Exam 1 Quizzes

Question 1

Traditionally, risk has been defined as

Answer 1

uncertainty concerning the occurrence of loss

Question 2

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

objective probability
objective risk
subjective probability
subjective risk

Answer 2

objective probability

Question 3

Dense fog that increases the chance of an automobile accident is an example of a

speculative risk
peril
physical hazard
moral hazard

Answer 3

physical hazard

Question 4

A name that encompasses all of the major risks faced by a business firm is

financial risk
speculative risk
enterprise risk
pure risk

Answer 4

enterprise risk

Question 5

The premature death of an individual is an example of a

pure risk
speculative risk
nondiversifiable risk
physical hazard

Answer 5

pure risk

Question 6

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.

Answer 6

both I and II

Question 7

All of the following are burdens to society because of the presence of risk EXCEPT

The size of an emergency fund must be increased
Risk provides an incentive for people to engage in risk control
Society is deprived of certain goods and services
Mental fear and worry are present

Answer 7

Risk provides an incentive for people to engage in risk control

Question 8

All of the following statements about risk retention are true EXCEPT

It may be used intentionally if commercial insurance is unavailable
It may be used passively because of ignorance
Its use is most appropriate for low-frequency, high-severity types of risks
Its use results in cost savings if losses are less than the cost of insurance

Answer 8

Its use is most appropriate for low-frequency, high-severity types of risks

Question 9

ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects that 8 homeowners out of every 100, on average, will report claims each year. The variation between the rate of loss that ABC expects to occur and the rate of loss that actually occurs is called

objective probability
subjective probability
objective risk
subjective risk

Answer 9

objective risk

Question 10

Ben is concerned that if he injures someone or damages someone’s property he could be held legally responsible and required to pay damages. This type of risk is called a

speculative risk
liability risk
nondiversifiable risk
property risk

Answer 10

liability risk

Question 11

Which of the following is a basic characteristic of insurance?

pooling of losses
avoidance of risk
payment of intentional losses
certainty about specific losses that will occur

Answer 11

pooling of losses

Question 12

Characteristics of a fortuitous loss include which of the following?

I. The loss is certain to occur.
II. The loss occurs as a result of chance.

Answer 12

II only

Question 13

Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable?

I. The loss must be definite as to place.
II. The loss must be definite as to amount.

Answer 13

both I and II

Question 14

Which of the following is a result of adverse selection?

The insurer’s financial results will be substantially improved.
Persons most likely to have losses are also most likely to seek insurance at standard rates.
It is unnecessary for the insurance company to use underwriting.
Insurance can be written only by the federal government.

Answer 14

Persons most likely to have losses are also most likely to seek insurance at standard rates.

Question 15

All of the following are social costs associated with insurance EXCEPT

insurance company operating expenses.
fraudulent claims.
inflated claims.
increased cost of capital.

Answer 15

increased cost of capital.

Question 16

Which of the following is a form of casualty insurance?

fire insurance
general liability insurance
inland marine insurance
ocean marine insurance

Answer 16

general liability insurance

Question 17

LMN Insurance sells homeowners insurance. The LMN homeowners policy combines property and casualty insurance in the same contract. Insurance policies combining property and casualty coverage in the same contract are called

mono-line policies
multi-year policies
multiple-line policies
manuscript policies

Answer 17

multiple-line policies

Question 18

Apex Insurance Company wrote a large number of property insurance policies in an area where earthquake losses could occur. When the president of Apex was asked if she feared that a severe earthquake might put the company out of business, she responded, “Not a chance. We transferred most of that risk to other insurance companies.” An arrangement by which an insurer that initially writes insurance transfers to another insurer part or all of the potential losses associated with such insurance is called

hedging
speculating
reinsurance
loss avoidance

Answer 18

reinsurance

Question 19

Adverse selection occurs

when an insurance company loses money on its investments
when insurance purchasers buy insurance but do not have a loss
when catastrophic losses occur as a result of a natural disaster
when applicants with a higher-than-average chance of loss seek insurance at standard rates

Answer 19

when applicants with a higher-than-average chance of loss seek insurance at standard rates

Question 20

The premium that insurance companies charge does not cover the cost of expected losses only. The premium must also cover the cost of compensating agents and other costs of doing business. The amount added to the pure premium to cover these costs is called the

expense loading
deductible
dividend
loss reserve

Answer 20

expense loading

Question 21

Risk management is concerned with

the identification and treatment of loss exposures
the management of speculative risks only
the management of pure risks that are uninsurable
the purchase of insurance only

Answer 21

the identification and treatment of loss exposures

Question 22

A risk manager is concerned with which of the following?

I. Identifying potential losses
II. Selecting the appropriate techniques for treating loss exposures

Answer 22

both I and II

Question 23

The worst loss that is likely to happen is referred to as the

maximum possible loss
probable maximum loss
frequency of loss
severity of loss

Answer 23

probable maximum loss

Question 24

Which of the following statements about the use of a captive insurance company by a parent firm is true?

