RMI 3011 EXAM 1 QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026
Peril - Answers the cause of the loss
Hazard - Answers condition that increases the frequency or severity of the loss
Physical Hazard - Answers physical condition that increases the frequency or severity of loss
Moral Hazard - Answers dishonesty or character defects in an individual that increase the frequency
or severity of loss
Attitudinal Hazard (Morale Hazard) - Answers carelessness or indifference to a loss, which increases
the frequency or severity of a loss
Legal Hazard - Answers characteristics of the legal system or regulatory environment that increase the
frequency or severity of losses
Pure Risk - Answers only the possibility of loss or no loss (e.g., natural disasters, accidents, theft)
Speculative Risk - Answers presents a chance for gain, loss, or no change (e.g., investing, gambling)
5 Steps of Risk Management - Answers 1. Identify the risk
2. Evaluate/measure the risk (freq/severity)
3. Select appropriate risk management technique
4. Implement Risk management technique
5. Monitor/re-evaluate
Loss Exposure - Answers Any situation or circumstance in which a loss is possible, regardless of
whether a loss occurs
Objective risk - Answers The relative variation of actual loss from expected loss
Subjective (perceived) risk - Answers Uncertainty based on a person's mental condition or state of
mind
Chance of Loss - Answers The probability that an event will occur
Objective probability - Answers The long-run relative frequency of an event based on the assumptions
of an infinite number of observations and of no change in the underlying conditions
Subjective probability - Answers The individual's personal estimate of the chance of loss
Diversifiable Risk - Answers Affects only individuals or small groups (car theft) and can be reduced or
eliminated by diversification
Nondiversifiable Risk - Answers Affects the entire economy or large numbers of persons or groups
within the economy (hurricane) and is also called fundamental risk
Strategic Risk - Answers Uncertainty regarding the firm's financial goals and objectives
Operational Risk - Answers Results from the firm's business operations
Financial Risk - Answers Uncertainty of loss because of adverse changes in commodity prices, interest
rates, foreign exchange rates, and the value of money
Enterprise Risk Management - Answers Combines into a single unified treatment program all major
risks faced by the firm
Fortuitous - Answers Random (accidental losses). Intentional losses not paid!
Indemnification - Answers "to make whole", restored to condition prior to loss
Payment of Fortuitous Losses - Answers pay for losses that are unexpected, unforseen, or occur as a
result of chance
Risk Transfer - Answers pure risk transfer from the insured to the insurer
Pooling of Losses - Answers -Spreading losses of a few over an entire group (pool)
-Risk reduction based on the Law of Large Numbers
Characteristics of Ideally Insurable Risk - Answers - Large number of Homogenous exposure Units
- Accidental and unintentional loss
- Determinable and measurable loss
- Calculable chance of loss
- Feasible Premium
Adverse Selection - Answers the tendency of persons with a higher-than-average chance of loss to
seek insurance at standard rates
Examples of Policy Provisions - Answers Suicide Clause (life insurance), Preexisting Conditions clause
(medical expenses policies)
Underwriting - Answers selecting and classifying insurance applicants. Have standards in place. If
standards are not met, either denied or offered higher rates
Example of Hedging - Answers airline buying fuel futures to lock in prices (RM against Commodity
Risk), Owning a mix of stocks and bonds (RM for Diversification)
, St. Petersburg Paradox - Answers rational decisions under risk depend on utility, not expected dollar
value, which is why risk aversion and insurance exist.
(Infinite expected value but people are only willing to pay finite amount to play. Loss hurts more than
fun to win)
Utility - Answers measure of satisfaction based on an individual's consumption of goods
Loss Exposure - Answers any situation where loss is possible, regardless of whether a loss occurs.
Pre-Loss - Answers -Prepare for potential losses in the most economicial way
- Reduce Anxiety
- Meet any legal obligations
Post-Loss - Answers - Survivial of the firm
- Continuing operating
- Stability of earnings
- Continued growth of the firm
- Minimize the effects that a loss will have on other persons and on society.
