FIN 360 Review Midterm 1

Hazard

A condition that increases the chance of loss is called a(n)

Peril

An earthquake is an example of a

Physical Hazard

Dense fog that increases the chance of an automobile accident is an example of a

Non diversifiable Risk

A risk that affects the entire economy, or a large number of persons or groups within the economy, is called a(n)

Loss Control

Dean's Discount Store has been experiencing problems with shoplifting losses. Dean decided to install a camera monitoring system and to use magnetic price tags on products. If a tag is not demagnetized before the product bearing the tag leaves the store, an alarm bell sounds. These measures are examples of

Legal Hazard

Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award. The characteristics of the judicial system that increase the frequency and severity of losses are known as

Owning liability insurance eliminates the possibility of being held legally liable.

All of the following are characteristics of the liability risk that most people face EXCEPT

Liability Risk

An individual may commit an act that results in bodily injury or damage to someone's
property. A court of law may order the person responsible for the wrongful act to pay
damage to the party who were injured. This type of risk is called the

Indirect (consequential) loss

Kyle opened a sporting goods store. After a fire damaged the store, Kyle was forced to close the business for four weeks while repairs were completed. The loss of profits that could have been earned if the business had remained open is best described as a(n)

II only

Which of the following statements is (are) true with respect to pure risks?

I. Pure risks may produce either a profit or a loss.
II. Premature death and damage to property caused by a fire are pure risks.

Pooling of losses

The spread of losses incurred by a few individuals over a larger group, so that average loss is substituted for actual loss, is known as

Identify loss exposures

The first step in the risk management process is to

Insurance

All of the following risk treatment techniques are classified as risk control methods EXCEPT

Risk Avoidance

Tindall Company manufactures electronic components. Managers of the company are
considering several diversification options. One possibility is the production of prescription drugs. When Tindall Company managers learned of the potential legal liability that could result from the manufacture and sale of prescription drugs, the managers rejected the idea and decided to consider other diversification options. How did Tindall Company choose to deal with the risk of legal liability arising from the manufacture and sale of prescription drugs?

It can be used for any loss exposure facing a firm

All of the following statements about avoidance are true EXCEPT

A captive insurance company

Harris Petroleum, a fuel storage and delivery business, occasionally has difficulty in
obtaining affordable pollution liability insurance. Jane Elmore, Risk Manager at Harris
Petroleum, decided to form an insurance subsidiary for the purpose of writing pollution
liability insurance for Harris Petroleum, as well as other insurance coverage. The insurance subsidiary will be based in Bermuda for regulatory reasons. What is such a subsidiary called?

Insurance

All of the following are methods used to pay retained losses EXCEPT

Unfunded Reserve

During each accounting period, Harris Company Department Store charges a bookkeeping account for its estimated shoplifting losses. The method that Harris Company Department Store uses to fund its retained shoplifting losses is a(n)

Both I and II

Which of the following statements is (are) true with respect to identifying potential loss
exposures?
I. A physical inspection of company plants and operations can help to identify major loss
exposures.
II. Historical claims data can help to identify major loss exposures

The probable maximum loss

Risk managers must consider a range of outcomes that could occur. The worst loss that is likely to happen is called

Non-insurance transfer

Rather than purchasing computers and software, ABC Company entered into a lease
agreement with Computer Solutions Company (CSC). Under the terms of the lease, CSC
provides computers and software and is responsible for damage to the computers and
software. ABC uses the lease to shift responsibility for hardware and software losses to CSC. ABC’s use of the lease illustrates which method of dealing with risk?

Actual results will more closely approach expected results

According to the law of large numbers, what should happen as an insurer increases the
number of units insured?

Loss reduction and loss prevention

Loss control includes which of the following?

They increase the volatility of the parent company's earnings

All of the following statements about captive insurers are true EXCEPT

Protection from catastrophic losses

All of the following are potential advantages of retention EXCEPT

The only potential losses that can be transferred are those that are not commercially
insurable.

All of the following are disadvantages of non-insurance transfers EXCEPT

This results in considerable fluctuations in earnings after losses occur.

