1

Chapter 1 - Summary
Current definitions of risk:
1. It is the probability or chance of loss.
2. It is the uncertainty concerning the occurrence of a financial loss.
3. Risk is a condition in which there is a possibility of an adverse deviation of actual outcome from
expected outcome
1- Objective Risk:
The relative variation between actual outcome (or loss) and expected outcome (or loss).
𝐀𝐜𝐭𝐮𝐚𝐥 𝐥𝐨𝐬𝐬𝐞𝐬 − 𝐄𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐥𝐨𝐬𝐬𝐞𝐬
𝐎𝐛𝐣𝐞𝐜𝐭𝐢𝐯𝐞 𝐑𝐢𝐬𝐤 = × 𝟏𝟎𝟎
𝐄𝐱𝐩𝐞𝐜𝐭𝐞𝐝 𝐥𝐨𝐬𝐬𝐞𝐬
Expected Loss = Exposure units x probability. Of loss
The law of large numbers which is states that:
- As the number of exposure units increases, the actual loss will be close to the expected loss.
- As the number of exposure units increases, an insurance company can predict its future losses with a
high degree of accuracy and can determine a fair and adequate insurance premium.
2- Subjective Risk
Is defined as uncertainty based on a person’s mental condition or state of mind and it is not insurable.
Chance of loss: Is defined as the probability that an event will occur.
Peril: The cause of loss. ‫مسبب أو بسبب الخسارة‬ p
Personal peril: Death / Disability / Sickness.
m
Property peril: Fire / Collision / Lightning / Theft Burglary / Windstorm/ Earthquake.
ca

Hazard: It is any condition (factor) that increases the chance of loss or the severity (size) of loss.
Physical Hazard 2) Moral Hazard: 3) Morale Hazard:
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es

It is a physical condition that It is dishonesty or character in It is the carelessness or

increases the chance of loss or an individual that increase the indifference to loss because of
Zn

the severity of loss like: frequency or severity of loss the existence of insurance like:
Bi

- Chemical material in a plant like: - Leaving car keys in an

increases the chance of fire - Make Fake accident to collect unlocked car, which increases
- Mechanical defect in a car money from insurance the chance of theft.
increases the chance of company.
collision

Basic classifications of risk

Financial risks (it is an insurable risk). Non-financial Risks (not insurable risk)
Have financial consequences such as: Contain a feeling or emotional condition such as
1. Collision, Fire, Theft, Death, Earthquake. death of a friend or a failure in an exam.

Pure risks (insurable risk) Speculative Risks (not insurable risk)

Is a situation where there is only one possible Is a situation where there are two possible
outcome which is loss such as: outcomes profit or loss such as:
1. Death, Fire, Collision, Flood, Earthquake. 1. Buying stocks of business firm.
2. Producing a new product or Gambling.

Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy

 2

Static risks (insurable risk) Dynamic Risks (not insurable risk)

Are risks connected with losses caused by Risks associated with changing economy such
irregular action of nature. as: inflation, technological changes, consumer
taste change.
Fundamental risks (not insurable risk) Particular Risks (insurable risk)
Is a risk that affects the whole economy or large Is a risk that affects only the individual and not
no. of persons within the economy such as: the whole economy such as: theft, collision,
- Economic changes: as inflation and death, fire.
unemployment.
- Natural disaster: as flood and earthquake.
- Political conditions: as riot, strike and war.

Types of pure risks

1. Personal risks 2-Property risks: 3. Liability risks:

a. Risk of premature death. There are 2 major types of Most persons and business
b. Risk of old age. property risk: Loss maybe: firms may face under the civil
c. Risk of poor health. A. Direct loss: is a financial loss law, anyone can be held legally
d. Risk of unemployment. that results from the physical
p liable if he does something that
damage or destruction or theft result in bodily injured or
m
of the property. property damage to someone
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B. Indirect or consequential else.

s

loss: Is the financial loss that

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results from the indirect

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consequences of the physical

damage in the property.
Bi

Methods of handling risks

There are 2 approaches

Risk Control Risk Financing

Risk Avoidance Loss Control Risk Retention Risk Transfer

a) Risk Avoidance, Doing nothing to handle risk and considered a negative technique, for
example, not entering a certain business from fear of losing money.
b) Risk retention, Where individual or firm may retain all or part of the risk actively
(deductibles and self-insurance) or passively.
c) Risk Transfer, By contracts or by insurance.
d) Loss Control, includes certain activities undertaken to reduce both frequency and severity,
by loss prevention or loss reduction.
e) Insurance, and it is the most practical method of handling risks of small probability and
high severity.
Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy
 3

Chapter (1) – Questions - MCQ

(1) The risk has been defined as:

A. The adverse deviation of actual outcome from expected outcome.
B. The probability of loss.
C. Uncertainty of occurrence financial loss.
D. All the above.
(2) The risk can be defined as:
A. Any situation in which the probability of loss is one.
B. Any situation in which the probability of loss is zero.
C. Uncertainty concerning the occurrence of financial loss.
D. The certainty of a loss occurring.
(3) The objective risk is defined as:
A. The relative variation between actual and expected loss.
B. Uncertainty based on state of mind.
C. Uncertainty of occurrence nonfinancial loss. p
m
D. All the above.
ca

(4) The Objective risk is defined as:

A. The probability of loss.
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es

B. The relative variation of actual loss from expected loss.

Zn

C. Uncertainty based on a person's mental condition or state of mind.

D. The cause of loss.
Bi

(5) The relative variation between actual and expected results is known as:
A. Objective risk. B. Objective probability.
C. Subjective probability. D. Subjective risk.
(6) Uncertainty based on a person's mental condition or state of mind is known as:
A. Objective risk. B. Subjective risk.
C. Objective probability. D. Subjective probability.
(7) The law of large number state that, as the number of exposure units increases:
A. The objective risk will decrease.
B. The actual loss will be close to the expected loss.
C. An insurance company can predict its future losses with a high degree of accuracy.
D. All the above.

Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy

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(8) The probability that an event will occur refers to:

A. Liability Risk. B. Chance of Loss.
C. Direct Loss. D. Financial Risk.
▪ Given the following table, answer the questions from (9) to (13).
Year 2022 2023
No. of buildings insured against fire 10,000 50,000
The probability of fire 1% 1%
Therefore, expected number of buildings may burn ?? ??
But assuming actual No. of building burn 105 510
Therefore, the objective risk is ?? % ?? %
Thus, objective risk declines from? % to? % as the number of exposure units increases
from? in 2022 to?% in 2023. This concept is known as the law of ……………
(9)The expected number of buildings may burn (in 2022) = ...
A. 500 B. 1000 C. 100
p D. 105
m
(10) The expected number of buildings may burn (in 2023) = ...
ca

A. 500 B. 1000 C. 100 D. 105

s
es

(11) The objective risk (in 2022) = ...

Zn

A. 4% B. 5% C. 6% D. 8%
Bi

(12) The objective risk (in 2023) = ...

A. 6% B. 5% C. 4% D. 2%
(13) Thus, objective risk declines as the number of exposure units increases. This concept is
known as ……
A. The chance of loss B. The law of large numbers
C. The subjective risk D. The peril
(14) Given the following data: No. of cars insured against theft 30,000 cars. The actual no. of
stolen cars is 615 cars. If you know that the objective risk is 2.5%, find the expected no. of
stolen cars.
A. 425 B. 492 C. 562 D. 600
(15) Given the following data: No. of cars insured against theft 30,000 cars. The actual no. of
stolen cars is 615 cars. If you know that the objective risk is 2.5%, calculate the chance of theft.
A. 1.64% B. 1.36% C. 1.16% D. 2%

Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy

 5

(16) The cause of the loss:

A. Pure risk. B. Peril. C. Hazard. D. Risk.
(17) A peril is:
A. A moral hazard.
B. The cause of a loss.
C. A condition which increases the chance of a loss.
D. The probability that a loss will occur.
(18) To be technically correct, we should define "fire" as:
A. a Peril. B. a Hazard.
C. Physical Hazard. D. Objective risk.
(19) An earthquake is an example of a (an):
A. Moral hazard. B. Peril.
C. Physical hazard. D. Objective risk.
(20) The condition that increases the chance of loss or the severity of loss is defined as:
p
m
A. Peril B. pure risk.
ca

C. Hazard. D. All the above.

s

(21) A defective gas line that may lead to an explosion is an example of:
es

A. Peril. B. objective risk.

Zn

C. Morale Hazard. D. Physical Hazard.

Bi

(22) Fictitious accident to obtain indemnification amount is an example of:

A. objective risk. B. Morale Hazard.
C. Moral Hazard. D. Physical Hazard.
(23) Faking an accident to collect insurance proceeds is an example of a:
A. Physical hazard. B. Objective risk.
C. Moral hazard. D. Attitudinal hazard.
(24) Dishonesty or character defects in an individual that increase the frequency or severity of
loss, refers to:
A. Physical Hazard. B. Morale Hazard.
C. Moral Hazard. D. Legal Hazard.
(25) Dense fog that increases the chance of an automobile accident is an example of a:
A. Speculative risk. B. Peril.
C. Physical hazard. D. Moral hazard.
Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy
 6

