Risk and Insurance Exam 4

(Chapter 4) T or F: Self-insurance usually involves risk transfer.

False

(Chapter 4) T or F: The concept of enterprise risk management suggests that diversification has little relevance to risk management.

False

(Chapter 3) Which state had the most favorable ranking (#1) in the 2017 Lawsuit Climate Survey: Ranking the States?

South Dakota

(Chapter 3) T or F: If the mean loss is greater than the median loss, this tells us that the distribution of losses is positively or right skewed (more extreme losses). Looking at Figure 3-1, do liability losses appear to be positively skewed with extreme losses?

True

(Chapter 2) All of the following are common approaches to risk identification EXCEPT: a. best guess estimation b. loss exposure checklists c. financial statement analysis d. on-site inspection

a. best guess estimation (Correct Answer)

(Chapter 2) As the probability of loss decreases, the number of exposure units required to achieve a certain level of confidence a. increases b. decreases c. remains constant

a. increases

(Chapter 2) If a loss distribution is positively skewed, how will the mean compare to the median? a. mean larger than the median b. mean equal to the median c. mean smaller than the median d. Can't be determined

a. mean larger than the median

(Chapter 2) An advantage of using _ is that managers contemplating various projects are forced to consider the cost of risk in evaluating the potential profitability of those projects. a RMIS b RAROC c VAR d Loss exposure checklist

b.) RAROC

(Chapter 1) Which of the following would be an example of a pure risk? a Risk from opening a small business b Risk of fire damage to a restaurant c Risk of a change in tax rates d All of the above

b.) Risk of fire damage to a restaurant

(Chapter 2) WFS Corporation owns three cars and two buildings. Because these numbers are not very large, which of the following should the WFS risk manager use to evaluate the severity of possible losses to the cars and the buildings? a A loss exposure checklist b The concepts of maximum possible loss as well as maximum probable loss c The risk-adjusted return on capital d The coefficient of variation

b.) The concepts of maximum possible loss as well as maximum probable loss

(Chapter 3) Fill in the blanks: The four elements that are required to establish negligence include a legal duty, a ______ of that legal duty, ______ being incurred, and proximate _______

breach, damages, cause

(Chapter 1) Why does the degree of risk decrease as the chance of loss increases (assuming a constant number of exposure units)? a As loss becomes less and less certain to happen, there is more and more uncertainty that it will not happen b As loss becomes less and less certain to happen, there is less and less uncertainty that it will not happen c As loss becomes more and more certain to happen, there is less and less uncertainty that it will not happen d As loss becomes more and more certain to happen, there is more and more uncertainty that it will not happen

c As loss becomes more and more certain to happen, there is less and less uncertainty that it will not happen

(Chapter 4) Which of the forms of hold-harmless agreements are least likely to be enforced by a court? a limited form b intermediate form c broad form

c. broad form

(Chapter 2) Which of the following is not a measure of central tendency or location? a. mode b. median c. probability d. mean

c. probability

(Chapter 3) All of the following would typically be viewed as having a professional liability exposure EXCEPT:

carpenters

(Chapter 4) Fill in the Blanks: Storing inventory in two different physical locations is an example of _____

separation

(Chapter 1) Fill in the Blanks: Joe looks at a particular situation and considers it to be high risk. Sarah looks at the exact same situation and considers it low risk. Their difference of opinion illustrates the concept of __________ risk

subjective

(Chapter 3) Fill in the Blanks: Liability of the owner for the negligence of others operating the car is an example of ______ activity

vicarious

(Chapter 1) In decimal terms, what is the probability of getting a number greater than 3 when rolling a die?

.33

(Chapter 2) If the likelihood of flood damage to a particular home is estimated to be 1 in 100, it is said that the home is located in a 100-year flood plain. What is the probability of flood damage in a given year?

