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Question 1In the global credit crisis of 2008, what was the function of credit default swaps?It derived or created credit for borrowers.It insured mortgage-backed securities.It guaranteed payment by the U.S. government.It insured insurance companies.It introduced financial instruments like mortgage-backed securities in the market.Question 2Which of the following is an example of risk?You could or could not get caught driving under the influence of alcoholSmoking cigarettes at various numbers per dayPower plant and automobile emission of greenhouse gasses (CO2)Higher car insurance rates or cancellation of auto insurancePotential variety in interest rates over timeQuestion 3Identify the risk seeker.A retiree, living on fixed income, purchasing a lottery ticketAn employee, selecting a health insurance planA college student, taking a summer job to pay for tuitionA retiree, living on fixed income, purchasing a dividend-earning securityAn employee, who is neither interested in insurance nor in stocksQuestion 4Rebecca has been badly injured while using a product manufactured by Huergo Manufacturing Co. Which of the following liability best explains the situation if Huergo is held liable for Rebecca's injury?Customer liabilityProduct liabilityMarket liabilityProfessional liabilityPremises liabilityQuestion 5Which of the following statements correctly differentiate between perils and hazards?Perils refer to the number of losses during a specified period and hazards refer to the average dollar value of a loss per occurrence.Both perils and hazards are causes of loss; perils are tangible, hazards are intangible.Perils are causes of loss; hazards are conditions that increase perils.Perils are diversifiable risks; hazards are nondiversifiable risks.Perils are consequences of losses; hazards are cause of lossesQuestion 6Which of the following statements is true about the risk metrics?It is a system of related measures that help us measure the emotional aspects of risk.It is important but not critical because enterprises have alternative measures to see whether they have reached risk management objectives.It is an independent entity and can stand alone.It allows us to measure risk, giving us an ability to control risk and simultaneously exploit opportunities as they arise.The risk being considered in a particular situation does not dictate the risk measure used because they are standard for almost all risk types.Question 7If we roll two dice, what is the probability of rolling a 6 or a 7?7/362/91/45/1811/36Question 8Identify the distance between the highest possible outcome value to the lowest in a distribution.Standard deviationModeVarianceSkewnessRangeQuestion 9Range as a risk measure leaves the picture incomplete because:it cannot distinguish in riskiness between two distributions of situations where the possible outcomes are bounded.it does not take into account the frequency or probability of the extreme values.it measures the frequency of distribution and ignores the severity.it measures the extreme values of the distribution with the probability of its occurrence.it measures the severity of distribution and ignores the frequency.Question 10Why do we say that the utility theory has ordinal utility?It is designed to study relative satisfaction levels.It cannot be explained without the expected utility theory.It dictates that people should behave in the manner prescribed by it.It can represent the absolute level of satisfaction.It does not base its beliefs upon individuals' preferences.Question 11According to the utility theory, if one week of food is preferred to one week of clothing, then two weeks of food is a preferred package to one week of food. Identify this assumption on preference.MonotonicityRationalityConvexityMix-is-betterCompletenessQuestion 12Daniel Bernoulli was the first one to provide a solution to the St. Petersburg paradox in the eighteenth century. Identify this solution.Individuals' expectation of the amount of expected wealth depends upon their risk attitudes. Risk seekers have the highest expectations.Individuals do not look at the expected wealth when they bid a lottery price, but the actual wealth of the lottery is the key.Individuals do not look at the expected wealth when they bid a lottery price, but the expected utility of the lottery is the key.Individuals do not look at the expected utility when they bid a lottery price, but the expected wealth of the lottery is the key.Individuals do not look at the expected utility when they bid a lottery price, but the actual wealth of the lottery is the key.Question 13An individual's preference is characterized by the diminishing marginal utility function. Identify the risk attitude of this individual.Risk seekingRisk averseRisk lovingRisk neutralRisk biasedQuestion 14Self-insuring is a _____ strategy.risk avoidancerisk transferencerisk reductionrisk retentionrisk ignoranceQuestion 15This process involves charting entire spectrums of risk, not individual risk "silos" from each separate business unit. It becomes useful both in identifying risks and in choosing approaches