Risk Management & InsuranceTest Bank Exam
Solved #15
1. Objective risk is defined as
(a) the probability of loss.
(b) the relative variation of actual loss from expected loss.
(c) uncertainty based on a person's mental condition or state of mind.
(d) the cause of loss. - correct answer B
2. Uncertainty based on a person's mental condition or state of mind is known as
(a) objective risk.
(b) subjective risk.
(c) objective probability.
(d) subjective probability. - correct answer B
3. The long-run relative frequency of an event based on the assumption of an infinite
number of observations with no change in the underlying conditions is called
(a) objective probability.
(b) objective risk.
(c) subjective probability.
(d) subjective risk. - correct answer A
4. An earthquake is an example of a
(a) moral hazard.
(b) peril.
(c) physical hazard.
(d) objective risk. - correct answer B
5. Faking an accident to collect insurance proceeds is an example of a
(a) physical hazard.
(b) objective risk.
(c) moral hazard.
(d) morale hazard. - correct answer C
6. Some characteristics of the judicial system and regulatory environment increase the
frequency and severity of loss. This hazard is called
(a) moral hazard.
(b) physical hazard.
(c) morale hazard.
(d) legal hazard. - correct answer D
7. A phrase that encompasses all of the major risks faced by a business firm is
(a) financial risk.
(b) speculative risk.
(c) enterprise risk.
,(d) pure risk. - correct answer C
8. All of the following are considered financial risks EXCEPT
(a) the decline in the value of a bond portfolio because of rising interest rates.
(b) increased cost of production because of rising commodity prices.
(c) loss of money because of adverse movements in currency exchange rates.
(d) loss of profits after a physical damage loss occurs. - correct answer D
9. A pure risk is defined as a situation in which there is
(a) only the possibility of loss or no loss.
(b) only the possibility of profit.
(c) a possibility of neither profit nor loss.
(d) a possibility of either profit or loss. - correct answer A
10. The premature death of an individual is an example of a
(a) pure risk.
(b) speculative risk.
(c) fundamental risk.
(d) physical hazard. - correct answer A
11. All of the following are programs to insure fundamental risks EXCEPT
(a) federally subsidized flood insurance.
(b) automobile physical damage insurance.
(c) Social Security.
(d) unemployment compensation. - correct answer B
12. Which of the following is a reason why premature death may result in economic
insecurity?
I. Additional expenses associated with death may be incurred.
II. The income of the deceased person's family may be inadequate to meet its basic
needs.
(a) I only
(b) II only
(c) both I and II
(d) neither I nor II - correct answer C
13. All of the following are burdens to society because of the presence of risk EXCEPT
(a) The size of an emergency fund must be increased.
(b) Insurance is unavailable, particularly for pure risks.
(c) Society is deprived of certain goods and services.
(d) Mental fear and worry are present. - correct answer B
14. Following good health habits can be categorized as
(a) loss prevention.
(b) loss retention.
(c) noninsurance transfer.
, (d) personal insurance. - correct answer A
15. The use of fire-resistive materials when constructing a building is an example of
(a) risk transfer.
(b) loss control.
(c) risk avoidance.
(d) risk retention. - correct answer B
16. All of the following statements about retention are true EXCEPT
(a) It may be used deliberately if commercial insurance is unavailable.
(b) It may be used passively because of ignorance.
(c) Its use is most appropriate for low-frequency, high-severity types of risks.
(d) Its use results in cost savings if losses are less than the cost of insurance. - correct
answer C
17. All of the following are methods of noninsurance transfer EXCEPT
(a) entering into hold-harmless agreements.
(b) avoiding dangerous activities.
(c) hedging risk using stock index futures.
(d) incorporating a business. - correct answer B
18. Curt borrowed money from a bank to purchase a fishing boat. He purchased
property insurance on the boat. Curt had difficulty making loan payments because he
did not catch many fish, and fish prices were low. Curt intentionally sunk the boat,
collected from his insurer, and paid off the loan balance. This scenario illustrates the
problem of
(a) adverse selection.
(b) moral hazard.
(c) fundamental risk.
(d) morale hazard. - correct answer B
19. Brad started a pest control business. To protect his personal assets against liability
arising out of the business, Brad incorporated the business. Brad's use of the corporate
form of organization to shield against personal liability claims illustrates
(a) fundamental risk.
(b) noninsurance transfer.
(c) risk retention.
(d) objective risk. - correct answer B
20. Williams Company installed smoke detectors, a sprinkler system, and fire
extinguishers in its new manufacturing facility. These devices are all examples of
(a) loss control.
(b) noninsurance transfer.
(c) risk avoidance.
