Business Risk Management Pre-Test
Questions
Course Introduction
Business Risk Management explores the identification, assessment, and mitigation of risks that organizations face in a dynamic business environment. This course introduces students to key concepts such as enterprise risk management, risk analysis techniques, and the development of strategies for minimizing and transferring risks. It covers various types of risks including financial, operational, strategic, and reputational while examining real-world case studies and industry practices. Students will learn how to create risk management frameworks that align with organizational objectives, enhance resilience, and support informed decision-making.
Recommended Textbook
Principles of Risk Management and Insurance 13th Edition by George E. Rejda
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27 Chapters
1397 Verified Questions
1397 Flashcards
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Page 2
Chapter 1: Risk and Its Treatment
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Sample Questions
Q1) The premature death of an individual is an example of a A) pure risk.
B) speculative risk.
C) nondiversifiable risk.
D) physical hazard.
Answer: A
Q2) An earthquake is an example of a(n)
A) moral hazard.
B) peril.
C) physical hazard.
D) objective risk.
Answer: B
Q3) Which of the following is an example of consequential (indirect) loss?
A) the theft of a person's jewelry
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
Answer: C
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Page 3
Chapter 2: Insurance and Risk
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Sample Questions
Q1) JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 2,000 homeowners this year?
A) The total number of claims filed by JKL policyowners should decrease.
B) The total dollar value of claims will decrease.
C) The average size of loss will decline in value.
D) The actual results will more closely approach the expected results.
Answer: D
Q2) Ashley opened an all-you-can-eat buffet restaurant. The price per-person was based on what Ashley believed an average restaurant patron would consume. The restaurant began to lose money. Ashley concluded that her patrons had "above average" appetites, and were attracted to her restaurant because they could eat as much as they wanted while being charged an average price. A similar phenomenon exists in insurance markets. This problem is called
A) legal hazard.
B) adverse selection.
C) attitudinal hazard.
D) nondiversifiable risk.
Answer: B
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Page 4
Chapter 3: Introduction to Risk Management
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Sample Questions
Q1) 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
Answer: B
Q2) Laura Evans is risk manager of LMN Company. Laura decided to retain certain property loss exposures. Which of the following is a method that Laura can use to fund the retained property losses?
A) current net income
B) private insurance
C) noninsurance transfer
D) high deductibles
Answer: A
Q3) Abandoning an existing loss exposure is an example of
A) avoidance.
B) retention.
C) noninsurance transfer.
D) insurance transfer.
Answer: A
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Chapter 4: Enterprise Risk Management and Related Topics
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Sample Questions
Q1) The property and liability insurance industry is characterized by a repetitive pattern of loose underwriting standards with low premiums followed by tight underwriting standards with high premiums. This repetitive pattern is called the
A) underwriting by exception method.
B) business cycle.
C) underwriting cycle.
D) account underwriting method.
Q2) Regional Airline (RA) spends millions of dollars each year on jet fuel. The company also has significant liability exposures. RA can retain a large portion of its liability exposure if fuel costs are low. The company 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 and high retained liability claims) occur. The contract the insurer designed is called a(n)
A) double indemnity rider.
B) double trigger option.
C) multiple protection policy.
D) other insurance provision.
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Chapter 5: Types of Insurers and Marketing Systems
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Sample Questions
Q1) Some investors decided to start an insurance company. Each investor contributed $50,000 to raise the capital required to charter a new company. Each investor received an ownership interest in the company. The company will raise additional capital by selling ownership rights to other investors. Under this type of organization, the customer and owner functions are separate. This type of insurer is called a A) stock company.
B) reciprocal exchange.
C) fraternal company.
D) mutual company.
Q2) Which of the following statements about Lloyd's of London is true?
A) Coverage is actually written by syndicates who belong to Lloyd's of London.
B) New individual members or Names who belong to the various syndicates have unlimited legal liability.
C) It operates as an admitted insurer throughout the United States.
D) It allows underwriters to write coverage without meeting stringent financial requirements.
