Chapter 1
29) Which of the following statements about liability risks is (are) true? I. Future income and assets can be attached to pay judgments if inadequate insurance is carried. II. There is an upper limit on the amount of loss.
A) I only
3) An insurance company estimates its objective risk for 10,000 exposures to be 10 percent. Assuming the probability of loss remains the same, what would happen to the objective risk if the number of exposures were to increase to 1 million?
A) It would decrease to 1 percent.
53) The production facility for ABC Manufacturing is located in a flood plain. Although the risk of flood is low, ABC's risk manager is concerned that a flood could damage the plant and equipment. He received bids on flood insurance from two insurance agents, but decided the cost of coverage was too high relative to the risk. So he did not purchase flood insurance. Which risk management technique is ABC using with respect to the risk of flood?
A) active retention
50) A risk that affects only individuals or small groups and not the entire economy is called a
A) diversifiable risk.
32) Following good health habits can be categorized as
A) loss prevention.
5) The long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called
A) objective probability.
19) A pure risk is defined as a situation in which there is
A) only the possibility of loss or no loss.
20) The premature death of an individual is an example of a
A) pure risk.
46) MLX Drug Company would like to market a new hypertension drug. While the Food and Drug Administration (FDA) was testing the drug, it discovered that the drug produced a harmful side effect. When MLX learned of the FDA's test result, MLX abandoned its plan to produce and distribute the drug. MLX's reaction illustrates
A) risk avoidance.
41) Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new manufacturing facility. These devices are all examples of
A) risk control.
22) A family's automobile that is a total loss as a result of a collision is an example of which of the following types of risk? I. Speculative risk II. Diversifiable risk
B) II only
49) Which of the following statements about chance of loss and risk is (are) true? I. If the chance of loss is identical for two groups, the objective risk must be the same. II. Two individuals may perceive differently the risk inherent in a given activity.
B) II only
30) All of the following are burdens to society because of the presence of risk EXCEPT
B) Risk provides an incentive for people to engage in risk control.
23) All of the following are programs to insure nondiversifiable risks EXCEPT
B) auto physical damage insurance.
56) Five years ago, Shannon decided to start investing monthly in the common stock of ABC Telecom Company. Her financial well-being will be harmed if the price of ABC Telecom stock drops significantly. The risk of investment loss can be reduced if she invests in other companies and other types of financial assets. The risk Shannon faces with regard to her investments is a(n)
B) diversifiable risk.
36) Which of the following is an example of a noninsurance risk transfer?
B) entering into a hold-harmless agreement
18) Katelyn was just named Risk Manager of ABC Company. She has decided to create a risk management program which considers all of the risks faced by ABC-pure, speculative, operational, and strategic-in a single risk management program. Such a program is called a(n)
B) enterprise risk management program.
17) One of the speculative financial risks considered in an enterprise risk management program is the risk of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money. This risk is called
B) financial risk.
47) ABC Insurance Company sells auto insurance in one state. Recently, the state legislature passed a law that limits the use of an individual's credit history by insurers when selecting applicants to insure. This change in law will increase the possibility of unprofitable results for ABC. This type of hazard is an example of
B) legal hazard.
45) Ben is concerned that if he injures someone or damages someone's property he could be held legally responsible and required to pay damages. This type of risk is called a
B) liability risk.
37) Curt borrowed money from a bank to purchase a fishing boat. He purchased property insurance on the boat. Curt had difficulty making loan payments because he did not catch many fish, and fish prices were low. Curt intentionally sunk the boat, collected from his insurer, and paid off the loan balance. This scenario illustrates the problem of
B) moral hazard.
39) Brad started a pest control business. To protect his personal assets against liability arising out of the business, Brad incorporated the business. Brad's use of the corporate form of organization to shield against personal liability claims illustrates
B) noninsurance transfer.
9) An earthquake is an example of a(n)
B) peril.
34) The use of fire-resistive materials when constructing a building is an example of
B) risk control.
52) A special form of planned retention by which part or all of a give loss exposure is retained by the firm is called
B) self-insurance.
4) Uncertainty based on a person's mental condition or state of mind is known as
B) subjective risk.
59) Some members of Congress are concerned that if one or two large U.S. banks fail, it could lead to the collapse of the entire U.S. financial sector. This risk is called
B) systemic risk.
8) A peril is
B) the cause of a loss.
51) Which of the following is an example of a commercial risk?
B) the loss of business income
2) Objective risk is defined as
B) the relative variation of actual loss from expected loss.