to mitigate them. They present a cumulative picture of all the risks in one risk management solution chart. Identify the process.Risk mappingRisk benchmarkingRisk profilingRisk retentionPrincipal agent analysisQuestion 16Glasgow Tech. is a highly leveraged corporation. What does this mean?Glasgow Corporation has numerous risk exposures due to operations all over the world.Glasgow Corporation has taken many loans to finance its operations.Glasgow Corporation has a very high P/E ratio.Glasgow Corporation has to receive huge amounts of money they owe (accounts receivables).Glasgow Corporation has financed its operations by itself and has not taken any loans.Question 17When we focus on one risk only, we work with this matrix. It provides alternative financial action to undertake for each frequency/severity combination. Identify this matrix.A space risk matrixA forced matrixA risk mapKernel's risk matrixA risk management matrixQuestion 18Identify the correct statement about the risk management matrix.It is also referred to as a risk map.It involves charting entire spectrums of risk, not individual risk "silos" from each separate business unit.It includes all important risks a firm is exposed to.It includes on one axis, categories of relative frequency (high and low) and on the other, categories of relative severity (high and low).It puts the risks a company faces into a visual medium to see how risks are clustered and to understand the relationships among risks.Question 19Reserving liabilities involves the calculation of the amount that the insurer needs to set aside to pay future claims. It's equivalent to the _____ of a nonfinancial firm.equityassetsreservesdebtmarket valueQuestion 20For an insurance company, the asset-liabilities matching ensures:that insurance policies are not issued at high risk areas.risk minimization so that minimum claims are filed.liquidity so that when claims come due the firm has available cash to pay for losses.transparency among the insurers and the policyholders.that individuals and groups that do not have to ability to pay premiums are not insured.Question 21Which of the following is a similarity between forwards and futures?Both are traded in the over-the-counter market.Both can be tailored to meet specific customer needs.Both trade on an exchange with standardized contract specifications.The prices for both derive from the spot, or cash market, which is "today's" price for a particular asset.Both are agreements that give the right (but not the obligation) to buy or sell an underlying asset at a specified price at a specified time in the future.Question 22The strategy of swaps are known as:"lock it in" defense."switch out of it" defense."cap" defense."floor" defense."ceiling" defense.Question 23The risk of an insurer with more exposures is relatively lower than that of an insurer with fewer exposures under the same expected distribution of losses. How do small insurers reduce the uncertainty in predicting losses?They use the sharing of data that exists in the insurance industry.They try to reduce the severity of exposures.They use the risk avoidance method to reduce losses.They use the risk retention method to reduce losses.They cannot reduce the uncertainty in predicting losses.Question 24The insurer assumes the insureds risk by promising to pay whatever loss may occur as long as it:is not a catastrophic loss and the insurer has enough funds to cover it.fits the description given in the policy and is not larger than the amount of insurance sold.is not covered by the federal insurance agencies.has reinsured the risk to a larger insurer or a federal insurance agency.premiums are paid.Question 25The bulk of the premium required by the insurer to assume risk is used to compensate those who incur covered losses. Loss sharing is accomplished through premiums collected by the insurer from all insureds--from those who may not suffer any loss to those who have large losses. In this regard, the losses are shared by all the risk exposures. This is the essence of:risk acceptance.risk pooling.risk severity.risk mapping.risk transfer.Question 26Which of the following explains why insurance companies have separate divisions within its underwriting department for personal lines, group lines, and commercial business?The method of forecasting and calculating frequency of losses is different in each type of insurance.The legal procedures are different in each type of insurance.The criterion to assign insureds into their appropriate risk pool for rating purposes is different for each type of insurance.The level of expertise in group and commercial lines are much higher than those of personal lines, which include individuals.The level of reserves needed for each type of insurance is different and should be kept separately for effective handling of funds.Question 27In this insurers' corporate structure, company officers are appointed by a board of directors that is elected by policyowners. The stated purpose of the organization is to provide low-cost insurance rather than to make a profit for stockholders. Identify the corporate structure in discussion.Smart insurersPart