Prelim_2_Practice_S08

Prelim_2_Practice_S08 - PAM 423 Risk Management and Policy...

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PAM 423 Risk Management and Policy Spring 2008 Study Aid for Prelim 2 General Notes 1. Review the homework assignments and answer the Concept Check questions and end- of-chapter questions in the textbook. Review the readings in Moss with an eye toward understanding the role of government management in the economy. We are not interested in the politics of government risk management, nor are we interested in dates or names of specific legislation. 3. The exam will consist of short answer questions, at least one discussion question (slightly longer responses than short answer) and problems. This review sheet should not be viewed as containing the complete set of material that you should know for the exam. Rather it contains examples of the types of questions and problems that might be seen on the exam. 4. The prelim exam includes all topics covered from since the first prelim exam, through the end of the course. Note that this includes the Moss chapters, which are not covered very thoroughly on the past exams due to differences in the courses from those years. Short Answer Questions from past exams 1. Draw and label an exposure diagram of a firm’s loss exposure if it purchases two policies in layers, with the first policy providing $2 million of coverage in excess of $1 million deductible, and the other providing $4 million of coverage in excess of $3 million. What would the insured firm pay if a loss of $8 million occurred? 2. An important trend in loss financing among large corporations is much greater reliance on retention of losses and alternative risk transfer methods. Briefly explain how these trends are consistent with the theoretical framework of minimizing the total cost of risk to the firm. 3. Using the criteria for “insurability” discussed in class, what is/are the main reason(s) that terrorism insurance may not be readily available in the private market? 4. The risk manager of Myopia, Inc. argues that a good insurance strategy is to buy fire insurance with a maximum coverage limit equal to 50 percent of the value of Myopia’s building. This way, most losses will be covered since it is unlikely that any loss will exceed the coverage limit. What advice would you give?
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5. What are 2 reasons that a business firm may choose to retain losses through
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