All of the following are disadvantages of using insurance in a risk management program
EXCEPT

increase the use of retention in the risk management program

Ryan decided to review his personal risk management program. His car is 10 years old, and he would receive little money from his insurer if the car was damaged or destroyed. Ryan decided to drop the physical damage insurance on the car. From a risk management perspective, dropping physical damage insurance on the car is best described as

Loss Control and Retention

Parker Department stores have been hurt in recent months by a large increase in shoplifting losses. Parker's risk manager concluded that while the frequency of shoplifting losses was high, the severity was still relatively low. What is (are) the appropriate risk management technique(s) to apply to this problem?

Active Retention

The production facility for ABC Manufacturing is located in a flood plain. Although the risk of flooding is low, ABC's risk manager is concerned that a flood could damage the plant and equipment. He received bids on flood insurance from two insurance agents, but decided the cost of coverage was too high relative to the risk. He did not purchase flood insurance. What risk management technique is the ABC using with respect to the risk of flooding?

Self-insurance

A special form of planned retention by which part or all of a given loss exposure is retained by the firm is called

Risk Transfer

A publishing company solicits manuscripts for publication. The publishing company is
concerned that an author might plagiarize material and that the person who was plagiarized might sue the publisher. To address this risk, the contract with the author includes a hold- harmless agreement. Through this agreement, the author, rather than the publisher, is held liable for plagiarism. In this situation, the publisher is using the hold-harmless agreement as what type of risk treatment measure?

Risk Control

Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new manufacturing facility. These devices are all examples of

Both I and II

Which of the following statements about hedging is (are) true?
I. Hedging is a form of risk transfer.
II. Hedging is used to address the risk of unfavorable price fluctuations

Loosening underwriting standards

Which of the following is least likely to occur during a "hard" insurance market period?

I only

Which of the following statements concerns the selection of risk management techniques and insurance market conditions is (are) true?
I. It's easier to purchase affordable insurance during a "soft" market than during a "hard"
market.
II. Retention is used more during a "soft" market than during a "hard" market.

The loss should be within the insured’s control

All of the following are ideal characteristics for a risk to be privately insurable EXCEPT

Adverse commodity price movements

All of the following risks are privately insurable EXCEPT

To reduce moral hazard

Which of the following is a fundamental purpose of the principle of indemnity?

Actual cash value property insurance

All of the following are exceptions to the principle of indemnity EXCEPT

Warranty

David owns a liquor store in a high-crime area. In order to obtain reduced insurance
premium, David promised to have a burglar alarm operating at the store when the store was closed. This agreement, which was incorporated into the insurance contract, is an example of

Subrogation

Kyle purchased collision insurance on his new car. While Kyle was driving home from work, another driver failed to stop at a stop sign and hit Kyle’s car. Kyle phoned his insurance agent and reported the accident. The agent said, “Don’t worry, Kyle, we’ll pay to get your car fixed.” And after we pay for the damage to your car, we will try to collect it from the driver who damaged your car.” The process the agent described is called

II only

Which of the following statements about the principle of insurable interest is (are) true?
I. For life insurance, the insurable interest requirement must be met only at the time of loss to receive life insurance proceeds after the insured has died.

II. The insurable interest requirement helps to reduce the problem of moral hazard

Misrepresentation

When Maria applied for a life insurance policy, she answered “No” in response to the
question “Have you visited a doctor for any reason during the previous 12 months?” In fact, Maria visited a doctor five weeks ago after experiencing chest pains. She was referred to a specialist who determined that Maria has severe heart disease. If Maria dies shortly after the life insurance policy is issued, on what grounds will the insurer be successful in denying the claim

Aleatory Contract

A contract in which the values exchanged are not equal because chance is involved is called a(n)

Contracts for adhesion

An insurance contract must be accepted in its entirety and any ambiguity in the contract must be construed against the insurer. Because of these characteristics, we can describe insurance contracts as

They are bilateral contracts

Property insurance contracts have all of the following distinct legal characteristics EXCEPT

Underwriting

Insurers use the process of selecting and classifying insurance applicants to prevent individuals with a higher-than-average probability of loss from obtaining insurance at average rates. This process is called