1.

Non insurance transfer technique not include:

A. transfer of risk by CONTRACT    B. hedging price risk

c. incorporation of a business firm    D. Unfunded reserve

2. To indemnify means

A. Put back in the same financial position just prior to the risk

B/ put aside fund to pay for losses reported but not yet paid

c/ transfer risk to someone who has better financial resources

D/ make financial provisions for dealing with potential losses

3. company A agreed to insure a large commercial client. Due to the size of their client’s
operation, there is the potential that they could suffer a substantial loss. It would be
financially difficult for company A to pay the entire claim itself. To spread this risk, A
contracted B to request that it cover a portion of the risk. B agreed with the condition that It
receive a portion of what the client paid A. The term that describe this

A. retention                        B. Reinsurance                   C. Double insurance          D.

Casualty Insurance

4. Current exchange rate risk is the risk related to the fluctuation of price of one country’s
currency expressed in another country’s currency. If the exchange rate for 1 euro in terms of
1 yen rise, the relative value of the yen

A. decrease B. increase             C. unchange           D/ all incorrect

5. Utmost good faith

A/ can void an insurance policy               B/ imply a high standard of honest

C/ is a mystical faith in the goodness of people   D/ is a requirement of all legal contracts

6. The main purpose of an insurance is to

A/ Provide compensation                        B/ provide security

C/ Share the losses of a few people among many  D/ create investment income

7. The law of large number

A/ indicate the likelihood of an occurrence

B/ Indicate the probability of an event occurring

C/ Means that predictability increases with the number of cases

D/ refers to the number of losses actually occurring divided by the number of losses that
could have occurred

8. A material fact is one that

A/Contributes to the description of the risk  B/ could influence the acceptance of the risk

C/ must be disclosed by law         D/ refers to all the key information

9. which of the following is not the principle of insurance

A/ insurance interest                    B/utmost good faith

C/ subrogation                              D/ historical background

10. transfer of rights and remedies of the insured to the insurer after indemnity has been
affected is called

