Deck 5: The Evolution of Risk Management: Enterprise Risk Management

Question 1

CAT bonds seek to protect the insurance industry from catastrophic events.

Answer 1

True

Question 2

The strategy using forward contracts is known as "switch out of it" defense.

Answer 2

False

Question 3

People interpret the term "firm's value" similarly with public and nonpublic companies.

Answer 3

False

Question 4

Forward contract characteristics are standardized.

Question 5

Both forwards and futures obligate the owner of the instrument to buy or sell an asset for a specified price at a specified time in the future.

Question 6

A company is a "good citizen" if it abides by the law and pursues profits.

Question 7

The enterprise risk manager depends on the actuarial and underwriting expertise to ensure the assets side of the business is well managed.

Question 8

Life expectancy shows the length of life expected for people born in each year.

Question 9

A put option acts like insurance to protect a floor selling price for a commodity.

Question 10

The chief risk officer (CRO) is responsible for all risk elements of the firm-pure and opportunity risks.

Question 11

Contingent surplus notes are securities backed by a pool of diversified assets.

Question 12

Underwriters specialize in forecasting the losses and developing the losses' potential future impact on the insurers.

Question 13

A call option grants the right to sell at the strike price.

Question 14

Together, income statements and balance sheets are known as financial statements.

Question 15

The strike price in an options contract is also called the exercise price.

Question 16

Futures are traded in the over-the-counter market.

Question 17

Due diligence is the process of evaluating risks, selecting which risks to accept, and identifying potential adverse selection.

Question 18

The swap derivative can act as insurance to mitigate interest rate risk.

Question 19

Franchise value is an alternative term for brand equity.

Question 20

Capital and surplus represent debt on the balance sheet of a nonfinancial firm.

Question 21

Reserving liabilities involves the calculation of the amount that the insurer needs to set aside to pay future claims.It's equivalent to the _____ of a nonfinancial firm.

A)equity
B)assets
C)reserves
D)debt
E)market value

Question 22

The enterprise risk manager depends on two types of experts to ensure the liabilities side of the business is well managed.Identify these experts.

A)Assessors and accountants
B)Actuaries and covenants
C)Covenants and attorneys
D)Actuaries and underwriters
E)Underwriters and assessors

Question 23

A firm's brand equity entails the value created by a company with:

A)consistent profits.
B)the largest market share.
C)a good reputation and good products.
D)frequent advertising.
E)a strong risk management system.

Question 24

They specialize in forecasting the losses and developing the losses' potential future impact on the insurers.They use mortality tables and life expectancy tables to estimate the future losses that the insurer must pay.Identify them.

A)Accountants
B)Underwriters
C)Actuaries
D)Covenants
E)Assessors

Question 25

Which of the following explains the details of the contracts and promises between the debt contract parties?

A)Capital structures
B)Covenants
C)Underwritings
D)Actuaries
E)Due diligence

Question 26

How do we calculate the firm's net worth?

A)Surplus minus liabilities
B)Reserves minus liabilities
C)Reserves added to assets
D)Capital minus surplus
E)Assets minus liabilities

Question 27

A firm's choice between debt and equity refers to its:

A)capital expenditure.
B)corporate governance.
C)capital structure.
D)cost of capital.
E)covenants.

Question 28

Which of the following is the mix of assets held by an insurer?

A)Asset allocation
B)Actuary
C)Underwriting
D)Covanent
E)Gentrification

Question 29

For a publicly traded firm, market value can be calculated or defined as the:

A)price of the stock times the number of shares traded.
B)increase in price of the stock times the number of shares traded.
C)face value of the stock times the number of shares traded.
D)sum of the number of shares traded and the price of the stocks.
E)face value of the stock times the increase in price of the stock for a particular period.

Question 30

The firm must maintain assets to cover the reserves and still leave the insurer with an adequate net worth in the form of:

A)liability accounts.
B)capital and surplus.
C)asset portfolio.
D)accounts receivables.
E)investment portfolio.

