Question 1

Which of the following statements about the confidence interval is not correct?

Accepted Answer

A)  A confidence interval is based on the outcomes of the probability distribution. 
B)  A confidence interval is calculated by adding and subtracting the standard deviation to/from the estimate of mean expected loss. 
C)  A confidence interval tells the insurer something about the size of the risk pool. 
D)  A confidence interval tells the insurer something about how much money it needs to cover potential losses. 
A)  A confidence interval is based on the outcomes of the probability distribution. 
B)  A confidence interval is calculated by adding and subtracting the standard deviation to/from the estimate of mean expected loss. 
C)  A confidence interval tells the insurer something about the size of the risk pool. 
D)  A confidence interval tells the insurer something about how much money it needs to cover potential losses.

Question 2

Which of the following is not a benefit of forecasting future losses?

Accepted Answer

A)  Better estimate of insurance costs 
B)  More appropriate budgeting of financial impact of the losses 
C)  Better selection of optimal risk-handling techniques 
D)  Better monitoring of trends and impact of change in trend 
A)  Better estimate of insurance costs 
B)  More appropriate budgeting of financial impact of the losses 
C)  Better selection of optimal risk-handling techniques 
D)  Better monitoring of trends and impact of change in trend

Question 3

One reason insurable losses must be definite is to allow measurability of the losses.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following would be most important in making the decision to provide insurance?

Accepted Answer

A)  Whether or not the probability distribution is normal 
B)  The current market interest rate 
C)  Whether or not the losses are independently distributed the accident 
D)  All are equally important 
A)  Whether or not the probability distribution is normal 
B)  The current market interest rate 
C)  Whether or not the losses are independently distributed the accident 
D)  All are equally important

Question 5

Why would "groom decides he doesn't want to get married" not be covered by a typical wedding insurance policy?

Accepted Answer

A)  It is a catastrophic event, and insurance companies do not cover that. 
B)  The groom has the right to make that decision, and therefore it is not covered under a typical insurance policy. 
C)  It is not an independent outside event. 
D)  The risk pool size is too small. 
A)  It is a catastrophic event, and insurance companies do not cover that. 
B)  The groom has the right to make that decision, and therefore it is not covered under a typical insurance policy. 
C)  It is not an independent outside event. 
D)  The risk pool size is too small.

Question 6

The confidence interval:

Accepted Answer

A)  decreases with a larger pool size 
B)  increases with a larger pool size 
C)  decreases and increases with a larger pool size 
D)  does not change with the pool size 
A)  decreases with a larger pool size 
B)  increases with a larger pool size 
C)  decreases and increases with a larger pool size 
D)  does not change with the pool size

Question 7

What is the so-called Risk Charge?

Accepted Answer

A)  Risk Charge represents how much an insurance company should charge for people not paying their insurance premium. 
B)  Risk Charge represents the margin of error arising from estimating an unknown variable. 
C)  Risk Charge represents the standard deviation of the variance. 
D)  Risk Charge represents how much an insurance company should charge for uncertainty. 
A)  Risk Charge represents how much an insurance company should charge for people not paying their insurance premium. 
B)  Risk Charge represents the margin of error arising from estimating an unknown variable. 
C)  Risk Charge represents the standard deviation of the variance. 
D)  Risk Charge represents how much an insurance company should charge for uncertainty.

Question 8

Which of the following is not a characteristic of a Probability Distribution?

Accepted Answer

A)  The probability of occurrence of a variable is assigned randomly. 
B)  The maximum probability for any one outcome will be less than 1. 
C)  The minimum probability for any one outcome will be greater than 0. 
D)  The sum of all probabilities must be equal to 1. 
A)  The probability of occurrence of a variable is assigned randomly. 
B)  The maximum probability for any one outcome will be less than 1. 
C)  The minimum probability for any one outcome will be greater than 0. 
D)  The sum of all probabilities must be equal to 1.

Question 9

Risk Pooling is the ability to reduce the risk of a unit by making more accurate predictions about a large pool of units.

Accepted Answer

A) True 
 B)False

Question 10

If the Average Loss Severity is $1,150 and the Average Loss Frequency is 0.12, what is the Average Loss?

Accepted Answer

A)  $9,583.33 
B)  $104.35 
C)  $138 
D)  There is not enough information to calculate the Average Loss. 
A)  $9,583.33 
B)  $104.35 
C)  $138 
D)  There is not enough information to calculate the Average Loss.

Question 11

When a probability distribution of a variable is not known, it can be estimated using prior experience.

Accepted Answer

A) True 
 B)False

Question 12

A risk pool needs a small group of similar exposures for predictive accuracy.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements about the standard deviation is correct?

Accepted Answer

A)  The standard deviation measures the expected loss for the firm. 
B)  The standard deviation is calculated by taking the square root of the variance. 
C)  The standard deviation is a subjective measure of risk. 
D)  All of the above are correct. 
A)  The standard deviation measures the expected loss for the firm. 
B)  The standard deviation is calculated by taking the square root of the variance. 
C)  The standard deviation is a subjective measure of risk. 
D)  All of the above are correct.

