Risk Management & Analysis Final (Multiple Choice)

c) The present value of expected tax payments is reduced

What is a tax benefit?

a) The future value of expected tax payments is increased

b) The future value of expected tax payments is reduced

c) The present value of expected tax payments is reduced

d) The present value of expected tax payments is increased

b) ERM brings together the management of all risks of a company into a single portfolio. The portfolio is then managed to reduce the company's overall risk exposure.

What is the difference between traditional risk management and ERM?

a) ERM is a scientific approach to dealing with pure risks of a company by implementing procedures to minimize those risks.

b) ERM brings together the management of all risks of a company into a single portfolio. The portfolio is then managed to reduce the company's overall risk exposure.

c) ERM treats separate company entities differently and there is no diversification effects that are taken into account.

d) ERM is the same as general management

c) Subrogation helps to hold down the cost of insurance coverage

Which of the following statements about subrogation is true?

a) Subrogation eliminates adverse selection

b) Subrogation permits a party who caused a loss to avoid responsibility

c) Subrogation helps to hold down the cost of insurance coverage

d) Subrogation results in violation of the principle of indemnity

b) Both I and II

Which of the following about the use of risk-based capital requirements is (are) true?

I. Insurers must have a certain amount of capital depending on the riskiness of their investments and insurance operations.

II. Insurers may be required to take certain actions depending on how much capital they have relative to their risk-based capital requirements.

a) neither I nor II

b) Both I and II

c) II only

d) I only

d) 1500

Lucy's couch was destroyed by a fire. The couch was expensive and cost 2,000 when it was purchased, but a similar one today costs even more, 3000. Assuming the couch was 50 percent depreciated, what is the actual cash value of Lucy's loss?

a) 900

b) 1000

c) 2000

d) 1500

b) Subrogation

Sue's office building was damaged by fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover the loss. This suit is based on the principle of ..

a) Indemnity

b) Subrogation

c) Utmost good faith

d) Warranty

b) Both I and II

Reasons for regulation of insurance include which of the following?

I. Maintaining insurer solvency to make sure losses can be paid.

II. Ensuring reasonable rates for consumers.

a) I only

b) Both I and II

c) neither I nor II

d) II only

a) II only

Fundamental purposes of the principle of indemnity include which of the following?

I. To reduce physical hazards to insureds.

II. To prevent the insured from profiting from insurance.

a) II only

b) both I and II

c) neither I nor II

d) I only

d) CRO is responsible for managing all aspects of risks within a company

What is the role of the Chief Risk Officer (CRO)?

a) CRO is responsible for IT and technology issues of the company

b) CRP is responsible for managing the company's finances

c) CRO is responsible for handling the companies accounting

d) CRO is responsible for managing all aspects of risks within a company

b) Determine insurance premiums

The function of an actuary is to...

a) Negotiate reinsurance treaties

b) Determine insurance premiums

c) Invest insurance company assets

d) Adjust claims

d) The insurer transferring business to a reinsurer is called the ceding company

Which of the following statements about reinsurance is true?

a) A reinsurer may not purchase reinsurance.

b) The reinsurer is responsible for providing claims services to the insured after a loss occurs.

c) The amount of insurance transferred to a reinsurer is called the net retention.

d) The insurer transferring business to a reinsurer is called the ceding company.

a) to increase the unearned premium reserve

All of the following reasons for a primary insurer to use reinsurance EXCEPT

a) to increase the unearned premium reserve

b) to increase underwriting capacity

c) to protect against catastrophic losses

d) to stabilize profits

d) fac reinsurance

A reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer is called

a) a reinsurance pool

b) automatic treaty reinsurance

c) retrocession

d) facultative reinsurance

b) The reinsurer is required to underwrite each individual applicant that is insured

Which of the following statements about treaty insurance is true?

a) The reinsurer is required to underwrite each individual applicant that is reinsured

b) The reinsurer must accept all business that falls within the scope of the treaty

c) The ceding insurer can choose which business falling within the scope of the treaty it wishes to reinsure

d) It protects the reinsurer by requiring the ceding insurer to charge adequate premiums

b) $700,000

Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance. Delta has a retention limit of $200,000, and nine lines of insurance are ceded with Eversafe. How much will Eversafe pay is a $1,600,000 building insured by Delta suffers an $800,000 loss?

