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principles of risk management

Questions and Answers of Principles Of Risk Management

Insurance
a. Define a captive insurer.b. Explain the advantages of a captive insurer in a risk management program.
The Swift Corporation has 5000 sales representatives. and employees in the United States who drive com- pany cars. The company's risk manager has recom- mended to the firm's management that the
A risk management program must be implemented and periodically monitored to be effective. This step requires the preparation of a risk management policy statement and a risk management manual. The
Explain the meaning of financial risk management and enterprise risk management.
Describe the impact of the underwriting cycle and consolidation in the insurance industry on the practice of risk management.
Explain the securitization of risk, including catastrophe bonds and weather options.
Explain the methods that a risk manager employs to forecast losses.
Show how financial analysis can be applied to risk management decision making.
Describe other risk management tools that may be of assistance to risk managers.
What variables are difficult to quantify when analyz ing investments in loss-control projects?
a. What is a risk management information system (RMIS)?b. How does a risk management Web site differ from a risk management intranet?
During a "hard" insurance market, a manufacturing company decided to self-insure its workers compensa- tion loss exposure. The company hired a third party to administer the workers compensation
Describe the major types of private insurers, including the following: Stock insurers Mutual insurers Reciprocal exchanges Lloyd's of London Blue Cross and Blue Shield plans Health maintenance
Explain why some life insurers have demutualized or formed holding companies in recent years.
Explain the difference between an agency building system and a nonbuilding agency system as life insurance marketing systems.
Describe the direct response system for selling life insurance.
Describe the different marketing systems in property and casualty insurance, including the following: Independent agency system Exclusive agency system Direct response system Mixed systems Direct
The corporate structure of mutual insurers is chang ing. Briefly describe three major trends that have an impact on the corporate structure of mutual insurers.
Briefly describe the basic characteristics of the follow- ing marketing systems in life and health insurance:a. Agency building systemb. Nonbuilding agency systemc. Direct response system
Briefly describe the basic characteristics of the follow- ing marketing systems in property and casualty insur- ancea. Independent agency systemb. Exclusive agency systemc. Direct writerd. Direct
What is a mass-merchandising plan in property and liability insurance? APPLICATION QUESTIONS
Compare a stock insurer with a mutual insurer with respect to each of the following:a. Identification of the parties who legally own the companyb. Right to assess policyowners additional premiumsc.
Property and casualty insurance can be marketed under different marketing systems. Compare the inde- pendent agency system with the exclusive agency sys- tem with respect to each of the following:a.
Explain the rate-making function of insurers.
Explain the steps in the underwriting process.
Describe the sales and marketing activities of insurers.
Describe the steps in the process of settling a claim.
Explain the reasons for reinsurance and the various types of reinsurance treaties. e
Explain the importance of insurance company investments and identify the various types of investments of insurers.
Briefly describe the following types of claims adjustors:a. Agentb. Company adjustorc. Independent adjustord. Adjustment bureaue. Public adjustor
Briefly explain the following types of reinsurance treaties:a. Quota-share treatyb. Surplus-share treatyc. Excess-of-loss treatyd. Reinsurance pool
Briefly describe the following insurance company operations:a. Electronic data processingb. Accountingc. Legal servicesd. Loss control
Delta Insurance is a property insurer that enters into a surplus-share reinsurance treaty with Eversafe Re. Delta has a retention limit of $200,000 on any single building, and up to nine lines of
Richard lives in a sparsely populated county in north- ern Vermont. He owns and operates an adjustment bureau that adjusts property insurance claims in the area. Property insurers that market
Felix is a property claims adjustor for a large property insurer. Janet is a policyowner who recently notified the company that the roof of her home incurred sub- stantial hail damage because of a
Understand the three major sections of the balance sheet for a property and casualty insurance company: assets, liabilities, and policyholders' surplus.
Identify the sources of revenues and types of expenses incurred by a property and casualty insurance company.
Explain how profitability is measured in the property and casualty insurance industry.
Understand the balance sheet and income and expense statement of a life insurance company, and explain how profitability is measured in the life insurance industry.
Explain the objectives of rate making in the property and casualty insurance industry and discuss the basic rate-making methods, including judgment rating, class rating, and merit rating.
a. How is the combined ratio of an insurance com- pany calculated and what does the combined ratio measure?b. How is it possible for a property and casualty insurance company to be profitable if its
Explain the following methods of merit rating:a. schedule ratingb. experience rating
Based on the following information, determine the policyholders' surplus for XYZ Insurance Company: Total invested assets Loss reserves Total liabilities Bonds $50,000,000 40,000,000 70,000,000
Explain the major reasons why insurers are regulated.