Loss Frequency - Answers - refers to the probable number of losses that may occur during some time
period`
Loss Severity - Answers -refers to the probable size of the losses that may occur
Maximum Possible Loss - Answers the worst loss that could happen to the firm during its lifetime
Probable Maximum Loss - Answers worst loss that is likely to happen
Avoidance - Answers chance of loss IS REDUCED TO ZERO
it is not always possible or practical
Loss Prevention - Answers ex: installing security cameras at a store to prevent theft
Loss Reduction - Answers Ex: installing automatic sprinkler ssytem to reduce damage
Duplication - Answers ex: having backup duplicates/ copies in case of loss to primary copy
Seperation - Answers dividing the assets exposed to loss to minimize harm from single event (storing
back up device in a completely different warehouse)
Diversification - Answers means spreading the loss exposure across different parties, securities, or
transactions, to reduce the chance of loss
Techniques for Payment of Losses after they occur - Answers 1. Retention
2. Non-insurance Transfers
3. Commerical Insurance
When should you retain risk - Answers - No other method of treatment available
- The Worst possible loss is not serious
- Losses are highly predictable
Non-Insurance Risk Transfer - Answers method other than insurance by which a pure risk and its
potential financial consequence are transferred to another party (ex: Hold Harmless Agreement- a
construction owner may agree to indemnify owner of property if any accidents occur)
Advantages of Non-Insrance Risk Transfer - Answers - Can transfer some losses that are not insurable
- Less Expensive
Disadvantages of Non-Insurance Risk Transfer - Answers - If other party fails to pay, firm is still
responsible for loss
- contract language may be ambiguous
Deductible - Answers - Specified amount subtracted from the loss payment otherwise payable to the
insured
(Ex: 5000 dollar bill with 2,000 dollar deductible, policyholder pays first 2k and insurance pays
remainder)
Excess Insurance Policy - Answers Insurer only pays if actual loss exceeds amount that firm decides to
retain
Manuscript Policy - Answers policy specifically tailored to the firm
Advantages of Commerical Insurance - Answers - firms are indemnified for loss, can continue to
operate
- uncertainty is reduced
- firm may recieve valuable risk management services
- premiums are tax deductible
Disadvantages of Commercial Insurance - Answers - Premiums can be costly
- Negotiation may take a lot of time
Peril - Answers the cause of the loss
Hazard - Answers condition that increases the frequency or severity of the loss
Physical Hazard - Answers physical condition that increases the frequency or severity of loss
Moral Hazard - Answers dishonesty or character defects in an individual that increase the frequency
or severity of loss
Attitudinal Hazard (Morale Hazard) - Answers carelessness or indifference to a loss, which increases
the frequency or severity of a loss
Legal Hazard - Answers characteristics of the legal system or regulatory environment that increase the
frequency or severity of losses
Pure Risk - Answers only the possibility of loss or no loss (e.g., natural disasters, accidents, theft)
Speculative Risk - Answers presents a chance for gain, loss, or no change (e.g., investing, gambling)
5 Steps of Risk Management - Answers 1. Identify the risk
2. Evaluate/measure the risk (freq/severity)
3. Select appropriate risk management technique
4. Implement Risk management technique
5. Monitor/re-evaluate
Loss Exposure - Answers Any situation or circumstance in which a loss is possible, regardless of
whether a loss occurs
Objective risk - Answers The relative variation of actual loss from expected loss
Subjective (perceived) risk - Answers Uncertainty based on a person's mental condition or state of
mind
Chance of Loss - Answers The probability that an event will occur
Objective probability - Answers The long-run relative frequency of an event based on the assumptions
of an infinite number of observations and of no change in the underlying conditions
Subjective probability - Answers The individual's personal estimate of the chance of loss
Diversifiable Risk - Answers Affects only individuals or small groups (car theft) and can be reduced or
eliminated by diversification
Nondiversifiable Risk - Answers Affects the entire economy or large numbers of persons or groups
within the economy (hurricane) and is also called fundamental risk
Strategic Risk - Answers Uncertainty regarding the firm's financial goals and objectives
Operational Risk - Answers Results from the firm's business operations
Financial Risk - Answers Uncertainty of loss because of adverse changes in commodity prices, interest
rates, foreign exchange rates, and the value of money
Enterprise Risk Management - Answers Combines into a single unified treatment program all major
risks faced by the firm
Fortuitous - Answers Random (accidental losses). Intentional losses not paid!
