Question 1

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 C

Question 2

From the insured's perspective,the use of deductibles in insurance contracts is an example of

Accepted Answer

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

Question 3

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. C

Question 4

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.

Question 5

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.

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

Question 7

The use of fire-resistive materials when constructing a building is an example of

Accepted Answer

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

Question 8

All of the following are examples of personal risks EXCEPT

Accepted Answer

A)  poor health.
B)  unemployment.
C)  premature death.
D)  loss of business income.

Question 9

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 got 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?

Accepted Answer

A)  active retention
B)  noninsurance transfer
C)  passive retention
D)  avoidance

Question 10

A peril is

Accepted Answer

A)  a moral hazard.
B)  the cause of a loss.
C)  a condition which increases the chance of a loss.
D)  the probability that a loss will occur.

Question 11

Objective risk is defined as

Accepted Answer

A)  the probability of loss.
B)  the relative variation of actual loss from expected loss.
C)  uncertainty based on a person's mental condition or state of mind.
D)  the cause of loss.

Question 12

All of the following are burdens to society because of the presence of risk EXCEPT

Accepted Answer

A)  The size of an emergency fund must be increased.
B)  Risk provides an incentive for people to engage in loss control.
C)  Society is deprived of certain goods and services.
D)  Mental fear and worry are present.

Question 13

Which of the following is an example of a commercial risk?

Accepted Answer

A)  the risk of insufficient retirement income
B)  the loss of business income
C)  the risk of premature death
D)  the risk of being unemployed

Question 14

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

Accepted Answer

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

Question 15

A risk that affects only individuals or small groups and not the entire economy is called a

Accepted Answer

A)  diversifiable risk.
B)  pure risk.
C)  speculative risk.
D)  nondiversifiable risk.

Question 16

All of the following are programs to insure fundamental risks EXCEPT

Accepted Answer

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

Question 17

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.

Question 18

Which of the following statements about a priori probabilities is correct?

Accepted Answer

A)  They are subjective probabilities based on ambiguity in the way probability is perceived.
B)  They are subjective probabilities that may vary among individuals because of factors such as age,gender,education,and the use of alcohol.
C)  They are objective probabilities that can be determined by deductive reasoning.
D)  They are objective probabilities that can be determined by subjective reasoning.

Question 19

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.

Question 20

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

Exam 1: Risk and Its Treatment

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