Assignment:
Q1. ABC Health Insurance Company sells health insurance in one state. Recently, that state's legislature passed a law forbidding health insurers from considering an individual's health history when selecting applicants to insure. This change in law will increase the possibility of unprofitable results for ABC. This type of hazard is an example of
A) physical hazard
B) attitudinal hazard
C) moral hazard
D) legal hazard
Q2. Five years ago, Shannon decided to start investing. She likes ABC Telecom Company, and she invests in the company each month. As ABC Telecom is the only company in which she invests, Shannon's financial well-being will be harmed if the price of ABC Telecom stock drops significantly. The risk of investment loss can be reduced if Shannon invests in other companies and other types of financial assets. For Shannon, the risk she faces with regard to her investments is a(n)
A) nondiversifiable risk
B) diversifiable risk
C) pure risk
D) enterprise risk
Q3. Which of the following statements regarding insurance and hedging is true?
A) Both insurance and hedging reduce risk but do not involve the transfer of risk.
B) Hedging reduces objective risk while insurance involves only risk reduction and not risk transfer.
C) Insurance reduces objective risk while hedging involves only risk transfer and not risk reduction.
D) Both insurance and hedging deal with pure risks.
Q4. Which of the following is a characteristic of insurance?
A) payment of intentional losses
B) avoidance of risk
C) certainty about specific losses that will occur
D) pooling of losses
Q5. Loss severity is defined as the
A) probable number of losses which may occur during some period.
B) probability that particular piece of property may be totally destroyed.
C) probable size of the losses which may occur during some period.
D) probability that a liability judgment may exceed a firm's net worth.