Indemnification - Answers "to make whole", restored to condition prior to loss
Payment of Fortuitous Losses - Answers pay for losses that are unexpected, unforseen, or occur as a
result of chance
Risk Transfer - Answers pure risk transfer from the insured to the insurer
Pooling of Losses - Answers -Spreading losses of a few over an entire group (pool)
-Risk reduction based on the Law of Large Numbers
Characteristics of Ideally Insurable Risk - Answers - Large number of Homogenous exposure Units
- Accidental and unintentional loss
- Determinable and measurable loss
- Calculable chance of loss
- Feasible Premium
Adverse Selection - Answers the tendency of persons with a higher-than-average chance of loss to
seek insurance at standard rates
Examples of Policy Provisions - Answers Suicide Clause (life insurance), Preexisting Conditions clause
(medical expenses policies)
Underwriting - Answers selecting and classifying insurance applicants. Have standards in place. If
standards are not met, either denied or offered higher rates
Example of Hedging - Answers airline buying fuel futures to lock in prices (RM against Commodity
Risk), Owning a mix of stocks and bonds (RM for Diversification)
, St. Petersburg Paradox - Answers rational decisions under risk depend on utility, not expected dollar
value, which is why risk aversion and insurance exist.
(Infinite expected value but people are only willing to pay finite amount to play. Loss hurts more than
fun to win)
Utility - Answers measure of satisfaction based on an individual's consumption of goods
Loss Exposure - Answers any situation where loss is possible, regardless of whether a loss occurs.
Pre-Loss - Answers -Prepare for potential losses in the most economicial way
- Reduce Anxiety
- Meet any legal obligations
Post-Loss - Answers - Survivial of the firm
- Continuing operating
- Stability of earnings
- Continued growth of the firm
- Minimize the effects that a loss will have on other persons and on society.
Loss Frequency - Answers - refers to the probable number of losses that may occur during some time
period`
Loss Severity - Answers -refers to the probable size of the losses that may occur
Maximum Possible Loss - Answers the worst loss that could happen to the firm during its lifetime
Probable Maximum Loss - Answers worst loss that is likely to happen
Avoidance - Answers chance of loss IS REDUCED TO ZERO
it is not always possible or practical
Loss Prevention - Answers ex: installing security cameras at a store to prevent theft
Loss Reduction - Answers Ex: installing automatic sprinkler ssytem to reduce damage
Duplication - Answers ex: having backup duplicates/ copies in case of loss to primary copy
Seperation - Answers dividing the assets exposed to loss to minimize harm from single event (storing
back up device in a completely different warehouse)
Diversification - Answers means spreading the loss exposure across different parties, securities, or
transactions, to reduce the chance of loss
Techniques for Payment of Losses after they occur - Answers 1. Retention
2. Non-insurance Transfers
3. Commerical Insurance
When should you retain risk - Answers - No other method of treatment available
- The Worst possible loss is not serious
- Losses are highly predictable
Non-Insurance Risk Transfer - Answers method other than insurance by which a pure risk and its
potential financial consequence are transferred to another party (ex: Hold Harmless Agreement- a
construction owner may agree to indemnify owner of property if any accidents occur)
Advantages of Non-Insrance Risk Transfer - Answers - Can transfer some losses that are not insurable
- Less Expensive
Disadvantages of Non-Insurance Risk Transfer - Answers - If other party fails to pay, firm is still
responsible for loss
- contract language may be ambiguous
Deductible - Answers - Specified amount subtracted from the loss payment otherwise payable to the
insured
(Ex: 5000 dollar bill with 2,000 dollar deductible, policyholder pays first 2k and insurance pays
remainder)
Excess Insurance Policy - Answers Insurer only pays if actual loss exceeds amount that firm decides to
retain
Manuscript Policy - Answers policy specifically tailored to the firm
Advantages of Commerical Insurance - Answers - firms are indemnified for loss, can continue to
operate
- uncertainty is reduced
- firm may recieve valuable risk management services
- premiums are tax deductible
Disadvantages of Commercial Insurance - Answers - Premiums can be costly
- Negotiation may take a lot of time
