Deck 5: Risk Management Techniques: Noninsurance Methods

Question 1

Risk avoidance is a conscious decision not to expose oneself or one's firm to a particular risk.

Answer 1

True

Question 2

One example of risk avoidance is to delay taking responsibility for purchased goods until the arrival of the goods.

Answer 2

True

Question 3

Loss control may take the form of frequency reduction, severity reduction, or diversification.

Answer 3

True

Question 4

Heinrich's domino theory suggests that the absence of an unsafe act or physical hazard avoids a personal fault from happening.

Question 5

A sprinkler system is a concurrent loss control measure.

Question 6

Risk retention means the voluntary assumption of risk.

Question 7

Risk retention can be planned or unplanned.

Question 8

Funded retention involves making various pre-loss arrangements to ensure that money is readily available to pay for losses.

Question 9

Credit is a major source of funds for most firms' funded retention programs.

Question 10

Small businesses are more likely to use self-insurance than large businesses because large businesses typically have greater access to funds with which they can purchase commercial insurance.

Question 11

When deciding whether to self-insure, a risk manager should consider the opportunity cost of reserve funds and cash flow advantages.

Question 12

The greater the total debt/net worth ratio, the greater the firm's ability to retain risk.

Question 13

Hold-harmless agreements reduce the original risk for the transferee.

Question 14

The difference between the limited form and the intermediate form of hold-harmless agreements involves clauses about the losses the transferee pays for.

Question 15

Once a risk has been transferred through a hold-harmless agreement the transferor is free from liability for the risks transferred.

Question 16

Diversification across various businesses or geographic locations can serve as a form of risk transfer.

Question 17

Match the descriptions with their terms:

-A common method of handling a speculative risk is through the process called _________________.

A) frequency reduction
B) hedging
C) hold-harmless agreement
D) loss control
E) risk avoidance
F) risk retention
G) risk transfer
H) self-insurance
I) separation
J) severity reduction
K) speculator
L) unplanned retention

Question 18

Match the descriptions with their terms:

-Efforts to reduce the frequency and/or the severity of a loss is through _________________.

A) frequency reduction
B) hedging
C) hold-harmless agreement
D) loss control
E) risk avoidance
F) risk retention
G) risk transfer
H) self-insurance
I) separation
J) severity reduction
K) speculator
L) unplanned retention

Question 19

Match the descriptions with their terms:

-A significant amount of retention could be characterized as _________________.

A) frequency reduction
B) hedging
C) hold-harmless agreement
D) loss control
E) risk avoidance
F) risk retention
G) risk transfer
H) self-insurance
I) separation
J) severity reduction
K) speculator
L) unplanned retention

Question 20

Match the descriptions with their terms:

-Risks that are considered too great to retain and too expensive to transfer might best be handled by means of _________________.

A) frequency reduction
B) hedging
C) hold-harmless agreement
D) loss control
E) risk avoidance
F) risk retention
G) risk transfer
H) self-insurance
I) separation
J) severity reduction
K) speculator
L) unplanned retention

Question 21

Match the descriptions with their terms:

-_________________ describes the situation in which a risk is not transferred primarily because of ignorance regarding the potential severity and/or frequency of the loss.

A) frequency reduction
B) hedging
C) hold-harmless agreement
D) loss control
E) risk avoidance
F) risk retention
G) risk transfer
H) self-insurance
I) separation
J) severity reduction
K) speculator
L) unplanned retention

Question 22

Match the descriptions with their terms:

-A sprinkler system that is installed in an office building would be an example of _________________.

A) frequency reduction
B) hedging
C) hold-harmless agreement
D) loss control
E) risk avoidance
F) risk retention
G) risk transfer
H) self-insurance
I) separation
J) severity reduction
K) speculator
L) unplanned retention

Question 23

Match the descriptions with their terms:

-The use of a deductible is a very common example of _____________ by a firm.

A) frequency reduction
B) hedging
C) hold-harmless agreement
D) loss control
E) risk avoidance
F) risk retention
G) risk transfer
H) self-insurance
I) separation
J) severity reduction
K) speculator
L) unplanned retention

Question 24

Match the descriptions with their terms:

-A manufacturer transferring its product liability to the retailer of the product might do so through a/an _________________.

A) frequency reduction
B) hedging
C) hold-harmless agreement
D) loss control
E) risk avoidance
F) risk retention
G) risk transfer
H) self-insurance
I) separation
J) severity reduction
K) speculator
L) unplanned retention

Question 25

Match the descriptions with their terms:

-The use of insurance is a common form of _________________.

