Chapter 3 Introduction to Risk Management Que & Ans

1) Risk management is concerned with A) the identification and treatment of loss exposures. B) the management of speculative risks only. C) the management of pure risks that are uninsurable. D) the purchase of insurance only. - ANS Answer: A 2) A situation or circumstance in which a loss is possible, regardless of whether a loss occurs, is called a A) deductible. B) loss exposure. C) loss avoidance. D) peril. - ANS Answer: B 3) Which of the following is a post-loss risk management objective? A) treating loss exposures in the most economical way B) continuing operations C) reduction of anxiety D) meeting externally imposed legal obligations - ANS Answer: B 4) Preloss objectives of risk management include which of the following? I. Preparing for potential losses in the most economical way II. Reduction of anxiety A) I only B) II only C) both I and II D) neither I nor II - ANS Answer: C 5) A risk manager is concerned with which of the following? I. Identifying potential losses II. Selecting the appropriate techniques for treating loss exposures A) I only B) II only C) both I and II D) neither I nor II - ANS Answer: C 6) Which of the following is a source of information a risk manager could use to help identify pure loss exposures? A) commodity prices B) physical inspections C) currency exchange rates D) interest rate movements - ANS Answer: B 7) Loss severity is defined as the A) probable size of the losses which may occur during some period. B) probable number of losses which may occur during some period. C) probability that any particular piece of property may be totally destroyed. D) probability that a liability judgment may exceed a firm's net worth. - ANS Answer: A 8) Loss frequency is defined as the A) probable size of the losses that may occur during some period. B) probable number of losses that may occur during some period. C) probability that any particular piece of property may be totally destroyed. D) probability that a liability judgment may exceed a firm's net worth. - ANS Answer: B 9) The worst loss that could ever happen to a firm is referred to as the A) maximum possible loss. B) probable maximum loss. C) frequency of loss. D) severity of loss. - ANS Answer: A 10) The worst loss that is likely to happen is referred to as the A) maximum possible loss. B) probable maximum loss. C) frequency of loss. D) severity of loss. - ANS Answer: B 11) All of the following statements about avoidance are true EXCEPT A) Certain loss exposures are never acquired. B) Certain loss exposures may be abandoned. C) The chance of loss for certain loss exposures may be reduced to zero. D) It can be used for any loss exposure facing a firm. - ANS Answer: D 12) Abandoning an existing loss exposure is an example of A) avoidance. B) retention. C) noninsurance transfer. D) insurance transfer. - ANS Answer: A 13) Which of the following conditions is (are) appropriate for using retention? I. Losses are difficult to predict. II. The worst possible loss is not serious. A) I only B) II only C) both I and II D) neither I nor II - ANS Answer: B 14) Which of the following statements regarding the use of retention is (are) true? I. Retention is best used for loss exposures that have a low frequency and a high severity. II. A financially strong firm can have a higher retention level than a firm whose financial position is weak. A) I only B) II only C) both I and II D) neither I nor II - ANS Answer: B 15) Which of the following statements about the use of a captive insurance company by a parent firm is true? A) The captive may not write outside, non-parent company, business. B) Captives are not permitted to use reinsurance, so any business insured by the captive stays with the captive. C) The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers. D) Business placed with the captive is always considered retained risk and is never considered transferred risk. - ANS Answer: C 16) Which of the following statements about self-insurance is (are) true? I. It is a form of planned retention. II. State law usually prohibits its use for workers compensation. A) I only B) II only C) both I and II D) neither I nor II - ANS Answer: A 17) All of the following are potential advantages of retention EXCEPT A) lower expenses. B) increased cash flow. C) encouragement of loss prevention. D) protection from catastrophic losses. - ANS Answer: D