Financial Risk Management Exam Preparation Guide
Course Introduction
Financial Risk Management is a comprehensive course that explores the identification, assessment, and mitigation of financial risks faced by organizations and individuals. The course covers key topics such as market risk, credit risk, liquidity risk, and operational risk, with an emphasis on quantitative and qualitative methods used to measure and manage these risks. Students will learn about modern financial instruments, risk modeling techniques, regulatory frameworks, and the role of risk management in corporate strategy. Through case studies and real-world examples, the course prepares students to apply risk management practices in banking, investment, and corporate environments, helping them develop the analytical and decision-making skills essential for success in the financial industry.
Recommended Textbook
Principles of Risk Management and Insurance 13th Edition by George E. Rejda
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27 Chapters
1397 Verified Questions
1397 Flashcards
Source URL: https://quizplus.com/study-set/239
Page 2
Chapter 1: Risk and Its Treatment
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59 Verified Questions
59 Flashcards
Source URL: https://quizplus.com/quiz/3703
Sample Questions
Q1) An individual's personal estimate of the chance of loss is a(n)
A) objective probability.
B) objective risk.
C) subjective probability.
D) a priori probability.
Answer: C
Q2) All of the following are characteristics of the liability risk that most people face EXCEPT
A) a lien may be placed on your income and assets to satisfy a legal judgment.
B) substantial legal expenses may be incurred defending the claim.
C) there is no upper limit on the amount of the loss.
D) owning liability insurance eliminates the possibility of being held legally liable.
Answer: D
Q3) The premature death of an individual is an example of a A) pure risk.
B) speculative risk.
C) nondiversifiable risk.
D) physical hazard.
Answer: A
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Page 3
Chapter 2: Insurance and Risk
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47 Verified Questions
47 Flashcards
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Sample Questions
Q1) Which of the following is a basic characteristic of insurance?
A) pooling of losses
B) avoidance of risk
C) payment of intentional losses
D) certainty about specific losses that will occur
Answer: A
Q2) ABC Appliance offers a warranty requiring an annual fee. The warranty may be purchased at the time of sale or at any time within the first year after the appliance was purchased. The warranty fee after the date of purchase is twice the time-of-purchase fee. When asked why the fee was higher after the date of purchase, ABC's president said, "Buying a warranty is voluntary. We've noted that those who buy the warranty after the purchase date have a greater need for service." Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers?
A) excessive premiums
B) reduced claims
C) bad investments
D) adverse selection
Answer: D
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4
Chapter 3: Introduction to Risk Management
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) Discount Department Stores is a national retail chain. The company had one large, central warehouse. At the suggestion of the risk manager, the company decided to build four smaller regional warehouses so that a loss at the central warehouse would not be a catastrophic blow to the company's distribution system. Splitting the inventory between four regional warehouses illustrates which risk management technique?
A) duplication
B) risk transfer
C) separation
D) risk avoidance
Answer: C
Q2) Preloss objectives of risk management include which of the following?
I.Preparing for potential losses in the most economical way
II.Reduction of anxiety
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
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Page 5
Chapter 4: Enterprise Risk Management and Related Topics
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56 Verified Questions
56 Flashcards
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Sample Questions
Q1) Reasons to adopt an enterprise risk management plan include all of the following EXCEPT
A) to increase earnings volatility.
B) to treat risks facing the business in a more holistic way.
C) to increase net income.
D) to gain an advantage over competitors.
Q2) Which statement is (are) true regarding property and liability insurance market conditions?
I.Premiums are high when the insurance market is "hard."
II.Underwriting standards are tight when the insurance market is "soft."
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) A method of characterizing the relationship between two or more variables and then using the characterization to make a prediction is called
A) loss analysis.
B) time value of money analysis.
C) regression analysis.
D) capital budgeting analysis.
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Chapter 5: Types of Insurers and Marketing Systems
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46 Verified Questions
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Sample Questions
Q1) Which of the following statements about mutual insurers is true?
A) They are legally organized as partnerships.
B) They have a board of directors which is selected by state insurance departments.
C) They are owned by their stockholders.
D) They may pay dividends to their policyholders.
Q2) Why are some mutual insurers referred to as "assessment mutuals"?
A) They charge low premiums because the loss exposures of their insureds are thoroughly assessed before a policy is written.
