Book 2 - Risk Management, Insurance, and Employee Benefits Planning

Question 1

What is the law of large numbers so important for insurance companies?

Answer 1

Allows insurers to forecast losses more accurately

Question 2

Is insurable risk objective or subjective?

Answer 2

Objective as it is a condition of the real world

Question 3

What is the difference between a moral hazard and a morale hazard?

Answer 3

Moral hazard is based on dishonesty and morale hazard is based on an indifference to loss (mainly because insurance does exist)

Question 4

What is the difference between a static risk and a dynamic risk?

Answer 4

Static risks are caused by factors other than a change in the economy and insurable because they are always present. Dynamic risks are caused by a change in the economy and are not normally insurable

Question 5

What is the difference between a fundamental risk and a particular risk?

Answer 5

Fundamental risks affect a large group of people. Particular risk affect either an individual or a small group of people

Question 6

What is the difference between pure risks and speculative risks?

Answer 6

Pure risks involve either a chance of loss or no loss. Speculative risks involve either a chance of loss or chance of gain. Pure risks are insurable and speculative risks are not

Question 7

What is adverse selection?

Answer 7

The likelihood that people with the highest risk of loss are also the people most likely to purchase insurance