Test Bank for Principles of Risk Management and
Insurance, 14th Edition by George E. Rejda
Risk - Correct answer-defined as uncertainty concerning the occurrence of a loss.
Loss Exposure - Correct answer-any situation or circumstance in which a loss is possible, regardless of
whether a loss occurs.
Objective Risk - Correct answer-defined as the relative variation of actual loss from expected loss. For
example of the 10,000 houses there is an expected loss of 100 (1%), but actually between 90-110 burn,
thus a variation of 10.
Subjective Risk - Correct answer-defined as uncertainty based on a person's mental condition or state of
mind. For example a person who has been heavily drinking may attempt to drive home even though he
is not sure whether he will be able to drive safely or get arrested.
Chance of Loss - Correct answer-defined as the probability that an event will occur.
Objective Probability - Correct answer-refers to the long-run relative frequency of an event based on the
assumptions of an infinite number of observations and of no change in the underlying conditions. For
example the probability of rolling a six on a six sided die is 1/6th.
,Subjective Probability - Correct answer-the individual's personal estimate of the chance of loss. For
example people who buy a lottery ticket on their birthday think its their lucky day and will overcome the
odds.
Peril - Correct answer-defined as the cause of loss
Hazard - Correct answer-a condition that creates or increases the frequency or severity of loss, there are
four major types which include Physical Hazard (icy roads), Moral Hazard (fraudulent claims), Attitudinal
Hazard (carelessness/indifference) & Legal Hazard.
Pure Risk - Correct answer-defined as a situation in which there are only the possibilities of loss or no
loss.
Speculative Risk - Correct answer-defined as a situation in which either profit or loss is possible.
Diversifiable Risk (Particular Risk) - Correct answer-a risk that affects only individuals or small groups and
not the entire economy.
Nondiversifiable Risk (Fundamental Risk) - Correct answer-is a risk that affects the entire economy or
large number of persons or groups within the economy.
Enterprise Risk - Correct answer-is a term that encompasses all major risks faced by a business firm.
Such risks include pure risk, speculative risk, strategic risk, operational risk and financial risk.
Enterprise Risk Management - Correct answer-combines all major risks faced by a business into a single
unified treatment program all major risks faced by the firm.
Personal Risk - Correct answer-are risks that directly affect an individual. They include premature death,
insufficient retirement income, injury or illness and unemployment.
Premature Death - Correct answer-is defined as the death of a family head with unfulfilled financial
obligations.
,Property Risk - Correct answer-the risk of having property damaged or lost from numerous causes.
Having property destroyed due to lighting, flood or fire are all examples of property risks which fall into
two major types: direct or indirect (consequential) loss.
Direct Loss - Correct answer-defined as a financial loss that results from the physical damage,
destruction or theft of the property. For example, if you own a home that is damaged by a fire.
Indirect or Consequential Loss - Correct answer-financial loss that results indirectly from the occurrence
of a direct physical damage or theft loss. For example because of the fire to your home you have to pay
for additional living expenses while the home is being rebuilt.
Liability Risk - Correct answer-are an important type of pure risk that most persons face.
Avoidance - Correct answer-technique for managing risk. For example you can avoid the risk of being
mugged in a high-crime area by staying out of the area.
Loss Control - Correct answer-another important technique for managing risk. It consists of certain
activities that reduce the frequency or severity of losses. Two major objectives: loss prevention and loss
reduction.
Loss Prevention - Correct answer-aims at reducing the probability of loss so that the frequency of losses
is reduced. For example, if drivers take safe-driving courses and drive defensively to reduce the risk of
accident.
Loss Reduction - Correct answer-strict loss prevention efforts can reduce the frequency of losses, yet
some losses will inevitably occur. Loss control is to reduce the severity of a loss after it occurs. For
example a department store can install a sprinkler system so that a fire will be promptly extinguished,
thereby reducing the severity of loss.
Retention - Correct answer-is a technique for managing risk where an individual or business firm retains
part of all of the financial consequences of a given risk. It can be active or passive. It should only be used
for high-frequency low-severity risks where potential losses are relatively small.
