ACCT4804

THE COUNCIL OF COMMUNITY COLLEGES OF JAMAICA BACHELORS DEGREE EXAMINATIONS SUMMER/ SUPPLEMENTAL AUGUST 2008

PROGRAMME: COURSE NAME: CODE: YEAR GROUP: DATE: TIME: DURATION: EXAMINATION TYPE:

BUSINESS STUDIES RISK MANAGEMENT AND INSURANCE (ACCT4804) FOUR THURSDAY, SEPTEMBER 4, 2008 1:00 4:00 PM 3 HOURS FINAL

INSTRUCTIONS: SECTION A: SECTION B: ANSWER ALL QUESTIONS IN THIS SECTION. ANSWER ANY TWO (2) QUESTIONS FROM THIS SECTION.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

The Council of Community Colleges of Jamaica

Page

ACCT4804

SECTION A Instructions: In your answer booklet provided, write the letter that corresponds with the most appropriate response for each of the following.

1.

Static risk refers to: A. B. C. D. a pure risk from a stable unchanging society a speculative risk from a stable and unchanging society pure or speculative risk from a stable society in equilibrium objective risk

2.

Risk is defined as: A. B. C. D. an economic burden for society due to unforeseen events uncertainty concerning loss speculative ventures resulting in loss objective loss due to uncertainty

3.

Objective risks: A. B. C. D. are measurable are dependent on the mental state of the individual Have known frequencies of occurrence are accurate known probable claims

4.

A hazard may be explained as: A. B. C. D. uncertainty concerning loss an uninsured peril a condition that increases the change of loss due to a peril an event whose occurrence is unknown

5.

Which of the following is NOT a step in the Risk Management process? A. B. C. D. Identification of risk Evaluation of risk Selection of Risk Management Determination of the frequency of occurrence of a peril

The Council of Community Colleges of Jamaica

Page

ACCT4804

Questions 6 to 9 are based on the chart information provided below.

Risk

Static

Dynamic

Static

Dynamic

6.

X represents __________ risk. A. B. C. D. pure speculative objective subjective

7.

Y represents _________ risk. A. B. C. D. pure speculative objective subjective

8.

A represents ________ risk. A. B. C. D. pure speculative objective subjective

The Council of Community Colleges of Jamaica

Page

ACCT4804

9.

B represents ________ risk. A. B. C. D. pure speculative objective subjective

10.

Which of the following is NOT a specific source of risk? A. B. C. D. Property risk Liability risks Life, health and loss of income risk Pure risk

11.

Which of the following is NOT an approved method of providing employees with the coverage required by law under Workers Compensation Insurance? A. Purchase a Workers Compensation and Employers liability policy from private insurer B. Purchase insurance from a state fund or federal agency C. Self-insure D. None of the above

12.

Major features of state laws governing Workers Compensation includes: i. employment covered ii. income provision iii. pension benefits Which of the following is CORRECT? A. B. C. D. i only ii only i, ii and iii i and ii

13.

Which of the following is an optional provision in life insurance contracts? A. B. C. D. Incontestability clause Suicide clause Paid-up additions options Misstatement of age or sex

The Council of Community Colleges of Jamaica

Page

ACCT4804

14.

Life Insurance contracts provide non-forfeiture options: i. cash ii. paid-up iii. extended-term option A. B. C. D. i and ii i, ii and iii ii and iii i and iii

15.

Health Insurance providers may be considered from: i. commercial health insurers ii. Blue Cross and Blue Shield Association iii. Health Maintenance Organization (HMO) A. B. C. D. i and ii only i and iii only i, ii and iii ii and iii only

16.

Under Insurance contracts deductibles are included as: i. Co-insurance ii. Co-pay iii. Maximum limit A. B. C. D. i only ii only i, ii and iii i and ii

17.

The Glass Coverage Insurance Form does NOT include coverage to pay for: A. damage to the glass and its lettering or ornamentation by breakage of the glass or by chemical application B. repair or replacement of frames when necessary C. loss of income arising from damage to plate glass D. installation of temporary plates or the boarding-up of windows when necessary

The Council of Community Colleges of Jamaica

Page

ACCT4804

18.

Ocean transportation insurance covers: i. ii. iii. iv. A. B. C. D. i, ii and iii i, ii and iv i, iii and iv i and iv the vessel or Hull the cargo shipping revenue or freight legal liability for any negligence

19.

A hold- harmless agreement specify that : i. The party is responsible for paying for part of the losses incurred ii. These agreement are also called indemnity agreements iii. Payment is up to a maximum value A. B. C. D. i only i and ii ii and iii i, ii and iii

20.

Large companies wishing to use risk retention as a risk management tool must consider: A. B. C. D. total liabilities cash flow capital employed all inventory

21.

