ERM/Exam 2/Chapter 4 Practice Questions

Which one of the following statements is correct regarding characteristics of ideally insurable loss exposures? Select one: 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.

n both noninsurance risk control and noninsurance risk financing transfers, Select one: A. A contract is usually formed before any loss occurs. B. The transferor has protection only after the funds to restore a loss are paid. C. The transferor has protection regardless of the transferee's bankruptcy. D. The transfer becomes effective only when the transferee actually performs the action that rids the transferor of risk.

A. A contract is usually formed before any loss occurs.

An excess liability insurance policy that covers a claim in excess of the underlying limits only if the loss is covered by the underlying policy is called Select one: A. A following-form excess policy. B. A layered policy. C. An umbrella policy. D. A true excess policy.

A. A following-form excess policy.

Leasing is a useful noninsurance risk control transfer because Select one: A. Certain loss exposures accompany property ownership but do not accompany its use or occupancy. B. The lessee retains the loss exposures resulting from property destruction. C. The lessor loses the ability to use the property for the remainder of the lease in the event of damage to the property. D. The lessee stands to lose the property's rental income in the event of damage to the property.

A. Certain loss exposures accompany property ownership but do not accompany its use or occupancy.

Advancements in machine learning and artificial intelligence (AI) have helped insurers do all of the following, EXCEPT: Select one: A. Completely prevent customers' risk B. Price insurance policies more precisely C. Deliver policy information and payment options to a mobile device D. Customize policies to more closely align with customers' actual ris

A. Completely prevent customers' risk

Hold-harmless agreements are Select one: A. Comprised of two parties—the indemnitor and the indemnitee. B. Enforceable without legal consideration. C. Highly regulated. D. Standardized.

A. Comprised of two parties—the indemnitor and the indemnitee.

"The contractor agrees to indemnify and hold harmless the owner against claims, damages, bodily injury, or property damage arising out of the contractor's work and caused by any act of omission of the contractor, his agents, and his employees." This is an example of which one of the following forms of a hold-harmless agreement? Select one: A. Limited form B. Basic form C. Broad form D. Intermediate form

A. Limited form

Which one of the following is a risk control technique that reduces the frequency of a particular loss? Select one: A. Loss prevention B. Duplication C. Loss reduction D. Separation

A. Loss prevention

A local shopping center reduced its net income loss after a fire by incurring additional expenses to shorten the time it takes to repair the damage and reopen the shopping center. Bob, the owner of the center, hired a contractor to work around the clock until repairs were completed. This reduced Bob's net income loss because he was able to repair the shops sooner. Bob's action is an example of which one of the following risk management techniques? Select one: A. Loss reduction B. Loss prevention C. Avoidance D. Diversification

A. Loss reduction

Each of the risk control techniques of duplication, separation, and diversification Select one: A. Reduce the severity of loss associated with the organization's loss exposures. B. Decrease the frequency of losses incurred by an organization. C. Work in combination to transfer the organization's loss exposures. D. Cause losses to be less predictable but more manageable.

A. Reduce the severity of loss associated with the organization's loss exposures.

The control technique that disperses a particular asset or activity over several locations and regularly relies on that asset or activity as a part of an organization's working resources is which one of the following? Select one: A. Separation B. Risk transfer C. Duplication D. Diversification

A. Separation

Which one of the following is true about the liability involved in contracting services? Select one: A. The responsibility that certain duties be performed safely cannot be delegated to another party, such as the duty of common carriers to carry passengers safely. B. If the subcontracted work is inherently dangerous to others, the party who hired the contractor is not liable for an injury to a third party caused by the contractor's negligence. C. If the party that hired the contractor is negligent in selecting the contractor, the contractor is directly liable for such negligence. D. In contracting for services, the party that transfers the risk must be an independent contractor, and the party that accepts the risk must be a subcontractor.

A. The responsibility that certain duties be performed safely cannot be delegated to another party, such as the duty of common carriers to carry passengers safely.

Which one of the following technologies can provide the infrastructure upon which smart contracts are built and implemented? Select one: A. Machine learning B. Blockchain C. Wearables D. Telematics

B. Blockchain

Under a large deductible plan, the amount that the insurer incurs to adjust losses Select one: A. Is prorated between the insured and the insurer based on the size of the loss. B. Can be inside or outside the deductible. C. Is inside, or included, in the deductible. D. Is outside the deductible.

B. Can be inside or outside the deductible.

When negotiating noninsurance risk transfer terms, risk management professionals should consider the Select one: A. Reduction in insurer risk charges and premium taxes that might result. B. Legal enforceability of contract provisions. C. Effect on the organization's relationship with its insurance broker. D. Effect on the organization's insurance program.

B. Legal enforceability of contract provisions.

Which one of the following statements is true regarding contracting for services as a noninsurance risk control transfer? Select one: A. Personnel loss exposures associated with an activity cannot be transferred through subcontracting. B. Liability loss exposures associated with an activity are not transferred easily, especially regarding harm to third parties. C. The party that accepts the risk through contracting for services must be an independent contractor for the transfer to be effective. D. Organizations rarely use contracting to transfer loss exposures to organizations that are better able to control losses from a particular activity.

B. Liability loss exposures associated with an activity are not transferred easily, especially regarding harm to third parties.

Emerald Industries has just invested a large sum in new, highly-sophisticated computer equipment and building renovations. Emerald installed state-of-the-art smoke detection devices throughout the facility. Emerald's state-of-the-art smoke detection devices are an example of Select one: A. Avoidance. B. Loss reduction. C. Loss prevention. D. Duplication.

