question

traditionally, risk has been defined as _____

answer

uncertainty concerning the occurrence of loss

question

objective risk is defined as ______

answer

the relative variation of actual loss from expected loss

question

an insurance company estimates its objective risk for 100,000 exposures to be 10%. Assuming the probability of loss remains the same, what would happento the objective risk if the number of exposures were to increase to 1 million?

answer

it would decrease to 1%

question

uncertainty based on a person's mental condition or state of mind is known as _____

answer

subjective risk

question

the long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called ______

answer

objective probability

question

which of the following statements about a priori probabilities is correct?

answer

they are objective probabilities that can be determined by deductive reasonins

question

an individual's personal estimate of the chance of loss is _____

answer

subjective probability

question

a peril is ______

answer

the cause of a loss

question

an earthquake is an example of ______

answer

peril

question

dense fog that increases the chance of an automobile accident is an example of a ________

answer

physical hazard

question

faking an accident to collect insurance proceeds is an example of a ______

answer

moral hazard

question

carelessness or indifference to a loss is an example of ______

answer

attitudinal hazard

question

some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. this hazard is called _______

answer

legal hazard

question

Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award. The characteristics of the judicial system that increase the frequency and severity of losses are known as _______

answer

legal hazard

question

a phrase that encompasses all of the major risks faced by a business firm is ________

answer

enterprise risk

question

all of the following are considered financial risks EXCEPT _________

answer

destruction of a production facility caused by an explosion

question

katelyn was just named Risk Manager of ABC Company. She has decided to create a risk management program which considers all of the risks faced by ABC - Pure, speculative, operational, and strategic - in a single risk management program. such a program is called a _______

answer

enterprise risk management program

question

a pure risk is defined as a situation in which there is _______

answer

only the possibility of loss or no loss

question

the premature death of an individual is an example of a ________

answer

pure risk

question

which of the following statements about speculative risks is true?

answer

they may benefit society even though a loss occurs

question

an automobile that is a total loss as a result of a collision is an example of which of the following types of risk?

answer

diversifiable

question

all of the following are programs to insure fundamental risks EXCEPT _________

answer

auto physical damage insurance

question

all of the following are examples of personal risks EXCEPT _______

answer

flood

question

which of the following is a reason why premature death may result in economic insecurity?

answer

additional expenses associated with death may be incurred & the income of the deceased person's family may be inadequate to meet its basic needs

question

which of the following are often consequences of long-term disability?

answer

continuing medical expenses & loss or reduction of employee benefits

question

all of the following are examples of direct property losses EXCEPT _______

answer

the cost of renting a substitute vehicle while a collision-damaged car is being repaired

question

the extra expense incurred by a business to stay in operation following a fire is an example of ______

answer

an indirect loss

question

which of the following statements about liability risks is true?

answer

future income and assets can be attached to pay judgments if inadequate insurance is carried

question

all of the following are burdens to society because of the presence of risk EXCEPT _______

answer

individuals may profit from accepting a speculative risk

question

loss control includes which of the following?

answer

loss reduction & loss prevention

question

following good health habits can be categorized as ______

answer

loss prevention

question

from the insured's perspective, the use of deductibles in insurance contracts is an example of _______

answer

risk retention

question

the use of fire-resistive materials when constructing a building is an example of _______

answer

loss control

question

all of the following statements about risk retention are true EXCEPT _________

answer

its use is most appropriate for low-frequency, high-severity types of risks

question

all of the following are methods of noninsurance transfer EXCEPT ______

answer

avoiding dangerous activities

question

Curt borrowed $ for a boat & couldn't pay off loan so he intentionally sunk the boat, collected from insurer and paid off loan balance. this illustrates the problem of ________

answer

moral hazard

question

after restaurant closes, electrical system malfunctions & causes fire. Physical damage to restaurant & the amount of profit lost during repair. this is an example of _________

answer

indirect loss

question

use of corporate form of organization to shield against personal liability claims illustrates _______

answer

noninsurance transfer

question

the variation between the rate of loss expected to occur and the rate of loss that actually does occur is called ______

answer

objective risk

question

williams company installed smoke detectors, sprinkler system, and fire extinguishers in its new facility. these devices are all examples of _____

answer

loss control

question

Cathy's car hit a patch of ice on the road. the car skidded off the road and hit a tree. the presence of the ice is best described as ______

answer

physical hazard

question

type of risk that is present when either a profit or loss could occur is called ______

answer

speculative risk

question

ben is concerned that if he injures someone he could be held legally responsible and required to pay damages. this type of risk is called a _________

answer

liability risk

question

MLX Drug Company would like to market a new hypertension drug. While FDA was testing, it discovered the drug had harmful side effect. MLX abandoned plan to produce drug. This reaction illustrates ________

answer

risk avoidance

question

All of the following are characteristics of the liability risk that most people face EXCEPT _______

answer

owning liability insurance eliminates the possibility of being held legally liable

question

which of the following statements about chance of loss & risk is true?

