CRM CRM Insurance and Financial Risk 2 — Questions and Answers
Question 1: What does 'loss frequency' refer to in insurance and risk management?
- The severity of individual losses
- How often losses occur within a given period (Correct answer)
- The total annual premium paid
- The number of insurance policies held
Correct answer: How often losses occur within a given period
Loss frequency measures how often loss events occur, which helps predict future losses and set appropriate premiums.
Question 2: Large deductible programs in risk financing primarily benefit organizations by:
- Eliminating all insurance costs
- Allowing cash flow advantages by retaining smaller losses internally (Correct answer)
- Transferring all risk to third parties
- Reducing regulatory compliance requirements
Correct answer: Allowing cash flow advantages by retaining smaller losses internally
Large deductible programs allow organizations to retain and internally fund smaller losses while gaining premium savings and cash flow benefits.
Question 3: What is a 'captive insurance company'?
- An insurer specializing in high-risk industries
- A company formed by an organization to insure its own risks (Correct answer)
- A reinsurer that takes on catastrophic risks
- A government-sponsored insurance pool
Correct answer: A company formed by an organization to insure its own risks
A captive is an insurance subsidiary created and owned by an organization to provide coverage for its parent company's risks.
Question 4: What is 'loss development' in actuarial terms?
- The process of identifying new loss exposures
- The change in claim reserves as losses mature over time (Correct answer)
- The development of new insurance products
- The growth of premium volume over time
Correct answer: The change in claim reserves as losses mature over time
Loss development refers to how incurred losses change as claims are investigated and settled over time.
Question 5: Which financial risk metric measures potential portfolio loss over a defined period at a given confidence interval?
- Standard deviation
- Expected loss
- Value at Risk (VaR) (Correct answer)
- Return on equity
Correct answer: Value at Risk (VaR)
Value at Risk (VaR) quantifies the maximum expected loss over a specific time period at a given confidence level such as 95% or 99%.
Question 6: What is 'moral hazard' in insurance?
- The risk that an insurer will become insolvent
- The tendency of insured parties to take greater risks because losses are covered (Correct answer)
- Fraudulent misrepresentation on an insurance application
- The risk of natural disasters causing catastrophic losses
Correct answer: The tendency of insured parties to take greater risks because losses are covered
Moral hazard occurs when insurance coverage reduces an insured's incentive to prevent losses or act carefully.
CRM CRM Insurance and Financial Risk 2
What does 'loss frequency' refer to in insurance and risk management?