Which of the following is NOT a type of hold-harmless agreements? A. B. C. D. Limited form Broad form Intermediate form Comprehensive form

22.

Which of the following is a type of risk control technique? A. B. C. D. Risk avoidance Unplanned risk retention Unfunded risk retention for perils which may result in substantial claims None of the above

The Council of Community Colleges of Jamaica

Page

ACCT4804

23.

Risk retention may be funded by the following methods. Which is the least favourable method? A. B. C. D. Credit Reserve funds Self-insurance Captive- insurer

24.

Which of the following BEST demonstrates the principle of insurable interest? A. B. C. D. The same as the principle of indemnity The insured need not demonstrate a personal loss prior to collecting a claim in settlement Place insurance contract on equal for as gambling Insurable interest removes an incentive for murder

Questions 25 to 28 is based on the information provided below. Building value = $600 000 Co-insurance requirement = 80% Insurance carried = $400 000 Loss = $150 000 25. The building is underinsured and therefore subject to the average clause which allows for: A. B. C. D. 26. application of the 80% full settlement of claim coinsurance specified a deductible calculated coinsurance value based on the information above

Sum recoverable from the insurer is: A. B. C. D. $120 000 $150 000 $125 000 $100 000

27.

In order to secure full settlement under the terms of the contract, the insured needs to increase the insurance value on the property to: A. B. C. D. $480 000 $600 000 $320 000 $700 000

The Council of Community Colleges of Jamaica

Page

ACCT4804

28.

If the present insurance coverage represented full coverage based on 80% coinsurance, the building value would be: A. B. C. D. $480 000 $500 000 $320 000 $700 000

Questions 29 to 34 is based on the information provided below. Insurance in force ($) 1 000 000 800 000 500 000 200 000 2 500 000 29. The value of X is: A. B. C. D. 30. $500 000 $250 000 $2 ,000 0 Losses (%) 0 10 50 100 fire losses payable ($) 0 80 000 X Y_______ 530 000

The value of Y is A. B. C. D. $200 000 $20 0000 $100 000 0

31.

If the insurer charges $0.55 per $100 of coverage, the premium payable is: A. B. C. D. $13 750 $2 915 $1 370.5 None of the above

32.

The average insured value is: A. B. C. D. $1 250 000 $265 000 $625 000 $132 500

The Council of Community Colleges of Jamaica

Page

ACCT4804

33.

The average settlement sum is A. B. C. D. $125 000 $265 000 $625 000 $132 500

34.

The amount of $0.55 represents which of the following? A. B. C. D. The premium payable per unit The premiums rate per $100 per insured unit The premiums per rate payable per $1000 per insured unit None of the above

Questions 35 to 39 is based on the information provided below: If P(X=x) = n Cx p x (1 p )n x ; x = 0,1,2,..n, represents the Binomial Distribution which may be applicable to particular insurance portfolio.
35. x represents: A. B. C. D. 36. the number of successes or claims made the number of units insured the number of units on which claims are not made none of the above

n represents: A. B. C. D. the number of successes or claim made the number of units insured the number of units on which claims are not made none of the above

37.

If n = 10 and p = 0.4, then P(X = 2) is: A. B. C. D. 0.121 0.011 0.027 0.003

38.

P(X>0) is: A. B. C. D. 0.994 0.006 0.9999 0.0001

The Council of Community Colleges of Jamaica

Page

ACCT4804

39.

P(X<1) is: A. B. C. D. 0.994 0.006 0.9999 0.0001

Questions 40 to 43 is based on the information provided below.

P(X=x)= 40.
e x!

x ; x = 0,1,2,.

E [ x ] is equal to:
A.
a)

2 B. 2 +
C. 41. none of the above Var (X) is: A. B. 2 C. 2 + D. none of the above 42. P(x = 0) is: A. B. C. D. 43.

e 1

A floater policy refers to a contract covering: A. B. C. D. the hull and cargo under ocean marine insurance covering small ocean going marine crafts aircraft, its cargo and freight goods and equipments in transit such as those for building contractor or jewellery stores

The Council of Community Colleges of Jamaica

Page 10

ACCT4804

44.

Bailment exists when: A. B. C. D. a property seized by law enforcement and released is subject to insurance coverage insurance coverage is written for all the stocks in trade of a typical jeweller one has entrusted personal property to another freight released with a ship that was formerly seized by a foreign state

45.

Title insurance applies to all of the following EXCEPT: A. B. C. D. fraud committed by an attorney involved in the sale of property forgery of public records invalid or undiscovered wills defective probate procedures

46.

The magnitude of the impact of crime on business is enormous. Business have attempted to protect themselves against its impact through: i. bonding i. crime insurance (burglary, robbery and theft) ii. self insurance A. B. C. D. i and ii i and iii ii and iii i, ii and iii

47.

