Question 1

Simon owns several gas stations. He realizes that among the several risks associated with this type of business is the risk of minor damage to cars from dirty or contaminated fuel. He also knows that there is a small chance of a major loss if a fire occurred at one of his gas stations. Simon wants to control his insurance costs while still maintaining a reasonable risk management program. He is considering self-insurance. If he decides to use this approach, he will probably
A) rely entirely on a strategy of risk avoidance.
B) decide to cover both types of risk himself.
C) decide to self-insure for the smaller, more routine, losses associated with the damage caused by dirty or contaminated fuel, but seek coverage from an insurance company for the potentially much larger loss from a fire.
D) decide to cover the risk of fire himself, and take out an insurance policy to cover the risk of contaminated fuel.

Accepted Answer

Self-insurance is a strategy to lower insurance costs by setting aside money to cover routine claims and then taking out insurance for larger, potentially catastrophic, losses.

Question 2

________ risk involves a chance of either profit or loss.
A) Insurable
B) Managed
C) Speculative
D) Pure

Accepted Answer

Speculative risk involves a chance of either profit or loss. In contrast, pure risk involves only the possibility of loss, insurable risk is a type of pure risk that can be transferred to an insurance company, and managed risk is a proactive approach to reducing or mitigating the impact of potential risks.

Question 3

Amusement parks often have a minimum height restriction on some of their most thrilling rides. This risk management strategy is done in an effort to
A) minimize the speculative risk associated with an injury.
B) reduce the risk associated with a potential accident.
C) self-insure against a catastrophic accident.
D) create the perception of a more exciting ride.

Accepted Answer

Reducing risk can be accomplished by establishing loss-prevention programs or strategies such as the height restriction used by amusement parks. Some amusement parks will discourage pregnant guests or those with a history of heart or back problems from riding certain rides.

Question 4

Which type of risk management strategy is a company using when it installs mirrors and surveillance cameras to spot and prevent shoplifting?
A) avoiding the risk
B) insuring against the risk
C) assuming the risk
D) reducing the risk

Accepted Answer

The installation of mirrors and surveillance cameras is a measure taken to reduce the risk of shoplifting. This is a risk management strategy that involves identifying and taking steps to minimize the likelihood or impact of a potential risk.

Question 5

________ is a term that refers to the chance of loss, the degree of probability of loss, and the amount of possible loss.
A) Speculation
B) Hazard
C) Insurability
D) Risk

Accepted Answer

The term that refers to the chance of loss, the degree of probability of loss, and the amount of possible loss is risk. Speculation refers to the act of making risky investments in the hopes of making a profit. Hazard refers to a condition or situation that increases the chance of loss. Insurability refers to the ability of an individual or property to meet the requirements for insurance coverage.

Question 6

Organizations spend about ________ percent of gross domestic product on insurance premiums.
A) 2
B) 5
C) 10
D) 20

Accepted Answer

According to the National Association of Insurance Commissioners, U.S. organizations spend about 10% of their gross domestic product on insurance premiums.

Question 7

A firm that chooses to self-insure and cover losses out of its budget is said to
A) fly blind.
B) roll boxcars.
C) go bare.
D) internalize risk.

Accepted Answer

Self-insuring and covering losses out of its budget is referred to as "going bare."

Question 8

Sadly, during a war many civilians watch as everything they have is destroyed. Insurance companies will view this type of loss as
A) an insurable risk.
B) an uninsurable risk.
C) a demonstration of the law of large numbers.
D) a rule of indemnity.

Accepted Answer

An uninsurable risk is one that no insurance company will cover, including political risks such as losses from war.

Question 9

AutoPROs recalled thousands of tires when several people died in traffic accidents blamed on faulty tires. This is an example of which of the following?
A) avoiding the risk
B) self-insuring against the risk
C) reducing the risk
D) a loss-prevention program

Accepted Answer

Recalling tires before more people were killed or hurt allowed Firestone and Ford to reduce the potential liability from consumer injuries.

Question 10

Robert, owner and operator of a local nursing home, is designing an addition. Though, he realized that water sprinklers and smoke detectors were now required by state regulations, it was not a problem for him. His existing structure already had sprinklers and detectors because he felt that this was an effective strategy to
A) self-insure against the risk of fire loss.
B) minimize the speculative risk of a fire.
C) reduce the risk of a fire loss.
D) avoid the risk of a fire loss.

Accepted Answer

A firm can reduce risk by establishing loss-prevention programs such as fire drills, health education, safety inspections, equipment maintenance, and accident prevention programs. Water sprinklers and smoke detectors are used to reduce the risk of fire loss.

Question 11

Ernesto is opening a new car wash. The required investment of money and time is sizable and although he has high hopes, Ernesto is taking a speculative risk. What does this mean?
A) His investment involves a chance of profit or loss.
B) His risk can be shifted to an insurance company if he buys product liability insurance.
C) He would be best advised to self-insure his exposure to malpractice liability.
D) His insurance premium would be based on the law of large numbers.

Accepted Answer

A speculative risk involves the chance of either profit or loss. All entrepreneurs take speculative risk on the chance of making a profit.

Question 12

Arturo is worried about the risk of potential flooding to his restaurant. He decides to buy insurance to cover this ________ risk.
A) speculative
B) pure
C) uninsurable
D) managed

Accepted Answer

Pure risk is the threat of loss with no chance for profit. If a flood occurs, the company will incur a loss; but if a flood does not occur, the company gains nothing.

Question 13

Brad has decided to increase the size of his auto repair business, although he realizes that this decision brings added risk. This is an example of ________ risk.
A) speculative
B) pure
C) insurable
D) managed

Accepted Answer

Speculative risk involves the potential of earning a profit or incurring a loss.