answer

two individuals may perceive differently the risk inherent in a given activity

question

a risk that affects only individuals or small groups and not the entire economy is called a ______

answer

diversifiable risk

question

all of the following are commercial risks EXCEPT ______

answer

the risk of insufficient retirement income

question

all of the following are characteristics of insurance EXCEPT

answer

risk avoidance

question

Which of the following is implied by the pooling of losses?

answer

sharing of losses by an entire group

question

According to the law of large numbers, what happens as the number of exposure units increases?

answer

actual results will more closely approach probable results

question

According to the law of large numbers, what should happen as an insurer increases the number of units insured?

answer

actual results will more closely approach expected results

question

Characteristics of a fortuitous loss include which of the following?

answer

the loss occurs as a result of chance

question

From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT

answer

the loss should be catastrophic

question

From the standpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT

answer

the loss must be indeterminable

question

Why is a large number of exposure units generally required before a pure risk is insurable?

answer

it enables the insurer to predict losses more accurately

question

The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following?

answer

decrease in moral hazard & more accurate prediction of future losses

question

Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable?

answer

the loss must be definite as to place & amount

question

Methods by which insurers may minimize or avoid catastrophic losses include which of the following?

answer

the use of reinsurance

question

Which of the following types of risks best meets the requirements for being insurable by private insurers?

answer

property risks

question

Reasons why market, financial, and production risks are often uninsurable include which of the following?

answer

the potential to produce a catastrophic loss is great & the chance of loss cannot be accurately estimated

question

Which of the following types of risks is normally uninsurable by private insurers?

answer

market risks

question

Which of the following is a result of adverse selection?

answer

persons most likely to have losses are also most likely to seek insurance at standard rates

question

The tendency for unhealthy people to seek life or health insurance at standard rates is an example of

answer

adverse selection

question

Which of the following statements regarding insurance and gambling is (are) true?

answer

insurance is used to handle existing pure risks, while gambling creates a new speculative risk

question

In addition to marketing life insurance, life insurers typically sell which of the following products?

answer

retirement annuities & disability income insurance

question

Inland marine insurance provides coverage for A) goods being shipped on land

answer

goods being shipped on land

question

All of the following are classified as casualty insurance EXCEPT

answer

life insurance

question

Which of the following is a form of casualty insurance?

answer

general liability insurance

question

The term ʺmultiple-line insuranceʺ is used to describe a type of insurance that combines which of the following coverages into a single contract?

answer

property and casualty insurance

question

All of the following are benefits to society that result from insurance EXCEPT

answer

elimination of moral hazard

question

Which of the following statements about the insurance industry as a source of investment funds is (are) true?

answer

these funds result in a lower cost of capital than would exist in the absence of insurance & these funds tend to promote economic growth and full employment

question

All of the following are social costs associated with insurance EXCEPT

answer

increased cost of capital

question

A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that the farmer sustained. Which characteristic of insurance is embodied in this agreement?

answer

pooling of losses

question

XYZ Insurance Company writes coverage for most perils which can damage property. XYZ, however, does not write flood insurance on property located in flood plains. Which requirement of an ideally insurable risk might be violated if XYZ wrote flood insurance on property located in flood plains?

answer

the loss should not be catastrophic

question

ABC Appliance offers a warranty requiring an annual fee. The warranty may be purchased at the time of sale or at any time within the first year after the appliance was purchased. The warranty fee after the date of purchase is twice the time-of-purchase fee. When asked why the fee was higher after the date of purchase, ABCʹs president said, ʺBuying a warranty is voluntary. Weʹve noted that those who buy the warranty after the purchase date have a greater need for service.ʺ Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers?

answer

adverse selection

question

Alpha Insurance Company insures a broad range of risks, including whatever is not covered by fire, marine, and life insurers. Which term best describes the wide range of risks written by Alpha Insurance?

