Deck 24: Extension: Managing Risk

Question 1

Pure risk involves the chance of either a profit or a loss.

Answer 1

False

Question 2

The management of risk is a small part of global business.

Answer 2

False

Question 3

If a pure risk occurs a company loses money; but if the events do not occur, the company gains nothing.

Answer 3

True

Question 4

The type of risk that is of most concern to businesspeople is speculative risk.

Question 5

Product recalls can reduce risk.

Question 6

Outsourcing helps some companies avoid risk.

Question 7

Risk is a term that refers to the chance of loss, the degree of probability of loss, and the amount of possible loss.

Question 8

One way to lower the need for outside insurance is to self-insure.

Question 9

Southern Deliveries has decided to manage risk by requiring drivers to wear seat belts, have a commercial driver's license, monitor any moving violations each driver obtains, and to be sure that this information is kept in the employee records. Furthermore Southern has decided to carry an insurance policy with a very large deductible, preferring to pay for small damages to its trucks out-of-pocket. Southern has built enterprise risk management into their organization.

Question 10

Speculative risk involves a chance of either profit or loss.

Question 11

Fairweather Farms is located on Florida's Gulf Coast and is primarily engaged in raising and harvesting citrus fruit. The owners of Fairweather Farms are correct in beginning to think about how the risk of climate change might impact their crops in the future.

Question 12

The chance of a fire is an example of a pure risk.

Question 13

The beginning of an effective risk management strategy is a good loss-prevention program.

Question 14

Companies adopt risk management procedures to minimize the chance of business failure due to unplanned events such as security breaches, terrorist attacks, and natural disasters.

Question 15

Businesses can often reduce the risk to which they are exposed.

Question 16

Risk management is getting much simpler thanks to the Internet.

Question 17

An enterprise risk management (ERM) program has a goal of defining which risks the program will manage.

Question 18

An entrepreneur takes a speculative risk when starting a new business.

Question 19

Risk management involves minimizing the losses from unexpected events.

Question 20

There are two different kinds of risk: passive and active.

Question 21

Self-insurance is the practice of setting aside money to cover routine claims and buying only "catastrophe" policies to cover big losses.

Question 22

A well-designed and implemented risk-prevention program can eliminate the potential of loss.

Question 23

UPS requires their delivery people to wear seat belts as they drive their trucks. This is an example of self-insuring as a risk management strategy.

Question 24

The terrorist attack against the World Trade Center in 2001 is an example of pure risk.

Question 25

Procter & Gamble Inc. is ready to launch a new shampoo in the marketplace. They will incur a speculative risk.

Question 26

The federal government provides some insurance protection.

Question 27

Self-insurance makes more sense for firms that operate one large facility than it does for firms with facilities scattered all over the country.

Question 28

Federal Housing Administration (FHA) insurance provides insurance to property owners in high-crime areas.

Question 29

All risks are insurable.

Question 30

All-Star Manufacturing has decided to stop producing football helmets due to the potential size of losses involved in product liability cases. This is an example of avoiding risk as a risk management strategy.

Question 31

"Insurable interest" means that the policyholder is the one at risk to suffer a loss.

Question 32

The Pension Benefit Guaranty Corporation provides retirement benefits, life insurance, health insurance, and disability income insurance.

Question 33

When a firm that is self-insuring against risk decides to cover losses straight out of its budget, it is said to be "going bare."

Question 34

Going bare is a much less risky strategy for self-insurance.

Question 35

Water sprinklers and smoke detectors can be used to minimize speculative risks.

Question 36

Typically, the only option that firms have to deal with pure risk is to buy insurance.

Question 37

Any risk is insurable as long as you can pay the premium.

Question 38

An uninsurable risk is one that no insurance company will cover.

Question 39

Insurance companies will provide coverage only for losses that are accidental.

Question 40

Kuhlman Appliances produces all of its products in one gigantic production facility near an earthquake fault line. Kuhlman is the classic example of a firm that should use self-insurance to manage its risks.

Question 41

A mutual insurance company is a nonprofit organization.

Question 42

An insurance premium is the fee charged by the insurance company in return for their promise to pay for all or part of a loss.

