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Mr
...


Discuss questions:
Q1: Explain the difference between the following:


Financial and non financial loss:

Financial loss

Non-financial loss
The outcome of accident is non
financial loss

Lack of the asset value in case of
accident
like :
 explosion
 theft
 motor accident

like :
 lose of your pets (animals)
 lose of your wife
 depression , headache

This definition is not accepted because we can’t calculate the outcome of some accident in
some cases accurately such as: In non financial loss case as it is subjective case
...
005

Subjective probability
It is the individuals estimation for the
chance of loss depending on their
education , intelligence & age

Mr
...


objective risk & chance of loss :

Chance of loss

Objective risk

 Is the probability of frequent that an
event will happen in the future
...
rather than back to
work

Mr
...


speculative & Pure risk :

Speculative risk

Pure risk

 The result (outcome) of speculative
may be loss or gain

 The result of this risk is loss only

Like:
Like :
 gambling , investing money in stock
 Theft , accident , fire , collusion
market because outcome of this
investment may be loss or gain ,
beating on a horse race, producing a
new product
Insurance company like to insure on pure risk rather than speculative risk


static risk and dynamic risk :

Static risk
 are risks connected with losses caused
by irregular action of nature or by
mistakes and misdeeds of human
beings

dynamic risk
 risks associated with changing in
economy

 same as pure risk

 Including changing in tastes of
consumers, technological changes
and new methods of production
...

 economic changes: inflation,
unemployment



Mr
...

personal risk and property risk & liability risk :

Personal risk:
are those risks that directly affect an
individual, they involve: the possibility
of actual loss or reduction in earned
income

consist of risk of :
 risk of premature death
 risk of old age
 risk of poor health
 risk of unemployment



Property risk:

liability risk:

anyone who owns , rents or
uses property is exposed to the
risk that it may be damaged ,
stolen or totally destroyed
which can be affected by 3
types of different losses:
 direct losses
 indirect loss
 natural disasters

anyone can be held legally
liable if he does something
that result in bodily injury
or property damage to
someone else
like:
business firms are being
sued because defective
products that result in harm
people

active and passive retention :

Active retention
 The individual understands the loss (risk) &
he decides to keep it
...

 The company may be failing to identify all
the assets which may be damage in case of
accident
...

 The individual can keep small losses in the
motor accident
 such as:
 deductibles
 self insurance

like :
 an individual may be unknowingly retained
certain risks because of ignorance ,
indifference & laziness
 an individual can keep smoking
although he know that it was risky
 Many of people keep the chance of smoking
without understanding the loss
...
Ye7ia

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Ye7ia

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Ye7ia

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4) Underwriting:
 Is defined: as the selection and classification of profitable insured’s
...
Ye7ia

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 executive decisions concerning with the management of pure risk
6) Beneficiary:
 A person or group that receives benefits, profits, or advantages
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Q3: state and explain the following with using examples :
1) Why insurers (Private insurance) reject to insure the fundamental risk?
 Because fundamental risk affects large number of people at the same time & that will
cause catastrophic (large) loss which may enforce company to go into bankruptcy
2) Why (government assistance) may be necessary in order to insure the
fundamental risk?
 Social insurance and government insurance programs are used to meet certain
fundamental risks in the United States
...
Ye7ia

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 it is a useful techniques for handling risk especially for( high frequency , low
severity risks) where potential losses are relatively small
 There are 2types of retention: active or passive retention
 The individual can keep small losses in the motor accident (active retention)
 Many of people keep the chance of smoking without understanding the loss
...
or insurance

 handling risk with (low frequency and high severity) , when potential losses are
relatively large

A) Transfer by contract:
 The computer company is responsible for the maintains and any physical damage
which may be happen in case of accident

Mr
...


B) Transfer by Insurance:
 shifting or transferring risk in consideration of a specific payment (premium) by one
party (insured) , the second party (insurer) contracts to indemnity (pay compensation)
to a certain limit for a specific losses
6) Explain loss control system? (Mention examples)

 reduce both the frequency of loss (loss prevention) and severity of losses (loss
reduction)

 is a useful technique for handling (high frequency and high severity losses)
 it is the ideal method for handling loss: , because : reduced direct and indirect
loss , social costs can be reduced through effective loss control program

 like: sprinkles system , security guards , safety devices , cameras’
7) Explain the steps of risk management?
a) Determine objectives ( exposure identification)
b) Identify the potential risk
c) Analyze the potential risk & evaluate it
d) Select the best way of handling the loss(best technique)
e) Implement the decision & administering the program
f) evaluation and review
8) Requirement of insurable risk from insurer view?
a) There must be a sufficient number of exposed units to expect Potential losses
make the expected losses close to the actual Loss & dividing the losses between all
individuals in the company
...
The insurance company will pay
unexpected losses
...
This means that loss shouldn’t occur for a large
number of exposures units at the same time
...
Ye7ia

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The insurer must be able to compute both
the average frequency and average severity of the future losses with some accuracy
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Low

……
...