answer

casualty insurance

question

LMN Insurance markets homeowners insurance. The LMN homeowners policy combines property and casualty insurance in the same contract. Insurance policies combining property and casualty coverage in the same contract are called

answer

multiple-line policies

question

One branch of government insurance programs has a number of distinguishing characteristics. These programs are compulsory, they are financed by mandatory contributions rather than general tax revenues, and benefits are weighted in favor of low-income groups. These government insurance programs are called

answer

social insurance programs

question

Gina would like to buy a house. She will pay 10 percent of the cost of the house as a down payment and borrow the other 90 percent from a mortgage lender. The home will serve as collateral for the loan. The lender requires Gina to purchase property insurance on the home so that the collateral supporting the loan will be protected. This scenario illustrates which of the following benefits of insurance to society?

answer

enhancement of credit

question

ABC Insurance Company calculated the amount that it expected to pay in claims under each policy sold. Rather than selling the insurance for the amount it expected to pay in claims, ABC added an allowance to cover the cost of doing business, including commissions, taxes, and acquisition expenses. This allowance is called a(n)

answer

expense loading

question

JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 2,000 homeowners this year?

answer

the actual results will more closely approach the expected results

question

Apex Insurance Company wrote a large number of property insurance policies in an area where earthquake losses could occur. When the president of Apex was asked if she feared that a severe earthquake might put the company out of business, she responded, ʺNot a chance. We transferred most of that risk to other insurance companies.ʺ An arrangement by which an insurer that initially writes insurance transfers to another insurer part or all of the potential losses associated with such insurance is called

answer

reinsurance

question

Bronson Casualty Company sells casualty insurance only. Which of the following coverages could you purchase from Bronson Casualty Company?

answer

liability insurance

question

Which of the following statements regarding insurance and hedging is (are) true?

answer

insurance involves the transfer of insurable risk while hedging handles risk that is typically uninsurable

question

Ashley opened an all-you-can-eat buffet restaurant. The cost per-person was based upon what Ashley believed an average restaurant patron would consume. The restaurant began to lose money. Ashley concluded that her patrons had ʺabove averageʺ appetites, and were attracted to her restaurant because they could eat as much as they wanted while being charged an average price. A similar phenomenon exists in insurance markets. This problem is called

answer

adverse selection

question

Which of the following statements is (are) true concerning private insurance?

answer

both individuals and businesses purchase private insurance

question

Adverse selection occurs

answer

when applicants with a higher-than-average chance of loss seek insurance at standard rates

question

Risk management is concerned with

answer

the identification and treatment of loss exposures

question

A situation or circumstance in which a loss is possible, regardless of whether a loss occurs, is called a

answer

loss exposure

question

All of the following are risk management objectives prior to the occurrence of loss EXCEPT

answer

continuing operations after a loss

question

Preloss objectives of risk management include which of the following?

answer

preparing for potential losses in the most economical way & reduction of anxiety

question

A risk manager is concerned with

answer

identifying potential losses & selecting the appropriate techniques for treating losses

question

Sources of information that can be used by a risk manager to identify pure loss exposures include all of the following EXCEPT

answer

currency exchange rates

question

Loss severity is defined as the

answer

probable size of the losses which may occur during some period

question

Loss frequency is defined as the

answer

probable number of losses that may occur during some period

question

The worst loss that could ever happen to a firm is referred to as the

answer

maximum possible loss

question

The worst loss that is likely to happen is referred to as the

answer

probable maximum loss

question

All of the following statements about avoidance are true EXCEPT

answer

it can be used for any loss exposure facing a firm

question

Abandoning an existing loss exposure is an example of

answer

avoidance

question

Which of the following conditions is (are) appropriate for using retention?

answer

the worst possible loss is not serious

question

Which of the following statements regarding the use of retention is (are) true?

answer

retention is best used for loss exposures that have a low frequency and high severity & a financially strong firm can have a higher retention level than a firm whose financial position is weak

question

All of the following statements about captive insurers are true EXCEPT

answer

they increase the volatility of the parent company's earnings

question

Which of the following statements about self-insurance is (are) true?

answer

it is a form of planned retention

question

All of the following are potential advantages of retention EXCEPT

answer

protection from catastrophic losses

question

A restaurant owner leased a meeting room at the restaurant to a second party. The lease specified that the second party, not the restaurant owner, would be responsible for any liability arising out of the use of the meeting room, and that the restaurant owner would be ʺheld harmlessʺ for any damages. The restaurant ownerʹs use of the hold-harmless agreement is an example of

answer

noninsurance transfer

question

All of the following are disadvantages of noninsurance transfers EXCEPT

answer

the only potential losses that can be transferred are those that are not commercially insurable

question

ABC Insurance retains the first $1 million of each property damage loss and purchases insurance for that part of any property loss that exceeds $1 million. The insurance for property losses above $1 million is called

answer

excess insurance

question

Which of the following statements about the use of deductibles is (are) true?

