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Chapter1

RiskinOurSociety

1) Traditionally,riskhasbeendefinedas
A) anysituationinwhichtheprobabilityoflossisone.
B) anysituationinwhichtheprobabilityoflossiszero.
C) uncertaintyconcerningtheoccurrenceofloss.
D) theprobabilityofalossoccurring.

Answer: C
QuestionStatus:Revised

2) Objectiveriskisdefinedas
A) theprobabilityofloss.
B) therelativevariationofactuallossfromexpectedloss.
C) uncertaintybasedonapersonsmentalconditionorstateofmind.
D) thecauseofloss.

Answer: B
QuestionStatus:PreviousEdition

3) Aninsurancecompanyestimatesitsobjectiveriskfor10,000exposuresat10percent.Assumingthe
probabilityoflossremainsthesame,whatwouldhappentotheobjectiveriskifthenumberof
exposuresweretoincreaseto1million?
A) Itwoulddecreaseto1percent.
B) Itwoulddecreaseto5percent.
C) Itwouldremainthesame.
D) Itwouldincreaseto20percent.

Answer: A
QuestionStatus:PreviousEdition

4) Uncertaintybasedonapersonsmentalconditionorstateofmindisknownas
A) objectiverisk.
B) subjectiverisk.
C) objectiveprobability.
D) subjectiveprobability.

Answer: B
QuestionStatus:PreviousEdition
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5) Thelong-runrelativefrequencyofaneventbasedontheassumptionofaninfinitenumberof
observationswithnochangeintheunderlyingconditionsiscalled
A) objectiveprobability.
B) objectiverisk.
C) subjectiveprobability.
D) subjectiverisk.

Answer: A
QuestionStatus:PreviousEdition

6) Whichofthefollowingstatementsaboutapriori probabilitiesiscorrect?
A) Theyaresubjectiveprobabilitiesbasedonambiguityinthewayprobabilityisperceived.
B) Theyaresubjectiveprobabilitiesthatmayvaryamongindividualsbecauseoffactorssuchas
age,gender,education,andtheuseofalcohol.
C) Theyareobjectiveprobabilitiesthatcanbedeterminedbydeductivereasoning.
D) Theyareobjectiveprobabilitiesthatcanbedeterminedbysubjectivereasoning.

Answer: C
QuestionStatus:PreviousEdition

7) Anindividualspersonalestimateofthechanceoflossis
A) anobjectiveprobability.
B) anobjectiverisk.
C) asubjectiveprobability.
D) anaprioriprobability.

Answer: C
QuestionStatus:PreviousEdition

8) Aperilis
A) amoralhazard.
B) thecauseofaloss.
C) aconditionwhichincreasesthechanceofaloss.
D) theprobabilitythatalosswilloccur.

Answer: B
QuestionStatus:PreviousEdition
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9) Anearthquakeisanexampleofa
A) moralhazard.
B) peril.
C) physicalhazard.
D) objectiverisk.

Answer: B
QuestionStatus:PreviousEdition

10) Densefogthatincreasesthechanceofanautomobileaccidentisanexampleofa
A) speculativerisk.
B) peril.
C) physicalhazard.
D) moralhazard.

Answer: C
QuestionStatus:PreviousEdition

11) Fakinganaccidenttocollectinsuranceproceedsisanexampleofa
A) physicalhazard.
B) objectiverisk.
C) moralhazard.
D) moralehazard.

Answer: C
QuestionStatus:PreviousEdition

12) Indifferencetolossbecauseoftheexistenceofinsuranceisanexampleofa
A) physicalhazard.
B) objectiveprobability.
C) moralhazard.
D) moralehazard.

Answer: D
QuestionStatus:PreviousEdition
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13) Somecharacteristicsofthejudicialsystemandregulatoryenvironmentincreasethefrequencyand
severityofloss.Thishazardiscalled
A) moralhazard.
B) physicalhazard.
C) moralehazard.
D) legalhazard.

Answer: D
QuestionStatus:PreviousEdition

14) TaylorTobaccoCompanyisconcernedthatthecompanymaybeheldliableinacourtoflawand
orderedtopayalargedamageaward.Thecharacteristicsofthejudicialsystemthatincreasethe
frequencyandseverityoflossesareknownas
A) moralhazard.
B) particularrisk.
C) speculativerisk.
D) legalhazard.

