Advanced Risk Management

Assessment
PART 1: CHOOSE THE BEST ANSWER (20 Questions)
1. 1. Which of the following best defines "objective risk" in insurance?
A. The chance of loss occurring
B. The mental uncertainty experienced by the insured
C. The measurable variation from expected loss
D. The insurer’s estimated claim
2. 2. In the principle of indemnity, which of the following payment methods violates this
principle?
A. Actual cash value
B. Replacement cost less depreciation
C. Valued policy
D. Fair market value
3. 3. What is the key difference between static and dynamic risk?
A. Dynamic risks affect only individuals
B. Static risks are speculative while dynamic are pure
C. Static risks do not change over time
D. Dynamic risks are not insurable
4. 4. Which one of the following is NOT a recognized type of hazard in risk management?
A. Physical
B. Morale
C. Catastrophic
D. Moral
5. 5. Which method is commonly used to compute actual cash value in property insurance?
A. Gross value less interest
B. Replacement cost less depreciation
C. Present value of income
D. Cost minus hazard
6. 6. Under the principle of insurable interest, when must interest exist in life insurance?
A. At the time of death
B. When the claim is filed
C. At the time the policy is taken
D. At the time of loss
7. 7. Which of the following is an exception to the principle of indemnity?
A. Business income insurance
B. Property insurance using market value
C. Valued policy
D. Liability insurance
8. 8. Which type of life insurance policy allows premium payments for only a limited
number of years?
A. Term life insurance
B. Ordinary whole life policy
C. Limited-payment whole life insurance
D. Convertible term insurance
9. 9. In legal interpretation, which principle supports the idea that ambiguities in the
policy are interpreted against the insurer?
A. Aleatory principle
B. Principle of indemnity
C. Principle of reasonable expectations
D. Unilateral contract
10. 10. Subrogation allows the insurer to:
A. Avoid all legal liability
B. Transfer the risk to another insurer
C. Recover loss from a third party
D. Change the contract terms
11. 11. What distinguishes pure risk from speculative risk?
A. Pure risk is not measurable
B. Speculative risk always results in loss
C. Pure risk involves no possibility of gain
D. Speculative risk is insurable
12. 12. In calculating gross premium, which of the following is NOT added to the net
premium?
A. Mortality rate
B. Loading
C. Administrative expenses
D. Profit margin
13. 13. Which policy pays a death benefit only if the insured dies within a specified period?
A. Endowment policy
B. Term insurance
C. Whole life policy
D. Single-payment life insurance
14. 14. A warranty in an insurance contract is:
A. A non-binding promise
B. A condition that can be freely changed
C. A statement that must be true for the contract to be valid
D. A request by the insured
15. 15. The proximate cause is:
A. The insured peril farthest from the loss
B. The most remote legal cause
C. The primary cause closest to the loss event
D. Always the insured peril
16. 16. What type of policy includes both protection and investment components?
A. Term insurance
B. Liability insurance
C. Endowment policy
D. Health insurance
17. 17. Which insurance principle prevents the insured from collecting twice for the same
loss?
A. Insurable interest
B. Contribution
C. Subrogation
D. Utmost good faith
18. 18. The insurer’s promise to pay only if the insured pays the premium refers to:
A. Bilateral contract
B. Conditional contract
C. Personal contract
D. Commutative contract
19. 19. In determining the net single premium, which of the following does NOT influence
the result?
A. Death benefit
B. Mortality rate
C. Investment interest rate
D. Sum of insured’s salary
20. 20. Which type of term policy decreases its coverage over time?
A. Level term
B. Renewable term
C. Decreasing term
D. Convertible term

PART 2: TRUE / FALSE (10 Questions)

21. Pure risks are not insurable by private insurers.

22. The principle of indemnity ensures the insured profits from loss.

23. Moral hazard refers to physical risks like icy roads.

24. A valued policy violates the principle of indemnity.

25. Fair market value may sometimes be used instead of actual cash value.

26. Subrogation applies to both life and health insurance.

27. A warranty must be strictly adhered to in an insurance contract.

28. An aleatory contract means each party gives equal value.

29. Grace period is usually 60 days in life insurance.

30. Group life insurance allows coverage without individual medical evidence.

PART 3: FILL IN THE BLANK (10 Questions)

31. __________ is the condition that increases the chance of a loss occurring.

32. The __________ rule allows any relevant information to be used in determining actual cash
value.

33. The __________ principle states that the insured must have a financial interest in the
subject matter.

34. Life insurance contracts are not contracts of __________.

35. The __________ clause prohibits recovery unless the insured has complied with all policy
conditions.

36. The price a willing buyer would pay a willing seller is known as __________ value.

37. __________ is the failure to disclose a material fact intentionally.

38. A __________ contract in insurance means that only the insurer makes a legally enforceable
promise.

39. In a whole life policy, the contract matures only at __________ or upon death.

40. The calculation of life insurance premium considers mortality, expenses, and __________
rate.

PART 4: WORK OUT PROBLEMS (5 Questions)

41. A 3-year term policy covers 100,000 people. Expected deaths over three years are:
- Year 1: 1,000 deaths
- Year 2: 1,200 deaths
- Year 3: 1,300 deaths
Death benefit: Birr 10,000
Interest rate: 5%
Calculate the Net Single Premium (NSP) for each policyholder.

42. Given:
- Replacement cost = 80,000
- Depreciation = 30%
Calculate the actual cash value.
43. Mr. X insures his house for 100,000 Birr with three insurers: A (40%), B (35%), C (25%).
If a fire causes total loss, compute each insurer’s contribution.

44. Given a life insurance policy has a cash value of 20,000 Birr. The insured takes a loan of
5,000 Birr. How much will be paid to the beneficiary if the insured dies?

45. Calculate the Net Level Premium (NLP) from this data:
- NSP = 18
- PV of 1 Birr premium = 2.4

ANSWER KEY
Multiple Choice:
1-C, 2-C, 3-C, 4-C, 5-B, 6-C, 7-C, 8-C, 9-C, 10-C,
11-C, 12-A, 13-B, 14-C, 15-C, 16-C, 17-C, 18-B, 19-D, 20-C

True/False:
21-F, 22-F, 23-F, 24-T, 25-T, 26-F, 27-T, 28-F, 29-F, 30-T

Fill in the Blank:

31. Hazard
32. Broad Evidence
33. Insurable Interest
34. Indemnity
35. Conditional
36. Fair Market
37. Concealment
38. Unilateral
39. Age 100
40. Interest

Work Out Problems:

41. NSP = Birr 316.37
42. Actual Cash Value = Birr 56,000
43. A = Birr 40,000, B = Birr 35,000, C = Birr 25,000
44. Paid = Birr 15,000
45. NLP = Birr 7.5