(26) Carelessness or indifference to a loss is an example of:

A. Physical hazard. B. Objective probability.
C. Moral hazard. D. Morale hazard.
(27) The risk which arises because of change in major economic, social, cultural, and political
factors are:
A. Particular risk. B. Fundamental risk.
C. Speculative risk. D. Static risk.
(28) Dynamic risks are closely related to:
A. Speculative risk. B. Static risk.
C. Particular risk. D. Personal risk.
(29) An automobile that could be totaled in a collision is an example of which of the following
types of risk? I. Speculative risk. II. Fundamental risk
A. I only B. II only
C. Both I and II D. Neither I nor II
p
m
(30) A situation in which there is only the possibility of loss is a:
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A. Risk. B. Peril.
s

C. Other risks. D. Pure risk

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(31) The premature death of an individual is an example of a:

Zn

A. Pure risk. B. Speculative risk.

Bi

C. Fundamental risk. D. Physical hazard.

(32) The insurable risk associated with:
A. A particular risk and speculative risk.
B. A particular risk, a pure risk and a static risk
C. A fundamental risk, a pure risk and a static risk
D. A particular risk and speculative risk and a static risk
(33) From the following which is an example of speculative risk.
A. War. B. unemployment.
C. Inflation. D. none of the above.
(34) One of the following is not example of direct particular property loss with
A. Destruction of a firm's manufacturing plant by an earthquake
B. Theft of person stereo. C. Destruction of a firm's manufacturing plant by a flood.
D. extra expense of a business to remain in operation following a fire.
Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy
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(35) ……… is the term referring to responsibility?

A. Fundamental risk B. static risk
C. Property risks D. Liabilities risks.
(36) A situation in which either profit or loss is possible:
A. Pure Risk. B. Speculative Risk.
C. Subjective Risk. D. Objective Risk.
(37) All the following are examples of personal risks EXCEPT:
A. Poor health. B. Unemployment.
C. Premature death. D. Flood.
(38) A financial loss that results from the physical damage and destruction of the property
because of fire is considered as:
A. Hazard. B. Passive retention.
C. Consequential loss. D. direct loss.
(39) A financial loss that results indirectly from the occurrence of a direct physical damage or
p
m
theft loss, e.g., the additional living expenses after a fire:
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A. Direct loss. B. Active retention.

s

C. indirect of consequential loss. D. Passive retention.

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(40) A financial loss that results from the physical damage, destruction, or theft of the property,
Zn

such as fire damage to a home:

Bi

A. Direct Loss. B. Pure Risk.

C. Retention. D. Other Risks.
(41) The extra expense incurred by a business to stay in operation following a fire is an example
of a(n):
A. Fundamental risk. B. Speculative risk.
C. Direct loss. D. Indirect loss.
(42) All the following are examples of direct property losses EXCEPT:
A. The theft of a person's jewelry.
B. The destruction of a firm's manufacturing plant by an earthquake.
C. The cost of renting a substitute vehicle while a collision-damaged car is being repaired.
D. The vandalism of a person's automobile.

Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy

 8

(43) Involve the possibility of losses associated with the destruction or theft of property, is …
A. Liability risks. B. Pure risks.
C. Property Risk. D. Other risks.
(44) Under the civil law, anyone can be held legally liable if he does something that result in
bodily injury or property damage to someone else, which known as:
A. Property risk. B. personal risk.
C. Hazard. D. Liability risk.

Solution
1 D 2 C 3 A 4 B 5 A
6 B 7 D 8 B 9 C 10 A
11 B 12 D 13 B 14 D 15 D
16 B 17 B 18 A 19 B 20 C
21 D 22 C 23 C 24 C 25 C
p
m
26 D 27 B 28 A 29 D 30 D
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31 A 32 B 33 D 34 D 35 D
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es

36 B 37 D 38 D 39 C 40 A
Zn

41 D 42 C 43 C 44 D
Bi

Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy

 9

True or False
(1) Subjective risk is inversely related to number of exposure units.
(2) Subjective risk is defined as the uncertainty based on an insurance company condition.
(3) Subjective risk is defined as the uncertainty based on an individual’s mental condition or
state of mind.
(4) As the number of exposure units increases, the subjective risk will decrease.
(5) Objective risk declines as the number of exposure units increases.
(6) The law of large numbers stated that: when number of exposure units increases, the
variation between actual loss and expected loss increases.
(7) The law of large numbers states that: As the number of exposure units increases, the
variation between actual and expected will decrease.
(8) Objective risk does not differ among insurance companies.
(9) Subjective Probability is the person's estimate of the chance of loss.
(10) The chance of loss may be the same for two different groups.
p
m
(11) Peril is a physical condition that increases the chance of loss or the severity of loss.
ca

(12) There are many personnel perils that cause partial or total loss of a property, such as fire,
s

collision lightning, theft and burglary.

es

(13) An example of property perils is the loss of income if a person dies prematurely.
Zn

(14) Carelessness and indifference are indicators of moral hazard.

Bi

(15) It is difficult to control physical hazards.

(16) A hazard is anything that is likely to cause loss, such as a fire, a windstorm, or an
earthquake.
(17) We should define "FIRE" as a loss.
(18) Chemical material in a plant is a moral hazard that increases the chance of fire.
(19) Natural disasters are examples of particular risk.
(20) Death of a friend and failure in an exam these cases are example of financial risks.
(21) Extra expenses are an example of direct loss of business firm destruction.
(22) Renting temporary places for a business to keep customers is an example of indirect cost
of property loss.
(23) There must be a direct loss before there can be an indirect.
(24) Causing bodily injury of someone else is an example of personal risk.
(25) Harming customers by providing defective products is an example of liability risks.
Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy
 10

(26) Examples of speculative risks include premature death, disability, lightning, flood and
earthquake.
(27) Pure risk is defined as a situation where there are two possible outcomes, profit or loss.
(28) Speculative risk is defined as a situation where there are two possible outcomes, profit or
loss.
(29) Examples of particular risks are wars, earthquakes, and floods.
(30) Indirect or consequential loss is a financial loss that results from the indirect consequence
of the physical damage, destruction, or theft of the property.
(31) The changing tastes of consumers, technological changes, and new methods of production
these cases are examples of static risks.
(32) Examples of static risks include death, disability, fire, and earthquake.
(33) Most static risks are speculative risks and not insurable.
(34) Static risks are risks associated with changing economy.
(35) Dynamic risks are those exposures to loss that result from changes in the economy.
p
m
(36) Dynamic risks are risks connected with losses caused by irregular actions of nature or by
ca

the mistakes and misdeeds of human beings.

s

(37) The risk of inflation is a fundamental risk since, with few exceptions, the entire economy
es

is harmed by rapid inflation.

Zn

(38) Fundamental risks may be due to economic changes: like inflation and unemployment.
Bi

(39) A particular risk is a risk that affects only the individual and not the whole economy
Solution
1 F 2 F 3 T 4 F 5 T
6 F 7 T 8 F 9 T 10 T
11 F 12 F 13 F 14 F 15 F
16 F 17 F 18 F 19 F 20 F
21 F 22 T 23 T 24 F 25 T
26 F 27 F 28 T 29 F 30 T
31 F 32 T 33 F 34 F 35 T
36 F 37 T 38 T 39 T

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 11

Chapter 1 – Important Questions

(1) The risk has been defined as:
A. The adverse deviation of actual outcome from expected outcome.
B. The probability of loss.
C. Uncertainty of occurrence financial loss.
D. All the above.
(2)The probability that an event will occur refers to:
A. Liability Risk. B. Chance of Loss.
C. Direct Loss. D. Financial Risk.
(3)The objective risk is defined as:
A. The relative variation between actual and expected loss.
B. Uncertainty based on state of mind.
C. Uncertainty of occurrence nonfinancial loss. D. All the above.
(4)The law of large number state that, as the number of exposure units increases:
A. The objective risk will decrease.
B. The actual loss will be close to the expected loss.
C. An insurance company can predict its future losses with a high degree of accuracy.
D. All the above
p
m
(5) Given that the number of buildings insured against the fire = 10,000 buildings, and the
ca

probability of fire = 0.01. If the actual number of buildings burn by fire = 105 buildings.
Therefore, the expected number of buildings burn = …...
s
es

A. 500 B. 1000
Zn

C. 100 D. 105
(6)The objective risk = ...
Bi

A. 4% B. 5%
C. 6% D. 8%
(7) An earthquake is an example of a (an):
A. Moral hazard. B. Peril.
C. Physical hazard. D. Objective risk.
(8) The condition that increases the chance of loss or the severity of loss is defined as:
A. Peril B. pure risk.
C. Hazard. D. All the above.
(9) A defective gas line that may lead to an explosion is an example of:
A. Peril. B. objective risk.
C. Morale Hazard. D. Physical Hazard.
(10) Faking an accident to collect insurance proceeds is an example of a:
A. Physical hazard. B. Objective risk.
C. Moral hazard. D. Attitudinal hazard.
(11) Carelessness or indifference to a loss is an example of:
A. Physical hazard. B. Objective probability.
C. Moral hazard. D. Morale hazard.
Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy
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(12) The risk which arises because of change in major economic, social, cultural, and political
factors are:
A. Particular risk. B. Fundamental risk.
C. Speculative risk. D. Static risk.
(13) A situation in which there is only the possibility of loss is a:
A. Risk. B. Peril.
C. Other risks. D. Pure risk
(14) A situation in which either profit or loss is possible:
A. Pure Risk. B. Speculative Risk.
C. Subjective Risk. D. Objective Risk.
(15) The extra expense incurred by a business to stay in operation following a fire is an
example of a(n):
A. Fundamental risk. B. Speculative risk.
C. Direct loss. D. Indirect loss.
1 D 2 B 3 A 4 D 5 C
6 B 7 B 8 C 9 D 10 C
11 D 12 B 13 D 14 B 15 D
True or False
p
m
(1) Subjective risk is defined as the uncertainty based on an individual’s mental condition or
ca

state of mind.
(2) Objective risk does not differ among insurance companies.
s
es

(3) The law of large numbers stated that: when number of exposure units increases, the
Zn

insurance company can predict its future losses with a high degree of accuracy.
(4) There is no difference between the chance of loss and the objective risk.
Bi

(5) It is difficult to control physical hazards.

