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AINS 24 Chapter 7

Pure Risk
A chance of loss or no loss, but no chance of gain.
Speculative Risk
A chance of loss, no loss, or gain.
Avoidance
A risk control technique that involves ceasing or never undertaking an activity so that the possibility of a future loss occurring from that activity is eliminated.
Retention
A risk financing technique by which losses are retained by generating funds within the organization to pay for the losses.
Which one of the following is true regarding loss histories?

A. Changing environments have little effect on the quality of loss histories.

B. Changes in an organizations operations have little effect on the quality of loss histories.

C. Loss histories are not commonly used to identify loss exposures.

D. The quality of loss histories depends on whether they are organized and consistent.

D. The quality of loss histories depends on whether they are organized and consistent.
The risk management technique that eliminates a loss exposure and reduces the chance of loss to zero is

A. Loss Prevention.

B. Loss reduction.

C. Duplication.

D. Avoidance.

D. Avoidance.
Risk management activities under the enterprise-wide risk management approach occur at the

A. Business unit level.

B. Corporate level.

C. Departmental level.

D. Regional level.

B. Corporate level.
In preparation for installing a new alarm system at a business location, Risk Manager Tony Marcelli has consulted with his insurance agent to make sure that appropriate property and liability coverages are in place during installation. Also, Tony wants to be sure the insurer provides the proper insurance credit for the new alarm system. Tony’s actions described above are part of which one of the following steps of the risk management process?

A. Examining the feasibility of the risk management technique.

B. Selecting the appropriate risk management technique.

C. Implementing the selected risk management technique.

D. Monitoring results of the risk management technique.

C. Implementing the selected risk management technique.
A business installs bars on windows and door deadbolts to prevent burglaries. This is an example of

A. Avoidance.

B. Separation.

C. Loss prevention.

D. Loss reduction.

C. Loss prevention.
Which one of the following is true regarding enterprise-wide risk management (ERM)?

A. ERM is an approach to risk management that focuses primarily on loss exposures associated with pure risk.

B. In practice, implementation of ERM occurs at the departmental or business unit level.

C. Implementation of ERM is fairly consistent among organizations, regardless of their size, nature, or complexity.

D. ERM is an approach to managing all of an organization’s key risks and opportunities.

D. ERM is an approach to managing all of an organization’s key risks and opportunities.
Businesses, individuals, and families that practice sound risk management can benefit society in all of the following ways, EXCEPT:

A. Increasing interest in leisure activities

B. Reducing the overall number of losses

C. Controlling medical expenses through reduced injuries

D. Stimulating economic growth

A. Increasing interest in leisure activities
Risk manager Maria Sanchez is evaluating her employer’s current fleet of vehicles to ensure they are roadworthy and determine if any replacements are needed. Maria’s activities are part of which one of the following steps in the risk management process?

A. Analyzing loss exposures

B. Monitoring results and revising the risk management program

C. Identifying loss exposures

D. Implementing the selected risk management techniques

B. Monitoring results and revising the risk management program
In smaller organizations and in households, the person making risk management decisions is often the person

A. Least qualified.

B. Settling the claims.

C. Implementing the program.

D. Causing the losses

C. Implementing the program.
Frank and Jan recently married and purchased their first home together. What is an effective way for Frank and Jan to begin identifying the liability loss exposures associated with their new home?

A. Hire a professional risk manager

B. Determine the value of the home and contents

C. Purchase a homeowners insurance policy

D. Inspect the home for loss exposures

D. Inspect the home for loss exposures
Outdoor Designs Company (ODC) makes cedar patio furniture. ODC’s lumber supplier, L&L Wood Products, is the largest and most competitive supplier of lumber in the area. ODC’s risk manager is concerned that a disruption in the supply of lumber from L&L due to a large fire loss would adversely affect its production. Which one of the following would best minimize the adverse effect to ODC of a large loss experienced by L&L?

