Risk Management Final UGA RMIN 4100

Underwriting Cycle
The property and liability insurance industry is characterized by a repetitive pattern of loose underwriting standards with low premiums followed by tight underwriting standards with high premiums. This repetitive pattern is called the
Loss Expense
A situation or circumstance in which a loss is possible, regardless of whether a loss occurs, is called a
Catastrophic Bonds
3. Quantum Insurance Company is concerned about its exposure to hurricane losses for property risks it insured on the Gulf Coast. Quantum borrowed money from investors by issuing financial securities. Quantum promised to repay the money it borrowed with interest if hurricane losses do not exceed a specified level. If hurricane losses exceed the specified level, Quantum will repay less than it borrowed and use the extra money to fund hurricane losses. The securities issued are
Physical Hazard
Dense fog that increases the chance of an automobile accident is an example of a
Subjective Risk
Uncertainty based on a person’s mental condition or state of mind is known as
Liability Risk
James is concerned that if he injures someone or damages someone’s property he could be held legally responsible and required to pay damages. This type of risk is called a
Adverse Selection
When applicants with a higher-than-average chance of loss risk seek insurance at standard rates
Legal Hazard
Dalton Tobacco Company is concerned that the tobacco company may be held liable in a court of law and ordered to pay a large damage award. The characteristics of the judicial system that increase the frequency and severity of loss are known as
Passive Retention
Tim never stopped to consider the possible consequences of long-term, permanent, disability. So Timothy did not include disability income insurance in his personal risk management program. Timothy is dealing with the risk of disability through
Loss Amount Probability
$0 .85
$10,000 .10
$25,000 .05
What is the Expected Loss?
What is the standard deviation of this loss distribution?
Loss Amount Probability
$0 .85
$10,000 .10
$25,000 .05
$200 Million
13. Byrne Company has three identical manufacturing plants, one on the Texas Gulf Coast, one in southern Alabama, and one in Florida. Each plant is valued at $200 million. Byrne’s risk manager is concerned about the damage which could be cause by a single hurricane. The risk manager believes there is an extremely low probability that a single hurricane could destroy two or all three plants because they are located so far apart. What is the probable maximum loss with a single hurricane?
Adverse Selection
14. ENO Appliances offers a warranty requiring an annual fee. The warranty may be purchased at the time of sale or at any time within the first year the appliance was purchased. The warranty fee after the date of purchase is twice the time-of-purchase fee. When asked why the fee was higher after the date of purchase, ENO’s president said, “Buying a warranty is voluntary.” We’ve noticed that those who buy the warranty after the purchase date have a greater need and service.” Charging the same rate or a lower rate after the date of purchase would expose ENO to what problem that also implicates insurance markets?”
Moral Hazard
Sean borrowed money from a bank to purchase a fishing boat. He purchased property insurance on the boat. Sean had difficulty making loan payments because he did not catch many fish and fish prices were low. Sean intentionally sunk the boat, collected from his insurer, and paid off the loan balance. This scenario illustrates the problem of
Pooling of Losses
Sharing of losses by an entire group
Pure Risk
The premature death of an individual is an example of
Physical Inspections
What could a risk manager use to help identity pure loss exposures?
Pooling of Losses
What is a characteristic of Insurance?
Pooling of Losses scenario
A group of farmers agree that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way each farmer is responsible for the average loss of the group rather than the actual loss that the farmer sustained. Which characteristic of insurance is embodied in this agreement?
Risk Control
The use of fire-restrictive materials when constructing a building is an example of
Pure and Speculative Risks
An integrated risk management program is a risk management program which combines
Sharing of losses by an entire group
What is implied by the pooling of losses?
Enterprise Risk Management Program
Anne was just named Risk Manager of ACE Company. She has decided to create a risk management program which considers all of the risks faced by ACE – pure, speculative, operational, and strategic- in a single risk management program. Such a program is called an
Cause of Loss
Risk Management
management of pure risks that are uninsurable
Loss Prevention
Following good health habits can be categorized as
The difference between actual and expected results should decrease
According to the Law of Large Numbers, what should happen as an insurance company increases the number of loss exposures that it insures?
Indirect Loss
The cost of renting a substitute vehicle while a collision-damaged car is being repaired
Shawn has a utility function expresses by U(W) = √W, where W is Shawn’s wealth. Currently Shawn has W=$500. He faces a potential loss L = $300 with probability p=.20. What is Shawn’s expected utility?
