UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGNCollege of BusinessD E P A R T M E N T O F F I N A N C E Finance 230 Assignment 4Fall, 2007 Due: September 21, 20071. The willingness to pay a premium for car insurance that is higher than your expected losses represents:A. Risk neutrality B. Risk aversion C. Risk seeking behaviorD. Pure risk E. None of the above2. The property damage coverage in the State Farm Car Policy protects you against which of the following exposures:A. Personal loss exposures B. Property loss exposures C. Liability loss exposuresD. Moral hazard E. None of the above3. Which ideal requisite for insurability is most seriously violated by a policy insuring Bruce Springsteen's voice?A. Many similar exposure units B. Fortuitous losses C. Definite lossesD. Small possibility of a catastrophe E. Economic feasibility4. Calculate the expected loss for bodily injury liability insurance if the loss frequency is 3 in 100 and the loss severity is $7,500. A. $3 B. $30 C. $75D. $2250 E. None of the above5. The State Farm Car Policy liability coverage can be best classified as which of the following:A. Personal, property-liability, private, involuntaryB. Commercial, life-health, private, voluntaryC. Personal, property-liability, government, voluntaryD. Personal, property-liability, private, voluntaryE. Personal, life-health, private, involuntary6. The State Farm Car Policy liability coverage excludes bodily injury relatives (page 8, item 2 c) to avoid violating which of the following ideal requisites for insurability:A. Many similar exposure unitsB. Fortuitous lossesC. Definite lossesD. Small possibility of a catastropheE. Economic feasibility7. The State Farm Car policy states that a “Temporary Substitute Car – means a car not owned by, registerted to or leased to you or your spouse, if it replaces your car for a short time.” On September 14, 2007, you borrow another car that has no other insurance while your Sebring is for repairs. The repairs require ordering parts from abroad that take several weeks to arrive. On October 13, 2007, youare in an accident with the borrowed vehicle. If you file a claim for coverage, which would apply?A. State Farm could deny the claim by arguing that 30 days is not a short timeB. State Farm would pay the claim since insurance policies are contracts based on utmost good faithC. State Farm could deny the claim since you did not provide any consideration for this coverageD. State Farm would have to pay the claim since this is a contract of adhesionE. None of the above8. You advertise for a graduate student to take notes for you in Finance 260 by posting a note on the bulletin board in Sherman Hall, and offer to pay $100 for a full semester's notes. Two days after the final exam a 22 year old law student provides you with a full semester of excellent notes (which might have helped you in the class), and asks for his $100. You decline to pay him and he sues you. Which, if any, of the requirements for a contract would be missing?A. Offer and acceptanceB. ConsiderationC. Competent partiesD. Legal purposeE. None are missing and you would be required to pay him the $1009. You sell your car to a woman who responds to an ad you placed in the newspaper, but you mistakenly pay the renewal premium on your insurance policy on the car. During the policy term you find out thatthe woman you sold the car to was in an accident that caused extensive damage to the car. Which of the following is true:A. You can collect for the damages done to the car since you had an insurable interest at the inception of the policyB. You cannot collect for the losses to the car, because you were not involved in the accidentC. You can collect under your policy, but you will have to turn over the payment to the woman you sold your car to under the subrogation clauseD. You cannot collect for the losses to the car since you did not have an insurable interest at the time of lossE. None of the above10. According to Tony Falcone, the guest speaker on September 7, what is RLI’s most successful product?A. UmbrellaB. HomeC. AutoD. SuretyE. Workers’
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