Warranties may be classified as i. i. ii. iii. A. B. C. D. expressed implied promissory aleatory

i, ii and iv i, ii and iii i, iii and iv ii, iii and iv

The Council of Community Colleges of Jamaica

Page 11

ACCT4804

48.

Insurable risks requires that i. there are a large number of similar objects exposed to a particular risk i. the losses be determinable and measurable ii. losses be subject to catastrophic hazards A. B. C. D. i only ii only iii only None of the above

49.

Commercial Package Policy (CPP) includes the Building and Personal Property Coverage Form (BPP), which states that building includes a number of the following EXCEPT: A. B. C. D. machinery and equipment service equipment fixtures loss of income from any of the items in A C above

50.

If liability exposure includes: i. i. ii. iii. A. B. C. D. bodily injury personal injury property damage cost of for criminal defence

i, ii and iv ii , iii and iv i, ii and iii i, ii, iii and iv

(Total 50 marks)

END OF SECTION A

The Council of Community Colleges of Jamaica

Page 12

ACCT4804

THE COUNCIL OF COMMUNITY COLLEGES OF JAMAICA BACHELORS DEGREE EXAMINATIONS SUMMER/ SUPPLEMENTAL AUGUST 2008

PROGRAMME: COURSE NAME: CODE: YEAR GROUP: DATE: TIME: DURATION: EXAMINATION TYPE:

BUSINESS STUDIES RISK MANAGEMENT AND INSURANCE (ACCT4804) FOUR THURSDAY, SEPTEMBER 4, 2008 1:00 4:00 PM 3 HOURS FINAL

INSTRUCTIONS:

SECTION B:

ANSWER ANY TWO (2) QUESTIONS FROM THIS SECTION.

SECTION B

The Council of Community Colleges of Jamaica

Page 13

ACCT4804

Instructions: Answer any two (2) questions from this section.

Question 1
Write on the following: a. Risk avoidance Risk control measures

(4 marks) (5 marks)

Clearly indicating why they may be so classified as risk management technique. Suitable examples should be cited. b. A critical consideration in implementing risk management techniques is a suitable mix (10 marks) of risk retention and risk transfer. Discuss Compare and contrast the role of the Risk Manager versus the Insurance Broker/Agent. (6 marks)

c.

(Total 25 marks)

Question 2
Discuss the benefits and convenience of one-stop shopping offered by Commercial Package Policy (CPP) (Total 25 marks)

Question 3
(a) Discuss the type of coverage provided under the ocean transportation insurance together with three (3) limitations applicable. (13 marks) Explain the operation of a captive insurer. Outline the formation and operation of a captive insurer as well as the problems associated with captive insurers. (12 marks)

(b)

(Total 25 marks)

The Council of Community Colleges of Jamaica

Page 14

ACCT4804

Question 4
a. Explain briefly each of the following: i. ii. iii. iv. Bodily injury Personal injury Property damage legal expenses

(12 marks) TABLE 1 No of units insured

5 15 30 50 100 Average value of each unit $ 1 000 000 500 000 250 000 200 000 150 000 Probability of loss (complete) 0.10 0.15 0.20 0.25 0.30

b.

Using table 1 above, determine the: i. ii. iii. iv. total exposure (insured value) average insured value per unit total expected loss average loss per unit

(3 marks) (2 marks) (3 marks) (2 marks)

With reference to table 1 above, the total loss is loaded by 20% to obtain the gross premium i. determine the total annual gross premium ii. determine gross premium rate per unit per $1000 of coverage

(2 marks) (1 mark) (Total 25 marks)

END OF EXAMINATION

The Council of Community Colleges of Jamaica

Page 15

ACCT4804

SOLUTIONS SECTION A

1 2 3 4 5 6 7 8 9 10

A B D C D A B D C D

11 12 13 14 15 16 17 18 19 20

D C D B C C C A A B

21 22 23 24 25 26 27 28 29 30

D A A D D C A B B A

31 32 33 34 35 36 37 38 39 40

A C D B A B A A B A

41 42 43 44 45 46 47 48 49 50

A C D C A A B C D C

Section B
Question 1 1a. Risk Avoidance -avoiding the risk resulting in elimination of that risk Inland flying may be avoided by a preference to other means of transportation such as rail or road. Properties owned nearby a site with hazardous wastes may be sold in order to avoid associated risks. Risk Reduction - cost benefit analysis to decide on course of action - used in conjunction with a mix of risk retention and risk transfer measures - funds maybe spent and measures implemented to reduce frequency of occurrence and severity of risks. - The benefit of crime insurance as well as bonding - Implementing industry safety standards. Implementing risk management techniques Guidelines in selecting risk retention vs risk transfer amounts. Expected frequency expected severity techniques

e.g.

ii)

1b.