answer

they represent risk retention by insurance purchasers

question

Which of the following statements about an excess insurance plan is true?

answer

the insurer does not participate in a loss until it exceeds the amount the firm has decided to retain

question

Factors a risk manager must consider in selecting an insurer include which of the following?

answer

the availability of risk management services & the financial strength of the insurer

question

An insurance policy specifically written and designed to meet the needs of an insurance purchaser is called a(n)

answer

manuscript policy

question

All of the following are disadvantages of using insurance in a risk management program EXCEPT

answer

it results in considerable fluctuations in earnings after losses occur

question

Which of the following types of loss exposures may be appropriately handled through the purchase of insurance?

answer

low frequency, high severity

question

Which of the following types of loss exposures are best handled by the use of avoidance?

answer

high frequency, high severity

question

Low-frequency, low-severity loss exposures are best handled by

answer

retention

question

All of the following statements about the administration of a risk management program are true EXCEPT

answer

if a risk management program is properly designed, periodic review of the program is unnescessary

question

Cal was just hired as XYZ Companyʹs first risk manager. Cal would like to employ the risk management process. The first step in the process Cal should follow is to

answer

identify potential losses faced by XYZ Company

question

Members of Mid-South Petroleum Distributors, a trade group, had trouble obtaining affordable pollution liability insurance. The members formed a group captive that is exempt from many state laws that apply to other insurers. This group captive is called a(n)

answer

risk retention group

question

Laura Evans is risk manager of LMN Company. Laura decided to retain certain property losses. All of the following are methods which Laura can use to fund retained property losses EXCEPT

answer

private insurance

question

Parker Department Stores has been hurt in recent months by a large increase in shoplifting losses. Parkerʹs risk manager concluded that while the frequency of shoplifting losses was high, the severity is still relatively low. What is (are) the appropriate risk management technique(s) to apply to this problem?

answer

loss control and retention

question

Barb, who is self-employed, is the main breadwinner for her family. Barb does not have disability income insurance because she has never stopped to consider the impact of a long-term disability upon her family. Barbʹs treatment of the risk of disability is best described as

answer

passive retention

question

Ryan decided to review his personal risk management program. His car is 10 years old, and he would receive little money from his insurer if the car was damaged or destroyed. Ryan decided to drop the physical damage insurance on the car. From a risk management perspective, dropping the physical damage insurance on the car is best described as

answer

increasing the use of retention in the risk management program

question

To better understand her companyʹs operations, a risk manager asked a production manager to draw a diagram tracing the steps in the production and distribution of the companyʹs products. Such a diagram, which is useful in risk identification, is called a

answer

flowchart

question

) In reviewing his companyʹs operations, a risk manager noticed that all of the companyʹs finished goods were stored in a single warehouse. The risk manager recommended that the finished goods be divided among three warehouses to prevent all of the finished goods from being destroyed by the same peril. Dividing the finished goods among three warehouses illustrates

answer

risk control

question

Which of the following statements about a personal risk management program is (are) true? I. Insurance and retention are the only techniques used to handle potential losses. II. The steps in a personal risk management process are the same steps used by businesses.

answer

the steps in a personal risk management process are the same steps used by businesses

question

Bev lives in the suburbs and works downtown. She drives to work, and her most direct route to work would require her to pass through an area where carjackings and drive-by-shootings are common. Bev does not drive through this area. Instead, she uses a route which adds 10 minutes to her commute. Which risk management technique is Bev using with respect to the risk of injury while driving through the dangerous area?

answer

avoidance

question

Which statement about a companyʹs cost of risk is (are) true?

answer

cost of risk includes insurance premiums and retained losses & reducing the cost of risk increases profitability

question

A useful measure for an organization is the total of the organizationʹs expenditures for treating loss exposures including retained losses, loss control expenses, insurance premiums, and other related expenses. This measure is called the organizationʹs

answer

cost of risk

question

Mark owns a 1998 sedan. The last time Mark renewed his auto insurance, he decided to drop the physical damage insurance on this vehicle. How is Mark dealing with the auto physical damage exposure in his personal risk management program?

answer

planned retention

question

Purchasing health insurance illustrates the use of which personal risk management technique?

answer

risk transfer

question

Which of the following statements about captive insurance companies is (are) true?

answer

a captive insurance company may be owned by several parents

question

Which of the following is least likely to occur during a ʺhardʺ insurance market period?

answer

higher insurer profits

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