ARM 402 EVALUATION TEST QUESTIONS AND
ANSWERS SET A+
✔✔The major purpose of a self-insurance plan is to
A. Help the organization avoid liability for losses by shifting the losses to an entity better
positioned to pay the losses.
B. Take advantage of the favorable tax treatment of self-insured plans compared to
purchasing traditional insurance.
C. Help the organization achieve a lower cost of risk by paying for its own losses and
avoiding risk transfer costs.
D. Allow an organization to take advantage of the full range of services a private
insurance company offers. - ✔✔C
✔✔A noninsurance transfer in which the transferor transfers a loss exposure to the
transferee, thereby eliminating the possibility that the transferor will suffer a loss from
the transferred exposures is a noninsurance
A. Risk financing transfer.
B. Pooling and funding mechanism.
C. Loss control mechanism.
D. Risk control transfer. - ✔✔D
✔✔An exculpatory clause is
A. A contractual provision that relieves one party from liability resulting from a negligent
or wrongful act.
B. The intentional relinquishment of a known right.
C. The surety's right to seek reimbursement from the principal for the surety's
payments.
D. The substitution of one party for another. - ✔✔A
✔✔Feldman Floor Coverings sells carpet and tile from five retail stores. Theft losses are
almost nonexistent. Most customers pay by check or credit card, so little cash is kept on
the premises. Most of the merchandise in the stores, floor coverings, is difficult to steal
,by customers. When theft losses occasionally occur, the losses are paid through current
cash flow. This method of dealing with theft losses is called
A. Informal retention.
B. Loss avoidance.
C. Self-insurance
D. Private insurance. - ✔✔A
✔✔A formal self-insurance program, which includes all of the necessary administrative
functions, is most appropriate for which one of the following types of loss exposures?
A. Low-frequency, high-severity loss exposures
B. High-frequency, low-severity loss exposures
C. Low-frequency, low-severity loss exposures
D. High-frequency, high-severity loss exposures - ✔✔B
✔✔Which one of the following explains how group self-insurance plans differ from
individual self-insurance plans?
A. Group self-insurance plans can handle many different lines of business.
B. Group self-insurance plans rely on a not-for-profit association or corporation.
C. Group self-insurance plans do not require state regulatory filings.
D. Group self-insurance plans are only used for healthcare benefits. - ✔✔B
✔✔Which one of the following statements is true regarding contracting for services as a
noninsurance risk control transfer?
A. Personnel loss exposures associated with an activity cannot be transferred through
subcontracting.
B. Organizations rarely use contracting to transfer loss exposures to organizations that
are better able to control losses from a particular activity.
C. Liability loss exposures associated with an activity are not transferred easily,
especially regarding harm to third parties.
D. The party that accepts the risk through contracting for services must be an
independent contractor for the transfer to be effective. - ✔✔C
✔✔The major difference between a self-insurance plan and informal retention is
A. Self-insurance involves a formal transfer of risk, and informal retention does not
involve a formal transfer of risk.
B. Self-insurance does not involve loss control, and informal retention does involve loss
control.
C. Self-insurance involves dedicated recording and payment of losses, and informal
retention does not involve formal recording and payment of losses.
D. Self-insurance loss payments are not tax deductible, and informal retention loss
payments are tax deductible. - ✔✔C
✔✔A self-insured plan is usually combined with
A. Extended perils insurance to insure perils usually not covered by private insurance.
B. Excess insurance to cover severe losses.
, C. Legal expense insurance to cover legal defense costs.
D. First-dollar private insurance to cover small, frequent claims. - ✔✔B
✔✔An advantage of a self-insurance plan when compared with an insurance plan is that
a self-insurance plan
A. Is less expensive over the long run.
B. Decreases the organization's financial uncertainty.
C. Is easier to implement.
D. Easily satisfies contractual requirements. - ✔✔A
✔✔When using a self-insurance plan, excess insurance is
A. Usually a useful addition to the total risk management program.
B. Purchased as an underlying layer of protection for specific hazards.
C. Not needed.
D. Needed to cover the frequent, low severity losses that make self-insurance plans
expensive. - ✔✔A
✔✔Margo is a technology company analyst for a large investment company. To
determine a market value for the companies she analyzes, Margo calculates the
present value of the future cash flows that will be derived from the intellectual property
these companies own. This valuation method is called the
A. Capital budgeting approach.
B. Cost approach.
C. Fair market value approach.
D. Income approach. - ✔✔D
✔✔One reason that an organization might choose to protect an invention with a trade
secret status rather than with a patent is that
A. A patent requires disclosure of the details of the invention.
B. A trade secret status provides a higher degree of protection than a patent.
C. Theft of a trade secret is less likely than theft of a patent.
D. The invention could be easily reproduced through reverse engineering. - ✔✔A
✔✔A patent used for the invention of a machine is a
A. Utility patent.
B. Process patent.
C. Design patent.
D. Plant patent. - ✔✔A
✔✔A distinctive design that legally identifies a product as belonging to a certain
organization is a
A. Trademark.
B. Trade secret.
C. Copyright.
ANSWERS SET A+
✔✔The major purpose of a self-insurance plan is to
A. Help the organization avoid liability for losses by shifting the losses to an entity better
positioned to pay the losses.
