Print Principles of Risk Management and Insurance - Chapter 4 flashcards Easy Notecards PDF

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1.2.3.4.5.Principles of Risk Management and Insurance - Chapter 4Which 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 rat...

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2020. 12. 5.

Print Principles of Risk Management and Insurance - Chapter 4 flashcards | Easy Notecards

Principles of Risk Management and Insurance - Chapter 4 1. Which of the following is a financial risk that m ay be faced by a business organization? 1. A) injuries suffered by employees at the workplace 2. B ) lost incom e after a fire loss 3. C ) product liability risk 4. D) currency exchange rate risk Answer: D 2. Which of the following statements about the scope of risk m anagement is (are) true? 1. Traditionally, risk m anagement was lim ited in scope to speculative loss exposures. 2. In the 1990s, som e 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 3. M id-States B eef is a comm ercial feedlot business. C urrently, the company has over 10,000 cattle in feedlots. M id-States is concerned that the price of corn, the grain fed to the catt le, will increase significantly. The risk that the price of corn may increase and harm the profitability of M id-States B eef' s operations is a(n) 1. A) currency exchange rate risk. 2. B ) property risk. 3. C ) com modity price risk. 4. D) interest rate risk. Answer: C 4. An integrated risk m anagement program is a risk m anagement program which com bines 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 5. Regional Airline (RA) spends m illions of dollars each year on j et fuel. The com pany also has significant liability exposures. RA can retain a large portion of its liability exposure if fuel costs are low. The com pany can pay high fuel costs if retained liability losses are low. RA cannot, however, absorb both high fuel costs and high retained liability claims. RA' s insurer designed an insurance program where the insurer pays only if both contingencies (high fuel costs a nd high retained liability claim s) occur. The contract the insurer designed is called a(n) 1. A) double indemnit y rider. 2. B ) double trigger option. https://www.easynotecards.com/print_list/70524

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3. C ) m ultiple protection policy. 4. D) other insurance provision. Answer: B 6. Which statement is (are) true with respect to enterprise risk m anagement program s? 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 7. A com prehensive risk m anagement program that addresses an organization' s pure risks, speculative risks, strategic risks, and operational risks is called a(n) 1. A) risk m anagement information system. 2. B ) financial risk m anagement plan. 3. C ) speculative risk m anagement plan. 4. D) enterprise risk m anagement plan. Answer: D 8. The property and liability insurance industry is charact erized by a repetitive pattern of loose underwriting standards with low premiums followed by tight underwriting standards wit h high premiums. This repetitive pattern is called the 1. A) underwriting by exception m ethod. 2. B ) business cycle. 3. C ) underwriting cycle. 4. D) account underwriting m ethod. Answer: C 9. Which statement is (are) true regarding property and liability insurance market conditions? 1. Premium s are high when the insurance m arket is "hard." 2. U nderwriting 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 10. Which of the following statements is true regarding insurance m arket conditions and underwriting results? 1. A) A com bined ratio greater than one (or 100 percent) indicates profitable underwriting. 2. B ) In a "soft" insurance m arket, more retention is used than in a "hard" insurance market. https://www.easynotecards.com/print_list/70524

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3. C ) Insurance rates are high and underwriting standards are tight when the insurance m arket is "hard." 4. D) P ropert y and liability insurance premiums and underwriting standards do not fluctuate over tim e. Answer: C 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 12. Which of the following statements is (are) true regarding investment returns and the underwriting cycle? 1. Investment returns have no im pact upon the underwriting cycle. 2. Investment returns can lengthen the duration of a soft m arket 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 13. A large property and liability insurance com pany m erged with a bank and t hen acquired a stock brokerage com pany. This type of m erger and acquisition activity is categorized as 1. A) insurance com pany consolidation. 2. B ) cross-industry consolidation. 3. C ) financial risk m anagement. 4. D) insurance brokerage consolidation. Answer: B 14. A com pany has a fleet of 200 vehicles. O n 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 15. RST C om pany has production facilities in Salt Lake C ity and C leveland. The probability that in any given year a fire will dam age the production facility in Salt Lake C ity is 5 percent. The probability that in any given year a fire will damage t he C leveland production facility is 4 percent. What is the probability that B O TH production facilities will be dam aged 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 https://www.easynotecards.com/print_list/70524

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Answer: A 16. RST C om pany has production facilities in Salt Lake C ity and C leveland. The probability that in any given year a fire will dam age the production facility in Salt Lake C ity is 5 percent. The probability that in any given year a fire will damage t he C leveland production facility is 4 percent. What is the probability that AT LEAST O NE of the production facilities will be dam aged 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 17. Som e events cannot occur together because the occurrence of one event makes the occurrence of the second event im possible. Such events are called 1. A) dependent events. 2. B ) independent events. 3. C ) conditional events. 4. D) m utually exclusive event s. Answer: D 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 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 20. Jane is risk m anager of AB C M anufacturing C ompany. She is trying to decide whether to self-insure her com pany' s workers compensation exposure or to purchase insurance. Jane would like to use regression analysis to predict the number of workers com pensation claim s that will occur next year. The num ber of claim s will be the dependent variable in the regression. All of the following would be reasonable independent variables to use EX C EPT 1. A) num ber of employees. https://www.easynotecards.com/print_list/70524

