Insurance Risk Assessment & Management 5 — Questions and Answers
Question 1: An actuary calculates that 1 in 1,000 homes will experience a total fire loss each year. This statistic represents:
- Loss severity
- Loss frequency (Correct answer)
- Risk retention level
- Adverse selection rate
Correct answer: Loss frequency
Loss frequency is the expected number of losses in a given time period, expressed as a rate or probability — here, 0.1% of homes per year.
Question 2: Which term describes the tendency of higher-risk individuals to seek insurance more than lower-risk individuals, skewing the insured pool?
- Moral hazard
- Adverse selection (Correct answer)
- Morale hazard
- Risk pooling
Correct answer: Adverse selection
Adverse selection occurs when individuals with a higher-than-average risk of loss are more likely to purchase or retain insurance, creating an unbalanced risk pool.
Question 3: What does 'risk pooling' accomplish in insurance?
- It eliminates all risk from the insured
- It allows many insureds to share losses, making individual losses more predictable (Correct answer)
- It transfers risk to the government
- It reduces the number of claims filed each year
Correct answer: It allows many insureds to share losses, making individual losses more predictable
Risk pooling spreads losses across a large group of insureds, using the law of large numbers to make aggregate losses more predictable and manageable.
Question 4: A tornado destroys an entire neighborhood, causing simultaneous losses for many insureds. This is an example of:
- Particular risk
- Fundamental risk (Correct answer)
- Speculative risk
- Static risk
Correct answer: Fundamental risk
Fundamental risks are caused by economic, social, or natural forces affecting large numbers of people simultaneously, making them difficult to insure privately.
Question 5: Which risk management step involves evaluating the effectiveness of implemented risk controls?
- Risk identification
- Risk analysis
- Risk monitoring and review (Correct answer)
- Risk financing
Correct answer: Risk monitoring and review
Risk monitoring and review is the ongoing process of tracking identified risks, evaluating control effectiveness, and identifying new risks as circumstances change.
Question 6: A business purchases an umbrella liability policy to cover losses exceeding its primary policy limits. This is an example of:
- Risk avoidance
- Excess risk transfer (Correct answer)
- Risk retention
- Loss prevention
Correct answer: Excess risk transfer
An umbrella policy provides additional liability coverage beyond the limits of underlying primary policies, transferring excess risk to the insurer.
Question 7: Which of the following scenarios best illustrates 'risk identification' in the risk management process?
- Calculating the expected annual cost of workplace injuries
- Listing all potential hazards and exposures a business faces (Correct answer)
- Deciding to purchase workers' compensation insurance
- Setting aside reserves to pay for future claims
Correct answer: Listing all potential hazards and exposures a business faces
Risk identification is the process of recognizing and cataloging all potential sources of loss or harm that an organization may face before analyzing or addressing them.
Insurance Risk Assessment & Management 5
An actuary calculates that 1 in 1,000 homes will experience a total fire loss each year.
This statistic represents: