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.
