RISK MANAGEMENT AND INSURANCE

Test Bank f or Introduction to

RISK MANAGEMENT AND INSURANCE

Tenth Edition Mark S. Dorfman David A. Cather 1 / 4

Introduction to Risk Management and Insurance, 10e (Dorfman/Cather) Chapter 1 Introduction to Enterprise Risk Management and Insurance

1) A Pure Risk is defined as:

• an event that offer no opportunity for financial gain
• the chance a loss will occur
• a diversifiable risk
• a contingency that increases the chance of a loss

Answer: A

Diff: 1

2) All the following are direct losses except:

• a car is stolen
• a house suffers flood damage
• an apartment must be rented after a house is destroyed by fire
• a business loses $100,000 in a law suit

Answer: C

Diff: 1

3) All the following are direct losses except:

• a house is burglarized
• a store loses $200,000 in sales because a fire closes it down for two weeks
• a corporation must pay $1 million in ransom when its CEO is kidnapped
• an delivery truck needs $15,000 in repairs after a collision

Answer: B

Diff: 1

4) Which of the following is not an example of a Catastrophic Loss Event?

• Hurricane Katrina
• Death of Michael Jackson
• September 11, 2001 terror attacks
• 2004 Tsunami in the Indian Ocean

Answer: B

Diff: 1

5) Which of the following is not a method of protection of risk?

• Group insurance plans
• Employee benefits
• Social insurance
• Humanitarian aid

Answer: D

Diff: 2

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6) Defective electrical wiring that may lead to a fire is an example of a:

• pure risk
• non-diversifiable risk
• speculative risk
• physical hazard

Answer: D

Diff: 2

7) Risk Pooling is an example of:

• a Catastrophic Loss Event
• diversifying risk
• a speculate risk
• applying the risk-return trade-off

Answer: B

Diff: 2

8) Which of the following is a false statement?

• Risk averse people will pay an insurance premium that is greater than the mathematically fair

chance of loss in order to relieve themselves of uncertainty.

• A risk seeker is willing to assume risk.
• The mathematically fair price for insurance is the objective risk for the insurer multiplied by

the maximum possible loss.

• Insurance is never a mathematically fair trade because the insurer adds several operating and

other costs to loss costs when it calculates the premium.

Answer: D

Diff: 3

9) Which of the following is not a hazard?

• Storing one ton of dynamite in a garage
• Bad diet (eating lots of junk food)
• Skating on thin ice
• Getting shot accidentally while deer hunting

Answer: D

Diff: 2

10) The correct order of the steps in the Risk Management Process is:

• Establish Goals, Identify Potential Loss Exposure, Measure Potential Loss Exposure, Choose

Risk Handling Techniques, Implement Techniques and Monitor Effectiveness

• Establish Goals, Choose Risk Handling Techniques, Identify Potential Loss Exposure,

Measure Potential Loss Exposure, Implement Techniques and Monitor Effectiveness

• Establish Goals, Choose Risk Handling Techniques, Measure Potential Loss Exposure,

Identify Potential Loss Exposure, Implement Techniques and Monitor Effectiveness

• Establish Goals, Measure Potential Loss Exposure, Identify Potential Loss Exposure, Choose

Risk Handling Techniques, Implement Techniques and Monitor Effectiveness

Answer: A

Diff: 2

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11) Assume that 1000 students, all healthy, all age 22, and all male, form a life insurance pool to pay $500 to the beneficiaries of any member who dies in the next 365 days. The chance of loss or probability of death for the members of this group is .002. To join the pool a member must pay: (Disregard interest earnings and reserves and assume expenses of operating the insurance pool are 30% of losses).

• $1

B) $1.30

• $3

D) $2.28

Answer: B

Diff: 3

12) Which of the following is not a type of risk when identifying a pure risk?

• Retention Risk
• Property Risk
• Liability Risk
• Human Resource Risk

Answer: A

Diff: 3

13) Which of the following is a true statement?

• Liability risks are risks associated with building calamities.
• Theft is a diversifiable risk.
• Most individuals in the industrialized countries carry no insurance.
• The Law of Large Numbers is used in Risk Pooling.

Answer: D

Diff: 1

14) Loss Transfer means:

• shifting the financial consequences of a loss to a third party
• shifting the financial consequences of a loss to a self-insurance program
• shifting the financial consequences of a loss to a well-diversified portfolio
• shifting the financial consequences of a loss to more wealthy group of people

Answer: A

Diff: 2

15) Which of the following is not a risk handling technique?

• Loss control
• Loss diversification
• Loss transfer
• Loss financing

Answer: B

Diff: 2

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