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2. B ) number of hours worked. 3. C ) total assets. 4. D) payroll. Answer: C 21. A m ethod of characterizing the relationship between two or m ore variables and then using the characterization to m ake a predict ion is called 1. A) loss analysis. 2. B ) tim e value of money analysis. 3. C ) regression analysis. 4. D) capital budgeting analysis. Answer: C 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 m ap. Answer: C 23. Which of the following statements is (are) true with respect to the tim e value of m oney? 1. M oney received today is worth more than the same am ount of money received in the fut ure. 2. The present value of a future am ount is greater than the future am ount. 3. A) I only 4. B ) II only 5. C ) both I and II 6. D) neither I nor II Answer: A 24. C alculating the present value of a future am ount is called 1. A) interpolating. 2. B ) discounting. 3. C ) com pounding. 4. D) regression analysis. Answer: B 25. The process of determ ining which set of investments in plant and equipment to undertake is called 1. A) regression analysis. 2. B ) loss forecasting. 3. C ) tim e value of money analysis 4. D) capital budgeting. Answer: D 26. Which of the following statements is (are) true regarding the net present value of a capital investm ent? 1. Net present value does not consider tim e value of money. https://www.easynotecards.com/print_list/70524

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2. 3. 4. 5. 6.

A positive net present value represents an increase in value to the firm. A) I only B ) II only C ) both I and II D) neither I nor II

Answer: B 27. M illie is risk m anager of JKL C om pany. She is considering an investment in a loss control project. The project will cost $40,000. Assuming a 10 percent discount rat e, the present value of the fut ure net cash flows that this proj ect will generate is $60,000. What is the net present value (NP V ) of this project? 1. A) $20, 000 2. B ) $26,000 3. C ) $60,000 4. D) $100,000 Answer: A 28. A com puterized data base that perm its risk m anagers to store and analyze risk m anagement data is called a 1. A) risk m anagement information system. 2. B ) risk m anagement Intranet. 3. C ) risk m anagement web site. 4. D) risk m ap. Answer: A 29. A grid charting the potential frequency and severity of losses is called a 1. A) risk m anagement information system. 2. B ) risk m anagement Intranet. 3. C ) risk m anagement web site. 4. D) risk m ap. Answer: D 30. Which of the following statements is (are) true with regard to the use of technology in risk m anagement programs? 1. Risk m anagement Intranets are networks intended for an internal audience. 2. Risk m anagement information systems can be used to store and track workers compensation claim s data. 3. A) I only 4. B ) II only 5. C ) both I and II 6. D) neither I nor II Answer: C 31. Terrorists attacked the World Trade C enter on September 11, 2001. The at tack sim ultaneously created large losses for life insurers, property insurers, workers compensation insurers, health insurers, and liability insurers. What nam e is given to an event that sim ultaneously creates large losses in several lines of insurance? 1. A) speculative loss 2. B ) clash loss https://www.easynotecards.com/print_list/70524

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3. C ) retroactive loss 4. D) consequential loss Answer: B 32. Which of the following was a consequence of passage of the Financial M odernization Act (Gram m-Leach-B liley)? 1. A) Formation of insurers was m ade easier because capital requirements were reduced. 2. B ) It becam e easier for insurers to conduct business as they were no longer required to be licensed in each state where they operate, but only in the state where they are domiciled. 3. C ) Insurers were required to prepare financial statements using generally accepted accounting principles (GAAP ) instead of using st atutory accounting. 4. D) Depression-era barriers between underwriting risk, depository functions, and securities underwriting were elim inated. Answer: D 33. The transfer of insurable risk to the capital m arkets through the creation of a financial instrum ent is called 1. A) coefficient of risk. 2. B ) securitizat ion of risk. 3. C ) financial risk m anagement. 4. D) enterprise risk m anagement. Answer: B 34. LM N Insurance C om pany is concerned about its exposure to hurricane losses for property risks it insured on the Gulf C oast. LM N borrowed money from investors by issuing financial securities. LM N prom ised to repay the m oney it borrowed with interest if hurricane losses do not exceed a specified level. If hurricane losses exceed the specified level, LM N will repay less than it borrowed and use the extra m oney to fund hurricane losses. The securities that LM N issued are 1. A) call options. 2. B ) futures contracts. 3. C ) weather options. 4. D) catastrophe bonds. Answer: D 35. Hedge Fund C ompany offers a m utual fund to investors. Fund m anagers are concerned about fund volatility. They analyzed the fund to determ ine the worst loss likely to occur in a calendar quarter, assuming a 90 percent level of confidence. The worst probable loss is known as the fund' s 1. A) unrealized capital gain. 2. B ) value at risk. 3. C ) beta coefficient. 4. D) surrender value. Answer: B 36. Reasons to adopt an enterprise risk m anagement plan include all of the following EX CEP T 1. A) to increase earnings volatility. https://www.easynotecards.com/print_list/70524

