Question 1

David never stopped to consider the possible consequences of a long-term,permanent,disability.So David did not include disability income insurance in his personal risk management program.David is dealing with the risk of disability through

Accepted Answer

David is dealing with the risk of disability through passive retention, as he has not actively planned or made a decision to retain the risk; rather, he has simply ignored or overlooked the potential consequences of disability.

Question 2

Melanie was just hired as the risk manager of JKL Company.The company president asked her to make a thorough review of all of the company's loss exposures.Melanie noted that many employees were too heavily invested in stock issued by the company in their 401-k plan.Melanie suggested that the employees change some of their investment holdings to mutual funds that invest in stock issued by different companies.The risk control method that Melanie suggested is

Accepted Answer

Melanie suggested diversification, which is a risk control method that involves spreading out investments to reduce the impact of any one loss. By suggesting that employees invest in mutual funds that include stock from different companies, she is reducing their exposure to the risk of holding too much stock in a single company.

Question 3

The U.S.government is concerned that terrorists might try to crash a vehicle loaded with explosives into a U.S.embassy in a foreign country.Inside the gate to the embassy,they installed steel and cement posts in the road.These posts can be raised up from the ground to form a barrier against suicide bombers.The posts can be lowered back into the ground to allow safe vehicles to pass.This physical barrier system illustrates which risk management technique?

Accepted Answer

The installation of steel and cement posts in the road to prevent suicide bombers is an example of loss prevention, which aims to reduce the frequency or severity of losses by implementing measures to prevent or mitigate risks. Risk avoidance (A) involves eliminating or avoiding the risk altogether, while insurance transfer (B) and noninsurance transfer (D) involve transferring the risk to another party such as an insurance company or a contractor. However, in this scenario, the U.S. government took proactive measures to prevent the risk from occurring in the first place, making loss prevention the most appropriate risk management technique.

Question 4

Which of the following is least likely to occur during a "hard" insurance market period?

Accepted Answer

During a "hard" insurance market period, it is unlikely to see ease in obtaining insurance policies, hence choice C is the least likely scenario. Typically, a "hard" market is characterized by higher premiums, stricter underwriting standards, and difficulty in obtaining insurance.

Question 5

Which statement about a company's cost of risk is (are)true?
I.Cost of risk includes insurance premiums and retained losses.
II.Reducing the cost of risk increases profitability.

Accepted Answer

I is true because cost of risk includes both insurance premiums and retained losses. II is also true because reducing the cost of risk can increase profitability by allowing a company to allocate resources elsewhere and avoid potential financial losses.

Question 6

The property and liability insurance industry fluctuates between periods of increasing insurance rates and tight underwriting standards,and decreasing insurance rates and loose underwriting standards.Profitability in the industry follows these cyclical movements.What is this pattern of fluctuations called?

Accepted Answer

This pattern of fluctuations is known as the underwriting cycle.

Question 7

Which of the following statements concerning the selection of risk management techniques and insurance market conditions is (are)true?
I.It's easier to purchase affordable insurance during a "soft" market than during a "hard" market.
II.Retention is used more during a "soft" market than during a "hard" market.

Accepted Answer

I is true because during a "soft" market, insurance premiums are generally lower and underwriting standards may be more relaxed, making it easier and more affordable to purchase insurance. II is incorrect because retention (self-insuring or assuming more risk) is typically used more during a "hard" market, when insurance premiums are high and coverage is harder to obtain, not during a "soft" market.

Question 8

Each accounting period,Harris Company Department Store charges a bookkeeping account for its estimated shoplifting losses.The method that Harris Company Department Store uses to fund its retained shoplifting losses is a(n)

Accepted Answer

Harris Company Department Store uses an unfunded reserve method to fund its retained shoplifting losses. This means that they set aside a portion of their earnings to cover any shoplifting losses that occur, rather than relying on an external insurance policy or credit line. Charging a bookkeeping account for estimated losses helps to build up this reserve over time.

Question 9

Brenda identified all of the pure loss exposures her family faces.Then she analyzed these loss exposures,developed a plan to treat these risks,and implemented the plan.The process Brenda conducted is called

Accepted Answer

Brenda conducted personal risk management by identifying, analyzing, treating, and implementing a plan to manage the pure loss exposures her family faces. Personal insurance programming, personal estate planning, and personal financial planning may be part of the overall personal risk management plan, but they are not the same as the risk management process itself.

Question 10

Bev lives in the suburbs and works downtown.She drives to work,and her most direct route to work would require her to pass through an area where carjackings and drive-by-shootings are common.Bev does not drive through this area.Instead,she uses a route which adds 10 minutes to her commute.Which risk management technique is Bev using with respect to the risk of injury while driving through the dangerous area?

Accepted Answer

Bev is avoiding the risk of injury by avoiding the dangerous area and taking a longer route to work.

Question 11

A risk manager was asked to review all the loss exposures his company faces.The risk manager noted that the company obtained over 90 percent of its raw materials from one supplier.He voiced concern about business interruption if that supplier was closed for some reason.Acting on his recommendation,the company began to purchase raw materials from two other suppliers.Using multiple suppliers illustrates which risk control technique?