B. Take advantage of the favorable tax treatment of self-insured plans compared to
purchasing traditional insurance.
C. Help the organization achieve a lower cost of risk by paying for its own losses and
avoiding risk transfer costs.
D. Allow an organization to take advantage of the full range of services a private
insurance company offers. - ✔✔C
✔✔A noninsurance transfer in which the transferor transfers a loss exposure to the
transferee, thereby eliminating the possibility that the transferor will suffer a loss from
the transferred exposures is a noninsurance
A. Risk financing transfer.
B. Pooling and funding mechanism.
C. Loss control mechanism.
D. Risk control transfer. - ✔✔D
✔✔An exculpatory clause is
A. A contractual provision that relieves one party from liability resulting from a negligent
or wrongful act.
B. The intentional relinquishment of a known right.
C. The surety's right to seek reimbursement from the principal for the surety's
payments.
D. The substitution of one party for another. - ✔✔A
✔✔Feldman Floor Coverings sells carpet and tile from five retail stores. Theft losses are
almost nonexistent. Most customers pay by check or credit card, so little cash is kept on
the premises. Most of the merchandise in the stores, floor coverings, is difficult to steal
,by customers. When theft losses occasionally occur, the losses are paid through current
cash flow. This method of dealing with theft losses is called
A. Informal retention.
B. Loss avoidance.
C. Self-insurance
D. Private insurance. - ✔✔A
✔✔A formal self-insurance program, which includes all of the necessary administrative
functions, is most appropriate for which one of the following types of loss exposures?
A. Low-frequency, high-severity loss exposures
B. High-frequency, low-severity loss exposures
C. Low-frequency, low-severity loss exposures
D. High-frequency, high-severity loss exposures - ✔✔B
✔✔Which one of the following explains how group self-insurance plans differ from
individual self-insurance plans?
A. Group self-insurance plans can handle many different lines of business.
B. Group self-insurance plans rely on a not-for-profit association or corporation.
C. Group self-insurance plans do not require state regulatory filings.
D. Group self-insurance plans are only used for healthcare benefits. - ✔✔B
✔✔Which one of the following statements is true regarding contracting for services as a
noninsurance risk control transfer?
A. Personnel loss exposures associated with an activity cannot be transferred through
subcontracting.
B. Organizations rarely use contracting to transfer loss exposures to organizations that
are better able to control losses from a particular activity.
C. Liability loss exposures associated with an activity are not transferred easily,
especially regarding harm to third parties.
D. The party that accepts the risk through contracting for services must be an
independent contractor for the transfer to be effective. - ✔✔C
✔✔The major difference between a self-insurance plan and informal retention is
A. Self-insurance involves a formal transfer of risk, and informal retention does not
involve a formal transfer of risk.
B. Self-insurance does not involve loss control, and informal retention does involve loss
control.
C. Self-insurance involves dedicated recording and payment of losses, and informal
retention does not involve formal recording and payment of losses.
D. Self-insurance loss payments are not tax deductible, and informal retention loss
payments are tax deductible. - ✔✔C
✔✔A self-insured plan is usually combined with
A. Extended perils insurance to insure perils usually not covered by private insurance.
B. Excess insurance to cover severe losses.
, C. Legal expense insurance to cover legal defense costs.
D. First-dollar private insurance to cover small, frequent claims. - ✔✔B
✔✔An advantage of a self-insurance plan when compared with an insurance plan is that
a self-insurance plan
A. Is less expensive over the long run.
B. Decreases the organization's financial uncertainty.
C. Is easier to implement.
D. Easily satisfies contractual requirements. - ✔✔A
✔✔When using a self-insurance plan, excess insurance is
A. Usually a useful addition to the total risk management program.
B. Purchased as an underlying layer of protection for specific hazards.
C. Not needed.
D. Needed to cover the frequent, low severity losses that make self-insurance plans
expensive. - ✔✔A
✔✔Margo is a technology company analyst for a large investment company. To
determine a market value for the companies she analyzes, Margo calculates the
present value of the future cash flows that will be derived from the intellectual property
these companies own. This valuation method is called the
A. Capital budgeting approach.
B. Cost approach.
C. Fair market value approach.
D. Income approach. - ✔✔D
✔✔One reason that an organization might choose to protect an invention with a trade
secret status rather than with a patent is that
A. A patent requires disclosure of the details of the invention.
B. A trade secret status provides a higher degree of protection than a patent.
C. Theft of a trade secret is less likely than theft of a patent.
D. The invention could be easily reproduced through reverse engineering. - ✔✔A
✔✔A patent used for the invention of a machine is a
A. Utility patent.
B. Process patent.
C. Design patent.
D. Plant patent. - ✔✔A
✔✔A distinctive design that legally identifies a product as belonging to a certain
organization is a
A. Trademark.
B. Trade secret.
C. Copyright.
