INSURING RISK IN NATURE AND INDUSTRY

1. Explain why using deterministic models for catastrophe loss modelling can understate the potential risk.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
(5 marks)

2. Describe what is meant by moral hazard in insurance. What can insurance companies do to reduce its occurrence? Give an example of a potential moral hazard issue outside of the insurance area.
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(5 marks)
3. Explain the principle of large numbers and its application in insurance.
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(5 marks)
4. Describe the key stages in a catastrophe model? (You may choose whether this captured in 3, 4 or 5 stages).
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(5 marks)
5. Describe the management of flood risk through the UK’s ‘memorandum of understanding’ between insurers and the government. Discuss the relationship between climate change and flood modelling.
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(10 marks)

6. A production line has a consecutive 3 part quality testing mechanism, QT1, QT2 and QT3.
If we consider the following probabilities:
Probability that QT1 operates properly= 0.76
Probability that QT2 operates properly =0.85
Probability that QT3 operates properly = 0.79

Design an event tree to demonstrate the routes to each of the possible outcomes. Work out the probability of each of the outcomes.
What is the probability that a faulty product will pass through the quality tests undetected?
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(10 marks)
7. Identify the key types of air pollution. Describe how they are hazardous to the environment. Discuss the role of insurers in environmental risk.
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(10 marks)

8. Describe in brief the key health concern of nanomaterials. Discuss the parallel with the insurance industry’s experience of liabilities resulting from asbestos.
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(10 marks)

9. Describe the critical success factors for effective integrated risk management.
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(5 marks)
10. What is the significance of the requirement to ‘establish the context’ of an enterprise’s risk?
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(5 marks)
11. Identify the theoretical tools used to control/manage the risks. How could these be implemented in a practical way within a financial institution?
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(10 marks)
12. Describe in brief the evolution of the use of catastrophe modelling in insurance/reinsurance.
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(5marks)

13. What are the typical key stages in a catastrophe model?
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(10 marks)

14. What is meant by the terms Annual Average Loss (AAL) and the Exceedance Probability (EP)?
How are they typically calculated
How are they used in insurance/reinsurance?
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(10 marks)

15. Discuss the relationship between climate change and catastrophe modelling (You can use a case study to illustrate).
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(10 marks)

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