Deck 4: Risk-Handling Techniques: Loss Control, Risk Transfer, and Loss Financing

Question 1

Jim S. buys a $50,000 car. Rather than buying insurance on the car, he sets aside $30,000 in a savings account to cover possible losses due to an accident. He is:

A) self-insuring
B) a moral hazard
C) assuming risk
D) decreasing his risk of physical loss

Answer 1

C

Question 2

Risk avoidance is the best risk management tool when the change of loss is ________ and the potential severity of loss is ________.

A) low, low
B) high, high
C) low, high
D) high, low

Answer 2

B

Question 3

Risk managers are concerned with policy limits and deductible size contained in insurance contracts because:

A) an increased deductible amount increases the policy's premium
B) the policy limit and the deductible are the only determinants of whether the policy will pay the claim
C) they determine how much of the exposure the insured retains and transfers
D) premiums set by policy limit and deductible are not tax deductible whereas uninsured losses are deductible

Answer 3

C

Question 4

If an individual causes a loss intentionally, we would say that person is a:

A) careful person
B) physical hazard
C) moral hazard
D) risk manager

Question 5

All of the following are examples of loss reduction, except:

A) improved lighting in the work place
B) fire walls
C) salvage operations
D) training replacement personnel

Question 6

Assume that you own a fireworks manufacturing plant. A prospective insurer indicates it will not insure your property unless you take some loss prevention measures. Which of the following is the best loss prevention measure?

A) Maintain your own fire department
B) Create two identical facilities, each having half the capacity of the original building
C) Put smoke alarms and fire sprinklers in each building
D) Do not mix ingredients until the last possible moment

Question 7

All of the following are ways of managing risk mentioned in the text, except:

A) competitive bidding
B) transfer
C) avoidance
D) assumption

Question 8

Assume that you own a house in rural Arkansas with a pier foundation (concrete blocks on each of the four corners). Your prospective insurance company indicates that they will not insure your home unless you take some loss prevention steps. Which of the following steps is the best loss prevention measure?

A) Join a local volunteer fire department
B) Put fire extinguishers on the front porch, bathroom, and kitchen
C) Enclose the open foundation with bricks to stop trash and leaves from accumulating
D) Put a smoke alarm in every room

Question 9

All of the following are true about OSHA, except:

A) that it promotes a safe working environment for all U.S. workers
B) that it encourages employers to remove all recognized hazards from the work environment
C) that it provides for heavy fines for employer noncompliance with standards
D) that it is directly responsible for reducing worker turnover

Question 10

Which of the following are examples of loss reduction techniques? I. Wearing your seat belt while driving your car
II) Polio vaccinations
III) Keeping poisons locked up and out of reach of small children
IV) Wearing a helmet while skateboarding

A) I and III only
B) I, II, and III only
C) I and IV only
D) I, II, III, and IV

Question 11

Assume you own an antique car. Your prospective insurance company indicates that they will not insure your car unless you take some loss prevention steps to avoid theft. Which of the following steps is the best loss prevention measure with regards to theft?

A) Always keep a canvas cover over the car to hide it.
B) Never drive in rainy weather.
C) Never drive in big cities.
D) Store the car in a closed and locked garage.

Question 12

Which tools are used by most individuals for handling the loss exposure of physical damage to their vehicles caused by collisions? I. Avoidance
II) Control
III) Retention
IV) Insurance

A) II and IV only
B) I, II, and III only
C) II, III and IV only
D) I, II, III, and IV

Question 13

Which of the following is true concerning the corporate taxation of insurance premiums and the treatment of uninsured losses?

A) Both premiums and expected losses are deductible at the beginning of the year.
B) Uninsured losses are deductible only when they occur and premiums are deductible in the year paid.
C) Since payments for insured losses are 100% tax deductible, commercial insurance is economically inefficient.
D) Losses paid under the deductible amount are not tax deductible because the insured assumed the losses.

Question 14

An automobile's airbag is primarily there for:

A) loss prevention
B) loss avoidance
C) loss reduction
D) risk assumption

Question 15

Small firms:

A) will be unable to get insurance
B) are more likely to self-insure
C) face more moral hazard compared with larger firms
D) are more likely to be dependent on insurance compared with large firms

Question 16

Which of the following statements about the loss control is not correct?