0.01

(Chapter 3) What are the elements of a negligent act? a Duty, breach, damages, proximate cause b Direct loss, libel, pain and suffering c Intention, vicarious, imputed, reasonable

A. Duty, breach, damages, proximate cause

(Chapter 4) Which financial factor may be important when considering the appropriate level of risk retention for a firm?

All of the above

(Chapter 1) ABC Company owns 10,000 cars and has determined that it is very likely to suffer between 60 and 70 collision losses this year. Compute the degree of risk for this company, assuming that they expect to suffer 65 losses. (State as a number representing a percentage and round to nearest whole number; e.g., 10.4% should be written as 10)

15

(Chapter 2) If a peril is expected to result in a loss with an expected annual frequency of 0.02 and an expected severity of $1 million, calculate the expected annual loss.

20,000

(Chapter 2) If another peril is expected to result in a loss with an expected annual frequency of 20 and an expected severity of $1,000, calculate the expected annual loss.

20,000

(Chapter 4) Which domino does Heinrich's Domino Theory suggest is the most important to focus on in reducing the frequency of workplace injuries (1-5)?

3; Unsafe act or physical hazard

(Chapter 1) XYZ Company also owns 10,000 cars and has determined that it is likely to experience 50 to 80 collision losses this year. Compute the degree of risk for the company, assuming that the company expects to suffer 65 losses. (State as a number representing a percentage and round to nearest whole number; e.g., 10.4% should be written as 10)

46

(Chapter 4) Fill in the blank: Prior to the loss control project at KFC, slip and fall injuries made up more than ______ percent of workplace injuries and in the first year these injuries were reduced by ______

50, 54

(Chapter 2) Based on the information in Table 2-2, what is the probability of no more than 3 losses occurring in one year?

98.1

(Chapter 1) You are informed that you have just received an inheritance from a great uncle who was something of an eccentric. You have your choice of (a) taking $10,000 in cash or (b) joining in a game of drawing balls from a bowl containing 90 black balls and 10 white ones. If you draw a black ball, you receive $1,000; if you draw a white ball, you receive $100,000. Which choice gives you a higher expectedl value?

B

(Chapter 4) What new senior executive role have some organizations created to oversee enterprise risk management?

Chief Risk Officer

(Chapter 4) Which selection accurately describes the differences among the three types of hold-harmless agreements?

Hold-harmless agreements differ in the extent to which risk is transferred. The limited form states that all parties are responsible for liabilities arising from their own actions. The second type is the intermediate form in which the transferee agrees to pay for any losses in which both the transferee and transferor are jointly liable. The broad from that requires the transferee be responsible for all losses arising out of particular situation, regardless of fault.

(Chapter 1) Put the steps fo the risk management process in the proper order.

Identify Risks, Evaluate Risks, Select Risk Management techniques, implement and review decisions.

(Chapter 1) Which of the following is NOT one of the four steps of risk management?

Speculate about risks

(Chapter 4) T or F: It is usually easier to estimate the potential costs associated with a loss control project than the potential benefits.

True

(Chapter 3) What is res ipsa loquitur? a Legal doctrine that allows the plaintiff to collect even though the plaintiff cannot or does not prove the defendant negligent b Legal doctrine that allows the defense to collect when the plaintiff is defeated in court

a Legal doctrine that allows the plaintiff to collect even though the plaintiff cannot or does not prove the defendant negligent

(Chapter 4) What are the roles of the transferor and the transferee in risk transfer? a The transferor pays or gives other valuable consideration to a transferee, who then bears the risk. b The transfee pays or gives other valuable consideration to a transferor, who then bears the risk. c None of the above.

a The transferor pays or gives other valuable consideration to a transferee, who then bears the risk.

(Chapter 4) Select the two necessary elements of true self-insurance. a A group of exposure units large enough to ensure accurate loss prediction. b The expected losses must be prefunded through a fund especially designed for that purpose. c Losses must be perfectly predictable. d The expected losses must be small.

a. A group of exposure units large enough to ensure accurate loss prediction.

