Assignment
Please remember that you must do your own work. Any plagiarism will result in a grade of zero for all students involved. Please use your own words even if you are using the textbook for answers. Always provide a citation when a reference is used.
1. How does insurance relate to the Law of Large Numbers? Be specific and provide an example.
2. Define the following terms:
a. Risk
b. Physical Hazard
c. Moral Hazard
d. Attitudinal hazard
e. Legal Hazard
3. How does enterprise risk management differ from traditional risk management?
4. Briefly explain and provide an example of each of the following risk-control techniques for managing risk:
a. Avoidance
b. Loss prevention
c. Loss reduction
d. Duplication
e. Separation
f. Diversification
II. Briefly explain each of the following risk financing techniques for managing risk:
a. Retention:
b. Noninsurance transfers:
c. Insurance:
5. There are several techniques available for managing risk. For each of the following risks, identify an appropriate technique, or combination of techniques, that would be appropriate for dealing with the risk.
a. A family head may die prematurely because of a heart attack.
b. An individual's home may be totally destroyed in a hurricane.
c. A new car may be severely damaged in an auto accident.
d. A negligent motorist may be ordered to pay a substantial liability judgment to someone who is injured in an auto accident.
e. A surgeon may be sued for medical malpractice.
6. Risk managers use a number of methods for managing risk. For each of the following, what method for handling risk is used? Explain your answer.
a. The decision not to carry earthquake insurance on a firm's main manufacturing plant
b. The installation of an automatic sprinkler system in a hotel
c. The decision not to produce a product that might result in a product liability lawsuit
d. Requiring retailers who sell the firm's product to sign an agreement releasing the firm from liability if the product injures someone
7. Explain the law of large numbers and how it reduces risk. Provide a hypothetical example.
8. List and briefly describe the six characteristics of an ideally insurable risk:
9. Explain the concept of adverse selection as it relates to insurance. Provide an example.
10. Explain the two major differences between insurance and gambling.
11. Using the requirements of an insurable risk, compare the risk of fire with the risk of flood in terms of how well they meet the requirements of an ideally insurable risk.
12. I. Explain the following benefits of insurance to society:
a. Indemnification for loss
b. Enhancement of credit
c. Source of funds for capital accumulation
II. Explain the major costs of insurance to society: