Question 1

To better understand her company's operations,a risk manager asked a production manager to draw a diagram tracing the steps in the production and distribution of the company's products.Such a diagram,which is useful in risk identification,is called a

Accepted Answer

A) financial statement. 
B) risk management matrix. 
C) flowchart. 
D) risk management audit.

Question 2

David never stopped to consider the possible consequences of a long-term,permanent,disability.So David did not include disability income insurance in his personal risk management program.David is dealing with the risk of disability through

Accepted Answer

A) passive retention. 
B) active retention. 
C) risk control. 
D) risk avoidance.

Question 3

A situation or circumstance in which a loss is possible,regardless of whether a loss occurs,is called a

Accepted Answer

A) deductible. 
B) loss exposure. 
C) loss avoidance. 
D) peril.

Question 4

Which of the following statements regarding the use of retention is (are)true?
I.Retention is best used for loss exposures that have a low frequency and a high severity.
II.A financially strong firm can have a higher retention level than a firm whose financial position is weak.

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Question 5

All of the following are potential advantages of retention EXCEPT

Accepted Answer

A) lower expenses. 
B) increased cash flow. 
C) encouragement of loss prevention. 
D) protection from catastrophic losses.

Question 6

The worst loss that could ever happen to a firm is referred to as the

Accepted Answer

A) maximum possible loss. 
B) probable maximum loss. 
C) frequency of loss. 
D) severity of loss.

Question 7

When he became risk manager of Boller Company,Derrick Huang noticed that the company did not have a clear set of risk management objectives and a clearly-stated risk management philosophy.Derrick developed a written document stating the company's risk management objectives and risk management philosophy.This document is called a risk management

Accepted Answer

A) policy statement. 
B) manuscript policy. 
C) matrix. 
D) binder.

Question 8

Acme Company has three identical manufacturing plants,one on the Texas Gulf Coast,one in southern Alabama,and one in Florida.Each plant is valued at $200 million.Acme's risk manager is concerned about the damage which could be caused by a single hurricane.The risk manager believes there is an extremely low probability that a single hurricane could destroy two or all three plants because they are located so far apart.What is the maximum possible loss associated with a single hurricane?

Accepted Answer

A) $0 million 
B) $200 million 
C) $400 million 
D) $600 million

Question 9

A risk manager is concerned with which of the following?
I.Identifying potential losses
II.Selecting the appropriate techniques for treating loss exposures

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Question 10

Parker Department Stores has been hurt in recent months by a large increase in shoplifting losses.Parker's risk manager concluded that while the frequency of shoplifting losses was high,the severity is still relatively low.What is (are)the appropriate risk management technique(s)to apply to this problem?

Accepted Answer

A) retention 
B) loss control and retention 
C) transfer through insurance 
D) avoidance

Question 11

Loss severity is defined as the

Accepted Answer

A) probable size of the losses which may occur during some period. 
B) probable number of losses which may occur during some period. 
C) probability that any particular piece of property may be totally destroyed. 
D) probability that a liability judgment may exceed a firm's net worth.

Question 12

An insurance policy specifically written and designed to meet the needs of an insurance purchaser is called a(n)

Accepted Answer

A) manuscript policy. 
B) bureau policy. 
C) standard policy. 
D) excess policy.

Question 13

In reviewing his company's operations,a risk manager noticed that all of the company's finished goods were stored in a single warehouse.The risk manager recommended that the finished goods be divided among three warehouses to prevent all of the finished goods from being destroyed by the same peril.Dividing the finished goods among three warehouses illustrates

Accepted Answer

A) risk avoidance. 
B) risk control. 
C) insurance. 
D) noninsurance transfer.

Question 14

Which of the following statements concerning the selection of risk management techniques and insurance market conditions is (are)true?
I.It's easier to purchase affordable insurance during a "soft " market than during a "hard" market.
II.Retention is used more during a "soft" market than during a "hard" market.

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Question 15

Acme Company has three identical manufacturing plants,one on the Texas Gulf Coast,one in southern Alabama,and one in Florida.Each plant is valued at $200 million.Acme's risk manager is concerned about the damage which could be caused by a single hurricane.The risk manager believes there is an extremely low probability that a single hurricane could destroy two or all three plants because they are located so far apart.What is the probable maximum loss associated with a single hurricane?

Accepted Answer

A) $0 million 
B) $200 million 
C) $400 million 
D) $600 million

Question 16

A restaurant owner leased a meeting room at the restaurant to a second party.The lease specified that the second party,not the restaurant owner,would be responsible for any liability arising out of the use of the meeting room,and that the restaurant owner would be "held harmless" for any damages.The restaurant owner's use of the hold-harmless agreement in the lease is an example of

Accepted Answer

A) retention. 
B) self-insurance. 
C) insurance. 
D) noninsurance transfer.

Question 17

Each accounting period,Harris Company Department Store charges a bookkeeping account for its estimated shoplifting losses.The method that Harris Company Department Store uses to fund its retained shoplifting losses is a(n)

Accepted Answer

A) private insurance policy. 
B) captive insurer. 
C) credit line. 
D) unfunded reserve.

Question 18

Bev lives in the suburbs and works downtown.She drives to work,and her most direct route to work would require her to pass through an area where carjackings and drive-by-shootings are common.Bev does not drive through this area.Instead,she uses a route which adds 10 minutes to her commute.Which risk management technique is Bev using with respect to the risk of injury while driving through the dangerous area?

Accepted Answer

A) noninsurance transfer 
B) avoidance 
C) passive retention 
D) loss reduction

Question 19

Which of the following statements about a personal risk management program is (are)true?
I.Insurance and retention are the only techniques used to handle potential losses.
II.The steps in a personal risk management process are the same steps used by businesses.

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Question 20

All of the following are disadvantages of using insurance in a risk management program EXCEPT

Accepted Answer

A) There is an opportunity cost because premiums must be paid in advance. 
B) Considerable time and effort must be spent selecting and negotiating coverages. 
C) It results in considerable fluctuations in earnings after losses occur. 
D) Attitudes toward loss control may become lax when losses are insured.

Exam 3: Introduction to Risk Management

To better understand her company's operations,a risk manager asked a production manager to draw a diagram tracing the steps in the production and distribution of the company's products.Such a diagram,which is useful in risk identification,is called a

David never stopped to consider the possible consequences of a long-term,permanent,disability.So David did not include disability income insurance in his personal risk management program.David is dealing with the risk of disability through

A situation or circumstance in which a loss is possible,regardless of whether a loss occurs,is called a

Which of the following statements regarding the use of retention is (are) true? I.Retention is best used for loss exposures that have a low frequency and a high severity. II.A financially strong firm can have a higher retention level than a firm whose financial position is weak.

All of the following are potential advantages of retention EXCEPT

The worst loss that could ever happen to a firm is referred to as the

A risk manager is concerned with which of the following? I.Identifying potential losses II.Selecting the appropriate techniques for treating loss exposures

Loss severity is defined as the

An insurance policy specifically written and designed to meet the needs of an insurance purchaser is called a(n)

Each accounting period,Harris Company Department Store charges a bookkeeping account for its estimated shoplifting losses.The method that Harris Company Department Store uses to fund its retained shoplifting losses is a(n)

Which of the following statements about a personal risk management program is (are) true? I.Insurance and retention are the only techniques used to handle potential losses. II.The steps in a personal risk management process are the same steps used by businesses.

All of the following are disadvantages of using insurance in a risk management program EXCEPT