A. Separation

B. Duplication

C. Loss prevention

D. Avoidance

A. Separation
There have been several recent burglaries in Sally’s neighborhood. Which one of the following best describes a risk management technique and a corresponding example of that technique that Sally should consider due to the recent increase in burglaries?

A. Separation, such as installing a new alarm system

B. Loss reduction, such as keeping doors and windows locked

C. Loss prevention, such as keeping doors and windows locked

D. Loss prevention, such as installing a safe in her home

C. Loss prevention, such as keeping doors and windows locked
The first step in the risk management process is to

A. Implement the selected technique.

B. Select the appropriate technique.

C. Identify loss exposures.

D. Analyze loss exposures.

C. Identify loss exposures.
Some businesses require key executives to fly on different flights. This is an example of which one of the following risk control techniques?

A. Avoidance

B. Loss prevention

C. Separation

D. Duplication

C. Separation
Gauging the severity of property losses is easier than gauging the severity of liability losses because property losses

A. Tend to be insured.

B. Have an infinite value.

C. Tend to happen more frequently.

D. Have a calculable value.

D. Have a calculable value.
What will individuals gain as a benefit of applying sound risk management to automobile loss exposures?

A. No future increases in insurance premiums

B. A loss free future

C. Economic growth

D. Greater peace of mind

D. Greater peace of mind
Randy and Ida are concerned that a buried heating oil tank in their yard might be leaking, but they have decided that replacing that tank must wait until they have the funds in a year or two. Randy and Ida have discovered that pollution resulting from a leak would not be covered by their homeowners insurance policy. They fear the oil might seep into the water table and contaminate their neighbors’ well water. Illness and damage that might result could be very expensive. Randy and Ida can purchase an endorsement that will provide coverage for this pollution exposure. The endorsement would cost $50 per year. Is this an effective risk management selection for Randy and Ida until they can replace the tank?

A. Yes, they should do this indefinitely and not replace the tank.

B. Yes, they are exchanging a large exposure for a little premium.

C. No, they are spending a lot of money for little protection.

D. No, each neighbor will have insurance to cover any damage to their wells.

B. Yes, they are exchanging a large exposure for a little premium.
Sho Ching is risk manager for Market Sales Company. Market Sales owns a large fleet of autos used by the sales employees. The fleet is insured with $1,000 physical damage deductibles. Sho Ching is concerned about an increasing frequency of auto accidents in recent years. Which one of the following is the best risk management option for addressing the increased frequency of accidents from the fleet of autos?

A. Decrease the deductible to $500

B. Increase the deductible to $2,000

C. Implement loss reduction programs

D. Implement loss prevention programs

D. Implement loss prevention programs
Which one of the following describes a benefit to businesses of making insurance part of an overall risk management program instead of relying solely on insurance?

A. Improved access to affordable insurance

B. Stimulating economic growth

C. Reducing the number of persons dependent on society for support

D. Increased use of exposure avoidance

A. Improved access to affordable insurance
Individuals and families benefit from effective risk management in which one of the following ways?

A. Increasing their personal cash flows by retaining rather than insuring their property exposures

B. Continuing activities following an accident or other loss, and thus reducing inconvenience.

C. Stimulating economic growth because fewer losses mean that more funds are available for other uses

D. Creating a positive effect on an insurer’s underwriting results

B. Continuing activities following an accident or other loss, and thus reducing inconvenience.
Traditionally, the risk management professional’s role has been associated with loss exposures related to

A. Business risk.

B. Operational risk.

C. Pure risk.

D. Speculative risk.

C. Pure risk.
Martha works in the city and drives to work each day. She is concerned about her auto exposures due to driving in the city. If Martha sells her vehicle and begins using public transportation, which one of the following risk management techniques will she be applying to her situation?