, Active Retention - Correct answer-means that an individual is consciously aware of the risk and
deliberately plans to retain all or part of it. For example, a motorist may wish to retain the risk of a small
collision loss by purchasing a policy with a $500 or higher deductible.
Passive Retention - Correct answer-risks can be retained passively. Certain risks may be unknowingly
retained because of ignorance, indifference or laziness. For example, many workers with earned
incomes are not insured against the risk of total and permanent disability.
Self-Insurance - Correct answer-a special form of planned retention by which part of all of a given loss
exposure is retained by the firm. For example, a large corporation may self-insure or fund part or all of
the group health insurance benefits paid to employees.
Noninsurance Transfers - Correct answer-technique for managing risk where risk is transferred to a party
other than an insurance company. These techniques include contracts, hedging or incorporation.
Contracts - Correct answer-used for transferring unwanted risk. For example, the risk of a defective
television or stereo set can be transferred to the retailer by purchasing a service contract, which makes
the retailer responsible for all repairs after the warrant expires.
Hedging - Correct answer-a technique for transferring the risk of unfavorable price fluctuations to a
speculator by purchasing and selling futures contracts on an organized exchange, such as the New York
Stock Exchange. For example, the portfolio manager of a pension fund may hold a substantial position in
a long-term U.S. Treasury bonds. If interest rates rise, the value of the Treasury bonds will decline. To
hedge that risk, the portfolio manager can sell U.S. Treasury bond futures. This will allow the manager to
offset the loss of declining stock price.
Incorporation - Correct answer-a risk transfer. If a firm is a sole proprietorship, the owner's personal
assets can be attached by creditors for satisfaction of debts. However, if a firm incorporates, personal
assets cannot be attached by creditors for payment of the firm's debt. This shifts the responsibility of
debts from shareholders and owners pockets to that of creditors.
Which of the following types of families is likely to have the least need for a large amount of life
insurance? - Correct answer-A single person family
The human life value is defined as the - Correct answer-present value of the family's share of a deceased
breadwinner's future earnings
Insurance, 14th Edition by George E. Rejda
Risk - Correct answer-defined as uncertainty concerning the occurrence of a loss.
Loss Exposure - Correct answer-any situation or circumstance in which a loss is possible, regardless of
whether a loss occurs.
Objective Risk - Correct answer-defined as the relative variation of actual loss from expected loss. For
example of the 10,000 houses there is an expected loss of 100 (1%), but actually between 90-110 burn,
thus a variation of 10.
Subjective Risk - Correct answer-defined as uncertainty based on a person's mental condition or state of
mind. For example a person who has been heavily drinking may attempt to drive home even though he
is not sure whether he will be able to drive safely or get arrested.
Chance of Loss - Correct answer-defined as the probability that an event will occur.
Objective Probability - Correct answer-refers to the long-run relative frequency of an event based on the
assumptions of an infinite number of observations and of no change in the underlying conditions. For
example the probability of rolling a six on a six sided die is 1/6th.
,Subjective Probability - Correct answer-the individual's personal estimate of the chance of loss. For
example people who buy a lottery ticket on their birthday think its their lucky day and will overcome the
odds.
Peril - Correct answer-defined as the cause of loss
Hazard - Correct answer-a condition that creates or increases the frequency or severity of loss, there are
four major types which include Physical Hazard (icy roads), Moral Hazard (fraudulent claims), Attitudinal
Hazard (carelessness/indifference) & Legal Hazard.
Pure Risk - Correct answer-defined as a situation in which there are only the possibilities of loss or no
loss.
Speculative Risk - Correct answer-defined as a situation in which either profit or loss is possible.
Diversifiable Risk (Particular Risk) - Correct answer-a risk that affects only individuals or small groups and
not the entire economy.
Nondiversifiable Risk (Fundamental Risk) - Correct answer-is a risk that affects the entire economy or
large number of persons or groups within the economy.
Enterprise Risk - Correct answer-is a term that encompasses all major risks faced by a business firm.
Such risks include pure risk, speculative risk, strategic risk, operational risk and financial risk.