(6) A physical hazard is a physical condition that increases the chance of loss or the severity of
loss.
(7) Chemical material in a plant is a moral hazard that increases the chance of fire.
(8) Death of a friend and failure in an exam these cases are example of financial risks.
(9) There must be a direct loss before there can be an indirect.
(10) Causing bodily injury of someone else is an example of personal risk.
(11) Harming customers by providing defective products is an example of liability risks.
(12) Examples of speculative risks include premature death, disability, lightning, flood and
earthquake.
(13) Examples of static risks include death, disability, fire, and earthquake.
(14) Most static risks are speculative risks and not insurable.
(15) The risk of inflation is a fundamental risk since, with few exceptions, the entire economy
is harmed by rapid inflation.
1 T 2 F 3 T 4 F 5 F
6 T 7 F 8 F 9 T 10 F
11 T 12 F 13 T 14 F 15 T
Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy
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Chapter 2 - summary
Risk management is a scientific approach to deal with pure risks faced by individuals and organizations
and to analyze pure risks in relation to the profitability.
Risk management is much broader than insurance management:
1. Risk management deals with both insurable and uninsurable risks, while insurance management
deals ONLY with insurable risks.
2. Risk management has many methods to handle risk, while insurance is only one of several methods
for handling risk.
3. Risk management requires large number of individuals and department throughout the firm than
insurance.
4. Risk management decisions haves greater impact on the firm than insurance.
The process of risk management consists of 6 steps
1. Determination of Objectives
Pre-loss Objectives: The firm has many risk management objectives prior to the occurrence of the loss.
 The Economy Goal  Reduction of Worry &  Meeting externally
Fear imposed obligation

The post loss objective of risk management:

 Survival of the firm.  Continue in work.  Stability of earnings.
 Continue in growth.
2. Identification of Risks (the most important step). p
3. Evaluation of Risks (Measurement of Risks).
m
Critical Risks Important Risks Unimportant Risks
ca

All risks in which the losses would All risks in which the losses would All risks in which the losses can
lead to insolvency. require the firm to borrow in order be met from assets or cash.
s

to continue operations.
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4. Selecting the Appropriate Technique for Handling Risks.

Zn

Loss Frequency Loss Severity The Appropriate Technique

Low Low Risk Retention
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High Low Loss Control or Risk Retention

Low High Insurance or loss Control
High High Avoidance or may be Loss Control
5. Implementing and Administering the Program.
6. Evaluate and Review.

The major requirements of an insurable risk.

a) There must be a large number of homogenous exposure units.
This is to enable the insurer to predict loss with a high degree of accuracy.
b) The loss must be accidental or unintentional.
Loss must be due to chance. This requirement decreases moral hazard.
c) The loss must be determinable and measurable.
Loss must be determinable with respect to cause, time, place and amount.
d) The loss should not be catastrophic.
Loss should not occur for large number of exposure units at the same time.
e) The chance of loss must be calculable.
The insurer must be able to compute both the average frequency and the average severity of
future losses with some accuracy.
f) The premium must be economically feasible.
 Pure risks (personal, property and liability risks) are insurable.
 Market, technical, production, economic, political and natural risks are uninsurable.

Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy

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Chapter (2) – Questions - MCQ

1) The appropriate technique for handling high frequency and low severity losses is
A) Active retention. B) Avoidance.
C) Insurance. D) Passive retention.
2) The appropriate technique for handling low frequency and high severity losses is
A) Active retention. B) Avoidance.
C) Insurance. D) Passive retention.
3) The appropriate technique for handling low frequency and severity losses is
A) Retention. B) Avoidance.
C) Insurance. D) Loss control.
4) The appropriate technique for handling high frequency and high severity losses is
A) Active retention. B) Avoidance.
C) Insurance. D) Passive retention.
5) Which of the following types of loss exposures are best handled by the use of avoidance?
p
m
A) low-frequency, low-severity. B) low-frequency, high-severity.
ca

C) high-frequency, low-severity. D) high-frequency, high-severity.

s

6) The risk most suited to treatment by insurance are those in which there is
es
Zn

A) a high probability and a low potential severity.

Bi

B) a low probability and a high potential severity.

C) a high probability and a high potential severity.
D) a low probability and a low potential severity.
7) Periodic inspections and sprinkler system are example of
A) Risk retention. B) Risk avoidance.
C) Risk transfer. D) Loss control.
8) Risk management concerned with
A) Deal with insurable pure risks. B) Deal with uninsurable pure risks.
C) Deal with speculative risks. D) Deal with insurable and uninsurable pure risks.
9) Risks may be unknowingly retained because of ignorance, indifference, or laziness.
A) Loss reduction. B) Passive retention.
C) Retention. D) Active retention.

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10) An individual is aware of the risk and intentionally plans to retain all or part of it.
A) Loss reduction. B) Passive retention.
C) Active retention. D) Retention.
11) You can avoid being mugged in a high crime area by not going there.
A) Peril. B) Hazard.
C) Avoidance. D) Risk.
12) Install a sprinkler system to reduce the damage caused by a fire
A) Loss Reduction. B) Retention.
C) Passive Retention. D) Loss prevention.
13) Loss control includes which of the following?
I. Loss reduction. II. Loss prevention.
A) I only. B) II only.
C) Both I and II. D) Neither I nor II.
14) Pre-loss objectives of risk management include which of the following?
p
m
I. Preparing for potential losses in the most economical way.
ca

II. Reduction of worry and fear.

s

A) I only. B) II only.
es

C) Both I and II. D) Neither I nor II.

Zn

15) The first step in the risk management process is:

Bi

A) Measure and analyze exposures.

B) Determining the risk management objectives.
C) Implementation of the risk management program.
D) Selection of the appropriate risk treatment technique.
16) Self-insurance is an example of which of the following risk management techniques?
A) Loss control. B) Noninsurance transfer.
C) Retention. D) Avoidance.
17) All of the following are post-loss risk management objectives EXCEPT:
A) Survival of the firm. B) Reduction of worry and fear.
C) Continued operations. D) Stability of earnings.
18) Transfer of risk to other party is done through:
A) Reduction. B) Control.
C) Retention. D) Insurance.
Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy
 16

19) All the following are requirements of an insurable risk EXCEPT:

A) There must be a large number of heterogeneous exposure units.
B) The loss must be accidental.
C) The loss must be definite as to cause, time, place, and the amount.
D) The loss should not be catastrophic.
20) From the viewpoint of the insurer, all of the following are characteristics of an insurable
risk EXCEPT
A) The loss must be accidental.
B) The loss should be catastrophic.
C) The premium must be economically feasible.
D) There must be a large number of exposure units
21) From the standpoint of the insurer, all of the following are characteristics of an insurable
risk EXCEPT
A) The loss must be unintentional. p
m
B) The chance of loss must be calculable.
ca

C) The loss must be indeterminable.

s

D) The loss must be measurable.

es

22) Which of the following is a characteristic of insurance?

Zn

A) Pooling of losses. B) Avoidance of risk.

Bi

C) Payment of intentional losses. D) Certainty about specific losses that will occur.
23) From the viewpoint of the insurer, all of the following are characteristics of an ideally
insurable risk EXCEPT
A) The loss must be accidental.
B) The loss should be catastrophic.
C) The premium must be economically feasible.
D) There must be a large number of exposure units.
24) Why is a large number of exposure units generally required before a pure risk is insurable?
A) It prevents the insurer from losing money.
B) It eliminates intentional losses.
C) It minimizes moral hazard.
D) It enables the insurer to predict losses more accurately.

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 17

(25) The requirement that losses should be accidental and unintentional in order to be insurable
results in which of the following?
I. Decrease in moral hazard
II. More accurate prediction of future losses
A) I only. B) II only.
C) Both I and II. D) Neither I nor II.
26) Which of the following is implied by the requirement that a loss should be determinable
and measurable to be insurable?
I. The loss must be definite as to place.
II. The loss must be definite as to amount.
A) I only. B) II only.
C) Both I and II. D) Neither I nor II.
27) A firm has several risk management objectives prior to the occurrence of loss.
Include the following:
A) The economy goals. B) Reduction of worry and fear.
C) Meeting externally imposed obligations. p D) All the above.
m
28) A firm has several risk management objectives prior to the occurrence of loss.
ca

Include the following:

A) Survival of the firm. B) Continuing in work.
s
es

C) The economy goals. D) Social responsibility.

