Section 1 (25 pts)

Question 1

identify insurable risk from the point of view of an underwriter

Answer 1

• Generates enough premium paid by many to pay for loss of all
• Unexpected
• Not catastrophic
• Shared by many
• Calculable

Question 2

identify insurable risk from the point of view of a risk manager

Answer 2

• Severity would be crippling to organization
• Not reasonably calculable
• Exceeds the organizations risk appetite
• Pricing by the industry is less than the cost of retaining b/c of insurance market conditions

Question 3

describe the finance options for managing risk

Answer 3

• retain
• transfer financial responsibility
• insurance

Question 4

define retention

Answer 4

the internal funds used to pay losses

Question 5

ALAE

Answer 5

Allocated Loss Adjustment Expense - all expenses directly assigned to a claim

Question 6

ULAE

Answer 6

Unallocated Loss Adjustment Expense - salaries, overhead, etc. cost not associated with a particular claim

Question 7

IBNR

Answer 7

Incurred But Not Reported - the liability for unpaid claims not reflected in the case reserve estimates for individual losses

Question 8

Incurred Losses

Answer 8

outstanding(reserves) AND actual losses paid

Question 9

Ultimate Loss

Answer 9

total losses that will have been paid when all claims have reached final settlement

Question 10

Loss Reserve vs Case/Claim Reserve

Answer 10

• reserve for all claims as of a given date including IBNR

- VS reserve for particular case/claim

Question 11

explain the parts of a Retention-Transfer Diagram

Answer 11

-budgeted retention
-tolerance corridor
-external financing
(see section 1. page 12)

Question 12

Law of Large Numbers

Answer 12

theorem that states the larger the number of units independently exposed to loss, the more accurate the ability to predict loss arising from those exposure units

Question 13

Measures of Central Tendency

Answer 13

Mean
Median
Mode

Question 14

Measures of Dispersion

Answer 14

(definition: statistics that describe the dispersion or extend of spread of data from its measure of central tendency)
1. Range: if smallest value is 100 and largest is 100 the range is 900
2. Standard Deviation: a statistic that quantifies the amount of variation or dispersion in a set of data values

Question 15

what is the Range

Answer 15

if smallest value is 100 and largest is 1000 = 900. the difference between the smallest and largest value in a set of of data value

Question 16

weighted mean purpose

Answer 16

• to forecast expected total losses
• each data point contributes differently to the overall mean. for example a class grade depends on 3 test with 30/30/40%. each percentage is called a weighting factor.

Question 17

Loss Reserve

Answer 17

Estimation of the liability for unpaid claims that have occurred as of a given date, including those IBNR losses