Final Quiz - 1

Which one of the following statements is correct regarding how a large deductible plan compares with guaranteed cost in meeting the various risk financing goals? Select one: A. A large deductible plan minimizes the cost of risk better than a guaranteed cost insurance. B. Cash flow uncertainty is better managed by a large deductible plan than by guaranteed cost insurance. C. The level of liquidity that needs to be maintained is lower for a large deductible plan than guaranteed cost insurance. D. Complying with legal and regulatory requirements is more difficult with a large deductible plan than with guaranteed cost insurance.

A. A large deductible plan minimizes the cost of risk better than a guaranteed cost insurance.

Currently, insurers process which portion of their available structured data? Select one: A. A low percentage B. A medium percentage C. A variable percentage D. A high percentage

A. A low percentage

Which one of the following types of insurance policies violates the principle of indemnity? Select one: A. A valued policy. B. A mono-line policy. C. A personal articles floater policy. D. A commercial crime policy.

A. A valued policy.

The insuring agreement often contains policy provisions regarding the Select one: A. Covered causes of loss. B. Covered policy period. C. Conditions of coverage. D. Duties of the insurer and insured.

A. Covered causes of loss.

Which one of the following loss reduction measures taken by a property owner would be considered a post-loss measure? Select one: A. Establishing a plan to temporarily relocate to another location B. Installing an automatic sprinkler system C. Enforcing a no-smoking policy throughout the building D. Erecting fire walls in a building

A. Establishing a plan to temporarily relocate to another location

Which one of the following is the network through which sensors and other smart products capture and transmit data? Select one: A. Internet of Things B. Blockchain C. Artificial intelligence D. Cloud

A. Internet of Things

The concept of correlation, in the context of why enterprise risk management works, Select one: A. Is the proposition that correlation increases risk while uncorrelated risks can reduce risk. B. Identifies internal and external occurrences that affect whether an organization will meet its objective. C. Occurs when risks are balanced and diversified, which creates less volatility in a portfolio. D. Occurs when the sum of individual risk effects is less than the total effect from the combination of all risks.

A. Is the proposition that correlation increases risk while uncorrelated risks can reduce risk.

The most common violations of the concept of utmost good faith in insurance policies involve buildup in insurance claims filed by insureds and/or Select one: A. Misrepresentation of key facts. B. Overindemnification. C. Exchange of unequal amounts. D. Adverse selection.

A. Misrepresentation of key facts.

Self-insurance is particularly well-suited for financing losses that are Select one: A. Paid out over a period of time. B. Retained informally. C. Covered with guaranteed cost insurance. D. Best paid by the organization but administered by an insurer.

A. Paid out over a period of time.

Which one of the following types of captive typically operates as a formalized retention plan rather than a transfer measure? Select one: A. Single-parent captive B. Risk retention group C. Rent-a-captive D. Protected cell company

A. Single-parent captive

Which one of the following describes the two ways in which loss data must be consistent to accurately estimate future loss exposures? Select one: A. The data must be collected on a consistent basis for all recorded losses, and the data must be expressed in constant dollars. B. The past losses under analysis must all have occurred during the same time period and at the same location. C. The loss values used must be actual amounts paid rather than estimates or reserves and should be expressed in current dollars. D. The data must come from an organization's own records rather than other sources, and it should be categorized by severity of loss.

A. The data must be collected on a consistent basis for all recorded losses, and the data must be expressed in constant dollars.

Which one of the following statements is true regarding the relationship between the size of the property policy deductible and the premium reduction? Select one: A. The premium credit increases much more slowly than the size of the deductible. B. The premium reduction is directly proportional to the size of the deductible. C. The premium credit increases much more rapidly than the size of the deductible. D. The premium credits tend to encourage the use of small deductibles and the practice of dollar trading.

A. The premium credit increases much more slowly than the size of the deductible.

Probability analysis would be most reliable for projecting losses in an organization Select one: A. With a substantial volume of data on past losses. B. With a low number of historical losses. C. Planning to restructure its operations. D. That has recently expanded its operations.

A. With a substantial volume of data on past losses.

Underwriter Carl is choosing between account A and account B which both have the same expected loss, but account B has more variation in its possible loss outcomes. Carl will most likely choose account Select one: A. B because there is less risk involved in the loss exposure. B. A because there is less risk involved in the loss exposure. C. A because the standard deviation is smaller. D. B because the standard deviation is smaller.

B. A because there is less risk involved in the loss exposure.

Which one of the following statements is correct regarding the ability of a hold-harmless agreement to meet risk financing goals? Select one: A. A hold-harmless agreement does not present any legal or regulatory concerns. B. A hold-harmless agreement can pay for the negative consequences of an event provided the other party has the financial ability to pay the losses covered by the agreement. C. A hold-harmless agreement is most effective in meeting the risk financing goals for an organization's workers compensation exposures. D. A hold-harmless agreement require more liquidity than retention and most other alternative transfer measures.