A) frequency reduction
B) hedging
C) hold-harmless agreement
D) loss control
E) risk avoidance
F) risk retention
G) risk transfer
H) self-insurance
I) separation
J) severity reduction
K) speculator
L) unplanned retention

Question 26

Match the descriptions with their terms:

-One who assumes risk that is typically associated with a business venture is a/an _________________.

A) frequency reduction
B) hedging
C) hold-harmless agreement
D) loss control
E) risk avoidance
F) risk retention
G) risk transfer
H) self-insurance
I) separation
J) severity reduction
K) speculator
L) unplanned retention

Question 27

Match the descriptions with their terms:

-Distributing inventory among several warehouses to prevent a single peril from destroying the entire stock is described as _________________.

A) frequency reduction
B) hedging
C) hold-harmless agreement
D) loss control
E) risk avoidance
F) risk retention
G) risk transfer
H) self-insurance
I) separation
J) severity reduction
K) speculator
L) unplanned retention

Question 28

Match the descriptions with their terms:

-Installing a "kill switch" to a piece of machinery that is capable of dismembering an employee if operated improperly would be a form of _________________.

A) frequency reduction
B) hedging
C) hold-harmless agreement
D) loss control
E) risk avoidance
F) risk retention
G) risk transfer
H) self-insurance
I) separation
J) severity reduction
K) speculator
L) unplanned retention

Question 29

When an entity avoids a risk

A) the chance of a loss is zero,
B) the chance of a loss is only moderately reduced,
C) the probability of a loss due to that risk is zero,
D) the chance of a loss for that entity due to that risk is reduced to zero.

Question 30

Which of the following statements is true?

A) Separation and duplication are the same,
B) Separation cannot be used at the same time as duplication for the same risk,
C) Duplication actually increases the maximum possible loss,
D) Duplication is always better than separation.

Question 31

The four basic techniques available for handling risk are:

A) risk avoidance, loss control, risk retention, and risk transfer,
B) risk avoidance, diversification, frequency reduction, and severity reduction,
C) risk retention, risk transfer, self-insurance, and loss control,
D) risk retention, loss control, self-insurance, and diversification.

Question 32

The three most commonly used methods of loss control are:

A) risk retention, risk avoidance, and risk transfer,
B) self-insurance, diversification, and risk transfer,
C) frequency reduction, severity reduction, and diversification,
D) insurance transfers, frequency reduction, and severity reduction.

Question 33

Self-insurance differs from the establishment of a reserve fund in that

A) establishing a reserve fund is a form of risk retention,
B) self-insurance involves prefunding of expected losses through a fund specifically designed for that purpose,
C) self-insurance requires the existence of a group of exposure units large enough to allow accurate loss prediction.
D) self-insurance requires the formation of a subsidiary company.

Question 34

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

A) the firm should have a sufficient number of objects so situated that the objects are not subject to simultaneous destruction,
B) the firm must be willing to allow an outside company to administer the plan and manage the self-insurance fund in order to ensure objectivity,
C) the firm must have accurate records or have access to satisfactory statistics to enable it to make good estimates of expected losses,
D) the general financial condition of the firm should be satisfactory and the firm's management must be willing and able to deal with large and unusual losses.

Question 35

Hedging is

A) insurance,
B) used for speculative risks,
C) used for pure risks,
D) gambling.

Question 36

Risk transfer is most likely ideal for a risk with

A) a high degree of diversification 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 37

A non-insurance transfer of risk is

A) the establishment of a reserve fund,
B) separation,
C) the installation of fire extinguishers,
D) a disclaimer of implied warranty on a sales contract.

Question 38

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 39

A non-insurance transfer of risk is

A) avoiding a dangerous manufacturing process by purchasing a part of a product made by a supplier,
B) a clause in a sales contract wherein the buyer assumes liability for damage done by the product,
C) the cancellation of an insurance policy,
D) self-insurance.

Question 40

Which of the following does not have to be present in order to start a self-insurance program?

A) a weak general financial condition so that the savings of insurance premiums will be material to the firm,
B) a sufficient number of exposure units to enable accurate loss prediction,
C) the establishment of a fund for the specific purpose of prefunding expected losses,
D) accurate records of past losses.

Question 41

Which of the following is not a form of severity reduction for a firm?

A) a driver's education program aimed at preventing accidents among a company's employees,
B) the installation of fire extinguishers in order to contain a fire before it spreads,
C) employee training in first-aid procedures,
D) the installation of driver's side air bags in all of the company's vehicles.

Question 42

Which of the following is not an example of risk retention?

A) self-insurance,
B) using a disclaimer of warranties clause on product packaging,
C) failure to identify a risk,
D) use of a reserve fund to prefund physical damage to company cars.