AIN1320 Insurance: To Buy or Not to Buy

Assignment
Please write down your name, student ID no., and class group no. on the first
page of your assignment submission. Show all necessary steps of your work.
Please upload your assignment to Moodle by 10th November, 2023 (Friday).
Late submission will not be accepted.

Part (I) Multiple choice questions (30 marks)

1. Michael regularly changes his email password to protect himself from cyber
risk. What method for handling the risk is used by Michael?

a) Avoidance
b) Loss prevention
c) Loss reduction
d) None of the above

2. Sara is nearing retirement and wants to make sure a steady stream of monthly
income to cover her living expenses without worrying about outliving her
savings after retirement. What kind of product should Sara purchase?

a) Medical expense insurance

b) Life insurance
c) Homeowners insurance
d) Annuity-certain
e) Life annuity

3. John purchases fire insurance for the bookstore that he is running. In order to
qualify for a lower premium, John does not disclose in his insurance
application that there is a small café inside the bookstore. Which of the
following principles best describes the situation?

a) Indemnity
b) Subrogation
c) Utmost good faith
d) Insurable interest
 4. John sold his house to Zoe. Zoe has borrowed $5,000,000 from HSMC Bank
to buy the house. Which of the following statement about insurable interest is
correct?

a) Only Zoe, but not HSMC Bank, has insurable interest in the house
b) Only HSMC Bank, but not Zoe, has insurable interest in the house
c) Both Zoe and HSMC Bank have insurable interest in the house
d) Both Zoe and John have insurable interest in the house

5. Jacky is covered by individual medical expense insurance. Which of the

following item(s) is/are likely to be excluded from his insurance policy?
a) He receives treatment for a pre-existing medical condition that he knew
before applying for the insurance.
b) He undergoes elective weight loss surgery to improve his appearance.
c) He received a cosmetic treatment on his aging eyelids in order to look
younger.
d) All of the above.

6. John slipped and fell on a wet floor in a grocery store. He filed a claim of
$20,000 for his injury. During the investigation, it was determined that John was
10% at fault for not paying attention to the sign “Be careful – Wet floor”. The
court ruled that John’s contributory negligence played a role in the accident.
How much will John collect from the grocery store for his injury?
a) $2,000
b) $18,000
c) $20,000
d) $22,000
Part (II) Short questions (70 marks)
1. Consider the following two risks:
Risk A
Loss amount Probability
$0 0.5
$ 50 0.49
$ 1000 0.01

Risk B
Loss amount Probability
$0 0.6
$ 100 0.2
$ 500 0.2

a) What are the expected loss amounts for Risk A and Risk B, respectively?
b) In terms of standard deviation of loss, is Risk A or Risk B riskier?

2. Lily has the following loss distribution for her medical expenses in the coming
year.
Medical expenses Probability
$0 0.59
$500 0.25
$5,000 0.15
$100,000 0.01

a) If Lily has a medical expense policy with full insurance, how much would
the insurer be expected to pay for the medical expenses?
b) If Lily has a medical expense policy with $300 deductible, how much
would the insurer be expected to pay for the medical expenses?
c) If Lily has a medical expense policy with $300 deductible, a 30 percent
coinsurance, and a $60,000 limit, how much would the insurer be expected to
pay for the medical expenses?
 3. Sam, who just had his 57th birthday, has the following probability of death in
each year:
Age Probability of death
57-58 0.01
58-59 0.011
59-60 0.013
60+ 0.015

Given an annual interest rate of 3%.

a) Calculate the single premium of a two-year term insurance with $1,000,000
face amount for Sam.
b) Calculate the premium of a two-year endowment policy with $1,000,000
face amount for Sam.
c) Suppose that Sam just reached age 59 and wanted to purchase a life
immediate annuity that pays him $150,000 each year, starting from his 60th
birthday until his death. Calculate the amount that Sam should pay to purchase
this annuity.

4. John is single, and his taxable income (after deduction of all available tax
allowances) is HK$210,000 in 2023/24. He has bought two Qualified Deferred
Annuity Policy (QDAP) policies for himself in the last quarter of 2023, with
annual premiums of HK$30,000 and HK$50,000 respectively. How much tax he
can save in 2023/24 by buying the QDAP policies?