Zn

29) All the following are post-loss objectives, EXCEPT:

Bi

A) Survival of the firm. B) Continuing in growth.

C) Reduction of worry and fear. D) Continuing in work.
30) Insurable risk must be:
A) Intentional. B) Determinable.
C) Catastrophic. D) All the above.
Solution
1 A 2 C 3 A 4 B 5 D
6 B 7 D 8 D 9 B 10 C
11 C 12 A 13 C 14 C 15 B
16 C 17 B 18 D 19 A 20 B
21 C 22 A 23 B 24 D 25 A
26 C 27 D 28 C 29 C 30 B

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 18

True or False
(1) Risk management is a scientific approach to dealing with all risks faced by individuals and
organizations.
(2) Risk manager is concerned only with the management of pure risks, not speculative risks.
(3) Risk management deals only with insurable risks.
(4) Risk avoidance is the best risk handling method.
(5) Risk avoidance is recommended when the chance of risk and severity of loss is low.
(6) Risk avoidance is recommended for those risks associated with low probability or frequency
and high severity.
(7) Firms can control risk by using risk avoidance or risk reduction.
(8) If loss frequency is high and loss severity is low, insurance will be the best method to handle
that risk.
(9) Risk transfer can be a useful technique for handling risk with low frequency and high
severity. p
m
(10) Individuals prefer using deductibles because of lower premiums.
ca

(11) In active risk retention, individuals have the intention to keep the risk.
s

(12) Under franchise deductible, when loss exceeds deductible, the insurer will pay nothing, and
es

the insured will bear all the risk.

Zn

(13) Self-insurance is misleading because it is not insurance.

Bi

(14) Self-insurance is a form of retention.

(15) Risk retention can be used in risks with high chance of loss and low severity.
(16) Risk can be transferred by using contracts.
(17) In insurance, risk is transferred from insured to the insurance company (insurer).
(18) Insurance is one of the mechanisms used to transfer risks.
(19) Insurance is the only method for handling risk.
(20) Risk control focuses on minimizing the probability of loss or severity of losses.
(21) Risk control focuses on maximizing the probability of loss or severity of losses.
(22) Since loss frequency and loss severity are low, risk retention is ideal.
(23) Risk transfer can be a useful technique for handling risk with low frequency and potential
losses are large
(24) Loss control is a useful technique for handling high frequency and high severity losses.

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 19

(25)The most appropriate technique of handling risk with low frequency and high severity is
Risk retention.
(26) Loss reduction reduces the frequency of loss.
(27) Risk management deals only with insurable risks.
(28) Periodic inspection is an example of loss reduction.
(29) Analyzing the cost and benefits of safety program expenses is an example of the post-loss
objectives of risk management.
(30) Reducing worry and fear should be conducted after loss occurred.
(31) Meeting the legal and governmental regulations is an example of pre-loss objectives of risk
management.
(32) Risk evaluation requires measuring frequency of loss and severity of loss.
(33) Frequency of loss is more important than severity of loss because risks with high frequency
can destroy the firm.
(34) Risks can be ranked as critical and important only. p
m
(35) Important risks can lead to the insolvency of the firm.
ca

(36) If the firm borrows to continue operations, this means that it faces critical risk.
s

(37) Risk reduction represents one of the risk financing methods.

es

(38) Passive retention occurs when you unknowingly retain a risk.

Zn

(39) One of the requirements of insurable risk is that loss must be accidental. This enables the
Bi

insurer to apply the law of large number.

(40) The loss must be determinable in terms of time and place only.
(41) One of the requirements of the insurable risk is that the loss should be catastrophic.
Solution
1 F 2 T 3 F 4 F 5 F
6 F 7 T 8 F 9 T 10 T
11 T 12 F 13 T 14 T 15 T
16 T 17 T 18 T 19 F 20 T
21 F 22 T 23 T 24 F 25 F
26 F 27 F 28 F 29 F 30 F
31 T 32 T 33 F 34 F 35 F
36 F 37 F 38 T 39 F 40 F
41 F

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 20

Chapter 2 – Important Questions

1) Risk management Deals with:
A) Insurable pure risks B) uninsurable pure risks
C) Speculative risks D) insurable and uninsurable pure risks
2) The appropriate technique for handling low frequency and severity losses is:
A) Retention B) Avoidance
C) Insurance D) loss control
3) The appropriate technique for handling high frequency and high severity losses is:
A) Active retention B) Avoidance
C) Insurance D) Passive retention
4) The risk most suited to treatment by insurance are those in which there is:
A) A high probability and a low potential severity
B) A low probability and a high potential severity
C) A high probability and a high potential severity
D) A low probability and a low potential severity
5) Risks may be unknowingly retained because of ignorance, indifference, or laziness.
A) Loss reduction B) Passive retention
C) Loss prevention D) Active retention
6) Pre-loss objectives of risk management include which of the following?
I. Preparing for potential losses in the most economical way.
p
m
II. Reduction of worry and fear.
A) I only B) II only
ca

C) Both I and II D) neither I nor II

s

7) The first step in the risk management process is:

es

A) Measure and analyze the risks.

Zn

B) Determining the risk management objectives

C) Implementation of the risk management program
Bi

D) Selection of the appropriate risk treatment technique

8) Self-insurance is an example of which of the following risk management techniques?
A) Loss control B) Risk transfer
C) Risk retention D) Risk avoidance
9) All of the following are post-loss risk management objectives EXCEPT:
A) Survival of the firm B) Reduction of worry and fear
C) Continued operations. D) Stability of earnings
10) All the following are requirements of an insurable risk EXCEPT:
A) There must be a large number of heterogeneous exposures units.
B) The loss must be accidental.
C) The loss must be definite as to cause, time, place, and the amount.
D) The loss should not be catastrophic.
11) From the viewpoint of the insurer, all of the following are characteristics of an insurable
risk EXCEPT:
A) The loss must be accidental. B) There must be a large number of exposure units.
C) The loss should be catastrophic. D) The premium must be economically feasible.

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 21

12) From the standpoint of the insurer, all of the following are characteristics of an insurable
risk EXCEPT:
A) The loss must be unintentional. B) The chance of loss must be calculable.
C) The loss must be indeterminable. D) The loss must be measurable.
13) A firm has several risk management objectives prior to the occurrence of loss. Include the
following:
A) Survival of the firm. B) Continuing in work.
C) The economy goals. D) Social responsibility.
14) All the following are post-loss objectives, EXCEPT:
A) Survival of the firm. B) Continuing in growth.
C) Reduction of worry and fear. D) Continuing in work.
15) Insurable risk must be:
A) Intentional. B) Determinable.
C) Catastrophic. D) All the above.
1 D 2 A 3 B 4 B 5 B
6 C 7 B 8 C 9 B 10 A
11 C 12 C 13 C 14 C 15 B
True or False
1) Risk management deals only with insurable risks. p
2) Risk avoidance is recommended when the chance of risk and severity of loss is low.
m
3) Insurance is recommended for those risks associated with high probability or frequency
ca

and high severity.

s

4) If loss frequency is high and loss severity is low, insurance will be the best method to
es

handle that risk.

Zn

5) Active risk retention means that an individual is knowingly aware of the risk and
intentionally plans to retain all or part of this risk.
Bi

6) Risk retention can be used in risks with high chance of loss and low severity.
7) Risk control focuses on minimizing the probability of loss or severity of losses.
8) Loss control is a useful technique for handling high frequency and high severity losses.
9) Analyzing the cost and benefits of safety program expenses is an example of the post loss
objectives of risk management.
10) Meeting the legal and governmental regulations is an example of pre-loss objectives of
risk management.
11) Frequency of loss is more important than severity of loss because risks with high frequency
can destroy the firm.
12) Important risks can lead to the insolvency of the firm.
13) If the firm borrows to continue operations, this means that it faces critical risk.
14) Passive retention occurs when you unknowingly retain a risk.
15) One of the requirements of an insurable risk is that the loss should be catastrophic.
1 F 2 F 3 F 4 F 5 T
6 T 7 T 8 T 9 F 10 T
11 F 12 F 13 F 14 T 15 F

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Chapter 3 - Summary

Social Insurance Private Insurance

Laws  Everything is determined by  Everything is determined by

Law such as: Insurance contract (policy).
- Determining benefits and (Supervised by Government)
contributions made by
insured.
Nature
 Compulsory (mandatory)  Voluntary coverage.
coverage by law.
Objectives  Provide minimum standard of  To attain profit.
living for the society.

Insurer  Government.  Commercial (private) insurance

companies.

Insured  The plan is not established for  It is available for anyone who has
government only. the ability to pay the premiums.
p
 It provided for:
m
- Government
ca

- Public sector employees.

s

- Private sector employees.

es

Insured  Premiums
 Contributions:
Zn

payment
- Employee pays 10% of salary
Bi

or wage monthly

 Contributions:  Nothing
Employers or
- Employer pays 15% of
government
regular wage or monthly
contribution
salary
Benefits  The benefits are not directly  The benefits are directly related to
related to contributions made. premium.

