Risk Management

Harry has a new sports car that is insured with an Insurance Services Office, Inc. (ISO) Personal Auto Policy sold through his neighborhood agent. Because this is the first new car he's ever owned, Harry is interested in making sure he is fully covered and knowledgeable about his insurance policy. Which one of the following is true for Harry? Select one: A. An insurance contract, like the ISO policy Harry purchased, has certain additional characteristics other than those of typical valid contracts. B. Harry understands his policy is modular one, combining various coverage forms and other documents especially tailored to his needs. C. As the policy is a contract of utmost good faith, both his insurer and his agent are the parties expected to be ethical in their dealings with one another.Incorrect. An insurance contract, like the ISO policy Harry purchased, has certain additional characteristics other than those of typical valid contracts. D. Harry can rest assured that if his new car is a total loss, he can expect to make a profit while being restored to his pre-loss financial position.

A. An insurance contract, like the ISO policy Harry purchased, has certain additional characteristics other than those of typical valid contracts.

In implementing risk management techniques, the risk manager usually Select one: A. Depends on others to implement the techniques based on the risk manager's advice. B. Relies on consultants outside the organization to implement the techniques. C. Has complete authority to make decisions and implement the techniques. D. Is responsible for communicating guidelines but is otherwise not involved in implementing techniques.

A. Depends on others to implement the techniques based on the risk manager's advice.

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

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

Loss exposure surveys, or checklists, are methods used to Select one: A. Identify loss exposures. B. Monitor results. C. Examine the feasibility of techniques. D. Analyze loss exposures.

A. Identify loss exposures.

Sho Ching is risk manager for Market Sales Company. Market Sales owns a large fleet of autos used by the sales employees. The fleet is insured with $1,000 physical damage deductibles. Sho Ching is concerned about an increasing frequency of auto accidents in recent years. Which one of the following is the best risk management option for addressing the increased frequency of accidents from the fleet of autos? Select one: A. Implement loss prevention programs B. Increase the deductible to $2,000 C. Implement loss reduction programs D. Decrease the deductible to $500

A. Implement loss prevention programs

Helen, the risk manager of a supermarket, has decided that the store needs a sprinkler system. She needs to check on the local water supply and building permits and decide what is necessary to comply with local ordinances as well as decide how much the supermarket can afford to spend on the system. Helen is making these decisions as part of Select one: A. Implementing the selected risk management technique. B. Selecting the appropriate risk management technique. C. Examining the feasibility of the risk management technique. D. Analyzing loss exposures.

A. Implementing the selected risk management technique.

Exposures with the potential of low frequency but high severity should generally be Select one: A. Insured because they are highly unpredictable. B. Written with a large deductible to reduce premium costs. C. Retained because they are fairly predictable. D. Retained because this would encourage loss control.

A. Insured because they are highly unpredictable.

The last step in the risk management process, monitoring results and revising the risk management program, Select one: A. Is a return to the first step and begins the risk management process once again. B. Is complete once expected results are achieved. C. Is not a necessary step for households but is an important step for organizations since their needs often change over time. D. Does not include complex decisions as do the previous steps of the risk management process.

A. Is a return to the first step and begins the risk management process once again.

A risk manager in an industrial plant is trying to determine where she needs to spend most of her time in reducing the number of work-related accidents. Which one of the following should the risk manager measure to determine where she should expend her efforts? Select one: A. Loss frequency B. Flow chart bottlenecks C. Number of workers in each area D. Loss severity

A. Loss frequency

Katie and Kevin have a small stream in their back yard. Last year was exceptionally rainy and they were concerned about flood exposures to their home. They recently had a contractor regrade the back yard, building a large berm, which provides a raised barrier to divert the flow of water away from the house. In this situation, Katie and Kevin are using which one of the following risk management techniques? Select one: A. Loss prevention B. Loss reduction C. Separation D. Avoidance

A. Loss prevention

A business installs bars on windows and door deadbolts to prevent burglaries. This is an example of Select one: A. Loss prevention. B. Avoidance. C. Loss reduction. D. Separation.

A. Loss prevention.

Outdoor Designs Company (ODC) makes cedar patio furniture. ODC's lumber supplier, L&L Wood Products, is the largest and most competitive supplier of lumber in the area. ODC's risk manager is concerned that a disruption in the supply of lumber from L&L due to a large fire loss would adversely affect its production. Which one of the following would best minimize the adverse effect to ODC of a large loss experienced by L&L? Select one: A. Separation B. Loss prevention C. Duplication D. Avoidance

A. Separation

Which one of the following is true regarding loss exposure surveys? Select one: A. Surveys usually group questions on similar exposures together. B. Loss exposures for unique operations are usually identified on surveys. C. Risk managers can depend solely on a comprehensive survey to identify loss exposures. D. Households and organizations are likely to face all of the loss exposures detailed in surveys.

