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RMI 300 Final Exam Practice Questions and Answers

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RMI 300 Final Exam Practice Questions and Answers What are the 3 ways a company decides who takes on what risks? - ANSWER--Better Opportunity to pool -Better way to use loss control incentives -Who has the benefit in taxes Prevention - ANSWER-Any measure that lessens the probability (frequenc...

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  • November 11, 2024
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RMI 300 Final Exam Practice Questions

and Answers


What are the 3 ways a company decides who takes on what risks? - ANSWER✔✔--Better Opportunity to

pool


-Better way to use loss control incentives


-Who has the benefit in taxes


Prevention - ANSWER✔✔-Any measure that lessens the probability (frequency) of loss but does not

eliminate it


Reduction - ANSWER✔✔-Any effort that lessens the size (severity) of losses that do occur


Avoidance - ANSWER✔✔-Marking decisions with the intention of eliminating either (1) some existing

potential for loss, or (2) a future potential for loss from a new venture. In essence, these are lost

opportunities




P(loss) = 0


Premium = - ANSWER✔✔-E(loss) + E(expenses) + Risk Charge + Profit - investment returns


What are Premium Loadings? - ANSWER✔✔-costs in excess of E(loss) before considering investments


When is it not worthwhile to pay this excess in Premium Loadings? - ANSWER✔✔--Value of insurer

services less than the cost of those services

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-For low severity events


-for high frequency events


-when estimation risk exists: correlated events and/or estimation uncertainity


Moral Hazard - ANSWER✔✔-Behavior that increases the frequency of bad outcomes


Adverse Selection - ANSWER✔✔--Definition: the tendency of buyers with higher than average expected

losses to buy more coverage than buyers with lower than average expected losses when charged the

premium


-Generally present when: potential insureds have differing distributions of expected losses and also

possess greater knowledge ("asymmetric information") about their expected losses than the insurer


-Effect of adverse selection: insurer unable to charge sufficient premiums for sustainable business;

insurance market falls apart


What should you do in an event that is low frequency and high severity? - ANSWER✔✔-Transfer




-loss reduction


What should you do in an event that is low frequency and low severity? - ANSWER✔✔-Retain!


What should you do in an event that is high frequency and high severity? - ANSWER✔✔-Avoidance




-transfer will be difficult because premiums will be very high


What should you do in an event that is high frequency and low severity? - ANSWER✔✔-Retain



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-Loss prevention


What Insurance Policy provision should be in place for a low frequency and high severity event? -

ANSWER✔✔-Limits


What Insurance Policy provision should be in place for a low-frequency and low severity event? -

ANSWER✔✔-Deductible


What Insurance Policy provision should be in place for a High-frequency and low severity event? -

ANSWER✔✔-Deductible


What Insurance Policy provision should be in place for a High-frequency and high severity event? -

ANSWER✔✔-Exclusions




For a flood


What are some Common Assumptions about decisions? - ANSWER✔✔--Decisions are consistent


-Generally we are aware of what we know and we do not know


-Decisions are improved with more information


-Generally we are risk averse


What are the 4 biases that may cause difficulty? - ANSWER✔✔--Framing


-Retrievability/Availability


-Anchoring



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