A. Avoidance

B. Loss control

C. Noninsurance transfer

D. Retention

A. Avoidance
Loss histories can offer great insight into an organization’s loss exposures. The problem with depending too heavily on this one source is that some past events might

A. Not have been recorded.

B. Have been insured.

C. Still be unresolved.

D. Not have been insured.

A. Not have been recorded.
Exposures with the potential of low frequency but high severity should generally be insured because they are

A. Highly predictable.

B. Less expensive.

C. Highly unpredictable.

D. More expensive.

C. Highly unpredictable.
Monitoring a risk management program is an

A. Occasional activity.

B. Every-three-year activity.

C. Ongoing activity.

D. Once and done activity.

C. Ongoing activity.
Barton Industries keeps copies of key documents stored at a second location. The risk control technique Barton Industries is using is

A. Duplication.

B. Separation.

C. Loss prevention.

D. Avoidance.

A. Duplication.
Sound risk management benefits society in each of the following ways, EXCEPT:

A. Causing fewer disruptions in the economic and social environment

B. Increasing opportunity costs

C. Reducing the number of people dependent on society for support

D. Stimulating economic growth

B. Increasing opportunity costs
The last step in the risk management process is to

A. Implement the selected technique.

B. Select the appropriate technique.

C. Identify loss exposures.

D. Monitor results.

D. Monitor results.
A physical inspection is a method used to

A. Analyze loss exposures.

B. Examine the feasibility of techniques.

C. Identify loss exposures.

D. Monitor results.

C. Identify loss exposures.
Which one of the following is the goal of enterprise-wide risk management (ERM)?

A. Coordinate loss reduction efforts

B. Reduce risk management costs

C. Decentralize control of business decisions

D. Maximize the organization’s value

D. Maximize the organization’s value
Which one of the following best describes how effective risk management benefits society?

A. Creating a positive effect on an insurer’s underwriting results

B. Providing more thoughtful consumers of insurance

C. Causing fewer disruptions in the economic and social environment

D. Increasing the types of charitable and governmental agencies available to the general public

C. Causing fewer disruptions in the economic and social environment
Which one of the following identifies a benefit that a business can receive by applying sound risk management?

A. It will meet state and federal safety regulations.

B. It will have a better opportunity to achieve business goals.

C. It will not have to worry about losses.

D. It will be able to attract and retain talented employees and managers.

B. It will have a better opportunity to achieve business goals.
Katie and Kevin have a small stream in their back yard. Last year was exceptionally rainy and they were concerned about flood exposures to their home. They recently had a contractor regrade the back yard, building a large berm, which provides a raised barrier to divert the flow of water away from the house. In this situation, Katie and Kevin are using which one of the following risk management techniques?

A. Separation

B. Avoidance

C. Loss prevention

D. Loss reduction

C. Loss prevention
The dollar amount of damage that results from a loss is the loss

A. Severity.

B. Frequency.

C. Prevention.

D. Reduction.

A. Severity
A risk manager in an industrial plant is trying to determine where she needs to spend most of her time in reducing the number of work-related accidents. Which one of the following should the risk manager measure to determine where she should expend her efforts?

A. Number of workers in each area

B. Flow chart bottlenecks

C. Loss frequency

D. Loss severity

C. Loss frequency
Waking up on a cold February morning, Amy discovers the roads are icy and snow covered. Concerned about driving to work and possibly having an accident, she decides to take the day off. Amy’s decision is an example of which one of the following risk management techniques?

A. Loss prevention

B. Loss reduction

C. Avoidance

D. Separation

C. Avoidance
Which one of the following identifies the two broad categories of risk management techniques?

A. Risk control and risk financing

B. Loss prevention and loss reduction

C. Separation and duplication

D. Insurance and noninsurance

A. Risk control and risk financing
Risk management departments of large organizations generally rely on a manual to inform others of how to identify new exposures, what risk management techniques are currently in place, how to report insurance claims, and other important information. This communication of risk management information is part of which one of the following steps in the risk management process?

A. Analyzing loss exposures

B. Monitoring results

C. Examining the feasibility of techniques

D. Implementing the selected risk management techniques

D. Implementing the selected risk management techniques
Which one of the following best describes how effective risk management benefits insurers?

