Property & Casualty Insurance Fundamentals Study Set

Risk management concepts in one form or another apply A. To all companies and families. B. Only to large companies. C. Only to international companies. D. To all companies but not families.

A. To all companies and families.

Which one of the following is typically a post-loss risk management goal? A. Legality B. Economy of operations C. Continuity of operations D. Tolerable uncertainty

C. Continuity of operations

Which one of the following risk control techniques will reduce loss severity and make losses more predictable, without increasing loss frequency significantly? A. Diversification B. Loss prevention C. Separation D. Duplication

D. Duplication

Which one of the following is an element of a loss exposure? A. A cause of loss B. The probability of a loss C. The verification of risk D. The occurrence of a loss

A. A cause of loss

Which one of the following statements is correct regarding characteristics of ideally insurable loss exposures? A. A common function that insurance provides is a spreading of risk across a large number of similar exposure units within the same period. B. Intertemporal risk transfer, the spreading of risk through time, requires a large number of similar exposure units. C. One requirement of the law of large numbers is that past events occur under different circumstances in the future. D. Loss exposures such as homes and automobiles generally will not meet the ideally insurable requirement that the exposure be of a large number of similar exposure units.

A. A common function that insurance provides is a spreading of risk across a large number of similar exposure units within the same period.

Delmond Corporation wishes to purchase key person life insurance to provide a financial cushion against the loss of its chief executive officer. This personnel loss exposure for Delmond meets all of the following characteristics of an ideally insurable loss exposure, EXCEPT: A. Definite and measurable B. Pure risk C. Fortuitous D. Independent and not catastrophic

A. Definite and measurable

Which one of the following statements is correct regarding government involvement in insurance? A. Federal and state government are involved in insurance to facilitate compulsory insurance purchases. B. Most organizations obtain workers compensation insurance through federal or state insurance programs. C. Government insurance plans typically incur significant costs in marketing and sales commissions. D. Legislators find it more straightforward to invite and analyze bids from private insurers than to establish government plans.

A. Federal and state government are involved in insurance to facilitate compulsory insurance purchases.

Every loss exposure has which one of the following elements? A. Financial consequences of loss B. Property exposed to loss C. Tangible asset exposed to loss D. Possibility of direct loss

A. Financial consequences of loss

George works for a large company and part of his job is to monitor assets according to their liquidity. George is particularly concerned that the company fleet cars are affecting its liquidity and rising fuel prices are having an adverse effect during tight economic markets. If George's concerns were categorized as causes of loss according to the quadrants of risk, his concern most directly relates to which one of the following types of risks? A. Financial risks B. Operational risks C. Strategic risks D. Hazard risks

A. Financial risks

Which one of the following statements is correct with regard to property loss exposures? A. Homes can be grouped into classes that face essentially the same loss potential. B. Commercial property exposures are easier to group into classes than individual homes. C. When insuring homes, insurers need not avoid excessive concentration of loss exposures. D. The property loss exposures associated with residential fires are not ideally suited to insurability.

A. Homes can be grouped into classes that face essentially the same loss potential.

An advantage that retention offers an individual or organization is A. Incentive for risk control. B. Reduction in exposure to large loss. C. Reduction in cash flow variability. D. Transference of responsibility for claims administration.

A. Incentive for risk control.

Which one of the following best explains the concept of residual uncertainty, as relates to estimation of the financial consequences of risk? A. It is the level of risk that remains after implementing risk management plans. B. It is the difference between estimated subjective risk and calculated objective risk.Incorrect. Residual uncertainty is the level of risk that remains after implementing risk management plans. C. It is the amount invested in risk management in order to eliminate concern. D. It is uncertainty regarding the value of any residual salvage that would remain after a loss.

A. It is the level of risk that remains after implementing risk management plans.

Which one of the following statements is true with regard to the selection of appropriate risk financing measures? A. It is typically more economical for an organization to retain rather than transfer loss exposures directly related to its core operations. B. Diversifying loss exposures tends to reduce the accuracy of loss estimates, and increases the uncertainty regarding future losses. C. An organization that undertakes extensive risk control measures is less likely to have the ability to fund retention of its loss exposures. D. The higher an organization's willingness to accept risk, the higher the likelihood that transfer will be used to cover its loss exposures.

A. It is typically more economical for an organization to retain rather than transfer loss exposures directly related to its core operations.