insurersMutual insurersStock insurersDemutual insurersQuestion 28Which of the following statements is true about agents and brokers?Both agents and brokers legally represent the company.Both agents and brokers represent the buyer.Both agents and brokers are compensated by the insurer.A broker legally represents the company, whereas an agent represents the buyer.Both agents and brokers are compensated by the insured.Question 29Identify the correct statement about independent agents.They usually represent a single insurance company.They are compensated on a salary basis by the insurance firm.They pay all agency expenses.They have the responsibility of collecting premiums on all circumstances.Legally, they represent the customers.Question 30Identify the characteristic feature of a broker than differentiates him/her from an agent.They are compensated by the insured.They do not represent the insurance company or the buyer.They legally represent the insurance company.They act as the insured's legal agent when the business is placed with an insurer.They work under the agent, who hire and train them and pay them a monthly salary Question 31The adjustments for various factors in life insurance premiums are known as premium elements. First, the premium is reduced because the insurer:recognizes that the insured has to pay taxes.expects to earn investment income.expects additional administrative expenditures.has transferred the risk to the insured.has a risk of not predicting future losses accurately.Question 32Most insurance policies prohibit direct access from the original insured to the reinsurer. The prohibition exists because:insurance companies realized that the original insured can take insurance directly from the reinsurance company and put them out of business.direct assess of the original insured to the reinsurer is illegal.reinsurance companies do not want to deal directly with original insureds.the insurance company does not want the original insured to know that it is reinsuring the risks.the reinsurance agreement is a separate contract from the primary insurance contract.Question 33Identify the characteristics of a hard market.Insurance rates and insurance capacity are highInsurance rates are high and insurance capacity is lowInsurance rates are low and insurance capacity is highInsurance rates and insurance capacity are lowInsurance rates are negligible and insurance capacity is very highQuestion 34Soft market conditions occur when:insurance losses and insurance prices are high.insurance losses are high and prices are very competitive.insurance losses are low and prices are very competitive.insurance gains are low and prices are very competitive.insurance gains and insurance prices are very low.Question 35Each line of business has its own break-even point because:the firm uses different strategies for each line to mitigate risks.each line in an industry has a different loss payment time horizon but similar length of time for the investment of the premiums.each line in an industry has varying length of time for the investment of premiums but similar loss payment time horizon.all lines in an industry have similar loss payment time horizon and length of time for the investment of the premiums.each line has a different loss payment time horizon and length of time for the investment of the premiums.Question 36In the insurance industry, identify the consequence of having a low combined ratio.Tightening of underwriting standardsStringent redlining standardsRelaxed actuarial processLoose underwriting standardsDecreased amount of cash that can be investedQuestion 37Which of the following statements is true about the insurance regulation scheme?Under the current scheme, federal legislatures pass insurance laws that form the basis for insurance regulation.To ensure the smooth operation of insurance markets and the solvency of insurers, insurance laws are concerned only with the operations and investments of insurers.Trade practices, including marketing and claims adjustment, are not part of the law.The laws provide standards of financial solvency, including methods of establishing reserves and the types of investments permitted.State insurance laws are concerned not only with the licensing requirements for insurers,agents, brokers, and claims adjusters.Question 38Nonlicensed insurers are permitted to sell insurance only if:no licensed company is willing to provide the coverage.they pay the nonlicense operation penalty to the commissioner of insurance.they conduct a joint venture with a licensed insurance firm.they are licensed in atleast five other states.the commissioner of insurance specifically permits it.Question 39The law of agency is significant to insurance in large part because:the only direct interaction most buyers of insurance have with the insurance company is through an agent or a broker.it allows the insurance companies to interact directly with the buyers without the help of agents or brokers.it gives the insurance company the clarity it requires while passing it's authority as principle to the agent.it makes investigation of claims easier.it provides clarity on the