Practice Quiz Chapter 3
Which of the following statements is (are) true with respect to the objectives of risk management? A pre-loss objective of risk management is the reduction of anxiety. A post-loss objective of risk management is the stabilization of earnings. both I and II neither I nor II II only I only
Correct Answer: both I and II
All of the following risk treatment techniques are classified as risk control methods EXCEPT loss reduction. avoidance. insurance. loss prevention.
Correct Answer: insurance
All of the following are methods used to pay retained losses EXCEPT current net income. insurance. funded reserve. credit line.
Correct Answer: insurance.
Rather than purchasing computers and software, ABC Company entered into a lease agreement with Computer Solutions Company (CSC). Under terms of the lease, CSC provides computers and software and is responsible for damage to the computers and software. ABC uses the lease to shift responsibility for hardware and software losses to CSC. ABC's use of the lease illustrates which method of dealing with risk? noninsurance transfer insurance transfer risk retention risk avoidance
Correct Answer: noninsurance transfer
Harris Petroleum, a fuel storage and delivery business, occasionally has difficulty in obtaining affordable pollution liability insurance. Jane Elmore, Risk Manager of Harris Petroleum, decided to form an insurance subsidiary for the purpose of writing pollution liability insurance for Harris Petroleum, as well as other insurance coverages. The insurance subsidiary will be based in Bermuda for regulatory reasons. What is such a subsidiary called? a social insurance company a risk retention group a fraternal insurer a captive insurance company
Your Answer: a captive insurance company
Tindall Company manufactures electronic components. Managers of the company are considering several diversification options. One possibility is production of prescription drugs. When Tindall Company managers learned of the potential legal liability that could result from the manufacture and sale of prescription drugs, the managers rejected the idea and decided to consider other diversification options. How did Tindall Company choose to deal with the risk of legal liability arising from the manufacture and sale of prescription drugs? risk avoidance loss reduction risk transfer risk retention
Correct Answer: risk avoidance
Which of the following statements is (are) true with respect to identifying potential loss exposures? A physical inspection of company plants and operations can help to identify major loss exposures. Historical claims data can help to identify major loss exposures. I only II only neither I nor II both I and II
Your Answer: both I and II
The first step in the risk management process is to select the appropriate techniques for handling losses. analyze potential losses. implement and administer the program. identify loss exposures.
Your Answer: identify loss exposures.
A written document that outlines the risk management objectives of a firm, as well as company policy with respect to the treatment of loss exposures, is called a risk management information system. manuscript policy. risk management specifications guide. risk management policy statement.
Your Answer: risk management policy statement.
Risk managers must consider the range of outcomes that could occur. The worst loss that is likely to happen is called the severity maximum loss. the possible maximum loss. the frequency maximum loss. the probable maximum loss.
Your Answer: the probable maximum loss.