Principles of Risk Management and Insurance 13th Edition Test Bank
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Principles of Risk Management and Insurance, 13e (Rejda/McNamara)
Chapter 4 Enterprise Risk Management and Related
Topics
1) Which of the
following is a financial risk that may be faced by a business organization?
1. A) injuries suffered by employees at the
workplace
2. B) lost income after a fire loss
3. C) product liability risk
4. D) currency exchange rate risk
Answer: D
Question Status:
Previous Edition
2) Which of the
following statements about the scope of risk management is (are) true?
1. Traditionally, risk management was limited in
scope to speculative loss exposures.
2. In the 1990s, some businesses began to expand
the scope of risk management to include financial risks.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II
Answer: B
Question Status:
Previous Edition
3) 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)
1.
A) currency exchange
rate risk.
2.
B) property risk.
3.
C) commodity price
risk.
4.
D) interest rate risk.
Answer: C
Question Status:
Previous Edition
4) An integrated risk
management program is a risk management program which combines
1. A) pure and speculative risks.
2. B) property and liability risks.
3. C) personnel-related risk and property risk.
4. D) direct and indirect loss risk.
Answer: A
Question Status:
Previous Edition
5) 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 andhigh retained liability claims. RA’s insurer
designed an insurance program where the insurer pays only if bothcontingencies (high fuel costs and high retained liability claims) occur.
The contract the insurer designed is called a(n)
1. A) double indemnity rider.
2. B) double trigger option.
3. C) multiple protection policy.
4. D) other insurance provision.
Answer: B
Question Status:
Previous Edition
6) Which statement is
(are) true with respect to enterprise risk management programs?
1. They address traditional property, liability,
and personnel loss exposures.
2. They do not address financial risks.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II
Answer: A
Question Status:
Previous Edition
7) A comprehensive
risk management program that addresses an organization’s pure risks,
speculative risks, strategic risks, and operational risks is called a(n)
1. A) risk management information system.
2. B) financial risk management plan.
3. C) speculative risk management plan.
4. D) enterprise risk management plan.
Answer: D
Question Status:
Previous Edition
8) 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
1. A) underwriting by exception method.
2. B) business cycle.
3. C) underwriting cycle.
4. D) account underwriting method.
Answer: C
Question Status:
Previous Edition
9) Which statement is
(are) true regarding property and liability insurance market conditions?
1. Premiums are high when the insurance market is
“hard.”
2. Underwriting standards are tight when the
insurance market is “soft.”
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II
Answer: A
Question Status:
Previous Edition
10) Which of the
following statements is true regarding insurance market conditions and
underwriting results?
1. A) A combined ratio greater than one (or 100
percent) indicates profitable underwriting.
2. B) In a “soft” insurance market, more
retention is used than in a “hard” insurance market.
3. C) Insurance rates are high and underwriting
standards are tight when the insurance market is “hard.”
4. D) Property and liability insurance premiums
and underwriting standards do not fluctuate over time.
Answer: C
Question Status:
Previous Edition
11) The relative level
of surplus in the insurance industry is called the industry’s
1. A) capacity.
2. B) liabilities.
3. C) reserves.
4. D) admitted assets.
Answer: A
Question Status:
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12) Which of the
following statements is (are) true regarding investment returns and the
underwriting cycle?
1. Investment returns have no impact upon the
underwriting cycle.
2. Investment returns can lengthen the duration
of a soft market by offsetting underwriting losses.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II
Answer: B
Question Status:
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13) 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
1. A) insurance company consolidation.
2. B) cross-industry consolidation.
3. C) financial risk management.
4. D) insurance brokerage consolidation.
Answer: B
Question Status:
Previous Edition
14) 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?
1. A) 10 percent
2. B) 20 percent
3. C) 25 percent
4. D) 50 percent
Answer: C
Question Status:
Previous Edition
15) 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?
1. A) 0.20 percent
2. B) 2.00 percent
3. C) 4.50 percent
4. D) 9.00 percent
Answer: A
Question Status:
Previous Edition
16) 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?
1. A) 0.20 percent
2. B) 2.00 percent
3. C) 8.80 percent
4. D) 9.00 percent
Answer: C
Question Status:
Previous Edition
17) Some events cannot
occur together because the occurrence of one event makes the occurrence of the
second event impossible. Such events are called
1. A) dependent events.
2. B) independent events.
3. C) conditional events.
4. D) mutually exclusive events.
Answer: D
Question Status:
Previous Edition
18) 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?
1. A) 1.6 percent
2. B) 2.4 percent
3. C) 8.0 percent
4. D) 64.0 percent
Answer: B
Question Status:
Previous Edition
19) Which of the
following statements is (are) true with regard to probability analysis?
1. If two events are independent, the occurrence
of one event does not affect the occurrence of the second event.
2. If two events are dependent, the occurrence of
one event affects the occurrence of the second event.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II
Answer: C
Question Status:
Previous Edition
20) 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
1. A) number of employees.
2. B) number of hours worked.
3. C) total assets.
4. D) payroll.
Answer: C
Question Status:
Previous Edition
21) A method of
characterizing the relationship between two or more variables and then using
the characterization to make a prediction is called
1. A) loss analysis.
2. B) time value of money analysis.
3. C) regression analysis.
4. D) capital budgeting analysis.
Answer: C
Question Status:
Previous Edition
22) A table showing
losses that could occur and the corresponding chance that each loss could occur
is called a(n)
1. A) underwriting cycle.
2. B) capital budget.
3. C) loss distribution.
4. D) risk map.
Answer: C
Question Status:
Previous Edition
23) Which of the
following statements is (are) true with respect to the time value of money?
1. Money received today is worth more than the
same amount of money received in the future.
2. The present value of a future amount is
greater than the future amount.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II
Answer: A
Question Status:
Previous Edition
24) Calculating the
present value of a future amount is called
1. A) interpolating.
2. B) discounting.
3. C) compounding.
4. D) regression analysis.
Answer: B
Question Status:
Previous Edition
25) The process of
determining which set of investments in plant and equipment to undertake is
called
1. A) regression analysis.
2. B) loss forecasting.
3. C) time value of money analysis
4. D) capital budgeting.
Answer: D
Question Status:
Previous Edition
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