Deck 23: Appendix: Managing Risk

Question 1

An entrepreneur takes a speculative risk when starting a new business.

Answer 1

True

Question 2

Businesses can often reduce the risk to which they are exposed.

Answer 2

True

Question 3

There are two different kinds of risk: passive and active.

Answer 3

False

Question 4

Pure risk involves the chance of either a profit or a loss.

Question 5

An enterprise risk management (ERM) program has a goal of defining which risks the program will manage.

Question 6

Speculative risk involves a chance of either profit or loss.

Question 7

The chance of a fire is an example of a pure risk.

Question 8

Risk management involves minimizing the losses from unexpected events.

Question 9

Outsourcing helps some companies avoid risk.

Question 10

SpeedyTime Delivery Service is managing risk by requiring all drivers to wear seat belts and hold a commercial driver's license, by monitoring any moving violations each driver obtains, and by keeping that information in the employee records. Additionally, SpeedyTime carries an insurance policy with a very large deductible, preferring to pay for small damages to its trucks out-of-pocket. SpeedyTime has built enterprise risk management into their organization.

Question 11

One way to lower the need for outside insurance is to self-insure.

Question 12

The type of risk that is of most concern to businesspeople is speculative risk.

Question 13

Risk management is getting much simpler thanks to the Internet.

Question 14

Companies adopt risk management procedures to minimize the chance of business failure due to unplanned events such as security breaches, terrorist attacks, and natural disasters.

Question 15

The management of risk is a small part of global business.

Question 16

Citrus City Groves on Florida's Gulf Coast, harvests an assortment of citrus fruits. The owners of Citrus City are right to think about how the risk of climate change might impact their crops in the future.

Question 17

The beginning of an effective risk management strategy is a good loss-prevention program.

Question 18

Risk is a term that refers to the chance of loss, the degree of probability of loss, and the amount of possible loss.

Question 19

Self-insurance is the practice of setting aside money to cover routine claims and buying only "catastrophe" policies to cover big losses.

Question 20

If a pure risk occurs, a company loses money. However, if the events do not occur, the company gains nothing.

Question 21

Federal Housing Administration (FHA) insurance provides insurance to property owners in high-crime areas.

Question 22

Water sprinklers and smoke detectors can be used to minimize speculative risks.

Question 23

A well-designed and implemented risk-prevention program can eliminate the potential of loss.

Question 24

Going bare is a much less risky strategy for self-insurance.

Question 25

Self-insurance makes more sense for firms that operate one large facility than it does for firms with facilities scattered all over the country.

Question 26

Marshall Manufacturing has decided to stop producing football helmets due to the potential size of losses involved in product liability cases. This is an example of "avoiding risk" as an alternative risk management strategy.

Question 27

All risks are insurable.

Question 28

An uninsurable risk is one that no insurance company will cover.

Question 29

Soap Stars, Inc. is ready to launch a new shampoo in the marketplace. They will incur a speculative risk.

Question 30

A terrorist attack is an example of pure risk.

Question 31

Any risk is insurable as long as you can pay the premium.

Question 32

Typically, the only option that firms have to deal with pure risk is to buy insurance.

Question 33

The federal government provides some insurance protection.

Question 34

Insurable interest means that the policyholder is the one at risk to suffer a loss.

Question 35

Insurance companies will provide coverage only for losses that are accidental.

Question 36

The Pension Benefit Guaranty Corporation provides retirement benefits, life insurance, health insurance, and disability income insurance.

Question 37

When a firm that is self-insuring against risk decides to cover losses straight out of its budget, it is said to be "going bare."

Question 38

SpeedyTime Delivery requires their drivers to wear seat belts as they operate their trucks. This is an example of self-insuring as a risk management strategy.

Question 39

Some companies are avoiding risk through the use of product recalls.

Question 40

The best strategy for a profit-seeking insurance company would be to specialize in providing protection to people in a specific geographical area.

Question 41

An insurance policy is a written contract.

Question 42

Donna owns a life insurance policy on her husband Mike through Securitas Mutual Life Insurance Company. As a policyholder, she also owns part of the company.

Question 43

The law of large numbers states that if a large number of people are exposed to the same risk, a predictable number of losses will occur during a given period of time.