……
...
Ye7ia

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 may be the same for two different
groups
 Chance of loss =

𝐞𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐥𝐨𝐬𝐬
𝐞𝐱𝐩𝐨𝐬𝐞𝐝 𝐥𝐨𝐬𝐬

Objective risk
 The difference between expected loss
from actual loss
 objective risk gives a higher degree
of accuracy
 may be different for different
groups
 objective risk =

𝐚𝐜𝐭𝐮𝐚𝐥− 𝐞𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐥𝐨𝐬𝐬
𝐞𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐥𝐨𝐬𝐬

Mr
...


Numerical example of law of large number:
No of
exposure units

Probability of
loss

25000

1%

250000

1%

Expected loss

25000*1% =
250
250000*1% =
2500

Actual
loss

𝑎𝑐𝑡𝑢𝑎𝑙 − 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑙𝑜𝑠𝑠
𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑙𝑜𝑠𝑠

260

𝑜𝑏𝑗𝑒𝑐𝑡𝑖𝑣𝑒 𝑟𝑖𝑠𝑘
260− 250
= 4%

2550

250

2550−2500
2500

= 2%

12) What are the economic and social benefits of the insurance?

a) indemnification of loss
 The insurance company will put the individual at the same financial position that he occupied
before the accident

b) loss fear and worry:
 The insurance provides stabilities in families and business

c) source of capital investment :
 Insurance collect premiums from the policy owners in advance these funds invested in bonds or
stocks

d) loss prevention :
 insurers engage in a wide variety of loss prevention activities that reduce burden of risk on society

e) enhances a credit :
 gives greater assurance that loan will be repaid
f) provide employment to a number of workers :
 Ins
...
Ye7ia

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According to (law of
large number) … write numerical example
14) What are Active retention three major reasons?
 1)save money : if the total actual losses are less than the cost of insurance
 2)lower expenses : can decrease some expenses , like: claims adjustment
commission fees and taxes
 3)exceeding cash flow : the company can save the cost of insurance and this will
help to exceed cash flow (and this only relatively for a small severity losses)
15) What is the difference between straight and franchise deductive
explain with examples?
 Deductible: is a small amount or percentage of loss that paid by insured
1) Loss < deductible …
...
If a collision loss is 250$, the insurer pays nothing and the driver bears
loss 250, but if loss is 5000$ and exceeds the deductible amount, the insurer pays 4700$ and the
drivers bears 300$ under a straight deductible
 or the insurer pays the full 5000$ and the driver bears nothing under franchise deductible

Mr
...


16) Explain fire and health, life & automobile insurance?
Life insurance:
 life insurance companies pay an amount (the face amount of insurance) to the
beneficiaries upon the death of insured’s
 life insurers sell private pensions and individual annuities to meet the need for
income after retirement
Health insurance:
 it provides for the payment of medical expenses in the event of sickness or injury
 sold by casualty insurers
Fire insurance:
 one of the most types of property and liability insurance
 it covers direct and indirect losses
Automobile insurance:
 may be classified as casualty insurance covers whatever is not covered by fire ,
marine and life insurers
 include: auto insurance , liability insurance , theft insurance and machinery insurance
17) Mention 4 types of protection under engineering insurance policies?
a) Damage of actual equipment

b) damage of surrounding property

c) Liability of death

d) consequence loss

19) What are main types of coverage available under aviation insurance?






accidental damage to the air craft it self
liability for death , injury , property damage
similar liabilities toward customer
cargo insurance
product liability , the liability arising from faulty design

20) What are main types of coverage available under auto insurance?





property insurance or physical damage
liability insurance
medical payment insurance
uninsured motorists insurance

21) Explain basic types of pure risk?
a) personal risks:
b) property risks:
c) liability risks:

Mr
...