a) $600,000

b) $700,000

c) $720,000

d) $800,000

a) stabilize profits

ABC Insurance Company entered into a reinsurance agreement with XYZ Reinsurance. Under the contract, XYZ Re has no liability unless ABC's loss ratio exceeds 75 percent for the year. XYZ Re agreed to pay all losses in excess of the 75 percent loss ratio. ABC Insurance Company is using reinsurance to

a) stabilize profits

b) reduce the unearned premium reserve

c) provide large risk capacity

d) retire from a line or territory

c) excess-of-loss reinsurance treaty

Huge Insurance Company is a property insurer that is interested in protecting itself against cumulative losses that exceed $200 million during the year. This protection can best be obtained using a(n)

a) quota-share reinsurance treaty

b) surplus-share reinsurance treaty

c) excess-of-loss reinsurance treaty

d) reinsurance pool

c) cat bonds

Pac-Coast Insurance (PCI) concentrates its underwriting activities in California. The company is concerned that if a catastrophic eq occurs, it might threaten the solvency of the company. To address this risk, PCI issued some debt securities. If the catastrophic eq occurs, PCI does not have to repay the full amount borrowed or pay interest. The securities PCI issued are called

a) catastrophic futures contracts

b) interest rate swaps

c) catastrophic bonds

d) contingent option contracts

c) securitization of risk

The process of transferring risk to the capital markets through the use of financial instruments such as bonds, future contracts, and options is known as

a) consolidation of risk

b) avoidance of risk

c) securitization of risk

d) compartmentalization of risk

c) both I and II

Reasons for regulation of insurance include which of the following?

I. Maintaining insurer solvency

II. Ensuring reasonable rates

a) I only

b) II only

c) both I and II

d) neither I nor II

b) II only

Fundamental purposes of the principle of indemnity include which of the following?

I. To reduce physical hazards

II. To prevent the insured from profiting from insurance

a) I only

b) II only

c) both I and II

d) neither I nor II

b) $900

Sam's furniture was destroyed by a fire. The furniture cost $1200 when it was purchased, but similar new furniture now costs $1800. Assuming the furniture was 50% depreciated, what is the actual cash value of Sam's loss?

a) $600

b) $900

c) $1200

d) $1800

b) II only

Which of the following statements about the principle of insurable interest is (are) true?

I. It makes it difficult to measure the amount of an insured's loss

II. It reduces moral hazard

a) I only

b) II only

c) both I and II

d) neither I nor II

b) only at the inception of the policy

When must an insurable interest legally exist in life insurance?

a) only at the time of the insured's death

b) only at the inception of the policy

c) only at the time the beneficiary is paid

d) both at the time of the insured's death and at the inception of the policy

a) only at the time of the loss

When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?

a) only at the time of the loss

b) only at the inception of the policy

c) only at the time the loss settlement process takes place

d) both at the time of the loss and at the inception of the policy

d) subrogation

Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of

a) warranty

b) insurable interest

c) utmost good faith

d) subrogation

b) subrogation helps to hold down the cost of insurance

Which of the following statements about subrogation is true?

a) subrogation eliminates adverse selection

b) subrogation helps to hold down the cost of insurance

c) subrogation results in violation of the principle of indemnity

d) subrogation permits a party who caused a loss to avoid responsibility for the loss

d) the probability of a loss occurring

Traditionally, risk has been defined as

a) any situation in which the probability of loss is one

b) any situation in which the probability of loss is zero

c) uncertainty concerning the occurrence of loss

d) the probability of a loss occurring

b) the relative variation of actual loss from expected loss

Objective risk is defined as

a) the probability of loss

b) the relative variation of actual loss from expected loss

c) uncertainty based on a person's mental condition or state of mind

d) the cause of loss

b) subjective risk

Uncertainty based on a person's mental condition or state of mind is known as

a) objective risk

b) subjective risk

c) objective risk

d) subjective risk

a) objective probability

The long-run relative frequency of an event based on the assumption of an infinite number of observations with no chance in the underlying conditions is called

a) objective probability

b) objective risk

c) subjective probability

d) subjective risk

d) insurance fraud

Faking an accident to collect insurance proceeds is an example of

a) physical hazard

b) objective risk

c) moral hazard

d) insurance fraud

c) enterprise risk

A name that encompasses all of the major risks faced by a business firm is

a) financial risk

b) speculative risk

c) enterprise risk

d) pure risk

b) financial risk

One of the speculative financial risks considered in an enterprise risk management program is the risk of loss because of the adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money. This risk is called

a) property risk

b) financial risk

c) strategic risk

d) operational risk

a) only the possibility of loss or no loss

A pure risk is defined as a situation in which there is

a) only the possibility of loss or no loss

b) only the possibility of profit

c) a possibility of neither profit not loss

d) a possibility of either profit or loss

a) a pure risk

The premature death of an individual is an example of

a) a pure risk

b) a speculative risk

c) a nondiversifiable risk

d) a physical hazard

b) II only

An automobile that is a total loss as a result of a collision is an example of which of the following types of risk?