Enterprise Risk Management - Correct answer-combines all major risks faced by a business into a single
unified treatment program all major risks faced by the firm.
Personal Risk - Correct answer-are risks that directly affect an individual. They include premature death,
insufficient retirement income, injury or illness and unemployment.
Premature Death - Correct answer-is defined as the death of a family head with unfulfilled financial
obligations.
,Property Risk - Correct answer-the risk of having property damaged or lost from numerous causes.
Having property destroyed due to lighting, flood or fire are all examples of property risks which fall into
two major types: direct or indirect (consequential) loss.
Direct Loss - Correct answer-defined as a financial loss that results from the physical damage,
destruction or theft of the property. For example, if you own a home that is damaged by a fire.
Indirect or Consequential Loss - Correct answer-financial loss that results indirectly from the occurrence
of a direct physical damage or theft loss. For example because of the fire to your home you have to pay
for additional living expenses while the home is being rebuilt.
Liability Risk - Correct answer-are an important type of pure risk that most persons face.
Avoidance - Correct answer-technique for managing risk. For example you can avoid the risk of being
mugged in a high-crime area by staying out of the area.
Loss Control - Correct answer-another important technique for managing risk. It consists of certain
activities that reduce the frequency or severity of losses. Two major objectives: loss prevention and loss
reduction.
Loss Prevention - Correct answer-aims at reducing the probability of loss so that the frequency of losses
is reduced. For example, if drivers take safe-driving courses and drive defensively to reduce the risk of
accident.
Loss Reduction - Correct answer-strict loss prevention efforts can reduce the frequency of losses, yet
some losses will inevitably occur. Loss control is to reduce the severity of a loss after it occurs. For
example a department store can install a sprinkler system so that a fire will be promptly extinguished,
thereby reducing the severity of loss.
Retention - Correct answer-is a technique for managing risk where an individual or business firm retains
part of all of the financial consequences of a given risk. It can be active or passive. It should only be used
for high-frequency low-severity risks where potential losses are relatively small.
, Active Retention - Correct answer-means that an individual is consciously aware of the risk and
deliberately plans to retain all or part of it. For example, a motorist may wish to retain the risk of a small
collision loss by purchasing a policy with a $500 or higher deductible.
Passive Retention - Correct answer-risks can be retained passively. Certain risks may be unknowingly
retained because of ignorance, indifference or laziness. For example, many workers with earned
incomes are not insured against the risk of total and permanent disability.
Self-Insurance - Correct answer-a special form of planned retention by which part of all of a given loss
exposure is retained by the firm. For example, a large corporation may self-insure or fund part or all of
the group health insurance benefits paid to employees.
Noninsurance Transfers - Correct answer-technique for managing risk where risk is transferred to a party
other than an insurance company. These techniques include contracts, hedging or incorporation.
Contracts - Correct answer-used for transferring unwanted risk. For example, the risk of a defective
television or stereo set can be transferred to the retailer by purchasing a service contract, which makes
the retailer responsible for all repairs after the warrant expires.
Hedging - Correct answer-a technique for transferring the risk of unfavorable price fluctuations to a
speculator by purchasing and selling futures contracts on an organized exchange, such as the New York
Stock Exchange. For example, the portfolio manager of a pension fund may hold a substantial position in
a long-term U.S. Treasury bonds. If interest rates rise, the value of the Treasury bonds will decline. To
hedge that risk, the portfolio manager can sell U.S. Treasury bond futures. This will allow the manager to
offset the loss of declining stock price.
Incorporation - Correct answer-a risk transfer. If a firm is a sole proprietorship, the owner's personal
assets can be attached by creditors for satisfaction of debts. However, if a firm incorporates, personal
assets cannot be attached by creditors for payment of the firm's debt. This shifts the responsibility of
debts from shareholders and owners pockets to that of creditors.
Which of the following types of families is likely to have the least need for a large amount of life
insurance? - Correct answer-A single person family
The human life value is defined as the - Correct answer-present value of the family's share of a deceased
breadwinner's future earnings