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Chapter 6: Insurance Company Operations
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Sample Questions
Q1) One source of life and health insurance underwriting information is an organization that life and health insurance companies can join. As a member, life and health insurance companies report health impairments of applicants, and this information is shared with member companies. Although the information is shared, the underwriting decision of the member company is not disclosed. What is this organization called?
A) Fair Isaac Corporation (FICO)
B) Medical Information Bureau (MIB)
C) National Association of Insurance Commissioners (NAIC)
D) National Association of Mutual Insurance Companies (NAMIC)
Q2) Insurers obtain data that can be used to determine rates from
A) pricing pools.
B) insurance advisory organizations.
C) banks.
D) reciprocal exchanges.
Q3) The primary function of an actuary is to
A) adjust claims.
B) determine premium rates.
C) negotiate reinsurance treaties.
D) invest insurance company assets.
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Page 8
Chapter 7: Financial Operations of Insurers
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Sample Questions
Q1) Ratemakers at ABC Insurance Company calculated the pure premium to be $280 for a risk they were considering insuring. What is the gross rate for this risk, assuming a 30 percent expense ratio?
A) $364
B) $400
C) $430
D) $520
Q2) Which of the following statements about experience rating is (are) true?
I.The insured's past loss experience is used to determine the premium for the next policy period.
II.Its use is generally limited to small firms whose actual experience lacks credibility.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 8: Government Regulation of Insurance
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Sample Questions
Q1) Under what type of rate regulation are insurers required to obtain approval of rates before using them if the rate change exceeds a specified predetermined range?
A) flex-rating law
B) prior-approval law
C) file-and-use law
D) use-and-file law
Q2) The regulation of insurers in areas that affect consumers, which include claims handling, underwriting, complaints, advertising, sales practices, and other trade practices is called
A) solvency surveillance.
B) market conduct regulation.
C) combined ratio analysis.
D) market share regulation.
Q3) The major argument in favor of an optional federal charter for insurers is that
A) small insurers need a national charter to be competitive with large insurers.
B) a federal charter will prevent insurer insolvencies.
C) a federal charter will provide greater oversight of insurer market practices.
D) national insurers are at a competitive disadvantage under the present system.
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Chapter 9: Fundamental Legal Principles
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Sample Questions
Q1) Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis?
A) Losses are settled without the applicable deductible.
B) Losses are settled without a deduction for depreciation.
C) The insurer must replace the damaged or destroyed property in lieu of a cash settlement.
D) The policy is converted to a valued policy.
Q2) Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of A) warranty.
B) insurable interest.
C) utmost good faith.
D) subrogation.
Q3) Powers specifically conferred on an agent to act on behalf of a principal are A) incidental authority.
B) apparent authority.
C) implied authority.
D) express authority.
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Page 11
Chapter 10: Analysis of Insurance Contracts
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Sample Questions
Q1) An insurance policy provision that specifies how a property loss will be settled if more than one property insurance policy covers the loss is the
A) insuring agreement provision.
B) loss settlement provision.
C) other insurance provision.
D) coinsurance provision.
Q2) Homeowners insurance policies usually cover resident relatives of the named insured who are under age 24 and who are full-time students away from home. Under the homeowners policy, these full-time students are considered
A) first named insureds.
B) second named insureds.
C) other insureds.
D) additional insureds.
Q3) Exclusions are used in insurance policies for all of the following reasons EXCEPT
A) to reduce moral hazard.
B) to waive policy conditions.
C) to eliminate coverage for uninsurable perils.
D) to eliminate coverage not needed by typical insureds.
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Chapter 11: Life Insurance
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Sample Questions
Q1) Which of the following statements about endowment insurance policies is (are) true?
I. The face amount is paid if the insured dies during the policy period or at the end of the policy period if the insured is still alive.