Question 31

For an insurance company, the asset-liabilities matching ensures:

A)that insurance policies are not issued at high risk areas.
B)risk minimization so that minimum claims are filed.
C)liquidity so that when claims come due the firm has available cash to pay for losses.
D)transparency among the insurers and the policyholders.
E)that individuals and groups that do not have to ability to pay premiums are not insured.

Question 32

Reserving liabilities involves the calculation of the amount that the insurer needs to set aside to pay future claims.The investment side includes decisions about asset allocation to achieve the best rate of return on the assets entrusted to the insurer by the policyholders seeking the security.The allocation of assets is necessary to meet the timing of the claims obligations.This activity is called:

A)gentrification.
B)due diligence.
C)redlining.
D)asset-liabilities matching.
E)blockbusting.

Question 33

Identify the statement that defines sustainability.

A)The capacity to maintain a certain process or state.
B)The value created by a company with a good reputation and good products.
C)The price of the stock times the number of shares traded
D)Value of equity held by the owners of a company plus income in the form of dividends.
E)The process of evaluating risks, selecting which risks to accept, and identifying potential adverse selection.

Question 34

For insurance companies, the liabilities comprise mostly reserves for claims on the products sold by the life insurer.These reserves are computed by:

A)actuaries.
B)underwriters.
C)covenants.
D)accountants.
E)assessors.

Question 35

Insurance-linked securities provide issuers with less flexibility and more reliance on reinsurers.

Question 36

A balanced sheet provides a snapshot of a firm's:

A)cash flows.
B)risk management activities.
C)future strategies.
D)assets and liabilities.
E)stock prices.

Question 37

When we say financial statements of a firm, we are referring to:

A)the accounts receivables and balance sheets.
B)the income statements and balanced sheets.
C)the accounts payable and balance sheets.
D)the accounts receivables and accounts payables.
E)the nominal ledger.

Question 38

Identify the process of evaluating risks, selecting which risks to accept, and identifying potential adverse selection.

A)Due diligence
B)Redlining
C)Actuary
D)Gentrifying
E)Underwriting

Question 39

Which of the following statements is true about an insurance firm?

A)The reserves for insurance products are computed by underwriters.
B)Actuaries use mortality tables and life expectancy tables to estimate the future losses that the insurer must pay.
C)Morality tables show the length of life expected for people born in each year.
D)Life expectancy tables indicate the percent of expected deaths for each age group.
E)Underwriters specialize in forecasting the losses and developing the losses' potential future impact on the insurers.

Question 40

Which of the following best describes stockholders' wealth?

A)Value of equity held by the owners of a company plus salary from a job in the company.
B)Value of equity held by the owners of a company plus income in the form of dividends.
C)Value of equity held by the owners of a company plus income in the form of increasing stock prices.
D)Value of equity held by the owners of a company plus income in the form of stocks.
E)Value of equity held by the owners of a company plus future security.

Question 41

List and define five types of insurance-linked securities (ISLs).

Question 42

Identify the derivative tools that are agreements to exchange or transfer expected future variable-price purchases of a commodity or foreign exchange contract for a fixed contractual price today.

A)Forwards
B)Futures
C)Swaps
D)Options
E)Coupons

Question 43

Describe securitization.How has it made a difference n the way insurance risk is traded?

Question 44

Explain the concept of sustainability from a risk management perspective.

Question 45

These derivative tools are traded in the over-the-counter market, and contract characteristics can be tailored to meet specific customer needs.Farmers and grain elevator operators also use them to lock in a price for their corn or soybeans or wheat.Identify them.

A)Forwards
B)Futures
C)Swaps
D)Options
E)Coupons

Question 46

Identify the risk of loss from failure of a counterparty, or second party, in a derivatives contract to perform as agreed or contracted.

A)Prepayment risk
B)Concentration risk
C)Credit risk
D)Reinvestment risk
E)Leverage risk

Question 47

In forward contracts, the amount of money above and beyond the futures price is known as:

A)terra.
B)annuity.
C)covenant.
D)alle.
E)basis.

Question 48

_____ strategies are known as "cap" and "floor" defenses.

A)Forward
B)Swaps
C)Futures
D)Option
E)Coupon

Question 49

What are options? How are they different from futures/forward contracts? What are the different kinds of options?

