Chapter 2

Question 1

empirical probability distributions provide

Answer 1

a mutually exclusive, collectively exhaustive list of outcomes

Question 2

What is the coefficient of variation

Answer 2

coef of v = standard deviation / mean

higher c of v means less predictability

used to compare data sets of different mean and s.d.

Question 3

Probabilities are expressed numerically as

Answer 3

Numerically, as a fraction, a percentage, or a decimal

Question 4

1st standard deviation above or below mean

Answer 4

34.13

Question 5

2nd standard deviation above or below mean

Answer 5

13.59

Question 6

two s. d. in either direction

Answer 6

47.72

Question 7

two s. d. in both directions

Answer 7

95.44

Question 8

probability that is developed based on actual experience

Answer 8

empirical

Question 9

hazard analysis is a method

Answer 9

That identifies conditions that increase the frequency or severity of loss.

Question 10

To accurately analyze loss exposures using data on past losses, the data should be

Answer 10

relevant, complete, consistent, and organized.

Question 11

If a fire damaged a building in 2002 and it cost $200,000 to repair the building in 2002, then $200,000 represents the value of the loss in

Answer 11

Nominal Dollars

Question 12

nominal value / dollar

Answer 12

is an economic value expressed in monetary terms (that is, in units of a currency).

Question 13

real value / dollar
aka
constant value / dollar

Answer 13

is a value that has been adjusted from a nominal value to remove the effects of general price level price changes over time.

Question 14

Current value / dollar

Answer 14

is a term describing income in the year in which a person, household, or family receives it. For example, the income someone received in 1989 unadjusted for inflation is in current dollars.

Question 15

Higher coeff of variation shows

Answer 15

the losses are less predictable.

Question 16

Under The Prouty Approach of analyzing loss exposures, the four broad categories of loss frequency and the three loss severity categories are

Answer 16

Subjective
Most losses are reduce/prevent, retain, or avoid
TRANSFER: High severity-low frequency;
significant or slight severity-slight frequency

Question 17

One way of presenting a continuous probability distribution is to divide the distribution

Answer 17

into a countable number of bins.

Question 18

Liability entries on an organization’s balance sheet are particularly useful to the risk management professional for exploring

Answer 18

Obligations such as mortgage payments

Question 19

The weighted average of all the possible outcomes of a theoretical probability distribution is the

Answer 19

Expected Value

Question 20

Probability analysis would be most reliable for projecting losses in an organization

Answer 20

with substantial volume of data on past losses

Question 21

When a risk management professional knows the mode of a distribution, it allows the professional to focus on the outcomes that are the most

Answer 21

Common

Question 22

Claim adjuster Phyllis is reviewing fire losses. The dollar amounts of the losses are $2,000, $8,000, $10,000, $15,000, and $20,000. The median loss has an adjusted value of

Answer 22

$10,000

Question 23

In an array of historical and adjusted auto physical damage losses the adjusted amount column is the historical loss amount adjusted to

Answer 23

Current year dollars using a price index.

Question 24

with respect to the completeness of past loss data when estimating future loss exposures

Answer 24

What constitutes complete loss data depends largely on the nature of the loss exposure being considered.

Question 25

a benefit of conducting compliance reviews

Answer 25

They can help minimize or avoid liability loss exposures.

Question 26

The mean loss value on each account is roughly the same, and Lucy determines that the two accounts exhibit similar underwriting characteristics. All else being equal, Lucy would be best advised to select the account with the

Answer 26

lower standard deviation - IE losses are more predictable since they will be within a lesser range

Question 27

An empirical probability distribution is based on

Answer 27

historical data

Question 28

EX: tenant has contractually agreed to indemnify him in the event that the Lucas is found legally liable for a bodily injury claim that occurs on the leased premises.

Answer 28

hold-harmless agreement

Question 29

Probabilities deduced solely from historical data may change as

Answer 29

new data are discovered or the environment changes.

Question 30

new data are discovered or the environment changes.

Answer 30

Auto Accidents per mile driven

Question 31

When developing loss severity distributions, insurance and risk management professionals should organize loss data by

Answer 31

size of loss

Question 32

arrange values in a data set by size to determine

Answer 32

median

Question 33

trying to analyze workers compensation loss frequency by cause of loss should use

Answer 33

discrete probability distribution