II. The use of endowment insurance has increased in recent years because of its favorable tax treatment.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Michael wants to make sure that life insurance proceeds are available to pay his outstanding mortgage balance if he dies. He purchased a type of life insurance in which the amount of coverage gradually declines, just as his outstanding mortgage balance gradually declines. This type of life insurance is called
A) modified life insurance.
B) decreasing term insurance.
C) re-entry term insurance.
D) current assumption whole life.
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Page 13
Chapter 12: Life Insurance Contractual Provisions
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Sample Questions
Q1) All of the following statements about the interest settlement option are true EXCEPT
A) The minimum guaranteed interest rate is usually equal to the prime rate.
B) The interest can be paid monthly, quarterly, semiannually, or annually.
C) The beneficiary may be allowed to withdraw part or all of the proceeds.
D) The beneficiary may be allowed to change to another settlement option.
Q2) Which of the following statements is (are) true regarding exclusions in life insurance contracts?
I.Life insurance policies are remarkably restrictive, including numerous exclusions.
II.A life insurer may exclude death attributable to certain activities or hobbies disclosed on the application.
A) I only
B) II only
C) both I and II
D) neither I nor II
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14
Chapter 13: Buying Life Insurance
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Sample Questions
Q1) David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent interest is $34.719. Based on this information, what is the net payment cost per thousand per year of David's policy over the 20-year period?
A) $5.62
B) $13.75
C) $15.77
D) $27.38
Q2) Which method of analyzing the cost of life insurance does not consider the cash value of the policy in the analysis?
A) traditional net cost method
B) net payment cost index
C) the Linton Yield
D) the surrender cost index
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Page 15
Chapter 14: Annuities and Individual Retirement Accounts
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Sample Questions
Q1) Stan paid an insurance company $50,000 for a fixed annuity when he was 50 years old. At age 62, Stan plans to begin to receive payments from the insurer. There are no guarantees on the number of payments he will receive. Based on the description provided, this annuity can be described as a(n)
A) deferred annuity.
B) life annuity with guaranteed payments.
C) immediate annuity.
D) variable annuity.
Q2) Bridget started to fund a variable annuity. Three years later, she experienced financial difficulty. She called her agent and cancelled the contract. The insurer returned all but 4 percent of the account balance. The 4 percent kept by the insurer is a(n)
A) account administration fee.
B) investment management fee.
C) front-end load.
D) surrender charge.
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16
Chapter 15: Health-Care Reform; Individual Health Insurance Coverages
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Sample Questions
Q1) The Affordable Care Act requires that most U.S. citizens and legal residents have qualifying health insurance or pay a financial penalty. This provision of the Affordable Care Act is known as the
A) Health Insurance Marketplace option.
B) public option.
C) individual mandate.
D) premium subsidy option.
Q2) The Affordable Care Act has a provision that expands a public assistance program designed to make health coverage available to low-income individuals by increasing the maximum amount of income that can be earned and still qualify for benefits. As a result, millions of individuals are eligible for coverage under this program. This public assistance program is called
A) Medicare.
B) Health Maintenance Organization.
C) Health Insurance Marketplace Exchange.
D) Medicaid.
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Chapter 16: Employee Benefits: Group Life and Health Insurance
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Sample Questions
Q1) Which of the following statements concerning managed care plans is true?
I. Most employees are covered under some form of managed care plan.
II. Managed care plans emphasize cost controls and preventative care.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about cafeteria plans is (are) true?
I.Unspent flexible spending account balances are refunded to the employee, tax-free, at year-end.
II.Cafeteria plans enable employees to select benefits that meet their specific needs.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 17: Employee Benefits: Retirement Plans
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Sample Questions
Q1) Under a 401(k) plan, what is compared to determine if the plan unfairly discriminates in favor of highly compensated employees?
A) the average percentage of salary made available to the highly compensated to defer is compared to the average percentage of salary made available to other eligible employees to defer
B) the ratio of eligible highly compensated employees is compared to the ratio of eligible other employees
C) the average percentage of salary deferred by the highly compensated is compared to the average percentage of salary deferred by other eligible employees
D) the percentage of highly compensated employees over age 50 who participate is compared to the percentage of all other employees who participate
Q2) For a long-term employee who is covered by a defined benefit plan, the highest retirement income will be obtained if his/her retirement income is based on
A) initial average pay.