Identify key legal cases and legislative acts that have had an important impact on insurance regulation.
Identify the major areas that are regulated.
Explain the objectives of rate regulation and the different types of rating laws.
Explain the major arguments for and against state regulation of insurance.
Explain the reasons why the insurance industry is regulated.
Briefly explain the significance of the following legal cases and legislative acts with respect to insurance company regulation:a. Paul u. Virginiab. South-Eastern Underwriters Association Casec.
Opal, age 75, has a $100,000 ordinary life insurance policy that has a cash value of $35,000. Opal is con- cerned about the cost of long-term care in a nursing home. A new agent of a national life
Opal filed a complaint against the agent with the state insurance department. An investi- gation revealed that the agent had made similar mis- representations to other clients.a. Based on the above
Today is Monday 27 October 2003. What are the spot and 1 month value dates?
Today is Wednesday 25 February 2004. What are the spot and 1-month value dates?
You are a dealer and a customer has just sold you GBP 5 million against EUR for value 3 months forward outright. Which of the following are possible ways of hedging your risk, either mostly or
You have just bought and sold EUR 10 million against USD, spot against 3 months (91 days) at 0.9120 and 0.9163. You hedge the position approximately by lending EUR 10 million at 3.0% and borrowing
It is now the middle of April. You have bought and sold EUR 10 million against Swiss francs, 2 months against 5 months(a 91-day period), with settlement rates of 1.6000 and 1.5910.You wish to hedge
An investor has EUR 3 million to invest for one week from spot.He can either invest directly in euros at 4.9%, or he can invest in dollars at 4.5%. The following exchange rates are quoted to
A dealer needs to produce overnight sterling on Friday (i.e. for a 3-day run from Friday to Monday). He decides that he can do it most cheaply via euros. If the following rates are quoted to him,
You wish to buy a Swiss franc 2v5 FRA (a 92-day period). Given the following market prices, at what rate can you create one synthetically via sterling?GBP/CHF spot: 2.4038/48 2 months: 124/120 5
You are a forward dealer in a sterling-based bank. You have taken a position by selling and buying EUR 5 million against Swiss francs, 2 months against 6 months, at a swap rate of −100 points.The
In March, a US company reports that it has an outflow of EUR 1 million which will occur in May and an inflow of EUR 1 million which will occur in June. In March, to what risk is the company exposed?
You are a Swiss airline company. Tickets which you sell in the UK for scheduled flights all over Europe are sold in sterling. However, your competitors in this industry are European, not UK ones. If
1 An amount of 5 million is placed on deposit from 17 August to 31 December at 6.7%. What would be the interest earned if the rate had been quoted on an ACT/365, ACT/360 or 30/360 basis?
2 A dealer quotes a rate of 6.7% on a 30/360 basis for an investment from 17 August to 31 December. What would be the equivalent rate if the customer asked him to quote it instead on an ACT/365 basis?
3 What is the present value of a cashflow of EUR 5,327.21 arising in 276 days, using 4.2% as the rate of discount?
4 I buy an investment for GBP 2,345,678.91 and sell it one week later for GBP 2,350,000.00. What is my yield?
5 The interest rate for 6 months (183 days) is 9.00% and the rate for 7 months (214 days) is 9.15%. What is the rate for 193 days?
6 A dealer quotes a customer 7.35% to borrow for one year with interest paid monthly. The customer prefers to pay interest quarterly.What rate should the dealer quote instead?
7 Which of the following is the cheapest for a borrower?• 6.7% annual money market basis• 6.7% semi-annual money market basis• 6.7% annual bond basis• 6.7% semi-annual bond basis.
8 What is the effective yield of a 45-day deposit in euros, with a nominal rate quoted of 4.6%?
9 A company borrows US dollars at 5.1% for 183 days and then at maturity refinances the principal and interest at 5.3% for a further 92 days. What is the simple cost of borrowing over the 9 months?
1 You are quoted 4.50% for a 273-day deposit of GBP 2 million.What amount do you expect to receive back at the end of 9 months?
