General Theory Of Insurance Markets EXAMINATION NUMBER 50082200 - 75871

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General Theory Of Insurance Markets EXAMINATION NUMBER 50082200 1. Which of the following is incorrect? A. Higher risk = Higher variance B. Higher variance = Higher standard deviation C. Higher standard deviation = Higher uncertainty D. Higher uncertainty = Lower risk 2. Which of the following represents a correct definition for underwriting? A. The costs associated with marketing and specifying the terms of agreements for risk pooling arrangements B. The procedures associated with estimating a potential risk pooling participant’s expected loss C. The cost associated with monitoring claims by members of the risk pool D. The process of writing an insurance contract 3. Which of the following statements is true of pooling arrangements? A. They result in overall risk reduction for each individual participant in the pool. B. They increase the risk for each individual participant in the pool. C. They result in overall risk reduction for selected participants in the pool. D. They increase the risk for selected participants in the pool. 4. Complete the following equation: Economic capital = A. Historical cost of assets – Historical cost of liabilities B. Replacement cost of assets – Replacement cost of liabilities C. Market value of assets – Market value of liabilities D. Depreciated cost of assets – Historical cost of liabilities 5. Reduction of a firm’s value resulting from the failure of management to act in the best interest of stockholders is called A. agency cost. C. monitoring cost. B. adverse selection. D. moral hazard. 6. The major underlying force that motivates individuals to purchase insurance even though insurance premiums exceed expected claim costs is A. profit. C. expected losses. B. risk aversion. D. premium loadings. 7. The public interest view of regulation suggests that regulation exists when the characteristics of a market differ significantly from those of a competitive market, characterized by all of the following except A. an absence of spillovers (i.e., all costs are internalized to sellers or buyers). B. large numbers of sellers with relatively low market shares and low cost of entry by new firms. C. low-cost information to firms with respect to the cost of production and to consumers concerning prices and quality. D. small numbers of sellers with relatively high market shares and high cost of entry by new firms. 8. Which area of insurance regulation includes risk-based capital requirements, guaranty funds, and financial reporting requirements? A. Licensing regulation C. Solvency regulation B. Rate regulation D. Regulation of sales practices 9. Regulatory monitoring of insolvency risk is a form of A. fixed minimum capital requirements. B. delegated monitoring. C. guaranty funds or guaranty associations. D. post-insolvency assessments. 10. The tendency of buyers with high expected losses to buy more coverage than buyers with low expected losses when charged the same premium is referred to as A. principal cost. C. moral hazard. B. agency cost. D. adverse selection. 11. Risk-based capital formulas for property-liability insurers encompass which of the following main risk categories? A. Asset risk, credit risk, underwriting risk, and off-balance sheet risk B. Asset risk, credit risk, and underwriting risk C. Asset risk, interest rate risk, credit risk, and off-balance sheet risk D. Credit risk, interest rate risk, underwriting risk, and off-balance sheet risk 12. The legal principle which states that an insurance policy can’t pay more than the financial loss suffered is called the principle of A. insurable interest. C. indemnity. B. moral hazard. D. adhesion. 13. A cross-subsidy in insurance occurs in which situation? A. When different lines of insurance (e.g., auto and homeowner’s) are priced so that those with higher administrative costs subsidize those with lower administrative costs B. When each risk class pays a premium that’s appropriate for their level of risk C. When buyers in different risk groups pay the same premium, so that lower-risk buyers subsidize the higher-risk buyers D. When insurance is designed to encourage a change in behavior of risky buyers 14. Nonmonetary losses include A. pain and suffering. C. agency cost. B. lost income. D. principal cost. 15. The doctrine of reasonable expectations holds that insurance policies will be interpreted in a fashion A. consistent with the expectations of a reasonable person with legal training. B. consistent with the expectations of a reasonable person without legal training. C. consistent with the expectations of a reasonable person with at least a sixth grade reading level. D. that provides the greatest benefit to the insurance company.
Solution Description

 

General Theory Of Insurance Markets

EXAMINATION NUMBER

50082200

1. Which of the following is incorrect?

A. Higher risk = Higher variance

B. Higher variance = Higher standard deviation

C. Higher standard deviation = Higher uncertainty

D. Higher uncertainty = Lower risk

2. Which of the following represents a correct definition for underwriting?

A. The costs associated with marketing and specifying the terms of agreements for risk pooling arrangements

B. The procedures associated with estimating a potential risk pooling participant’s expected loss

C. The cost associated with monitoring claims by members of the risk pool

D. The process of writing an insurance contract

3. Which of the following statements is true of pooling arrangements?

A. They result in overall risk reduction for each individual participant in the pool.

B. They increase the risk for each individu

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