1

1. Differentiate between the types of risk in the following pairs. [5 marks]

1. pure and speculative risks
2. diversifiable and non-diversifiable risks

2. Define the law of large numbers and explain its importance to a private insurer [5 marks]
3. Distinguish between loss control and insurance premiums and show how they are related [5 marks]
4. Morning light Property Insurance Company estimates that P300 000 structures they insure will generate incurred property losses and loss adjustment expenses of P65 million during the coming year. If companys expense ratio is 30%, what is the gross premium for this property insurance? [5 marks]
5. Kate was trying to sell her home. In listing the many positive features of the home, Kate said, ...and I just paid for my homeowners insurance for another year. If you buy the house, Ill throw in free homeowners insurance for a year! Evaluate Kates offer? [5 marks]
6. Distinguish between the life annuity (no refund) and life annuity with guaranteed payments [5 marks]
7. Identify and explain any two (2) parts of an insurance contract. [5 marks]
8. Define reinsurance and give 4 reasons why an insurance company would use reinsurance? [5 marks]

Section Two: Long Questions (60 Marks)

9. a) During the month of February 2017, A farmer estimates that she will harvest 50 000kgs of corn by November 2017.

0. 1. The price on futures contracts for November 2017 corn is P6.00 per kg.
   2. Corn futures contracts are traded in 5000 kgs
1. Identify the risk that the farmer is facing [1 mark]
2. Determine the number of contracts and show, with calculations, how the farmer can hedge the risk that she is exposed to at harvest time considering that the price of corn can rise to P8.00 or fall to P5.00 per kg. [9 marks]

b) Thapelo owns 2000 shares of a Duke Limited which is listed on a local bourse. The shares are currently priced at P20 per share. The strike or exercise price is P15 per share. If the investor holds a call option, explain what should happen to hedged risk when the price rises to P25 at the end of the period.

With calculations, show what happens to the loss or profit

1. with hedging [3 marks]
2. without hedging [2 marks]

10. Mpho is considering the purchase of a P45 000 whole life policy. The coverage will have an annual premium of P500.00. The coverage is participating, and based on the insurers history with similar policies, it is estimated the company will pay a total of P900 in dividends over the first fifteen (15) years. If these dividends are invested at 8% interest, they would accumulate to P1 500 after fifteen (15) years. The cash value after 15 years will be P4 500.00. For calculations involving the time value of money, 6% is the appropriate annual interest rate.

1. Determine the traditional net cost per thousand per year [9 marks]
2. Determine the net payment cost per thousand per year [6 marks]

11. (a) Maitumelo would like to use the needs approach to determine if she should purchase additional life insurance. Her employer provides two times each employees salary in group life insurance. Her salary is P22 500 per year. She has the following needs that she would like to satisfy upon her death: cost of funeral/final illness P7 500; income support for her daughter P30 000; income support for her dependent father P35 000 and educational funds for her daughter P20 000. Her current assets include P3000 in a current account and P7 000 in a mutual fund. She also estimates about P12 500 in Social Security survivor benefits would be payable if she died. How much additional life insurance should she purchase, according to the needs approach? [8 marks]

(b) Bakang is attempting to determine how much life insurance she should purchase according to the capital retention approach. Her goal is to provide P10 000 in income per year before taxes to her heirs. Her real estate investments currently generate P3 000 per year before taxes. Her preferred stock pays P1 250 in dividends annually; and she has a P25 000 certificate of deposit locked-in at an interest rate of 10%. All of these investments will pass to her heirs upon her death. The balance of the desired cash flow will be funded through life insurance proceeds which can be invested to yield 8% percent. How much additional life insurance is required? [7 marks]

12. Read the case below and answer the question that follows.

Katlego Gaborone is president of Gaborone Chemical, a company that manufactures industrial chemicals, including highly flammable acids. His company has outgrown its present facility, and Katlego is considering moving to a larger building. He has found two acceptable buildings. The first is a brick building located in a run-down section of the city. The building was constructed in 1950 and all of the internal fixtures have been removed. The building shares common walls with a vacant building and a warehouse. The second building is located eight kilometers outside the city limit. It is a free-standing wood frame building constructed two years ago. According to the building code, a sprinkler system was mandatory.

Use 5 factors found under the schedule rating perspective to explain the positive and negative features of these buildings. [15 marks]