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True/False 1. Lawsuit risk is one of the three major risks attitudes that prevail in our lives 2. During the financial crisis (or great recession) of 2007/2008, many mortgages, including subprime mortgages, were bundled into new instruments called mortgage-backed securities, which were guaranteed by U.S. government agencies such as Fannie Mae and Freddie Mac 3. We can attribute the 2007/2008 great recession to global warming and the market collapse in Greece and the collapse to financially risky behavior of a magnitude never before experienced 4. Risk management provides a framework for assessing opportunities for profit, as well as for gauging threats of loss 5. A \"metric\" is a system of related measures that helps us quantify characteristics or qualities 6. Risk management does not provide a framework for assessing opportunities for profit, as well as for gauging threats of loss 7. The most important measures for risk managers when they address potential losses that arise from uncertainty are usually those associated with frequency and severity of losses during a specified period of time. 8. The utility theory is utilized to compare two or more options. Thus, by its very nature, we refer to the utility theory as an \"ordinal\" theory, which rank orders choices, rather than \"cardinal\" utility, which has the ability to attach a number to even a single outcome where there are no choices involved. 9. The expected value is a sum of the products of two numbers, the outcomes and their associated probabilities. If the probability of a large outcome is very low then the expected value will also be low and vice versa. 10. Managers hedge because they are undiversified: Small shareholders like us can diversify our risks, but managers cannot. They invest their income from labor as well as their personal assets in the firm. Therefore, while owners (principals) are diversified, managers (agents) are not. Since managers are risk averse and they control the company directly, they hedge 11. The main steps in the risk management process are identifying risks, measuring risks, creating a map, finding alternative solutions to managing the risk, and evaluating programs once they are put into place. 12. Underwriting is the process of evaluating risks, selecting which risks to accept, and identifying potential adverse selection. 13. Risk pooling insurance is created by an insurer that, as a professional risk-bearer, assumes the financial aspect of risks transferred to it by insureds. The insurer assumes risk by promising to pay whatever loss may occur as long as it fits the description given in the policy and is not larger than the amount of insurance sold. 14. Catastrophe Modeling is a highly specialized mathematic analysis that deals with the financial and risk aspects of insurance. Actuarial analysis takes past losses and projects them into the future to determine the reserves an insurer needs to keep and the rates to charge 15. Moral Hazard policy statements are the primary tools to communicate risk management objectives Multiple Choice 1. Financial risks arise from changing market conditions involving which of the answers listed below (a) prices (b) volatility (c) liquidity (d) credit risk (e) foreign exchange risk (f) All of the above 2. Which is not a part of writing risk management manuals? (a) identification (b) monitoring (c) Assessment (d) evaluation (e) Measurement 3. A major component of insurance industry profits is (a) Interest income (b) investment income from the payment of premiums (c) Fee income from insurers (d) Deferred premium income (e) All of the above 4. Claims adjusting practices are influenced through: (a) Regulations (b) State Governing Body (c) Policyholder complaints to the state insurance commission. (d) Insurance Industry (e) All of the above 5. Employers use law defenses against liability for injury to workers: Which one is not one of the law defenses? (a) (b) (c) (d) (e) fellow-servant rule assumption for work place compliance and adherence assumption of risk doctrine contributory negligence doctrine employee risk assumption