Risk transfer is the appropriate risk financing measure for loss exposures with which one of the following combinations of characteristics? A. Low frequency and high severity B. High frequency and low severity C. Low frequency and low severity D. High frequency and high severity

A. Low frequency and high severity

Jean is the Risk Manager for a Fortune 1000 company. Her CFO has tasked her to analyze vulnerabilities in the firm's supply chain. The adequacy of suppliers to meet an organization's needs would be an example of which one of the following types of risk? A. Operational risk B. Strategic risk C. Financial risk D. Operating risk

A. Operational risk

Pravalt Construction Company pays less than its competitors for workers compensation insurance because Pravalt has had substantially fewer employee injuries than other firms in its class. This illustrates which one of the following benefits of insurance? A. Promote risk control B. Enable efficient use of resources C. Meet legal requirements D. Reduce social burden

A. Promote risk control

Which one of the following is an advantage of risk transfer that appears to be valued by investors? A. Reducing cash flow variability B. Maintaining control of the claims process C. Avoiding adverse employee relations D. The ancillary services provided

A. Reducing cash flow variability

Which one of the following rating plans adjusts the premium for the current policy period to recognize the insured's actual losses during the current policy period? A. Retrospective rating plan B. Schedule rating plan C. Experience rating plan D. Guaranteed cost plan

A. Retrospective rating plan

Managing an organization's cost of risk involves various categories of expenses. Commissions paid to an insurance broker would be considered which one of the following types of expense? A. Risk financing expenses B. Risk control expenses C. Statutory expenses D. Administrative expenses

A. Risk financing expenses

Jane always drives to visit her children who live one thousand miles away. She enjoys driving and feels safer in a vehicle than on an airplane because she feels she has more control of her fate. This driving versus flying decision is an example of A. Subjective risk. B. Speculative risk. C. Nondiversifiable risk. D. Objective risk.

A. Subjective risk.

Business continuity management is primarily designed to meet which one of the following risk management goals? A. Survival B. Tolerable uncertainty C. Social responsibility D. Growth

A. Survival

When it comes to providing management with the desired level of assurance, with which one of the following does tolerable uncertainty conflict? A. Legality B. Economy of operations C. Social responsibility D. Survival

B. Economy of operations

An organization generally should not incur substantial costs in exchange for slight benefits under its risk management program. By comparing its costs of risk management with other similar organizations, an organization can measure its pre-loss goal of A. Social responsibility. B. Economy of operations. C. Legality. D. Tolerable uncertainty.

B. Economy of operations.

Risk management activities under the enterprise-wide risk management approach occur at the A. Business unit level. B. Enterprise level. C. Regional level. D. Departmental level.

B. Enterprise level.

Two individuals each have a 75 percent probability of not suffering a homeowners loss in a given year. Assuming that losses involving these two homes are independent of one another, and that the two individuals enter into a pooling arrangement, which one of the following represents the probability of neither individual suffering a loss? A. .00 B. .56 C. .75 D. 1.5

B. .56

Which one of the following statements is correct with respect to retrospective rating plans? A. The loss limit for a retrospective rating plan is the most the insured must pay in any one year for losses. B. An organization must have a substantial insurance premium to benefit from retrospective rating. C. Retrospective rating adjusts premiums for the current policy period based on actual losses from prior policy periods. D. The loss limit for a retrospective rating plan is the most the insurer will pay per occurrence for a loss.

B. An organization must have a substantial insurance premium to benefit from retrospective rating.

Which one of the following statements is true? A. Real property and machinery are examples of liquid assets. B. As an organization's retention level increases, so does the level of liquidity required. C. Liquid assets offer higher returns than other, longer-term investments. D. Liquidity can be increased by using cash flow to fund capital projects.

B. As an organization's retention level increases, so does the level of liquidity required.

Which one of the following statements is correct regarding retirement as a personnel loss exposures? A. Retirement insurance is generally available to compensate organizations for the resulting loss when key employees retire. B. Because retirement is usually planned, most resulting personnel losses can be handled with proper planning. C. Generally a personnel loss resulting from a key employee's retirement is fortuitous from the organization's perspective. D. The personnel loss associated with retirement is the value of any pension or other benefits paid, which is easily measured.

B. Because retirement is usually planned, most resulting personnel losses can be handled with proper planning.

Which one of the following statements is correct? A. One disadvantage of insurance is that it promotes inefficient use of policyholders' funds. B. Contractors must usually provide evidence of liability insurance before a construction contract is granted. C. Insurance policies typically cannot be used to provide evidence of financial resources. D. Insurers generally do not provide incentives to organizations to implement risk control measures.

B. Contractors must usually provide evidence of liability insurance before a construction contract is granted.

Which one of the following planned retention measures is appropriate for funding losses with a low expected value, but becomes less advisable as the expected value of losses gets larger? A. Using a funded reserve B. Current expensing of losses C. Using an unfunded reserve D. Borrowing funds

B. Current expensing of losses

Which one of the following statements is accurate regarding pure and speculative risks? A. Pure risks may sometimes be desirable. B. Every business venture involves speculative risks. C. A pure risk is a chance of loss or no loss, or a chance of gain. D. Financial investments typically involve pure risk.

B. Every business venture involves speculative risks.

Retirement loss exposures generally fail to meet which one of the following characteristics of an ideally insurable loss exposure? A. Independent and not catastrophic B. Fortuitous C. Pure risk D. Definite and measurable

B. Fortuitous

Which one of the following correctly describes a reason for government involvement in property-casualty insurance? A. Selling insurance provides the government with a non-tax source of revenues and profits. B. Government programs can meet legitimate public demands unmet by private insurers. C. Competition from government plans keeps private insurer's premiums competitive. D. Preventing high-risk individuals or activities from being insured is in the public interest.