Q4: solve the following cases
1)
date

2012

Number of buildings insured
against fire
Probability of fire
Expected number of
buildings may burn each year
is
Assuming actual number of
buildings burn is
Objective risk

2013
10000

12000

2%

2%

?

?

215

250

?

?

 Compare between 2012& 2013 & give comment?

Solution
date

2012

2013

Number of buildings insured
against fire

10000

12000

2%

2%

10000*2% =200

12000*2% =240

215

250

Probability of fire
Expected number of
buildings may burn each year
is
Assuming actual number of
buildings burn is
Objective risk

(215-200)/200 =0
...
0416

 according to law of large numbers: As the number of exposure units increases, the
objective risk decreases and the company can expect the amount of loss which will face by it
& it help insurance company to expect losses in advance

Mr
...


2) Solve the following table:
Types of insurance
No
...
of losses units
The probability of loss
Total losses (paid claims)
Average loss
Pure or net premium per unit
Pure premium
Loading ratio
Gross premium per unit

Fire
10000
20
(1)?
(2)?
45000
(3)?
(4)?
15%
(5)?

auto
50000
(6) ?
0
...
02

, total losses = 45000 *20 = 900000$

3) pure premium (net premium) per unit =

total losses $
number of losses

=

900000
10000

4) pure premium = total losses = 900000$
5) gross premium per unit =

pure premuim
1−loading %

90
1−15 %

=

= 105
...
02 = 1000 units
7) severity (average loss) =

total losses $
number of losses

,

Total losses = 30000 *10000 = 30000000$
8) pure premium = total losses = 30000000$
9) gross premium per unit =

pure premuim
1−loading %



1000(1- loading %) = 600,



loading % =1000 = 0
...
6 = 40%

= 90$

Mr
...


3)


Suppose that among 210000 of houses, 3100 houses will burn in the next year and the average
size of loss is 75000$ per house, what is the net expected premium for such experience (similar
house)? Indicate equality principle

Solution
o Pure premium

= average frequency ∗ average severity
=
(3100 /210000) * 75000 = 1107
...
payment = insured payment

Ins
...
14285 *210000
232500000 = 232500000

4)



a)
b)
c)
d)

on the basis of past experience , an insurer is able to predict with reasonable accuracy that 15 of
1010 automobiles , on the average destroy or damage by collision each year incurred losses of
232000, assume also that each automobile is valued 43000 , loading % = 50%
Calculate the following:
the average frequency of losses
severity of losses
pure premium
gross premium

Solution
number of losses

1) the average frequency of loss =number

of exposture units

total losses $

2) severity (average loss) = number

of losses

=

232000
15

=

15
1010

= 0
...
6666

3) pure premium = = average frequency ∗ average severity =0
...
66 = 230
4) gross premium ==

pure premuim
1−loading %

=

230
1−50%

= 460$

Mr
...


MCQ:
1
...
Uncertainty based on a person’s mental conditions or state of mind is known as:
a) Objective risk
b) Subjective risk c) Objective probability d) Subjective probability
3
...
An earthquake is an example of a:
a) Moral hazard
b) peril c) physical hazard

d) objective risk

5-According to the law of large number, as the number of exposure units is increased
a- The chance of loss declines
...

c-The accuracy of predictions should be better
...

e- None of the above
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C) Fundamental risk D) physical hazard
...
Ye7ia
22) Pure risk is characterized by
a) A chance of loss and chance of gain
b) A chance of loss or no loss only
c) Certainty that loss occur
d) The chance o loss or no loss only
e) None of the above

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B) any situation in which the probability of loss is zero
...

D) the probability of a loss occurring
...

B) the relative variation of actual loss from expected loss
...

D) the cause of loss
...

B) objective risk
...

D) attitudinal hazard
...
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B) objective probability
...

D) attitudinal hazard
...

Loss reduction
II
...

B) risk retention
...


D) personal insurance
...

B) risk control
...

D) risk retention
...
Ye7ia
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True or false:
1
...

2
...

3
...

4
...

5
...

6
...

7
...

8
...

9
...

10
...

11
...

12
...

13
...

14
...

15
...