A. Surveys usually group questions on similar exposures together.

Which one of the following best describes how effective risk management benefits society? Select one: A. Creating a positive effect on an insurer's underwriting results B. Causing fewer disruptions in the economic and social environment C. Providing more thoughtful consumers of insurance D. Increasing the types of charitable and governmental agencies available to the general public

B. Causing fewer disruptions in the economic and social environment

A company interested in improving cash flow should consider meeting its insurance needs through which one of the following types of insurance organizations? Select one: A. Reciprocal insurance exchanges B. Captive insurers C. Mutual insurers D. Stock insurers

B. Captive insurers

Individuals and families benefit from effective risk management in which one of the following ways? Select one: A. Stimulating economic growth because fewer losses mean that more funds are available for other uses B. Continuing activities following an accident or other loss, and thus reducing inconvenience. C. Creating a positive effect on an insurer's underwriting results D. Increasing their personal cash flows by retaining rather than insuring their property exposures

B. Continuing activities following an accident or other loss, and thus reducing inconvenience.

As part of the risk management process, determining how to allocate the costs of the risk management program is important. All of the following are risk management costs that should be allocated, EXCEPT: Select one: A. Losses retained B. General overhead expenses C. Costs of loss control D. Insurance premiums

B. General overhead expenses

Which one of the following will individuals gain as a benefit of applying sound risk management to automobile loss exposures? Select one: A. No future increases in insurance premiums B. Greater peace of mind C. Economic growth D. A loss free future

B. Greater peace of mind

In order to monitor and modify the risk management program, the risk manager must periodically Select one: A. Rewrite the risk management mission statement. B. Identify and analyze new and existing loss exposures. C. Purchase insurance. D. Change insurers.

B. Identify and analyze new and existing loss exposures.

Which one of the following lists the steps in the risk management process in the correct order? Select one: A. Identify loss exposures, analyze loss exposures, select techniques, examine techniques, implement techniques, monitor, and revise the program B. Identify loss exposures, analyze loss exposures, examine techniques, select techniques, implement techniques, monitor, and revise the program C. Select techniques, examine techniques, identify loss exposures, analyze loss exposures, implement techniques, monitor, and revise the program D. Implement techniques, monitor and revise the program, identify loss exposures, analyze loss exposures, examine techniques, and select techniques

B. Identify loss exposures, analyze loss exposures, examine techniques, select techniques, implement techniques, monitor, and revise the program

Properly estimating loss severity is essential in treating a loss exposure because the potential severity is a major consideration in determining whether to Select one: A. Use risk control or risk financing. B. Insure or retain a particular loss exposure. C. Physically inspect or rely on a loss exposure survey. D. Use loss avoidance or loss prevention.

B. Insure or retain a particular loss exposure.

Which one of the following identifies a benefit that a business can receive by applying sound risk management? Select one: A. It will meet state and federal safety regulations. B. It will have a better opportunity to achieve business goals. C. It will not have to worry about losses. D. It will be able to attract and retain talented employees and managers.

B. It will have a better opportunity to achieve business goals.

Chuck and Sally discovered they have flaking lead paint on the walls and trim inside their recently purchased house. They researched lead paint hazards and abatement techniques on the Internet and discovered the best action they can take is to remove loose paint chips and dust, replace the windows, and seal the walls with a paint designed for that purpose. Which one of the following risk management techniques does this activity involve? Select one: A. Avoidance B. Loss control C. Noninsurance transfer D. Retention

B. Loss control

Loss exposure surveys or checklists are comprehensive and apply to almost any organization. The survey's major weakness is that they Select one: A. Take too long to complete. B. May omit an important exposure. C. Are expensive. D. Have to be custom designed for each business.

B. May omit an important exposure.

The last step in the risk management process is to Select one: A. Implement the selected technique. B. Monitor results. C. Identify loss exposures. D. Select the appropriate technique.

B. Monitor results.

Households and organizations should review their current insurance programs with their agent or broker each year. This is done as part of which one of the following steps in the risk management process? Select one: A. Selecting the appropriate risk management techniques B. Monitoring results and revising the risk management program C. Analyzing loss exposures D. Identifying loss exposures

B. Monitoring results and revising the risk management program

Risk manager Maria Sanchez is evaluating her employer's current fleet of vehicles to ensure they are roadworthy and determine if any replacements are needed. Maria's activities are part of which one of the following steps in the risk management process? Select one: A. Identifying loss exposures B. Monitoring results and revising the risk management program C. Implementing the selected risk management techniques D. Analyzing loss exposures

B. Monitoring results and revising the risk management program

Alan Peachtree owns a hobby shop, which he runs from a detached garage on his property. Alan has set aside funds to pay for possible property losses rather than purchasing insurance. Which one of the following risk management techniques is Alan using? Select one: A. Loss control B. Retention C. Non-Insurance transfer D. Avoidance

B. Retention

The technique that is used to decrease the frequency and/or severity of losses is Select one: A. Transfer. B. Risk control. C. Risk financing. D. Retention.

