Financial Risk Management
Textbook Exam Questions
Course Introduction
Financial Risk Management introduces students to the fundamental concepts, tools, and techniques used to identify, assess, and mitigate various types of financial risks faced by organizations, including market, credit, liquidity, and operational risks. The course covers risk measurement methodologies such as Value at Risk (VaR), stress testing, scenario analysis, and the use of derivatives and other hedging strategies. Students will also explore regulatory frameworks, risk governance, and the role of financial institutions in managing risk. Through case studies and real-world examples, learners develop practical skills in risk analysis and the application of modern risk management practices in both domestic and global contexts.
Recommended Textbook
Introduction to Risk Management and Insurance 10th Edition by Mark S. Dorfman
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Page 2
Chapter 1: Introduction to Enterprise Risk Management and Insurance
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Sample Questions
Q1) The correct order of the steps in the Risk Management Process is:
A) Establish Goals, Identify Potential Loss Exposure, Measure Potential Loss Exposure, Choose Risk Handling Techniques, Implement Techniques and Monitor Effectiveness
B) Establish Goals, Choose Risk Handling Techniques, Identify Potential Loss Exposure, Measure Potential Loss Exposure, Implement Techniques and Monitor Effectiveness
C) Establish Goals, Choose Risk Handling Techniques, Measure Potential Loss Exposure, Identify Potential Loss Exposure, Implement Techniques and Monitor Effectiveness
D) Establish Goals, Measure Potential Loss Exposure, Identify Potential Loss Exposure, Choose Risk Handling Techniques, Implement Techniques and Monitor Effectiveness
Answer: A
Q2) Hazards may increase either the frequency or the severity of losses. A)True
B)False Answer: True
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Chapter 2: Risk Identification
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Q1) Enterprise risk management is concerned with:
A) both pure and speculative risks
B) insurance contracts
C) pure risks
D) subjective risks
Answer: A
Q2) Property Risk:
A) is an example of a speculative risk
B) is an example of an indirect risk
C) only relates to buildings
D) is an example of a pure risk
Answer: D
Q3) A person can be found negligent even though his failure to perform some act was unintentional.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Risk Assessment and Pooling
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Sample Questions
Q1) "Independence" in an insurance pool means:
A) the bad risks pay more for insurance than good risks
B) the members of the pool exhibit the same level of risk
C) those who experience losses have their premiums raised
D) the occurrence of one event makes it neither more nor less probable that the other occurs
Answer: D
Q2) Which of the following is not a risk measure?
A) Standard Deviation
B) Confidence Interval
C) Variance
D) All of the above are risk measures
Answer: B
Q3) The use of loss distributions lead to a subjective estimate of risk exposure.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Risk-Handling Techniques: Loss Control, Risk Transfer,
and Loss Financing
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Q1) All of the following are true about captive insurers, <u>except</u>:
A) that they are located in locations like Bermuda
B) that claims-settlement often take longer
C) that the parent company or companies save on overhead and profits that they would otherwise pay to third insurance companies
D) that the parent company or companies are in some cases allowed to deduct their premiums from their tax liability
Q2) Assume you own an antique car. Your prospective insurance company indicates that they will not insure your car unless you take some loss prevention steps to avoid theft. Which of the following steps is the best loss prevention measure with regards to theft?
A) Always keep a canvas cover over the car to hide it.
B) Never drive in rainy weather.
C) Never drive in big cities.
D) Store the car in a closed and locked garage.
Q3) The transfer/retention risk management decision is unimportant and therefore risk managers should not waste their time on the decision.
A)True
B)False
Page 6
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Chapter 5: Risk-Handling Techniques: Diversification and Hedging
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Q1) Exchange rate losses arise when the value of the domestic currency falls relative to foreign currencies.
A)True
B)False
Q2) What is the essential difference between a call option and a put option?
A) A call option transaction occurs now, while a put option transaction takes place in the future.