B. Government programs can meet legitimate public demands unmet by private insurers.

Which one of the following best describes one of the steps in the business continuity process? A. Identify the organization's important resources B. Identify the risks to the organization's critical functions C. Develop an emergency response plan to deal with life and safety issues D. Arrange appropriate insurance coverage

B. Identify the risks to the organization's critical functions

Which one of the following statements is correct with respect to the characteristics of the products liability loss exposure? A. Typically, premiums for products liability insurance are economically feasible, regardless of the product. B. If a product has been widely distributed, a loss could be catastrophic in terms of number of claims. C. Because products liability losses arise out of defective or inherently dangerous products, they are not considered to be fortuitous. D. Products liability losses are typically definite in cause and relatively easy to measure in monetary terms.

B. If a product has been widely distributed, a loss could be catastrophic in terms of number of claims.

Which one of the following statements is correct with respect to characteristics of insurable loss exposures? A. If the insured has control over whether or when a loss will occur, the risk is attractive to insure. B. If losses are not fortuitous, the insurer cannot calculate an appropriate premium. C. If a loss is fortuitous, the chance of loss could increase as soon as a policy is issued. D. Private insurance is suitable for risks where the probability and timing of loss is known.

B. If losses are not fortuitous, the insurer cannot calculate an appropriate premium.

When a loss at one loss exposure has no effect on the probability of a loss at another loss exposure, those exposures are said to be A. Correlated. B. Independent. C. Unique. D. Separate.

B. Independent.

The cost of residual uncertainty can have a significant effect on an individual or organization. Which one of the following statements is correct with respect to residual uncertainty? A. For organizations, the cost of residual uncertainty is limited to the effect that uncertainty has on members of the organization. B. Individuals and organizations vary greatly as to how much residual uncertainty they are willing to accept, and this benefits society and the economy. C. The cost of residual uncertainty includes the cost of any insurance policies purchased to cover losses not treated by other risk management techniques. D. The cost of residual uncertainty can be calculated by subtracting the expected cost of losses or gains from an organization's cost of risk.

B. Individuals and organizations vary greatly as to how much residual uncertainty they are willing to accept, and this benefits society and the economy.

Jane wrote a book and copyrighted the material. The copyright on Jane's book is A. Physical property. B. Intangible property. C. Tangible property. D. Real property.

B. Intangible property.

Which one of the following is correct with respect to a business continuity plan? A. It details all of the risk control techniques that an organization has implemented in order to meet its risk management goals. B. It is designed to be used during a crisis, so it should be clear and able to be quickly read and understood. C. It should be developed after the occurrence of a significant loss and should outline how the organization will respond to similar future losses. D. It is typically a closely-guarded document, available only to an organization's senior management.

B. It is designed to be used during a crisis, so it should be clear and able to be quickly read and understood.

Automatic sprinklers are a classic example of which one of the following risk control techniques? A. Avoidance B. Loss reduction C. Disaster planning D. Separation

B. Loss reduction

Three risk control techniques can be used effectively to control liability losses. Which one of the following is included among those three techniques? A. Separation B. Loss reduction C. Duplication D. Diversification

B. Loss reduction

Risk transfer measures are most appropriate for losses that exhibit which one of the following patterns? A. Low-frequency, low-severity B. Low-frequency, high-severity C. High-frequency, low-severity D. High-frequency, high-severity

B. Low-frequency, high-severity

Despite being frequently reminded otherwise, Laura was in the habit of leaving her car door unlocked, often with her purse inside. As a result, Laura's car was stolen, along with her purse. Laura's behavior is an example of a A. Legal hazard. B. Morale hazard. C. Moral hazard. D. Physical hazard.

B. Morale hazard.

Which one of the following is a federal insurance plan in which the government can partner with private insurers, who sell insurance and provide claim settlement services? A. Beach and Windstorm Plan B. National Flood Insurance Program (NFIP) C. Terrorism Risk Insurance Program (TRIP) D. Residual Auto Plan

B. National Flood Insurance Program (NFIP)

Which one of the following best describes the categories of risk included in the enterprise risk management model? A. Domestic, national, international B. Operational, strategic, financial, and hazard C. Primary, secondary, and tertiary D. Pure, dynamic, objective, and subjective

B. Operational, strategic, financial, and hazard

Which one of the following statements is correct with regard to the concept of pooling? A. Pooling arrangements reduce the most risk when the loss exposures being pooled are correlated. B. Pooling arrangements combine the loss exposures and financial resources of pool members for the purpose of sharing losses. C. As the size of a pool increases, the expected losses to each pool member become less predictable. D. Generally, a loss to one member of a pooling arrangement increases the chance of a loss to another member.

B. Pooling arrangements combine the loss exposures and financial resources of pool members for the purpose of sharing losses.

Business continuity is designed to meet both the primary risk management program post-loss goal of continuity of operation and the A. Pre-loss goal of social responsibility. B. Post-loss goal of survival. C. Post-loss goal of growth. D. Pre-loss goal of economy of operations.

