Main test 1 risk and insurance

Pure risk is characterized by

a chance of loss or no loss only.

The definition of "risk" suggested in the text views risk as

a condition of the real world.

The term "hazard" refers to

a condition that increases the chance of loss.

Unemployment would generally be considered to be

a dynamic fundamental risk.

In property insurance terminology, all the following are considered hazards except:

a fire which is started in a waste paper basket.

The hazard that reflects the tendency in some jurisdictions for judges and juries to favor a plaintiff in litigation is properly classified as

a legal hazard.

Probability may be defined as

a measure of the likelihood of an occurrence.

A business firm with an inventory of obsolete stock and high notes payable might represent

a moral hazard.

To be technically correct, we should define "fire" as

a peril.

The possibility of loss resulting from a flood is an example of

a static fundamental risk.

Adverse selection

affects the accuracy of insurer's predictions.

Involuntary retention occurs when

all of the above.

Risk management contributes to organization profit

all of the above.

The combination of a large number of exposure units by an insurer is important for the operation of insurance because:

all of the above.

The evolution of risk management is traceable to

all of the above.

The term "self-insurance"

all of the above.

The four elements of an insurable risk

are desirable, but some insurable risks do not possess them.

Social insurance is distinguished from private or voluntary insurance primarily in that social insurance

attempts to redistribute income in favor of certain classes and is usually compulsory.

An insurer insures 1000 houses, with 10 expected losses and a standard deviation of 2. Other things being equal, the insurer may be 99% certain that the number of losses will be

between 4 and 16.

From the insurer's perspective, the operation of the insurance mechanism is an example of

combination.

As it exists today, risk management represents the merging of the specialties

decision theory, risk financing, and risk control.

A fire caused $50,000 damage to Smith's house, and the family was forced to spent $10,000 to live in rented housing while it was being repaired. Which of the following best describes Smith's loss?

direct property loss of $50,000, indirect property loss of $10,000

Traditional risk management

draws on several other disciplines but is a distinct discipline and function.

The most difficult step in the risk management process is likely to be

evaluating risks.

The step in the risk management process that is most likely to be overlooked is

evaluating risks.

The terrorist attack on the World Trade Center on September 11, 2001 led to a debate over whether such risks are

fundamental or particular.

Henri Fayol's place in the history of risk management arises from

his recognition of risk management as one of six broad functions of business.

According to the FBI, the fastest growing form of white collar crime is.

identify theft.

Classify the following as pure or speculative risk:

(1) speculative, (2) speculative, (3) pure

The insurance mechanism operated by the Federal Deposit Insurance Corporation

is a public guarantee insurance program.

The surety company issuing a bond to a principal

is similar in many respects to the co-signer of a note.

Pure risk is considered distasteful by most persons because

it can be a source of worry and concern.

From the viewpoint of society and the economy, the most desirable means of dealing with risk is

loss prevention.

Property insurance policies typically exclude coverage for losses caused by war. This is because

losses from war are potentially catastrophic.

The term enterprise risk management refers to

management of risks for profit-making organizations.

Insurance which is required by law

may be social or private, depending on other characteristics.

The two most important of the pre-loss and post-loss objectives are

meeting social responsibility and meeting external obligations.

The ultimate goal of risk management is to

minimize the adverse effects of losses and uncertainty connected with risks.

Hazards are usually classified into three categories. They are:

moral, morale, and physical.

Because she knows she has insurance to cover losses from theft, Jones rarely locks the door to her house. Her behavior is an example of

morale hazard.

The risk that a firm's IT systems will fail is an example of

operational risk.

Pure risks are generally classified as

personal risks, property risks, liability risks, and risks arising out of the failure of others.

The type of insurance that is characterized by individual equity and contractual arrangements is generally referred to as

private insurance.

Financial risk management encompasses management of

pure risk, speculative risk, and strategic risk

Traditional risk management is concerned primarily with

pure risks.

The two broad approaches to dealing with risk are

risk control and risk financing.

Which of the following statements about risk management is correct?

risk management has relevance for organizations of all sizes.

Which of the following techniques for dealing with risk may be said to represent a special variation of other techniques?

sharing.

A risk management policy statement

should permit the risk manager some latitude.

The three broad general classes into which the types of insurance may be classified are

social insurance, private insurance, and public guarantee programs.

According to the law of large numbers, as the number of exposure units is increased

the accuracy of predictions should be better.

A peril, as distinguished from a hazard, is defined as

the cause of a loss.

Risk avoidance should be used in those instances in which

the exposure has catastrophic potential and the risk cannot be reduced or transferred.

For the insurance company, a meaningful measure of risk is

the possible deviation of actual from predicted results.

There are two basic approaches to the interpretation of probability. In insurance we are primarily concerned with

the relative frequency interpretation.

Adverse selection is a term used to describe

the tendency of the poorer than average risks to seek insurance to a greater extent than do the better than average risks.

Although insurance may be defined in various ways, the two fundamental characteristics of the insurance mechanism are

transfer and sharing.

From the insured's perspective, the purchase of insurance is an example of

transfer.

The type of retention that is always undesirable is

unintentional retention.

The distinction between fundamental and particular risks is important because

whether a risk is fundamental or particular may determine how society will deal with it.