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Question 1

How is the pure premium calculated?

Answer 1

Frequency x Severity

Question 2

The ___ is the bias of the human mind toward that which has occurred recently.

Answer 2

recency bias

Question 3

___ is the process that identifies loss exposures faced by an organization and selects the most appropriate technique for treating loss exposure.

Answer 3

risk management

Question 4

Name the five Enterprise Risks faced by a business firm.

Answer 4

• Pure risk
• Speculative risk
• Strategic risk
• Operational risk
• Financial risk

Question 5

___ refers to uncertainty regarding the firm’s financial goals and objectives.

Answer 5

Strategic risk

Question 6

___ are risks that result from the firm’s business operations.

Answer 6

Operational risks

Question 7

___ refers to the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money.

Answer 7

financial risk

Question 8

What is the biggest enterprise risk faced by a business firm?

Answer 8

Operational

Question 9

___ refers to the collapse of an entire system or market due to the failure of a single entity or group of entities that can result in the breakdown of the entire financial system.

Answer 9

systemic risk

Question 10

___ are risks that directly affect an individual or family. They involve the possibility of a loss or reduction in income, extra expenses, or depletion of financial assets.

Answer 10

personal risks

Question 11

Name the four main causes of personal risks.

Answer 11

• Premature death
• Inadequate retirement income
• Poor health
• Unemployment

Question 12

Name the four main personal risks.

Answer 12

• Property risk
• Direct loss
• Indirect/Consequential loss
• Liability risks

Question 13

A(n) ___ is a financial loss that results from the physical damage, destruction or theft of property.

Ex: fire damage to a home.

Answer 13

direct loss

Question 14

A(n) ___ refers to the possibility of losses associated with the destruction of theft or property.

Answer 14

property risk

Question 15

A(n) ___ is a financial loss that results indirectly from the occurrence of a direct physical damage or theft loss.

Ex: additional living expenses after a fire.

Answer 15

indirect loss

Question 16

___ involve the possibility of being held legally liable for bodily injury or property damage to someone else. There’s no upper limit to the amount of the loss and legal defense costs can be enormous.

Answer 16

liability risks

Question 17

___ refer to a variety of pure risks that firms face when a risk occurs.

Answer 17

commercial risks

Question 18

Name the 8 main commercial risks.

Answer 18

• Property risks
• Liability risks
• Loss of business income
• Cybersecurity & identity theft
• Human resources exposures
• Foreign loss exposures
• Intangible property exposures
• Government exposures

Question 19

Which commercial risk would the following example be classified as?

Damage to buildings, furniture, and office equipment.

Answer 19

property risk

Question 20

Which commercial risk would the following example be classified as?

Suits for defective products, pollution, and sexual harassment.

Answer 20

liability risk

Question 21

Which commercial risk would the following example be classified as?

When the firm must shut down for some time after a physical damage loss.

Answer 21

Loss of business income

Question 22

Which commercial risk would the following example be classified as?

Thieves breaking into a firm’s computer system.

Answer 22

cybersecurity and identity theft

Question 23

Which commercial risk would the following example be classified as?

Job-related injuries.

Answer 23

human resources exposures

Question 24

Which commercial risk would the following example be classified as?

Acts of terrorism.

Answer 24

foreign loss exposures

Question 25

Which commercial risk would the following example be classified as?

Damage to the market reputation and public image of the company.

Answer 25

intangible property exposures

Question 26

Which commercial risk would the following example be classified as?

Violation of safety standards.

Answer 26

government exposures

Question 27

What are the two main types of risk control?

Answer 27

• Avoidance
• Loss prevention: activities to reduce the frequency of losses

Question 28

What are the three main burdens of risk on society?

Answer 28

• Without insurance, individuals and business firms would have to maintain large emergency funds to pay for unexpected losses
• Risk of a liability lawsuit may discourage innovation
• Risk causes worry and fear

Question 29

What are the three main methods of loss reduction?

Answer 29

• Duplication
• Separation
• Diversification

Question 30

___ means that an individual or business firm retains part or all of the losses that can result from a given risk.

Answer 30

retention

Question 31

___ means that an individual is aware of the risk and deliberately plans to retain all or part of it.

Answer 31

active retention

Question 32

___ means risk may be unknowingly retained because of ignorance, indifference, or laziness.

Answer 32

Passive retention

Question 33

___ is a special form of planned retention by which part or all of a given loss exposure is retained by the firm.

Answer 33

Self insurance

Question 34

A(n) ___ transfers a risk to another party.

Answer 34

noninsurance transfer

Question 35

What are the three main types of noninsurance transfer?

Answer 35

• Hedging
• Contract (hold-harmless clause)
• Incorporation

Question 36

___ is a technique for transferring the risk of unfavorable price fluctuations to a speculator.

Answer 36

Hedging

Question 37

___ of a business firm transfers to the creditors the risk of having insufficient assets.

Answer 37

Incorporation

Question 38

The ___ technique is used to spread the losses of the few over the entire group.

Answer 38

pooling