B. A hold-harmless agreement can pay for the negative consequences of an event provided the other party has the financial ability to pay the losses covered by the agreement.

Dr. Donna Jenkins is a research chemist for PharmaCon, a large pharmaceutical company. Last year, she was responsible for 12 of the 14 patents awarded to PharmaCon. Clearly, the future prospects of the company would be damaged if Dr. Jenkins died or became severely disabled. In risk management parlance, Dr. Jenkins is considered Select one: A. An officer. B. A key employee. C. A director. D. A protected employee.

B. A key employee.

When a business suffers loss of income following a liability suit that causes customers to lose confidence in the business' products, what type of loss has the business suffered? Select one: A. Special damage B. Damage to reputation C. Punitive damage D. Confidence loss

B. Damage to reputation

Which one of the following is an example of a wearable? Select one: A. Motion sensors B. Helmets that monitor fatigue C. Robots D. Unmanned aircraft

B. Helmets that monitor fatigue

To understand risk, one needs to know the probability of an outcome or event occurring. Which one of the following statements is correct with respect to probability? Select one: A. It is typically expressed verbally rather than numerically. B. It can be used to decide which activities to undertake. C. It verifies that risk is present, but does not quantify it. D. It identifies what can be lost when a negative outcome occurs.

B. It can be used to decide which activities to undertake.

A large hotel chain uses a layered liability insurance program to insure its large liability loss exposures. For the auto liability coverage, the umbrella policy requires a buffer layer. Which one of the following best describes the function of the buffer layer? Select one: A. It includes the primary policies covering general liability, commercial auto liability, and employers liability. B. It serves as a layer of excess insurance above the primary layer when the primary auto liability policy limits are below the umbrella policy's minimum requirements. C. It is a layer of excess insurance above the umbrella policy, providing layers of coverage for loss exposures not covered by the umbrella policy. D. It is the highest layer of coverage available to the hotel chain for auto liability.

B. It serves as a layer of excess insurance above the primary layer when the primary auto liability policy limits are below the umbrella policy's minimum requirements.

Property insurance policies using the agreed value method Select one: A. Pay replacement cost for total losses. B. Pay the agreed value for total losses. C. Pay actual cash value for total losses. D. Are contracts of indemnity.

B. Pay the agreed value for total losses.

COPE is an acronym for the basis used to examine commercial property loss exposures. The letter P in COPE represents Select one: A. Physical hazards. B. Protection. C. Proximity. D. Probability.

B. Protection.

Which one of the following statements is true regarding the financial consequences of loss? Select one: A. The financial consequences of any loss can be established immediately after the loss occurs. B. The financial consequences depend on the type of loss exposure, the cause of loss, and the loss frequency and severity. C. The financial consequences of a loss are independent of any hazards that may have contributed to the loss. D. The financial consequences of future losses cannot be predicted with any degree of certainty.

B. The financial consequences depend on the type of loss exposure, the cause of loss, and the loss frequency and severity.

One goal of risk financing is to handle risk in a cost-effective manner. To do this, an organization seeks to minimize its total expenditures on loss control, retained losses, loss transfer costs, and administrative expenses. A composite measure encompassing all expenditures on risk is called an organization's Select one: A. Insurance budget. B. Cost of capital. C. Cost of risk. D. Capital budget.

C. Cost of risk.

An insurer is beginning to write business in a new state. The claim manager, Carla, wants to know how many new claim representatives to hire to accommodate the additional volume of claims. Based on the marketing department's estimate and industry data, Carla has determined the mean number of new claims to be 2,000, with a standard deviation of 1,000 in a normal distribution. If a claim representative can typically adjust 600 claims per year, and Carla wants at least 80 percent certainty that she has enough representatives, which one of the following represents how many representatives she will need to hire? Select one: A. 2 B. 3 C. 5 D. 6

C. 5

Which one of the following statements regarding the extent of damages in liability claims is true? Select one: A. Unlike property damage claims, evaluation of bodily injury claims considers a narrow range of damage elements for the claimant. B. The insured/defendant usually has the burden of proof regarding bodily injury and property damage proximately caused by his or her acts. C. A claimant in a bodily injury or property damage liability claim has a duty to mitigate loss after an accident. D. A claimant generally may not recover damages to compensate for loss of use of damaged property.