Risks to be • Covers Personal Risks only. • Covers:

covered • Social insurance provide 4 1. Personal risks
types of benefits: 2. Property risks
1. Retirement benefits (Pension). 3. Liability risks
2. Survival benefits.
3. Disability benefits.
4. Medicare benefits.

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 23

Types of Private Insurance

1-Life Insurance:
 Life insurance companies pay an amount (the face amount) to the beneficiaries upon the death
of the insured, in addition, they sell private pension and annuities to meet the need of income
after retirement.
 Life insurance provide the following coverage:
Premature Death, Old Age, Disability, Bad Health, Bodily Injury, Unemployment.
2-Health Insurance:
Life & health insurers also sell health insurance that provides for:
 The payment of medical expenses such as: doctor bills, hospital cost, medicine cost
 Disability income benefits to meet the loss of earning during the disability period.
 Health insurance is also sold by casualty insurers and provided by social insurance.
3-Property and Liability Insurance (Non-life):
 It covers physical damage of a property & Direct and indirect loss.
 Liability against the third party, and its available for individual and business firms.
4-Multiple-Line Insurance:
 It combines both property and liability coverage into one contract.
 Ex: Homeowner’s policy combines fire insurance and other perils with liability insurance in one
contract.
Property and Liability Insurance (Non-Life)
a) Fire Insurance and Allied Lines: p
- Fire insurance covers direct losses or damage to real estate because of fire, lightning & theft.
m
- And also cover indirect losses such as loss of profit and extra expenses.
ca

 Other perils can be added such as, windstorm, hail, tornadoes and vandalism.
b) Automobile Insurance (Car insurance):
s

Classified to: Property insurance. Liability insurance, Medical payments insurance.

es

In Egypt, bodily injury (or death) is covered compulsorily. But property damage is covered voluntarily.
Zn

c) Marine Insurance:
1) Ocean Marine Insurance: Ocean marine insurance provides protection for all type of oceangoing
Bi

vessels (ships, containers, and boats) and their cargoes

Covered perils: an ocean marine policy provides coverage to sea perils such as damage, bad weather,
high waves, collision, fire, sinking. Stranding, pirates, jettison, barratry and thieves.
2) Inland Marine Insurance:
Provide protection for goods shipped on land. This includes insurance on imports and exports,
domestic shipment, and means of transportation, such as bridges and tunnels. In addition, inland
marine insurance can be used to insure fine arts, jewelry, furs, and similar properties.
d) Aviation Insurance: covers damage to the aircraft itself, liability for death, injury or property
damage to third party, cargo, group personnel accident, and product liability.
e) Engineering Insurance:
It covers a power producing equipment including boilers, turbines, steam or gas engines,
generators and computers.
The main types of coverage or protection under engineering insurance are:
a) Damage to the equipment including breakdown.
b) Damage to surrounding property.
c) Liability for death, injury or property damage to third parties.
d) Consequential loss.

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 24

Chapter (3) – Questions – MCQ

1) The Social insurance has the following characteristics EXEPT:
A) Organized and determined by law. B) Provided by the government.
C) Benefits are directly related to contribution. D) Compulsory.
2) One of the following can be classified as a social insurance:
A) Car insurance. B) Ocean marine insurance.
C) Unemployment. D) None of the above.
3) Social insurance covers:
A) Liability risk. B) Property risk.
C) Personal risk. D) None of the above.
4) Which one of the following risks is NOT covered by social insurance?
A) Retirement. B) Disability.
C) Medicare. D) Liability risk.
5) Private insurance covers: p
m
A) Liability insurance. B) Property insurance.
ca

C) Personal insurance. D) All the above.

s

6) All the following can be classified as private insurance EXCEPT:

es

A) Ocean marine insurance. B) Health insurance.

Zn

C) Workers’ compensation insurance. D) Burglary and theft insurance.

Bi

7) Life insurance is available under:

A) Private insurance and social insurance. B) Fire insurance only.
C) Social insurance only. D) Private insurance only.
8) Which one of the following is NOT private insurance?
A) Health insurance. B) Auto insurance.
C) Marine. D) Social insurance.
9) Which one of the following is NOT an example of life insurance perils?
A) Old age. B) Bodily injury.
C) Medicine cost. D) Unemployment.
10) Which one of the following is NOT an example of automobile insurance?
A) Allied lines insurance. B) Property insurance.
C) Medical payment insurance. D) Liability insurance.

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 25

True or False
(1) Social insurance covers personal, property and liability risks.
(2) Social insurance covers all employees in government only.
(3) Social insurance covers all employees in the government and private sector.
(4) Social insurance and private insurance are determined by law.
(5) Providing a minimum standard of living is one of the social insurance objectives.
(6) Property and liability insurance is available under both private insurance and social
insurance.
(7) Life insurance is available under both private insurance and social insurance.
(8) The main objective of social insurance is achieving profit.
(9) The payment paid by employees in social insurance is called a premium.
(10) Under social insurance, benefits are related to the contribution of each person.
(11) The definition of "bodily injury" means "bodily harm, sickness and death".
(12) Life insurance provides protection against unemployment and bodily injury.
(13) Life insurance covers only death and disability.
(14) Health insurance provides coverage for medical expenses in case of sickness and injury.
(15) Property and liability insurance are available under both private insurance and social
insurance.
p
m
(16) General liability insurance and aviation insurance are examples of life insurance.
ca

(17) Missing profit because of fire may be covered under fire insurance.
(18) Fire insurance and allied lines cover only direct loss or damage to personal property.
s
es

(19) The fire insurance may provide coverage for additional expenses after a fire.
Zn

(20) Ocean marine insurance provides protection for goods and ships.
(21) Ocean marine insurance provides protection for goods shipped on land.
Bi

(22) Inland marine policy provides broad coverage for certain specified perils. They include the
perils of the sea, such as damage or loss from: bad weather, collision, sinking and stranding.
(23) Comprehensive auto insurance may cover the Bodily injury (or death) which may occur to
the insured, the driver, and any family member.
(24) In Egypt, Bodily injury (or death) is covered compulsory, while property damage occurs to
another car (or the insured`s car) may be covered voluntarily.
(25) In Egypt, Bodily injury (or death) and property damage occurs to another car, are covered
compulsory.
(26) Under the compulsory insurance contract, the liability includes bodily injury in all
countries, but property damage is compulsory in some countries.
(27) Property auto insurance covers the potential legal liability of the car driver.
(28) Liability auto insurance covers accidents for which the insured is legally liable.
(29) Medical payment insurance covers the car driver himself against expenses of medical
services.
(30) The law requires the owners and operators of automobiles to carry automobile property
insurance.

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 26

(31) Medical payments coverage applies to medical expenses of anyone in your vehicle,
including you.
(32) Since automobile liability insurance imposed mandatory (compulsory), it is classified as
social insurance.
(33) Despite the automobile liability insurance imposed mandatory (compulsory), it is classified
as private insurance.
(34) The main type of coverage or protection available under engineering insurance is damage
to the actual equipment (including breakdown).
(35) General liability Insurance and Aviation insurance are examples of life insurance.
(36) Engineering insurance covering a wide variety power producing equipment, including
Turbines, Steam of gas engines, and computers.
(37) Homeowner’s policy is a good example of multiple line insurance as it combines fire
insurance with liability insurance at the same time.
(38) Multiple insurance may be defined as a combination of life insurance coverage and Liability
insurance coverage.
(39) Multiple-line insurance combines life and property insurance into one contract.

MCQ SOLUTIONS
p
m
1 C 2 C 3 C 4 D 5 D
ca

6 C 7 A 8 D 9 C 10 A
s
es
Zn

True or False Solutions

Bi

1 F 2 F 3 T 4 F 5 T
6 F 7 T 8 F 9 F 10 F
11 T 12 T 13 F 14 T 15 F
16 F 17 T 18 F 19 T 20 T
21 F 22 F 23 T 24 T 25 F
26 T 27 F 28 T 29 T 30 F
31 T 32 F 33 T 34 T 35 F
36 T 37 T 38 F 39 F

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 27

Chapter 3 – Important Questions

1) The Social insurance has the following characteristics EXEPT:
A) Organized and determined by law.
B) Provided by the government.
C) Benefits are directly related to contribution.
D) Compulsory.
2) One of the following can be classified as a social insurance:
A) Car insurance B) Ocean marine insurance
C) Unemployment D) None of the above
3) Social insurance covers:
A) Liability risk B) Property risk
C) Personal risk D) None of the above
4) Which one of the following risks is NOT covered by social insurance?
A) Retirement B) Disability
C) Medicare D) Liability risk
5) Private insurance covers:
A) Liability insurance B) Property insurance
C) Personal insurance
p D) All the above
m
6) All the following can be classified as private insurance EXCEPT:
ca

A) Ocean marine insurance B) Health insurance

C) Workers’ compensation insurance D) Burglary and theft insurance
s
es

7) Life insurance is available under:

Zn

A) Private insurance and social insurance B) Fire insurance only

C) Social insurance only D) Private insurance only
Bi

8) Which one of the following is NOT private insurance?