Maximum Possible Loss
The worst loss that could ever happen to a firm is referred to as the
Only the possibility of loss or no loss
A pure risk is defined as a situation in which there is
Uncertainty concerning the occurrence of loss
The loss should not be catastrophic
PHI Insurance Company writes coverage for most perils which can damage property. PHI, however, does not write flood insurance on property located in flood plains. Which requirement of an ideally insurable risk might be violated if PHI wrote flood insurance on property located in flood plains?
Auto physical damage insurance
All of the following are programs to insure fundamental risks, except
Risk provides an incentive for people to engage in loss control
All of the following are burdens to society because of the presence of risk, except
Sharp increase in the number of mutual insurance companies
The corporate structure of mutual insurers is changing rapidly. All of the following are current trends, except
The underwriting process begins with
Independent Agent
Sara owns a property and liability insurance agency. She is authorized to represent several insurance companies and she is compensated by commissions. Sara’s agency owns the expiration rights to the business she sells. Sarah is an
Foreign Insurer
An insurance company incorporated in another state has been licenses to operate in your state. In your state, the insurer would be considered an
Death benefits paid to a beneficiary
Expense for a life insurance company
Risk base capital standards
Which of the following is a method used to help ensure the solvency of insurers?
Retaliatory tax law
PA’s premium tax is 2%. GA’s premium tax rate is 3%. PA insurers are required to pay the 3 percent rate on business written in GA. PA requires insurers from GA to pay a 3% premium tax on business written in PA even though the tax rate is only 2%. This practice is known as
Flex Rating Law
Under what type of rate are insurers required to obtain approval of ratings before using them if the rate change exceeds a specified predetermined range?
9. Carson Mutual Insurance Company would like to take advantage of financial services deregulation by acquiring a bank and a stock brokerage firm. CM, however, would have trouble raising the funds needed to make these acquisitions under the mutual form of organization. CM is planning to switch from the mutual form of organization to the stock form, and to issue shares of common stock to raise capital. The change of organizational structure is called
True or False. In a reinsurance transaction, the primary insurer will pay a ceding commission the reinsurer
Determine premium rates
The function of an actuary is to
$8 million
AMB Mutual Insurance Company has total assets of $10 million. The policyholders’ surplus is $2 million. What are their total liabilities?
Loss Reserves
Which of the following would not appear in the asset section of an insurance company’s balance sheet?
Coverage is actually written by syndicates who belong to Lloyd’s of London
Which of the following statements about Lloyd’s of London is true?
To increase the unearned premium reserve
All of the following are reasons for a primary insurer to use reinsurance except
The insurer transferring business to a reinsurer is called the ceding company
Which of the following statements about reinsurance is true?
Unearned premium reserve of an insurer
A liability representing the unearned portion of gross premiums on outstanding policies
Use and File
Under one type of rating law, insurers are free to change rates and to use modified rates immediately. However, the new rate must be filed with regulators within a specific period, such as 60 days after the modified rate is employed. This type of rating law is called
Rates must not be excessive
Moore insurance is the only insurance company marketing a certain line of insurance in a state. After complaints from several consumers, the State Insurance Department investigated Moore’s rates. The regulators determined that Moore was taking advantage of being the only insurer offering the line by charging more than double the actuarial cost of the coverage. Which regulatory rating objective was Moore violations?
What was Atkinson’s loss ratio last year?
Loss Adjustment Expenses $5,000,000
Underwriting Expenses $30,000,000
Premiums Earned $100,000,000
Incurred Losses $70,000,000
Preparing accounting statements using Statutory and GAAP accounting
Anne is in charge of accounting at EME Insurance Company. EME is a publicly traded insurer. In describing her job, Anne said, “There aren’t too many businesses where you are required to keep two sets of books.” Anne’s comment most likely refers to her company
Claims anticipated but not yet incurred
A property and casualty insurer’s loss reserve includes estimates for all of the following except
Investments such as stocks and bonds
The assets of a property and liability insurance company are primarily
Experience Rating
Under one type of merit rating, the class or manual rate is adjusted upward or downward based on past loss history. This type of merit rating is called
MedProf Insurance markets medical malpractice insurance. The company’s combined ratio in 2012 was 95.4. Its expense ratio was 25.4. What was the company’s loss ratio?
Quicker response to local insurance problems
Which of the following is an advantage of state regulation of insurance over federal regulation of insurance?
Guaranty Fund
DLE Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If DLE becomes insolvent, which of the following will help pay the unpaid claims of the insurer?
