Question 1

Why is a large number of exposure units generally required for a risk to be insurable?

Accepted Answer

A)  It allows the insurer to accurately predict the aggregate dollar amount of loss. 
B)  It allows for at least some losses to occur. 
C)  It reduces speculative risk. 
D)  It reduces both the speculative risk and pure risk. 
A)  It allows the insurer to accurately predict the aggregate dollar amount of loss. 
B)  It allows for at least some losses to occur. 
C)  It reduces speculative risk. 
D)  It reduces both the speculative risk and pure risk. A

Question 2

Loss prevention and control:

Accepted Answer

A)  eliminate risk 
B)  are an alternative to self insurance 
C)  reduce the probability and severity of loss 
D)  directly minimize the probability of a natural disaster occurring 
A)  eliminate risk 
B)  are an alternative to self insurance 
C)  reduce the probability and severity of loss 
D)  directly minimize the probability of a natural disaster occurring C

Question 3

One reason catastrophes are difficult to insure is because the damage is so unpredictable.

Accepted Answer

A) True 
 B)False  True

Question 4

Discuss risk reduction through diversification.

Accepted Answer

Diversification reduces risk by not putt

Question 5

Arthur is driving home from work when he runs off the road and hits a telephone pole. These are the losses he suffers: $12,000 to repair the damage to his car, and, $800 to rent a car while his car is being repaired. What is the correct name for each of these losses?

Accepted Answer

A)  The $12,000 is an indirect loss, and the $800 is a direct loss. 
B)  The $12,000 is a direct loss, and the $800 is also a direct loss. 
C)  The $12,000 is a direct loss, and the $800 is an indirect loss. 
D)  The total loss of $12,800 is a direct loss. 
A)  The $12,000 is an indirect loss, and the $800 is a direct loss. 
B)  The $12,000 is a direct loss, and the $800 is also a direct loss. 
C)  The $12,000 is a direct loss, and the $800 is an indirect loss. 
D)  The total loss of $12,800 is a direct loss.

Question 6

If the chance of loss is high and loss severity is high, generally the most appropriate risk management tool is:

Accepted Answer

A)  risk transfer 
B)  risk reduction 
C)  risk assumption 
D)  risk avoidance 
A)  risk transfer 
B)  risk reduction 
C)  risk assumption 
D)  risk avoidance

Question 7

Speculative risks refer to those events which can only result in loss.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is not an example of a Catastrophic Loss Event?

Accepted Answer

A)  Hurricane Katrina 
B)  Death of Michael Jackson 
C)  September 11, 2001 terror attacks 
D)  2004 Tsunami in the Indian Ocean 
A)  Hurricane Katrina 
B)  Death of Michael Jackson 
C)  September 11, 2001 terror attacks 
D)  2004 Tsunami in the Indian Ocean

Question 9

When faced with a risk of loss that is low frequency-high severity in nature, a prudent risk manager would choose which of the following methods for handling the loss exposure?

Accepted Answer

A)  self-insure 
B)  avoidance 
C)  transfer 
D)  mediate 
A)  self-insure 
B)  avoidance 
C)  transfer 
D)  mediate

Question 10

Examine the following list of "risks." Determine which of these are "pure risks."
 I. The risk that your antique Corvette will depreciate in market value
II. The risk that you will have a collision in your Corvette, thus causing you to spend thousands of dollars in repair costs
III. The risk that someone will steal your Corvette
IV. The risk that you will buy a house and lightning will strike your roof, thus causing you to have to purchase a new roof
V. The risk that you will invest your life savings in a business venture that fails, thus causing you to lose your entire investment

Accepted Answer

A)  I, II, III, IV, and V 
B)  I, II, and IV 
C)  I, II, III, and IV 
D)  II, III, and IV 
A)  I, II, III, IV, and V 
B)  I, II, and IV 
C)  I, II, III, and IV 
D)  II, III, and IV

Question 11

Which of the following best describes a pure risk?

Accepted Answer

A)  An uncontrollable risk that cannot be insured 
B)  The outcome will either be a loss or no change 
C)  The outcome will be either a loss or a gain 
D)  A risk with three possible outcomes 
A)  An uncontrollable risk that cannot be insured 
B)  The outcome will either be a loss or no change 
C)  The outcome will be either a loss or a gain 
D)  A risk with three possible outcomes

Question 12

A "pure risk" is defined as a situation where there is the possibility:

Accepted Answer

A)  of loss or no change 
B)  of profit or no change 
C)  of profit or loss 
D)  that actual losses will deviate from expected losses 
A)  of loss or no change 
B)  of profit or no change 
C)  of profit or loss 
D)  that actual losses will deviate from expected losses

Question 13

Risk diversification is based on the principle that:

Accepted Answer

A)  one should not be exposed to only one event 
B)  one should put all her "eggs in one basket" 
C)  risk can be measured subjectively 
D)  pure risk seldom happens 
A)  one should not be exposed to only one event 
B)  one should put all her "eggs in one basket" 
C)  risk can be measured subjectively 
D)  pure risk seldom happens

Question 14

Which of the following is not an example of a speculative risk?