(Chapter 4) What is risk avoidance? a A conscious decision not to expose oneself or one's firm to a particular risk of loss. b A conscious decision to reduce exposure to a particular risk of loss. c Weighing the pros and cons of a decision regarding how much risk to take.

a. A conscious decision not to expose oneself or one's firm to a particular risk of loss.

(Chapter 2) QAZ Company owns a fleet of 100 automobiles, for which the probability of loss is approximately equal to 0.05. Use the Poisson distribution to estimate the probability that QAZ will suffer two or fewer auto accidents next year. a 0.12465 b 0.32577 c 0.00005 d 0.87535

a.) 0.12465

(Chapter 2) How might the RMIS requirements for an automobile manufacturer differ from those of an amusement theme park? a A theme park may be more concerned with the liability exposures resulting from injury to its guests b A theme park may be less concerned with liability exposures c A theme park will have more loss exposure d A theme park will have a higher value at risk

a.) A theme park may be more concerned with the liability exposures resulting from injury to its guests

(Chapter 1) The formula used to calculate the degree of objective risk is: a Probable variation of actual from expected losses divided by the expected loss b Expected loss multiplied by the quantity 1 minus variance divided by expected loss c Range of reasonable loss expectation divided by actual loss experience d Expected losses minus probable losses divided by the range of actual losses experienced

a.) Probable variation of actual from expected losses divided by the expected loss

(Chapter 1) If you were asked to accurately estimate your maximum loss potential from property, liability, life, and health risks, which classification would generally be easiest to estimate? a Property b Liability c Life d Health

a.Property

(Chapter 1) Fill in the Blanks: Gail knows that the expected loss for a particular risk she faces is $1,000. If she is willing to pay $1,200 to buy insurance that fully protects her from the risk, we know that Gail is risk _____

averse

(Chapter 4) One aspect of the value of risk management to a corporation is the fact that managing risk can increase the likelihood that the firm will meet its obligations to its debt-holders. Which of the following is an example of how lenders require individuals who buy a home or car to engage in some form of risk management? a Lenders maintaining an appropriate capital ratio. b Lenders requiring borrowers to purchase property insurance coverage. c Both of the above.

b Lenders requiring borrowers to purchase property insurance coverage.

(Chapter 3) What are the three classes of persons giving rise to liability to a property owner (mark all that apply)? a Invitee: invited on the premises , such as customer of a business b Licensee: on premises for a legal purpose, such as a mail carrier c Owner: responsible for the claim d Trespasser: any other person, such as a robber

b Licensee: on premises for a legal purpose, such as a mail carrier

(Chapter 2) Which of the following are true of risk mapping? a. It doesn't consider both frequency and severity of loss b. It is common in firms that are focusing on ERM c. It only focuses on pure risks

b. It is common in firms that are focusing on ERM

(Chapter 2) Which of the following risk measures represents relative risk of loss? a. standard deviation b. coefficient of variation c. mean d. median

b. coefficient of variation

(Chapter 4) All of the following are reasons why transfer of risk by a corporation is valuable EXCEPT: a insurance can allocate risks to the firms' claimholders who have a comparative advantage in riskbearing b insurance is usually less costly than self-insurance c insurance can reduce the expected costs of bankruptcy d insurers may have a comparative advantage in offering certain services (real services)

b. insurance is usually less costly than self-insurance

(Chapter 3) Which of the following costs are least likely to be covered by a liability insurance policy? a pain and suffering b punitive damages c personal injury damages d legal expenses

b. punitive damages

(Chapter 4) Which of the following would be an example of a pre-loss loss control method? a salvage of damaged property b safety training of employees c return to work programs for employees following an injury

b. safety training of employees

(Chapter 2) Losses to Callaghan Company are assumed to be distributed normally, with a mean of $75,000 and a standard deviation of $4,000. Calculate the probable range of losses if the risk manager desires 95 percent confidence in the estimate (rounded to the nearest thousands). a $71,000 to $79,000 b $67,000 to $83,000 c $63,000 to $87,000 d $68,000 to $84,000