Mr
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16
...
Risk management and insurance management are synonymous terms
...
In general, the risk manager of an organization should be someone outside the firm
...
In the last analysis, there are only two approaches to dealing with risk: retention and transfer
...
Risk management is a scientific approach to the problem of dealing with the risks faced by individuals and businesses
...
Risk management derives its rules (laws) from the general knowledge of experience, through deduction, and
from precepts drawn from other disciplines, particularly decision theory
...
The first objective of risk management is survival; to guarantee the continuing existence of the organization
as an operating entity
...
Risk retention deserves serious consideration when the maximum loss potential is small
...
Risk management is concerned primarily with the risk management function of giant corporations and has
little relevance for smaller organizations
...
As it exists today, risk management represents the merging of three specialties; decision theory, risk
financing, and risk control
...
The first step in the risk management process is identification of the risks facing the organization
...
The final step in the risk management process is implementing the decision to deal with the risks
...
An organization's risk management policy should be approved by the highest policy-making body in the
organization
...
Risk management's primarily contribution to the organization is in reducing expenditures for insurance and
retained losses
...
The two fundamental characteristics of the insurance mechanism are transfer of shifting of risk and the
sharing of losses on some equitable basis
...
From the standpoint of individual, insurance is a device in which a small certain cost is substituted for a large
uncertain loss
...
In addition of the transfer of risk from individuals, the insurance mechanism also involves a reduction in the
total amount of risk
...
Other things being equal, the probable variation of actual from expected results varies with the number of
cases in the group
...
One of the most important of the elements of an insurable risk is "economically feasible insurability"
...
Insurance is similar to gambling in the sense that both involve the transfer of risk
...
Insurance cannot exist without a sufficiently large number of exposures to make losses predictable
...
Through the law of large numbers and a reduction in uncertainly, insurers are able to charge each individual
a premium that is less than the expected value of his or her loss
...
Self- insurance is a definitional impossibility, but the term has found widespread acceptance
...
In selecting an insurer, the most important consideration should be the cost of its products and the company's
attitude toward claim payment and cancellation of insured's
...
The primary purpose of underwriting is to avoid adverse selection
...
The financial status of the application is an important underwriting factor in both property insurance and life
insurance
...
Public adjusters represent the policyholder in the loss adjustment process
...
Retention can effectively used in risk management in case of losses which are highly predication only
...
The function definition of insurance is based on the compensation for loss
...
The basic function of underwriting is to avoid insuring people who are likely to have losses
...
The type of insurance in which the insurance are also the insurance is a reciprocal insurer
...
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...

It is the process of insurance [ not hedging ]
Insurer can eliminate small losses through deductibles
The Insurance is the most attractive not avoidance

Depreciation is not a risk but it is a natural state of machines
sickness is not a Hazard
Risk management is not synonymous to insurance management
...

Final step is selecting the best method in dealing with risk
...

Economically feasible insurability
...
Insurance transfer risk but gambling create risk
A premium will be lawer than befor & it is not necessary to be lawer than
expected value of loss
The most important consideration is the financial position of the firm & cost of
insurance
...
Ye7ia
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(X)
()
()

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...
of exposure
Reciprocal = re insurance

………………………………………………………………………………………

Very important questions:
Example: 1
An insurance policy contained an aggregate deductible of 10000$ , with respect to all four losses
a) (indicate any mathematical operations)
occur during the year , complete the following table
losses
Amount of losses
Insurer payments
b) Insured payment
st
1
4500
?
?
c)
2nd
3300
?
?
rd
3 d)
3500
?
?
4th
2450
?
?
Total
?
?
?

Solution
Aggregate deductible = 10000, total loss during the year = 4500+ 3300+3500+2450 = 13750
 loss = 13750 > deductible 10000
losses
Amount of losses
st
1
4500
2nd
3300
rd
3
3500
4th
2450
Total
13750

Insured payment
4500
3300
2200
10000

Insurer payments
1300
2450
3750

Example: 2
Let us assume the number of accident collision is 40, the average loss of these cars is 20000$,
average frequency = 0
...
of exposture

units

= 0
...
02 =2000

b) 20000

=

Mr
...

, amount of all losses =20000 *40 =800000$

the amount of all losses
40

c) Pure premium = 0
...
33%

………………………………………………………………………………………

1) Gross premium equation (give numerical example)?
 The earlier net or pure premium represents the cost of loss only without any loading
...
667

2) Characteristics of social insurance (give at least five)?






Benefits related to contribution
Emphasis on social equity
Help to coverage un employment
Social security and medical care
Help personal finance

3) Explain pro rata liability clause (contribution) give numerical example?


Schedule rating charges for building & constructions
Basic rate 0
...
10%
Deficient roof
0
...
20%
………
...
10%
- Credit sprinkles (0
...

Final net rate
0

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