Question 50

In this process, the risks that have been underwritten are pooled together into a bundle, which is then considered an asset and the underwriter then sells its shares; hence, the risk is transferred from the insurers to the capital markets.Identify this process.

A)Reinsurance
B)Securitization
C)Credit swapping
D)Redlining
E)Gentrification

Question 51

Agreements that give the right (but not the obligation) to buy or sell an underlying asset at a specified price at a specified time in the future are known as:

A)forwards.
B)futures.
C)coupons.
D)swaps.
E)options.

Question 52

Which of the following examines every action and items in the financial statement of companies to ensure the data reflect true value?

A)Underwriting
B)Actuary
C)Redlining
D)Blockbusting
E)Due diligence

Question 53

Which of the following is a similarity between forwards and futures?

A)Both are traded in the over-the-counter market.
B)Both can be tailored to meet specific customer needs.
C)Both trade on an exchange with standardized contract specifications.
D)The prices for both derive from the spot, or cash market, which is "today's" price for a particular asset.
E)Both are agreements that give the right (but not the obligation) to buy or sell an underlying asset at a specified price at a specified time in the future.

Question 54

Which of the following explains the difference between options and futures/forward contracts?

A)An option is the right to buy or sell, whereas a futures/forward contract is an obligation to buy or sell.
B)An option is traded in the over-the-counter market, whereas a futures/forward contract is traded on an exchange.
C)An option has standardized contract specifications, whereas a futures/forward contract can be tailored to meet specific customer needs.
D)An option is traded on an exchange, whereas a futures/forward contract is traded in the over-the-counter market.
E)An option is an obligation to buy or sell, whereas a futures/forward contract is the right to buy or sell.

Question 55

Identify the noninsurance instruments used to hedge, or protect, against adverse movements in prices in stocks or in commodities such as rice and wheat or rates such as interest rates or foreign exchange rates.

A)Mutual funds
B)Derivatives
C)Covenants
D)Hedge funds
E)Annuities

Question 56

What are derivatives? Summarize the similarities and differences between forward and futures contracts.

Question 57

Explain the role of actuaries in insurance firms.

Question 58

In an ecological context, _____ can be defined as the ability of an ecosystem to maintain ecological processes and functions.

Question 59

The strategy of swaps are known as:

A)"lock it in" defense.
B)"switch out of it" defense.
C)"cap" defense.
D)"floor" defense.
E)"ceiling" defense.

Question 60

Which of the following is the specified price in the option contract?

A)Basis price
B)Switch price
C)Strike price
D)Floor price
E)Cap price

Question 61

Securitization instruments are also called _____.

Question 62

If the reserve calculations miss the mark, the insurer can become insolvent very quickly and lose the _____, which is its net worth.

Question 63

Packaging and transferring the insurance risks to the capital markets through the issuance of a financial security is termed _____.

Question 64

_____ represent equity on the balance sheet of a nonfinancial firm.

Question 65

_____ is a derivative tool that trades on an exchange with standardized contract specifications.

Question 66

The insurance firm maintains _____ in the form of reserves on balance sheets to cover future claims and other obligations such as taxes and premium reserves.

Question 67

Collateralized debt obligations are securities backed by a pool of diversified assets.When the underlying assets are bonds, they are referred to as _____.

Question 68

Buying in the forwards/futures market allows the manufacturer to guarantee future delivery of the wheat at a locked-in price.Hence, this strategy is known as a "_____" defense.

Question 69

A put option grants the right to _____ at the strike price.

Question 70

_____ can be defined as financial securities whose value is derived from another underlying asset.

Question 71

A _____ option acts like insurance to provide an upper limit on the cost of a commodity.

Question 72

_____ tables indicate the percent of expected deaths for each age group.

Question 73

With _____, the insurer has the option to sell equity at predetermined prices, contingent upon the catastrophic event.

Question 74

Insurance _____ develop specialized expertise to ensure that the insurer does not sell the products too cheaply for the risks that the insurer accepts.

Question 75

An investor advantage in insurance-linked securities is _____, as these instruments allow noninsurance investors to participate in insurance-related transactions