A/ insurable interest         B/ SUBROGATION C/proximate cause D/cause proxy

11. Speculative risk is

A) a situation in which there are only the possibilities of loss or no loss

B) situation in which either profit or loss is possible
C) A situation in which there are only possibilities of profit or non-profit
D) None of the above - 
12. If retention is used, the risk manager must use some methods for paying losses, which not
includes:
A) Current net income
B) Credit line
C) Cantive insurer
D) Funded Reserve 
13. Captive insurers are formed because of A) Difficulty in obtaining insurance
B) Difficulty in obtaining reinsurance
C) Problem of fix commercial insurance premium
D) None of the above 
14 Disadvantages of Retention technique are: A) Possible higher losses
B) Possible higher expenses C) Possible higher tax
D) All of the above 
15. To make decision involving cash flows, the risk manager must employ time value of
money analysis, which is
A) When valuing cash flow in certain time period, the interest earning capacity of money
must be taken into consideration
B) When valuing cash flow in different time periods, the interest earning capacity of
money must be taken into consideration
C) When valuing cash flow in different time periods, the balance at the end of the previous
year must be taken into consideration
D) None of the above
16. Samy's stereo was destroyed in a fire. The stereo cost $1200 when it was purchased, but a
similar new stereo now $1800. Assuming the stereo was 50 percent depreciated, what is the
actual cash value of Samy stereo:
A) S600
b) $900
C) $1200
D) S1800 
17. Pre-loss objectives of enterprise risk management not include:
A) Prepare for potential losses in the most economical way
B) Reduce anxiety
C) Survival of the firm
D) Meet any legal obligations 
18. Which of the followings is a source of information that risk manager use to identify loss
exposures:
A) Flowcharts
B) Risk analysis questionnaires
C) Financial statements
D) All of the above 
19. Types of political risks not include: A) Changes in customer behaviour
B) Changes in law and regulations C) Import/Export Restrictions
D) Expropriation 
20. Which of the followings should not do to reduce possibility of breach of contract by a
government counterparty:
A) Make sure the contract was awarded to the affiliate in a transparent manner.
B) Make sure the contract does not disproportionately favour the affiliate.
C) Make sure the affiliate diligently observes all contractual obligations
D) None of the above
 21. Non-diversifiable risk is the risk that:
A) Affects only individuals or small group
B) Affects an entire economy
C) Can be eliminated or reduced by diversification
D) None of the above 
22. Retention can be effectively used in a risk management program under the following
conditions
A) No other method of treatment is available
B) The worst possible loss is serious
C) Losses are fairly unpredictable
D) A and B 
23. Suppose the probability of a fire at plant A is 4% and the probability of a fire at plant B is
5%. Then the probability that both production facilities will be damaged in the fire is:
A) 9% B) 1%
C) 0.2% D) None of the above
24. If the probability of minor fire damage is 4 percent and the probability of minor flood
damage is 3 percent, then the probability of at least one of these events occurring is: A)
0.12%
B) 7% C) 1%
D)6.88%
25. All of the following are basic purposes of subrogation except
A) To eliminate adverse selection B) To hold down the cost of insurance
C/To prevent an insured from collecting twice for the same loss D) To hold the negligent
person responsible for a loss
26. If the probability that a building will be destroyed by fire is 2 percent and the probability
that the building will be destroyed by flood is percent than the probability the building will be
destroyed by either fire or flood is: A)3% B)0.02% C) 1.96%
D) 2.98%
27. Suppose the future value of an investment after 2 years is $150,000, assume that the
interest rate per year is 6%. What is present value of the investment? 150,000= X x (1+6%)^2
=> 133,499.466
28. Suzan's office building was damaged by a fire caused by a careless tenant. After paying
Suran for net loss, the insurance company sued the tenant to recover its loss. This suit is
based on the principle of
A) Indemnity B) Insurable interest
C) Utmost good faith D) Subrogation
29. Samy purchased a living room set for S1000 and insured this furniture on an actual cash
value basis Two years later the living room set was destroyed by a covered peril. At the time
of loss, the property had depreciated in value by 25 percent. The replacement cost of the
furniture at the time of loss was $1200. Assuming no deductible, how much will Sammy
receive from her insurer?
A) $900 B) 5950
C) S1000 D) $1200
30. When must an insurable interest legally exist in property insurance?
A) Only at the time of loss
B) Only at the inception of policy (life insurance)
C) Only at the time of loss settlement process takes place D) A and B
PART 2 (4 points):
1. The Swift Corporation has 5000 sales representatives and employees in the United States
who drive company cars. The company’s risk manager has recommended to the firm’s
management that the company should implement a partial retention program for physical
damage losses to company cars.
a. Explain the advantages and disadvantages of a partial retention program to the Swift
Corporation.
The following advantages may result from the retention program:
1- The Swift Corporation can save money if its actual losses are less than the loss allowance
in the insurer's premium.
2- There may also be sizable expense savings.
3- Loss prevention is encouraged.
4- Cash flow may be increased since the firm can use the funds that normally would be held
by the insured.

The following disadvantages may result from the retention program:

1- The losses retained by Swift Corporation may be greater than the loss allowance in the
insurance premium that is saved by not purchasing the insurance, and there may be great
volatility in the firm's loss experience in the short run.
2- Expenses may actually be higher, since loss preventing programs should be established,
which may be provided by insurers more cheaply.
3- Contributions to a funded reserve under a retention program are not usually income tax-
deductible.

b. Identify the factors that the Swift Corporation should consider before it adopts a partial
retention program for physical damage losses to company cars.
1- Average frequency and severity of losses
2-Company's past loss experience
3-Dollar amount of losses the firm will retain
4-Added costs of retention (administrative problems)
5- Elements of the premium that could be saved (potential premium savings)
6- Predictability of losses
7- Maximum possible loss and maximum probable loss
8-Tax aspects
9- Availability of excess of loss coverage
10- Availability of other alternatives
11- Whether management is risk adverse
c. If a partial retention program is adopted, what are the various methods the Swift
Corporation can use to pay for physical damage losses to company cars?
Losses can be paid out of current net income, earmarked assets, funds borrowed from
commercial lenders, or payment from a captive insurer if a captive insurer has been
established. Losses in excess of the retention levels can be paid by commercial insurance.
d. Identify two risk-control measures that could be used in the company’s partial retention
program for physical damage losses.
Risk control refers to measures that reduce the frequency and severity of losses. The
company could avoid hiring drivers with poor driving records. The company could also
reduce losses by requiring drivers to take a defensive driving course.
2) A corn grower estimates in May that he will harvest 20,000 bushels of corn by December
- The price on futures contracts for December corn is $4.90 per bushel.
- Corn futures contracts are traded in 5000 bushel units
How can he hedge the risk that the price of corn will be lower at harvest time?