Question 14

Which of the following statements about the confidence interval is correct?

Accepted Answer

A)  A confidence interval tells the insurer something about how confident it should be about the calculated risk premium. 
B)  A confidence interval tells the insurer something about the size of the risk pool. 
C)  A confidence interval tells the insurer something about how much money it has reserved in the past year to cover potential losses. 
D)  All of the above are correct. 
A)  A confidence interval tells the insurer something about how confident it should be about the calculated risk premium. 
B)  A confidence interval tells the insurer something about the size of the risk pool. 
C)  A confidence interval tells the insurer something about how much money it has reserved in the past year to cover potential losses. 
D)  All of the above are correct.

Question 15

When the variance of a probability distribution is $360,000, the standard deviation equals:

Accepted Answer

A)  $600 
B)  $3,600 
C)  $180,000 
D)  $12,000 
A)  $600 
B)  $3,600 
C)  $180,000 
D)  $12,000

Question 16

Which of the following would be least important in making a self-insurance decision?

Accepted Answer

A)  The size of the risk pool 
B)  Social and ethical concerns 
C)  Historical management policy 
D)  Financial ability to pay losses 
A)  The size of the risk pool 
B)  Social and ethical concerns 
C)  Historical management policy 
D)  Financial ability to pay losses

Question 17

Large employers with a large number of employees often use pooling to self-insure some of their risk.

Accepted Answer

A) True 
 B)False

Question 18

If insurers didn't practice pooling, what would happen?

Accepted Answer

A)  They would save a lot of time and money by not having to do difficult calculations. 
B)  They would make a handsome profit since they would get to sell a lot of insurance to a lot of people. 
C)  The insurance mechanism would become unfeasible. 
D)  The insurance mechanism would become the largest money-making venture in the United States. 
A)  They would save a lot of time and money by not having to do difficult calculations. 
B)  They would make a handsome profit since they would get to sell a lot of insurance to a lot of people. 
C)  The insurance mechanism would become unfeasible. 
D)  The insurance mechanism would become the largest money-making venture in the United States.

Question 19

Which of the following statements about probability of occurrence is correct?

Accepted Answer

A)  The range of values found by adding and subtracting one standard deviation to the mean of the random variable accounts for 68.26 percent of the area under the curve. 
B)  The range of values found by adding and subtracting two standard deviations to the mean of the random variable accounts for 68.26 percent of the area under the curve. 
C)  The range of values found by adding and subtracting two standard deviations to the mean of the random variable accounts for 99.74 percent of the area under the curve. 
D)  All of the above are incorrect. 
A)  The range of values found by adding and subtracting one standard deviation to the mean of the random variable accounts for 68.26 percent of the area under the curve. 
B)  The range of values found by adding and subtracting two standard deviations to the mean of the random variable accounts for 68.26 percent of the area under the curve. 
C)  The range of values found by adding and subtracting two standard deviations to the mean of the random variable accounts for 99.74 percent of the area under the curve. 
D)  All of the above are incorrect.

Question 20

Explain why the standard deviation represents risk.

Accepted Answer

Standard deviation reflects the volatili

Exam 3: Risk Assessment and Pooling

Which of the following statements about the confidence interval is not correct?

Which of the following is not a benefit of forecasting future losses?

One reason insurable losses must be definite is to allow measurability of the losses.

Which of the following would be most important in making the decision to provide insurance?

Why would "groom decides he doesn't want to get married" not be covered by a typical wedding insurance policy?

The confidence interval:

What is the so-called Risk Charge?

Which of the following is not a characteristic of a Probability Distribution?

Risk Pooling is the ability to reduce the risk of a unit by making more accurate predictions about a large pool of units.

If the Average Loss Severity is $1,150 and the Average Loss Frequency is 0.12, what is the Average Loss?

When a probability distribution of a variable is not known, it can be estimated using prior experience.

A risk pool needs a small group of similar exposures for predictive accuracy.

Which of the following statements about the standard deviation is correct?

Which of the following statements about the confidence interval is correct?

When the variance of a probability distribution is $360,000, the standard deviation equals:

Which of the following would be least important in making a self-insurance decision?

Large employers with a large number of employees often use pooling to self-insure some of their risk.

If insurers didn't practice pooling, what would happen?

Which of the following statements about probability of occurrence is correct?

Explain why the standard deviation represents risk.

Introduction to Enterprise Risk Management and Insurance

Risk Identification

Risk-Handling Techniques: Loss Control, Risk Transfer, and Loss Financing

Risk-Handling Techniques: Diversification and Hedging

Fundamentals of Insurance

Insurable Perils and Insuring Organizations

Insurance Functions

Insurance Markets: Economics and Issues

Insurance Regulation

Insurance Contracts

The Personal Auto Policy

Homeowners Insurance

Professional Financial Planning

Life Insurance Policies

Standard Life Insurance Contract Provisions and Options

Annuities

Health Insurance and Disability Income

Employee Benefits

Social Security

Unemployment and Workers Compensation Insurance

Commercial Property Insurance

Commercial Liability Insurance

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