Question 1

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 2

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 3

Discount Department Stores is a national retail chain.The company had one large,central warehouse.At the suggestion of the risk manager,the company decided to build four smaller regional warehouses so that a loss at the central warehouse would not be a catastrophic blow to the company's distribution system.Splitting the inventory between four regional warehouses illustrates which risk management technique?

Accepted Answer

A) duplication 
B) risk transfer 
C) separation 
D) risk avoidance

Question 4

Laura Evans is risk manager of LMN Company.Laura decided to retain certain property loss exposures.Which of the following is a method that Laura can use to fund the retained property losses?

Accepted Answer

A) current net income 
B) private insurance 
C) noninsurance transfer 
D) high deductibles

Question 5

Cal was just hired as XYZ Company's first risk manager.Cal would like to employ the risk management process.The first step in the process Cal should follow is to

Accepted Answer

A) evaluate potential losses faced by XYZ Company. 
B) formulate a treatment plan for XYZ Company's loss exposures. 
C) identify potential losses faced by XYZ Company. 
D) implement and administer a risk management plan for XYZ Company.

Question 6

Loss frequency is defined as the

Accepted Answer

A) probable size of the losses that may occur during some period. 
B) probable number of losses that 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 7

All of the following are disadvantages of noninsurance transfers EXCEPT

Accepted Answer

A) The party to whom the potential loss is transferred may be unable to pay. 
B) The transfer may fail because the contract language is ambiguous. 
C) The only potential losses that can be transferred are those that are not commercially insurable. 
D) The noninsurance transfer may be costly.

Question 8

Which of the following types of loss exposures may be appropriately handled through the purchase of insurance?
I.High-frequency,low-severity loss exposures
II.Low-frequency,high-severity loss exposures

Accepted Answer

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

Question 9

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 prevention 
C) transfer through insurance 
D) avoidance

Question 10

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 11

Which of the following statements about an excess insurance plan is true?

Accepted Answer

A) The insurer does not participate in a loss until the loss exceeds the amount the firm has decided to retain. 
B) The insurer pays first up to some specified level;the insured then pays all losses exceeding the insurer's retention level. 
C) Losses in excess of a specified amount are not covered. 
D) The insured and insurer share equally in any loss that occurs.

Question 12

Members of Mid-South Petroleum Distributors,a trade group,had trouble obtaining affordable pollution liability insurance.The members formed a group captive that is exempt from many state laws that apply to other insurers.This group captive is called a(n)

Accepted Answer

A) reinsurance pool. 
B) Lloyd's association. 
C) alien insurer. 
D) risk retention group.

Question 13

All of the following statements about avoidance are true EXCEPT

Accepted Answer

A) Certain loss exposures are never acquired. 
B) Certain loss exposures may be abandoned. 
C) The chance of loss for certain loss exposures may be reduced to zero. 
D) It can be used for any loss exposure facing a firm.

Question 14

Which of the following types of loss exposures are best handled by the use of avoidance?

Accepted Answer

A) low-frequency,low-severity loss exposures 
B) low-frequency,high-severity loss exposures 
C) high-frequency,low-severity loss exposures 
D) high-frequency,high-severity loss exposures

Question 15

All of the following are disadvantages of using insurance in a commercial 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.

Question 16

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 17

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 18

Low-frequency,low-severity loss exposures are best handled by

Accepted Answer

A) avoidance. 
B) retention. 
C) insurance. 
D) noninsurance transfer.

Question 19

Abandoning an existing loss exposure is an example of

Accepted Answer

A) avoidance. 
B) retention. 
C) noninsurance transfer. 
D) insurance transfer.

Question 20

A college professor stores class grading records on a spreadsheet on her office computer.Each time she updates a grading file she makes a printout and a backup copy of the grading file.The professor is using which risk management method to address the risk of losing her class grading records?

Accepted Answer

A) risk avoidance 
B) duplication 
C) separation 
D) noninsurance transfer

Exam 3: Introduction to Risk Management