B. Post-loss goal of survival.

Which one of the following statements is correct with respect to retention's ability to meet risk financing goals? A. Retention exposes an organization to less variability in cash flows than transfer. B. Retention enables an organization to manage its cost of risk. C. Retention is the most effective way to meet the risk financing goal of paying losses. D. Retention generally reduces the level of liquidity needed.

B. Retention enables an organization to manage its cost of risk.

Examples of risk control loss reduction techniques that primarily apply to occupancy are Select one: A. Relocation away from hazards and removing combustible materials from the space that separates buildings. B. Safety training and emergency evacuation procedures. C. Fire detection and suppression. D. Construction design and internal fire protection.

B. Safety training and emergency evacuation procedures.

Company G is a manufacturer of high profile golf equipment. The risk management professional for Company G is concerned about loss of business related to product design. Failing to respond to changing customer demand and preferences in the design of golf clubs could cost Company G significant market share. Categorized according to the quadrants of risk, this exposure to loss would be classified as a(n) A. Hazard risk. B. Strategic risk. C. Operational risk. D. Financial risk.

B. Strategic risk

Hardware Store has been able to control its prices and inventory since it has no competitors. A new highway currently being constructed is going to allow increased competition for Hardware Store. According to the quadrants of risk, this risk of increased competition falls into the category of A. Operational risk. B. Strategic risk. C. Hazard risk. D. Financial risk.

B. Strategic risk.

Which one of the following statements is correct with respect to an organization's risk financing goals? A. To be effective as part of a risk management program, the cost of risk must be managed to minimize administrative, risk control, and risk financing expenses. B. The acceptable cash flow variability level for an organization depends on factors such as its size and financial strength. C. For most organizations, borrowing is the only available method of increasing liquidity to pay for retained losses. D. The level of cash flow variability that an organization is willing to accept is highest for organizations that prefer to avoid risk.

B. The acceptable cash flow variability level for an organization depends on factors such as its size and financial strength.

Many laws and regulations require organizations to implement specific risk control measures. Which one of the following statements is true in this regard? A. These measures are a means of implementing the risk control techniques of separation, duplication, and diversification. B. The cost of adhering to these legal requirements becomes part of the cost of risk. C. These laws and regulations are amended infrequently and do not require ongoing monitoring. D. Failure to comply with legal requirements can expose an organization to sanction, but not to liability.

B. The cost of adhering to these legal requirements becomes part of the cost of risk.

During the past year, International Toys has undertaken four capital projects. The company has renovated and refurbished one of its aging warehouse buildings. It has purchased the most recent version of its current order processing computer software. It has added two trucks to its fleet of delivery vehicles. Lastly, it has purchased a new production machine that will allow it to launch a new product line. Which one of the following company projects is the most speculative risk? A. The software upgrade B. The new production machine C. The two new trucks D. The warehouse refurbishment

B. The new production machine

Which one of the following statements is correct with respect to finite risk insurance plans? A. A finite risk insurance plan typically offers the most risk transfer of all the risk financing measures. B. The premium for a finite risk insurance plan is a very high percentage of the policy limits. C. A finite risk insurance plan typically provides lower limits than guaranteed cost insurance. D. A disadvantage is that a finite risk plan does not address the goal of complying with legal requirements.

B. The premium for a finite risk insurance plan is a very high percentage of the policy limits.

George has received an inheritance and is deciding what to do with the money. He has limited his options to four choices: donate all the money to his favorite charity, use the entire inheritance to buy a yacht, invest the inheritance in a small rental property, or use the entire amount to purchase T-bills. Which one of the following statements is true regarding the risk involved in George's options? A. Purchasing T-bills is a pure risk because the interest rate payable is known, and the chance of loss is minimal. B. The rental property presents both pure and speculative risk; property values may increase, and the building could burn down. C. Donating his inheritance to charity is a pure risk; there is no uncertainty that the money will be gone and George will have no chance of profit. D. Buying a boat is a nondiversifiable risk because George can only afford to purchase a single yacht.

B. The rental property presents both pure and speculative risk; property values may increase, and the building could burn down.

Which one of the following statements is true regarding risk management techniques? A. Data based on objective risk factors are usually the only criteria considered in determining appropriate risk management techniques. B. The risk management techniques selected by for-profit organizations should be both effective in meeting the organizations' goals and economical. C. In support of the goal of economy of operations, the risk management techniques selected by most for-profit organizations should be the least expensive ones. D. Nonfinancial considerations are usually disregarded in selecting risk management techniques because they cannot be factored into a cost/benefit analysis.

B. The risk management techniques selected by for-profit organizations should be both effective in meeting the organizations' goals and economical.

The focus of risk quadrants is different from the focus of risk classifications. While the classifications of risk focus on some aspect of the risk itself, the four quadrants of risk focus on A. Pure and speculative risks. B. The source of risk and who has traditionally managed it. C. The determination of whether the risk is diversifiable. D. Subjective and objective risks.