C. A claimant in a bodily injury or property damage liability claim has a duty to mitigate loss after an accident.

Which one of the following planned retention funding measures recognizes in advance the potential for loss and supports that potential by allocating cash, securities, or other liquid assets to meet obligations? Select one: A. Current expensing of losses B. An unfunded reserve C. A funded reserve D. Borrowed funds

C. A funded reserve

Data credibility refers to the level of confidence that Select one: A. Past loss data was properly recorded. B. Losses that have not occurred in the past will not occur in the future. C. Available data can accurately indicate future losses. D. The statistical analysis of the four loss exposure dimensions was completed correctly.

C. Available data can accurately indicate future losses.

Which one of the following describes the distribution shape in which the mean, median, and mode all have the same value? Select one: A. Skewed left B. Asymmetrical C. Bell-shaped D. Skewed right

C. Bell-shaped

Bentley Organization has a retrospective rating plan. It experiences $1.5 million in losses subject to the policy limit; however, Bentley's adjusted premium is limited to $1 million. This is likely because Select one: A. Bentley also has a guaranteed cost insurance plan. B. Bentley's loss limit applies. C. Bentley has a maximum premium of $1 million. D. Bentley has a minimum premium of $500,000.

C. Bentley has a maximum premium of $1 million.

Many businesses have refrigeration equipment, production equipment, steam boilers, and air conditioning systems. These are all examples of Select one: A. Mobile equipment. B. Personal property. C. Boilers and machinery. D. Property in transit.

C. Boilers and machinery.

Which one of the following statements is correct with respect to property loss exposures? Select one: 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.

Shelton Manufacturing is a publicly traded chemical manufacturer. It has an agreement with an investment bank that requires the bank to purchase a specified number of Shelton Manufacturing shares at a predetermined price if Shelton should suffer a significant property loss at its manufacturing plant for which it was unable to acquire property insurance. This is an example of which one of the following types of capital market solutions? Select one: A. Derivative contract B. Hedging arrangement C. Contingent capital arrangement D. Insurance securitization

C. Contingent capital arrangement

Which one of the following is a way that insurers and risk managers can use data science to improve their results through data-driven decision making? Select one: A. Using industry data in addition to the organization's own data B. Determining prior year losses at a particular location C. Discovering new relationships in data D. Providing human analysis of data

C. Discovering new relationships in data

Aaron finds 10 new laptop computers in the basement of his office building. The attached invoice indicates that each laptop was worth $1,500 four years ago. Hoping to sell them, Aaron was disappointed to learn he could obtain only $500 per unit. This discrepancy in valuation of the laptop computers is most likely due to Select one: A. Replacement cost value. B. Market value. C. Functional depreciation. D. Accounting depreciation.

C. Functional depreciation.

Many insurers have developed their own company-specific preprinted forms, especially for coverages in which the insurer specializes, or for Select one: A. Niche market exposures. B. Catastrophic loss exposures. C. High-volume lines of insurance. D. Infrequently used coverage needs.

C. High-volume lines of insurance.

Which one of the following statements is correct regarding characteristics of ideally insurable loss exposures? Select one: A. 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. B. One requirement of the law of large numbers is that past events occur under different circumstances in the future. C. Ideally, loss exposures should be spread across a large number of similar exposure units within the same period. D. The spreading of risk through time, requires a large number of similar exposure units.

C. Ideally, loss exposures should be spread across a large number of similar exposure units within the same period.

Under which one of the following types of insurance policies are the insurer's payments for defense costs and supplemental payments typically applied to reduce the policy limits? Select one: A. Commercial auto B. CGL C. Pollution liability D. Homeowners

C. Pollution liability

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

C. Reduces the residual uncertainty associated with risk.

A project team at Goshen Mutual has been working on developing a new product for the personal insurance market. The team is using geodemographic data to determine which territories would be the best to introduce the product. Geodemographic data would be categorized as Select one: A. Structured internal data. B. Unstructured internal data. C. Structured external data. D. Unstructured external data.

C. Structured external data.

All of the following are reasons insurers restrict the use of deductibles in liability insurance policies, EXCEPT: Select one: A. Liability deductibles do not noticeably reduce premiums for most liability insurance policies. B. Insureds may not report seemingly minor incidents to the insurer until the situation has escalated. C. The insurer loses its right to provide a defense under liability insurance policies that include a deductible. D. The insurer must pay third-party claimants in full and then recover the amount of the deductible from the insured.