A) Health insurance B) Auto insurance
C) Marine D) social insurance
9) Which one of the following is NOT an example of life insurance perils?
A) Old age B) Bodily injury
C) Medicine cost D) Unemployment
10) Which one of the following is NOT an example of automobile insurance?
A) Allied lines insurance B) Property insurance
C) Medical payment insurance D) Liability insurance

1 C 2 C 3 C 4 D 5 D
6 C 7 A 8 D 9 C 10 A

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 28

True or False
1) Social insurance covers personal, property and liability risks.
2) Social insurance covers all employees in the government and private sector.
3) Providing a minimum standard of living is one of the social insurance objectives.
4) Under social insurance, benefits are related to the contribution of each person.
5) The definition of "bodily injury" means "bodily harm, sickness and death".
6) Health insurance provides coverage for medical expenses in case of sickness and injury.
7) Property and liability insurance are available under both private insurance and social
insurance.
8) Ocean marine insurance provides protection for goods and ships.
9) Ocean marine insurance provides protection for goods shipped on land.
10) In Ocean Marine, Jettison means throwing goods overboard to save the ship.
11) In Ocean, Barratry ‫ ااالحتيال‬means: Fraud by the master or crew at the expense of the ship or
cargo owners.
12) In Egypt, Bodily injury (or death) and property damage occurs to another car, are covered
compulsory.
13) Property auto insurance covers the potential legal liability of the car driver.
14) Liability auto insurance covers accidents for which the insured is legally liable.
p
m
15) Medical payment insurance covers the car driver himself against expenses of medical
ca

services.
16) The law requires the owners and operators of automobiles to carry automobile property
s
es

insurance.
17) Despite the automobile liability insurance imposed mandatory (compulsory), it is classified
Zn

as private insurance.
Bi

18) Engineering insurance covering a wide variety power producing equipment, including
Turbines, Steam of gas engines, and computers.
19) One of the main types of coverage under engineering insurance is: the damage to the
equipment (including the breakdown).
20) Multiple insurance may be defined as a combination of life insurance coverage and
Liability insurance coverage.

1 F 2 T 3 T 4 F 5 T
6 T 7 F 8 T 9 F 10 T
11 T 12 F 13 F 14 T 15 T
16 F 17 T 18 T 19 T 20 F

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 29

Chapter 4 - summary
(1) Principle of Indemnity
It means that the insured should NOT collect more than the actual value of loss.
Applied only in property and liability insurance not life insurance.
(1) In case of Property Insurance:
Actual Loss

Or
Indemnity Face Amount of Insurance Whatever LESS
Or

Actual Cash Value

(2) In case of Life Insurance:

In life insurance, the principle of indemnity is NOT applied since the loss is always total.
(2) Principle of Insurable Interest
The insured must lose financially if a loss occurs or must incur some other kind of harm if the loss
takes place.
Applied for property, liability and life insurance.
Applicability of the principle:
(1) In case of Property and liability Insurance:
In case of property and liability, insurable interest can be supported by:
p
(A) Ownership of property (B) Potential legal liability (C) Contract right
m
(2) In case of Life Insurance:
ca

In case of life insurance, insurable interest can be supported by:

(A) Purchasing a policy by yourself. (B) Close ties of blood. (C) Marriage.
s

Note 
es

Remote family relations will not support an insurable interest.

Zn

If financial interest is involved, the insurable interest in life insurance can be met.
Purpose and Importance of the Principle:
Bi

1. To prevent gambling. 2. To reduce moral hazard. 3. To measure the amount of loss.

(3) Principle of Subrogation
Substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third
person for loss covered by insurance.
Applied only in property and liability insurance, not in life insurance.
Applicability of the principle:
(1) In case of Property and liability Insurance:
The principle of subrogation strongly supports the principle of indemnity.
(2) In case of Life Insurance:
Life insurers do not have subrogation right because the value of human life is unlimited.
Purpose and Importance of the Principle:
1. To prevent the insured from collecting twice for the same loss.
2. To hold the neglected person responsible for the loss. 3. To hold down insurance rates.
(4) Principle of Utmost Good Faith
A higher degree of honesty is imposed on both parties to an insurance contract.
Applied for property, liability and life insurance.
This principle is supported by 3 important legal doctrines:
(1) Representation.
Insurance contract is avoidable at the insurer’s option if the representation is: Material or False.
(2) Concealment.
(3) Warranty.

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Chapter (4) – Questions - MCQ

1) Which one of the following principles is applied in all property insurance only?
A. indemnity principal B. subrogation principle
C. insurable interest D. A and B
2) The maximum financial responsibility of the insurer is called:
A. ACV B. carried amount of insurance
C. actual loss D. required amount of insurance
3) All the following are examples of the principle of indemnity except:
A. over insurance. B. sufficient insurance.
C. adequate insurance. D. valued policies.
4) The principal which designed to restore the insured to approximately the same financial
position after the loss as existed before the loss is:
A. Subrogation B. insurable interest
C. indemnity
p D. utmost good faith principle
m
5) In life insurance, indemnity will be made for:
ca

A. face amount B. required amount.

s
es

C. amount of loss D. amount paid premium.

Zn

6) Which statement about the principle of indemnity is correct?

Bi

I. The principle of indemnity reduces moral hazard.

II. The principle of indemnity is applied in all types of insurance.
A. I only B. II only
C. both I and II D. neither I nor II
7) Insurable interest is required for all the following reasons except:
A. to prevent gambling. B. to measure the extent of loss.
C. to reduce the premium. D. to reduce moral hazard.
8) The principal of insurance which use to prevent from gambling is:
A. Indemnity. B. Subrogation.
C. Insurable interest. D. Utmost good faith.

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 31

9) A dry-cleaning firm has an insurable interest in the property of the customers, so this type
of insurance is called:
A. property insurance B. liability insurance
C. life insurance D. engineering insurance
10) Which one of the following supports insurable interest in the case of life insurance?
A. Potential legal liability. B. contract right.
C. remote family relations. D. marriage.
11) Which statement (s) is/ are true about subrogation:
I. Subrogation supports the principle of indemnity.
II. Subrogation helps to keep insurance premiums lower.
A. I only. B. II only.
C. Both I and II. D. neither I nor II.
12) The principle which means substitution of the insurer in place of the insured for the
purpose of claiming indemnity from a third person for the loss covered by insurance is:
p
m
A. indemnity principle B. subrogation principle
ca

C. interest principal D. utmost good faith

s
es

13) The principle specifies that the insured must lose financially if a loss occurs, or must incur
some other kind of harm if the loss takes place.
Zn

A. indemnity principle B. subrogation principle

Bi

C. Interest principle D. utmost good faith principle

14) Subrogation is used in all the following types of insurance except:
A. life insurance B. marine insurance
C. property insurance D. automobile insurance
15) The principle or principles of insurance that prevents the insured from profiting of
insurance is or are:
A. Subrogation. B. pro rata.
C. Indemnity. D. All the above.
16) Assume that a car has an actual cash value of $100,000 and that its owner has insured it for
$ 80,000. Then the insurance is:
A. Adequate (sufficient). B. Over.
C. Insufficient (under). D. None of the above.

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 32

17) Assume that a car has an actual cash value of $100,000 and that its owner has insured it for
$ 100,000. Then the insurance is:
A. Adequate. B. Over.
C. Insufficient. D. None of the above.
18) Assume that a car has an actual cash value of $80,000 and that its owner has insured it for
$ 100,000. Then the insurance is:
A. Adequate. B. Over.
C. Insufficient. D. None of the above.
19) Assume that a car has an actual cash value of 100,000$ and that its owner has insured it for
100,000$. if a loss is $15,000 then the insurer pays:
A. 15,000. B. 100,000.
C. 85,000. D. Zero.
20) The insured pays:
A. 100,000. p B. 15,000.
m
C. 7500. D. Zero.
ca

21) Assume that a car has an actual cash value of 100,000$ and that its owner has insured it for
100,000$. If a loss is TOTAL, then the insurer pays:
s
es

A. 15,000. B. 100,000.
Zn

C. Zero. D. None of the above.

Bi

22) Assume that a car has an actual cash value of 100,000$ and that its owner has insured it for
120,000$. If a loss is $80,000 then the insurer pays:
A. 20,000. B. 100,000.
C. 80,000. D. 120,000.
23) The insured pays:
A. Zero. B. 20,000.
C. 80,000. D. None of the above.
24) Assume that a car has an actual cash value of 100,000$ and that its owner has insured it for
60,000$. If a loss is 80,000$ and coinsurance clause is present, then the insurer pays:
A. 80,000. B. 48,000.
C. 12,000. D. 60,000.