A) Loss control is also known as risk control.
B) Loss control can be classified into two categories, namely loss prevention and loss reduction.
C) A number of activities associated with loss control simultaneously reduce both loss frequency as well as severity.
D) Risk transfer is an example of loss control.

Question 17

Taking a defensive driving course is an example of which one of the following:

A) moral hazard
B) risk transfer
C) loss avoidance
D) loss prevention

Question 18

Risk Retention is not a good idea if:

A) the risk is unimportant
B) you did not identify the risk
C) the frequency is so low it almost will never happen
D) the exposure is potentially catastrophic

Question 19

Risk assumption is the best risk management tool when the change of loss is ________ and the potential severity of loss is ________.

A) low, low
B) high, high
C) low, high
D) high, low

Question 20

From the standpoint of the insured, deductibles in insurance contracts are a form of:

A) risk transfer
B) loss control
C) risk retention
D) risk avoidance

Question 21

All of the following are ways of transferring risk mentioned in the text, except:

A) competitive bidding
B) exculpatory clauses
C) hold-harmless agreements
D) creating an LLP or LLC

Question 22

Which of the following statements about captive insurers is not correct?

A) They are typically a subsidiary of a larger firm or firms.
B) They are typically located in places where insurance regulation is less restrictive.
C) They capitalize on their size to mitigate risks.
D) They are typically located in places where insurance regulation is less costly.

Question 23

Which of the following statements about loss prevention is correct?

A) All losses can be prevented.
B) Some losses cannot be prevented.
C) Loss prevention activities aim to minimize the impact of losses.
D) All of the above are correct.

Question 24

Which of the following statements about hold-harmless agreements is correct?

A) Hold-harmless agreements create moral hazard.
B) In a hold-harmless agreement, a party assumes a second party's financial responsibility in the case of a loss.
C) Hold-harmless agreements are created after a loss occurs.
D) All of the above are incorrect.

Question 25

Which of the following statements about limited liability is correct?

A) It is only provided to the owners of certain businesses.
B) Creditors cannot attach a claim to the personal assets of the owners of a limited liability company.
C) There are now more organizational forms of business with limited liability characteristics than in the past.
D) All of the above are correct.

Question 26

"OSHA" stands for:

A) Occupational Safety Hearings Administration
B) Occupational Servants and Homemakers Act
C) Obligatory Standards for Health Act
D) Occupational Safety and Health Act

Question 27

Which of the following statements about duplication and physical separation is not correct?

A) Duplication is closely related to physical separation.
B) Like duplication, physical separation involves multiple and similar copies.
C) When a company engages in physical separation, it cannot also engage in duplication.
D) Both duplication and physical separation aim to minimize supply-chain interruptions.

Question 28

Lack of supply of insurance:

A) can be the result of inefficient insurance regulation
B) is a reason why companies now get their insurance on Bermuda or the Cayman Islands
C) is no problem when it comes to risk against earthquakes
D) is no problem when it comes to private unemployment insurance

Question 29

Which of the following statements about duplication is correct?

A) Duplication is in general too costly to be effective.
B) Duplication is in general effective when the cost is low.
C) Duplication stimulates supply-chain interruptions.
D) All of the above are correct.

Question 30

Which of the following statements about risk-bearing financial institutions is not correct?

A) They are a good example of creating self-insurance by the customers of these institutions.
B) They allow its customers to transfer their financial risks to the institution for a fee.
C) They capitalize on their size to mitigate risks.
D) They finance the cost of any losses by the fees they get from their customers.

Question 31

All of the following are true about the CPSC, except:

A) that it promotes companies to sell safe products
B) that it requires manufacturers and retailers to notify it of any hazardous products
C) that it provides for heavy fines for the noncompliance of firms with standards
D) that it is directly responsible for increasing the sale of more products

Question 32

Which of the following pools would be the best subject for a fully-funded self-insurance arrangement?