B) They are noted for being very thorough in their assessment of investment opportunities.
C) They are assessed for state premium taxes only if they make a profit.
D) They can assess policyholders if premiums are insufficient to pay losses and expenses.
Q3) Which of the following statements about stock insurers is true?
A) They issue assessable policies.
B) They are not permitted to write property and liability insurance.
C) Stockholders bear any losses and share in any profits.
D) They are owned by their policyholders.
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Chapter 6: Insurance Company Operations
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52 Flashcards
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Sample Questions
Q1) Which of the following statements about claims settlement is true?
A) Agents are never authorized to settle claims.
B) Independent adjustors may be used in a geographic area where the volume of business is too low for an insurer to have its own adjustors.
C) A public adjustor is a salaried employee who works for one insurer.
D) A staff claims representative is hired by a policyholder to represent him or her if the policyholder does not agree with the claim settlement offered by the insurer.
Q2) A reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer is called
A) a reinsurance pool.
B) automatic treaty reinsurance.
C) retrocession.
D) facultative reinsurance.
Q3) Insurers obtain data that can be used to determine rates from A) pricing pools.
B) insurance advisory organizations.
C) banks.
D) reciprocal exchanges.
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Chapter 7: Financial Operations of Insurers
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48 Flashcards
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Sample Questions
Q1) One item that appears on an insurance company's financial statements is a liability that represents an estimate of the claims reported and adjusted but not yet paid, claims reported and filed but not yet adjusted, and claims incurred but not yet reported to the company. This liability is called the insurer's
A) net income.
B) loss reserves.
C) admitted assets.
D) unearned premium reserve.
Q2) A strip-mall includes eight identical-sized retail units. All of the units were built at the same time and each has an identical sprinkler system. Unit number two is a dry cleaning business. Unit number three is a bar and grill. Unit number four is a dress shop. The owners of these three units are all insured by the same insurance company, but the property insurance premiums vary significantly. Which of the following rating factors best explains the difference in premiums?
A) exposure
B) protection
C) construction
D) occupancy
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Chapter 8: Government Regulation of Insurance
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51 Verified Questions
51 Flashcards
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Sample Questions
Q1) Which of the following is a principal method of ensuring the solvency of insurers?
A) requiring submission of annual financial statements to state regulators
B) tracking and investigating market conduct complaints against insurers
C) disciplining agents of the insurer for illegal sales practices
D) regulating the forms (applications and policies) employed by the insurer
Q2) The risk-based capital requirements for life insurers are based on a formula that considers four types of risk. One risk reflects whether the insurer will have enough surplus if claims are higher than expected. This risk is called
A) asset risk.
B) insurance risk.
C) interest rate risk.
D) business risk.
Q3) Which of the following is an advantage of federal regulation of insurance over state regulation of insurance?
A) greater opportunity for innovation
B) more effective treatment of systemic risk
C) greater responsiveness to local needs
D) more competent regulators
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10
Chapter 9: Fundamental Legal Principles
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Sample Questions
Q1) Which of the following is a fundamental purpose of the principle of indemnity?
A) to reduce moral hazard
B) to minimize physical hazards
C) to settle property insurance losses on a replacement cost basis
D) to require deductibles in all property insurance policies
Q2) Which of the following statements about the principle of insurable interest is (are) true?
I.It makes it difficult to measure the amount of an insured's loss.
II.It reduces moral hazard.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) The authority of an agent to perform all incidental acts necessary to fulfill the purposes of the agency agreement is called
A) implied authority.
B) declared authority.
C) apparent authority.
D) express authority.
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Page 11
Chapter 10: Analysis of Insurance Contracts
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49 Flashcards
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Sample Questions
Q1) The purpose of a coordination-of-benefits provision in group health insurance plans is to
A) determine which plan pays first if more than one plan covers a loss.
B) determine which health care provider an insured may use for his or her care.
C) determine if the calendar-year deductible has been satisfied by the insured.
D) determine if the employee is eligible for coverage under the group health plan.
Q2) Which of the following statements about the definition of the insured is (are) true?
I.In some cases, a person who is not specifically named may be classified as an insured. II.Under no circumstances can more than one person be named as an insured.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 11: Life Insurance
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) To calculate a human life value, it is necessary to deduct certain costs from a person's average annual earnings. These costs include
A) funeral costs.
