Question 1

Alberto is worried about the risk of potential flooding to his restaurant.He decides to buy insurance to cover this ________ risk.

Accepted Answer

Pure risk refers to situations where there is only the possibility of loss, and no potential for gain or profit. In this case, the risk of flooding could lead to potential loss for Alberto's restaurant. Therefore, buying insurance to cover this risk falls under the category of pure risk management. The other options are not applicable in this scenario. Speculative risk involves potential gain or loss, while uninsurable risk is a risk that cannot be covered by insurance. Managed risk refers to situations where the potential loss is minimized through risk management strategies.

Question 2

The National Highway Traffic Safety Administration NHTSA)provides consumers with recall notices for all makes and models of cars,trucks,motorcycle,and even school buses.In terms of risk management,the purpose of the NHTSA service is:

Accepted Answer

The purpose of the NHTSA service is to reduce risk by providing consumers with recall notices in order to address safety issues and prevent accidents. The other options (avoiding risk, self-insuring against risk, and making available opportunity for insurance) do not accurately reflect the purpose of the NHTSA service.

Question 3

Abraham is excited about opening his car wash facility.The required investment of money and time is sizable and although he has high hopes,Abraham is taking a speculative risk.This means that:

Accepted Answer

Speculative risk refers to a situation where an investor takes a risk with the expectation of making a profit, but there is also a chance of losing their investment. In this case, Abraham is investing a considerable amount of resources into his car wash facility with the hope of making a profit, but there's no guarantee that he'll succeed. Therefore, his investment involves a speculative risk. Option B is incorrect because product liability insurance only covers losses resulting from an insured product, and it is not applicable in this situation. Option C is also incorrect because malpractice liability insurance only applies to situations where there is a breach of professional duty. Finally, option D is incorrect because the law of large numbers is a statistical principle that states that as the sample size increases, the average of the sample will get closer to the population mean. It is not applicable in this context.

Question 4

The ________ says that an insured person cannot collect more than the actual loss from an insurable risk.

Accepted Answer

The rule of indemnity is a fundamental principle of insurance that states that the purpose of insurance is to restore the insured to the same financial position they were in prior to the loss, but not to allow them to profit from the insurance payout. The insured cannot collect more than the actual loss from an insurable risk.

Question 5

In an effort to minimize the cost of conventional property/casualty insurance,XYZ Electronics decided to manage their risk by self-insuring.The most likely way XYZ would try to do this would be to:

Accepted Answer

By covering small and medium sized losses itself, XYZ Electronics can reduce its insurance premiums and only carry conventional insurance for catastrophic losses. This allows them to manage their risk and save money on insurance costs. It also incentivizes the company to maintain a well-monitored loss-prevention program to minimize the impact of losses.

Question 6

Risky Business Insurance Company insures business clients against unexpected disasters such as tornadoes and floods.The company operates in several regions in the U.S. ,and negotiates contracts following standard insurance industry guidelines.A strategic business guideline that the company would follow is:

Accepted Answer

By dispersing clients among several geographic areas, the company can balance the risk of loss from natural disasters in different areas. This helps to ensure that the company can handle losses without facing insolvency.

Question 7

One guideline to determine that a risk is generally insurable is:

Accepted Answer

One of the guidelines to determine the insurability of a risk is that the loss must be measurable. This means that the loss should be quantifiable and able to be estimated accurately. If the loss cannot be measured, then it is difficult for an insurer to determine an appropriate premium and coverage amount. Therefore, choice letter A is correct. The other options are incorrect as they represent non-insurable risks - price changes are usually considered speculative risks and are not insurable, war is excluded from coverage under most insurance policies, and operational issues such as strikes are considered more of a business risk than an insurable risk.

Question 8

Sadly,during a war many civilians watch everything they have destroyed.Insurance companies will view this type of loss as:

Accepted Answer

Insurance companies typically do not cover losses resulting from war or acts of terrorism, as they are considered uninsurable risks. These risks are often too large and unpredictable for insurance companies to accurately assess and price premiums for. As a result, most insurance policies contain exclusions for losses caused by war or acts of terrorism.

Question 9

Amusement parks often have a minimum height restriction on some of their most thrilling rides.This risk management strategy is done in an effort to:

Accepted Answer

The minimum height restriction helps to reduce the risk associated with a potential accident by ensuring that riders are physically capable and safe to ride the thrill rides. It allows for better risk management and helps to prevent injuries or accidents from occurring.

Question 10

Firestone and Ford recalled thousands of tires when several people died in traffic accidents blamed on faulty tires.This is an example of which of the following?