Question 14

________ risk involves the threat of loss with no chance for profit.
A) Minimum
B) Pure
C) Speculative
D) Managed

Accepted Answer

Pure risk involves the threat of loss with no possibility of gain or profit. This type of risk is typically insurable, as it involves events that are out of our control, such as natural disasters or accidents. Minimum risk refers to the lowest level of risk possible, while speculative risk involves the potential for both profit and loss. Managed risk involves taking actions to mitigate or control risk.

Question 15

An insurance company would not be willing to insure a risk if it
A) results from political disruptions.
B) has a measurable loss.
C) results from an accident.
D) has a low probability of occurring.

Accepted Answer

Insurance companies are generally reluctant to insure risks that stem from political disruptions because these events are unpredictable and can lead to massive, unquantifiable losses.

Question 16

________ is the armor individuals, businesses, and nonprofit organizations use to protect themselves from various financial risks.
A) A good accountant
B) Investment in AAA bonds
C) Insurance
D) Indemnity

Accepted Answer

Insurance is the standard protection used by individuals, businesses, and nonprofit organizations to mitigate financial risks. It helps them transfer the risks to an insurance company, which takes on the financial burden in the event of a loss or damage. Insurance covers a wide range of risks, including property damage, liability, loss of income, and health-related issues. A good accountant and investment in AAA bonds may help with financial management, but they do not provide the same level of protection as insurance. Indemnity refers to a contractual arrangement where one party agrees to compensate the other party for any losses, typically caused by the first party's actions or omissions. It is a form of insurance, but not all insurance policies include indemnity clauses.

Question 17

In an effort to minimize the cost of conventional property/casualty insurance, Epic Electronics decided to manage their risk by self-insuring. The most likely way Epic would try to do this would be to
A) cover small and medium-sized losses itself, and carry conventional insurance only for catastrophic losses.
B) carry insurance for the small, routine losses and pay for any highly unusual major losses with its own funds.
C) buy an insurance policy that covers all risks.
D) establish a well-monitored loss-prevention program.

Accepted Answer

Self-insuring lowers the cost of insurance by having the organization pay for smaller, routine losses, and then buying "catastrophe" policies to cover larger losses.

Question 18

Sean is in charge of risk management for First Friends, Inc., a large chain of preschools on the East Coast. He has decided to build enterprise risk management into the organization. The first step Sean should take is to
A) decide on the spyware software the organization should buy.
B) send a letter to all of the staff informing them that using e-mail for personal purposes will not be allowed.
C) remove the playgrounds from all of the locations.
D) decide which risks the organization should manage.

Accepted Answer

An enterprise risk management (ERM) program usually has a few well-defined goals, the first of which is to define which risks the program will manage.

Question 19

A policyholder must have a(n) ________ in what is being insured, meaning that the policyholder must be the one at risk to suffer an economic loss.
A) speculative interest
B) uncertain stake
C) unsecured holding
D) insurable interest

Accepted Answer

Insurable interest means that the policyholder stands to suffer an economic loss if the event insured against occurs. In other words, the policyholder must have a financial or legal stake in the property or person being insured. Speculative interest refers to a potential gain rather than a potential loss, uncertain stake and unsecured holding are not relevant terms in insurance policies.

Question 20

Some businesses will set aside money to cover routine losses and buy "catastrophe" policies to cover big losses. This is an example of which of the following?
A) avoiding the risk
B) self-insuring against the risk
C) reducing the risk
D) loss-prevention program

Accepted Answer

Self-insuring against the risk means setting aside money to cover potential losses instead of purchasing insurance. This is what the businesses in the scenario are doing by setting aside funds for routine losses and buying "catastrophe" policies for big losses. Avoiding the risk would mean not engaging in the activity that poses the risk, reducing the risk would involve taking steps to lower the likelihood of a loss occurring, and a loss-prevention program would involve specific actions to prevent losses from occurring in the first place. None of these fully capture the strategy of self-insuring for routine losses and purchasing catastrophe policies for large losses.

Quiz 23: Appendix: Managing Risk

________ risk involves a chance of either profit or loss.

Amusement parks often have a minimum height restriction on some of their most thrilling rides. This risk management strategy is done in an effort to

Which type of risk management strategy is a company using when it installs mirrors and surveillance cameras to spot and prevent shoplifting?

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

Organizations spend about ________ percent of gross domestic product on insurance premiums.

A firm that chooses to self-insure and cover losses out of its budget is said to

Sadly, during a war many civilians watch as everything they have is destroyed. Insurance companies will view this type of loss as

AutoPROs recalled thousands of tires when several people died in traffic accidents blamed on faulty tires. This is an example of which of the following?

Ernesto is opening a new car wash. The required investment of money and time is sizable and although he has high hopes, Ernesto is taking a speculative risk. What does this mean?

Arturo is worried about the risk of potential flooding to his restaurant. He decides to buy insurance to cover this ________ risk.

Brad has decided to increase the size of his auto repair business, although he realizes that this decision brings added risk. This is an example of ________ risk.

________ risk involves the threat of loss with no chance for profit.

An insurance company would not be willing to insure a risk if it

________ is the armor individuals, businesses, and nonprofit organizations use to protect themselves from various financial risks.

In an effort to minimize the cost of conventional property/casualty insurance, Epic Electronics decided to manage their risk by self-insuring. The most likely way Epic would try to do this would be to

Sean is in charge of risk management for First Friends, Inc., a large chain of preschools on the East Coast. He has decided to build enterprise risk management into the organization. The first step Sean should take is to

A policyholder must have a(n) ________ in what is being insured, meaning that the policyholder must be the one at risk to suffer an economic loss.

Some businesses will set aside money to cover routine losses and buy "catastrophe" policies to cover big losses. This is an example of which of the following?