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

Alberto is buying insurance to cover the risk of potential flooding, which is a pure risk. Pure risks involve only the possibility of loss or no loss, unlike speculative risks which involve the possibility of gain or loss. Uninsurable risks cannot be covered by insurance, and managed risks are risks that have been actively reduced or avoided through risk management strategies.

Question 2

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

Accepted Answer

The term that refers to the chance of loss, the degree of probability of loss, and the amount of possible loss is "risk." Options A, B, and C are not accurate descriptions of this concept. "Speculation" refers to making a risky investment in hopes of making a profit, "hazard" refers to a specific condition or situation that increases the likelihood of loss, and "insurability" refers to the ability to obtain insurance coverage.

Question 3

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 way to manage minor losses, such as damage from dirty or contaminated fuel, while still seeking coverage from an insurance company for potentially major losses, such as from a fire. By self-insuring for smaller, routine losses, Harold can control his insurance costs and reduce the likelihood of costly insurance claims. However, it is still important for Harold to carefully assess and manage all risks associated with his gas stations, and to have a comprehensive risk management plan in place to ensure the ongoing success and profitability of his business.

Question 4

Which type of risk management strategy is a company using when it installs mirrors and surveillance cameras to spot and prevent shoplifting?

Accepted Answer

The company is reducing the risk of shoplifting by installing mirrors and surveillance cameras.

Question 5

An insurance company would not be willing to insure a risk if it:

Accepted Answer

Insurance companies are generally reluctant to insure risks that stem from political disruptions because these events are unpredictable and can lead to massive, unquantifiable losses.

Question 6

________ risk involves the threat of loss with no chance for profit.

Accepted Answer

Pure risk involves the threat of loss with no chance for profit, including events like death or natural disasters that can result in financial loss without any potential gain. Minimum risk refers to the lowest possible amount of risk, while speculative risk involves the possibility of both gain and loss. Managed risk refers to the process of actively identifying, evaluating, and controlling risks.

Question 7

A policyholder must have a(n) __________ in what is being insured, meaning that the policyholder must be the one at risk to suffer an economic loss.

Accepted Answer

Insurable interest refers to the policyholder's financial interest in the item or event being insured. The policyholder must have a potential financial loss if the item or event is damaged, destroyed or lost. This ensures that insurance policies are not taken out on things that the policyholder has no stake in or that could incentivize the policyholder to intentionally bring harm to the insured item or event.

Question 8

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 save on premiums paid to conventional insurance companies. They can carry conventional insurance only for catastrophic losses, which are not typically covered by self-insurance. This way, the company can manage its risk effectively while still minimizing costs.

Question 9

Some businesses will set aside money to cover routine losses and buy "catastrophe" policies to cover big losses. This is an example of which of the following?

Accepted Answer

Self-insuring against the risk involves setting aside money to cover routine losses, which is exactly what the business is doing in this scenario. Catastrophe policies are purchased to cover big losses that may exceed what the business has set aside. This approach allows the business to have some control over their risk management strategy while also mitigating potential losses.

Question 10

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

Accepted Answer

According to a study by the National Bureau of Economic Research, organizations in the United States spend roughly 10 percent of their gross domestic product on insurance premiums.

Question 11

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

Abraham is taking a speculative risk, which means that his investment involves a chance of profit or loss. This is the definition of speculative risk, and it is the most appropriate choice among the given options. Option B is not applicable since product liability insurance would not cover the risk associated with opening a car wash facility. Option C is also not applicable since malpractice liability is not relevant to opening a car wash facility. Option D is not applicable since the law of large numbers is not relevant to insurance premiums for opening a car wash facility.

Question 12

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 felt that having sprinklers and detectors was an effective strategy to reduce the risk of a fire loss in his nursing home. With the new state regulations requiring them, it shows that the state also recognizes the importance of these safety measures in reducing the risk of fire. Option A is incorrect because self-insuring only involves taking on the financial risk of a loss, but does not mitigate or reduce the risk of a loss. Option B is incorrect because having sprinklers and detectors is not speculative but rather a proven risk reduction strategy. Option D is incorrect because avoiding the risk of a fire loss would mean not having the building at all, which is not the case here.

Question 13

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

Accepted Answer

War and its consequences are considered an uninsurable risk by insurance companies as it is impossible to predict or quantify the extent of damage that may occur. The likelihood of destruction during war is too great and would result in unsustainable losses for insurance companies, which is why it is commonly excluded from insurance policies.

Question 14

________ risk involves a chance of either profit or loss.

Accepted Answer

Speculative risk involves the possibility of both profit and loss, making it different from pure risk which only involves the possibility of loss. Insurable risk refers to risks that can be protected against through insurance policies, and managed risk refers to risks that can be reduced through various strategies.

Question 15

Jonathon is in charge of risk management for Learnit Corp., a large chain of preschools in the midwest. He has decided to build enterprise risk management into the organization. The first step Jonathon should take is to:

Accepted Answer

The first step in building enterprise risk management is to identify and prioritize the risks that the organization should manage. This will help Jonathon to develop a strategy to mitigate those risks and ensure that the organization is adequately protected. A, B, and C are not appropriate first steps for building enterprise risk management.

Question 16

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 by Firestone and Ford is an example of risk reduction because they took steps to eliminate or mitigate the risk of accidents caused by faulty tires. Avoiding the risk would involve not engaging in the activity that poses the risk (in this case, selling the tires). Self-insuring against the risk would involve absorbing the financial consequences of the risk rather than taking action to eliminate it. A loss-prevention program involves an ongoing effort to identify and mitigate risks before they result in losses, whereas the recall is a specific action taken in response to a known risk.

Question 17

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

Accepted Answer

Insurance is specifically designed to financially protect individuals, businesses, and nonprofit organizations from a variety of risks such as property damage, liability, and loss of income. While a good accountant and investment in AAA bonds can potentially help mitigate financial risks, they do not provide the same level of protection as insurance. Indemnity is a legal concept that refers to a party being held harmless from certain losses or damages, but it is not a specific form of financial protection like insurance.

Question 18

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 is in place to reduce the risk associated with a potential accident. By setting a minimum height, the amusement park can ensure that riders meet certain physical requirements for the ride, reducing the likelihood of injury or accident.

Question 19

A firm that chooses to self-insure and cover losses out of its budget is said to:

Accepted Answer

The answer of A firm that chooses to self-insure and...

Question 20

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

Speculative risk involves the potential for both loss and gain, as is the case with Bill's decision to expand his business, which could lead to increased profits or losses.

Quiz 24: Extension: Managing Risk