Question 1

Traditionally,risk has been defined as

Accepted Answer

A) any situation in which the probability of loss is one. 
B) any situation in which the probability of loss is zero. 
C) uncertainty concerning the occurrence of loss. 
D) the probability of a loss occurring. 
A) any situation in which the probability of loss is one. 
B) any situation in which the probability of loss is zero. 
C) uncertainty concerning the occurrence of loss. 
D) the probability of a loss occurring. C

Question 2

An earthquake is an example of a(n)

Accepted Answer

A) moral hazard. 
B) peril. 
C) physical hazard. 
D) objective risk. 
A) moral hazard. 
B) peril. 
C) physical hazard. 
D) objective risk. B

Question 3

The extra expense incurred by a business to stay in operation following a fire is an example of a(n)

Accepted Answer

A) fundamental risk. 
B) speculative risk. 
C) direct loss. 
D) indirect loss. 
A) fundamental risk. 
B) speculative risk. 
C) direct loss. 
D) indirect loss. D

Question 4

Loss control includes which of the following?
I.Loss reduction
II.Loss prevention

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II 
A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Question 5

Which of the following is an example of a noninsurance risk transfer?

Accepted Answer

A) not engaging in dangerous activities 
B) entering into a hold-harmless agreement 
C) installing smoke detectors in your home 
D) using nonflammable building material when constructing a house 
A) not engaging in dangerous activities 
B) entering into a hold-harmless agreement 
C) installing smoke detectors in your home 
D) using nonflammable building material when constructing a house

Question 6

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.

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II 
A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Question 7

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

Accepted Answer

A) direct loss. 
B) nondiversifiable risk. 
C) speculative risk. 
D) indirect loss. 
A) direct loss. 
B) nondiversifiable risk. 
C) speculative risk. 
D) indirect loss.

Question 8

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?

Accepted Answer

A) loss prevention 
B) loss reduction 
C) diversification 
D) duplication 
A) loss prevention 
B) loss reduction 
C) diversification 
D) duplication

Question 9

Which of the following statements is true regarding careers in risk management and insurance going forward?

Accepted Answer

A) Employment opportunities in insurance will be limited to sales and claims. 
B) Reduced consumer demand for insurance products will create significant job losses in the industry. 
C) Many job opportunities will be available requiring a wide range of knowledge and skills. 
D) A government takeover of the insurance industry is predicted,reducing the number of private sector jobs. 
A) Employment opportunities in insurance will be limited to sales and claims. 
B) Reduced consumer demand for insurance products will create significant job losses in the industry. 
C) Many job opportunities will be available requiring a wide range of knowledge and skills. 
D) A government takeover of the insurance industry is predicted,reducing the number of private sector jobs.

Question 10

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.

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II 
A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Question 11

All of the following are programs to insure nondiversifiable risks EXCEPT

Accepted Answer

A) federal flood insurance. 
B) auto physical damage insurance. 
C) Social Security. 
D) unemployment insurance. 
A) federal flood insurance. 
B) auto physical damage insurance. 
C) Social Security. 
D) unemployment insurance.

Question 12

Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss.This hazard is called

Accepted Answer

A) moral hazard. 
B) physical hazard. 
C) attitudinal hazard. 
D) legal hazard. 
A) moral hazard. 
B) physical hazard. 
C) attitudinal hazard. 
D) legal hazard.

Question 13

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

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) nondiversifiable risk. 
D) attitudinal hazard. 
A) adverse selection. 
B) moral hazard. 
C) nondiversifiable risk. 
D) attitudinal hazard.

Question 14

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

Accepted Answer

A) risk avoidance. 
B) hedging. 
C) risk transfer. 
D) risk retention. 
A) risk avoidance. 
B) hedging. 
C) risk transfer. 
D) risk retention.

Question 15

Which of the following statements about speculative risks is true?

Accepted Answer

A) They are almost always insurable by private insurers. 
B) They are more easily predictable than pure risks. 
C) They may benefit society even though a loss occurs. 
D) They involve only a chance of loss. 
A) They are almost always insurable by private insurers. 
B) They are more easily predictable than pure risks. 
C) They may benefit society even though a loss occurs. 
D) They involve only a chance of loss.

Question 16

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?

Accepted Answer

A) It would decrease to 1 percent. 
B) It would decrease to 5 percent. 
C) It would remain the same. 
D) It would increase to 20 percent. 
A) It would decrease to 1 percent. 
B) It would decrease to 5 percent. 
C) It would remain the same. 
D) It would increase to 20 percent.

Question 17

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

Accepted Answer

A) speculative risk. 
B) liability risk. 
C) nondiversifiable risk. 
D) property risk. 
A) speculative risk. 
B) liability risk. 
C) nondiversifiable risk. 
D) property risk.

Question 18

A name that encompasses all of the major risks faced by a business firm is

Accepted Answer

A) financial risk. 
B) speculative risk. 
C) enterprise risk. 
D) pure risk. 
A) financial risk. 
B) speculative risk. 
C) enterprise risk. 
D) pure risk.

Question 19

Uncertainty based on a person's mental condition or state of mind is known as

Accepted Answer

A) objective risk. 
B) subjective risk. 
C) objective probability. 
D) subjective probability. 
A) objective risk. 
B) subjective risk. 
C) objective probability. 
D) subjective probability.

Question 20

Rapid inflation,cyclical unemployment,war,hurricanes,and floods are all examples of

Accepted Answer

A) diversifiable risks. 
B) physical hazards. 
C) nondiversifiable risks. 
D) speculative risks. 
A) diversifiable risks. 
B) physical hazards. 
C) nondiversifiable risks. 
D) speculative risks.

Exam 1: Risk and Its Treatment

Traditionally,risk has been defined as

An earthquake is an example of a(n)

The extra expense incurred by a business to stay in operation following a fire is an example of a(n)

Loss control includes which of the following? I.Loss reduction II.Loss prevention

Which of the following is an example of a noninsurance risk transfer?

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.

Which of the following statements is true regarding careers in risk management and insurance going forward?

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.

All of the following are programs to insure nondiversifiable risks EXCEPT

Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss.This hazard is called

Which of the following statements about speculative risks is true?

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?

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

A name that encompasses all of the major risks faced by a business firm is

Uncertainty based on a person's mental condition or state of mind is known as

Rapid inflation,cyclical unemployment,war,hurricanes,and floods are all examples of

Insurance and Risk

Introduction to Risk Management

Enterprise Risk Management

Types of Insurers and Marketing Systems

Insurance Company Operations

Financial Operations of Insurers

Government Regulation of Insurance

Fundamental Legal Principles

Analysis of Insurance Contracts

Life Insurance

Life Insurance and Contractual Provisions

Buying Life Insurance

Annuities and Individual Retirement Accounts

Health-Care Reform;individual Health Insurance Coverages

Employee Benefits: Group Life and Health Insurance

Employee Benefits: Retirement Plans

Social Insurance

The Liability Risk

Auto Insurance

Auto Insurance Continued

Homeowners Insurance,section I

Homeowners Insurance,section II

Other Property and Liability Insurance Coverages

Commercial Property Insurance

Commercial Liability Insurance

Crime Insurance and Surety Bonds

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