Module 7 Risk Managment and Insurance

Question 1

Risk

Answer 1

The possibility of loosing something of value

Question 2

Speculative Risk

Answer 2

Involves the possibility of lose or gain and is undertaken as a concious choise

Question 3

Pure Risk

Answer 3

Involves the possibility of loss only and is not choosen

Question 4

5 Steps of Risk managment

Answer 4

1) Identifying Risk
2) Evaluating the Risk
3) Controling the Risk
4) Financing the Risk
5) Monitoring the risk profile

Question 5

Identifying risk: What are the 3 types of risk?

Answer 5

1) Personal, life and health
2) Property ( loss or damage to personal possession)
3) 3rd Party

Question 6

Evaluating the Risks

Answer 6

Consider size, impact and proba of occurance of potential loss + assess which loss would be insuportable

Question 7

Controling Risk: What are the 3 ways to control risk

Answer 7

• Avoidance
• Separation or Diversification
• Prevention or reduction of frequency

Question 8

Financing Risk

Answer 8

Finding someont to share risk with through insurance

Question 9

Law of Large Number

Answer 9

Principle on which insurance is based on. If the occurance of some particular event are independent of each other, then, in a large pop, the proba of their occuring can be represented by the average of their frequency

Question 10

Moral Hazard

Answer 10

Risk brought on by choice

Question 11

Self insurance

Answer 11

Mythical idea based on the decision not to insure/ finance risk

Question 12

Acturial tables

Answer 12

Show the proba of occurance for every combination of age sex and occupation

Question 13

Life Insurance

Answer 13

Finance premature and untimely death of a family member by compensating the dependance for the loss of income

Question 14

Insured

Answer 14

The person upon whose death the face value of the insurance will be paid

Question 15

Beneficiary

Answer 15

Person who receive the death benefit upon the death of the insured

Question 16

Premium

Answer 16

$ amount that must be paid to the insurance company

Question 17

Owner of an insurance policy

Answer 17

The person who pays the premiums, can be the insured, his employer, the beneficiary or a third party

Question 18

Term insurance policy

Answer 18

Period during which the insurance is in force

Question 19

Rate (life insurance)

Answer 19

Cost of each unit of insurance

Question 20

Insurability (life insurance)

Answer 20

Qualification for the insured to be insurable.

Question 21

Guarenteed insurability

Answer 21

A provision that allows the insured to buy additional life insurance at certain specified future dates without proof of insurability

Question 22

How to claculate the amount of life insurance needed (3 approaches)

Answer 22

1) Income Approach
2) Expense Approach
3) The human capital approach

Question 23

The income approach (life insurance)

Answer 23

It is based on the present value of expected future earnings of the insured. It is calculated with real rate of interest and a 0 growth in real earnings

Question 24

Why are their adjustment to the income approach of life insurance

Answer 24

• Higher discount rate
• Increase in salary
• the beneficiary does not pay tax on the principal

Question 25

The 6 steps of the expense approach to calculating the amount of life insurance needed

Answer 25

1) project a balance sheet on death until retirement + identify the assets that can be invested to generate income
2) Estimate income that can be generated from asset
3) include other sources of income arising from death
4) estimate expenses of the dependants
5) determine expenses -income
6) determin the face value

Question 26

The human capital approach to calculating the amount of life insurance needed

Answer 26

starts with the income approach but adjust it for the unpaid income aspect of stared household duties and the expenses that wouldn’t be incured once a person dies.

Question 27

What are the principal types of life insurance

Answer 27

1) Term life insurance

2) Life insurance with saving/investment

Question 28

Term life insurance

Answer 28

Pays the face value to the beneficiary only if the insured dies during the term of the policy

Question 29

Pure Premium

Answer 29

The portion of the policy premium that covers the pure risk. Calculated based on the proba of dying x face value of the policy

Question 30

Adverse Selection (life insurance)

Answer 30

Group insurance is priced to reflect the average quality

Question 31

Convertible Insurance

Answer 31

Life insurance provided by an employer can be converted into non group insurance upon leaving that employer

Question 32

Participating term policy

Answer 32

the insurance company pays back dividend

Question 33

Cash Surender value (life insurance)

Answer 33

Extra cash accumulated by the life insurance during the early years of the policy

Question 34

Whole life insurance

Answer 34

Policy that pays out the face value to the beneficiary when the insured dies. It has leveled premiums and cash surender value when the policy is cancelled

Question 35

Endowment Life policy

Answer 35

Pays the face value to the beneficiary when the insured dies OR pays the face amount (the endowment) if the beneficiary reach a certain age

Question 36

Universal life insurance

Answer 36

A combinetion of life insurance and side investment fund

Question 37

Waver of premium (life insurance)

Answer 37

If the insured becomes totaly disabled, premium will not have to be paid although the policy will stay in force

Question 38

Guarenteed insurability

Answer 38

No need to provied evidence of insurability

Question 39

The premium in a disability insurance is called

Answer 39

Waiting period of elimination period

Question 40

non participating term policy

Answer 40

the policy pays no dividend back to the insured

Question 41

Net premium (life insurance)

Answer 41

Premium minus insurance. It is the true cost of a life insurance

Question 42

level term insurance

Answer 42

The face value of the policy stays the same through out the term of the insurance contract

Question 43

Decreasing term insurance

Answer 43

The face value of the insurance declines at the insurance approaches expiry