Unit-4: Risk Management and Reinsurance Quiz

What is the primary objective of risk management?

• To maximize profits

• To mitigate the adverse effects of loss

• To eliminate all risks

• To focus solely on speculative risks

Which of the following is NOT a core economic function of insurance?

• Risk transfer

• Risk pooling

• Increasing tax liabilities

• Facilitating economic activity

What does reinsurance primarily help insurers achieve?

• Eliminate all risks

• Reduce their exposure to large losses

• Increase operational costs

• Avoid paying claims

Which legal principle requires both the insurer and reinsurer to disclose all material facts?

• Indemnity

• Utmost good faith

• Subrogation

• Contribution

Which of the following best describes 'loss severity'?

• The frequency of losses over a given period

• The total number of losses in a year

• The probable size of losses that may occur

• The cost of avoiding losses

Why might a company choose retention as a risk financing technique?

• Because it eliminates all risks

• Because it ensures immediate reimbursement

• Because it can save money on insurance premiums and lower expenses

• Because it guarantees no losses will occur

How does reinsurance contribute to income smoothing for insurers?

• By increasing the volatility of financial results

• By absorbing large losses and reducing capital requirements

• By eliminating the need for reserves

• By transferring all risks to reinsurers

What is the main difference between facultative and treaty reinsurance?

• Facultative reinsurance covers entire portfolios, while treaty reinsurance covers individual risks

• Treaty reinsurance is negotiated for each policy, while facultative reinsurance is not

• Facultative reinsurance is negotiated for individual risks, while treaty reinsurance covers portfolios of risks

• Treaty reinsurance is optional, while facultative reinsurance is mandatory

An insurance company wants to underwrite more business but lacks sufficient capital. Which reinsurance method should it use to enhance its capacity?

• Proportional reinsurance

• Non-proportional reinsurance

• Self-retention

• Avoidance

An insurer notices that insured individuals with higher risks are more likely to purchase policies, leading to higher-than-expected claims. This scenario illustrates which economic concept?

• Moral hazard

• Adverse selection

• Information asymmetry

• Arbitrage