types of risks and makes risk classification easier.Question 40An insurance company suspends an agent, but the agent retains possession of blank policies. Which of the following is likely to happen if the former agent issues those policies?The company provides the suspension order of the agent in front of a judge and cancels those policies.The company waives the agent's authority and the existence of an agency relationship and cancels the policies.The premiums of these policyholders are paid back, and the policy cancelled by their consent.The court holds the authority to decide whether the policy stands or is canceled.The company is estopped from denying the existence of an agency relationship and will be bound by the policy.Question 41Students who misrepresent to their auto insurers where their cars are garaged take the chance of having no coverage at the time of a loss because:location is a factor in determining premium rates and therefore, material fact.the insurance contracts of minors are voidable.auto insurers are very strict about misrepresentations and do not cover them even if the information is not a material fact.the auto insurance contracts of students are voidable.auto insurances do not cover auto thefts that occur in the insured's garage.Question 42With cancelable policies, the insurer is responsible under a binder for losses that:occur due to pure risk exposures.the underwriter thinks are insurable.occur due to idiosyncratic risk exposures.occur throughout the term of the policy.occur prior to cancellation.Question 43In an insurance policy, it states that the "insurer promises to pay...." This general description of the insurer's promises is the essence of:an insuring clause.the conditions of a policy.the exclusions of a policy.an endorsement.a rider.Question 44Which of the following statements is true about open-perils policy and named-perils policy?Open-perils policies cover many perils not covered by named-perils policies.An open-perils policy covers only losses caused by the perils listed in the policy.A named-perils policy is also known as the "all risk" policy.The exclusions in a named-perils policy are more definitive of coverage than in an open- perils policy.A named-perils policy provides broader coverage than an open-perils policy.Question 45The 1992 Chicago flood required that Marshall Fields downtown store close its doors for several days while crews worked to clean up damage caused by the flood waters. If Marshall Fields reduced its orders to suppliers of its goods, these suppliers would experience losses caused by the water damage, even though their own property was not damaged. Identify these losses.Dependent lossesContingent business interruption lossesExtra expense lossesPreventative lossesFacultative business interruption lossesQuestion 46Which of the following statements is true about exclusions?Losses caused intentionally by the insured are not excluded.Wear and tear is included in insurance coverage.Exclusions encourage adverse selection and moral hazard.Losses that are not accidental make prediction difficult.Naturally occurring losses that are expected are not excluded in insurance coverages.Question 47Motorized vehicles, furniture, business inventory, clothing, and similar items are properties that are not permanently attached to something else, and therefore are movable. Identify this category of physical property.Personal propertyVirtual propertyNon-depreciating propertyReal propertyNon-movable propertyQuestion 48If you have a $500 deductible on the collision coverage part of your auto policy, you pay the total amount of any loss that does not exceed $500. In addition, you pay $500 of every loss in excess of that amount. If you have a loss of $1,500, therefore, you pay $500 and the insurer pays $1,000. Identify this type of deductible.Vanishing deductibleFranchise deductibleWaived deductibleStraight deductibleDisappearing deductibleQuestion 49Disputes over the rights to a domain name result from specific events. An event arises when a business or an individual reserves the well-recognized name or trademark of an unrelated company as a domain name with the intent of selling the domain name to the trademark holder. Identify this event.CybersquattingDomain name hijackingReverse cybersquattingReverse domain name hijackingWebsite hijackingQuestion 50The Insurance Services Office (ISO) has an e-commerce endorsement that modifies insurance provided under commercial property coverage. Identify the correct statement about this endorsement.Section I of the endorsement defines the period of coverage.Section II of the endorsement describes the electronic data coverage.Section III of the endorsement classifies covered and excluded perils.Section IV of the endorsement defines the coverage of business income, extra expenses, and resumption of e-commerce activity.Section V of the endorsement is for other provisions
Risk Management and Insurance

Risk Management and Insurance

Question # 00074895 Posted By: lynsey Updated on: 06/08/2015 02:07 PM Due on: 06/10/2015
Subject Finance Topic Finance Tutorials:
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