Accepted Answer

The recall of the faulty tires is an example of reducing the risk, as Firestone and Ford took measures to address the problem and prevent future accidents.

Question 11

Organizations spend about __________ percent of gross domestic product on insurance premiums.

Accepted Answer

According to a report by the National Bureau of Economic Research, organizations in the United States spend approximately 10 percent of GDP on insurance premiums.

Question 12

Harold owns several gas stations.He realizes that among the several risks associated with this type of business is the risk of minor damage to cars from dirty or contaminated fuel.He also knows that there is a small chance of a major loss if a fire occurred at one of his gas stations.Harold wants to control his insurance costs while still maintaining a reasonable risk management program.He is considering self-insurance.If he decides to use this approach,he will probably:

Accepted Answer

Self-insurance can be a cost-effective method of risk management, but it is important to carefully consider which risks to cover through self-insurance and which to transfer to an insurance company. In this scenario, Harold can likely afford to cover the smaller, more routine losses associated with dirty or contaminated fuel, but a major loss from a fire could be financially devastating. Therefore, he should seek coverage from an insurance company for the risk of fire while self-insuring for the smaller losses.

Question 13

Demetrius was turned down when he attempted to buy a life insurance policy on his former Introduction to Business instructor.The most likely reason the insurance company turned down his attempt to insure the life of his former instructor was that:

Accepted Answer

In order to purchase a life insurance policy on someone else, the purchaser must have an insurable interest in that person's life. This typically means that the purchaser would be financially impacted by the person's death. In this case, it is unlikely that Demetrius had an insurable interest in his former instructor's life, which is why the insurance company turned down his attempt to buy a policy.

Question 14

Nancy owns a high-fashion boutique and one source of competitive advantage in the past has been her ability to spot the latest trends,stock the store with those items,and sell out before the next new trend becomes popular.Unfortunately,this year Nancy missed on what would be "hot" and is now stuck with mountains of clothing and accessories that did not sell.All of her cash is invested in this clothing and at the moment she is unable to restock the store with the next season's clothes.Nancy is likely not worried because:

Accepted Answer

The answer of Nancy owns a high-fashion boutique and one...

Question 15

Green Gardens Sprinkler Systems Company experienced increasing sales for several years.The firm expanded its product offerings,and now serves both commercial and residential customers.Which of the following situations would be considered an uninsurable risk for Green Gardens?

Accepted Answer

Option D is an example of a business risk that might affect the growth or profitability of Green Garden but cannot be insured. Insurable risks refer to those risks that can be covered by insurance, such as fire damage or theft.

Question 16

Hector had been asked to serve on the board of a major pharmaceutical firm.He reluctantly declined,citing the firm's lack of liability coverage for outside members of the board of directors.Hector's decision indicates that he:

Accepted Answer

Hector's decision to decline the position indicates he is managing his risk by avoiding the potential loss from a liability suit, as the firm lacks liability coverage for board members.

Question 17

__________ is the armor individuals,businesses,and nonprofit organizations use to protect themselves from various financial risks.

Accepted Answer

Insurance is the commonly understood tool that individuals, businesses, and nonprofit organizations use to protect themselves from various financial risks. A good accountant and investment in AAA bonds may be helpful, but they do not provide the same level of protection as insurance. Indemnity is a type of insurance, so it is not a separate answer choice that represents a distinct tool for financial protection.

Question 18

Bill has decided to increase the size of his auto repair business,although he realizes that this decision brings added risk.This is an example of ________ risk.

Accepted Answer

The answer of Bill has decided to increase the size...

Question 19

In designing an addition to his successful nursing home,Steve realized that water sprinklers and smoke detectors were now required by state regulations.His existing structure already had sprinklers and detectors because he felt that this was an effective strategy to:

Accepted Answer

Steve installed sprinklers and detectors in his existing structure to reduce the risk of a fire loss. Therefore, it is likely that he is now required to install them in the addition to meet state regulations as a safety precaution. The other options (self-insure, minimize speculative risk, and avoid risk) do not necessarily explain why Steve chose to install the sprinklers and detectors in the first place.

Question 20

The Best West Soccer Athletic Association was formed to administer youth soccer leagues and tournaments in a popular urban are A.All board members recently resigned stating that they could no longer assume the risk of participating on a board that did not insure its volunteer members against serious player injuries and other unanticipated problems.Collectively,these members are:

Accepted Answer

The board members are resigning because they do not want to take on the risk of being on a board that does not insure its volunteer members. By resigning, they are avoiding the risk altogether.

Quiz 24: Managing Risk