Insurance and Risk Management Flashcards

Flashcards covering key concepts in insurance and risk management based on lecture notes.

Q: Ashley opened an all-you-can-eat buffet restaurant. She charged based on what she thought an average person would eat. The restaurant lost money because people with large appetites were drawn to the fixed price. What is this problem called?

A. Nondiversifiable risk

B. Legal hazard

C. Attitudinal hazard

D. Adverse selection

Adverse selection ✅

Q: The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following?

I. Decrease in moral hazard

II. More accurate prediction of future losses

A. I only

B. II only

C. Both I and II

D. Neither I nor II

Both I and II ✅

Q: All of the following are social costs associated with insurance EXCEPT:

A. Fraudulent claims

B. Inflated claims

C. Insurance company operating expenses

D. Increased cost of capital

Increased cost of capital ✅

Q: Which of the following is a form of casualty insurance?

A. Inland marine insurance

B. Fire insurance

C. Ocean marine insurance

D. General liability insurance

General liability insurance ✅

Q: These government insurance programs are compulsory, funded by mandatory contributions, and benefits favor low-income groups. They are called:

A. Private insurance programs

B. Welfare programs

C. Casualty insurance programs

D. Social insurance programs

Social insurance programs ✅

Q: ABC Insurance adds an amount to expected claims to cover expenses like commissions and taxes. This amount is called:

A. Premium

B. Rate credit

C. Policyowner dividend

D. Expense loading

Expense loading ✅

Q: Which of the following is an example of private insurance?

A. Social Security

B. Federal deposit insurance

C. Unemployment insurance

D. Life insurance

Life insurance ✅

Q: Which of the following statements about the insurance industry as a source of investment funds is (are) true?

I. These funds result in a lower cost of capital than would exist in the absence of insurance.

II. These funds tend to promote economic growth and full employment.

A. I only

B. II only

C. Both I and II

D. Neither I nor II

Both I and II ✅

Q: The tendency for unhealthy people to seek life or health insurance at standard rates is an example of:

A. Moral hazard

B. Attitudinal hazard

C. Fundamental risk

D. Adverse selection

Adverse selection ✅

Q: Characteristics of a fortuitous loss include which of the following?

I. The loss is certain to occur.

II. The loss occurs as a result of chance.

A. I only

B. II only

C. Both I and II

D. Neither I nor II

II only ✅

Q: 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

Both I and II ✅

Q: Which of the following types of loss exposures may be appropriately handled through the purchase of insurance?

I. High-frequency, low-severity loss exposures

II. Low-frequency, high-severity loss exposures

A. I only

B. II only

C. Both I and II

D. Neither I nor II

II only ✅

Q: Risk management is concerned with:

A. The management of speculative risks only

B. The purchase of insurance only

C. The management of pure risks that are uninsurable

D. The identification and treatment of loss exposures

The identification and treatment of loss exposures ✅

Q: What is the first step Cal should take as a risk manager at XYZ Company?

A. Formulate a treatment plan for XYZ Company's loss exposures

B. Implement and administer a risk management plan

C. Evaluate potential losses faced by XYZ Company

D. Identify potential losses faced by XYZ Company

Identify potential losses faced by XYZ Company ✅

Q: The worst loss that is likely to happen is referred to as the:

A. Maximum possible loss

B. Frequency of loss

C. Severity of loss

D. Probable maximum loss

Probable maximum loss ✅

Q: Dropping physical damage insurance on an old car with low value is best described as:

A. Increasing avoidance

B. Using noninsurance transfer

C. Increasing risk control

D. Increasing retention

Increasing retention ✅

Q: Steel posts installed at embassies to block vehicle attacks are an example of:

A. Noninsurance transfer

B. Insurance transfer

C. Loss prevention

D. Risk avoidance

Loss prevention ✅

Q: A group captive insurance company exempt from many state laws is called a:

A. Reinsurance pool

B. Lloyd's association

C. Alien insurer

D. Risk retention group

Risk retention group ✅

Q: Building four regional warehouses instead of one large one is an example of:

A. Duplication

B. Separation

C. Risk avoidance

D. Risk transfer

Separation ✅

Q: Buying health insurance is an example of:

A. Risk control

B. Risk retention

C. Avoidance

D. Risk transfer

Risk transfer ✅

Q: Rapid inflation, war, and hurricanes are all examples of:

A. Physical hazards

B. Diversifiable risks

C. Speculative risks

D. Nondiversifiable risks

Nondiversifiable risks ✅

Q: Traditionally, risk has been defined as:

A. The probability of a loss occurring

B. Any situation in which the probability of loss is one

C. Any situation in which the probability of loss is zero

D. Uncertainty concerning the occurrence of loss

Uncertainty concerning the occurrence of loss ✅

Q: Faking an accident to collect insurance proceeds is an example of:

A. Attitudinal hazard

B. Objective risk

C. Physical hazard

D. Moral hazard

Moral hazard ✅

Q: Legal system conditions that raise frequency and severity of loss are a:

A. Attitudinal hazard

B. Moral hazard

C. Physical hazard

D. Legal hazard

Legal hazard ✅

Q: All of the following are examples of personal risks EXCEPT:

A. Premature death

B. Poor health

C. Unemployment

D. Loss of business income

Loss of business income ✅

Q: The premature death of an individual is an example of a:

A. Speculative risk

B. Nondiversifiable risk

C. Physical hazard

D. Pure risk

Pure risk ✅

Q: All of the following statements about risk retention are true EXCEPT:

A. It may be used intentionally if insurance is unavailable

B. It results in savings if losses are low

C. It may be used passively due to ignorance

D. It is best for low-frequency, high-severity risks

It is best for low-frequency, high-severity risks ✅

Q: Loss control includes which of the following?

I. Loss reduction

II. Loss prevention

A. I only

B. II only

C. Both I and II

D. Neither I nor II

Both I and II ✅

Q: Concern about being held legally responsible for damages is what type of risk?

A. Property risk

B. Nondiversifiable risk

C. Speculative risk

D. Liability risk

Liability risk ✅

Q: Curt intentionally sank his boat to collect insurance money and pay off a loan. This is an example of:

A. Nondiversifiable risk

B. Attitudinal hazard

C. Adverse selection

D. Moral hazard

Moral hazard ✅