Principles of Risk Management & Insurance: Topic 2

(Exactly One Correct Answer) Suppose you are comparing the degree of risk for the two firms, Cameron Inc. and Meghan Enterprises. From their respective loss frequency distributions, we have the following information concerning "inventory shrinkage" per month. For CAMERON INC. the mean is equal to 5 and the variance is equal to 9. For MEGHAN ENTERPRISES the mean is equal to 10 and the variance is equal to 16.

Which company faces LESS RISK and why?

Meghan Enterprises because their coefficient of variation is lower than Cameron.

The more that an individual tolerates risk:

1. The lower will be their worry value.

2. The lower will be their PMAX.

Which of the following would result in an increased pure premium for an insurance firm who is selling auto insurance? [other things equal]?

A rival insurer develops a telematics device and becomes better able to estimate risk.

[Topic 2-10] Suppose Person A purchases full insurance for an actuarially fair premium and Person A is the ONLY person in

the insurer's risk pool. Which of the following statements is (are) TRUE about this arrangement?

1. The actuarially fair premium for Person A is $2.

2. The amount of risk the insurer faces with Person A being their only customer is 1.

[Topic 2-11] (Exactly One Correct Answer) Suppose that Person B also purchases insurance for an actuarially fair premium

and joins Person A in the insurer's risk pool. Note that the risk pool now contains Person A and Person B only. Which of the

following statements is TRUE about this arrangement?

The amount of risk faced by the insurer is about 0.7.

[Topic 2-12] Suppose that Person C also purchases insurance and joins Person A in the insurer's risk pool. Note that the risk

pool now contains Person A and Person C only. The insurer charges both person A and person C a premium of $3. Which

of the following statements is FALSE?

Person C is charged his/her actuarially fair premium.

[Topic 2-23] What is the Law of Large Numbers?

1. The probability that the sum of a large number of independent trials will be close to the expected value of the trials multiplied by the number of trials

2. The probability that the average of a large number of independent trials will be close to the expected value of the trials

[Topic 2-16] Which of the following is an example of an objective risk measurement?

1. The risk of getting a cold, as determined by a medical study of infection rates

2. The likelihood of a stock market crash, as determined by historical data and economic analysis

[Topic 2-14] Which of the following characteristics of an exposure are associated with a higher risk charge?

1. Limited ability to pool risks.

2. High maximum possible loss.

[Topic 2-15] Which of the following would cause a decrease in worry value for a company owner?

The value of the company increases (holding potential loss constant).

[Topic 2-25] What is a necessary condition for the Law of Large Numbers to apply?

A large number of trials

[Topic 2-26] (Exactly One Correct Answer) Consider a weighted coin flip with probability of heads being p = 0.8 and

probability of tails being q = 0.2. If it is heads, you win $10, if it tails you win nothing. What is the coefficient of variation for

this probability distribution?

None of these

[Topic 2-18] Which of the following is an example of a subjective risk measurement?

1. The danger of a new medication, as determined by Joe Rogan

2. The level of danger of a horror movie, as determined by personal opinion

[Topic 2-3] According to the law of large numbers, as the number of exposure units or the number of trials in an experiment

or the amount of past experience is increased:

(I) The probability of the loss decreases.

(II) The probability of the loss increases.

(III) The relative accuracy of predictions about future losses increases.

(IV) The relative accuracy of predictions about future losses decreases.

III

[Topic 2-6] Which of the following would result in an increased pure premium for an insurance firm who is selling auto insurance?

[other things equal]?

None of the above.

[Topic 2-22] (Exactly One Correct Answer) Consider a weighted coin flip with probability of heads being p = 0.8 and

probability of tails being q = 0.2. If it is heads, you win $10, if it tails you win nothing. What is the coefficient of variation for

this probability distribution? Pick the closest answer.

0

[Topic 2-8] The more that an individual does not like risk:

1. The higher will be their PMAX.

2. The higher will be their worry value.

[Topic 2-21] How is an actuarially fair value determined for an insurance policy?

1. By calculating the frequency and severity of claims

2. By calculating the expected value of its claims

[Topic 2-19] Which of the following is an example of an objective risk measurement?

The risk of an economic recession, as determined by data on GDP and unemployment rates

[Topic 2-20] What is an actuarially fair value in the context of insurance?

The value of an insurance policy that is equal to the expected value of its claims

[Topic 2-28] (Exactly One Correct Answer) Consider a weighted coin flip with probability of heads being p = 0.8 and

probability of tails being q = 0.2. If it is heads, you win $10, if it tails you win nothing. What is the coefficient of variation for

this probability distribution?

None of these

[Topic 2-27] (Exactly One Correct Answer) Which job involves determining the appropriate risk charge for an insurance

policy?

Underwriter

[Topic 2-17] Which of the following is an example of an objective risk measurement?

1. The risk of heart disease, as determined by a study of genetic factors and lifestyle choices

2. The risk of a flood in a particular area, as determined by meteorological data and historical records

3. The level of safety of a car, as determined by crash test results

[Topic 2-13] Assuming the market can be profitable. What will insurance premiums be determined by if the insurer has monopoly

power and can perfectly price discriminate?

The consumer's PMAX

[Topic 2-1] (Exactly One Correct Answer) Suppose you are comparing the degree of risk for the two firms, Cameron Inc. and

Meghan Enterprises. From their respective loss frequency distributions, we have the following information concerning "inventory shrinkage" per month. For CAMERON INC. the mean is equal to 5 and the variance is equal to 9. For MEGHAN ENTERPRISES the mean is equal to 10 and the variance is equal to 16.

Which company faces more risk and why?

Cameron Inc. because their coefficient of variation is higher than Meghan.

[Topic 2-7] Which of the following would result in an lower pure premium for an insurance firm who is selling auto insurance?

[other things equal]?

The insurer decides to only insure drivers who have excellent driving records.

[Topic 2-4] (Exactly One Correct Answer) A trucking firm has the following probability distribution for severity due to

trucking accidents. Which answer below best defines the maximum possible loss?

$10,000

[Topic 2-24] How does the Law of Large Numbers apply to insurance?

1. The number of claims from policyholders will be close to the expected number of claims in a given time period

2. The total cost of claims will be close to the expected cost of claims in a given time period