2 You lend EUR 10 million for 3 months at 4.28%, you lend EUR 3 million for 3 months at 4.23% and you borrow EUR 9 million for 3 months at 4.25%. What is your net position and your average rate?
3 A bank issues a CD with a face value of USD 5 million, a term of 181 days and a coupon of 4.7%.a) What are the total maturity proceeds of the CD?(b) You buy this CD when it has only 129 days left
4 You are a dealer. A customer places a deposit of EUR 5 million with you at 4.64% for 92 days. After 61 days, the customer asks to break the deposit. Interest rates at the time are as follows. Your
You own ECP with face value USD 10 million. The paper was issued at a yield of 4.50% on 15 March for 59 days, maturing on 13 May.It is now 17 April and you wish to sell the paper for value 19 April
2 You own US domestic CP with face value USD 10 million. The paper was issued at a discount rate of 4.50% on 15 March for 59 days, maturing on 13 May.It is now 19 April and you wish to sell the paper
3 A US Treasury bill with 147 days left to maturity is quoted in the market at 4.97%. What is the bill’s yield on a 365-day basis?
4 A UK Treasury bill with 83 days left to maturity has a yield of 4.5567%. At what discount rate would it be quoted?
5 You buy sterling commercial paper with 163 days left to maturity, face value GBP 10 million, at a yield of 5.1%. You sell it one week later at a yield of 5.15%. What yield per annum have you made
6 You buy a US Treasury bill with 163 days left to maturity, face value USD 10 million, at a discount rate of 5.1%. You sell it one week later at a discount rate of 5.15%. What yield per annum have
7 What is the bond-equivalent yield for a US Treasury bill with 190 days left to maturity, trading at a discount rate of 4.99% on 10 July 2003?
8 You sell a Norwegian Treasury bill, with 103 days left to maturity, at a price of NOK 98.08 per NOK 100 face value. At what effective yield have you sold?
9 Which has the higher yield – a Norwegian Treasury bill with an effective yield of 5.7%, or a US Treasury bill quoted at a discount rate of 5.5%? Both have 119 days left to maturity.
10 Place the following instruments in ascending order of yield, given the rate quoted for each. All the instruments have exactly 91 days left to maturity.UK sterling Treasury bill 4.98%UK euro
Based on the following cash market rates for Swedish kronor, what is the theoretical rate at which a dealer would take a 6v9 forward-forward deposit from a customer?3 months (91 days) 4.87/5.00%6
On Friday, you lend EUR 10 million for 1 week at 4.3% and borrow the same amount overnight at 4.25%. What is the breakeven rate for the remaining period?
You sold a 2v5 GBP 2,000,000 FRA when rates were quoted to you as 7.30/7.40%. Settlement is now due and 3-month(91 days) GBP LIBOR is 7.15%. What amount do you pay or receive?
You are a dealer. You are given a deposit of EUR 7 million at 4.9% for 9 months (273 days). You also lend EUR 7 million at 4.9% for 3 months (92 days). You cover the mismatch with a 3v9 FRA, quoted
You sell 10 December euro futures contracts at 95.32. In which direction do you expect euro interest rates to move? You buy them back at 95.43. What is your profit or loss?
It is now the middle of March. You fund yourself at LIBOR flat and need to borrow euros for 9 months. What is the cheapest way of achieving this, given the following rates?3-month cash:
It is now the middle of October. You are a dealer and sell a 7v12 FRA to a customer. Which futures contracts might you use to hedge your position?
You have taken a deposit from one customer for 6 months and lent to another for 3 months. Assuming all the dates match, what is the best hedge for the mismatched position, given the following prices
It is now the middle of April. What is the theoretical 2v8 FRA rate in US dollars consistent with the following futures prices?March 95.23 June 95.61 September 95.84 December 95.93
It is now March and the yield curve is negative. You expect it to become less negative over the next few months but have no view on whether interest rates will rise or fall overall. What might be an
1 The SGD/NOK exchange rate is quoted as 2.9584. Does this exchange rate express the number of Norwegian kroner equal to 1 Singapore dollar, or the number of Singapore dollars equal to one Norwegian
2 You wish to sell US dollars against sterling and are given the following quotes from two banks. At what price will you deal?• 1.4356/61• 1.4358/63
3 You are a dealer and a counterparty asks you for you price in EUR/USD. You quote ‘‘0.9503/08’’ and the counterparty replies‘‘5 yours’’. What have you sold or bought, how much, and

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