Question 1

Which of the following is a source of information a risk manager could use to help identify pure loss exposures?

Accepted Answer

Physical inspections can help identify pure loss exposures by examining the physical condition of assets and identifying potential hazards or weaknesses in the structure or location. Commodity prices, currency exchange rates, and interest rate movements are all financial indicators that may be relevant to other types of risk management but are less useful for identifying pure loss exposures.

Question 2

The worst loss that is likely to happen is referred to as the

Accepted Answer

Probable maximum loss is the worst loss that is likely to happen, taking into account all possible scenarios and potential risks. It provides a realistic estimate of the potential damage or financial loss that an organization may suffer in the event of a major incident or disaster. The other answer choices are not as accurate or comprehensive in describing the concept of worst loss.

Question 3

Which of the following is a post-loss risk management objective?

Accepted Answer

B

Question 4

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.

Accepted Answer

Retention is appropriate when the worst possible loss is not serious, meaning the entity can absorb the loss without significant financial strain. When losses are difficult to predict, relying on retention could be risky, as unpredictable and potentially large losses could financially harm the entity.

Question 5

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.

Accepted Answer

Statement I is true, as self-insurance is a form of planned retention where an organization chooses to retain a portion or total of the risk of loss. 
However, Statement II is false, as state laws do allow self-insurance for workers compensation in some circumstances, although there may be certain requirements that must be met.

Question 6

All of the following statements about avoidance are true EXCEPT

Accepted Answer

The statement "It can be used for any loss exposure facing a firm" is not entirely true. Avoidance is not always a viable option for all loss exposures as some may be inherent to the nature of the business or the risks may be impossible to completely eliminate.

Question 7

Abandoning an existing loss exposure is an example of

Accepted Answer

Abandoning an existing loss exposure means avoiding the loss exposure altogether. Therefore, A is the correct choice as it represents avoidance.

Question 8

All of the following are potential advantages of retention EXCEPT

Accepted Answer

Protection from catastrophic losses is not an advantage of retention. Retention involves an organization or individual assuming the financial risk of loss, rather than transferring that risk to an insurance company. This strategy can lead to lower expenses, increased cash flow, and encouragement of loss prevention measures because the entity retains the risk. However, it does not protect against catastrophic losses, as these can far exceed the entity's ability to pay, which is why insurance or other risk transfer mechanisms are typically used for such risks.

Question 9

ABC Insurance retains the first $1 million of each property damage loss and purchases insurance for that part of any property loss that exceeds $1 million.The insurance for property losses above $1 million is called

Accepted Answer

The insurance purchased for property losses above $1 million is called excess insurance.

Question 10

Which of the following statements about the use of a captive insurance company by a parent firm is true?

Accepted Answer

Captive insurance companies can be used by parent firms to insure loss exposures that private insurers may be unwilling or unable to insure. This allows the parent firm to have more control over their insurance program and potentially save money on premiums. However, captives are typically limited to insuring only the risks of their parent and affiliated companies, so they cannot write outside, non-parent company business. Captives can also use reinsurance, which transfers risk from the captive to a third-party reinsurer, allowing the captive to reduce its exposure to losses. Therefore, statement A and B are incorrect. Finally, business placed with a captive can be considered retained or transferred risk depending on whether or not the captive uses reinsurance, so statement D is also incorrect.

Question 11

Loss frequency is defined as the

Accepted Answer

Loss frequency refers to the probable number of losses that may occur during some period. It is different from loss severity, which pertains to the probable size or amount of losses that may occur in a similar period. Options A, C, and D do not accurately define loss frequency.

Question 12

Risk management is concerned with

Accepted Answer

Risk management involves identifying potential sources of loss and developing strategies to address them. This includes treating pure risks that are uninsurable through means such as risk transfer, risk mitigation, or risk avoidance. Additionally, risk management involves managing both pure and speculative risks. The purchase of insurance is one potential method for treating loss exposures, but it is not the only method and risk management is broader in scope than just purchasing insurance.

Question 13

Preloss objectives of risk management include which of the following?
I.Preparing for potential losses in the most economical way
II.Reduction of anxiety

Accepted Answer

The preloss objectives of risk management include preparing for potential losses in the most economical way as well as reducing anxiety. Therefore, both option I and II are correct.

Question 14

A situation or circumstance in which a loss is possible,regardless of whether a loss occurs,is called a

Accepted Answer

A loss exposure is a situation where there is a possibility of loss, even if it doesn't occur. It is a potential threat to a company's assets or earnings. Deductible is a specific amount a policyholder needs to pay before the insurance coverage kicks in. Loss avoidance is a risk management technique aimed at eliminating or avoiding the loss before it occurs. Peril refers to a specific type of risk, such as fire, theft, or flood.

Question 15

A restaurant owner leased a meeting room at the restaurant to a second party.The lease specified that the second party,not the restaurant owner,would be responsible for any liability arising out of the use of the meeting room,and that the restaurant owner would be "held harmless" for any damages.The restaurant owner's use of the hold-harmless agreement in the lease is an example of

Accepted Answer

The use of a hold-harmless agreement in a lease is an example of noninsurance transfer, where the transfer of risk is made to the second party using the meeting room, rather than through the purchase of insurance or self-insurance by the restaurant owner.

Question 16

All of the following are disadvantages of noninsurance transfers EXCEPT

Accepted Answer

Noninsurance transfers can include a variety of methods such as contracts, warranties, and guarantees. One of the disadvantages of noninsurance transfers is that they may not cover all types of losses, particularly those that are commercially insurable. However, the other options listed (A, B, and D) are all valid disadvantages of noninsurance transfers.

Question 17

The worst loss that could ever happen to a firm is referred to as the

Accepted Answer

The worst loss that could ever happen to a firm is referred to as the "maximum possible loss." This term describes the absolute worst-case scenario in terms of financial loss that a firm could potentially face.

Question 18

Loss severity is defined as the

Accepted Answer

Loss severity is the probable size of the losses which may occur during some period. This means that it refers to the amount of financial damage that may occur in the event of a loss. Therefore, option A is the most appropriate choice. Option B refers to loss frequency, option C refers to probability of loss, and option D refers to potential bankruptcy risk.

Question 19

A risk manager is concerned with which of the following?
I.Identifying potential losses
II.Selecting the appropriate techniques for treating loss exposures

Accepted Answer

A risk manager is concerned with identifying potential losses and selecting the appropriate techniques for treating loss exposures. Thus, both I and II are correct.

Question 20

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.

Accepted Answer

Statement I is false because retention is best used for loss exposures that have a high frequency and a low severity. Statement II is true because a financially strong firm can afford to retain more risk and have a higher retention level compared to a financially weak firm.

Quiz 3: Introduction to Risk Management