Question 1

Jessica is the risk manager of a large technology company.To help better understand the risks that her company faces,Jessica prepared a chart listing all of the risks along with pertinent information about each risk.The chart shows the risk category,who is primarily responsible for the risk,the maximum possible and maximum probable loss,the risk severity score untreated and the risk severity score after risk management measures are applied.The chart Jessica prepared is called a

Accepted Answer

Jessica prepared a chart listing all of the risks along with pertinent information about each risk. This type of chart is called a risk register, which is a tool used in risk management to document and track identified risks. A risk register typically includes information such as the risk category, risk owner, likelihood and impact of the risk, risk severity scores, and risk management measures. A risk management information system (A) is a computer-based system that organizations use to manage risks, while a risk management matrix (C) and a risk map (D) are other types of tools used in risk management to identify and assess risks. However, neither of these tools includes all of the information that is typically included in a risk register.

Question 2

Which of the following statements is (are)true regarding investment returns and the underwriting cycle?
I.Investment returns have no impact upon the underwriting cycle.
II.Investment returns can lengthen the duration of a soft market by offsetting underwriting losses.

Accepted Answer

Investment returns can have an impact on the underwriting cycle by offsetting underwriting losses and potentially lengthening the duration of a soft market. Therefore, statement II is true while statement I is false.

Question 3

The property and liability insurance industry is characterized by a repetitive pattern of loose underwriting standards with low premiums followed by tight underwriting standards with high premiums.This repetitive pattern is called the

Accepted Answer

The repetitive pattern of loose underwriting standards with low premiums followed by tight underwriting standards with high premiums is called the underwriting cycle. This reflects the insurance industry's response to changes in the economy and market conditions. The underwriting cycle is typically driven by the availability and cost of capital, level of competition, regulatory environment, and frequency and severity of claims. The underwriting cycle can have a significant impact on the financial health and stability of insurance companies.

Question 4

A company has a fleet of 200 vehicles.On average,50 vehicles per year experience property damage.What is the probability that any vehicle will be damaged in any given year?

Accepted Answer

The answer of A company has a fleet of 200...

Question 5

Which of the following statements about the scope of risk management is (are)true?
I.Traditionally,risk management was limited in scope to speculative loss exposures.
II.In the 1990s,some businesses began to expand the scope of risk management to include financial risks.

Accepted Answer

Traditionally, risk management focused on pure risks, not speculative risks. In the 1990s, businesses began to include financial risks, expanding the scope of risk management.

Question 6

Two buildings are located close together at a production facility.The probability that either of these buildings will experience a fire loss is 4 percent.However,if one building has a fire,the probability that the second building will have a fire is 60 percent.What is the probability that both buildings will have a fire?

Accepted Answer

The probability of both buildings having a fire can be calculated using the formula for conditional probability:

P(A and B) = P(A) x P(B given A)

Where A and B are events, P(A) is the probability of event A occurring, and P(B given A) is the probability of event B occurring given that event A has already occurred.

In this case, let A be the event that one building has a fire and B be the event that the other building has a fire. The probability of event A occurring is 4 percent, or 0.04. If event A occurs, the probability of event B occurring is 60 percent, or 0.6. Therefore:

P(A and B) = P(A) x P(B given A) = 0.04 x 0.6 = 0.024 or 2.4 percent.

So the probability that both buildings will have a fire is 2.4 percent, or closest to choice B) 2) 4 percent.

Question 7

RST Company has production facilities in Salt Lake City and Cleveland.The probability that in any given year a fire will damage the production facility in Salt Lake City is 5 percent.The probability that in any given year a fire will damage the Cleveland production facility is 4 percent.What is the probability that AT LEAST ONE of the production facilities will be damaged by fire in any given year?

Accepted Answer

The probability of at least one facility being damaged is equal to 1 minus the probability of none of the facilities being damaged.

P(at least one facility damaged) = 1 - P(neither facility damaged)

P(neither facility damaged) = (0.95) x (0.96) = 0.912

P(at least one facility damaged) = 1 - 0.912 = 0.088 = 8.8%

Therefore, the correct choice is C) 8.8 percent.

Question 8

RST Company has production facilities in Salt Lake City and Cleveland.The probability that in any given year a fire will damage the production facility in Salt Lake City is 5 percent.The probability that in any given year a fire will damage the Cleveland production facility is 4 percent.What is the probability that BOTH production facilities will be damaged by fire in any given year?

Accepted Answer

The probability of both facilities being damaged by fire is the product of the probabilities of each facility being damaged by fire. So, the probability is 0.05 * 0.04 = 0.002, or 0.2%.

Question 9

Which of the following statements is (are)true with regard to probability analysis?
I.If two events are independent,the occurrence of one event does not affect the occurrence of the second event.
II.If two events are dependent,the occurrence of one event affects the occurrence of the second event.

Accepted Answer

Statement I is true because if two events are independent, the outcome of one event has no impact on the outcome of the second event. For example, if a coin is flipped twice, the first outcome does not affect the second outcome.
Statement II is also true because if two events are dependent, the occurrence of one event affects the occurrence of the second event. For example, if a card is drawn from a deck and not replaced, the probability of drawing a certain card changes for subsequent draws. Therefore, both statements are true for probability analysis, making option C the correct answer.

Question 10

The relative level of surplus in the insurance industry is called the industry's

Accepted Answer

The relative level of surplus in the insurance industry is referred to as the industry's capacity. This term reflects the industry's ability to underwrite new policies and take on new risks, essentially indicating how much more business it can handle given its current financial resources.