A) Automobile physical damage coverage for a national rental car chain, with 100 locations and approximately 3,000 automobiles of similar value at each location
B) Employment practices liability coverage for a petroleum refinery located in Texas
C) Medical malpractice liability coverage for all doctors and nurses employed by a group of 3 hospitals in Florida
D) $50,000 of life insurance on every employee of a life insurance company located in New York, with no physical exam required to obtain insurance

Question 33

It is a fact that supply chains have become increasingly more complicated in the past decade, with products moving across the globe. This means that:

A) loss reduction measures also have become more important
B) there has been a growth of captive insurers
C) duplication as a risk mitigant has also become more important
D) hold-harmless agreements have become less relevant

Question 34

If insurers have insufficient pricing information available for a particular exposure:

A) they go bankrupt
B) they will need to create a larger risk pool
C) they will probably be unwilling to provide insurance for that particular loss exposure
D) they will assume more risk

Question 35

Which of the following types of risk lend themselves well to self-insurance?

A) Car insurance and earthquake insurance
B) Workers' compensation and car insurance
C) Workers' compensation and health insurance
D) Health insurance and earthquake insurance

Question 36

Which of the following statements about risk pooling as a form of insurance is correct?

A) Lending institutions forcing consumers to buy insurance as a condition for financing is not an example of risk pooling.
B) Captive insurers diminish the need for risk pooling.
C) Duplication is a form of risk pooling.
D) In some cases the law requires firms to create them.

Question 37

Which of the following statements about risk assumption is not correct?

A) Risk assumption is also known as risk retention.
B) Risk assumption can be transferred through hedging.
C) Larger firms have a better ability to assume risk.
D) All of the above are correct.

Question 38

All of the following are true about captive insurers, except:

A) that they are located in locations like Bermuda
B) that claims-settlement often take longer
C) that the parent company or companies save on overhead and profits that they would otherwise pay to third insurance companies
D) that the parent company or companies are in some cases allowed to deduct their premiums from their tax liability

Question 39

The size of a firm:

A) has no impact on the ability to retain risk
B) is proportional to the amount of risk it is willing to take
C) determines whether a firm can hedge its risk
D) has an impact on its ability to absorb losses

Question 40

All of the following are examples of loss financing, except:

A) raising capital through selling stocks and bonds on the capital market
B) insurance
C) hedging
D) risk retention

Question 41

When the chance of loss is great and the potential for loss severity is also very high, insurance is the best approach to the risk management problem.

Question 42

The transfer/retention risk management decision is unimportant and therefore risk managers should not waste their time on the decision.

Question 43

OSHA is a federal loss prevention law.

Question 44

Funded risk assumption:

A) is typically done through a subsidiary on Bermuda or the Cayman Islands
B) increases moral hazard for the firm
C) is when a firm assumes by creating a liquid or near liquid cash reserve
D) is a form of risk transfer

Question 45

Insurance increases moral hazard.

Question 46

There are no clear rules for choosing an appropriate risk-handling technique.

Question 47

What are the main considerations in determining the proper mix of retention and transfer in handling potential loss exposures?

Question 48

The insurer's efficiency and underwriting practices are much more important to the consumer than where the insurer is located, for example Bermuda or the Cayman Islands.

Question 49

Which of the following is not a form of internal loss-financing technique?

A) Hedging
B) Risk retention
C) Self-insurance
D) Captive insurance

Question 50

Discuss the concept of funded risk assumption.

Question 51

Explain the concept of self-insurance. Why is all self-insurance assumption, but not all assumption self-insurance?

Question 52

Increasing litigation risk is one of the main drivers of the growth of organizational forms of business with limited liability characteristics.

Question 53

Which of the following statements about external and internal loss-financing techniques is not correct?

A) Self-insurance is a form of internal loss-financing.
B) Risk retention is a form of internal loss-financing.
C) Insurance is a form of external loss-financing.
D) Captive insurance is a form of external loss-financing.

Question 54

Loss prevention activities, if successful, may increase risk.

Question 55

How do deductibles affect moral hazard?

Question 56

Which of the following is not a federal regulation or agency?

A) EUREX
B) OSHA
C) CPSC
D) EPA

Question 57

For centuries consumers have relied upon insurance to pay for unexpected losses.

Question 58

Loss exposures which are both high-frequency and high-severity in nature are best handled by assumption.

Question 59

Many captive insurance companies are located in states where insurance regulation is very strict.

Question 60

Exculpatory clauses are clauses in business contracts that transfer risk between contracting parties.

Question 61

Explain the difference between loss prevention versus loss reduction.