Question 1

The best method for handling a particular exposure today will be the best method a year from now because relevant factors do not change.

Accepted Answer

The best method for handling a particular exposure can change over time due to evolving risks, technological advancements, regulatory changes, and shifts in economic conditions, making it necessary to regularly reassess and adapt risk management strategies.

Question 2

The results of financial calculations are the only considerations needed when analyzing loss control decisions.

Accepted Answer

Loss control decisions also consider factors such as safety, employee morale, legal implications, and the potential impact on reputation and customer satisfaction, beyond just financial calculations.

Question 3

Loss control equipment with a positive net present value should be purchased.

Accepted Answer

False

Question 4

The present value of $600,000 in 3 years at 8 percent is $476,299.34.

Accepted Answer

The present value (PV) is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of periods. Plugging in the values: PV = $600,000 / (1 + 0.08)^3 = $476,299.34.

Question 5

If $100,000 is invested at an annual interest rate of 7 percent for 4 years, it will grow to a value of $131,079.60.

Accepted Answer

Using the formula for compound interest, $A = P(1 + \frac{r}{n})^{nt}$, where $P = 100,000$, $r = 0.07$ (7%), $n = 1$ (compounded annually), and $t = 4$ years, the future value $A$ calculates to approximately $131,079.60.

Question 6

Risk transfer is the best choice for risks that have a low expected frequency and a high potential severity.

Accepted Answer

Risk transfer is a strategy often used for risks that are rare but could have severe consequences, as it allows an organization to shift the financial burden of these risks to another party, such as through insurance.

Question 7

The definitions of "high" and "low" loss frequency and severity may differ by company.

Accepted Answer

Different companies may have varying thresholds for what they consider "high" or "low" in terms of loss frequency and severity, based on their specific risk appetites, industry standards, and operational contexts.

Question 8

Deductibles help lower the cost of insurance as well as increase its availability.

Accepted Answer

Deductibles reduce the financial risk for insurers by sharing some of the risk with the policyholder, which can lead to lower premiums and make insurance more accessible to a broader range of people.

Question 9

If a company sets aside a sum of money in a reserve fund to pay any possible loss that could occur due to a fire in the main offices of the company, it is involved in self-insurance.

Accepted Answer

The answer of If a company sets aside a sum...

Question 10

If it could be conclusively proven to management that a self-insurance program could be started that would reduce costs in the long run, management would always choose to self-insure.

Accepted Answer

Management decisions are influenced by various factors beyond just long-term cost savings, including risk tolerance, cash flow considerations, regulatory requirements, and strategic priorities.

Question 11

A captive insurer is a company that insures against the risks of kidnap and ransom.

Accepted Answer

A captive insurer is an insurance company that is wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and it can cover a wide range of risks, not limited to kidnap and ransom.

Question 12

Subjective and objective risks can be reduced with research and training.

Accepted Answer

Research and training can help in understanding and mitigating both subjective risks (personal perceptions of risk) and objective risks (quantifiable and measurable risks) by providing knowledge and skills to manage and reduce those risks effectively.

Question 13

Group discussion is commonly known to increase the amount of subjective risk.

Accepted Answer

Group discussion often leads to a phenomenon known as "risk shift," where groups tend to make decisions that are either riskier or more conservative than individuals would make alone, depending on the initial leanings of the group members. It does not inherently increase subjective risk; the direction of the shift can vary.

Question 14

In dealing with a particular risk, it is common practice among risk managers to use a combination of risk management techniques instead of only one.

Accepted Answer

Using a combination of risk management techniques allows for a more comprehensive approach to addressing risks, as different techniques can address different aspects of the risk or provide layers of mitigation.

Question 15

A loss that will occur with certainty is still considered a risk to the firm.

Accepted Answer

A risk implies uncertainty about outcomes, whereas a loss that will occur with certainty does not involve uncertainty, and thus is not considered a risk.

Question 16

Enterprise risk management is limited to the management of pure risk.

Accepted Answer

Enterprise risk management (ERM) encompasses the management of all types of risks, including pure risks (those that involve only the possibility of loss) and speculative risks (those that involve the possibility of loss or gain), not just pure risks. It aims to manage the full spectrum of risks facing an organization in a holistic manner.

Question 17

Matching :
-If the _________________ of a project is positive, the project probably should be undertaken.
A) present value
B) third-party administrator
C) net present value
D) opportunity cost
E) risk management policy

Accepted Answer

The net present value (NPV) of a project is a financial metric used to assess the profitability of an investment. If the NPV is positive, it means the project's returns exceed its costs, suggesting that the project is financially viable and should probably be undertaken.

Question 18

Matching :
-A firm holding an emergency fund in a low interest-bearing account when the funds could have been invested in a project offering a higher return would result in a/an _________________ to the firm.
A) present value
B) third-party administrator
C) net present value
D) opportunity cost
E) risk management policy

Accepted Answer

Opportunity cost refers to the loss of potential gain from other alternatives when one alternative is chosen. In this case, choosing to hold funds in a low interest-bearing account instead of investing in a higher-return project represents a lost opportunity for greater earnings, hence an opportunity cost to the firm.

Question 19

Matching :
-In nominal terms, the _________________ of a positive stream of income is typically less than the future value.
A) present value
B) third-party administrator
C) net present value
D) opportunity cost
E) risk management policy

Accepted Answer

The present value of a positive stream of income is typically less than the future value because it discounts future cash flows back to their value in today's dollars, accounting for the time value of money.

Question 20

Matching :
-A firm with a self-insured major medical plan might find the services of a/an _________________ helpful.
A) present value
B) third-party administrator
C) net present value
D) opportunity cost
E) risk management policy

Accepted Answer

A third-party administrator can be helpful for a firm with a self-insured major medical plan because they can manage claims, handle administrative duties, and provide other services to support the firm's healthcare plan.

Quiz 8: Selecting and Implementing Risk Management Techniques