B. The source of risk and who has traditionally managed it.

One approach to categorizing risks involves dividing risks into risk quadrants. The risks categorized as hazard risks are A. Speculative risks that fall outside the operational risk category. B. Traditionally managed by risk management professionals. C. Traditionally handled by the chief financial officer. D. Fundamental to an organization's existence and business plans.

B. Traditionally managed by risk management professionals.

State governments can be involved in insurance at various levels. Some states provide which one of the following types of insurance in competition with private insurers? A. Flood B. Workers compensation C. General liability D. Crop

B. Workers compensation

Delmond Manufacturing is opening a new manufacturing facility in a building that it purchased from a competitor. Using the information below, which one of the following represents the cost of risk of opening the new facility? New building cost $60.0 million Safety system upgrades $6.0 million Insurance premiums $1.5 million Retained losses $3.0 million Risk management department budget at the site $1.0 million A. $7.0 million B. $10.0 million C. $11.5 million D. $71.5 million

C. $11.5 million

Classifying risk appropriately can help in managing risk. Which one of the following statements is correct with respect to the classifications of risk? A. Risk classifications are mutually exclusive, and only one can be applied to any given risk. B. Insurance deals primarily with speculative risk, rather than with pure risk. C. A pure risk is a chance of loss or no loss, but no chance of gain. D. Usually, pure risks and speculative risks can be managed using the same techniques.

C. A pure risk is a chance of loss or no loss, but no chance of gain.

Carol has worked as a payroll clerk for a small organization for 20 years. Over the years she received only two small salary increases and began to embezzle funds from the company since she felt she was not adequately compensated for her job efforts. In terms of the quadrants of risk, Carol's theft risk can be classified as A. Both a hazard risk and a financial risk. B. A financial risk. C. Both a hazard risk and an operational risk. D. A strategic risk.

C. Both a hazard risk and an operational risk.

Which one of the following statements is correct with respect to property loss exposures? A. Avoidance, loss prevention, loss reduction, separation, and diversification are risk control techniques that can be applied to property loss exposures. B. The risk control techniques commonly selected for property loss exposures are the same regardless of the type of property. C. Commercial property underwriters commonly assess fire loss exposures based on each building's construction, occupancy, protection, and external exposure. D. Risk control techniques commonly selected to reduce one property cause of loss, such as fire, are equally effective with other causes of loss.

C. Commercial property underwriters commonly assess fire loss exposures based on each building's construction, occupancy, protection, and external exposure.

Organizations find it difficult to establish a benchmark against which the performance of their risk management program can be assessed because it is difficult to assign a specific value to the A. Cost of implementing and administering risk management. B. Cost of measures to prevent or reduce the size of potential losses. C. Cost of residual uncertainty. D. Cost of losses not reimbursed by insurance.

C. Cost of residual uncertainty.

Risk can be classified as diversifiable or nondiversifiable. Which one of the following statements is true with respect to this type of risk classification? A. Private insurance tends to concentrate on nondiversifiable risks; government insurance is often suitable for diversifiable risks. B. Inflation, unemployment and natural disasters, such as hurricanes, are examples of diversifiable risk. C. Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk. D. Systemic risks are generally diversifiable.

C. Diversifiable risks tend not to be correlated so they can be managed through diversification or spread of risk.

Which one of the following risk control techniques is more commonly applied to managing business risk rather than hazard risk? A. Avoidance B. Separation C. Diversification D. Duplication

C. Diversification

The risk control technique that spreads loss exposures over numerous projects, products, regions, or markets is A. Duplication. B. Loss prevention. C. Diversification. D. Separation.

C. Diversification.

Fluctuations in the value of stocks or bonds due to interest rate changes is an example of A. Strategic risk. B. Hazard risk. C. Financial risk. D. Operational risk.

C. Financial risk.

After identifying and analyzing loss exposures and evaluating and selecting the appropriate risk management techniques, the next step in the risk management process is to A. Monitor the results. B. Revise the risk management program. C. Implement the selected techniques. D. Decide on risk financing techniques.

C. Implement the selected techniques.

The primary role of insurance is to A. Make a profit for the insurance company's shareholders. B. Sell insurance policies to individuals and organizations. C. Indemnify individuals and organizations for covered losses. D. Educate individuals and organizations about loss prevention.

C. Indemnify individuals and organizations for covered losses.

Which one of the following statements is correct with respect to the expected cost of losses or gains? A. The expected cost of gains or losses includes only the direct costs associated with a particular risk. B. Calculating the expected cost of losses or gains for pure risks is more complex than for speculative risks. C. Industrial accidents can illustrate the various costs that need to be accounted for in determining cost of losses. D. The expected cost of losses is equal to the uninsured portion of any bodily injury or property damage.

C. Industrial accidents can illustrate the various costs that need to be accounted for in determining cost of losses.

Which one of the following statements is correct? A. Insurers cannot invest premium income because it must be available to pay claims. B. Insurance provides a source of investment funds for insurers but not for policyholders. C. Insurers' investment income helps keep premiums at a reasonable level. D. Insurers are prohibited from investing in social projects.

