25.

The main (economic) reason for the existence of insurance companies is:

1.individuals need to diversify risk

2.insurers' ability to predict individual losses

3.insurers' ability to form efficient risk pools with minimal contracting costs

4.individuals inability to determine expected loss

24.

The expected loss per exposure is:

1.the expected frequency per exposure.

2the expected severity per occurrence.

3the expected frequency per exposure times the expected severity per occurrence all divided by the number of exposures.

4the expected frequency per exposure times the expected severity per occurrence

23.

The formation of risk pools by insurers is the same, in principle, as:

1reducing expected losses through the use of safety equipment

2creating a well-diversified portfolio of stock shares

3using the futures markets to hedge against fluctuations in the exchange rate of a particular foreign currency

4agreeing to an assessment premium

22.

Under what circumstance will a pooling arrangement result in reduced risk (standard deviation) to the participants in the pool?

1only when losses are perfectly positively correlated

2when losses are high

3only when losses are negatively correlated

4whenever losses are less than perfectly positively correlated