Question 1

A peril is a contingency that can cause a loss.

Accepted Answer

A peril is indeed a specific risk or cause of loss covered by an insurance policy, such as fire, windstorm, flood, or theft.

Question 2

An objective risk is the risk based on the mental state of an individual who experiences uncertainty as to the outcome of an event.

Accepted Answer

Objective risk is the measurable variation in uncertain outcomes based on facts and data, not on an individual's mental state.

Question 3

Pure risk exists when there is uncertainty as to whether loss will occur.

Accepted Answer

Pure risk involves situations where there is a possibility of loss or no loss, but no chance of gain, making the uncertainty of loss its defining characteristic.

Question 4

If a loss is certain to occur, objective risk is zero.

Accepted Answer

Objective risk is the measurable variation in uncertain outcomes, so if a loss is certain, there is no variation or uncertainty, making the objective risk zero.

Question 5

As the probability of an event occurring increases, the degree of objective risk also increases.

Accepted Answer

Objective risk is defined as the relative variation of actual loss from expected loss. As the probability of an event occurring increases, it does not necessarily increase the degree of objective risk, because objective risk is more about the unpredictability or variability of the outcome rather than the likelihood of the event itself.

Question 6

Doing nothing about a risk exposure is a viable risk management technique.

Accepted Answer

This technique is known as "risk acceptance," where an organization or individual acknowledges the risk but decides to proceed with the operation without taking any specific actions to mitigate it, often due to cost-benefit analysis or risk insignificance.

Question 7

Enterprise risk management is concerned solely with the management of exposures to pure risks.

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 exposures to pure risks. It aims to manage risks across an entire organization in a comprehensive and integrated manner.

Question 8

As the number of exposure units increases, the degree of risk increases.

Accepted Answer

As the number of exposure units increases, the degree of risk actually decreases due to the law of large numbers, which allows for more predictable outcomes and reduces the relative variation of risk.

Question 9

As the chance of loss increases, the variation of actual from expected losses tends to increase if the number of exposures remains the same.

Accepted Answer

The answer of As the chance of loss increases, the...

Question 10

Employee theft is an example of a morale hazard.

Accepted Answer

Employee theft is an example of a moral hazard, not morale hazard, as it involves the increase in the probability of a loss due to the dishonesty or character defects in an individual.

Question 11

The long-run chance of occurrence or relative frequency of a loss is defined to be the degree of risk.

Accepted Answer

The degree of risk is more accurately defined as the variability around the expected loss, not the long-run chance of occurrence or relative frequency of a loss.

Question 12

The threat of Congress enacting a costly environmental regulation is an example of a risk that is both pure and dynamic.

Accepted Answer

A pure risk is a risk that can only result in a financial loss, and a dynamic risk is a risk that can change over time. The threat of Congress enacting a costly environmental regulation is an example of a pure risk because it can only result in a financial loss to the company. It is also an example of a dynamic risk because the likelihood and severity of the risk can change over time depending on the political climate and the actions of Congress.

Question 13

The purchase of a stock that has little chance of earnings growth or price appreciation is an example of the assumption of a speculative risk.

Accepted Answer

Speculative risk involves a situation where there is a possibility of gain or loss, such as investing in a stock with uncertain future performance.

Question 14

The degree of subjective risk is easily measured.

Accepted Answer

Subjective risk refers to an individual's perception of risk, which varies from person to person and is influenced by personal feelings, experiences, and biases, making it difficult to measure objectively.

Question 15

The term objective risk is most often used in connection with pure static risks.

Accepted Answer

Objective risk refers to the measurable variation in uncertain outcomes based on facts and data, often associated with pure risks (those that involve only the chance of loss and no opportunity for gain), which are typically static and do not change much over time.

Question 16

If two companies have the same number of exposure units and experience the same average number of losses, then the degree of risk for each company tends to be equal.

Accepted Answer

The degree of risk also depends on the variability of losses, not just the average number of losses. Two companies could have the same average number of losses but different variances or distributions of those losses, leading to different degrees of risk.

Question 17

The degree of risk is essentially the same concept as the chance of loss.

Accepted Answer

The degree of risk refers to the variability of outcomes (including both potential gains and losses), while the chance of loss specifically focuses on the likelihood of an adverse outcome occurring.

Question 18

Match the descriptions with their terms:
-_________________ is the process of systematically managing risks through the following steps: identifying risks, evaluating risks, selecting risk management techniques, and implementing and reviewing decisions.

Accepted Answer

The answer of Match the descriptions with their terms:
-_________________ is...

Question 19

Match the descriptions with their terms:
-A/An _________________ is a contingency that can cause a loss.

Accepted Answer

The answer of Match the descriptions with their terms:
-A/An _________________...

Question 20

Match the descriptions with their terms:
-_________________ is uncertainty regarding loss.

Accepted Answer