B. Loss reduction.

Diversification is a risk control technique that Select one: A. Produces a copy or backup and keeps it in reserve. B. Spreads loss exposures over numerous projects, products, markets, or regions. C. Views the cause of accidents to be a result of business concentration and vertical integration. D. Divides an asset or operation into two or more separate units.

B. Spreads loss exposures over numerous projects, products, markets, or regions.

Telematics devices allow organizations to accurately identify patterns of risk and predict risk for which one of the following types of loss exposures? Select one: A. Workers compensation B. Property C. Automobile D. Business income

C. Automobile

Ideally insurable loss exposures are subject to losses that Select one: A. Are immeasurable in terms of frequency or severity. B. Occur gradually over long periods of time. C. Are definite in time, cause, and location D. Result from unidentifiable causes.

C. Are definite in time, cause, and location

An organization may use a large deductible plan to do which one of the following? Select one: A. Retain high severity losses B. Increase its cost of risk C. Defer cash outflows for accidental losses D. Avoid paying residual market loadings

C. Defer cash outflows for accidental losses

The risk control technique that spreads loss exposure over numerous projects, products, markets, or regions is which one of the following risk management techniques? Select one: A. Risk transfer B. Separation C. Diversification D. Duplication

C. Diversification

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 Select one: A. A large number of similar exposure units. B. Fortuitous. C. Independent and not catastrophic. D. Definite and measurable.

C. Independent and not catastrophic.

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? Select one: A. Pure risk B. Definite and measurable C. Large number of similar exposure units D. Independent and not catastrophic

C. Large number of similar exposure units

A risk control technique that reduces the severity of a particular loss is Select one: A. Loss prevention. B. Duplication. C. Loss reduction. D. Diversification.

C. Loss reduction.

Large deductible plans Select one: A. Enable organizations to transfer the financial consequences of losses below the deductible level. B. Seldom require proof of financial security from the insured organization. C. Lower an organization's cost of risk. D. Provide that the insured settle all claims and bill the insurer for losses in excess of the deductible.

C. Lower an organization's cost of risk.

Concerning fundamental guidelines of contractual risk transfer management, it is wise to Select one: A. Be aggressive in negotiations—the more ruthless the better. B. Try to be as general and nonspecific as possible. C. Require a certificate of insurance for contractual liability before contract operations begin. D. Avoid being named as an additional insured on the transferee's policy.

C. Require a certificate of insurance for contractual liability before contract operations begin.

Internet of Things (IoT) devices, sensors, wearables, and telematics devices have had the greatest impact on which one of the following risk treatment techniques? Select one: A. Risk transfer B. Risk avoidance C. Risk modification D. Risk retention

C. Risk modification

Which one of the following risk control techniques might actually increase loss frequency? Select one: A. Loss reduction B. Diversification C. Separation D. Loss prevention

C. Separation

Statutory limitations on hold-harmless agreements vary in the Select one: A. Allowable complexity of the agreement. B. Length of time that such transfers can be effective. C. Types of noninsurance transfers to which the statutes apply. D. Cost or compensation associated with the agreement.

C. Types of noninsurance transfers to which the statutes apply.

An exculpatory clause is Select one: A. The surety's right to seek reimbursement from the principal for the surety's payments. B. The intentional relinquishment of a known right. C. The substitution of one party for another. D. A contractual provision that relieves one party from liability resulting from a negligent or wrongful act.

D. A contractual provision that relieves one party from liability resulting from a negligent or wrongful act.

Blithe Drug Manufacturing has developed a drug that cures obesity. However, the side effects are significant and potentially fatal. Blithe decides not to manufacture and sell the drug. This is an example of Select one: A. Loss prevention. B. Loss reduction. C. Diversification. D. Avoidance.

D. Avoidance.

Maxwell Company has just invested a large sum in new, highly-sophisticated computer equipment and building renovations. Maxwell arranged to lease identical equipment at another location so that it could use the equipment in the event of a disaster at its location. Maxwell's lease of identical equipment at another location is an example of Select one: A. Separation. B. Diversification. C. Loss reduction. D. Duplication.

D. Duplication.

Party A and Party B have entered into a contract specifying that Party A will hold Party B harmless from claims arising from their joint fault. This is an example of which one of the following forms of a hold-harmless agreement? Select one: A. Broad form B. Basic form C. Limited form D. Intermediate form

D. Intermediate form

Which one of the following risk control techniques is generally used to reduce the frequency of a particular loss? Select one: A. Separation B. Avoidance C. Loss reduction D. Loss prevention

D. Loss prevention

A large deductible is similar to a self-insured retention (SIR) in that both Select one: A. Provide detailed reports to the insurer on all claims. B. Give the insurer complete control over claim handling. C. Require that the insured adjust and pay claims up to the deductible or SIR amount. D. Require the insured organization to retain a relatively large amount of loss.

D. Require the insured organization to retain a relatively large amount of loss.

A noninsurance transfer in which the transferor transfers a loss exposure to the transferee, thereby eliminating the possibility that the transferor will suffer a loss from the transferred exposures is a noninsurance Select one: A. Pooling and funding mechanism. B. Risk financing transfer. C. Loss control mechanism. D. Risk control transfer.

D. Risk control transfer.

Cold Coolers, Inc., has its main warehouse in St. Louis. It also stores inventory in two warehouses in other cities to reduce the distance between their warehouses and retail locations. Cold Coolers is using which one of the following risk management techniques? Select one: A. Risk transfer B. Diversification C. Duplication D. Separation

D. Separation