Insurance MCQ

The probability distribution associated with the role of a die: A) can be used to forecast the risk of restaurant law suits B) is a non-normal distribution C) is known in advance D) can not be identified Answer: C

Why does a risk manager typically focus on the upper tail of the probability distribution? A) The upper tail shows the amount of coverage of the risk a firm faces. B) The upper tail shows the total risk pool. C) The upper tail shows the confidence interval of the loss distribution. D) The upper tail shows the sum of the estimated mean loss plus the risk charge. Answer: D

Which of the following would not be a reason influencing whether or not an insurance company provides insurance? A) The size of the pool B) The current market interest rate C) Whether or not the losses are independently distributed D) Whether or not the losses can financially ruin the insurance company Answer: B

Which of the following is not a risk measure? A) Standard Deviation B) Confidence Interval C) Variance D) All of the above are risk measures Answer: B

A insured person will generally collect on his insurance policy when: A) he caused the event B) the event was outside his control C) the event affected everybody else also, for example a war D) the event was statistically dependent upon his actions Answer: B

The third step in risk management is: A) creating large enough pools to diversity risk B) the process of the assessment of risk C) the process of identifying risk tools D) the process of identifying possible risks that can occur Answer: B

Which of the following statements about the risk charge is correct? A) The Risk Charge represents how much an insurance company should charge for people not paying their insurance premium. B) The Risk Charge can only be calculated when the probability distribution is normal. C) The Risk Charge is what is added to and subtracted from the Estimated Mean to get to the Confidence Interval. D) All of the above are incorrect. Answer: C

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

Which of the following would be least important in making a self-insurance decision? A) The size of the risk pool B) Social and ethical concerns C) Historical management policy D) Financial ability to pay losses Answer: C

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

Which of the following statements about the confidence interval is 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. Answer: B

Which of the following statements about the confidence interval is not correct? 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. Answer: C

What is the so-called Risk Charge? 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. Answer: B

Which of the following statements about the risk reduction is correct? A) When the probability distribution is non-normal, risk cannot be reduced by increasing the pool size. B) After the pool size has reached 36, risk can no longer be reduced any further. C) Risk is reduced as the pool size increases. D) All of the above are correct. Answer: C

Which of the following statements about probability of occurrence is correct? 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. Answer: A

Given the requisites of risk pooling, which of the following exposures would make the best subject of a profitable insurance pool? Assume a premium appropriate to the exposure is charged and analyze the exposure from the insurer's standpoint. A) Insuring all the lives of college seniors in the U.S. for $10,000 each, without an initial medical exam B) Insuring college students against their GPA falling below a 3.0 C) Insuring all the dorms on a single college campus against property damage D) Insuring students against the theft or disappearance of textbooks Answer: A

If insurers didn't practice pooling, what would happen? 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. Answer: C

Which of the following statements about the risk pooling is correct? A) Risk pooling works best if the parties involved have heterogeneous risk characteristics. B) Risk pooling works best if the number of parties involved is small. C) Risk pooling works best if the loss experience of the parties involved is statistically dependent. D) Risk pooling, assuming some assumptions are met, reduce overall risk. Answer: D

Which of the following statements about the exposure units and risk pooling is not correct? A) Exposure units should not be exposed to risk in order to be added to the risk pool. B) Risk pooling is the ability to reduce the risk of an exposure unit by creating more homogenous pool of units. C) Risk pooling works best if the number of exposure units is small. D) Risk pooling is the ability to reduce the risk of an exposure unit by making more accurate predictions about a large pool of units. Answer: D

Which of the following statements about the risk pooling is correct? A) Risk pooling works best if the number of parties involved is small. B) Risk pooling reduces the standard deviation of the loss distribution. C) Risk pooling increases the loss probability. D) Risk pooling can be used to increase the cost of bearing risk. Answer: B