I. Speculative risk

II. Diversifiable risk

a) I only

b) II only

c) both I and II

d) neither I and II

Auto physical damage insurance

All of the following are programs to insure fundamental risks EXCEPT

a) federally subsidized flood insurance

b) auto physical damage insurance

c) Social Security

d) unemployment insurance

d) loss of business income

All of the following are examples of personal risk EXCEPT

a) poor health

b) unemployment

c) premature death

d) loss of business income

II only

Which of the following statements about chance of loss and risk is (are) true?

I. If the chance of loss is identical for two groups, the objective risk must be the same

II. Two individuals may perceive differently the risk inherent in a given activity

a) I only

b) II only

c) both I and II

d) neither I nor II

a) diversifiable risk

A risk that affects only individuals or small groups and not the entire economy is called a

a) diversifiable risk

b) pure risk

c) speculative risk

d) nondiversifiable risk

d) subjective risk

A student who has skipped many classes and not studied the course material was surprised to learn there was a test when he showed up for class. The student's mental uncertainty about whether or not he will pass the test is called

a) objective risk

b) objective probability

c) subjective probability

d) subjective risk

c) nondiversifiable risks

Rapid inflation, cyclical unemployment, war, hurricanes, and floods are all examples of

a) diversifiable risks

b) physical hazards

c) nondiversifiable risk

d) speculative risks

b) diversifiable risk

Five years ago, Shannon decided to start investing. She likes ABC Telecom Company, and she invests in the company each month. As ABC Telecom is the only company in which she invests, Shannon's financial well-being will be harmed if the price of ABC Telecom stock drops significantly. The risk of investment loss can be reduced if Shannon invests in other companies and other types of financial assets. For Shannon, the risk she faces with regard to her investment is a(n)

a) enterprise risk

b) diversifiable risk

c) pure risk

d) nondiversifiable risk

b) continuing operations

Which of the following is a post-loss risk management objective?

a) treating loss exposure in the most economical way

b) continuing operations

c) reduction of anxiety

d) meeting externally imposed legal obligations

both I and II

A risk manager is concerned with which of the following

I. Identifying potential losses

II. Selecting the appropriate techniques for treating loss exposures

a) I only

b) II only

c) both I and II

d) neither I nor II

a) avoidance

Abandoning an existing loss exposure is an examples of

a) avoidance

b) retention

c) noninsurance transfer

d) insurance transfer

a) Risk identification

As discussed in class, which step in the risk management process is considered most important

a) Risk identification

b) Risk evaluation

c) Risk management implementation

d) Risk treatment

d) Risk identification

What is the first step in the risk management process?

a) Risk management

b) Risk evaluation

c) Risk treatment

d) Risk identification

b) Frequency and severity

When evaluating risk exposures, risk managers often try to estimate the risk's

a) Frequency and velocity

b) Frequency and severity

c) Frequency and reoccurrence

d) Frequency and resilience

c) Low frequency, high severity

What type of risk is best managed through the purchase of insurance or risk transfer?

a) High frequency, low resilience

b) Low frequency, low velocity

c) Low frequency, high severity

d) High frequency, low resilience

a) High frequency, high severity

Which type of risk is best managed through risk avoidance?

a) high frequency, high severity

b) low frequency, low velocity

c) low frequency, high severity

d) high frequency, low resilient

II only

Which of the following statements regarding the use of retention is (are) true?

I. Retention is best used for loss exposures that have a low frequency and high severity

II. A financially strong firm can have a higher retention level than firm whose financial position is weak

a) I only

b) II only

c) both I and II

d) neither I nor II

b) risk transfer

Purchasing health insurance illustrates the use of which personal risk management technique?

a) avoidance

b) risk transfer

c) risk control

d) risk retention

c) loss prevention

The U.S. government is concerned that terrorists might try to crash a vehicle filled with explosives into a U.S. embassy in a foreign country. Inside the gate to the embassy, they installed steel and cement posts in the road. These posts can be raised up from the ground to form a barrier against suicide bombers. The posts can be lowered back into the ground to allow safe vehicle to pass. This physical barrier system illustrates which risk management techniques?

a) risk avoidance

b) insurance transfer

c) loss prevention

d) noninsurance transfer

b) prefers to receive the expected value for certain rather than owning a risky lottery

An individual is considered risk-adverse if she

a) prefers to receive the variance of a lottery for certain rather than owning the risky lottery

b) prefers to receive the expected value for certain rather than owning the risky lottery

c) prefers to receive the standard deviation for certain rather than owning the risky lottery

d) prefers to receive the minimum value for certain rather than owning the risky lottery

a) vertical

(u,o)- indifference lines of a risk neutral individual are

a) vertical

b) concave

c) convex

d) changing in curvature

d) all of the above

Which of the following is a shortcoming/limitation of the (u,o) principle?

a) The preference functional may be hard to determine

b) informative on e.g. skewness of distribution may be lost

c) decision may violate-state-by-state dominance

d) all of the above

b) choose the alternative that maximizes the expected utility over all states of the world

Bernoulli's Principles states that an individual's decision rule is to

a) choose the alternative that maximizes the expected value over all states to world

b) choose the alternative that maximizes the expected utility over all states of the world

c) choose the alternative that minimizes the expected value over all states of the world

d) choose the alternative that minimizes the expected utility over all states of the world

c) Both I and II

Reasons for regulation of insurance include which of the following?

