Skip to content

FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management

A company buys property insurance with a deductible. Which risk problem does the deductible primarily help to reduce?

A deductible mainly reduces moral hazard. Because the insured bears the first part of every loss, it has a financial incentive to take care and avoid small claims, which lowers the insurer's expected payouts and the premium needed.

  1. ABasis risk, because the payout tracks the loss exactly
  2. BMoral hazard, because the insured retains part of any loss and so has an incentive to take careCorrect
  3. CSystematic risk, because the deductible diversifies the insurer's book
  4. DLiquidity risk, because premiums are paid in advance

Explanation

A deductible makes the insured bear the first part of each loss, aligning incentives and reducing careless behaviour (moral hazard). It also discourages small claims. It does not address basis risk, systematic risk or liquidity risk.

Did you get it right without looking?

One question tells you little. A timed set on The Building Blocks of Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise The Building Blocks of Risk ManagementFree diagnostic mock

More The Building Blocks of Risk Management questions