B) income taxes.
C) investment income.
D) pension benefits after retirement.
Q2) All of the following are defects which limit the usefulness of the human life value approach in determining the correct amount of life insurance to purchase EXCEPT
A) The effects of inflation are ignored.
B) Other sources of income for survivors are ignored.
C) Earnings are assumed to remain constant.
D) Earnings during the individual's productive lifetime are ignored.
Q3) What happens to the premiums for yearly renewable term insurance as an insured gets older?
A) They increase at an increasing rate.
B) They increase at a decreasing rate.
C) They decrease at a constant rate.
D) They remain level.
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13
Chapter 12: Life Insurance Contractual Provisions
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Sample Questions
Q1) Which of the following statements is (are) true regarding exclusions in life insurance contracts?
I.Life insurance policies are remarkably restrictive, including numerous exclusions.
II.A life insurer may exclude death attributable to certain activities or hobbies disclosed on the application.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) A contingent beneficiary in a life insurance policy has the right to
A) receive the policy proceeds if the primary beneficiary dies before the insured.
B) share the policy proceeds with the primary beneficiary.
C) change the beneficiary designation under specified circumstances.
D) exercise policy rights if the insured is incapacitated.
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14
Chapter 13: Buying Life Insurance
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48 Flashcards
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Sample Questions
Q1) Beth purchased a $50,000 nonparticipating whole life insurance policy. The annual premium was $1,278. The cash value of the policy after 10 years will be $13,740. The future value of $1 deposited at the start of the year for 10 years, assuming 5 percent interest, is $13.207. If the premiums were invested at 5 percent interest for 10 years, the premiums would grow to $16,878.55. Assuming 5 percent interest, what is the surrender cost of this policy, per thousand per year, over the first 10 years the policy is in force?
A) $4.48
B) $4.75
C) $4.92
D) $5.16
Q2) Actuaries at Term Life Insurance Company calculated the net single premium per thousand for a five-year term policy for a man age 32 to be $5.04. To calculate the net level premium for this policy, the net single premium should be A) divided by 5.
B) divided by the future value life annuity due factor for $1 for five years. C) divided by the present value life annuity due factor for $1 for five years. D) divided by the present value ordinary life annuity factor for $1 for five years.
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Page 15
Chapter 14: Annuities and Individual Retirement Accounts
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50 Verified Questions
50 Flashcards
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Sample Questions
Q1) Which of the following statements is true concerning traditional and Roth IRAs?
A) The investment income portion of Roth IRA distributions must be reported as taxable income.
B) Roth IRA contributions are tax deductible.
C) There are minimum distribution requirements for traditional IRAs.
D) There are no limits on the tax deductibility of traditional IRA contributions once the account owner has reached age 50.
Q2) Which of the following statements is (are) true with respect to an equity-indexed annuity?
I.The maximum percentage gain is usually capped.
II.There is no downside protection against loss of principal if the annuity is held to term.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 15: Health-Care Reform; Individual Health Insurance Coverages
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47 Verified Questions
47 Flashcards
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Sample Questions
Q1) Which of the following statements about long-term care insurance is (are) true?
I.Long-term care insurance is inexpensive, especially if purchased at older ages.
II.Purchasers have a choice of daily benefits and benefit periods.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Because of the Affordable Care Act, all new medical expense plans that offer individual and group coverage must accept all individuals and employers in the state who apply for coverage. These insurers are required to continue to renew the coverage at the option of the individual or plan sponsor. Thus, under the Affordable Care Act, the renewal provision is
A) conditionally renewable.
B) guaranteed issue.
C) nonrenewable.
D) renewable at the insurer's option.
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Chapter 16: Employee Benefits: Group Life and Health Insurance
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53 Verified Questions
53 Flashcards
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Sample Questions
Q1) What is the purpose of stop-loss insurance that is used with self-insured group medical expense plans?
A) to require employees to buy insurance for losses in excess of some specified amount
B) to have a commercial insurer pay claims that exceed a specified limit
C) to obtain administrative services from a commercial insurer
D) to exempt self-insured plans from state insurance laws that require mandated benefits
Q2) Which of the following statements about group short-term disability income plans is true?
A) Most plans have a short elimination period for accidents but cover sickness from the first day of disability.
B) Disability is usually defined in terms of a worker being unable to work in any substantial, gainful, employment.