B) An call option transaction is the right to purchase the underlying asset, while a put option is the right to sell the underlying asset.
C) An call option transaction is not standardized, while put option transaction is standardized.
D) An call option transaction deals with financial assets, while a put option transaction deals with commodities.
Q3) Explain when and why a call option has value.
Q4) When the option holder decides to exercise the option, the option writer has the option to not fulfill the request.
A)True
B)False
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Chapter 6: Fundamentals of Insurance
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Sample Questions
Q1) Which of the following is a true statement?
A) Insurers are significant financial intermediaries in the U.S. economy.
B) Property insurers are prohibited from insuring commercial real estate.
C) The insurance companies in the U.S. are estimated to be very profitable.
D) Both A and C above are true statements.
Q2) Rusty is the president of The Huge Insurance Company. His Vice-President in charge of Finance comes to him one day and says "Rusty, our combined ratio for the year is 95%." Rusty replies, "Wooo hooo, profit sharing bonuses for everyone!" Why isn't Rusty upset about this combined ratio?
A) The company probably made enough money on its investments to make up for the underwriting losses.
B) The company has actually made a profit on its insurance business.
C) Rusty is not very bright and doesn't understand what the combined ratio really means.
D) The combined ratio is not an important indicator of underwriting results.
Q3) What is cash flow underwriting? Why is it a concern for insurance companies?
Q4) Insurance increases the number of intentional losses that occur in society.
A)True
B)False
Q5) Explain briefly why insurance functions as an antimonopoly device.
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Chapter 7: Insurable Perils and Insuring Organizations
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Q1) Which of the following is not a type of mutual insurance organization?
A) Assessment
B) Advanced-premium
C) Perpetual
D) Reciprocal
Q2) A reciprocal exchange is:
A) a nonprofit corporation
B) unincorporated
C) a mutual insurance company
D) a federal insurance company
Q3) Mrs. Barker has a poodle that she loves very much. The poor little dog is killed in a house fire, and Mrs. Barker asks her homeowners insurance company to pay $100,000 for the loss of the dog. The insurer denies the claim. On what grounds would it be able to do this?
A) Too much moral hazard potential exists with the loss of pets.
B) It's impossible to measure, economically, the value of a beloved pet.
C) Animals are never insurable items.
D) The insurer could not legally deny the claim.
Q4) How do a reciprocal exchange and a mutual insurance company differ?
Q5) What are the basic differences between a stock and a mutual insurance company?
Page 9
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Chapter 8: Insurance Functions
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Sample Questions
Q1) Which of the following pieces of information would be the LEAST useful to a property insurance underwriter?
A) Age of the property owner
B) Age of the property
C) Use of the property
D) What the surrounding properties are like
Q2) The brokerage function does not exist in life insurance sales.
A)True
B)False
Q3) The independent agent system:
A) is used by direct writing companies
B) uses agents who own their own business
C) is used only in life insurance
D) requires agents to be paid a flat salary
Q4) Insurance brokers are:
A) compensated by a flat salary
B) legally, agents of the insurance company
C) only used in life insurance
D) legally, agents of the insurance consumer
Q5) What are the steps in the loss adjustment process?
Page 10
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Chapter 9: Insurance Markets: Economics and Issues
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Q1) Which of the following is the best driver to maintain an adequate supply of insurance at affordable prices?
A) Regulations
B) Excluding high-risk applicants
C) Excluding low-risk applicants
D) Competition among insurers
Q2) All the following are true concerning FAIR (Fair Access to Insurance Requirements) plans except:
A) they are one possible solution to the insurance availability problem
B) they are found in only four states
C) they are designed to deal with unavailability of property insurance
D) they have not been profitable in most states most years
Q3) The efficient insurance market requires all of the following conditions <u>except</u>:
A) numerous sellers and buyers
B) well-informed consumers
C) numerous purchase substitutes (homogeneity)
D) a government subsidy for lower-income citizens
Q4) Explain briefly why increasing or decreasing price artificially can decrease the supply of insurance.