Accepted Answer

Diversification involves spreading the potential losses from a single source of risk by using multiple suppliers, among other things. This technique is used to reduce the likelihood of business interruption due to the closure of a single supplier.

Question 12

Discount Department Stores is a national retail chain.The company had one large,central warehouse.At the suggestion of the risk manager,the company decided to build four smaller regional warehouses so that a loss at the central warehouse would not be a catastrophic blow to the company's distribution system.Splitting the inventory between four regional warehouses illustrates which risk management technique?

Accepted Answer

The technique of splitting the inventory between four regional warehouses is an example of separation, which involves dividing up a risk into smaller parts to minimize the impact of a potential loss. This reduces the concentration of risk in one location, which can help to avoid a catastrophic outcome if a loss occurs. This is different from duplication, which involves creating backups or redundancies to ensure continuity of operations, and risk transfer, which involves shifting the financial consequences of a risk to another party through insurance or contracts. Risk avoidance, on the other hand, involves avoiding a particular risk altogether by not engaging in certain activities or exposures.

Question 13

Morris Company self-insures its workers compensation loss exposure.The risk manager of Morris Company is concerned about the possible impact of a single catastrophic claim.She decided to set a retention limit of $500,000 per-claim,and to purchase insurance that will be begin to pay once Morris Company has paid $500,000 on a single claim.The insurance the risk manager purchased is called

Accepted Answer

The insurance purchased by the risk manager of Morris Company is excess insurance because it only begins to pay after Morris Company has paid the retention limit of $500,000 on a single claim. This type of insurance is designed to provide coverage for losses that exceed a certain threshold or retention limit. Captive insurance is a form of self-insurance where an organization establishes its own insurance company to cover its risks, primary insurance is the first layer of insurance coverage, and umbrella insurance provides additional coverage beyond the limits of primary insurance. None of these options fit the description of the insurance purchased by Morris Company.

Question 14

A college professor stores class grading records on a spreadsheet on her office computer.Each time she updates a grading file she makes a printout and a backup copy of the grading file.The professor is using which risk management method to address the risk of losing her class grading records?

Accepted Answer

The professor is using the risk management method of duplication by creating a backup copy of the grading file each time it is updated. This ensures that she has a duplicate copy in case the original file is lost or corrupted.

Question 15

A useful measure for an organization to monitor is the total expenditures for treating loss exposures including retained losses,loss control expenses,insurance premiums,and other related expenses.This measure is called the organization's

Accepted Answer

The total expenditures for treating loss exposures including retained losses, loss control expenses, insurance premiums, and other related expenses is called the organization's cost of risk. This measure is useful because it reflects the overall financial impact of the organization's risk management strategies and can help identify areas where improvements can be made to reduce costs associated with risk. Options A, B, and D are not relevant to this measure.

Question 16

A U.S.athletic equipment company has production plants in several Pacific Rim countries.Each plant is divided into separate production areas using six-foot thick concrete walls.The construction method is designed to prevent fire from spreading from one production area to another.Using thick concrete walls so that fire does not spread to another production area illustrates which risk control method?

Accepted Answer

The use of thick concrete walls to prevent fire from spreading from one production area to another is an example of the separation risk control method. This method involves physically separating assets or processes in order to prevent one risk from affecting another.

Question 17

When Derrick became risk manager of Boller Company,he noticed that the company did not have a clear set of risk management objectives and a clearly-stated risk management philosophy.Derrick developed a written document stating the company's risk management objectives and risk management philosophy.This document is called a risk management

Accepted Answer

A written document stating the company's risk management objectives and risk management philosophy is typically referred to as a risk management policy statement. While a manual or binder may contain the policy statement, they are not the specific term for the document itself. "Manuscript policy" is not a commonly used term in the context of risk management.

Question 18

Which of the following statements about captive insurance companies is (are)true?
I.A captive insurance company established by a U.S.company must be domiciled in the United States.
II.A captive insurance company may be owned by several parents.

Accepted Answer

II is true because a captive insurance company can indeed be owned by multiple parent companies, allowing for shared risks and costs among the owners. This is known as a group or association captive. I is false because a U.S. company can establish a captive insurance company in various jurisdictions outside the United States, not just within it, to take advantage of regulatory, tax, or cost benefits.

Question 19

Mark owns a 2009 sedan.The last time Mark renewed his auto insurance,he decided to drop the physical damage insurance on this vehicle.How is Mark dealing with the auto physical damage exposure in his personal risk management program?

Accepted Answer

Mark is actively retaining the physical damage exposure by choosing not to insure his vehicle for such damages.

Question 20

Purchasing health insurance illustrates the use of which personal risk management technique?

Accepted Answer

Purchasing health insurance transfers the risk of medical expenses from the individual to the insurance company. Therefore, it is an example of risk transfer.

Quiz 3: Introduction to Risk Management