(d) risk retention. - correct answer A
Solved #15
1. Objective risk is defined as
(a) the probability of loss.
(b) the relative variation of actual loss from expected loss.
(c) uncertainty based on a person's mental condition or state of mind.
(d) the cause of loss. - correct answer B
2. Uncertainty based on a person's mental condition or state of mind is known as
(a) objective risk.
(b) subjective risk.
(c) objective probability.
(d) subjective probability. - correct answer B
3. The long-run relative frequency of an event based on the assumption of an infinite
number of observations with no change in the underlying conditions is called
(a) objective probability.
(b) objective risk.
(c) subjective probability.
(d) subjective risk. - correct answer A
4. An earthquake is an example of a
(a) moral hazard.
(b) peril.
(c) physical hazard.
(d) objective risk. - correct answer B
5. Faking an accident to collect insurance proceeds is an example of a
(a) physical hazard.
(b) objective risk.
(c) moral hazard.
(d) morale hazard. - correct answer C
6. Some characteristics of the judicial system and regulatory environment increase the
frequency and severity of loss. This hazard is called
(a) moral hazard.
(b) physical hazard.
(c) morale hazard.
(d) legal hazard. - correct answer D
7. A phrase that encompasses all of the major risks faced by a business firm is
(a) financial risk.
(b) speculative risk.
(c) enterprise risk.
,(d) pure risk. - correct answer C
8. All of the following are considered financial risks EXCEPT
(a) the decline in the value of a bond portfolio because of rising interest rates.
(b) increased cost of production because of rising commodity prices.
(c) loss of money because of adverse movements in currency exchange rates.
(d) loss of profits after a physical damage loss occurs. - correct answer D
9. A pure risk is defined as a situation in which there is
(a) only the possibility of loss or no loss.
(b) only the possibility of profit.
(c) a possibility of neither profit nor loss.
(d) a possibility of either profit or loss. - correct answer A
10. The premature death of an individual is an example of a
(a) pure risk.
(b) speculative risk.
(c) fundamental risk.
(d) physical hazard. - correct answer A
11. All of the following are programs to insure fundamental risks EXCEPT
(a) federally subsidized flood insurance.
(b) automobile physical damage insurance.
(c) Social Security.
(d) unemployment compensation. - correct answer B
12. Which of the following is a reason why premature death may result in economic
insecurity?
I. Additional expenses associated with death may be incurred.
II. The income of the deceased person's family may be inadequate to meet its basic
needs.
(a) I only
(b) II only
(c) both I and II
(d) neither I nor II - correct answer C
13. All of the following are burdens to society because of the presence of risk EXCEPT
(a) The size of an emergency fund must be increased.
(b) Insurance is unavailable, particularly for pure risks.
(c) Society is deprived of certain goods and services.
(d) Mental fear and worry are present. - correct answer B
14. Following good health habits can be categorized as
(a) loss prevention.
(b) loss retention.
(c) noninsurance transfer.
, (d) personal insurance. - correct answer A
15. The use of fire-resistive materials when constructing a building is an example of
(a) risk transfer.
(b) loss control.
(c) risk avoidance.
(d) risk retention. - correct answer B
16. All of the following statements about retention are true EXCEPT
(a) It may be used deliberately if commercial insurance is unavailable.
(b) It may be used passively because of ignorance.
(c) Its use is most appropriate for low-frequency, high-severity types of risks.
(d) Its use results in cost savings if losses are less than the cost of insurance. - correct
answer C
17. All of the following are methods of noninsurance transfer EXCEPT
(a) entering into hold-harmless agreements.
(b) avoiding dangerous activities.
(c) hedging risk using stock index futures.
(d) incorporating a business. - correct answer B
18. Curt borrowed money from a bank to purchase a fishing boat. He purchased
property insurance on the boat. Curt had difficulty making loan payments because he
did not catch many fish, and fish prices were low. Curt intentionally sunk the boat,
collected from his insurer, and paid off the loan balance. This scenario illustrates the
problem of
(a) adverse selection.
(b) moral hazard.
(c) fundamental risk.
(d) morale hazard. - correct answer B
19. Brad started a pest control business. To protect his personal assets against liability
arising out of the business, Brad incorporated the business. Brad's use of the corporate
form of organization to shield against personal liability claims illustrates
(a) fundamental risk.
(b) noninsurance transfer.
(c) risk retention.
(d) objective risk. - correct answer B
20. Williams Company installed smoke detectors, a sprinkler system, and fire
extinguishers in its new manufacturing facility. These devices are all examples of
(a) loss control.
(b) noninsurance transfer.
(c) risk avoidance.
(d) risk retention. - correct answer A