The captive may not write outside, non-parent company, business
Captives are not permitted to use reinsurance, so any business insured by the captive stays with the captive
The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers
Business placed with the captive is always considered retained risk and is never considered transferred risk

Answer 24

The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers

Question 25

ABC Insurance retains the first $1 million of each property damage loss and purchases reinsurance for that part of any property loss that exceeds $1 million. The insurance for property losses above $1 million is called excess insurance liability insurance coinsurance primary insurance

Answer 25

excess insurance

Question 26

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 evaluate potential losses faced by XYZ Company formulate a treatment plan for XYZ Company's loss exposures identify potential losses faced by XYZ Company implement and administer a risk management plan for XYZ Company

Answer 26

identify potential losses faced by XYZ Company

Question 27

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? retention loss prevention transfer through insurance avoidance

Answer 27

loss prevention

Question 28

Which of the following statements about a personal risk management program is (are) true? I. Insurance and retention are the only techniques used to handle potential losses. II. The steps in a personal risk management process are the same steps used by businesses.

Answer 28

II only

Question 29

All of the following are disadvantages of using insurance in a commercial risk management program EXCEPT There is an opportunity cost because premiums must be paid in advance Considerable time and effort must be spent selecting and negotiating coverages It results in considerable fluctuations in earnings after losses occur Attitudes toward loss control may become lax when losses are insured

Answer 29

It results in considerable fluctuations in earnings after losses occur

Question 30

Mark owns a 2009 sedan. The last time Mark renewed his auto insurance, he decided to drop the physical damage insurance on this vehicle. How is Mark dealing with the auto physical damage exposure in his personal risk management program? risk transfer passive retention avoidance active retention

Answer 30

risk transfer

Question 31

Which of the following statements about stock insurers is true? They issue assessable policies They are not permitted to write property and liability insurance Stockholders bear any losses and share in any profits They are owned by their policyholders

Answer 31

Stockholders bear any losses and share in any profits

Question 32

Which of the following statements is true about fraternal insurers? They are legally organized as stock insurers They specialize in writing life and health insurance They are taxed more heavily than other types of insurers because of discriminatory marketing practices They account for the majority of life insurance in force in the United States

Answer 32

They specialize in writing life and health insurance

Question 33

Neil needs insurance that is unavailable in the state where he lives. To obtain insurance from a nonadmitted insurer, Neil should contact a surplus lines broker nonadmitted agent general agency broker direct writer

Answer 33

surplus lines broker

Question 34

All of the following statements about the independent agency system are true EXCEPT Agents are often authorized to adjust small claims Agents are compensated on the basis of commissions The insurer rather than the agent owns the renewal rights to the business The agent is an independent business person who represents several insurers

Answer 34

The insurer rather than the agent owns the renewal rights to the business

Question 35

David is a successful independent insurance agent. Recently, one of the life insurance companies with whom he places business offered him a special financial arrangement. If David meets sales targets, he will receive large bonuses. He will also be able to recruit and train sub-agents and receive an over-riding commission based on the amount of life insurance the sub-agents sell. Based on this description, David is a(n) insurance broker personal-producing general agent direct writer multiple life exclusive agent

Answer 35

personal-producing general agent

Question 36

Cathy just started a job with XYZ Manufacturing Company. She attended an orientation and was given a packet providing information about the various employee benefits XYZ offers. One item in the packet was a booklet and application form from an auto insurer. The insurer offers lower premiums to XYZ employees. The insurer's plan for selling individually-underwritten auto insurance to employees of XYZ Manufacturing Company is called direct response mass merchandising financial institution distribution multiple marketing

Answer 36

mass merchandising

Question 37

Some investors decided to start an insurance company. Each investor contributed $50,000 to raise the capital required to charter a new company. Each investor received an ownership interest in the company. The company will raise additional capital by selling ownership rights to other investors. Under this type of organization, the customer and owner functions are separate. This type of insurer is called a stock company reciprocal exchange fraternal company mutual company

Answer 37

stock company

Question 38

All of the following are reasons why mutual insurance companies convert to stock insurance companies EXCEPT Stock companies can raise new capital more easily Stock companies are exempt from state insurance regulations Stock companies offer greater flexibility to expand through acquisitions

Answer 38

Stock companies are exempt from state insurance regulations

Question 39

Marcy advises her clients on investments, taxes, wealth management, estate issues, budgeting, and insurance. Marcy is also a licensed life insurance agent. When Marcy sells life insurance to a client, the distribution channel used is a(n) stock broker financial planner insurance broker

Answer 39

financial planner

Question 40

A reciprocal exchange is managed by a corporation that is authorized to collect premiums, pay losses, invest funds, seek new members, and perform other functions. This corporate manager is called a(n) holding company attorney-in-fact resident agent captive manager

Answer 40

attorney-in-fact