Question 1

All of the following are disadvantages of noninsurance transfers EXCEPT
A)The party to whom the potential loss is transferred may be unable to pay.
B)The transfer may fail because the contract language is ambiguous.
C)The only potential losses that can be transferred are those that are not commercially insurable.
D)The noninsurance transfer may be costly.

Accepted Answer

The statement "The only potential losses that can be transferred are those that are not commercially insurable" is false. Noninsurance transfers can be used for a variety of potential losses, whether or not they are commercially insurable. The other options are all disadvantages of noninsurance transfers.

Question 2

A situation or circumstance in which a loss is possible,regardless of whether a loss occurs,is called a
A)deductible.
B)loss exposure.
C)loss avoidance.
D)peril.

Accepted Answer

Loss exposure refers to a situation where there is a possibility of loss, regardless of whether the loss occurs or not. It could be due to various factors such as natural disasters, accidents, or other unexpected events. Deductible refers to the portion of the loss that is borne by the policyholder, while loss avoidance refers to the proactive steps taken to prevent loss. Peril refers to a specific cause of loss covered under an insurance policy.

Question 3

Abandoning an existing loss exposure is an example of
A)avoidance.
B)retention.
C)noninsurance transfer.
D)insurance transfer.

Accepted Answer

Abandoning an existing loss exposure means avoiding it altogether, which is the definition of avoidance. Retention refers to accepting the risk and paying for any losses that may occur. Noninsurance transfer refers to transferring the risk to another party, such as through contractual agreements or warranties. Insurance transfer refers to transferring the risk to an insurer through the purchase of insurance.

Question 4

Which of the following is a source of information a risk manager could use to help identify pure loss exposures?
A)commodity prices
B)physical inspections
C)currency exchange rates
D)interest rate movements

Accepted Answer

Physical inspections can help identify pure loss exposures by identifying potential hazards or vulnerabilities at a physical location or within a process. Commodity prices, currency exchange rates, and interest rate movements are more relevant to financial risk management.

Question 5

Loss frequency is defined as the
A)probable size of the losses that may occur during some period.
B)probable number of losses that may occur during some period.
C)probability that any particular piece of property may be totally destroyed.
D)probability that a liability judgment may exceed a firm's net worth.

Accepted Answer

Loss frequency refers to the probable number of losses that may occur during some period. Option A refers to probable size of losses and option C refers to probability of total destruction of property, which are not related to loss frequency. Option D refers to potential impact of a loss and not the frequency of losses.

Question 6

A restaurant owner leased a meeting room at the restaurant to a second party.The lease specified that the second party,not the restaurant owner,would be responsible for any liability arising out of the use of the meeting room,and that the restaurant owner would be "held harmless" for any damages.The restaurant owner's use of the hold-harmless agreement in the lease is an example of
A)retention.
B)self-insurance.
C)insurance.
D)noninsurance transfer.

Accepted Answer

The use of the hold-harmless agreement in the lease by the restaurant owner is an example of noninsurance transfer. This means that the restaurant owner is transferring the risk of liability and potential damages to the second party, who is agreeing to assume that risk. This is not insurance, as there is no third-party insurer involved. It is also not retention or self-insurance, as the restaurant owner is not assuming the risk themselves or setting aside funds to cover potential damages.

Question 7

The worst loss that is likely to happen is referred to as the
A)maximum possible loss.
B)probable maximum loss.
C)frequency of loss.
D)severity of loss.

Accepted Answer

The probable maximum loss refers to the worst loss that is expected to occur based on statistical analysis, past losses, and other relevant factors. It is important for insurance companies and risk managers to determine this value in order to appropriately price policies and plan for potential losses. The maximum possible loss refers to the absolute worst-case scenario, which may be theoretically possible but is extremely unlikely to occur. Therefore, B is the best choice as it is the closest option to the likely worst loss.

Question 8

Which of the following statements about self-insurance is (are)true?
I.It is a form of planned retention.
II.State law usually prohibits its use for workers compensation.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Self-insurance is a form of planned retention, meaning that instead of transferring the risk to an insurance company, the organization retains the risk and pays for losses out of its own funds. State law does vary, but in some cases, it may allow self-insurance for workers compensation. Therefore, statement I is true and statement II is not always true.

Question 9

The worst loss that could ever happen to a firm is referred to as the
A)maximum possible loss.
B)probable maximum loss.
C)frequency of loss.
D)severity of loss.

Accepted Answer

The worst loss that could ever happen to a firm is referred to as the "maximum possible loss." This term describes the absolute worst-case scenario in terms of financial loss that a firm could potentially face.

Question 10

Preloss objectives of risk management include which of the following?
I.Preparing for potential losses in the most economical way
II.Reduction of anxiety
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Preloss objectives of risk management include preparing for potential losses in the most economical way and reducing anxiety. These objectives aim to minimize the cost of risk and maintain peace of mind for individuals and organizations.

Question 11

Which of the following is a post-loss risk management objective?
A)treating loss exposures in the most economical way
B)continuing operations
C)reduction of anxiety
D)meeting externally imposed legal obligations

Accepted Answer

Continuing operations is a post-loss objective, focusing on maintaining business functions after a loss occurs.

Question 12

Loss severity is defined as the
A)probable size of the losses which may occur during some period.
B)probable number of losses which may occur during some period.
C)probability that any particular piece of property may be totally destroyed.
D)probability that a liability judgment may exceed a firm's net worth.

Accepted Answer

Loss severity refers to the magnitude of losses that may occur during a given period. It is the probable size of losses, including the value of property that may be destroyed, the amount of liability judgments that may be awarded, and the cost of settling claims. Therefore, option A is the correct choice. Option B refers to loss frequency, while options C and D relate to specific aspects of loss severity.