C. Insurers' investment income helps keep premiums at a reasonable level.

The level of cash flow variability that an organization is willing to accept A. Is highest for organizations with low risk tolerance. B. Is typically quite easy to determine. C. Is affected by the risk appetite of its stakeholders. D. Is independent of the organization's risk tolerance.

C. Is affected by the risk appetite of its stakeholders.

Which one of the following statements is correct with respect to the U.S. property-casualty insurance market? A. It is immature. B. It functions perfectly. C. It is cyclical. D. It meets all consumer needs.

C. It is cyclical.

JNL Construction is a general contractor. As the risk management professional for JNL, Marie should be aware of the company's contractual obligations, as well as the contractual obligations that others owe JNL. This knowledge is necessary for Marie to meet which one of the following pre-loss risk management goals? A. Tolerable uncertainty B. Social responsibility C. Legality D. Economy of operations

C. Legality

As part of its risk management program, a vending company installed a new top of the line security system with an expectation of fewer thefts and A. Higher expected losses. B. Increased anxiety. C. Less residual uncertainty. D. Increased residual uncertainty.

C. Less residual uncertainty.

Which one of the following common risk financing goals is most significantly influenced by an organization's tolerance for risk? A. Maintain an appropriate level of liquidity B. Comply with legal requirements C. Managing cash flow variability D. Pay for losses

C. Managing cash flow variability

Traditionally, the risk management professional's role has been associated with loss exposures related to A. Business risk. B. Speculative risk. C. Pure risk. D. Operational risk.

C. Pure risk.

Insurance deals primarily with A. Speculative risks. B. Subjective risks. C. Pure risks. D. Strategic risks.

C. Pure risks.

Regarding diversifiable and nondiversifiable risk, which one of the following statements is accurate? A. An example of a diversifiable risk is inflation. B. Risks must be either diversifiable or nondiversifiable. C. Systemic risks are generally nondiversifiable. D. An example of a nondiversifiable risk is a fire.

C. Systemic risks are generally nondiversifiable.

Sara and her husband Jack own a saddle shop that has been in Sara's family for generations. Because of the sentimental value of the shop, they have invested a great deal in loss prevention devices and safety features to ensure the survival of the business. This tendency to over invest in loss prevention measures creates the risk that A. Risks that should be transferred are being retained. B. The risk management techniques selected are not the best ones for the saddle shop. C. The financial value of the saddle shop is not being maximized. D. Too much emphasis is being placed on maximum earnings in any one period rather than stability of earnings over time.

C. The financial value of the saddle shop is not being maximized.

Which one of the following best describes effective and efficient risk control measures? A. They are those measures that increase employee satisfaction while reducing the level of risk. B. They reduce risk to a level that is acceptable to the organization's management. C. They are the least expensive measures of all possible effective that achieve an organization's risk management goals. D. They eliminate risk without requiring the organization to make outlays of cash.

C. They are the least expensive measures of all possible effective that achieve an organization's risk management goals.

In addition to implementing effective and efficient measures, complying with legal requirements, and promoting safety, which one of the following is a goal of risk control efforts? A. To ensure that preventable losses do not adversely affect ongoing operations B. To avoid or prevent all hazard risks to which the organization may be exposed C. To minimize or eliminate significant business interruptions, whatever their cause D. To transfer as much of the organization's hazard and business risks as possible to third parties

C. To minimize or eliminate significant business interruptions, whatever their cause

Which one of the following is a risk financing technique? A. Loss prevention B. Separation C. Transfer D. Diversification

C. Transfer

Captive insurers are A. Prohibited from underwriting loss exposures not directly related to the captive's parent or affiliates. B. Typically domiciled in the same jurisdiction as the parent company. C. Used to insure property loss exposures that are difficult to insure in the primary market. D. Not permitted to transfer the financial consequences of insured loss exposures to other insurers.

C. Used to insure property loss exposures that are difficult to insure in the primary market.

Which one of the following is a characteristic of an organization that would be more appropriate for risk transfer than risk retention? A. Diversity of loss exposures B. High risk tolerance C. Weak financial condition D. Loss control capabilities

C. Weak financial condition

Which one of the following is considered the primary advantage of using retention as a risk financing technique? A. Control of claims process B. Timing of cash flows C. Incentives for risk control D. Cost savings

D. Cost savings

Commercial general liability insurance policies written on an occurrence basis apply to bodily injury and property damage that occurs during the policy period. This provision supports the principle that insurable loss exposures must ideally be A. Pure risks. B. Fortuitous. C. Independent. D. Definite.

D. Definite.

Which one of the following risk financing measures can reduce an organization's cost of risk over time but has significant start-up costs relative to the other measures? A. A large deductible plan B. A retrospective rating plan C. A self insurance plan D. A captive plan

D. A captive plan

Which one of the following statements regarding monitoring the results of a risk management program is true? A. When performance substantially exceeds the standard, the risk management professional knows that the standard has been appropriately set. B. Risk management professionals generally prefer performance standards that are solely dependent on the organization's loss record. C. A results standard focuses on the quality and quantity of the risk management activities undertaken by the organization. D. Activities standards are necessary to obtain a complete picture of the success or failure of a risk management program.