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Chapter 10: Insurance Regulation
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Q1) McCarran-Ferguson Act expressed the intent of the federal government to forever abandon to the states the right to regulate insurance.
A)True
B)False
Q2) The best argument for continued state insurance regulation is that state regulation is cheaper and more efficient than federal regulation would be.
A)True
B)False
Q3) The Gramm-Leach-Bliley Act took effect on January 1, 1998.
A)True
B)False
Q4) What is the difference between prior approval and open rating laws?
Q5) A foreign insurer is:
A) one that is home-officed outside the U.S.
B) one that has offices both in the U.S. and in other countries
C) one that is incorporated in another state
D) one that has not been in existence for at least three fiscal years
Q6) Explain what a policy reserve is. How is a policy reserve calculated?
Q7) What is the overall regulatory objective for a state's rate regulations?
Page 12
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Chapter 11: Insurance Contracts
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Sample Questions
Q1) While driving home from work, Bailey's car is struck from behind by a van full of drunken college students. Asimov is the driver of the van. The resulting damage to Bailey's car totals $7,000. Bailey files a claim under his own auto insurance policy to have his car repaired, but his insurance policy only covers $6,000 of the $7,000 loss. Bailey pays the remaining $1,000 of the loss out of his pocket. Which of the following is a true statement?
A) Bailey has no legal right of subrogation against Asimov for the $1,000 that he had to pay out of his pocket.
B) Bailey's insurer has no legal right of subrogation against Asimov for the $6,000 of damages it had to pay to Bailey.
C) Bailey has the right under the principle of indemnity to now sue Asimov personally for the $7,000 damages to his car.
D) Both Bailey and his insurer have subrogation RIGHTS against Asimov for the damages he (Asimov) caused.
Q2) Describe the purposes of deductibles.
Q3) When entering into a legally enforceable insurance contract consideration must exist. Explain what consideration is and the form it takes in insurance contracts.
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Chapter 12: The Personal Auto Policy
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Q1) Which of the following is true?
A) Suing an uninsured motorist for damages they cause you to suffer is not a promising source of recovery.
B) If you are struck by an uninsured motorist and want your PAP's Uninsured Motorist coverage to pay for your bodily injuries, you must convince your insurer that the Uninsured Motorist was at-fault in the incident.
C) If you cannot clearly establish that an uninsured motorist was at fault in the accident, you may have to enter the arbitration process to get your insurer to pay for your damages under the PAP's Uninsured Motorist coverage.
D) All of the above
Q2) Ron's PAP has a $500 deductible for Collision and a $0 deductible for Other than Collision. Ron collides with a wild deer, causing $6,000 of damage to his car. He can recover from the insurer:
A) $6,000
B) $5,500
C) $6,500
D) $0
Q3) Explain the purpose of Uninsured Motorist coverage.
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Chapter 13: Homeowners Insurance
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Q1) The term "named insured" includes spouses and children (if any are living at home) in the homeowners (HO) insurance policy.
A)True
B)False
Q2) Replacement cost is most closely synonymous with:
A) original purchase price
B) actual cash value less depreciation
C) accounting book value
D) reconstruction cost
Q3) The replacement cost of a home covered under the HO-3 policy is $100,000. Assume the home is insured for $50,000 and a $10,000 loss occurs (replacement cost). Also assume depreciation is set at 10 percent. Assume that there is no deductible. How much will the insured recover if repaired?
A) $9,000
B) $10,000
C) $8,000
D) $6,250
Q4) Explain why there is a coinsurance clause applied to the building structures. How does it work?
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Chapter 14: Professional Financial Planning
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Q1) Financial planners:
A) should be knowledgeable of many topics
B) will make decisions for their clients
C) can assist people in the financial planning process
D) A and C above
Q2) Federal Estate Taxes:
A) are also called uniform transfer taxes
B) are different from state to state
C) are levied on the fair market value of the gross estate
D) are levied on the taxable estate
Q3) Why would a company favor an entity plan over a cross-purchase plan?