Question 13

ABC Insurance retains the first $1 million of each property damage loss and purchases reinsurance for that part of any property loss that exceeds $1 million.The insurance for property losses above $1 million is called
A)excess insurance.
B)liability insurance.
C)coinsurance.
D)primary insurance.

Accepted Answer

Excess insurance is purchased to cover losses above a certain limit or deductible. In this case, ABC Insurance retains the first $1 million of each property damage loss and purchases excess insurance for any losses that exceed this amount.

Question 14

All of the following statements about avoidance are true EXCEPT
A)Certain loss exposures are never acquired.
B)Certain loss exposures may be abandoned.
C)The chance of loss for certain loss exposures may be reduced to zero.
D)It can be used for any loss exposure facing a firm.

Accepted Answer

Avoidance may not always be a feasible option for all loss exposures. An organization may face certain risks that are critical to its operations and cannot be avoided. In such cases, the organization has to devise other risk management strategies to reduce the impact of the risk. Therefore, it cannot be used for any loss exposure facing a firm.

Question 15

Which of the following conditions is (are)appropriate for using retention?
I.Losses are difficult to predict.
II.The worst possible loss is not serious.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Retention is appropriate when the worst possible loss is not serious, meaning the entity can absorb the loss without significant financial strain. When losses are difficult to predict, relying on retention could be risky, as unpredictable and potentially large losses could financially harm the entity.

Question 16

Risk management is concerned with
A)the identification and treatment of loss exposures.
B)the management of speculative risks only.
C)the management of pure risks that are uninsurable.
D)the purchase of insurance only.

Accepted Answer

Risk management involves identifying potential exposure to losses, and developing strategies to manage those risks. This can involve a number of approaches, from avoiding or reducing risks, to transferring them through insurance, to accepting and managing them. Risk management is concerned with both pure risks (such as natural disasters or liability claims) and speculative risks (such as stock market investments) that can impact an organization. The focus is on managing risks, rather than simply purchasing insurance coverage.

Question 17

All of the following are potential advantages of retention EXCEPT
A)lower expenses.
B)increased cash flow.
C)encouragement of loss prevention.
D)protection from catastrophic losses.

Accepted Answer

Protection from catastrophic losses is not an advantage of retention. Retention involves an organization or individual assuming the financial risk of loss, rather than transferring that risk to an insurance company. This strategy can lead to lower expenses, increased cash flow, and encouragement of loss prevention measures because the entity retains the risk. However, it does not protect against catastrophic losses, as these can far exceed the entity's ability to pay, which is why insurance or other risk transfer mechanisms are typically used for such risks.

Question 18

Which of the following statements regarding the use of retention is (are)true?
I.Retention is best used for loss exposures that have a low frequency and a high severity.
II.A financially strong firm can have a higher retention level than a firm whose financial position is weak.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Statement I is incorrect as retention is best used for loss exposures with a high frequency and low severity. Statement II is correct as a financially strong firm can afford to retain a higher level of risk compared to a financially weak firm, which may choose to transfer more risk.

Question 19

Which of the following statements about the use of a captive insurance company by a parent firm is true?
A)The captive may not write outside,non-parent company,business.
B)Captives are not permitted to use reinsurance,so any business insured by the captive stays with the captive.
C)The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers.
D)Business placed with the captive is always considered retained risk and is never considered transferred risk.

Accepted Answer

Captive insurance companies are created by parent firms to insure their own risks. They are often used when traditional insurers are unwilling or unable to provide coverage for certain risks. Captives can write both parent and non-parent company business, but typically focus on the parent company's risks. Captives can also use reinsurance to help manage their own risk, and business placed with the captive is considered transferred risk.

Question 20

A risk manager is concerned with which of the following?
I.Identifying potential losses
II.Selecting the appropriate techniques for treating loss exposures
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

A risk manager is concerned with both identifying potential losses and selecting the appropriate techniques for treating loss exposures. Identifying potential losses helps the risk manager to understand the risks the organization faces and evaluate the need for risk treatment. Selecting the appropriate techniques for treating loss exposures is necessary to manage the risks effectively and minimize their impact on the organization. Therefore, both I and II are important concerns for a risk manager.

Quiz 3: Introduction to Risk Management

All of the following are disadvantages of noninsurance transfers EXCEPT

A situation or circumstance in which a loss is possible,regardless of whether a loss occurs,is called a

Abandoning an existing loss exposure is an example of

Which of the following is a source of information a risk manager could use to help identify pure loss exposures?

Loss frequency is defined as the

The worst loss that is likely to happen is referred to as the

Which of the following statements about self-insurance is (are) true? I.It is a form of planned retention. II.State law usually prohibits its use for workers compensation.

The worst loss that could ever happen to a firm is referred to as the

Preloss objectives of risk management include which of the following? I.Preparing for potential losses in the most economical way II.Reduction of anxiety

Which of the following is a post-loss risk management objective?

Loss severity is defined as the

ABC Insurance retains the first $1 million of each property damage loss and purchases reinsurance for that part of any property loss that exceeds $1 million.The insurance for property losses above $1 million is called

All of the following statements about avoidance are true EXCEPT

Which of the following conditions is (are) appropriate for using retention? I.Losses are difficult to predict. II.The worst possible loss is not serious.

Risk management is concerned with

All of the following are potential advantages of retention EXCEPT

Which of the following statements regarding the use of retention is (are) true? I.Retention is best used for loss exposures that have a low frequency and a high severity. II.A financially strong firm can have a higher retention level than a firm whose financial position is weak.

Which of the following statements about the use of a captive insurance company by a parent firm is true?

A risk manager is concerned with which of the following? I.Identifying potential losses II.Selecting the appropriate techniques for treating loss exposures