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 33

25) The insured pays:

A. Zero. B. 20,000.
C. 32,000. D. 60,000.
26) Assume that a car has an actual cash value of 100,000$ and that its owner has insured it for
60,000$. If a loss is 80,000$ and coinsurance clause is NOT present, then the insurer pays:
A. 80,000. B. 48,000.
C. 12,000. D. 60,000.
27) The insured pays:
A. Zero. B. 20,000.
C. 12,000. D. 60,000.
28) Assume that a car has an actual cash value of 100,000$ and that its owner has insured it for
60,000$. If a loss is 55,000$ and coinsurance clause is NOT present, then the insurer pays:
A. 55,000. B. 60,000.
C. 45,000. p D. 5,000.
m
29) Assume that a car has an actual cash value of 100,000$ and that its owner has insured it for
ca

70,000$. If a loss is 100,000$, then the insurer pays:

s

A. 80,000. B. 70,000.
es

C. 100,000. D. None of the above

Zn

30) The insured pays:

Bi

A. 30,000. B. 40,000.
C. 70,000. D. 100,000.

Solution
1 D 2 B 3 D 4 C 5 A
6 A 7 C 8 C 9 B 10 D
11 C 12 B 13 C 14 A 15 C
16 C 17 A 18 B 19 A 20 D
21 B 22 C 23 A 24 B 25 C
26 D 27 B 28 A 29 B 30 A

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 34

True or False
1) The life insurance policy is an exception to the principle of indemnity.
2) The principle of indemnity is not applied in life insurance.
3) The principle of indemnity is applied in all types of insurance.
4) The principle of indemnity aims to prevent the insured from profiting from the insurance.
5) The principle of indemnity can reduce morale hazard.
6) Indemnity equals: actual loss or face amount of insurance (insured sum) or value at risk
(ACV), whatever more.
7) According to the principle of insurable interest, the insured should not collect more than
the actual cash value.
8) The actual cash value is the value of property at the time of buying the contract.
9) The actual cash value (ACV) is the value of property at the time of loss not on the day of
buying the insurance.
10) When the face amount of insurance exceeds the actual cash value, the insurance condition
will be insufficient.
p
m
11) If the carried amount is 20,000 and ACV is 15,000, the insurance condition is over insurance.
ca

12) The required amount of insurance is the face amount of insurance determined in the policy
and it represents the maximum financial responsibility of the insurer in both partial and total
s
es

loss.
Zn

13) The Carried amount of insurance is the face amount of insurance determined in the policy
Bi

and it represents the maximum financial responsibility of the insurer in both partial and total
loss.
14) In life insurance, the amount paid is the actual cash value.
15) The principle of insurable interest means that the insured must financially lose if risk
occurs.
16) The principle of insurable interest is applied only in life insurance.
17) All insurance contracts must be supported by an insurable interest.
18) Insurable interest in property insurance can be supported by ownership and contract
rights only.
19) Remote family relations can support insurable interest.
20) Close ties of blood can support the utmost good faith principle.
21) The principle of subrogation is not applied in life insurance.
22) The principle of subrogation is not applied in property insurance.
23) The principle of subrogation is applied in all types of insurance.

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 35

24) The principle of subrogation means that the insurer is entitled to recover from a
neglected third party any loss payments.
25) Life insurers do not have subrogation right because the value of human life is unlimited.
26) The insurance contract is avoidable if representation is material and false.
27) According to the insurable interest principle, a high degree of honesty is imposed on both
parties of insurance.
28) The utmost good faith is a principle that exists in property insurance contracts not in life
insurance.
29) The utmost good faith is a principle related to all types of insurance.
30) Representations are statements made by the applicant (insured) for insurance.

Solution
1 T 2 T 3 F 4 T 5 T
6 F 7 F 8 F 9 T 10 F
11 T 12 F 13 T 14 F 15 T
16 F 17 T 18 F 19 F 20 F
21 T 22 F 23 F 24 T 25 T
p
m
26 T 27 F 28 F 29 T 30 T
ca
s
es
Zn
Bi

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 36

Chapter 4 – Important Questions

1) Which one of the following principles is applied in all property insurance only?
A. Indemnity principal B. Subrogation principle
C. Insurable interest D. A and B
2) Subrogation is used in all the following types of insurance except:
A. Life insurance. B. Marine insurance.
C. Property insurance. D. Automobile insurance.
3) The maximum financial responsibility of the insurer is called:
A. Actual Cash Value. B. Carried amount of insurance.
C. Actual loss. D. Required amount of insurance.
4) In life insurance, indemnity will be made for:
A. Face amount. B. Required amount.
C. Amount of loss. D. Amount paid premium.
5) Which statement about the principle of indemnity is correct?
I. The principle of indemnity reduces moral hazard.
II. The principle of indemnity is applied in all types of insurance.
A. I only B. II only
C. both I and II D. neither I nor II
6) Insurable interest is required for all the following reasons except:
A. to prevent gambling. B. to measure the extent of loss.
p
m
C. to reduce the premium. D. to reduce moral hazard.
ca

7) The principal of insurance which use to prevent from gambling is:

A. Indemnity. B. Subrogation.
s

C. Insurable interest. D. Utmost good faith.

es

8) Which one of the following supports insurable interest in the case of life insurance?
Zn

A. Potential legal liability. B. Contract right.

C. Remote family relations. D. Marriage.
Bi

9) Which statement (s) is/ are true about subrogation:

I. Subrogation supports the principle of indemnity.
II. Subrogation helps to keep insurance premiums lower.
A. I only II. B. II only.
C. Both I and. D. neither I nor II.
10) The principle or principles of insurance that prevents the insured from profiting of
insurance is or are:
A. Subrogation. B. Pro rata.
C. Indemnity. D. All the above.

1 D 2 A 3 B 4 A 5 A
6 C 7 C 8 D 9 C 10 C

Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy

 37

True or false
1) The principle of indemnity is not applied in life insurance.
2) In property insurance, Indemnity equals the face amount of insurance.
3) Life insurance contract is a valued policy under which the face amount of insurance paid by
the insurer, is determined in advance at the day of buying the insurance.
4) The actual cash value is the value of property at the time of buying the contract.
5) If the face amount of insurance is $50,000 and ACV is $40,000, and the actual loss is $20,000,
then the indemnity=$16,000.
6) If the face amount of insurance is $15,000 and ACV is $20,000, the insurance condition is
over insurance.
7) Insurable interest in property insurance can be supported by ownership of property since
the owner of a property can lose financially if it damaged.
8) All insurance contracts must be supported by an insurable interest.
9) Close ties of blood can support the utmost good faith principle.
10) The principle of subrogation means the Substitution of the insurer in place of the insured
for the purpose of claiming indemnity from a third person for loss covered by insurance.
11) Life insurers do not have subrogation right because the value of human life is unlimited.
12) According to the Utmost Good Faith principle, a lower degree of honesty is imposed on
p
m
both parties of insurance.
ca

13) The utmost good faith is a principle that exists in property insurance contracts not in life
insurance.
s
es

14) Concealment is intentional failure of the applicant for insurance to reveal a material fact to
the insurer such as Nondisclosure.
Zn

15) If the insured is silent and deliberately withholds material information from the insurer,
Bi

Insurance contract is avoidable at the insurer’s option.

1 T 2 F 3 T 4 F 5 F
6 F 7 T 8 T 9 F 10 T
11 T 12 F 13 F 14 T 15 T

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 38

Test yourself - Midterm 2023

1. The negative technique for handling the risks is:
a. Active retention b. Avoidance
c. Insurance d. Passive retention
2. Loss control includes which of the following?
I. Loss reduction II. Loss prevention
a. I only b. II only
c. Both I and II d. Neither I nor II
3. Risks may be unknowingly retained because of ignorance, indifference, or laziness.
a. Passive retention b. Loss reduction
c. Loss prevention d. Active retention
4. From the viewpoint of the insurer, all the following are characteristics of an insurable risk
EXCEPT:
a. The loss must be accidental
b. There must be a large number of exposure units
c. The premium must be economically feasible
d. The loss should be catastrophic
5. The principle (or principles) of insurance that prevents the insured from profiting of
p
m
insurance is (or are):
ca

a. Utmost Good Faith b. Insurable interest.

c. Indemnity d. All the above
s
es

6. If the ACV (actual cash value) is $200,000 and the face amount of insurance is $300,000, if a
total loss occurs, how much does the insurer pay?
Zn

a. $100,000. b. $300,000.
Bi

c. $200,000 d. None of the above

7. If the ACV (actual cash value) is $250,000 and the face amount of insurance is $250,000, then
the condition of insurance is:
a. Insufficient b. Sufficient.
c. Over sufficient d. All the above
8. If a plant is insured against fire, the ACV (actual cash value) is one million dollars and the face
amount of insurance $800,000, if a fire occurs and the plant is totally destroyed, the insurer
pays:
a. $800,000 b. One million dollars.
c. $640,000 d. None of the above
9. If a firm is insured against fire and theft, the ACV (actual cash value) is three million dollars
and the face amount of insurance is two million dollars, if a fire occurs and loss is $720,000,
the insurer pays (apply coinsurance clause)
a. $720,000 b. $480,000
c. Two million dollars. d. None of the above.
10. A situation is which either profit or loss is possible refers to a ………
a. Pure risk. b. Subjective risk.
c. Speculative risk. d. Objective risk.
Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy
 39

11. An earthquake is an example of a ………

a. Speculative risk. b. Dynamic risk.
c. Fundamental risk. d. Subjective risk.
12. Given that the number of cars insured against collision = 25,000, the probability of collision
= 0.045, and the actual number of cars damaged by collision = 1170. Therefore, the objective
risk is = ………
a. 4%. b. 5%.
c. 1125. d. 50.
13. The term chance of loss means:
a. The size of loss. b. The probability of loss.
c. The objective risk. d. All the above.
14. Objective risk is defined as the ………
a. Actual outcome (or less). b. Expected outcome (or less).
c. Variation between actual outcome (or less) and expected outcome (or less).
d. Relative variation between actual outcome (or loss) and expected outcome (or loss).
15. The extra expense incurred by a business to stay in operation following a fire is an example
of a (an) ………
a. Direct loss. p b. Indirect loss.
m
c. Nonfinancial loss. d. Property loss.
ca

16. All the following is a characteristic of social insurance EXCEPT:

a. Coverage is compulsory.
s
es

b. The method of determining benefits is prescribed by law.

c. The plan is administrated or supervised by the government.
Zn

d. The benefits are directly related to contributions.

