
Frequency times severity is equal to - Correct answer-Expected loss
The presence of the law of large numbers is critical to the success of the business
of insurance. - Correct answer-True
©COPYRIGHT 2025, ALL RIGHTS RESERVED 1
,You are comparing two different exposures to risk that your business faces: your
building burning and your building flooding. Based on information you gather
from your history and that of similar nearby businesses, you calculate that your
expected loss for your building burning is $80,000 and the expected loss of your
building flooding is $12,000. The variance of your building burning is $10,000 and
the variance of flooding is $11,000. Which exposure is riskier and why? (Choose
the best answer) - Correct answer-Flooding because it has a higher relative
variance
Who generally pays for fundamental risks (directly)? - Correct answer-
Government
If you are risk averse about driving (select the best answer) - Correct answer-We
can say that you have a higher subjective risk when you drive
Which of the following IS TRUE of the law of large numbers in terms of loss
exposures? - Correct answer-It means that an insurance company can more
efficiently assume risk than individuals
Fundamental risk is diversifiable. - Correct answer-False
Making certain that a catastropic loss does not force your firm into insolvency is -
Correct answer-The post-loss objective of survival of the firm
©COPYRIGHT 2025, ALL RIGHTS RESERVED 2
,Which two requirements of an insurable risk does satellite risk most likely violate?
- Correct answer-Large number of homogeneous exposure units and chance of loss
should be calculable
Alex has a 5 year old car that was wrecked last month. He repairs his car and gets
indemnified from his insurer (less his deductible). But now he wants to get a new
car and sell his current one but he can't sell it for as much he thought since it has
been wrecked. However, he discovers he can actually get as much for it from the
insurance company as he could have gotten before it was wrecked. This most
clearly - Correct answer-Could result in a moral hazard loss
From the video, Dr. Berry noted that insurance companies have developed many of
these specifically to help risk managers and business owners identify loss
exposures for specific industries or types of organizations. What are they? - Correct
answer-Survey form
Considering how aggressive or conservative an individual or company is with
respect to risk should be part of which step of the risk management process? -
Correct answer-Setting your pre-loss objectives
The modern approach to risk management that focuses on managing not only pure
but also speculative risks is commonly known as - Correct answer-Enterprise risk
management
©COPYRIGHT 2025, ALL RIGHTS RESERVED 3
, Having your brakes inspected and maintained is, according to the video, an
example of which of the following? - Correct answer-a. Loss reduction
b. Loss prevention
Which method of identifying loss exposures can help the risk manager identify
specific property values of the firm and the ability of the firm to retain risk? -
Correct answer-Financial statement analysis
What type of loss exposure is the loss of business income that results from not
being able to continue running your business because of a fire? - Correct answer-
Property
To be the most conservative, companies would insure their property (as close as
possible) to what level of loss exposure? - Correct answer-The maximum possible
loss
Bobby works for a lone shark and he wants to buy liability insurance before going
to"put the fear" into his boss's client. He wants to protect himself from his boss's
suing him for his medical bills. His insurance agent tells Bobby that insurance is
not available for this risk because, in addition to the loss not being fortuitous, there
would not be - Correct answer-Legal purpose
©COPYRIGHT 2025, ALL RIGHTS RESERVED 4