A. Stimulating economic growth

B. Causing fewer disruption in the social environment

C. Increased ability to accurately predict future losses

D. Encourages insurers to create innovative products and offer competitive prices

D. Encourages insurers to create innovative products and offer competitive prices
In managing loss exposures using the risk management process, the key to identifying loss exposures is

A. Understanding how the household or organization operates.

B. An organizational process flowchart.

C. A financial analysis of customers and suppliers.

D. Understanding the loss frequency and loss severity.

A. Understanding how the household or organization operates.
Risk manager Carla Jones is deciding how to allocate the costs of the risk management program for Empire Company. The decision to allocate risk management costs is part of which one of the following steps in the risk management process?

A. Analyzing loss exposures

B. Examining the feasibility of techniques

C. Implementing the selected risk management techniques

D. Monitoring results

C. Implementing the selected risk management techniques
The monetary amount of damage that results from a loss is known as

A. The deductible.

B. Loss severity.

C. Loss frequency.

D. The retention.

B. Loss severity
As part of the risk management process, determining how to allocate the costs of the risk management program is important. All of the following are risk management costs that should be allocated, EXCEPT:

A. General overhead expenses

B. Insurance premiums

C. Costs of loss control

D. Losses retained

A. General overhead expenses
Larger organizations often have a written risk management statement outlining procedures and authority for

A. Implementing risk management techniques.

B. Eliminating risk management techniques.

C. Analyzing risk management techniques.

D. Identifying risk management techniques.

A. Implementing risk management techniques.
Alan Peachtree owns a hobby shop, which he runs from a detached garage on his property. Alan has set aside funds to pay for possible property losses rather than purchasing insurance. Which one of the following risk management techniques is Alan using?

A. Avoidance

B. Non-Insurance transfer

C. Retention

D. Loss control

C. Retention
Jeff recently started a consulting business. One of his concerns is that he will be sued for giving erroneous advice to a client. Which one of the following would most likely be the best risk management technique for Jeff’s use in this situation?

A. Retention

B. Avoidance

C. Insurance

D. Duplication

C. Insurance
In implementing risk management techniques, the risk manager usually

A. Is responsible for communicating guidelines but is otherwise not involved in implementing techniques.

B. Relies on consultants outside the organization to implement the techniques.

C. Has complete authority to make decisions and implement the techniques.

D. Depends on others to implement the techniques based on the risk manager’s advice.

D. Depends on others to implement the techniques based on the risk manager’s advice.
Analyzing loss exposures requires

A. Understanding how a household or organization operates.

B. Estimating how large the losses may be and how often they may occur.

C. A physical inspection of all locations, operations, and maintenance routines.

D. Interviews and the analysis of a flowchart.

B. Estimating how large the losses may be and how often they may occur.
Chuck and Sally discovered they have flaking lead paint on the walls and trim inside their recently purchased house. They researched lead paint hazards and abatement techniques on the Internet and discovered the best action they can take is to remove loose paint chips and dust, replace the windows, and seal the walls with a paint designed for that purpose. Which one of the following risk management techniques does this activity involve?

A. Avoidance

B. Loss control

C. Retention

D. Noninsurance transfer

B. Loss control
The use of a seatbelt while driving a car is an example of

A. Loss reduction.

B. Loss prevention.

C. Separation.

D. Avoidance.

A. Loss reduction.
Malvern Imports has several retail stores in a three-state area. They receive and store imports in a large central warehouse. The risk manager is considering ways to lower the severity exposure due to a fire loss to the warehouse. Which one of the following would most effectively decrease the severity exposure of fire loss to the warehouse?

A. Separation

B. Duplication

C. Loss prevention

D. Avoidance

A. Separation
Financial statement analysis, loss history analysis, and flowcharts are used in

A. Identifying loss exposures.

B. Analyzing loss exposures.

C. Selecting risk management techniques.

D. Implementing risk management techniques.

A. Identifying loss exposures.

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