Question 1

One example of risk avoidance is to delay taking responsibility for purchased goods until the arrival of the goods.

Accepted Answer

A) True 
 B)False

Question 2

When deciding whether to self-insure, a risk manager should consider the opportunity cost of reserve funds and cash flow advantages.

Accepted Answer

A) True 
 B)False

Question 3

Diversification across various businesses or geographic locations can serve as a form of risk transfer.

Accepted Answer

A) True 
 B)False

Question 4

A non-insurance transfer of risk is

Accepted Answer

A)   avoiding a dangerous manufacturing process by purchasing a part of a product made by a supplier,
B)   a clause in a sales contract wherein the buyer assumes liability for damage done by the product,
C)   the cancellation of an insurance policy,
D)   self-insurance.E) B) and C)
F) C) and D)

Question 5

Match the descriptions with their terms:
-Efforts to reduce the frequency and/or the severity of a loss is through _________________.

Accepted Answer

A)   frequency reduction
B)   hedging
C)   hold-harmless agreement
D)   loss control
E)   risk avoidanceF)  risk retentionG)  risk transferH)  self-insuranceI)  separationJ)  severity reductionK)  speculatorL)  unplanned retentionM) G) and H)
N) C) and D)

Question 6

Risk transfer is most likely ideal for a risk with

Accepted Answer

A)   a high degree of diversification and a low potential severity,
B)   a high expected frequency and a low potential severity,
C)   a high expected frequency and a high potential severity,
D)   a low expected frequency and a high potential severity.E) B) and C)
F) All of the above

Question 7

Match the descriptions with their terms:
-A sprinkler system that is installed in an office building would be an example of _________________.

Accepted Answer

A)   frequency reduction
B)   hedging
C)   hold-harmless agreement
D)   loss control
E)   risk avoidanceF)  risk retentionG)  risk transferH)  self-insuranceI)  separationJ)  severity reductionK)  speculatorL)  unplanned retentionM) A) and B)
N) B) and J)

Question 8

The three most commonly used methods of loss control are:

Accepted Answer

A)   risk retention, risk avoidance, and risk transfer,
B)   self-insurance, diversification, and risk transfer,
C)   frequency reduction, severity reduction, and diversification,
D)   insurance transfers, frequency reduction, and severity reduction.E) A) and B)
F) A) and C)

Question 9

Self-insurance differs from the establishment of a reserve fund in that

Accepted Answer

A)   establishing a reserve fund is a form of risk retention,
B)   self-insurance involves prefunding of expected losses through a fund specifically designed for that purpose,
C)   self-insurance requires the existence of a group of exposure units large enough to allow accurate loss prediction.
D)   self-insurance requires the formation of a subsidiary company.E) C) and D)
F) B) and D)

Question 10

Match the descriptions with their terms:
-_________________ describes the situation in which a risk is not transferred primarily because of ignorance regarding the potential severity and/or frequency of the loss.

Accepted Answer

A)   frequency reduction
B)   hedging
C)   hold-harmless agreement
D)   loss control
E)   risk avoidanceF)  risk retentionG)  risk transferH)  self-insuranceI)  separationJ)  severity reductionK)  speculatorL)  unplanned retentionM) F) and J)
N) D) and E)

Question 11

Match the descriptions with their terms:
-Distributing inventory among several warehouses to prevent a single peril from destroying the entire stock is described as _________________.

Accepted Answer

A)   frequency reduction
B)   hedging
C)   hold-harmless agreement
D)   loss control
E)   risk avoidanceF)  risk retentionG)  risk transferH)  self-insuranceI)  separationJ)  severity reductionK)  speculatorL)  unplanned retentionM) C) and J)
N) D) and K)

Question 12

Match the descriptions with their terms:
-A manufacturer transferring its product liability to the retailer of the product might do so through a/an _________________.

Accepted Answer

A)   frequency reduction
B)   hedging
C)   hold-harmless agreement
D)   loss control
E)   risk avoidanceF)  risk retentionG)  risk transferH)  self-insuranceI)  separationJ)  severity reductionK)  speculatorL)  unplanned retentionM) F) and K)
N) D) and I)

Question 13

Which of the following statements is true?

