Exam 1 Quizzes Flashcards
Traditionally, risk has been defined as
uncertainty concerning the occurrence of loss
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
objective probability
Dense fog that increases the chance of an automobile accident is an example of a
speculative risk
peril
physical hazard
moral hazard
physical hazard
A name that encompasses all of the major risks faced by a business firm is
financial risk
speculative risk
enterprise risk
pure risk
enterprise risk
The premature death of an individual is an example of a
pure risk
speculative risk
nondiversifiable risk
physical hazard
pure risk
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.
both I and II
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
Risk provides an incentive for people to engage in risk control
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
Its use is most appropriate for low-frequency, high-severity types of risks
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
objective risk
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
liability risk
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
pooling of losses
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.
II only
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.
both I and II
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.
Persons most likely to have losses are also most likely to seek insurance at standard rates.
All of the following are social costs associated with insurance EXCEPT
insurance company operating expenses.
fraudulent claims.
inflated claims.
increased cost of capital.
increased cost of capital.
Which of the following is a form of casualty insurance?
fire insurance
general liability insurance
inland marine insurance
ocean marine insurance
general liability insurance
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
multiple-line policies
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
reinsurance
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
when applicants with a higher-than-average chance of loss seek insurance at standard rates
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
expense loading
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
the identification and treatment of loss exposures
A risk manager is concerned with which of the following?
I. Identifying potential losses
II. Selecting the appropriate techniques for treating loss exposures
both I and II
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
probable maximum loss
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
The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers
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
excess insurance
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
identify potential losses faced by XYZ Company
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
loss prevention
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.
II only
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
It results in considerable fluctuations in earnings after losses occur
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
risk transfer
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
Stockholders bear any losses and share in any profits
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
They specialize in writing life and health insurance
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
surplus lines broker
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
The insurer rather than the agent owns the renewal rights to the business
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
personal-producing general agent
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
mass merchandising
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
stock company
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
Stock companies are exempt from state insurance regulations
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
financial planner
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
attorney-in-fact
