Question 1

Jim S. buys a $50,000 car. Rather than buying insurance on the car, he sets aside $30,000 in a savings account to cover possible losses due to an accident. He is:

Accepted Answer

C

Question 2

Risk avoidance is the best risk management tool when the change of loss is ________ and the potential severity of loss is ________.

Accepted Answer

Risk avoidance is most suitable when the chance of loss is high and the potential severity of loss is also high, as it aims to eliminate the risk entirely.

Question 3

Risk managers are concerned with policy limits and deductible size contained in insurance contracts because:

Accepted Answer

Risk managers are concerned with policy limits and deductible size because they determine how much of the risk is retained by the insured and how much is transferred to the insurer. This decision can have a significant impact on the financial stability of the organization. Higher policy limits and lower deductibles may provide greater protection but also result in higher premiums, while lower policy limits and higher deductibles may save on premiums but increase the financial exposure of the insured.

Question 4

If an individual causes a loss intentionally, we would say that person is a:

Accepted Answer

A moral hazard is when an individual knowingly takes actions or behaves in a way that increases the likelihood of a loss occurring, such as committing fraud or intentionally causing damage or harm. A careful person would not intentionally cause a loss, and a physical hazard refers to a condition or object that can cause a loss, but not intentional actions by an individual. A risk manager may be responsible for identifying and mitigating the effects of moral hazards, among other risks.

Question 5

All of the following are examples of loss reduction, except:

Accepted Answer

The answer of All of the following are examples of...

Question 6

Assume that you own a fireworks manufacturing plant. A prospective insurer indicates it will not insure your property unless you take some loss prevention measures. Which of the following is the best loss prevention measure?

Accepted Answer

The answer of Assume that you own a fireworks manufacturing...

Question 7

All of the following are ways of managing risk mentioned in the text, except:

Accepted Answer

The text mentions competitive bidding as a way of securing a contract or project, but not necessarily as a way of managing risk. The other options - transfer, avoidance, and assumption - are all explicitly mentioned as risk management strategies.

Question 8

Assume that you own a house in rural Arkansas with a pier foundation (concrete blocks on each of the four corners). Your prospective insurance company indicates that they will not insure your home unless you take some loss prevention steps. Which of the following steps is the best loss prevention measure?

Accepted Answer

Enclosing the open foundation with bricks will prevent trash and leaves from accumulating, which can be a fire hazard. While joining a local volunteer fire department or putting fire extinguishers and smoke alarms in the home are also beneficial, they do not directly address the insurance company's concern about the pier foundation.

Question 9

All of the following are true about OSHA, except:

Accepted Answer

OSHA is responsible for promoting workplace safety and health, encouraging hazard mitigation, and imposing fines for noncompliance with standards. However, OSHA is not directly responsible for reducing worker turnover.

Question 10

Which of the following are examples of loss reduction techniques? I. Wearing your seat belt while driving your car II. Polio vaccinations III. Keeping poisons locked up and out of reach of small children IV. Wearing a helmet while skateboarding

Accepted Answer

Loss reduction techniques aim to minimize the severity of a loss once it occurs. Wearing a seat belt and wearing a helmet are both measures that reduce the impact of an accident, making them loss reduction techniques. Vaccinations and keeping poisons locked up are more about preventing the occurrence of a loss, which are loss prevention techniques.

Question 11

Assume you own an antique car. Your prospective insurance company indicates that they will not insure your car unless you take some loss prevention steps to avoid theft. Which of the following steps is the best loss prevention measure with regards to theft?

Accepted Answer

Storing the car in a closed and locked garage is the best loss prevention measure with regards to theft as it ensures that the car is kept in a safe place and is not easily accessible to thieves. Keeping a canvas cover may deter some theft, but it is not as secure as keeping the car in a garage. Avoiding rainy weather or big cities does not guarantee protection against theft.

Question 12

Which tools are used by most individuals for handling the loss exposure of physical damage to their vehicles caused by collisions? 
I. Avoidance
II. Control
III. Retention
IV. Insurance

Accepted Answer

Insurance is commonly used to transfer the financial risk of vehicle damage to an insurance company, while control measures (like safe driving practices) are used to minimize the risk of accidents. Retention might apply in cases where individuals choose to self-insure or absorb the cost of minor damages.

Question 13

Which of the following is true concerning the corporate taxation of insurance premiums and the treatment of uninsured losses?

Accepted Answer

Uninsured losses are deductible only when they occur and premiums are deductible in the year paid. This reflects the general tax principle that expenses are deductible in the year they are incurred, and not before. Losses paid under the deductible amount are not tax deductible because the insured assumed the losses. Commercial insurance is still economically efficient even though payments for insured losses may be 100% tax deductible because it allows companies to transfer risk and reduce uncertainty.

Question 14

An automobile's airbag is primarily there for:

Accepted Answer

An automobile's airbag is primarily there for loss reduction. It is designed to reduce the potential loss of life or injury in the event of a collision by providing a cushioning effect for the vehicle occupants. The airbag does not prevent or avoid the accident from occurring, but it does reduce the severity of the loss.

Question 15

Small firms:

Accepted Answer

The answer of Small firms:
...

Question 16

Which of the following statements about the loss control is not correct?

Accepted Answer

Risk transfer is not an example of loss control, but rather a risk management technique that involves shifting the financial burden of loss to another party, such as an insurance company. Loss control focuses on preventing or minimizing losses, whereas risk transfer involves transferring the financial impact of potential losses.

Question 17

Taking a defensive driving course is an example of which one of the following:

Accepted Answer

Taking a defensive driving course is an example of loss prevention because it is an action taken to prevent or reduce the likelihood of an accident, thereby reducing the potential for loss.

Question 18

Risk Retention is not a good idea if:

Accepted Answer

Risk retention involves accepting and managing the risk internally without transferring it to an external party. This strategy may not be a good idea if the exposure to the risk is potentially catastrophic, as it can lead to significant financial losses or reputational damage.

Question 19

Risk assumption is the best risk management tool when the change of loss is ________ and the potential severity of loss is ________.

Accepted Answer

When the change of loss is low and the potential severity of loss is low, risk assumption is the best risk management tool. This means that the likelihood of a negative event occurring is minimal, and even if it does occur, the impact will not be significant enough to justify spending time and resources trying to manage it. It is therefore more cost-effective to simply accept the risk and move on.

Question 20

From the standpoint of the insured, deductibles in insurance contracts are a form of:

Accepted Answer

Deductibles require the insured to pay a portion of the loss out of pocket, representing a form of risk retention. The insured is retaining a certain level of risk in exchange for a lower premium. Risk transfer involves shifting the risk to another party, such as an insurer, while loss control and risk avoidance are measures taken to mitigate or avoid risk altogether.

Quiz 4: Risk-Handling Techniques: Loss Control, Risk Transfer, and Loss Financing