Chapter 4 Enterprise Risk
Management and Related Topics (Test
bank) With 100% Correct Answers
1) Which of the following is a financial risk that may be faced by a business organization?
A) injuries suffered by employees at the workplace
B) lost income after a fire loss
C) product liability risk
D) currency exchange rate risk - CORRECT ANSWER✔✔D
2) Which of the following statements about the scope of risk management is (are) true? I.
Traditionally, risk management was limited in scope to speculative loss exposures. II. In the
1990s, some businesses began to expand the scope of risk management to include financial
risks.
A) I only
B) II only
C) both I and II
D) neither I nor II - CORRECT ANSWER✔✔B
3) Mid-States Beef is a commercial feedlot business. Currently, the company has over 10,000
cattle in feedlots. Mid-States is concerned that the price of corn, the grain fed to the cattle, will
increase significantly. The risk that the price of corn may increase and harm the profitability of
Mid-States Beef's operations is a(n)
A) currency exchange rate risk.
B) property risk.
C) commodity price risk.
D) interest rate risk. - CORRECT ANSWER✔✔C
,4) An integrated risk management program is a risk management program which combines
A) pure and speculative risks.
B) property and liability risks.
C) personnel-related risk and property risk.
D) direct and indirect loss risk. - CORRECT ANSWER✔✔A
5) Regional Airline (RA) spends millions of dollars each year on jet fuel. The company also has
significant liability exposures. RA can retain a large portion of its liability exposure if fuel costs
are low. The company can pay high fuel costs if retained liability losses are low. RA cannot,
however, absorb both high fuel costs and high retained liability claims. RA's insurer designed an
insurance program where the insurer pays only if both contingencies (high fuel costs and high
retained liability claims) occur. The contract the insurer designed is called a(n)
A) double indemnity rider.
B) double trigger option.
C) multiple protection policy.
D) other insurance provision. - CORRECT ANSWER✔✔B
6) Which statement is (are) true with respect to enterprise risk management programs? I. They
address traditional property, liability, and personnel loss exposures. II. They do not address
financial risks.
A) I only
B) II only
C) both I and II
D) neither I nor II - CORRECT ANSWER✔✔A
7) A comprehensive risk management program that addresses an organization's pure risks,
speculative risks, strategic risks, and operational risks is called a(n)
A) risk management information system.
, B) financial risk management plan.
C) speculative risk management plan.
D) enterprise risk management plan. - CORRECT ANSWER✔✔D
8) The property and liability insurance industry is characterized by a repetitive pattern of loose
underwriting standards with low premiums followed by tight underwriting standards with high
premiums. This repetitive pattern is called the
A) underwriting by exception method.
B) business cycle.
C) underwriting cycle.
D) account underwriting method. - CORRECT ANSWER✔✔C
9) Which statement is (are) true regarding property and liability insurance market conditions? I.
Premiums are high when the insurance market is "hard." II. Underwriting standards are tight
when the insurance market is "soft."
A) I only .
B) II only .
C) both I and II .
D) neither I nor II. - CORRECT ANSWER✔✔A
10) Which of the following statements is true regarding insurance market conditions and
underwriting results?
A) A combined ratio greater than one (or 100 percent) indicates profitable underwriting.
B) In a "soft" insurance market, more retention is used than in a "hard" insurance market.
C) Insurance rates are high and underwriting standards are tight when the insurance market is
"hard."
D) Property and liability insurance premiums and underwriting standards do not fluctuate over
time. - CORRECT ANSWER✔✔C
Management and Related Topics (Test
bank) With 100% Correct Answers
1) Which of the following is a financial risk that may be faced by a business organization?
A) injuries suffered by employees at the workplace
B) lost income after a fire loss
C) product liability risk
D) currency exchange rate risk - CORRECT ANSWER✔✔D
2) Which of the following statements about the scope of risk management is (are) true? I.
Traditionally, risk management was limited in scope to speculative loss exposures. II. In the
1990s, some businesses began to expand the scope of risk management to include financial
risks.
A) I only
B) II only
C) both I and II
D) neither I nor II - CORRECT ANSWER✔✔B
3) Mid-States Beef is a commercial feedlot business. Currently, the company has over 10,000
cattle in feedlots. Mid-States is concerned that the price of corn, the grain fed to the cattle, will
increase significantly. The risk that the price of corn may increase and harm the profitability of
Mid-States Beef's operations is a(n)
A) currency exchange rate risk.
B) property risk.
C) commodity price risk.
D) interest rate risk. - CORRECT ANSWER✔✔C
,4) An integrated risk management program is a risk management program which combines
A) pure and speculative risks.
B) property and liability risks.
C) personnel-related risk and property risk.
D) direct and indirect loss risk. - CORRECT ANSWER✔✔A
5) Regional Airline (RA) spends millions of dollars each year on jet fuel. The company also has
significant liability exposures. RA can retain a large portion of its liability exposure if fuel costs
are low. The company can pay high fuel costs if retained liability losses are low. RA cannot,
however, absorb both high fuel costs and high retained liability claims. RA's insurer designed an
insurance program where the insurer pays only if both contingencies (high fuel costs and high
retained liability claims) occur. The contract the insurer designed is called a(n)
A) double indemnity rider.
B) double trigger option.
C) multiple protection policy.
D) other insurance provision. - CORRECT ANSWER✔✔B
6) Which statement is (are) true with respect to enterprise risk management programs? I. They
address traditional property, liability, and personnel loss exposures. II. They do not address
financial risks.
A) I only
B) II only
C) both I and II
D) neither I nor II - CORRECT ANSWER✔✔A
7) A comprehensive risk management program that addresses an organization's pure risks,
speculative risks, strategic risks, and operational risks is called a(n)
A) risk management information system.
, B) financial risk management plan.
C) speculative risk management plan.
D) enterprise risk management plan. - CORRECT ANSWER✔✔D
8) The property and liability insurance industry is characterized by a repetitive pattern of loose
underwriting standards with low premiums followed by tight underwriting standards with high
premiums. This repetitive pattern is called the
A) underwriting by exception method.
B) business cycle.
C) underwriting cycle.
D) account underwriting method. - CORRECT ANSWER✔✔C
9) Which statement is (are) true regarding property and liability insurance market conditions? I.
Premiums are high when the insurance market is "hard." II. Underwriting standards are tight
when the insurance market is "soft."
A) I only .
B) II only .
C) both I and II .
D) neither I nor II. - CORRECT ANSWER✔✔A
10) Which of the following statements is true regarding insurance market conditions and
underwriting results?
A) A combined ratio greater than one (or 100 percent) indicates profitable underwriting.
B) In a "soft" insurance market, more retention is used than in a "hard" insurance market.
C) Insurance rates are high and underwriting standards are tight when the insurance market is
"hard."
D) Property and liability insurance premiums and underwriting standards do not fluctuate over
time. - CORRECT ANSWER✔✔C
