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Traditionally Risk has been defined as? •A) any situation in which the probability of loss is one. •B) any situation in which the probability of loss is zero. •C) uncertainty concerning the occurrence of loss. •D) the probability of a loss occurring. - correct answer ✅C uncertainty concerning the occurrence of loss •The premature death of an individual is an example of a •A) pure risk. •B) speculative risk. •C) nondiversifiable risk. •D) physical hazard. - correct answer ✅A pure risk •A family's automobile that is a total loss as a result of a collision is an example of which of the following types of risk? •I. Speculative risk •II. Diversifiable risk •A) I only •B) II only
•C) both I and II •D) neither I nor II - correct answer ✅B II only •Jim and Paula Franklin started a dry cleaning business. The business may be successful or it may fail. This type of risk is called •A) pure risk. •B) subjective risk. •C) nondiversifiable risk. •D) speculative risk. - correct answer ✅D Speculative Risk
- Rapid inflation, cyclical unemployment, war, hurricanes, and floods are all examples of •A) diversifiable risks. •B) physical hazards. •C) nondiversifiable risks. •D) speculative risks. - correct answer ✅C nondiversifiable risks
•B) the destruction of a firm's manufacturing plant by an earthquake •C) the cost of renting a substitute vehicle while a collision- damaged car is being repaired •D) the vandalism of a person's automobile - correct answer ✅C) the cost of renting a substitute vehicle while a collision-damaged car is being repaired •Which of the following statements about liability risks is (are) true? •I. Future income and assets can be attached to pay judgments if inadequate insurance is carried. •II. There is an upper limit on the amount of loss. •A) I only •B) II only •C) both I and II •D) neither I nor II - correct answer ✅A) I only •All of the following are characteristics of the liability risk that most people face EXCEPT
•A) a lien may be placed on your income and assets to satisfy a legal judgment. •B) substantial legal expenses may be incurred defending the claim. •C) there is no upper limit on the amount of the loss. D) owning liability insurance eliminates the possibility of being held legally liable. - correct answer ✅D) owning liability insurance eliminates the possibility of being held legally liable. •Jenna opened a successful restaurant. One night, after the restaurant had closed, a fire started when the electrical system malfunctioned. In addition to the physical damage to the restaurant, Jenna lost profits that could have been earned while the restaurant was closed for repairs. The lost profits are an example of •A) direct loss. •B) diversifiable risk. •C) speculative risk. D) indirect loss - correct answer ✅D) indirect loss •An earthquake is an example of a(n) •A) moral hazard.
•D) legal hazard. - correct answer ✅•D) legal hazard. •Curt borrowed money from a bank to purchase a fishing boat. He purchased property insurance on the boat. Curt had difficulty making loan payments because he did not catch many fish, and fish prices were low. Curt intentionally sunk the boat, collected from his insurer, and paid off the loan balance. This scenario illustrates the problem of •A) adverse selection. •B) moral hazard. •C) speculative risk. •D) morale (attitudinal) hazard. - correct answer ✅B) moral hazard. •Cathy's car hit a patch of ice on the road. The car skidded off the road and hit a tree. The presence of ice on the road is best described as a(n) •A) peril. •B) pure risk. •C) physical hazard.
•D) direct loss. - correct answer ✅C) physical hazard. •ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects that 8 homeowners out of every 100, on average, will report claims each year. In that year, 10 homeowners reported a claim. The variation between the rate of loss that ABC expects to occur and the rate of loss that actually occurs is called •A) objective probability. •B) subjective probability. •C) objective risk. •D) subjective risk. - correct answer ✅•C) objective risk. •Which of the following statements about chance of loss and risk is (are) true? •I. If the chance of loss is identical for two groups, the objective risk must be the same. •II. Two individuals may perceive differently the risk inherent in a given activity. •A) I only
•D) California because of a higher objective risk •E) The risk level is the same in those two states - correct answer ✅B) Oregon because of a higher objective risk •Pre-loss objectives of risk management include which of the following? •I. Preparing for potential losses in the most economical way •II. Reduction of anxiety •A) I only •B) II only •C) both I and II •D) neither I nor II - correct answer ✅C) both I and II •Which of the following is a post-loss risk management objective? •A) treating loss exposures in the most economical way •B) continuing operations •C) reduction of anxiety D) meeting externally imposed legal obligations - correct answer ✅•B) continuing operations
•Risk management is concerned with •A) the identification and treatment of loss exposures. •B) the management of speculative risks only. •C) the management of pure risks that are uninsurable. •D) the purchase of insurance only. - correct answer ✅A) the identification and treatment of loss exposures. •All of the following statements about the administration of a risk management program are true EXCEPT •A) The risk manager is an important part of a firm's management team. •B) A risk management policy statement can be used to educate top executives about the risk management process. •C) If a risk management program is properly designed, periodic review of the program is unnecessary. D) In order to properly identify loss exposures, the risk manager needs the cooperation of other departments. - correct answer ✅C) If a risk management program is properly designed, periodic review of the program is unnecessary.
•A) underwriting by exception method. •B) business cycle. •C) underwriting cycle. •D) account underwriting method. - correct answer ✅C) underwriting cycle. •Which of the following is least likely to occur during a "hard" insurance market period? •A) difficulty in obtaining insurance •B) tightening underwriting standards •C) ease in obtaining insurance D) increasing premiums - correct answer ✅C) ease in obtaining insurance •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 - correct answer ✅A) I only •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. - correct answer ✅C) Insurance rates are high and underwriting standards are tight when the insurance market is "hard." •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.
•D) risk management audit. - correct answer ✅C) flowchart. •Which of the following loss identification method is BEST suited for discovering the risk arising from account receivables? Account receivables are the balance of money due to a firm for goods delivered to customers but not yet paid for by customers. •A) financial statements approach •B) physical (on-site) inspections •C) risk assessment checklist •D) contracts approach •E) flowchart - correct answer ✅A) financial statements approach •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. - correct answer ✅•D) mutually exclusive events. •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 - correct answer ✅C) 25 percent •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
•C) $400 million •D) $600 million - correct answer ✅•D) $600 million
- Refer to the article on Blackboard/Articles/Topic 1, "Self-Driving Cars Might Kill Auto Insurance as We Know It." a. Recall our discussion in class concerning the classification of risk. From the article, identify and briefly discuss one example for each of pure, speculative, static, and dynamic risks. (8 points) - correct answer ✅· Pure: car accident/crash, death · Speculative: o Tesla's production of autonomous vehicles o Automakers developing self-driving car business o Auto insurance business for insurers o Launching a new firm specializing in insurance for automated driving modes · Static: car accident/crash (always present) · Dynamic: o Self-driving car accidents caused by system errors or hacking o Law or regulation changes that ban the automated vehicle in some states and cause the automated business to be discontinued
b. Discuss whether the auto accident of self-driving cars is a diversifiable risk or nondiversifiable risk. Explain your answer. ( points) - correct answer ✅You can make an argument either way, but you need to explain it correctly based on the definitions of diversifiable risk and nondiversifiable risk. Diversifiable · The risk of an auto collision is not highly correlated among drivers. · When an accident happens, only a small group of people is affected, such as the drivers and passengers of the cars involved in the accident. Nondiversifiable · If there is a technology problem (e.g., system design flaw) that potentially increases the risk of auto accidents, this can affect all of the users of self-driving cars that have this technology. · These people's auto accident risk may become highly correlated because of the technology problem.
