BUSINESS
Risk-mana-Classion-discussion-questions-answer-Chap-1-6.docx

Risk manager risk retention risk transfer loss

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risk manager – risk retention, risk transfer, loss control – finance divisions – contractual provision, capital market. 3. B 4. – A call option, which gives the holder the right to buy an underlying security at a specified price, before the option expires. For example, if the stock is trading at $9 on the stock market, it is not worthwhile for the call option buyer to exercise their option to buy the stock at $10 because they can buy it for a lower price ($9) on the stock market. – A put option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time frame. For example, if the stock is trading at $11 on the stock market, it is not worthwhile for the put option buyer to exercise their option to sell the stock at $10 because they can sell it for a higher price ($11) on the stock market. 5. A double-trigger option is a provision that provide for payment only if two specified losses occur. Its objective is when there is 2 risks, either of which by itself may not harm the organization if the company has a strong balance sheet but the occurrence of both may damage the business more severely, firm can use double-trigger option because the cost of such coverage is less than the cost of treating each risk separately. 6. B 7. A – combined ratio is 118% indicates that for every $1.00 that insurers collected in premiums, they paid out $1.07 in claims and expenses. 8. Combined ratio = (paid losses + loss adjustment expenses + underwriting expenses)/premiums = (300,000 + 18,000 + 3,000)/325,000 = 98.77% (< 1) profitable 9. B 10. a. reduce – loosing b. reduce – loosing c. reduce d. increase – typing 11. 80/600 = 13.33% 12. 6% x 10% = 0.6% 13. 0.04 x 0.5 = 2% 14. 5% + 6% = 11% 15. . - Insurer A’s bid , the expected cash outflow is ($6,000 x 14) + ($7,000 x 8) + ($7,000 x 6) = $182,000 The present value of these deductible payment is PV = 182,000/ (1 + 0.05) 1 = $173,333.333 The present value of the total expected payments = $173,333.333 + $120,000 = $293,333,333 - Insurer B’s bid , the expected cash outflow is ($6,000 x 14) + ($11,000 x 8) + ($12,000 x 6) = $224,000 The present value of these deductible payment is PV = 224,000/ (1 + 0.05) 1 = $232,380.95 The present value of the total expected payments = $232,380.95 + $45,000 = $277,380.95 Chap 5
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1. a) Consolidation. b) Convergence. 2. a) Mutual insurer. b) Lloyd’s of London. c) Reciprocal Exchange. d) Blue cross& Blue shield plans. e) Health maintenance Organizations. 3. 1-c. 2-a. 3-b. 4. Some mutual insurers have become stock insurers for the following reasons: The ability to raise new capital is increased. Stock insurers have greater flexibility to expand by acquiring new companies or by diversification. Stock options can be offered to attract and retain key executives and employees. Conversion to a stock insurer may provide tax advantages. 5. a) Bulk reinsurance b) pure conversion. c) Merger 6. a. 7. a-Implied authority. b-Express authority. c-Apparent authority. 8. c. 9. the agency owns the expirations or renewal rights to the business. If a policy comes up for renewal, the agency can place the business with another insurer if it chooses to do so. Likewise, if the contract with an insurer is terminated, the agency can place the business with other insurers that the agency represents.
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