Exam 2021
• Q1b. What is objective risk and what are the methods that an insurance
company can use to reduce objective risk?
• Objective risk is the deviation between actual losses and expected losses
• The methods that an insurance company can use to reduce objective risk is:
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* The law of large numbers: As the number of insured increases, the deviation between
actual and expected results will decline.
* Underwriting : The Evaluation of insurable risks.
* Co-insurance – A loss-sharing provision in insurance
* Restrictive covenants – A legal obligation imposed in a contract to do or not to do
something
* Reinsurance The process by which insurers shift some of the risk that they have insured to
another insurance company
Exam 2021
• Question 5
a. What are the core business activities of investment banks?
• Investment banks help businesses and governments sell their new securities in the primary market
• After the securities are sold, investment bankers make secondary markets for the securities as brokers and dealers.
b. What is underwriting by investment banks? What is the risk involved in
underwriting for investment banks?
Underwriting involves the bank investing risk
The investment bank guarantees to buy the new securities at a fixed price
The risk is that the bank sells it at a price less than this amount