Bi

17. Social insurance covers:

a. Personal risks. b. Property risks.
c. Liability risks. d. All the above.
18. Life insurance is available under:
a. Private insurance and social insurance. b. Fire insurance only.
c. Private insurance only. d. Social insurance only.
19. ……… is the amount of money an insured receives in the time of loss.
a. Face amount of insurance. b. Compensation.
c. Indemnity. d. All the above.
20. One of the requirements for insurable risks is that the loss is determined in terms of:
a. Cause. b. Time.
c. Place. d. All the above.
Solution
1 2 3 4 5 6 7 8 9 10
b c a d c c b a b c
11 12 13 14 15 16 17 18 19 20
c a b d b d a a d d

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 40

Second: True or False (20 questions)

1. Risk management deals with insurable and uninsurable pure risks.
2. One of the requirements of an insurable risk is that the loss should Not be Catastrophic.
3. An individual who purchases insurance is called an insurer.
4. Risk manager is concerned only with the management of pure risks, not speculative risks.
5. Insurance is recommended for those risks associated with high probability or frequency and
high severity.
6. There must be a direct loss before there can be an indirect.
7. Death of a friend and failure in an exam these cases are example of financial risks.
8. The law of large numbers states that: As the number of exposure units increases, an
insurance company cannot predict its future losses with a high degree of accuracy.
9. There is no difference between Chance of Loss and Objective Risk.
10. Chemical material in a plant is a moral hazard that increases the chance of fire.
11. Subjective risk is defined as the uncertainty based on an individual’s mental condition or
state of mind.
12. Loss control is recommended for those risks associated with high probability or frequency
and high severity.
13. Subrogation is Substitution of the insurer in place of the insured for the purpose of claiming
p
m
indemnity from a third person for loss covered by insurance.
ca

14. If financial interest is involved, the insurable interest in life insurance can be met. For
example One business partner can insure the life of his partner.
s
es

15. Concealment is an intentional failure of the applicant for insurance to reveal a material fact
to the insurer such as Nondisclosure.
Zn

16. In life insurance, the principle of indemnity is applied since the loss is always total.
Bi

17. Indemnity in property insurance = Face amount of insurance.

18. A life insurance contract is a valued policy under which the face amount of insurance paid
by the insurer is determined in advance on the day of buying the insurance.
19. Assume that a car has an actual cash value (ACV) of $80,000 and that its owner has insured
it for $100,000 (Face amount or carried amount) against collision. If the loss is $30,000, the
indemnity is $37,500.
20. If the Face amount of insurance is more than ACV, therefore, the condition of insurance is
“Under Insurance or Insufficient Insurance”

Solution
1 2 3 4 5 6 7 8 9 10
T T F T F T F F F F
11 12 13 14 15 16 17 18 19 20
T T T T T F F T F F

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 41

Test youself 
State whether the following statements are true or false
(1) An individual who purchases insurance is called an insured.
(2) Active risk retention means that an individual is knowingly aware of the risk and
intentionally plans to retain all or part of this risk.
(3) The law of large numbers states that: As the number of exposure units increases, an
insurance company cannot predict its future losses with a high degree of accuracy.
(4) Risk management can be defined as executive decisions concerning the management of
pure risks. Risk management is a scientific approach to deal with pure risks faced by
individual and organization, and to analysis pure risks in relation to the profitability.
(5) Insurance is recommended for those risks associated with high probability or frequency and
high severity.
(6) Loss control is recommended for those risks associated with low probability or frequency
and low severity.
(7) Chemical material in a plant is a Physical hazard that increases the chance of fire.
(8) Insurance management affects a large number of persons in a firm than does risk
management.
(9) A physical hazard is a physical condition that increases the chance of loss or/and the severity
of loss.
(10) Risk management deals with insurable and uninsurable pure risks.
p
(11) Multiple insurance may defined as a combination of life insurance coverage and liability
m
insurance coverage.
ca

(12) The pooling technique is used to spread the losses of a few number of exposure units over
a large number of exposures.
s

(13) Risk management provides for the periodic evaluation of all techniques for handling losses,
es

not just insurance.

Zn

(14) There is no Difference between Chance of Loss and Objective Risk.

(15) The risk of inflation is a fundamental risk since, with few exceptions; the economy is
Bi

harmed by rapid inflation.

(16) Individual are being held legally liable for the negligent operation of their automobile.
(17) Insurance management concept is much wider than risk management concept.
(18) Non-financial risks have not any financial consequences, such as death of a friend, or failure
in an exam, these cases, contain a feeling or emotional condition that has no any financial
consequences. Insurance is concerned only with financial risks.
(19) Fundamental risks may be due to economic changes: as inflation and unemployment.
(20) A business firm who purchases insurance is called an insurer.

Solution
1 T 2 T 3 F 4 T 5 F 6 F 7 T
8 F 9 T 10 T 11 F 12 T 13 T 14 F
15 T 16 T 17 F 18 T 19 T 20 F

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Test yourself 
QUESTION ONE Select the most correct answer for the following questions:
1. A financial loss that results from the physical damage and destruction of the property because
of fire is considered as:
a. hazard. b. passive retention
c. consequential loss d. direct loss
e. more than one of the above
2. The condition that increases the chance of loss or the severity of loss is defined as:
a. Peril b. pure risk
c. hazard d. risk
e. none of the above.
3. Windstorm is an example of:
a. Peril b. objective risk
c. morale hazard d. physical risk
e. moral hazard
4. One of the following is an example of particular risk:
a. Inflation b. premature death
c. flood d. unemployment
p
e. physical risk
m
ca

5. Uncertainty based on an individual's mental condition or state of mind is known as:

a. Objective risk b. morale hazard
s

c. chance of loss d. subjective risk

es

e. more than one of the above.

Zn

6. The possibility of loss resulting from a flood is an example of:

Bi

a. a static fundamental risk. b. a dynamic fundamental risk.

c. a static particular risk d. a dynamic particular risk.
e. none of the above.
7. Private Insurance concerns with:
a. uninsurable pure risks b. speculative risks
c. insurable pure risks d. dynamic risks
e. more than one of the above.
8. The appropriate technique for handling high frequency and low severity losses is:
a. Active Retention b. Avoidance
c. Insurance d. Passive Retention
e. More than one of the above.
9. The requirements of an insurable risk:
a. Require that the probability of loss be known.
b. are desirable, but some insurable risks do not possess them.
c. include the requirement of economic feasibility.
d. the loss must be catastrophic.
e. more than one of the above.

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 43

10. Under the civil law, anyone can be held legally liable if he does something that results in
bodily injury or property damage to someone else, which known as:
a. Property risk b. personal risk
c. hazard d. liability risk
e. more than one of the above.
11. Periodic inspections and sprinkler system are examples of a:
a. Risk retention b. Risk avoidance
c. Risk transfer d. Loss control
e. more than one of the above
12. All of the following are characteristics of social insurance EXCEPT:
a. coverage is compulsory.
b. the method of determining benefits is prescribed by law.
c. the plan is administered or supervised by government.
d. there is an attempt to redistribute income in favor of certain classes.
e. the benefits are directly related to contribution.
QUESTION TWO
State whether the following statement is true or false, number 1, is relating to the following
table, complete the table with respect to an insurer that sell fire:
p
m
Number of exposure units 20000
ca

Number of losses (1)?

The probability of loss 0.003
s
es

1. Number of losses = 60
Zn

2. Insurance management deals with both insurable and uninsurable pure risks, while risk
Bi

management deals with insurable risks only.

3. Ocean marine insurance provides protection for goods and ships.
4. There is no need to insurance if an industrial firm adopting a loss control program.
5. An insurance policy means "the strategy that’s adopted by an insurance company".
6. The existence of Insurance may increase the frequency of losses.
7. The third party is a terminology means "the beneficiary".
Solution - Question One
1 d 2 c 3 a 4 b 5 d
6 a 7 c 8 e 9 e 10 d
11 d 12 e

Question Two
1 T 2 F 3 T 4 F 5 F 6 T 7 F

Good luck  - Nirmeen Samy ..

Nirmeen Samy – Introduction to Risk and Insurance – 01003703872 – Fb.group: N.Samy