Question

1) Some events cannot occur together because the occurrence of one event makes the occurrence of the second event impossible. Such events are called

A) dependent events.

B) independent events.

C) conditional events.

D) mutually exclusive events.

2) An insurance company estimates its objective risk for 10,000 exposures to be 10 percent. Assuming the probability of loss remains the same, what would happen to the objective risk if the number of exposures were to increase to 1 million?

A) It would decrease to 1 percent.

B) It would decrease to 5 percent.

C) It would remain the same.

D) It would increase to 20 percent.

3) According to the law of large numbers, what should happen as an insurance company increases the number of loss exposures that it insures?

A) Fewer losses should be expected to occur.

B) The amount of premiums needed to cover losses should decrease.

C) The volatility of the insurance company's underwriting results should increase.

D) The difference between actual and expected results should decrease.

4) ABC Insurance retains the first $1 million of each property damage loss and purchases reinsurance for that part of any property loss that exceeds $1 million. The insurance for property losses above $1 million is called

A) excess insurance.

B) liability insurance.

C) coinsurance.

D) primary insurance.

Answer 1

Solution

1)

Mutually exclusive events

Because the occurence of one event makes another event not possible to happen

2)

Here for 10,000 exposures objective risk is 10%.

We know that Objective risk will reduce as the number of exposure increases.

In the above case, 10,000 exposures are at objective risk of 10%. Instead, if 1,000,000 exposure was insured, the expected number of claims will increase from 1,000 to 200,000 (20% of 1,000,000 cars) by 10 times, but the variation will only to 447 ( approximately square root of 200,000) by slightly more than 3 times. As a result, the relative variation or the objective risk actually reduces from 1% .

It would decrease to 1 percent.

3)

The difference between actual and expected results should decrease.

When the company increases the exposure, the expected results may diverge from actual resuls as the loan exposures are increasing

4)

excess insurance.

Excess insurance, also known as excess waiver insurance is an optional insurance policy that protects you against any excess charges you may incur in the event your hire car is damaged or stolen.