62) Janice mistakenly thought that Medicare covers the cost of a long-term care in a nursing home. So she did not purchase long-term care insurance or save in case she needed a long stay in a nursing home. Janice's treatment of the risk of a long-term stay in a nursing home is best described as
B) unplanned retention.
35) All of the following statements about risk retention are true EXCEPT
C) Its use is most appropriate for low-frequency, high-severity types of risks.
61) Which of the following statements is true regarding careers in risk management and insurance going forward?
C) Many job opportunities will be available requiring a wide range of knowledge and skills.
6) Which of the following statements about a priori probabilities is correct?
C) They are objective probabilities that can be determined by deductive reasoning.
21) Which of the following statements about speculative risks is true?
C) They may benefit society even though a loss occurs.
25) Which of the following is a reason why premature death may result in economic insecurity? I. Additional expenses associated with death may be incurred. II. The income of the deceased person's family may be inadequate to meet its basic needs.
C) both I and II
26) Which of the following is (are) often consequences of long-term disability? I. Continuing medical expenses II. Loss or reduction of employee benefits
C) both I and II
31) Loss control includes which of the following? I. Loss reduction II. Loss prevention
C) both I and II
42) Which of the following statements about hedging is (are) true? I. Hedging is a form of risk transfer. II. Hedging is used to address the risk of unfavorable price fluctuations.
C) both I and II
60) Which of the following are personal risks that can cause great economic insecurity? I. Alcohol and drug addiction II. Inadequate retirement income
C) both I and II
15) A name that encompasses all of the major risks faced by a business firm is
C) enterprise risk.
11) Faking an accident to collect insurance proceeds is an example of
C) moral hazard.
55) Rapid inflation, cyclical unemployment, war, hurricanes, and floods are all examples of
C) nondiversifiable risks.
40) ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects that 8 homeowners out of every 100, on average, will report claims each year. The variation between the rate of loss that ABC expects to occur and the rate of loss that actually occurs is called
C) objective risk.
10) Dense fog that increases the chance of an automobile accident is an example of a
C) physical hazard.
43) Cathy's car hit a patch of ice on the road. The car skidded off the road and hit a tree. The presence of ice on the road is best described as a(n)
C) physical hazard.
58) Rather than storing all of its finished goods in a single location, Davis Company divides the finished goods between two warehouses. This simple risk control technique which is designed to limit losses should a warehouse fire occur is called
C) separation.
7) An individual's personal estimate of the chance of loss is a(n)
C) subjective probability.
27) Which of the following is an example of consequential (indirect) loss?
C) the cost of renting a substitute vehicle while a collision-damaged car is being repaired
1) Traditionally, risk has been defined as
C) uncertainty concerning the occurrence of loss.
12) Carelessness or indifference to a loss is an example of
D) attitudinal hazard.
57) Frazier Electric keeps a paper copy of business records at the company's headquarters. The company also has two back-up copies of business records stored in electronic files. The electronic files are kept in the event the paper records are damaged or destroyed. The back-up files illustrate which of the following risk control techniques?
D) duplication
28) The extra expense incurred by a business to stay in operation following a fire is an example of a(n)
D) indirect loss.
38) Jenna opened a successful restaurant. One night, after the restaurant had closed, a fire started when the electrical system malfunctioned. In addition to the physical damage to the restaurant, Jenna lost profits that could have been earned while the restaurant was closed for repairs. The lost profits are an example of
D) indirect loss.
13) Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called
D) legal hazard.
14) Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award to a smoker harmed by the company's cigarettes. The characteristics of the judicial system that increase the frequency and severity of loss are known as
D) legal hazard.
24) All of the following are examples of personal risks EXCEPT
D) loss of business income.
16) Which of the following statements about financial risk is (are) true? I. Enterprise risk does not include financial risk. II. Financial risk is easily addressed through the purchase of insurance.
D) neither I nor II
48) All of the following are characteristics of the liability risk that most people face EXCEPT
D) owning liability insurance eliminates the possibility of being held legally liable.
33) From the insured's perspective, the use of deductibles in insurance contracts is an example of
D) risk retention.
44) Jim and Paula Franklin started a dry cleaning business. The business may be successful or it may fail. The type of risk that is present when either a profit or loss could occur is called
D) speculative risk.
54) A student who has skipped many classes and not studied the course material was surprised to learn there was a test when he showed-up for class. The student's mental uncertainty about whether or not he will pass the test is called
D) subjective risk.
