浙江财经大学-全面风险管理与保险(双语)-期末题库

pure risk: Risk where the random outcome can only result in loss (produce a cash outflow); that is, no outcome involving a gain (cash flow) is possible.retention: With which a business or individual retains the obligation to pay for part of all of the losses. When coupled with a formal plan to fund losses for medium-to-large business, retention often is self-insurance. integrated risk management: It is a new approach to corporate the risk management, which uses the technology of both finance and insurance to address the whole range of corporate risk-financial, insurable, operational, and business risk.the return on equity (ROE) : It is defined as the ratio of net operating earnings to the book value of equity.the weighted-average cost of capital (WACC) :valued contracts: It establishes the amount of that the insurer pays at the time the contract is initiated without regard to the amount of the loss caused by the insured event.policy limits: Insurance policies often limit the amount of coverage by placing an upper limit, known as policy limits, on the amount that the insurer will pay for any loss. 保单限额deductibles: It is a common way to limit the amount of the coverage,which eliminate coverage for relatively small losses. 免赔额multi-line/multi-year products (MMPs): Several lines of insurance are bundled within the same insurance programme.multi-tragger products (MTPs): The most important feature of these covers is that claims are only paid if, in addition to an insurance event (“first trigger”) during the term of the policy, a non-insurance event (“second trigger”) also occurs.1. Intuitively explain why risk management activities like insurance purchases and loss control expenditures may be redundant form the perspective of diversified shareholders.1 Risk management is unlikely to decrease the opportunity cost of capital for firms with well-diversified shareholders because risk management activities generally decrease the type of risk (diversifiable risk) that shareholders can eliminate on their own by holding diversified portfolios.2 If risk management does decrease non-diversifiable risk and therefore the opportunity cost of capital, the cost of doing so is likely to negate the benefits of reducing the discount rate.2. Analyze relations between risk management activities (like insurance purchase and loss control) and the opportunity cost of capital for firms. The discount rate (the opportunity cost of capital) equals the risk-free rate plus a risk premium. The risk-free rate is the rate of return on government bonds and cannot be influenced by firm decisions. Thus, if risk management is to affect the discount rate it must affect the risk premium. The risk premium depends only on the amount of non-diversifiable risk. As a result, if risk management decreases diversifiable risk only (the risk that investors can eliminate by holding diversified portfolios), the risk premium will be unaffected and so the opportunity cost of capital will be unaffected.1 Risk management activities like insurance purchases and loss control expenditures typically only reduce a firm’s diversifiable risk. The type of risk that insurance companies tend to insure also are risks that insurance company can largely diversified by selling insurance to many different policyholders. If insurance companies can diversified the risk, then so can shareholders by holding well-diversified portfolios, can thus insurance purchases generally do not reduce a firm’s opportunity cost of capital.2 The risk that is reduced through loss control also tends to be firm-specific risk. For example, the frequency and severity of workplace accidents and product failures are likely to be uncorrelated across firms. These firm-specific risks can be diversified by shareholders and so control activities usually will not decreases a firm’s opportunity cost of capital.3. Explain why exposures with low severity of losses are not likely to be insured?Exposures with low severity of losses are not likely to be insured on an individual basis because the fixed costs associated with underwriting and distributing a policy make the loading very high compared to expected losses.4. Describe the advantages of captives for a company. 自保1 Efficiency gains through participating in one’s claims experienceCaptive were originally invented because companies questioned the efficiency transferring high-frequency risks. Captives help companies avoid the cost of substantial transaction cost as well as improve claims experience through appropriate risk management measures.2 Tax and financial advantages?At the start of the captive boom towards the end of the sixties and the start of the seventies, tax and financial considerations played an important role. The financial advantages include the explicit inclusion of investment income for claims payments and the ability to influence investment policy as well as direct access to the reinsurance market.3 Stabilization of insurance costsHigh price and the lack of capacity in the traditional market, as well as the long-term stabilization of insurance cost make the number of captives rose sharply.4 The strategic benefit is becoming more and more important: captive as an instrument of holistic risk managementIncreasingly a broader spectrum of risks is being ceded to captives, as well as the entire range of insurance risks. Captives allow a business to benefit from the natural smoothing and diversification effects of different risks.5. Explain why correlated exposures are not likely to be insured?When losses are highly correlated across potential policyholders, the variance of the distribution average losses also will be high. Examples of highly correlated losses are losses from major earthquake, hurricanes and other storms. The problem insuring highly correlated losses is that insurers need to hold a large amount of capital to keep the probability of insolvency low. The cost of raising and holding this capital imply that insurance against highly correlated losses will have a high premium loading. As a result, the amount of coverage purchases is likely to limited and in some cases private insurance coverage will not exist.6. Describe conditions that are required for moral hazard to arise and methods that can decrease moral hazard.Expected losses must depend on the insured’s behavior after having obtained insurance. It must be costly for the insurer to observe precautions by policyholders and measure their impact on expected claim costs.Reducing: Experience rating and limited coverage are the two methods of reducing moral hazard. Experience rating makes the premium charged contingent on the claims in prior periods. Limiting the amount of insurance coverage through deductibles and other provisions.7. What are the major reasons that insurance contracts rarely provide full coverage?If a insurance contract’s premium equals the present value of expectedclaim costs, a risk-averse person will likely demand full insurance coverage for monetary losses that otherwise would be paid by the person. Because premiums almost always have a positive loading. However, risk-averse people will demand less than full coverage. As the loading increases, the quantity of coverage demanded is likely to decrease. Thus, any factor that increases administrative or capital costs (and thus the loading on a policy) will limit the amount of private market insurance coverage.8. Describe inefficiencies of traditional insurance solutions. P1491 Good risks are becoming increasingly risks reluctant to subsidize bad and are choosing self instead insurance (adverse selection)2 Insurance reduces the incentive to prevent/contain losses (moral hazard)3 Basis risks as counterpole to moral hazard4 Traditional (re)insurance involves a substantial credit risk5 Capacity bottlenecks and coverage gaps for large risks (limited insurance capacities)9. Outline the risk management process and describe major risk management methods.Process:1.Identify all significant risks.2.Evaluate the potential frequency and severity of losses.3.Develop and select methods for managing risk.4.Implement the risk management methods chosen.5.Monitor the performance and suitability of the risk managementmethods and strategies on an ongoing basis.Method:10. Analyze relations between the insurability of risk and premium loading.There are three major factors that increase costs and there limit the insurability of risk in private insurance market:1premium loadings, which reflect insurer administrative and capital costs 2moral hazard that arises because insurance changes a person’s incentive to take precautions3adverse selection that arises when policyholders are better informed about expected claim costs than insurers.11. Please make a comparison between catastrophe bonds and contingent capital.巨灾债券和应急资本的比较：（1）在赔偿/融资方面，前者是赔偿买方的损失，后者是在损失事件发生时按照事先约定的条件提供融资，且不可以改善收益。