Question 44

Liability losses result from property damage or injuries suffered by others for which the policyholder is held responsible.

Question 45

Insurance companies make predictions such as how recent health trends will affect the number of heart attacks that men in the United States over the age of 45 will suffer.

Question 46

A mutual insurance company is a nonprofit organization.

Question 47

Molly's neighbor, Steve, is quite careless and is in danger of burning his house down. Molly tried to buy a fire insurance policy on Steve's house, so she could collect the payment when Steve inevitably burned down his own house. The insurance company would not allow Molly to purchase the policy because she did not have an insurable interest in the property.

Question 48

An insurance company can use the law of large numbers to predict the number of people in your community that will have a car accident in a given month.

Question 49

An insurance premium is the fee charged by the insurance company in return for their promise to pay for all or part of a loss.

Question 50

Atlanta Appliances produces all of its products in one gigantic production facility near an earthquake fault line. Atlanta Appliances is the classic example of a firm that should use self-insurance to manage its risks.

Question 51

A mutual insurance company is owned by its policyholders.

Question 52

The chances of dying when young are much higher than the chances of becoming disabled when young.

Question 53

Health savings accounts are managed care plans that have a high deductible.

Question 54

One advantage of health savings accounts is that healthy people can use tax-deferred money to save for their future medical needs.

Question 55

Tom and Sarah are both 24 years old and looking for car insurance. While comparing numbers, they notice the car insurance premiums charged for young male drivers are higher than the premiums for young female drivers. This is due to the rule of indemnity.

Question 56

Apple has an insurable interest in the lives of its top executives.

Question 57

Property insurance covers losses from fires, accidents, or theft.

Question 58

An example of an uninsurable risk would be the potential losses suffered by Patrick's Pizza Pies resulting from a popular new product from Paulie's Pizza Palace.

Question 59

A stock insurance company is owned by its policyholders.

Question 60

According to the rule of indemnity, an insured person cannot collect more than the actual loss from an insurable risk.

Question 61

Firms can take out term life-insurance policies on their top executives.

Question 62

Workers' compensation insurance guarantees payment of wages, medical care, and rehabilitation services for employees who are injured on the job.

Question 63

Risks such as global warming are the concern of businesses and governments primarily in the U.S.

Question 64

A surety bond protects employers from employee dishonesty.

Question 65

Enterprise risk management is

A) important to business.
B) irrelevant to business.
C) only used by nonprofit organizations.
D) only used by the Department of Homeland Security.

Question 66

Workers' compensation insurance is required in all states except Louisiana.

Question 67

An endorsement can provide additional coverage to a homeowner's policy for business equipment.

Question 68

Disability insurance replaces part of your income if you become disabled and can no longer work, but you usually must be disabled for a specified period of time before benefits are provided.

Question 69

Risk management for business is critical due in part to

A) natural disasters.
B) profitability.
C) legal requirements.
D) international requirements.

Question 70

Which of the following is a goal of enterprise risk management?

A) defining which risks the program will manage
B) deciding how to petition the government for financial help
C) assigning risk management to a lobbyist in Washington
D) refining the business plan for risk management

Question 71

It's good advice for doctors and lawyers to carry malpractice insurance.

Question 72

A fidelity bond covers losses resulting from a second party's failure to fulfill a contract.

Question 73

Worldwide risks need to be prioritized so that international funds can be spent where they can do the most good.

Question 74

John is part of a highway construction crew and frequently handles explosives. His friend Don is a bookkeeper for a retail store. The amount of workers' compensation premiums paid by John's employer will probably exceed the premiums paid by Don's employer.

Question 75

Risk management is

A) only a consideration to insurance companies.
B) increasing in importance.
C) decreasing in importance.
D) used exclusively when engaging in global Internet business.

Question 76

The premium charged for workers' compensation insurance is the same for all workers, regardless of their occupation.

Question 77

Most homeowners' insurance policies automatically provide adequate coverage for small home-based businesses.

Question 78

Professional liability insurance is also sometimes known as malpractice insurance.

Question 79

Risk management is concerned only with risks to individuals and businesses.

Question 80

Product liability insurance covers liability arising out of defective products sold.