Office Furniture
Example of what is considered a non admitted asset for an insurer?
Paul v Virginia
The right of the states to regulate the business of insurance was FIRST established by
Facultative Reinsurance
A reinsurance contract that is entered into on a case-by-case basis after a application for insurance is received by a primary insurer is called
Excess-of-loss reinsurance treaty
Bradford 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
Requiring submission of annual financial statements to state regulators
Which of the following is a principal method of ensuring the solvency of insurers?
Grace is a life insurance agent. She is attempting to sell a large life insurance policy, but the prospective purchaser is having second thoughts. To persuade the prospective purchaser, Grace said, “I will earn a $1,000 commission if you buy this policy. I’ll give you $500 of my commission if you buy the policy.” In most states, what illegal sales practice will Grace be guilty of if she splits her commission with the purchaser?
The Insurance Regulatory Information System (IRIS)
The National Association of Insurance Commissioners administers an “early warning system” to help ensure insurance company solvency. This system uses data provided in the annual statements to help identify companies that may pose a solvency risk. This early warning system is called
True or False: The National Association of Insurance Commissioners can force states to adopt the model laws that it drafts
True or False: Mutual Insurers may pay dividends to their policyholders
Surplus Line Broker
Courtney needs insurance that is unavailable in the state where she lives. To obtain insurance from a non-admitted insurer, Courtney should contact a
Vicky is employed by an insurance company. She reviews applications to determine whether the company should insure the applicant. If insurable, Vicky assigns the applicant to a rating category based on the applicant’s degree of risk. Vicky is an
Jackson’s policy automatically provided $50,000 of liability coverage
Jackson has $25,000 of bodily injury liability coverage under his PAP. This limit is the minimum amount required by his state to be considered financially responsible. While on a vacation, Jackson visited a neighboring state which has a minimum financial responsibility limit of $50,000 for bodily injury. Which of the following statements describes the situation for Jackson while he was in the neighboring state?
Failure to exercise the degree of care required by law to protect others from harm is called
Collision Loss
What kind of loss does Part D of the PAP consider this to be?
The covered auto is damaged when it slid off an icy road and hit a fence
The ability to pay
All of the following are elements are negligence except
General Damages
James was injured in an auto accident cause by another motorist’s negligence. He received severe facial lacerations and injured his back in the accident. In payment for hihs pain, suffering, and disfigurement, losses which cannot be specifically names, James will receive
Res ipsa loquitor
Christina had major abdominal surgery. Months after the surgery, she still did not feel well. When she was operated on again, the surgeon discovered two sponges that were not removed at the conclusion of the first operation. Christina should be able to collect damages without having to prove negligence under the doctrine of
The insured backs into and damages the garage door of his rented house
Which of the following situations would be covered by the liability section of an unendorsed PAP if the insured is legally liable?
Last clear chance rule
Erin was injured when she drove her car through a stop sign and was struck by Cameron’s car. Cameron saw Erin and could have stopped. However, he failed to do so since he has the right of way. Erin can recover damages from Cameron under which of the following legal doctrines?
Special Damages
Damages for losses that can be determined or measured are
The friend’s policy will pay $50,000 and Vicki’s policy will pay $20,000
Vicki was injured by an uninsured drunk driver while she was riding in a friend’s car. Vicki and her friend each have a PAP with an uninsured motorists limit of $50,000. How much will be paid by each policy if it is determined that Vicki has $70,000 of bodily injuries?
Uninsured motorists
Grace purchased a PAP. Her car was rear ended by a driver who fled the scene. Grace suffered whiplash, migraines, and she was unable to work. Which of the following coverage will cover her lost work earnings?
True or False concerning the uninsured motorists coverage of the PAP: The coverage applies only if the uninsured motorists is legally liable
Sale of Alcohol
Under a dram shop law, a business may be held liable for damages resulting from
In addition to providing coverage in the US, its territories and possessions, and Puerto Rico, where else does the PAP provide coverage?
Cathy’s policy will pay $100,000, David’s policy will pay $200,000
David occasionally borrows the car of a friend, Cathy. Cathy has a PAP with a liability limits of 100/300/50. David also has a PAP, and his liability limits are 250/500/50. David had an accident while using Cathy’s care and was found to be legally liable for $300,000 in bodily injury liability for injuries suffered by one person. How much will be paid by each policy?
