Deck 8: Selecting and Implementing Risk Management Techniques

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.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 6

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

Question 7

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

Question 8

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

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.

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.

Question 11

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

Question 12

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

Question 13

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

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.

Question 15

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

Question 16

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

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

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

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

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

Question 21

Matching :

-Firms should establish a/an _________________ so that their procedures for dealing with actual and potential losses are consistent over time.

A) present value
B) third-party administrator
C) net present value
D) opportunity cost
E) risk management policy

Question 22

As a general rule, how often should loss control be considered when analyzing the costs and benefits of risk retention or transfer techniques?

A) always,
B) most of the time,
C) some of the time,
D) never.

Question 23

The first step in selecting available risk management techniques is to

A) implement appropriate loss control measures,
B) select the optimal mix of risk retention and risk transfer,
C) avoid risks if possible,
D) determine the availability of risk management tools.

Question 24

If P = principal, i = interest, and N = number of years in the future, the correct formula to calculate future value is

A) P(1 + i)N,
B) P / (1 + i)N,
C) (P × i)N,
D) P(N)i.

Question 25

An IRS auditor visits the main offices of Sharon's Secret (SS). SS has put $150,000 into a 9 percent interest-bearing account a year ago to start a shoplifting training program for its employees. The auditor finds out that the SS account has earned interest in the amount of

A) $109,000,
B) $163,500,
C) $13,500,
D) $9,000.

Question 26

Risk retention is optimal for losses that have

A) high expected severity,
B) low expected frequency but high severity,
C) low expected severity,
D) high frequency and high severity.

Question 27

Risk transfer is most likely ideal for a risk with

A) a high degree of separation and a low potential severity,
B) a high expected frequency and a low potential severity,
C) a high expected frequency and a high potential severity,
D) a low expected frequency and a high potential severity.

Question 28

The Lippert Companies have been given a choice of deductibles for their auto fleet coverage. The probability of a loss over $500 is minimal for the company, and the premium per car without any deductible is $2,500. Which deductible and premium combination is optimal? (Each amount is on a per car basis.)

A) deductible $200, premium $2,000,
B) deductible $250, premium $1,700,
C) deductible $1,000, premium $1,350,
D) not enough information to answer.

Question 29

Which statement is true?

A) Capital budgeting and statistical analysis cannot be used to select the best mix of risk retention and transfer,
B) Deductibles and self-insurance cannot be used together,
C) Capital budgeting and statistical analysis can be used to select the best mix of risk retention and transfer,
D) Risk transfer is the same thing as insurance.

Question 30

A deductible should only be accepted if

A) the firm can afford the associated losses,
B) the firm will experience sufficient savings,
C) the firm is already in a self-insurance program,
D) both a. and b. are correct.

Question 31

A captive insurance company is owned by

A) banks,
B) one non-insurance company,
C) an association of companies with similar risks,
D) any of the these could own a captive insurer.

Question 32

A tool that generally is not used to manage subjective risk is

A) obtaining more information,
B) group discussion,
C) systematically identifying and analyzing appropriate methods for dealing with risks,
D) severity reduction.

Question 33

"High" and "low" loss frequency and severity are

A) considered the same for all firms,
B) defined differently for different firms,
C) identifiable by industry standards,
D) unimportant when considering risk avoidance.

Question 34

Selecting a particular deductible level is one way of mixing

A) risk retention and risk transfer,
B) risk avoidance and risk retention,
C) risk avoidance and risk transfer,
D) loss control and risk transfer.

Question 35

Insurance should be purchased for losses in excess of the firm's

A) risk avoidance level,
B) short-term assets,
C) expected losses,
D) retention level.

Question 36

All of the following conditions are suggestive of the types of situations where self-insurance by a business is both possible and feasible except:

A) objects at risk are not subject to simultaneous destruction,
B) the firm must administer the plan with existing, in-house personnel,
C) the firm has accurate records or has access to satisfactory statistics regarding the probability of loss,
D) the firm is in satisfactory financial condition.

Question 37

All of the following represent alternative risk transfer tools except:

A) captives,
B) finite risk insurance,
C) traditional insurance,
D) multiple-trigger insurance policies.