Question 43

Insurance companies make predictions such as how recent health trends will affect the number of heart attacks that men in the United States over the age of 45 will suffer.

Question 44

Cary owns a life insurance policy on her husband Jay through Mutual of Cincinnati Life Insurance Company. As a policyholder, she also owns part of the company.

Question 45

The car insurance premium charged for young male drivers is higher than the premium for young female drivers. This is due to the rule of indemnity.

Question 46

The best strategy for a profit-seeking insurance company would be to specialize in providing protection to people in a specific geographical area.

Question 47

An insurance policy is a written contract.

Question 48

Liability losses result from property damage or injuries suffered by others for which the policyholder is held responsible.

Question 49

Property insurance covers losses from fires, accidents, or theft.

Question 50

The chances of dying when young are much higher than the chances of becoming disabled when young.

Question 51

A mutual insurance company is owned by its policyholders.

Question 52

John has decided that his neighbor Sam is quite careless and is in danger of burning his own house down. John tried to buy a fire insurance policy on Sam's house so that he could collect the payment when Sam inevitably burned down his own house. The insurance company would not allow John to purchase the policy because he did not have an insurable interest in the property.

Question 53

According to the rule of indemnity, an insured person cannot collect more than the actual loss from an insurable risk.

Question 54

One advantage of health savings accounts is that healthy people can use tax-deferred money to save for their future medical needs.

Question 55

A stock insurance company is owned by its policyholders.

Question 56

The Ford Motor Company has an insurable interest in the lives of its top executives.

Question 57

Health savings accounts are managed care plans that have a high deductible.

Question 58

The law of large numbers states that if a large number of people are exposed to the same risk, a predictable number of losses will occur during a given period of time.

Question 59

An insurance company can use the law of large numbers to predict the number of people in your community that will have a car accident in a given month.

Question 60

An example of an uninsurable risk would be the potential losses suffered by Domino's Pizza resulting from a popular new product from Pizza Hut.

Question 61

Harmon works on a highway construction crew and frequently handles explosives. His friend Willie works as a bookkeeper for a retail store. The amount of workers' compensation premiums paid by Harmon's employer will probably exceed the premiums paid by Willie's employer.

Question 62

Disability insurance replaces part of your income if you become disabled and can no longer work, but you usually must be disabled for a specified period of time before benefits are provided.

Question 63

Risk management for business is critical due in part to:

A) natural disasters.
B) profitability.
C) legal requirements.
D) international requirements.

Question 64

The premium charged for workers' compensation insurance is the same for all workers, regardless of their occupation.

Question 65

Professional liability insurance is also sometimes known as malpractice insurance.

Question 66

An endorsement can provide additional coverage to a homeowner's policy for business equipment.

Question 67

Which of the following is a goal of enterprise risk management?

A) Defining which risks the program will manage
B) Deciding how to petition the government for financial help
C) Assigning risk management to a lobbyist in Washington
D) Refining the business plan for risk management

Question 68

Firms can take out term life-insurance policies on their top executives.

Question 69

Workers' compensation insurance guarantees payment of wages, medical care, and rehabilitation services for employees who are injured on the job.

Question 70

Workers' compensation insurance is required in all states except Louisiana.

Question 71

It's good advice for doctors and lawyers to carry malpractice insurance.

Question 72

Enterprise risk management is:

A) important to business.
B) irrelevant to business.
C) only used by nonprofit organizations.
D) only used by the Department of Homeland Security.

Question 73

Risk management is:

A) only a consideration to insurance companies.
B) increasing in importance.
C) decreasing in importance.
D) used exclusively when engaging in global Internet business.

Question 74

Product liability insurance covers liability arising out of defective products sold.

Question 75

A surety bond protects employers from employee dishonesty.

Question 76

A fidelity bond covers losses resulting from a second party's failure to fulfill a contract.

Question 77

Worldwide risks need to be prioritized so that international funds can be spent where they can do the most good.

Question 78

Risk management is concerned only with risks to individuals and businesses.

Question 79

Risks such as global warming are the concern of businesses and governments primarily in the U.S.

Question 80

Most homeowners' insurance policies automatically provide adequate coverage for small home-based businesses.