The collateral source rule
Jenny was injured in a work related auto accident. She sued the other driver and the case went to court. While questioning Jenny, the defendant’s lawyer asked if her injuries and lost earnings were covered under worker’s compensation. Jenny’s lawyer objected to the question. The judge ruled the question improper and instructed the jury to disregard the question. Based on the judge’s reaction to the question, we can conclude that which of the following rules is in force where this trial took place?
Stephen was involved in an auto accident. He was judged to be 20 percent at fault in the accident and the other party was judged to be 80 percent at fault. Stephen’s actual damages where $40,000. Under a pure comparative negligence rule, how much will Stephen receive for his injuries?
Sarbanes Oxley Act
Addresses corporate fraud and lax corporate governance
Emily has an individual medical expense policy with a $1,000 calendar year deductible, a $5,000 out of pocket limit, and a 20 percent coinsurance requirement. Emily was hospitalized for a surgical procedure in March, her first health care treatment received during the year. The total bill was $20,000. Considering the deductible and coinsurance, how much of this amount must Emily pay?
True or False: The policy owner has the option of investing the cash value in several accounts
A family member of the named insured is struck by an auto while crossing the street
covered person under the medical payments coverage of the PAP?
Underinsured motorist coverage
Wendy was injured when her car was struck by a driver who ran a red light. The other driver carried the minimum liability coverage necessary to be considered financially responsible. Wendy’s injuries were $15,000 above the minimum bodily injury limit. There is a coverage that can be added to the PAP that applies when a negligent driver carries the minimum liability insurance required by the state, but is less than the insured’s actual damages for bodily injury. This coverage is called
The portion of a property and liability insurance contract that contains information about the property or activity to be insured is called the
BMN Company insured its building on a replacement cost basis for $450,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $500,000 when it sustained a $50,000 loss. How much will BMN Co receive from its insurer, assuming no deductible applies?
Open perils coverage
Eric’s property was damaged in an accident. He phoned his agent ot see if the loss was covered under his property insurance policy. The agent said, “As long as the cause of the loss is not specifically excluded in the policy, the loss is covered.” Based on the agent’s answer, what type of insuring agent agreement appeals in the policy?
Sam’s furniture was destroyed by a fire. The furniture costs $1,200 when it was purchased, but similar new furniture now costs $1,800. Assuming the furniture was 50 percent depreciated, what is the actual cash value of Sam’s loss?
Named perils coverage
A legal reserve in life insurance is a result of
Actual cash value property insurance
The loss settlement under which of the following supports the principle of indemnity?
Brooke plans to open a bar in a high crime area. She had difficulty obtaining insurance for the business. She found an insurer willing to write the coverage, but only if Brooke agreed to have a security alarm system in operation at all times when the business is closed. Brooke’s promise to have a security alarm system operational as a condition of having the insurance coverage in force is a
When Alex applied for life insurance, he was asked on the application if he smoked or used tobacco products. Alex answered, “No”. In reality, Alex smokes two packs of cigarettes a day. The policy was issued at the “preferred, nonsmoker rate.” If Alex dies 6 months after the policy is issued, upon what grounds will the insurer be able to legally deny the claim?
A single person family
Which type of family is likely to have the least need for a large amount of life insurance?
Net amount at risk for an ordinary life insurance policy
difference between the face amount of the policy and the legal reserve
Universal life insurance
Anne is considering the purchase of a life insurance policy with these characteristics: flexible premium payments, the insurance and savings components are separate, the interest rate credited to the cash value is tied to a changing market interest rate but a minimum interest rate is guaranteed, and a monthly administrative fee is charged. She is considering buying
Principle of subrogation
Melody’s car was damaged when another driver ran a stop sign and hit her car. Melody decided to collect from her own insurer and to let her insurer recoup the loss payment from the negligent driver who hit her. What fundamental legal principle is illustrated in this scenario?
Human Life Value
Present value of the family’s share of a deceased breadwinner’s future earnings
Aleatory contract
contract in which the values exchanged are not equal because chance is involved is called
Thomas suffered a heart attack as was rushed to the hospital where heart surgery was performed. His total bill for medical services was $50,000. Thomas has a major medical policy with a $1,000 calendar year deductible and a $5,000 out of pocket limit. His coinsurance percentage is 20%. Assuming this hospitalization was the first medical care that Thomas received during the year and that all of the hospital services were eligible for coverage under the policy, how much of the $50,000 will the insurer pay?
Unilateral contracts
What distinct legal characteristic of insurance contracts states that only the insurer’s promise to perform is legally enforceable?

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