B. Risk control.

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

B. To all companies and families.

Wanlett Enterprises has a risk manager who is charged with making sure the organization has the necessary property and liability insurance policies in place to respond to hazard risks that were identified over twenty years ago. Wanlett still creates and manufactures the same products it did decades ago. Which one of the following is true given this scenario? Select one: A. Wanlett's risk management efforts are intended to maximize the organization's value. B. Wanlett is mostly concerned with pure, as opposed to speculative risks. C. Wanlett is managing all its loss exposures that arise from speculative risk. D. Wanlett shows it wants the risk management process to occur at the enterprise level.

B. Wanlett is mostly concerned with pure, as opposed to speculative risks.

When implementing the selected risk management techniques, the risk management program must include Select one: A. An analysis of expected results. B. A mission statement. C. A communications plan. D. A loss analysis.

C. A communications plan.

For loss exposures with high frequency and low severity, the two best risk management alternatives are retention and Select one: A. Avoidance. B. Transfer. C. Risk control. D. Insurance.

C. Risk control.

Which one of the following best describes the monitoring and revising step in the risk management process be simply described? Select one: A. Create a new workflow and identify new bottlenecks that have occurred. B. Identify noninsurance transfers through hold harmless agreements. C. Check to make sure the decisions made are still valid and make changes as needed. D. Make sure insurance is not being used as a substitute for loss control.

C. Check to make sure the decisions made are still valid and make changes as needed.

A taxi firm maintains a few spare vehicles to keep all drivers on the road even if one vehicle needs repair. Which one of the following identifies the risk management technique being used in this example? Select one: A. Avoidance B. Separation C. Duplication D. Diversification

C. Duplication

Which one of the following best describes how effective risk management benefits insurers? Select one: A. Causing fewer disruption in the social environment B. Stimulating economic growth C. Encourages insurers to create innovative products and offer competitive prices D. Increased ability to accurately predict future losses

C. Encourages insurers to create innovative products and offer competitive prices

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

C. Enterprise level.

Analyzing loss exposures requires Select one: A. Understanding how a household or organization operates. B. Interviews and the analysis of a flowchart. C. Estimating how large the losses may be and how often they may occur. D. A physical inspection of all locations, operations, and maintenance routines.

C. Estimating how large the losses may be and how often they may occur.

Gauging the severity of property losses is easier than gauging the severity of liability losses because property losses Select one: A. Tend to be insured. B. Tend to happen more frequently. C. Have a calculable value. D. Have an infinite value.

C. Have a calculable value.

Risk manager Carla Jones is deciding how to allocate the costs of the risk management program for Empire Company. The decision to allocate risk management costs is part of which one of the following steps in the risk management process? Select one: A. Examining the feasibility of techniques B. Monitoring results C. Implementing the selected risk management techniques D. Analyzing loss exposures

C. Implementing the selected risk management techniques

Which one of the following describes a benefit to businesses of making insurance part of an overall risk management program instead of relying solely on insurance? Select one: A. Increased use of exposure avoidance B. Reducing the number of persons dependent on society for support C. Improved access to affordable insurance D. Stimulating economic growth

C. Improved access to affordable insurance

Businesses, individuals, and families that practice sound risk management can benefit society in all of the following ways, EXCEPT: Select one: A. Stimulating economic growth B. Controlling medical expenses through reduced injuries C. Increasing interest in leisure activities D. Reducing the overall number of losses

C. Increasing interest in leisure activities

Risk control is intended to prevent or reduce losses. When practicing sound risk control, an organization Select one: A. Is likely to see the same economic benefit as compared to insurance. B. Will often be able to eliminate losses from those loss exposures. C. Is likely to use insurance to treat those loss exposures. D. Will not be required to expend economic resources to insure those loss exposures.

C. Is likely to use insurance to treat those loss exposures.

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

C. Maximize the organization's value

Sally went downhill skiing on vacation. On the back of her lift ticket was printed an agreement that the skier would not hold the ski resort responsible for any injury incurred. From the ski resort's perspective, this is an example of Select one: A. Insurance. B. Retention. C. Noninsurance transfer. D. Loss reduction

C. Noninsurance transfer.

Financial management decisions are made during which one of the following steps in the risk management process? Select one: A. Analyzing loss exposures B. Implementing the selected risk management techniques C. Selecting the appropriate risk management techniques D. Examining the feasibility of risk management techniques

C. Selecting the appropriate risk management techniques

Malvern Imports has several retail stores in a three-state area. They receive and store imports in a large central warehouse. The risk manager is considering ways to lower the severity exposure due to a fire loss to the warehouse. Which one of the following would most effectively decrease the severity exposure of fire loss to the warehouse? Select one: A. Loss prevention B. Avoidance C. Separation D. Duplication

C. Separation

The size of an employer's loss exposure for workers compensation insurance is based on Select one: A. The number of its employee B. The extent of its operations. C. The amount of its payroll. D. The final premium audit.