I. Maintaining insurer solvency

II. Ensuring reasonable rates

a) I only

b) II only

c) both I and II

d) neither I nor II

b) II only

Fundamental purposes of the principle of indemnity include which of the following?

I. To reduce physical hazards

II. To prevent the insured from profiting from insurance

a) I only

b) II only

c) both I and II

d) neither I nor II

b) II only

Which of the following statements about the principle of insurable interest is (are) true?

I. It makes it difficult to measure the amount of an insured's loss.

II. It reduces moral hazard

a) I only

b) II only

c) both I and II

d) neither I nor II

b) only at the inception of the policy

When must an insurable interest legally exist in life insurance?

a) only at the time of insured's death

b) only at the inception of the policy

c) only at the time the beneficiary is paid

d) both at the time of the insured's death and at the inception of the policy

a) only at the time of the loss

When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer

a) only at the time of the loss

b) only at the inception of the policy

c) only at the time the loss settlement process takes place

d) both at the time of the loss and at the inception of the policy

d) subrogation

Sue's office building was damages by a fire cause by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of

a) warranty

b) insurable interest

c) utmost good faith

d) subrogation

b)Subrogation helps to hold down the cost of insurance

Which is the following statements about subrogation is true?

a) Subrogation eliminates adverse selection

b)Subrogation helps to hold down the cost of insurance

c) Subrogation results in violation of the principle of indemnity

d) Subrogation permits a party who caused a loss to avoid responsibility for the loss

a) Derivatives are financial contracts that are mostly traded at exchange around the world

Which of the following statements about derivatives is true?

a) Derivatives are financial contracts that are mostly traded at exchange around the world

b) Derivatives can only be call options or long futures/forward contracts

c) Derivatives cannot be bought by institutional investors

d) Derivatives are financial contracts that are independent of their underlying asset

d) to insure against losses from natural disaster

All of the following are reasons for investors to use derivatives EXCEPT

a) to protect against stock market volatility

b) to increase profits from speculation

c) to protect against a certain stock falling in the near future

d) to insure against losses from natural disaster

c) The option writer is the buyer of an option contract

Which of the following about options and futures is NOT correct?

a) A futures contract gives the owner the obligation to buy/sell an asset at a fixed price at a future date

b) An option contract gives the owner the right but not the obligation to buy/sell an asset at a fixed price at a future date

c) The option writer is the buyer of an option contract

d) The strike price is the price at which an option holder buys/sells an asset when the option is exercised

a) an option contract that allows the holder to exercise the option at any date up to and including the expiration date

An American Option is...

a) an option contract that allows the holder to exercise the option at any date up to and including the expiration date

b) an option contract that allows the holder to exercise the option only at the expiration date

c) always dealing with different contracts to secure a certain investment income

d) an option contract that is never out-of-the-money

b) the difference between the asset value being hedged and the payoff from the derivative that is used to hedge

Basic risk refers to...

a) the difference between supply and demand for a derivative

b) the difference between the asset value being hedged and the payoff from the derivative that is used to hedge

c) the cost-of-carry relationship on forward/future prices

d) the put-call parity relationship

a) The value of a put option decreases as the stock price decreases, all other things held at constant

Which factors affecting option prices are NOT correct?

a) The value of a put option decreases as the stock price decreases, all other things held at constant

b) The value of a call option increases as the stock price increases, all other things held constant

c) The vale of a put option increases as the strike price increases, all other things held constant

d) The value of a call option increases as the strike price decreases, all other things held constant

b) Portfolio that is long a call option and a put option on the same stock with the same exercise date but the strike price on the call exceeds the strike price on the put

A strangle is described as follows as a...

a) Portfolio that is long a call option and a put option on the same stock with the same exercise date but the strike price on the put exceeds the strike price on the call

b) Portfolio that is long a call option and a put option on the same stock with the same exercise date but the strike price on the call exceeds the strike price on the put

c) Portfolio that is short a call option and a put option on the same stock with the same exercise date but the strike price on the call exceeds the strike price on the put

d) Portfolio that is short a call option and a put option on the same stick with the same exercise date but the strike price on the put exceeds the strike price on the call