Question 1

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.
A) I only
B) II only
C) both I and II
D) neither I nor II

Accepted Answer

Both statements I and II are true with regard to probability analysis. In independent events, the occurrence of one event has no effect on the occurrence of the other event. For example, if we toss a coin twice, the outcome of the first toss has no impact on the outcome of the second toss. 
In contrast, in dependent events, the occurrence of one event affects the probability of the second event. For example, if we draw two cards from a deck of cards without replacement, the probability of drawing a certain card on the second draw depends on whether we drew that card on the first draw or not.

Question 2

Some events cannot occur together because the occurrence of one event makes the occurrence of the second event impossible. Such events are called
A) dependent events.
B) independent events.
C) conditional events.
D) mutually exclusive events.

Accepted Answer

Mutually exclusive events are events that cannot occur at the same time. If one event happens, the other event cannot happen. For example, flipping a coin and rolling a six-sided die are mutually exclusive events because it is impossible for the coin to land heads up and the die to show a six at the same time.

Question 3

Regional Airline (RA) spends millions of dollars each year on jet fuel. The company also has significant liability exposures. RA can retain a large portion of its liability exposure if fuel costs are low. The company can pay high fuel costs if retained liability losses are low. RA cannot, however, absorb both high fuel costs and high retained liability claims. RA's insurer designed an insurance program where the insurer pays only if both contingencies (high fuel costs and high retained liability claims) occur. The contract the insurer designed is called a(n)
A) double indemnity rider.
B) double trigger option.
C) multiple protection policy.
D) other insurance provision.

Accepted Answer

The insurance program that the insurer designed is called a double trigger option, which means that both contingencies must occur for the insurer to pay out. This type of insurance program is designed to address multiple risks that are interconnected and can impact the organization's overall financial stability. The other answer choices are not applicable in this scenario.

Question 4

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
A) number of employees.
B) number of hours worked.
C) total assets.
D) payroll.

Accepted Answer

Total assets would not be a reasonable independent variable to use in predicting workers compensation claims. It is not directly related to the potential for employee injuries or claims. The other variables - number of employees, number of hours worked, and payroll - are all directly related to the potential for worker injury or claims.

Question 5

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?
A) 1.6 percent
B) 2.4 percent
C) 8.0 percent
D) 64.0 percent

Accepted Answer

We can use the formula P(A and B) = P(A) * P(B|A) to solve the problem. Let A be the event that the first building has a fire and B be the event that the second building has a fire. Then we know P(A or B) = 0.04, P(B|A) = 0.6, and we want to find P(A and B). Using the formula, we get:

P(A and B) = P(A) * P(B|A) = 0.04 * 0.6 = 0.024

Therefore, the probability that both buildings will have a fire is 2.4 percent, which corresponds to choice B.

Question 6

Which of the following is a financial risk that may be faced by a business organization?
A) injuries suffered by employees at the workplace
B) lost income after a fire loss
C) product liability risk
D) currency exchange rate risk

Accepted Answer

Currency exchange rate risk refers to the possibility of a business organization facing losses due to fluctuations in currency exchange rates. This risk is particularly relevant for organizations that operate across international borders or have significant foreign currency holdings. In contrast, choices A, B, and C refer to other types of risks that businesses may face, namely workplace injury risk, fire loss risk, and product liability risk, respectively. While these risks can certainly impact a business organization, only choice D relates directly to financial risk.

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?
A) 0.20 percent
B) 2.00 percent
C) 8.80 percent
D) 9.00 percent

Accepted Answer

To find the probability that at least one of the production facilities will be damaged by fire, we need to calculate the probability that neither of the facilities will be damaged and subtract it from 1.

The probability that neither facility will be damaged is:
(1 - 0.05) * (1 - 0.04) = 0.95 * 0.96 = 0.912

So the probability that at least one facility will be damaged is:
1 - 0.912 = 0.088 or 8.8%

Question 8

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)
A) currency exchange rate risk.
B) property risk.
C) commodity price risk.
D) interest rate risk.