Question 11

Which statement is (are)true regarding property and liability insurance market conditions?
I.Premiums are high when the insurance market is "hard."
II.Underwriting standards are tight when the insurance market is "soft.

Accepted Answer

I is true because in a "hard" insurance market, premiums are high due to decreased competition and tighter underwriting standards. II is false because in a "soft" market, underwriting standards are generally looser, and premiums are lower due to increased competition.

Question 12

One category of risk that is considered in an enterprise risk management program is the risk associated with an organization's property,liability,and personnel-related loss exposures.This risk is called

Accepted Answer

Hazard risk is defined as the risk of loss arising from damage or destruction of property, injury to persons, or from other events that are accidental or unintentional in nature. This includes property damage, personal injury, and liability risks. Hazard risk is a key component of enterprise risk management programs, as it can have significant financial and reputational impacts on an organization. Financial risk, operational risk, and strategic risk are all other categories of risk that may be considered in an enterprise risk management program, but they are not specifically related to property, liability, and personnel-related loss exposures.

Question 13

Businesses face several operational risks.One operational risk is the risk associated with deviations from the organization's regular practices and procedures.This risk is called

Accepted Answer

Deviations from regular practices and procedures are primarily related to the process followed by the organization, which makes it a process risk. Systems risk is related to the technology and software systems used by the organization, people risk is related to the employees, and external event risk is related to external factors like natural disasters, political instability, etc.

Question 14

Some events cannot occur together because the occurrence of one event makes the occurrence of the second event impossible.Such events are called

Accepted Answer

Mutually exclusive events are events that cannot happen at the same time. The occurrence of one event excludes the possibility of the occurrence of the other event. For example, flipping heads and flipping tails are mutually exclusive events when flipping a coin.

Question 15

A comprehensive risk management program that addresses all of an organization's risks,includes hazard risks,financial risks,strategic risks,and operational risks is called a(n)

Accepted Answer

An enterprise risk management plan (ERMP) is a comprehensive risk management program that addresses all of an organization's risks, including hazard risks, financial risks, strategic risks, and operational risks. The ERMP takes a holistic approach to risk management, emphasizing that risks are interconnected and suggesting that by addressing risks in an integrated manner, organizations can manage their overall risk profile more effectively.

Question 16

Which statement is (are)true with respect to enterprise risk management programs?
I.They address traditional property,liability,and personnel loss exposures.
II.They do not address financial risks.

Accepted Answer

Enterprise risk management programs address traditional property, liability, and personnel loss exposures as well as financial risks. Therefore, statement I is true and statement II is false.

Question 17

Jane is risk manager of ABC Manufacturing Company.She is trying to decide whether to self-insure her company's workers compensation exposure or to purchase insurance.Jane would like to use regression analysis to predict the number of workers compensation claims that will occur next year.The number of claims will be the dependent variable in the regression.All of the following would be reasonable independent variables to use EXCEPT

Accepted Answer

Total assets are not expected to have a direct relationship with the number of workers compensation claims. The number of employees, number of hours worked, and payroll are more logical independent variables to use in predicting the number of claims.

Question 18

Which of the following statements is true regarding insurance market conditions and underwriting results?

Accepted Answer

In a "hard" insurance market, insurance rates are indeed high and underwriting standards are tight. This is because insurers are more cautious about the risks they underwrite, leading to higher premiums and stricter criteria for coverage.

Question 19

Which of the following is a financial risk that may be faced by a business organization?

Accepted Answer

Currency exchange rate risk refers to the possibility that changes in currency exchange rates can negatively impact a business's financial performance. For example, if a company has funds in a foreign currency and that currency's value declines, the company's profits could be negatively affected.

Question 20

Mid-States Beef is a commercial feedlot business.Currently,the company has over 10,000 cattle in feedlots.Mid-States is concerned that the price of corn,the grain fed to the cattle,will increase significantly.The risk that the price of corn may increase and harm the profitability of Mid-States Beef's operations is a(n)

Accepted Answer

Commodity price risk refers to the risk of changes in the prices of a commodity, such as corn, that a company relies on for its operations. In this scenario, Mid-States Beef is concerned about the potential increase in the price of corn, which could harm their profitability. Therefore, the risk they are facing is commodity price risk. The other options such as currency exchange rate risk, property risk, and interest rate risk do not apply in this scenario.

Quiz 4: Enterprise Risk Management

Which of the following statements is (are) true regarding investment returns and the underwriting cycle? I.Investment returns have no impact upon the underwriting cycle. II.Investment returns can lengthen the duration of a soft market by offsetting underwriting losses.

The property and liability insurance industry is characterized by a repetitive pattern of loose underwriting standards with low premiums followed by tight underwriting standards with high premiums.This repetitive pattern is called the

A company has a fleet of 200 vehicles.On average,50 vehicles per year experience property damage.What is the probability that any vehicle will be damaged in any given year?

Which of the following statements about the scope of risk management is (are) true? I.Traditionally,risk management was limited in scope to speculative loss exposures. II.In the 1990s,some businesses began to expand the scope of risk management to include financial risks.

Which of the following statements is (are) true with regard to probability analysis? I.If two events are independent,the occurrence of one event does not affect the occurrence of the second event. II.If two events are dependent,the occurrence of one event affects the occurrence of the second event.