A) Tax benefits
B) An entity plan has fewer policies
C) When they have a lot of so-called "key employees"
D) When a buy-and-sell agreement is not feasible
Q4) Why would a company favor a cross-purchase plan over an entity plan?
A) Tax benefits
B) A cross-purchase plan has fewer policies
C) When they have a lot of so-called "key employees"
D) When a buy-and-sell agreement is not feasible
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Chapter 15: Life Insurance Policies
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Sample Questions
Q1) Premiums for industrial insurance are collected at the insured's home, often on a weekly basis.
A)True
B)False
Q2) After taking an introductory course in insurance, your parents ask you what type of life insurance policy they should purchase if they want permanent death protection and the potential for earning a relatively high rate of return on their cash value. Which type of life insurance would you suggest?
A) Term life
B) Whole life
C) Universal life
D) Variable life
Q3) There is more Individual Life Insurance Coverage in the United States compared to Group Life Insurance Coverage.
A)True
B)False
Q4) Mortality tables assume that all people die at age 95.
A)True
B)False
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Chapter 16: Standard Life Insurance Contract Provisions and Options
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Q1) One life insurance nonforfeiture option allows the insured to convert a whole life policy into term insurance.
A)True
B)False
Q2) The guaranteed insurability option allows the insured to:
A) purchase additional amounts of life insurance without proof of insurability
B) purchase life insurance for his friends without proof of insurability
C) retain coverage even if the insurer learns that the insured lied on the insurance application
D) receive a discount for taking an extensive physical examination before coverage begins
Q3) Only whole life insurance policies have a grace period.
A)True
B)False
Q4) The owner of a life insurance policy has which of the following rights under the contract?
A) Select the beneficiary
B) Discontinue the policy's coverage
C) Borrow the cash value
D) All of the above
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Chapter 17: Annuities
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Q1) The amount paid for an annuity divided by the expected return from the annuity is the:
A) FICA deduction ratio
B) rate of return on the annuity
C) exclusion ratio
D) none of the above
Q2) Explain how an annuity 10 years certain would work.
Q3) Which of the following does not influence how an insurer calculates monthly annuity benefits?
A) Age
B) Health status of insured annuitant
C) Sex
D) Amount of the premium the annuitant has paid
Q4) Oprah has $250,000 and wishes to purchase a single-premium annuity. All other things being equal, which of the following annuities will provide her with the smallest monthly liquidation payment?
A) 20-year period certain, joint and 2/3 survivor, single premium
B) 20-year period certain, single premium
C) 20-year period certain, joint and survivor, single premium
D) Straight life annuity, single premium.
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Chapter 18: Health Insurance and Disability Income
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Q1) Which one of the following is not a reason for the increase in U.S. health care costs?
A) More expensive medical equipment and buildings
B) Increased medical malpractice insurance costs
C) Hospital labor operating costs
D) Increased cost of funeral expenses
Q2) Insurers do not sell Medicaid policies; they are provided by the government.
A)True
B)False
Q3) Granny Mayberry's health insurance policy has a $500 annual aggregate deductible, 80/20 cost sharing deductible, and a maximum annual out-of-pocket cap of $5,000. She wrecks her Harley and breaks her hip, and her total medical bills for the injury are $12,890. How much will her insurer pay for this claim?
A) $7,890
B) $10,312
C) $9,912
D) $12,890
Q4) Explain how a typical major medical contract works.
Q5) Distinguish between cost shifting and cost containment in health care.
Q6) What is the difference between an HMO and a PPO in providing health care?
Page 20
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Chapter 19: Employee Benefits
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Q1) A group disability plan that considers Social Security disability benefits is referred to as an integrated plan.
A)True
B)False
Q2) The traditional American method of providing retirement and health benefits is best described as a democratic socialist approach.
