Study 1 Multiple Choice Practice Questions

Question 1

All costs associated with managing pure risk are known as which of the following?
Select one:
a. Cost of doing business
b. Cost of risk
c. Cost of goods sold
d. Cost of loss

Answer 1

b. Cost of risk

All costs associated with managing pure risk are known as cost of risks.

Question 2

Identify an example of peril.
Select one:
a. Explosion resulting in fire
b. Loose carpet on stairs
c. Obsolete machinery at a factory
d. Poorly maintained heating system

Answer 2

a. Explosion resulting in fire

The explosion is the event that caused the fire to start, which then caused the damage.

Question 3

Paul opens up a new barber shop on a busy downtown street and expects to earn a big profit. What is this an example of?
Select one:
a. Illegal risk
b. Speculative risk
c. Pure risk
d. Moral risk

Answer 3

b. Speculative risk

Speculative risk exists where there is either a chance of loss or a chance of profit.

Question 4

What is a peril?
Select one:
a. An example of risk
b. An event that will give rise to a loss
c. An event that will prevent a loss
d. A factor that may increase the likelihood of a loss

Answer 4

b. An event that will give rise to a loss

A peril is an event that may cause a loss.

Question 5

What is a simple definition of earnings?
Select one:
a. The difference between revenues and expenses—the profits (net income) of a business
b. The cost of doing business
c. The difference between gross profit and net proceeds
d. The premium less the commission

Answer 5

a. The difference between revenues and expenses—the profits (net income) of a business

Earnings are the difference between revenues and expenses—the profits (net income) of a business.

Question 6

Which of the following is a commonly used method of exposure identification?
Select one:
a. Survey
b. Personal opinion
c. Cost-benefit analysis
d. Law of large numbers

Answer 6

a. Survey

The following are commonly used methods of exposure identification: surveys, flow charts, financial statements, inspections

Question 7

Which of the following is a proximate cause of loss?
Select one:
a. A cigarette that was tossed from an upper balcony lands on a lower balcony and causes a fire that damages the apartment unit; fire is the proximate cause.
b. A person trips on loose carpet on stairs and falls down the stairs; the person’s footwear is the proximate cause.
c. A negligent property owner doesn’t clear snow from sidewalks in winter, and a visitor slips and falls; the fall is the proximate cause.
d. A poorly maintained heating system causes smoke and soot to enter the heating ducts and spread throughout the home, causing damage; the smoke and soot are the proximate cause.

Answer 7

a. A cigarette that was tossed from an upper balcony lands on a lower balcony and causes a fire that damages the apartment unit; fire is the proximate cause.

The proximate cause is the immediate and effective cause of the loss. In this case it was fire that damaged the home. The smoking didn’t cause the damage, but the fire did

Question 8

Which of the following is an example of an organization practising social responsibility after a loss?
Select one:
a. Deciding to lay off as many employees as possible after a major loss affecting a building and equipment to cut costs
b. Deciding to declare bankruptcy after a major loss affecting a building and equipment
c. Deciding to stop funding an employee pension plan after a major loss affecting a building and equipment
d. Deciding to maintain as many employees on the payroll as possible in spite of a major loss affecting a building and equipment

Answer 8

d. Deciding to maintain as many employees on the payroll as possible in spite of a major loss affecting a building and equipment

After a loss, it is still important to consider the employees and the community.

Question 9

Which of the following is both a pre-loss and a post-loss objective of risk management?
Select one:
a. Sustained growth
b. Survival
c. Social responsibility
d. Operational continuity
Question 10
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Question text
Which type of risk can be insured?

Answer 9

c. Social responsibility

Social responsibility is both a pre-loss and post-loss objective of risk management.

Question 10

Which type of risk can be insured?
Select one:
a. Illegal risk
b. Pure risk
c. Speculative risk
d. Moral risk

Answer 10

b. Pure risk

Pure risk entails a chance of loss but no chance of profit. Insurance is concerned only with pure risk