Answer: D
QuestionStatus:Revised

15) Aphrasethatencompassesallofthemajorrisksfacedbyabusinessfirmis
A) financialrisk.
B) speculativerisk.
C) enterpriserisk.
D) purerisk.

Answer: C
QuestionStatus:PreviousEdition

16) Whichofthefollowingstatementsaboutfinancialriskis(are)true?
I. Enterpriseriskdoesnotincludefinancialrisk.
II. Financialriskiseasilyaddressedthroughthepurchaseofinsurance.
A) Ionly
B) IIonly
C) bothIandII
D) neitherInorII

Answer: D
QuestionStatus:Revised
Chapter1RiskinOurSociety5

17) AllofthefollowingareconsideredfinancialrisksEXCEPT
A) thedeclineinthevalueofabondportfoliobecauseofrisinginterestrates.
B) increasedcostofproductionbecauseofrisingcommodityprices.
C) lossofmoneybecauseofadversemovementsincurrencyexchangerates.
D) lossofprofitsafteraphysicaldamagelossoccurs.

Answer: D
QuestionStatus:PreviousEdition

18) KatelynwasjustnamedRiskManagerofABCCompany.Shehasdecidedtocreatearisk
managementprogramwhichconsidersalloftherisksfacedbyABC -pure,speculative,operational,
andstrategic-inasingleriskmanagementprogram.Suchaprogramiscalleda(n)
A) financialriskmanagementprogram.
B) enterpriseriskmanagementprogram.
C) fundamentalriskmanagementprogram.
D) consequentialriskmanagementprogram.

Answer: B
QuestionStatus:PreviousEdition

19) Apureriskisdefinedasasituationinwhichthereis
A) onlythepossibilityoflossornoloss.
B) onlythepossibilityofprofit.
C) apossibilityofneitherprofitnorloss.
D) apossibilityofeitherprofitorloss.

Answer: A
QuestionStatus:PreviousEdition

20) Theprematuredeathofanindividualisanexampleofa
A) purerisk.
B) speculativerisk.
C) fundamentalrisk.
D) physicalhazard.

Answer: A
QuestionStatus:PreviousEdition
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21) Whichofthefollowingstatementsaboutspeculativerisksistrue?
A) Theyarealmostalwaysinsurablebyprivateinsurers.
B) Theyaremoreeasilypredictablethanpurerisks.
C) Theiroccurrencemaybenefitsociety.
D) Theyinvolveonlyachanceofloss.

Answer: C
QuestionStatus:PreviousEdition

22) Anautomobilethatisatotallossasaresultofacollisionisanexampleofwhichofthefollowing
typesofrisk?
I. Speculativerisk
II. Fundamentalrisk
A) Ionly
B) IIonly
C) bothIandII
D) neitherInorII

Answer: D
QuestionStatus:Revised

23) AllofthefollowingareprogramstoinsurefundamentalrisksEXCEPT
A) federallysubsidizedfloodinsurance.
B) autophysicaldamageinsurance.
C) SocialSecurity.
D) unemploymentinsurance.

Answer: B
QuestionStatus:Revised

24) AllofthefollowingareexamplesofpersonalrisksEXCEPT
A) poorhealth.
B) unemployment.
C) prematuredeath.
D) flood.

Answer: D
QuestionStatus:PreviousEdition
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25) Whichofthefollowingisareasonwhyprematuredeathmayresultineconomicinsecurity?
I. Additionalexpensesassociatedwithdeathmaybeincurred.
II. Theincomeofthedeceasedpersonsfamilymaybeinadequatetomeetitsbasicneeds.
A) Ionly
B) IIonly
C) bothIandII
D) neitherInorII

Answer: C
QuestionStatus:PreviousEdition

26) Whichofthefollowingareoftenconsequencesoflong-termdisability?
I. Continuingmedicalexpenses
II. Lossorreductionofemployeebenefits
A) Ionly
B) IIonly
C) bothIandII
D) neitherInorII

Answer: C
QuestionStatus:PreviousEdition

27) AllofthefollowingareexamplesofdirectpropertylossesEXCEPT
A) thetheftofapersonsjewelry.
B) thedestructionofafirmsmanufacturingplantbyanearthquake.
C) thecostofrentingasubstitutevehiclewhileacollision-damagedcarisbeingrepaired.
D) thevandalismofapersonsautomobile.