A)True
B)False
Q3) When you are "100% vested" in a pension plan, what does that mean?
A) You own 100% of your contributions, but you do not own the employer's contributions to the plan.
B) You own 100% of the employer's contributions, but you do not own your contributions to the plan.
C) You own 100% of your contributions to the plan.
D) You own 100% of the employer's contributions to the plan.
Q4) One requirement of group insurance is that the group be formed for the purpose of purchasing coverage.
A)True
B)False
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Chapter 20: Social Security
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Q1) Many HMOs have not enjoyed providing managed care for Medicare because:
A) the reimbursement schedule is inadequate or unattractive
B) they object to being forced to participate in the program
C) older patients are typically unprofitable for all insurers and health care providers
D) both A and B
Q2) Social Security eligibility is based on how many ________ are earned.
A) years of full-time employment
B) total dollars
C) quarters of coverage
D) units of insurance
Q3) Which of the following benefits is not provided under the Social Security program?
A) Survivor benefits
B) Disability benefits
C) Retirement benefits
D) Welfare payments to poor people
Q4) What are the requirements for receiving Social Security disability benefits?
Q5) Explain what is meant by a "blackout period" as it applies to Social Security benefits.
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Page 22
Chapter 21: Unemployment and Workers Compensation Insurance
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Q1) Workers' compensation covers all of the following losses<u> except</u>:
A) medical expenses resulting from a job-related injury
B) rehabilitation expenses resulting from a job-related injury
C) lost wages during a disability that results from job-related injuries
D) medical expenses resulting from an at-home accident
Q2) The major change established by the passage of workers' compensation laws was to:
A) help lawyers obtain more business
B) substitute the employer's liability without fault for the common law doctrine of negligence
C) enable the employer to effectively defend itself in a liability suit
D) bar the employee from recovery for job related injuries
Q3) Workers' compensation is likely to cover all the following <u>except</u>:
A) 100 percent of lost wages during disability
B) medical expenses
C) rehabilitation expenses
D) reasonable funeral expenses
Q4) Explain how a worker can be disqualified for unemployment benefits.
Q6) What are the general types of benefits provided under workers' compensation? Page 23
Q5) Explain the economic significance for the existence of unemployment insurance.
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Page 24
Chapter 22: Commercial Property Insurance
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Q1) Which of the following is <u>not</u> a function of the Insurance Services Office (ISO)?
A) Collecting loss data
B) Developing standard insurance policies
C) Coordinating prices between insurance companies
D) Providing public information about insurance
Q2) If the Bartow Publishing House sends a shipment of textbooks to the university bookstore via a common carrier, it needs:
A) no inland marine insurance because the trucking company already has this coverage
B) inland marine insurance because a shipper cannot recover from a common carrier
C) liability insurance to sue the common carrier for the carrier's legal liability
D) inland marine insurance, even though it can collect a liability claim from the carrier, because such collection could be slow and potentially expensive
Q3) "Cargo" and "freight" losses are the same thing in ocean marine insurance.
A)True
B)False
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Chapter 23: Commercial Liability Insurance
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Q1) Which of the following is <u>not</u> a defense of the tort liability-system?
A) Encourages good driving
B) Reduces fraud
C) Places the blame for negligence on those responsible
D) Maximizes the dollars going to the injured due to legal involvement of attorneys
Q2) All of the following have contributed to the increasing costs corporate liability risks, <u>except</u>:
A) higher tax rates
B) the passage of acts protecting the environment
C) more litigious consumers
D) decreased use of contributory negligence
Q3) Businesses typically insure their primary liability exposures using:
A) the commercial general liability policy
B) the business owners liability package policy
C) hold-harmless agreements
D) the comprehensive business policy
Q4) Explain the idea behind business liability umbrella policies.
Q5) Explain the need for a claims-made form. Explain how a liability insurance contract written on a claims-made form works.
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