D. Activities standards are necessary to obtain a complete picture of the success or failure of a risk management program.

Which one of the following statements is correct with respect to applying risk control techniques to the various types of loss exposures? A. Separation, duplication, and diversification are the most effective risk control techniques for treating liability loss exposures. B. Risk control techniques to reduce a liability loss once it occurs are generally not available. C. The most cost-effective risk control techniques for personnel loss exposures are those aimed at causes of loss that occur outside the workplace. D. Any measure that controls property, liability, or personnel loss exposures also indirectly controls associated net income loss exposures.

D. Any measure that controls property, liability, or personnel loss exposures also indirectly controls associated net income loss exposures.

Which one of the following personal loss exposures generally meets all of the characteristics of an ideally insurable loss exposure? A. Flood damage B. Health loss C. Net income loss D. Automobile liability

D. Automobile liability

Classifying the various types of risk can help in assessing, controlling, and financing risk as part of the risk management process. Which one of the following statements is true regarding the typical classifications of risk? A. Classifications of risk are mutually exclusive. B. All classification pairs can not be applied to any given risk. C. Classifications of risk is not helpful with assessing risk but can assist with the administrative function of risk management. D. Classifications of risk can help with controlling and financing risk.

D. Classifications of risk can help with controlling and financing risk.

Which one of the following is true regarding enterprise-wide risk management (ERM)? A. In practice, implementation of ERM occurs at the departmental or business unit level. B. Implementation of ERM is fairly consistent among organizations, regardless of their size, nature, or complexity. C. ERM is an approach to risk management that focuses primarily on loss exposures associated with pure risk. D. ERM is an approach to managing all of an organization's key risks and opportunities.

D. ERM is an approach to managing all of an organization's key risks and opportunities.

Which one of the following activities is the first step in the business continuity process? A. Evaluate the effect of risks on the organization's critical functions. B. Develop a business continuity plan. C. Develop a business continuity strategy. D. Identify the organization's critical functions.

D. Identify the organization's critical functions.

Private insurers are reluctant to provide windstorm insurance on coastal properties. This is because the loss exposures fail to meet the criterion that ideally insurable exposures must be A. Definite and measurable. B. Fortuitous. C. A large number of similar exposure units. D. Independent and not catastrophic.

D. Independent and not catastrophic.

Risk can be classified as pure or speculative. Which one of the following is the best example of a speculative risk? A. Purchasing an insurance policy B. Buying a new personal vehicle C. Acquiring a new television D. Investing in shares of stock

D. Investing in shares of stock

Which one of the following statements is correct regarding the benefits that insurance provides? A. The premiums collected by insurers must be held in cash to be available to pay claims. B. Insurance provides a source of investment funds for insurers but not for insureds. C. Insurers are prohibited from investing in such things as research or technological advancements. D. Investment income helps keep insurance premiums at a reasonable level.

D. Investment income helps keep insurance premiums at a reasonable level.

Oscar's custom-built vehicle looks like a sausage sandwich on wheels. He plans to drive it to special events at schools around the country where it will serve as a mobile billboard to promote his product. Oscar is surprised to learn that insurers are reluctant to insure his vehicle because it fails to meet one of the ideal characteristics of an insurable risk. Which characteristic is Oscar's vehicle least likely to meet? A. Pure risk B. Independent and not catastrophic C. Definite and measurable D. Large number of similar exposure units

D. Large number of similar exposure units

Which one of the following focuses on the minimum building design, construction, operation, and maintenance requirements necessary to assure occupants of a safe exit from the burning portion of a building? A. Building code B. Environmental security C. Workers compensation D. Life safety

D. Life safety

Which one of the following risk control techniques is primarily used to reduce the frequency of losses, although it may also mitigate loss severity? A. Separation B. Duplication C. Diversification D. Loss prevention

D. Loss prevention

Which one of the following is the goal of enterprise-wide risk management (ERM)? A. Reduce risk management costs B. Decentralize control of business decisions C. Coordinate loss reduction efforts D. Maximize the organization's value

D. Maximize the organization's value

Driving carelessly or failing to lock an unattended building are examples of A. Moral hazard. B. Physical hazard. C. Legal hazard. D. Morale hazard.

D. Morale hazard.

Which one of the following statements is correct with respect to risk transfer measures? A. The majority of risk transfer measures are pure transfers. B. Risk transfers shift the transferor's legal responsibility for paying a loss to the transferee. C. Risk transfer measures tend to increase the variability of cash flow making an organization less attractive to investors. D. Most risk transfer measures limit the potential loss amounts being transferred.

D. Most risk transfer measures limit the potential loss amounts being transferred.

Which one of the following statements is correct with respect to the characteristics of premises and operations liability loss exposures? A. Because organizations profit from their operations, premises and operations liability loss exposures involve speculative risk. B. Premises and operations liability losses typically arise from an insured's negligence, so they cannot be considered to be fortuitous. C. Given the large number of retail stores in the U.S., the premises and operations liability loss exposure is potentially catastrophic. D. Premises and operations liability losses are definite in time, cause, and location, and are measurable.