b.) $67,000 to $83,000

(Chapter 1) Cyber attack risk would b e best classified as a: a Pure static risk b Pure dynamic risk c Speculative static risk d Speculative dynamic risk

b.) Pure dynamic risk

(Chapter 3) Of the three categories of individuals who might enter premises, to which one does the owner or tenant owe the highest degree of care? a licensees b trespassers c invitees

c. invitees

(Chapter 2) Useful risk assessment measures in an enterprise-wide risk management process include each of the following EXCEPT a. VAR b. RAROC c. net effect of risk

c. net effect of risk

(Chapter 2) Which of the following is an important element in risk evaluation? a Maximum probable loss b The frequency and severity of an occurrence c Maximum possible loss d All of the above

d. All of the Above

(Chapter 1) Which risk is both pure and static? a A windstorm b A flood c An earthquake d All of the above

d. All of the above

(Chapter 3) What types of losses do bodily injury liability include? a Medical expenses b Loss of income c pain and suffering d All of the above

d. All of the above

(Chapter 3) What is the liability basis that requires larger corporate defendants to pay more than their proportional share of the damages because they have "deep pockets"?

joint and several liability

(Chapter 2) Fill in the Blanks: If a corporation doubles the number of exposure units, the degree of objective risk decreases. The basic principle illustrated is call the _______

law of large numbers

(Chapter 2) What concept allows larger firms to do a better job of predicting future losses than smaller firms?

law of large numbers

(Chapter 1) Fill in the Blanks There is a higher degree of risk when there is a _____ probability of occurrence because as a loss becomes more certain to occur there is less uncertainty that it will not occur.

lower

(Chapter 4) Explain why a hold-harmless agreement may not be legally enforceable. a Courts may not enforce a hold-harmless agreement if a transferor has superior bargaining power or knowledge in comparison to the transferee. b Courts may not enforce a hold-harmless agreement if a transferee has superior bargaining power or knowledge in comparison to the transferor. c Hold-harmless agreements are always legally enforceable. d None of the above

a Courts may not enforce a hold-harmless agreement if a transferor has superior bargaining power or knowledge in comparison to the transferee.

(Chapter 4) The purchase of required textbooks can represent a significant investment for college students. Which of the following is an example of risk to your textbooks. a Damage or loss by fire, flood, and other natural disasters. b Failing to read the books. c Trading books with other students. d None of the above.

a Damage or loss by fire, flood, and other natural disasters.

(Chapter 4) How is diversification a form of risk reduction? a Diversifying creates a sharing of risk between business segments or geographic locations. b Diversifying creates a sharing of risk between creditors and shareholders. c Diversifying creates a sharing of risk between companies and their investors

a Diversifying creates a sharing of risk between business segments or geographic locations.

(Chapter 3) What types of tort reform is the insurance industry supporting? a Imposing restriction on rights to sue, limiting punitive damages, and pain and suffering, reducing standard of care required for product liability, and repealing collateral source jul b Imposing restriction on rights to defend, increasing punitive damages, increasing standard of care required for product liability

a Imposing restriction on rights to sue, limiting punitive damages, and pain and suffering, reducing standard of care required for product liability, and repealing collateral source jul

(Chapter 3) Who may be liable for the operation of an automobile (mark all that apply)? a The owner b A user c The lessee d A bystander

b. a user

(Chapter 1) It has been said that a well-informed buyer experiences less risk than an uninformed buyer. What type of risk is referred to in this statement? a Dynamic risk b Speculative risk c Pure risk d Subjective risk

d.) Subjective risk

(Chapter 1) Fill in the Blanks: The approach to risk management which reflects the intent to manage all forms of risk, regardless of type, is called _______ risk management

enterprise

(Chapter 2) Fill in the Blanks: A risk manager can use the information from a theoretical probability distribution to approximate the actual experience. This information is useful for predicting ______ losses.

future