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. Provide a complete definition of Insurance and briefly discuss the essential elements of the definition.

2. The Law of Large Numbers is used in the development of insurance rates. Explain how this statistical tool is important to the success of insurance.The law of large numbers states that the greater the number of exposures, the more closely the actual results will approach the probable results expected from an infinite number of exposures. As the number of exposures increases, the relative variation of actual loss from expected loss will decline. Thus, the insurer can predict future losses with a greater degree of accuracy as the number of exposures increases. This is important, since an actuary must charge a premium that is adequate for paying all losses and expenses during the policy period. The lower the degree of objective risk, the more confidence an insurer has that the actual premium charged will be sufficient to pay all claims and expenses and leave a margin for profit.

3. Briefly define and discuss risk as it relates to insurance. Provide an example of how insurance reduces risk.

4. Provide an example of the following terms:

a. Physical Hazardphysical condition that increases the chance of loss. Examples are icy streets, poorly designed intersections, and dimly lit stairways.

b. Moral Hazarddishonesty or characteristics of an individual that increase the chance of loss

c. Morale Hazardcarelessness or indifference to a loss, which increases the frequency orseverity of loss

5. How does enterprise risk management differ from traditional risk management?

Enterprise risk management combines into a single unified treatment program all major risks faced by the firm. These risks include pure risk, speculative risk, strategic risk, operational risk, and financial risk.

(b) Traditional risk management considered only major and minor pure risks faced by a corporation. Enterprise risk management considers all risks faced by a corporation as described in (a) above.

6. Identify an appropriate risk management technique, or combination of techniques, that would be appropriate for dealing with the following risk exposures.

a. A student may not be able to finish school as his financial aid is discontinued. -----------Need answer

b. A family head may die prematurely because of a heart attack.

Risk control such as exercise, losing weight, and following a healthy diet can reduce the chance of dying prematurely from a heart attack. Life insurance can also be used, which reduces or eliminates the financial consequences to surviving family members if a family head dies prematurely.

c. An individual's home may be totally destroyed in a hurricane.

Property insurance is an appropriate technique for dealing with the risk of a hurricane. Retention can also be used by purchasing the policy with a deductible.

d. A new car may be severely damaged in an auto accident.

Collision insurance on the new car is an effective way to deal with this exposure. Retention can also be used by purchasing the policy with a deductible for collision losses. The insured can also drive defensively, which is a form of risk control.

e. A negligent motorist may be ordered to pay a substantial liability judgment to someone who is injured in an auto accident.

A catastrophic loss exposure is present. Auto liability insurance should be purchased to deal with the exposure.

7. List and briefly describe the six characteristics of an ideally insurable risk:

(a) There must be a large number of exposure units.
(b) The loss must be accidental and unintentional.
(c) The loss must be determinable and measurable.
(d) The loss should not be catastrophic.
(e) The chance of loss must be calculable.
(f) The premium must be economically feasible.

8. Explain the concept of adverse selection as it relates to insurance. Provide an example of adverse selection.

(A) Adverse selection is the tendency of persons with a higher-than-average chance of loss to seek insurance at standard (average) rates, which, if not controlled by underwriting, results in higher-than-expected loss levels.

(b) Adverse selection can be controlled by careful underwriting, by charging higher premiums to substandard applicants for insurance, and by certain policy provisions.

9. Explain the two major differences between insurance and gambling.

Insurance differs from gambling in two ways. First, gambling creates a new speculative risk that did not exist before, while insurance is a technique for handling an already existing pure risk. Second, gambling is socially unproductive, since the winner's gain comes at the expense of the loser. Insurance is always socially productive, since both the insured and insurer win if the loss does not occur.

10. How have you practiced risk management today? Be specific.