Answer: C
QuestionStatus:Revised

28) Theextraexpenseincurredbyabusinesstostayinoperationfollowingafireisanexampleofa(n)
A) fundamentalrisk.
B) speculativerisk.
C) directloss.
D) indirectloss.

Answer: D
QuestionStatus:PreviousEdition
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29) Whichofthefollowingstatementsaboutliabilityrisksis(are)true?
I. Futureincomeandassetscanbeattachedtopayjudgmentsifinadequateinsuranceiscarried.
II. Thereisanupperlimitontheamountofloss.
A) Ionly
B) IIonly
C) bothIandII
D) neitherInorII

Answer: A
QuestionStatus:PreviousEdition

30) AllofthefollowingareburdenstosocietybecauseofthepresenceofriskEXCEPT
A) Thesizeofanemergencyfundmustbeincreased.
B) Individualsmayprofitfromacceptingaspeculativerisk.
C) Societyisdeprivedofcertaingoodsandservices.
D) Mentalfearandworryarepresent.

Answer: B
QuestionStatus:PreviousEdition

31) Losscontrolincludeswhichofthefollowing?
I. Lossreduction
II. Lossprevention
A) Ionly
B) IIonly
C) bothIandII
D) neitherInorII

Answer: C
QuestionStatus:PreviousEdition

32) Followinggoodhealthhabitscanbecategorizedas
A) lossprevention.
B) lossretention.
C) noninsurancetransfer.
D) personalinsurance.

Answer: A
QuestionStatus:PreviousEdition
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33) Fromtheinsuredsperspective,theuseofdeductiblesininsurancecontractsisanexampleof
A) risktransfer.
B) losscontrol.
C) riskavoidance.
D) riskretention.

Answer: D
QuestionStatus:PreviousEdition

34) Theuseoffire-resistivematerialswhenconstructingabuildingisanexampleof
A) risktransfer.
B) losscontrol.
C) riskavoidance.
D) riskretention.

Answer: B
QuestionStatus:PreviousEdition

35) AllofthefollowingstatementsaboutriskretentionaretrueEXCEPT
A) Itmaybeusedintentionallyifcommercialinsuranceisunavailable.
B) Itmaybeusedpassivelybecauseofignorance.
C) Itsuseismostappropriateforlow-frequency,high-severitytypesofrisks.
D) Itsuseresultsincostsavingsiflossesarelessthanthecostofinsurance.

Answer: C
QuestionStatus:Revised

36) AllofthefollowingaremethodsofnoninsurancetransferEXCEPT
A) enteringintoahold-harmlessagreement.
B) avoidingdangerousactivities.
C) hedgingriskusingfuturescontracts.
D) incorporatingabusiness.

Answer: B
QuestionStatus:Revised
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37) Curtborrowedmoneyfromabanktopurchaseafishingboat.Hepurchasedpropertyinsuranceon
theboat.Curthaddifficultymakingloanpaymentsbecausehedidnotcatchmanyfish,andfish
priceswerelow.Curtintentionallysunktheboat,collectedfromhisinsurer,andpaidofftheloan
balance.Thisscenarioillustratestheproblemof
A) adverseselection.
B) moralhazard.
C) fundamentalrisk.
D) moralehazard.

Answer: B
QuestionStatus:PreviousEdition

38) Jennaopenedasuccessfulrestaurant.Onenight,aftertherestauranthadclosed,afirestartedwhen
theelectricalsystemmalfunctioned.Inadditiontothephysicaldamagetotherestaurant,Jenna
alsolostprofitsthatcouldhavebeenearnedwhiletherestaurantwasclosedforrepairs.Thelost
profitsareanexampleof
A) directloss.
B) fundamentalrisk.
C) speculativerisk.
D) indirectloss.

Answer: D
QuestionStatus:Revised

39) Bradstartedapestcontrolbusiness.Toprotecthispersonalassetsagainstliabilityarisingoutofthe
business,Bradincorporatedthebusiness.Bradsuseofthecorporateformoforganizationtoshield
againstpersonalliabilityclaimsillustrates
A) fundamentalrisk.
B) noninsurancetransfer.
C) riskretention.
D) objectiverisk.