Accepted Answer

A)   Separation and duplication are the same,
B)   Separation cannot be used at the same time as duplication for the same risk,
C)   Duplication actually increases the maximum possible loss,
D)   Duplication is always better than separation.E) A) and B)
F) A) and D)

Question 14

Credit is a major source of funds for most firms' funded retention programs.

Accepted Answer

A) True 
 B)False

Question 15

Loss control may take the form of frequency reduction, severity reduction, or diversification.

Accepted Answer

A) True 
 B)False

Question 16

Match the descriptions with their terms:
-A common method of handling a speculative risk is through the process called _________________.

Accepted Answer

A)   frequency reduction
B)   hedging
C)   hold-harmless agreement
D)   loss control
E)   risk avoidanceF)  risk retentionG)  risk transferH)  self-insuranceI)  separationJ)  severity reductionK)  speculatorL)  unplanned retentionM) B) and G)
N) K) and L)

Question 17

A non-insurance transfer of risk is

Accepted Answer

A)   the establishment of a reserve fund,
B)   separation,
C)   the installation of fire extinguishers,
D)   a disclaimer of implied warranty on a sales contract.E) C) and D)
F) B) and D)

Question 18

Risk avoidance is a conscious decision not to expose oneself or one's firm to a particular risk.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following does not have to be present in order to start a self-insurance program?

Accepted Answer

A)   a weak general financial condition so that the savings of insurance premiums will be material to the firm,
B)   a sufficient number of exposure units to enable accurate loss prediction,
C)   the establishment of a fund for the specific purpose of prefunding expected losses,
D)   accurate records of past losses.E) B) and D)
F) All of the above

Question 20

Once a risk has been transferred through a hold-harmless agreement the transferor is free from liability for the risks transferred.

Accepted Answer

A) True 
 B)False

Exam 5: Risk Management Techniques: Noninsurance Methods

Match the descriptions with their terms: -_________________ describes the situation in which a risk is not transferred primarily because of ignorance regarding the potential severity and/or frequency of the loss.

Correct AnswerverifiedShow Answer

When deciding whether to self-insure, a risk manager should consider the opportunity cost of reserve funds and cash flow advantages.

Correct AnswerverifiedShow Answer

Match the descriptions with their terms: -Distributing inventory among several warehouses to prevent a single peril from destroying the entire stock is described as _________________.

Correct AnswerverifiedShow Answer

Loss control may take the form of frequency reduction, severity reduction, or diversification.

Correct AnswerverifiedShow Answer

Match the descriptions with their terms: -A common method of handling a speculative risk is through the process called _________________.

Correct AnswerverifiedShow Answer

A non-insurance transfer of risk is

Correct AnswerverifiedShow Answer

Match the descriptions with their terms: -Efforts to reduce the frequency and/or the severity of a loss is through _________________.

Correct AnswerverifiedShow Answer

The three most commonly used methods of loss control are:

Correct AnswerverifiedShow Answer

A non-insurance transfer of risk is

Correct AnswerverifiedShow Answer

Risk transfer is most likely ideal for a risk with

Correct AnswerverifiedShow Answer

Risk avoidance is a conscious decision not to expose oneself or one's firm to a particular risk.

Correct AnswerverifiedShow Answer

One example of risk avoidance is to delay taking responsibility for purchased goods until the arrival of the goods.

Correct AnswerverifiedShow Answer

Credit is a major source of funds for most firms' funded retention programs.

Correct AnswerverifiedShow Answer

Diversification across various businesses or geographic locations can serve as a form of risk transfer.

Correct AnswerverifiedShow Answer

Match the descriptions with their terms: -A sprinkler system that is installed in an office building would be an example of _________________.

Correct AnswerverifiedShow Answer

Match the descriptions with their terms: -A manufacturer transferring its product liability to the retailer of the product might do so through a/an _________________.

Correct AnswerverifiedShow Answer

Which of the following does not have to be present in order to start a self-insurance program?

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

Self-insurance differs from the establishment of a reserve fund in that

Correct AnswerverifiedShow Answer

Once a risk has been transferred through a hold-harmless agreement the transferor is free from liability for the risks transferred.

Correct AnswerverifiedShow Answer

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