Accepted Answer

The risk of increasing corn prices affecting the profitability of Mid-States Beef's operations is a commodity price risk since corn is a commodity that is a vital input for the company's feedlot business. A currency exchange rate risk implies that fluctuations in currency rates will harm the company's profits, a property risk refers to risks like theft, damage, and other losses to the physical property, while an interest rate risk relates to the effect on profits due to changes in interest rates. Therefore, Commodity price risk is the best choice.

Question 9

Which of the following statements is true regarding insurance market conditions and underwriting results?
A) A combined ratio greater than one (or 100 percent) indicates profitable underwriting.
B) In a "soft" insurance market, more retention is used than in a "hard" insurance market.
C) Insurance rates are high and underwriting standards are tight when the insurance market is "hard."
D) Property and liability insurance premiums and underwriting standards do not fluctuate over time.

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 10

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.
A) I only
B) II only
C) both I and II
D) neither I nor II

Accepted Answer

Statement I is incorrect because risk management has always included pure loss exposures, not only speculative loss exposures. Statement II is correct because businesses began to expand risk management to include financial risks in the 1990s, which is known as Enterprise Risk Management.

Question 11

A large property and liability insurance company merged with a bank and then acquired a stock brokerage company. This type of merger and acquisition activity is categorized as
A) insurance company consolidation.
B) cross-industry consolidation.
C) financial risk management.
D) insurance brokerage consolidation.

Accepted Answer

The merger and acquisition activity described involves companies from different industries, which is known as cross-industry consolidation.

Question 12

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."
A) I only
B) II only
C) both I and II
D) neither I nor II

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 13

The relative level of surplus in the insurance industry is called the industry's
A) capacity.
B) liabilities.
C) reserves.
D) admitted assets.

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 14

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) underwriting by exception method.
B) business cycle.
C) underwriting cycle.
D) account underwriting method.

Accepted Answer

The repetitive pattern described in the question matches the definition of the underwriting cycle, which refers to the oscillation between periods of loose underwriting standards and low premiums, and periods of tight underwriting standards and high premiums. The other answer choices do not accurately reflect this pattern in the property and liability insurance industry.

Question 15

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?
A) 10 percent
B) 20 percent
C) 25 percent
D) 50 percent

Accepted Answer

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

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.
A) I only
B) II only
C) both I and II
D) neither I nor II

Accepted Answer

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

Question 17

An integrated risk management program is a risk management program which combines
A) pure and speculative risks.
B) property and liability risks.
C) personnel-related risk and property risk.
D) direct and indirect loss risk.

Accepted Answer

An integrated risk management program combines both pure risks (which involve only the chance of loss or no loss) and speculative risks (which involve the chance of loss, no loss, or gain).

Question 18

A comprehensive risk management program that addresses an organization's pure risks, speculative risks, strategic risks, and operational risks is called a(n)
A) risk management information system.
B) financial risk management plan.
C) speculative risk management plan.
D) enterprise risk management plan.

Accepted Answer

An enterprise risk management plan is a comprehensive approach to managing all types of risks that an organization faces including pure risks, speculative risks, strategic risks, and operational risks. It involves identifying, assessing, and prioritizing risks, and implementing strategies to mitigate or manage those risks. An enterprise risk management plan is a proactive approach to risk management that helps organizations to avoid or minimize potential losses and disruptions to their operations.

Question 19

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.
A) I only
B) II only
C) both I and II
D) neither I nor II

Accepted Answer

Investment returns do have an impact on the underwriting cycle. Option II is true, as strong investment returns can help to offset underwriting losses during a soft market and thereby lengthen its duration. Option I is false, as investment returns can also affect insurer pricing and risk appetite, both of which are key components of the underwriting cycle.

Question 20

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?
A) 0.20 percent
B) 2.00 percent
C) 4.50 percent
D) 9.00 percent

Accepted Answer

The answer of RST Company has production facilities in Salt...

Quiz 4: Enterprise Risk Management and Related Topics

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

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

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

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.

A large property and liability insurance company merged with a bank and then acquired a stock brokerage company. This type of merger and acquisition activity is categorized as

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."

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

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 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.

An integrated risk management program is a risk management program which combines

A comprehensive risk management program that addresses an organization's pure risks, speculative risks, strategic risks, and operational risks is called a(n)

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.