Answer: B
QuestionStatus:PreviousEdition
Chapter1RiskinOurSociety11

40) ABCInsuranceCompanyplanstosellhomeownersinsuranceinfiveWesternstates.ABCexpects
that8homeownersoutofevery100,onaverage,willreportclaimseachyear.Thevariation
betweentherateoflossthatABCexpectstooccurandtherateoflossthatactuallydoesoccuris
called
A) objectiveprobability.
B) subjectiveprobability.
C) objectiverisk.
D) subjectiverisk.

Answer: C
QuestionStatus:PreviousEdition

41) WilliamsCompanyinstalledsmokedetectors,asprinklersystem,andfireextinguishersinitsnew
manufacturingfacility.Thesedevicesareallexamplesof
A) losscontrol.
B) noninsurancetransfer.
C) riskavoidance.
D) riskretention.

Answer: A
QuestionStatus:PreviousEdition

42) TyndalProductsCompanyproducescereal.Thecompanyhasenteredintocontractstodeliver
500,000boxesofcerealduringthenext18months.Thecompanyisconcernedthatthepricesoftwo
ingredients,cornandwheat,mayincreaseoverthenext18months.Thecompanyusedgrain
futurescontractstohedgethepriceriskassociatedwiththesecommodities.Tyndalsuseof
hedgingillustrateswhichriskmanagementtechnique?
A) noninsurancetransfer
B) riskavoidance
C) riskretention
D) riskassumption

Answer: A
QuestionStatus:Revised

43) Cathyscarhitapatchoficeontheroad.Thecarskiddedofftheroadandhitatree.Thepresence
oficeontheroadisbestdescribedasa(n)
A) peril.
B) subjectiverisk.
C) physicalhazard.
D) indirectloss.

Answer: C
QuestionStatus:PreviousEdition
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44) JimandPaulaFranklinstartedadrycleaningbusiness.Thebusinessmaybesuccessfuloritmay
fail.Thetypeofriskthatispresentwheneitheraprofitorlosscouldoccuriscalled
A) purerisk.
B) subjectiverisk.
C) fundamentalrisk.
D) speculativerisk.

Answer: D
QuestionStatus:PreviousEdition

45) Benisconcernedthatifheinjuressomeoneordamagessomeonespropertyhecouldbeheld
legallyresponsibleandrequiredtopaydamages.Thistypeofriskiscalleda
A) speculativerisk.
B) liabilityrisk.
C) fundamentalrisk.
D) propertyrisk.

Answer: B
QuestionStatus:PreviousEdition

46) MLXDrugCompanywouldliketomarketanewhypertensiondrug.WhiletheFoodandDrug
Administration(FDA)wastestingthedrug,itdiscoveredthatthedrugproducedaharmfulside
effect.WhenMLXlearnedoftheFDAstestresult,MLXabandoneditsplantoproduceand
distributethedrug.MLXsreactionillustrates
A) riskavoidance.
B) hedging.
C) risktransfer.
D) riskretention.

Answer: A
QuestionStatus:PreviousEdition

47) ABCHealthInsuranceCompanysellshealthinsuranceinonestate.Recently,thatstateslegislature
passedalawforbiddinghealthinsurersfromconsideringanindividualshealthhistorywhen
selectingapplicantstoinsure.Thischangeinlawwillincreasethepossibilityofunprofitableresults
forABC.Thistypeofhazardisanexampleof
A) physicalhazard.
B) legalhazard.
C) moralhazard.
D) moralehazard.

Answer: B
QuestionStatus:Revised
Chapter1RiskinOurSociety13

48) AllofthefollowingarecharacteristicsoftheliabilityriskthatmostpeoplefaceEXCEPT
A) alienmaybeplacedonyourincomeandassetstosatisfyalegaljudgment.
B) substantiallegalexpensesmaybeincurreddefendingtheclaim.
C) thereisnoupperlimitontheamountoftheloss.
D) owningliabilityinsuranceeliminatesthepossibilityofbeingheldlegallyliable.

Answer: D
QuestionStatus:New

49) Whichofthefollowingstatementsaboutchanceoflossandriskis(are)true?
I. Ifthechanceoflossisidenticalfortwogroups,theobjectiveriskmustbethesame.
II. Twoindividualsmayperceivedifferentlytheriskinherentinagivenactivity.
A) Ionly
B) IIonly
C) bothIandII
D) neitherInorII

Answer: B
QuestionStatus:New