Chapter 3: Risk Assessment and Pooling

Question 1

After risk is identified, what is required?

Answer 1

Estimate of the financial impact of risk, firms can budget appropriately and implement risk handling techniques

Question 2

Random Variable and used to ?

Answer 2

Variable/element where future value is not known with certainty
forecast / predict outcomes

Question 3

Probability Distribution

Answer 3

graph that shows the pattern, specific distribution, and probabilities at a certain value for a random variable

Question 4

Expected Value

Answer 4

Long run average or value of specific event or random variable

Question 5

Variance

Answer 5

measures degree to which actual losses square deviate from expected value

Question 6

Standard deviation

Answer 6

square root of variance, dispersement of data set relevant to it’s mean

Question 7

risk handling measurements (2)

Answer 7

variance and standard deviation

Question 8

Average Loss

Answer 8

Average Loss Severity x Average Loss Frequency

Question 9

Severity

Answer 9

average size of loss measured across specific items or group

Question 10

Frequency

Answer 10

average loss occurrence rate

Question 11

Exposure Unit

Answer 11

person or object exposed to risk

Question 12

Risk Pooling and what law is important? What do you reduce

Answer 12

method to reduce each exposure units risk by making more accurate predictions, law of large numbers

Question 13

Means loss pool

Answer 13

Loss exposure of each individual/ number of people in the pool

Question 14

more in the risk pool….then what about standard deviation

Answer 14

lower the standard deviation of results of total pool

Question 15

Risk Faced

Answer 15

unpooled standard deviation/ square root of number of pool members

Question 16

normal distribution

Answer 16

as element > 30, distribution is normal with loss on x-axis and probability on y

Question 17

Risk Charge

Answer 17

confidence interval to approximate risk and financial loss, add and subtract deviation from expected value

Question 18

Risk charge equation

Answer 18

k multiplied by standard deviation (margin of error)

Question 19

Practical considerations in risk pooling (3)

Answer 19

Risk pooling minimizes risk and premiums charged
Some risks non diversifiable
Companies do not have exclusive rights to risk pool

Question 20

Risk pooling requirements or categories (3)

Answer 20

Homogenous risk categories
Independent assumptions
Enough data and information