The Council of Community Colleges of Jamaica

Page 16

ACCT4804

Low High Low High

Low Low High High

Retention Retention Transfer Avoidance

-overlapping role of Insurance Brokers and Risk Managers -additional costs and the mandatory brokers commission. -the difficulty of coordinate a comprehensive insurance program based on a risk management policy -the company needs someone dedicated to protecting the firms interest. -the importance of protecting the corporate property is too important to be placed in the hands of an outsider.

A skilled Risk Manager or insurance professional/consultant may be required to help determine the appropriate mix -deductible -self-insurance, opportunity cost and third party administrator Question 2 A recent and simplified approach to commercial insurance coverage -wide variety of coverage offered with broad contract provisions included are: Building and Personnel Property Coverage Form (BPP) -buildings -business personal property motor vehicles, aircraft, watercraft, etc may be inclded. - with limitations boiler and machinery insurance extension -newly acquired or constructed property - $250,000 U.S.. limit - $100,000 U.S. limit -your business personal property at newly acquired premises - $4,000 U.S. limit -personal effects and properly of others -valuable papers and records - $2500 U.S. limit. -property off-premises - $10,000 limit. Outdoor property $41,000 U.S. limit Specific or blanket coverage, debris removal - $25% of covered physical loss Notable exclusions work mens compensation and ocean transportation (marine) insurance. The principal of subrogation applies in all instances.

Question 3a

The Council of Community Colleges of Jamaica

Page 17

ACCT4804

Major types of coverage -the hull or vessel -the cargo -the freight, or shipping revenue received by the ship owners which may represents a loss of income as such revenue in accident is paid upon delivery of cargo. -legal liability for proven negligence- protected against third party claims against collision. Limitations -the running down clause provides a limitation on claims, acts of God excluding ( earthquake, storms, floods, etc.) acts of negligence of the shipper improper packing or loading - a loss from the inherent nature of the goods (e.g loss due to decay)

Deductibles Memorandum of free of particular average (FPA) clause Trading warranty restrict ship to a particular area (specifying time and route) Sue and labour clause Abandonment Warehouse to-warehouse clause Coinsurance Warranties 3B Captive Insurer a subsidiary formed by a company called the parent -captive insurer take tax deductible for payments to it. -underwriting, loss control and other administrator expenses are usually sums paid to the risk manager of the parent on agents or brokers or the risk management department. Potential problems -demand a considerable amount of time and energy of the risk manager -costly to register a captive insurer either on or offshore -several company sometimes group together to form an industry captive insurer -tax deduction being allowed based on a substantial amount of unrelated business by the I.R.S. -sometimes substantial losses result from this industry through claims settlement -reinsure are unwilling to provide coverage because of the apparent risk of expertise in some areas -competition from regular insurers sometimes force captives out of business -financial officers dislike captives because of the difficulty to move money out of them. Question 4

The Council of Community Colleges of Jamaica

Page 18

ACCT4804

Bodily injury losses a person may incur because of his or her body and mind which includes: -medical bills loss of income -rehabilitation cost -loss of service (household as well as marital) -pain and suffering damages -punitive damages Property Damage -damage to real and personal property and includes: -loss of income -payment of extra expenses (rental to replace damaged property) Personal Injury -losses from slander, libel, invasion of privacy, false arrest, etc. -slander involves spoken word which are defamatory -libel involves written, printed or pictorial material that damages a persons reputation by ridiculing or defaming him/her. Legal Defence Organizations being sued must retain the service of a lawyer for defence (this can be very costly). Product liability suits the legal cost of defense may be greater than the award for the damage.

No of units Insured 5 15 30 50 100 200

Average Value of Each units $ 1,000,000 500,000 250,000 200,000 150,000

Probability of Complete loss 0.10 0.15 0.20 0.25 0.30

Total Expensive 5,000,000 7,500,000 7,500,000 1,000,000 15,000, 000 36,000,000 (3)

Total expected Loss 500,000 1,125,000 1,500,000 250,000 4,500,000 7,875,000 (3)

(i) (ii) (iii) (iv) (v)

Total exposure - $36,000,000 (annual insured value) Total annual expected loss = $7,875,000 Average insured value = 36,000,000 = $180,000 200 Average loss per unit = 7,875,000 = $39,375 200 Gross annual premium = 7,875,000 x $1.20

The Council of Community Colleges of Jamaica

Page 19

ACCT4804

(iv)

= $9,450,000 Gross premium rate per unit per $1000 = 9,450,000 = $47.25 200x1000

The Council of Community Colleges of Jamaica

Page 20