C) The amount of disability income benefits typically is equal to some percentage of a worker's normal earnings.
D) Most short-term plans cover occupational disability only.
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18
Chapter 17: Employee Benefits: Retirement Plans
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Sample Questions
Q1) All of the following statements about 403(b) plans are true EXCEPT
A) Contributions to a 403(b) reduce an employee's taxable income.
B) 403(b) plans are designed for employees of public school systems and tax-exempt organizations.
C) The law limits the amount of income that an employee can elect to defer under a 403(b) plan.
D) Matching employer contributions are not permitted under a 403(b) plan.
Q2) Vesting refers to
A) the employer's right to terminate contributions if a pension plan is adequately funded.
B) the employer's right to recapture employee contributions to a pension plan if employment terminates prior to retirement.
C) the employee's right to the employer's contributions or benefits attributable to the contributions if employment terminates prior to retirement.
D) the employer's right to discriminate against non-highly compensated employees when determining pension benefit levels.
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Chapter 18: Social Insurance
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Sample Questions
Q1) Which of the following statements about the Medicare prescription drug benefit is (are) true?
I.Beneficiaries select a prescription drug plan and pay monthly premiums, with the premium reduced or waived for low-income beneficiaries.
II.The benefit provides first-dollar coverage of prescription drugs up to a maximum of $10,000 per year, but no coverage after $10,000.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following is a current problem with workers compensation programs?
A) declining involvement of lawyers in workers compensation claims
B) exclusion of deaths and injuries attributable to terrorism
C) exclusion of benefits for occupational illness
D) overuse of opiate prescription drugs in workers compensation.
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Chapter 19: The Liability Risk
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56 Verified Questions
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Sample Questions
Q1) A legal wrong for which the law allows a remedy in the form of money damages is a A) crime.
B) breach.
C) misdemeanor.
D) tort.
Q2) Under state workers compensation programs, employers may not use common law defenses to defend against claims of workers who are injured on the job. In such cases, proof of a worker's injury is proof of responsibility of the employer. Because of this characteristic, workers compensation is an example of
A) personal injury.
B) strict (absolute) liability.
C) comparative negligence.
D) tort liability.
Q3) Which of the following is an intentional tort?
A) slander
B) negligence
C) strict liability
D) murder
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21
Chapter 20: Auto Insurance
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55 Verified Questions
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Sample Questions
Q1) Dennis was involved in an accident. He believes the damage to his auto is $7,000. His insurer believes the damage is only $3,500. Which PAP provision is designed to handle disputes between the insurer and the insured over the amount of the loss?
A) other insurance provision
B) agreed amount endorsement
C) coinsurance provision
D) appraisal provision
Q2) The appraisal provision in the Personal Auto Policy is used to determine the
A) value of a loss payable under property damage liability.
B) amount paid for a physical damage loss to the insured's auto if the insured and insurer disagree.
C) amount of auto insurance that should be purchased for an older/antique car.
D) value of the loss payable under the medical payments coverage.
Q3) All of the following statements about Part D (coverage for damage to your auto) of the PAP are true EXCEPT
A) Coverage may be purchased with or without collision insurance.
B) Losses are paid regardless of fault.
C) Coverage applies to a nonowned auto occasionally driven by an insured.
D) No coverage is provided for newly-acquired vehicles.
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Page 22
Chapter 21: Auto Insurance (continued)
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Sample Questions
Q1) Some insurers are experimenting with the use of an electronic device that can be installed in a vehicle to track driving behavior. The insurers then use the information to help determine the appropriate auto insurance premium to charge. Such devices are called
A) data recorders.
B) radar detectors.
C) original equipment manufacturer parts.
D) thresholds
Q2) Some insurance companies intentionally seek to insure motorists with poor driving records. These insurers commonly insure drivers who have been turned-down or canceled by other insurers. What name is given to insurers who provide coverage to these higher-than-average risks drivers?
A) alien insurers
B) guaranty fund insurers
C) specialty insurers
D) surplus lines insurers
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23
Chapter 22: Homeowners Insurance, Section I
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58 Verified Questions
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Sample Questions
Q1) Which of the following statements about the personal property coverage (Coverage C) of the Homeowners 3 policy is (are) true?
