Insurance Risk Assessment & Management 5

Question 1

An actuary calculates that 1 in 1,000 homes will experience a total fire loss each year. This statistic represents:

Accepted Answer

Loss frequency

Answer

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?

Accepted Answer

Adverse selection

Answer

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?

Accepted Answer

It allows many insureds to share losses, making individual losses more predictable

Answer

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:

Accepted Answer

Fundamental risk

Answer

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?

Accepted Answer

Risk monitoring and review

Answer

Risk monitoring and review is the ongoing process of tracking identified risks, evaluating control effectiveness, and identifying new risks as circumstances change.

Insurance Practice Test

Insurance Practice Test

Insurance Risk Assessment & Management 5