C. The amount of its payroll.

An accurate measure of loss frequency is important because Select one: A. If loss frequency has been increasing, loss reduction methods will likely need to be implemented. B. Loss frequency is a major consideration in determining whether a flowchart is required. C. The proper treatment of the loss exposure often depends on how frequently the loss is expected to occur. D. Loss frequency is a major consideration in determining whether a physical inspection is necessary.

C. The proper treatment of the loss exposure often depends on how frequently the loss is expected to occur.

In managing loss exposures using the risk management process, the key to identifying loss exposures is Select one: A. A financial analysis of customers and suppliers. B. Understanding the loss frequency and loss severity. C. Understanding how the household or organization operates. D. An organizational process flowchart.

C. Understanding how the household or organization operates.

Estimating how large the losses may be and how often they may occur is required under which one of the steps of the risk management process? Select one: A. Identifying loss exposures B. Monitoring results C. Examining the feasibility of risk management techniques D. Analyzing loss exposures

D. Analyzing loss exposures

The premium charged for an insurance policy should be Select one: A. Concurrent with the loss exposure. B. Equal to the loss exposure. C. Equivalent to the loss exposure. D. Commensurate with the loss exposure.

D. Commensurate with the loss exposure.

When implementing selected risk management techniques, a risk manager must Select one: A. Analyze the benefits of the risk management program. B. Base decisions on informal guidelines. C. Base decisions on financial criteria. D. Determine how to allocate the costs of the program.

D. Determine how to allocate the costs of the program.

Barton Industries keeps copies of key documents stored at a second location. The risk control technique Barton Industries is using is Select one: A. Loss prevention. B. Avoidance. C. Separation. D. Duplication

D. Duplication

A physical inspection is a method used to Select one: A. Examine the feasibility of techniques. B. Monitor results. C. Analyze loss exposures. D. Identify loss exposures.

D. Identify loss exposures.

The first step in the risk management process is to Select one: A. Implement the selected technique. B. Analyze loss exposures. C. Select the appropriate technique. D. Identify loss exposures.

D. Identify loss exposures.

Sound risk management benefits society in each of the following ways, EXCEPT: Select one: A. Reducing the number of people dependent on society for support B. Stimulating economic growth C. Causing fewer disruptions in the economic and social environment D. Increasing opportunity costs

D. Increasing opportunity costs

Frank and Jan recently married and purchased their first home together. What is an effective way for Frank and Jan to begin identifying the liability loss exposures associated with their new home? Select one: A. Purchase a homeowners insurance policy B. Determine the value of the home and contents C. Hire a professional risk manager D. Inspect the home for loss exposures

D. Inspect the home for loss exposures

Which one of the following statements is correct regarding the benefits provided by insurance? Select one: A. Insurance reduces the financial consequences of loss exposures but not the related uncertainty.Incorrect. Insurance helps reduce the financial burden to society by compensating accident victims. B. The primary role of insurance is to meet mandatory insurance requirements. C. The reduction in losses paid by insurers due to risk control measures benefits individual insureds but not society as a whole. D. Insurance helps reduce the financial burden to society by compensating accident victims

D. Insurance helps reduce the financial burden to society by compensating accident victims

A document listing potential loss exposures that a household or an organization may face is a Select one: A. Flowchart. B. Loss exposure analysis. C. Method of monitoring loss exposures. D. Loss exposure survey or checklist.

D. Loss exposure survey or checklist.

Grocers' Warehouse is a newly created business that will open next month. It will include a retail operation as well as 500,000 square feet of warehouse space with loading docks. Which one of the following methods of identifying loss exposures would be least applicable in this situation? Select one: A. Loss exposure survey B. Physical inspection C. Interviews with management D. Loss histories

D. Loss histories

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

D. Pure risk.

Some businesses require key executives to fly on different flights. This is an example of which one of the following risk control techniques? Select one: A. Loss prevention B. Avoidance C. Duplication D. Separation

D. Separation

A business buys multiple small warehouses to minimize the effects of a single loss. This is an example of Select one: A. Loss prevention. B. Avoidance. C. Duplication. D. Separation.

D. Separation.

Which one of the following is the most common reason premium audits are conducted? Select one: A. Loss control activities during the policy period may reduce the risk of loss. B. The amount of actual losses are not known at the start of the policy period. C. Claim examiners have discovered unacceptable operations during the policy period. D. The amount of the loss exposure is unknown at the start of the policy period.

D. The amount of the loss exposure is unknown at the start of the policy period.