C. The insurer loses its right to provide a defense under liability insurance policies that include a deductible.

Oliver has a commercial property policy covering his retail store. The policy has an 80 percent coinsurance clause, and the insurable value of the store is its replacement cost. When the policy was written, the value of the store was $320,000. Assuming the current replacement cost of the store is $300,000, and that it is insured for $240,000, how much will Oliver recover under his insurance policy if the store suffers a $50,000 covered loss? Select one: A. $0 B. $37,500 C. $40,000 D. $50,000

D. $50,000

Which one of the following is an example of a noninsurance agreement that may overlap with insurance coverage of losses? Select one: A. A business warranty agreement B. A lease payment plan C. A responsible party agreement D. A home warranty

D. A home warranty

The cost of a risk management technique can be determined through a cost-benefit analysis that considers the technique's effect on the frequency, severity, and timing of expected losses relative to an estimate of the Select one: A. Value of maintaining peace of mind. B. Before-tax costs involved in applying the various risk management techniques. C. Value of maintaining operations. D. After-tax costs involved in applying the various risk management techniques.

D. After-tax costs involved in applying the various risk management techniques.

Alice bought furniture for her home using store credit. There were no liens attached, and when Alice could not pay the full amount for the furniture, the store owner sued her. The store owner was Select one: A. A secured creditor. B. A bailor. C. A lessor. D. An unsecured creditor.

D. An unsecured creditor.

Cara, a risk management professional, advises an organization that by using a finite risk plan, it will not meet its goal of maintaining liquidity. Which one of the following best explains the reason for this? Select one: A. Because cash flows are smoothed over multiple periods B. Because the insured ultimately pays for all its own losses C. Because the insurer will not issue a policy guaranteeing that all covered claims will be paid D. Because premium payments are usually paid upfront

D. Because premium payments are usually paid upfront

Which one of the following correctly describes cluster analysis? Select one: A. Cluster analysis predicts a numerical value given characteristics of each member of a dataset. B. Cluster analysis develops algorithms to develop rules to apply to new data. C. Cluster analysis assigns members of a dataset into categories based on known characteristics. D. Cluster analysis explores data to find groups with common and previously unknown characteristics.

D. Cluster analysis explores data to find groups with common and previously unknown characteristics.

The primary method of post-loss policy analysis is the Select one: A. Scenario analysis method. B. Formula method. C. Financial impact method. D. DICE method.

D. DICE method.

Which one of the following statements is correct regarding duplication? Select one: A. Duplication tends to make losses less predictable, but more manageable. B. Duplication is an easy and inexpensive way to reduce loss frequency. C. Duplication tends to increase an organization's dependence on a single asset or activity. D. Duplication reduces loss severity without increasing loss frequency.

D. Duplication reduces loss severity without increasing loss frequency.

Which one of the following types of risk assessment involves a global assessment of risks that could affect the organization's overall business goals? Select one: A. Program assessment B. Process assessment C. Site assessment D. Enterprise assessment

D. Enterprise assessment

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

D. Financial risk.

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? Select one: A. Building code B. Environmental security C. Workers compensation D. Life safety

D. Life safety

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

D. Low frequency and high severity

The purpose of data analytics for insurers is to Select one: A. Automate most organizational processes. B. Eliminate the need for human analysis. C. Acquire and use all the new types of technology. D. Make data-driven decisions and strategy.

D. Make data-driven decisions and strategy.

Which one of the following statements is correct with respect to insurance policy exclusions? Select one: A. Its purpose is to eliminate coverage, not to clarify the coverage granted. B. Its use does not help insurers manage moral and morale hazards. C. Its use has little or no impact on the policy premium an insurer must charge. D. One of its purposes is to eliminate coverages requiring special treatment.

D. One of its purposes is to eliminate coverages requiring special treatment.

Each insured member of a pool contributes premium based on its loss exposures. In exchange, Select one: A. The pool forms a captive insurer. B. The pool implements various risk financing techniques. C. The pool contributes capital. D. The pool pays for each insured's covered losses.

D. The pool pays for each insured's covered losses.

Which one of the following statements is true regarding the use of checklists and questionnaires to identify loss exposures? Select one: A. The completion of standardized checklists helps organizations describe in detail their specific loss exposures and shows how those loss exposures support or affect specific organizational goals. B. Standardized risk assessment questionnaires can be used as the sole method to uncover an organization's loss exposures and reveal key information about those exposures. C. An advantage of risk assessment questionnaires is that they can be completed with relatively little expense, time, and effort. D. The questionnaires developed by insurers, called insurance surveys, relate mainly to loss exposures for which commercial insurance is generally available.

D. The questionnaires developed by insurers, called insurance surveys, relate mainly to loss exposures for which commercial insurance is generally available.

Sean recently started a small consulting practice. Sean is the only employee of the business and the sole generator of revenue. Sean is very concerned that in the event that he becomes disabled due to an accident or disease there will be no revenue coming into the business. Which one of the following goals best identify Sean's concerns? Select one: A. Social responsibility and earnings stability B. Economy of risk management operations C. Legality and profitability D. Tolerable uncertainty and earnings stability

D. Tolerable uncertainty and earnings stability