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2. B ) to treat risks facing the business in a m ore holistic way. 3. C ) to increase net incom e. 4. D) to gain an advant age over com petitors. Answer: A 37. Which of the following statements concerning the securitization of risk is (are) true? 1. Securitization increases the capacity of the insurance industry. 2. Securitization can be used to protect against catastrophic loss. 3. A) I only 4. B ) II only 5. C ) both I and II 6. D) neither I nor II Answer: C 38. Insurance B rokerage C om pany uses a com puter-based m ethod of estim ating the losses its clients will suffer if a severe storm or earthquake occurs. This method of estim ating losses is called 1. A) capital budgeting. 2. B ) securitizat ion of risk. 3. C ) risk m apping. 4. D) catastrophe modeling. Answer: D 39. U ncertainty pertaining to the organization' s goals and obj ectives and the organization' s strengths, weaknesses, opportunities, and threats is called 1. A) operational risk. 2. B ) strategic risk. 3. C ) subj ective risk. 4. D) pure risk. Answer: B 40. C onsolidation in the insurance industry is a continuing trend. O ne area where mergers and acquisitions frequently occur is between m arketing interm ediaries who represent insurance purchasers. These interm ediaries are called 1. A) insurance adjusters. 2. B ) insurance agents. 3. C ) insurance underwriters. 4. D) insurance brokers. Answer: D 41. Five B elow Zero is a new ski resort in C olorado. Five B elow Zero is concerned that an abnormally warm winter will prevent the accumulation of snow needed to have a profitable ski season. Five B elow Zero purchased a contract that will pay a lump sum if the daily high temperature exceeds 30 degrees for more than 12 days between January 1st and M arch 31st. The contract Five B elow Zero purchased is called a(n) 1. A) catastrophe bond. 2. B ) weather option. 3. C ) interest rate swap. https://www.easynotecards.com/print_list/70524

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4. D) convertible bond. Answer: B 42. Which statement is (are) true concerning catastrophe m odels? 1. B usinesses other than insurance com panies use catastrophe models. 2. C atastrophe models are able t o precisely predict disaster occurrences and loss values. 3. A) I only 4. B ) II only 5. C ) both I and II 6. D) neither I nor II Answer: A 43. Which of the following is a financial derivative that derives value from specific insurable losses or from an index of values? 1. A) com modity futures contract 2. B ) corporate bond 3. C ) catastrophe bond 4. D) insurance option Answer: D 44. An emerging concern for risk m anagers is the greater volatility that has been observed in weather patterns—higher high temperatures, lower low temperatures, record rainfall, drought, etc. C ollectively, this risk is called 1. A) seismic risk. 2. B ) hurricane risk. 3. C ) speculative risk. 4. D) clim ate change risk. Answer: D 45. Which of the following statements regarding terrorism insurance is (are) t rue? 1. There is a federal backstop if terrorism claim s are catastrophic. 2. Private insurers market terrorism insurance. 3. A) I only 4. B ) II only 5. C ) both I and II 6. D) neither I nor II Answer: C 46. The terrorism risk in the U nited States 1. A) is of no concern to private com panies. 2. B ) is lim ited to attacks by foreign nationals. 3. C ) can be addressed through risk control and insurance. 4. D) is an uninsurable risk. Answer: C 47. Which of the following is a demographic factor that has increased losses from clim ate change in the U nited States? 1. A) The increasing life expectancy in the U nited States.

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2. B ) The increasing population in Southern states such as Florida, Texas, and South C arolina. 3. C ) The declining fertility rate (live births per wom en of child-bearing age) in the U nited States. 4. D) The growth in the num ber of families living below the poverty line in the U nited States. Answer: B 48. Last year, X YZ Insurance C om pany had a com bined ratio of 102.4 and lost $10.2 million on the insurance that it sold. The company, however, was required to pay incom e taxes. The best explanation for this apparent contradiction is that X YZ offset its underwriting loss with 1. A) increased loss reserves. 2. B ) investm ent incom e. 3. C ) increased loss adjustm ent expenses. 4. D) unearned premiums. Answer: B 49. AB C C om pany in considering a loss control investm ent. The project will cost $100, 000. It will generate an after-tax net cash flow of $60,000 one year after investm ent and an after-tax net cash flow of $60,000 two years after investm ent. The present value of $1 received one year from today assum ing a 6 percent rate is .9434. The present value of $1 received two years from today assum ing a 6 percent interest rate is . 8900. Assuming a discount rate of 6 percent, what is the net present value (NP V ) of this project? 1. A) $10, 004 2. B ) $13,195 3. C ) $16,604 4. D) $20, 000 Answer: A 50. Which of the following statements about the risk of terrorism in the U nited States is (are) true? 1. C ongress created a federal backstop for terrorism claim s. 2. C overage for losses attributable to t errorism is not m arketed by private insurers in the U .S. 3. A) I only 4. B ) II only 5. C ) both I and II 6. D) neither I nor II Answer: A 51. When announcing that an enterprise risk m anagement program would be implemented at X YZ C om pany, the president of the com pany observed, “We must overcom e the silo m entality for...