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RISK MANAGEMENT AND INSURANCE (RMIN 4000) BROWN FINAL EXAM STUDY Q&A UNIVERSITY OF GEORGIA.
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RISK MANAGEMENT AND INSURANCE (RMIN 4000) BROWN FINAL EXAM STUDY Q&A UNIVERSITY OF GEORGIA.
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RISK MANAGEMENT AND INSURANCE(RMIN 4000) BROWN FINAL EXAM STUDY
Q&A UNIVERSITY OF GEORGIA.
Loss of business income
Correct Answer -If a business has to shut down for a period of time due to
a physical damage loss, it is unable to generate an income - Direct or
Indirect loss?
INDIRECT!!! EXAMPLE: Grease fire in the kitchen causes a restaurant to
close down for 4 weeks while repairs are made. The restaurant has no
income while closed
risk control
Correct Answer -Techniques to reduce the frequency or severity of losses.
Loss Prevention, Reduces frequency.
EXAMPLES: Airport security, safety training programs
loss reduction
Correct Answer -Reduces severity. EXAMPLE: fire sprinklers
Can occur pre-loss or post-loss. Duplication, Separation & Diversification
avoidance
Correct Answer -Technique in which a certain loss exposure is never
acquired (proactive). EXAMPLE: Heard roommates can be bad & avoided it
altogether.... OR an existing loss exposure is abandoned (reactive).
EXAMPLE: Had a bad roommate and left to avoid the situation
,risk financing
Correct Answer -Techniques for funding losses. Retention: retaining part or
all of losses that can occur from a given risk
Active - Deliberately retaining risk (choosing a high deductible). Passive -
Unknowingly retaining risk (not purchasing disability insurance). Good
strategy for low frequency/low severity losses. Bad for high severity
ALSO noninsurance transfer- By Contract
EXAMPLE: Liability waiver
Hedging - derivatives as options, futures, etc
Incorporation - Reduces personal liability
insurance
Correct Answer -the pooling of accidental losses by transfer of such risks
to insurers, who agree to compensate insureds for such losses, to provide
other monetary benefits on their occurrence, or to render services
connected with the risk. Shifts financial responsibility from self to
insurance company.
pooling of losses
Correct Answer -The spreading of losses incurred by a few over the entire
group. Purpose is to reduce variation (as measured by standard deviation)
which reduces uncertainty (risk)
SD = Average distance from the mean
The LOWER the SD, the lower the risk
Payment of fortuitous losses
Correct Answer -Unforeseen and unexpected by the insured and occurs as
a result of chance
EXAMPLE: Mr. Brown punches a student & student falls and gets impaled
by something in his backpack
,Indemnification
Correct Answer -The insured is restored to his or her approximate financial
position prior to the occurrence of the loss
Characteristics of an Ideally Insurable Risk
Correct Answer -Large number of exposure units
Accidental and unintentional loss
Determinable and measurable loss
No catastrophic loss
Calculable chance of loss
Economically feasible premium
Large number of exposure units
Correct Answer -to predict average loss based on the law of large
numbers- large number of similar exposure units needed.
Loss must be accidental & unintentional
Correct Answer -loss is outside of the insured's control. law of large
numbers is based on randomness.
the loss must be determinable and measurable
Correct Answer -Definite cause, time, place, and amount of loss. Is
the loss covered under an insurance policy? EXAMPLE: Car gets hit & has a
dent in it ... was that already there or did the accident cause it?
EXAMPLE: Person gets hit ... claim "pain and suffering" --> do you
actually have that?
, Loss should not be catastrophic to insurer
Correct Answer -Allows pooling technique to work.
EXAMPLE: Terrorism, flood, earthquake
Why is a catastrophic loss problematic? Catastrophes are infrequent, so
there isn't prior data to base decisions on. Clash loss= multiple insurance
agencies have to pay out a bunch of money at the same time.
EXAMPLE: 9/11 ... companies had insurance, people had life insurance,
liability to airlines, workers comp, etc. --> Largest insured loss in history!
Solutions for insurers: Reinsurance & Diversification
Chance of Loss Must be Calculable
Correct Answer -Must be able to calculate average frequency and average
severity. Pure Premium = Frequency * Severity
Premium must be economically feasible
Correct Answer -Insured must be able to afford it
Would the premium be economically feasible for a 90 year old looking to
buy life insurance?
Adverse Selection
Correct Answer -The tendency of persons with a higher-than-average
chance of loss to seek insurance at average rates, which, if not controlled
by underwriting, results in higher than expected loss levels. Those with the
greatest probability of loss are most likely to buy insurance. EXAMPLE:
Insurance agencies charging higher for drivers with more speeding tickets
because they're riskier drivers ... that driver searching for an agency that
will ignore those tickets and give a lower rate!
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