D. Premises and operations liability losses are definite in time, cause, and location, and are measurable.

Which one of the following statements is correct with respect to property loss exposures? A. Many organizations do not have property loss exposures related to their business operations. B. All property fire losses are fortuitous and involve pure risk. C. Windstorm losses are ideally insurable because they are independent and not catastrophic. D. Premiums for flood insurance may not be economically feasible, depending on location

D. Premiums for flood insurance may not be economically feasible, depending on location

Which one of the following statements is correct with respect to property loss exposures? A. Many organizations do not have property loss exposures related to their business operations. B. All property fire losses are fortuitous and involve pure risk. C. Windstorm losses are ideally insurable because they are independent and not catastrophic. D. Premiums for flood insurance may not be economically feasible, depending on location.

D. Premiums for flood insurance may not be economically feasible, depending on location.

Daniel has developed a business continuity plan to address the threat of the loss of utility services at his company's large manufacturing plant. The management team has reviewed his plan and agrees that the plan can be quickly read and understood and should be effective in the event of a crisis. Daniel has provided copies of the plan to all relevant parties. Which one of the following should be Daniel's next step? A. Develop a business recovery and restoration plan B. Perform a cash flow analysis C. Locate a backup manufacturing site D. Provide training and periodic rehearsals of the procedures

D. Provide training and periodic rehearsals of the procedures

The two benefits of risk management affecting individuals, organizations, and society are: it preserves financial resources by reducing expected losses and it A. Increases the attractiveness to investors. B. Improves the allocation of productive resources. C. Increases productivity within the economy and improves overall standard of living. D. Reduces the residual uncertainty associated with risk.

D. Reduces the residual uncertainty associated with risk.

Which one of the following statements is correct with respect to residential property loss exposures? A. Residential homes are tougher to group into classes that face the same loss potential than commercial property loss exposures. B. Residential losses caused by flood are usually neither definite nor measurable. C. Residential property loss exposures associated with windstorm are ideally suited to insurability. D. Residential property loss exposures associated with fire, windstorm, and flood involve a large number of similar exposure units.

D. Residential property loss exposures associated with fire, windstorm, and flood involve a large number of similar exposure units.

Which one of the following statements is correct with respect to residential property loss exposures? Select one: A. Residential homes are tougher to group into classes that face the same loss potential than commercial property loss exposures. B. Residential losses caused by flood are usually neither definite nor measurable. C. Residential property loss exposures associated with windstorm are ideally suited to insurability. D. Residential property loss exposures associated with fire, windstorm, and flood involve a large number of similar exposure units.

D. Residential property loss exposures associated with fire, windstorm, and flood involve a large number of similar exposure units.

Which one of the following statements is true regarding risk management efforts on the part of individuals, organizations, and society in general? A. The benefits that risk management efforts provide to individuals and organizations are not felt by society in general. B. Risk management tends to increase the deterrence effect of risk in organizations. C. Organizations tend to exhibit a greater degree of risk aversion than do individuals. D. Risk management makes those who own or run an organization more willing to undertake risky activities.

D. Risk management makes those who own or run an organization more willing to undertake risky activities.

Which two risk control measures are directly aimed at reducing the severity of net income losses? A. Avoidance and diversification B. Diversification and loss reduction C. Avoidance and loss prevention D. Separation and duplication

D. Separation and duplication

Pooling arrangements are essential to the operation of insurance. Pooling is a risk A. Transfer technique. B. Retention technique. C. Control technique. D. Sharing technique.

D. Sharing technique.

Through reinsurance, primary insurers pool or transfer risks, thereby A. Increasing net written premium while maintaining or decreasing policyholder surplus. B. Controlling and monitoring current loss exposures. C. Expanding the insurer's capacity to write surplus lines of coverage. D. Staying within capacity constraints and helping to ensure their solvency.

D. Staying within capacity constraints and helping to ensure their solvency.

Life, health, and retirement causes of loss are A. Examples of speculative risks. B. Insurable through private insurers. C. Typically not definite or measurable. D. Subject to moral and morale hazard problems.

D. Subject to moral and morale hazard problems.

Risk can be classified as subjective or objective. Which one of the following statements is correct with respect to these risk classifications? A. Individuals' subjective perception of risk in a given set of circumstances is typically much higher than the objective risk. B. Risk managers focus on objective risk and attempt to avoid allowing subjective risk to affect their decisions. C. Subjective risk is risk associated with individuals; objective risk is risk associated with objects or things. D. Subjective risk can exist even where objective risk does not.

D. Subjective risk can exist even where objective risk does not.

Billy owns a beach front cottage which has become his primary residence. Billy's primary concern is that his home will be hit by a hurricane and badly damaged or even destroyed. For Billy, this hurricane risk is a A. Market risk. B. Speculative risk. C. Strategic risk. D. Subjective risk.

D. Subjective risk.