I. There are special limits of liability that apply to certain types of personal property.
II. The full amount of coverage applies only if the property is permanently located at any residence of the insured.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) All of the following are duties of the mortgagee under the standard mortgage clause EXCEPT
A) to reimburse the insurer for any loss payments.
B) to notify the insurer of any change in ownership of the property of which the mortgagee is aware.
C) to provide a proof of loss form if the insured fails to do so.
D) to pay the premium if the insured fails to do so.
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Chapter 23: Homeowners Insurance, Section II
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Sample Questions
Q1) Which of the following statements about the coverage for medical payments to others (Coverage F) under the homeowners policy is true?
A) Medical payments may be made for any resident of the named insured's household.
B) Medical expenses incurred within 3 years of an accident are covered.
C) Medical payments are made only if the insured is not legally liable.
D) Covered medical expenses are limited to emergency room charges.
Q2) For which of the following situations would there be personal liability coverage under the homeowners policy?
I.The named insured accidentally injures her husband with a hammer.
II.The named insured breaks his wife's valuable vase while practicing his golf swing.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 24: Other Property and Liability Insurance Coverages
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Sample Questions
Q1) All of the following are considered floods under the federal flood insurance program EXCEPT
A) the overflow of tidal waters.
B) the accumulation of surface water after a heavy rain.
C) a mudslide caused by an accumulation of water after a heavy rain.
D) the discharge of water from a home appliance, such as a water heater or washing machine.
Q2) Valerie's home does not qualify for coverage under a standard homeowners policy. Valerie would like to have "open-perils" (all-risks) coverage on her dwelling and named-perils coverage on her personal property. Which of the following policies should Valerie purchase?
A) Dwelling Property 1-Basic Form
B) Dwelling Property 2- Broad Form
C) Dwelling Property 3-Special Form
D) All of these policies provide "open perils" coverage on the dwelling and named-perils coverage on personal property.
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Chapter 25: Commercial Property Insurance
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Sample Questions
Q1) Renee is risk manager of XYZ Company. She purchased a Commercial Package Policy for her company and added one optional coverage. This option suspends the coinsurance clause and substitutes a new agreement covering any loss in the same proportion that the limit of insurance purchased bears to a value specified in the declarations. This provision is known as
A) waiver of inventory coverage.
B) inflation guard coverage.
C) agreed value coverage.
D) replacement cost coverage.
Q2) Reimbursement for spoilage of frozen food caused by failure of a refrigeration unit at a frozen foods processor can be covered under A) equipment breakdown insurance.
B) extra expense insurance.
C) builders risk insurance.
D) difference in conditions insurance.
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Chapter 26: Commercial Liability Insurance
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Sample Questions
Q1) Which of the following losses is generally covered under a commercial umbrella policy?
A) liability arising out of workers compensation laws
B) liability arising out of pollution
C) liability arising out of use of a business auto
D) the cost of recalling defective products
Q2) Which of the following statements is true concerning the ISO employment-related practices liability form?
A) Coverage is provided without a co-payment provision.
B) Legal defense costs are included as part of the policy limit.
C) Wrongful termination is excluded from coverage.
D) Liability to employees is excluded from coverage.
Q3) The auto dealers coverage form includes coverage for violating odometer (mileage) disclosure laws and selling a vehicle where there was a title defect. Which coverage under the auto dealers coverage form would respond to such claims?
A) garagekeepers liability coverage
B) liability coverage for "covered autos"
C) general liability insurance coverage
D) acts, errors or omissions liability coverage
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Chapter 27: Crime Insurance and Surety Bonds
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Sample Questions
Q1) In the ISO Commercial Crime Coverage form, robbery is defined as the
A) unlawful taking of property to the deprivation of the insured.
B) unlawful taking of property from the care and custody of a person by someone who has caused or threatens to cause bodily harm or who has committed an unlawful act witnessed by that person.
C) unlawful taking of money or securities through the alteration of a negotiable instrument.
D) unlawful taking of property from inside the premises by someone who unlawfully enters or leaves the premises as evidenced by marks of forcible entry or exit.
Q2) Graham is a cashier at a convenience store. A customer pulled a gun on him, and said that he would shoot Graham unless he gave him all the money in the cash register. This crime, which is covered under the ISO commercial crime coverage form, is called A) extortion.
B) murder.
C) robbery.
D) burglary.
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