Risk management and Insurance

Example for Mid-term Exam

Part I. Choose true or false? Explain why?

1. Pure risk refers to a situation where there is the probability of loss or gain. True or
False? Explain?
2. Insurance covers both pure risks and speculative risks. True or False? Explain?

3. Subrogation will be applying if insured losses are caused by the third party? True
or False? Explain and give an example?
4. Principle of utmost good faith only applies to the insured. True or False? Explain
and give an example?
5. In third party liability insurance, third party can be the insured or the members of
their family. True or False? Explain?

Part II. Exercise

Exercise: In an accident:
Car A: property damage: damage of the car: 42 mil. VND, business damage: 8
mil. VND. Driver is injury: Medicare cost: 90 mil. VND and income lost: 60 mil. VND.
Car B: property damage: damage of the car: 64 mil. VND, business damage: 36
mil. VND.
Mistake of parties: A: 60%; B: 40%
Both cars are insured (property and third party liability insurances); at time of
accident: the insurance policies are in force. (liability limit: 50 mil./risk/property and 50
mil./risk/person)
Two cars A and B bought insurance from two insurance companies X and Y in
turn.
Requirement: calculate the indemnity of the insurers to the insureds and the actual
damage of two car owners.
 ANSWER

Part I.
1. False. Pure risk refers to situations that involve only the possibility of loss or no
change in condition; speculative risk refers to a situation where there is the
probability of loss or gain.

2. False. Insurance only covers pure risks. There are no opportunities for gain or
profit when pure risks occur, so moral hazard is less. Speculative risk is not
insurable primarily due to the potential for moral hazard.

3. True. Subrogation will be applying if insured losses are caused by the third party,
this principle is applied to guarantee that total indemnities from parties for insured
is not over the actual loss.

4. False. Principle of utmost good faith applies to both insured and insurer. Potential
insureds are held to the highest standards of truthfulness and honesty in providing
information for the underwriter. In additon, insurers have to provide honest advice
on the terms of insurance contracts and assess honestly the insureds’ losses.

5. True. In liability insurance, insurance companies do not cover some exclusions

such as damage caused to the insured’s or family’s property; personal injury to the
insured and members of the family.

Part II. Exercise

Step 1: Determine the damages of parties 
Car A:  
Damage of car: 42 mil. 
Business damage: 8 mil. 
Personal damage: 90+60=150 mil. 
Civil liability A->B: property-damage: 60%*(64+36)=60 mil. 
 Total damage: 260 mil.
Car B:  
Damage of car: 64 mil. 
Business damage: 36 mil. 
Civil liability B->A: property-damage: 40%*(42+8)=20 mil.
Person-injury: 40%*150=60 mil.
 Total damage: 180 mil.
Step 2: Determine indemnity of insurance companies 
IC X indemnifies car A owner 
Damage of car: 42 mil 
Civil liability consists of property-damage liability: 50 mil. 
 Total indemnity of IC X: 92 mil.
IC Y indemnifies car B owner 
Damage of car: 64 mil.
Civil liability: property-damage: 20 mil.
Person-injury: 50 mil.
 Total indemnity of IC Y: 134 mil.
Step 3: Insurance companies are returned from car owners 
IC X returned from car A owner:  
= 40%*42 = 16.8 mil. 
IC Y returned from car B owner: 
= 60%*64 = 38.4 mil. 
Step 4: Calculate actual indemnity of insurance companies 
Actual indemnity of IC X to car A owner: 92-16.8= 75.2 million VNDs 
Actual indemnity of IC Y to car B owner: 134-38.4= 95.6 million VNDs 
Step 5: Calculate actual damages of car owners 
Actual damage of car A owner 
Income = 75.2 (step4) + (20+60) (step1) = 155.2 mil. 
Expense= 260 million 
 Actual damage of car A owner= 260-155.2=104.8 mil. VND 
Actual damage of car B owner 
Income = 95.6 (step 4) + 60 (step1)= 155.6 mil.
Expense= 180 million 
 Actual damage of car B owner= 180-155.6= 24.4 mil. VND