Accepted Answer

A)  Purchase of an insurance policy 
B)  Investment in common stocks 
C)  Operating a business for profit 
D)  Investment in banana futures 
A)  Purchase of an insurance policy 
B)  Investment in common stocks 
C)  Operating a business for profit 
D)  Investment in banana futures

Question 15

Which of the following is a true statement?

Accepted Answer

A)  Liability risks are risks associated with building calamities. 
B)  Theft is a diversifiable risk. 
C)  Most individuals in the industrialized countries carry no insurance. 
D)  The Law of Large Numbers is used in Risk Pooling. 
A)  Liability risks are risks associated with building calamities. 
B)  Theft is a diversifiable risk. 
C)  Most individuals in the industrialized countries carry no insurance. 
D)  The Law of Large Numbers is used in Risk Pooling.

Question 16

The primary reason the insurance mechanism functions successfully is the:

Accepted Answer

A)  existence of hazard risks 
B)  ease with which losses can be measured 
C)  predictability of losses via the law of large numbers 
D)  existence of many non-industrial nations 
A)  existence of hazard risks 
B)  ease with which losses can be measured 
C)  predictability of losses via the law of large numbers 
D)  existence of many non-industrial nations

Question 17

The law of large numbers states that as the number of exposure units increases:

Accepted Answer

A)  accuracy of predictions should improve 
B)  the chance of loss declines 
C)  Speculative risk increases 
D)  the number of accidents decreases 
A)  accuracy of predictions should improve 
B)  the chance of loss declines 
C)  Speculative risk increases 
D)  the number of accidents decreases

Question 18

There are four basic components of an insurance premium. Which of the following is not one of those components?

Accepted Answer

A)  Losses suffered by the members of the insurance pool 
B)  Law of large numbers 
C)  An allowance for unexpected losses 
D)  Earnings on investments 
A)  Losses suffered by the members of the insurance pool 
B)  Law of large numbers 
C)  An allowance for unexpected losses 
D)  Earnings on investments

Question 19

Loss prevention is the best risk management tool when the chance of loss is ________ and the potential loss severity is ________.

Accepted Answer

A)  high, high 
B)  high, low 
C)  low, low 
D)  low, high 
A)  high, high 
B)  high, low 
C)  low, low 
D)  low, high

Question 20

Enterprise Risk Management:

Accepted Answer

A)  is only applicable to insurance firms 
B)  is an outdated method of dealing with risk 
C)  works best when evaluating risks is distinct company silos 
D)  is a process that examines all risks collectively 
A)  is only applicable to insurance firms 
B)  is an outdated method of dealing with risk 
C)  works best when evaluating risks is distinct company silos 
D)  is a process that examines all risks collectively

Exam 1: Introduction to Enterprise Risk Management and Insurance

Why is a large number of exposure units generally required for a risk to be insurable?

Loss prevention and control:

One reason catastrophes are difficult to insure is because the damage is so unpredictable.

Discuss risk reduction through diversification.

Arthur is driving home from work when he runs off the road and hits a telephone pole. These are the losses he suffers: $12,000 to repair the damage to his car, and, $800 to rent a car while his car is being repaired. What is the correct name for each of these losses?

If the chance of loss is high and loss severity is high, generally the most appropriate risk management tool is:

Speculative risks refer to those events which can only result in loss.

Which of the following is not an example of a Catastrophic Loss Event?

When faced with a risk of loss that is low frequency-high severity in nature, a prudent risk manager would choose which of the following methods for handling the loss exposure?

Which of the following best describes a pure risk?

A "pure risk" is defined as a situation where there is the possibility:

Risk diversification is based on the principle that:

Which of the following is not an example of a speculative risk?

Which of the following is a true statement?

The primary reason the insurance mechanism functions successfully is the:

The law of large numbers states that as the number of exposure units increases:

There are four basic components of an insurance premium. Which of the following is not one of those components?

Loss prevention is the best risk management tool when the chance of loss is ________ and the potential loss severity is ________.

Enterprise Risk Management:

Risk Identification

Risk Assessment and Pooling

Risk-Handling Techniques: Loss Control, Risk Transfer, and Loss Financing

Risk-Handling Techniques: Diversification and Hedging

Fundamentals of Insurance

Insurable Perils and Insuring Organizations

Insurance Functions

Insurance Markets: Economics and Issues

Insurance Regulation

Insurance Contracts

The Personal Auto Policy

Homeowners Insurance

Professional Financial Planning

Life Insurance Policies

Standard Life Insurance Contract Provisions and Options

Annuities

Health Insurance and Disability Income

Employee Benefits

Social Security

Unemployment and Workers Compensation Insurance

Commercial Property Insurance

Commercial Liability Insurance

Filters

Loss prevention is the best risk management tool when the chance of loss is and the potential loss severity is .