B) random year annual pay.
C) career-average pay.
D) final average pay.
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Chapter 18: Social Insurance
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Sample Questions
Q1) In order to receive unemployment insurance benefits, an unemployed worker must meet all of the following eligibility requirements EXCEPT
A) have qualifying wages and employment.
B) be able to work.
C) be actively seeking work.
D) satisfy a 6-month waiting period.
Q2) Under one type of Medicare Advantage Plan, members of the plan can see any doctor or health services provider that accepts Medicare patients. If members receive care outside the network of member physicians and care facilities, they must pay higher out-of-pocket costs. This type of Medicare Advantage Plan is a
A) Medicare HMO.
B) Medicare PPO.
C) Medicare Special Needs Plan.
D) Medicare Private Fee-for-Service Plan.
Q3) Which of the following is a reason that social insurance programs exist?
A) to compete with private insurance programs
B) to provide a base of economic security
C) to provide needs-tested benefits to low-income individuals
D) to reduce involvement of the government in insurance markets
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Page 20
Chapter 19: The Liability Risk
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Sample Questions
Q1) Situations under which parents can be held liable for the actions of a child include which of the following?
I.The child uses a parent's gun to injure someone.
II.The child is acting as an agent of the parent.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Steve was involved in an auto accident. Both drivers were partially at fault for the accident. Steve's actual damages were $50,000. He was judged to be 20 percent at fault. If Steve's state has a contributory negligence law, how much will Steve collect?
A) $0
B) $10,000
C) $25,000
D) $40,000
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21
Chapter 20: Auto Insurance
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Sample Questions
Q1) Which of the following statements about the payment of defense costs by the PAP is (are) true?
I.They are paid in addition to the policy limits.
II.They are payable even after the limit of liability is exhausted.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) All of the following are considered to be a covered auto under the Personal Auto Policy EXCEPT
A) a trailer owned by the insured.
B) a temporary substitute auto loaned to the insured while her care is being repaired.
C) a motorcycle owned by the insured.
D) a newly acquired auto.
Q3) A vehicle is considered a constructive total loss when
A) it cannot be repaired.
B) the repair cost exceeds the actual cash value.
C) it can be repaired, but the insured prefers a cash settlement.
D) it can be repaired, but the insurer prefers a cash settlement.
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Page 22
Chapter 21: Auto Insurance (continued)
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Sample Questions
Q1) A few states have dual automobile insurance systems. A motorist can pay a higher premium and retain the right to sue under the tort system, or pay a lower premium and be covered under the state's no-fault law. This dual system is called a
A) pure no-fault plan.
B) modified no-fault plan.
C) "no pay, no play" law.
D) choice no-fault plan.
Q2) Which of the following statements about shopping for auto insurance is true?
A) Adequate physical damage insurance on your auto is the most important consideration.
B) Consideration should be given to dropping liability coverage if you drive an older car with a low market value.
C) To obtain the lowest premium, an applicant should review his or her eligibility for all discounts offered.
D) Price comparisons are of little value since auto insurers tend to charge the same premiums.
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Chapter 22: Homeowners Insurance, Section I
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Sample Questions
Q1) Which of the following statements about the coverage for other structures (Coverage B) under the Homeowners 3 policy is true?
A) The coverage applies to a detached garage or tool shed on the residence premises.
B) Structures attached to the dwelling by a fence or utility line are considered to be part of the dwelling rather than other structures.
C) Coverage applies even if the other structure is used for business purposes.
D) There is no coverage for a private garage if it is rented to a tenant of the dwelling.
Q2) Several different values can be considered when determining how much insurance should be carried on a dwelling (the Coverage A limit of the Homeowners 3 policy). The appropriate value that should be used is:
A) the home's market value.
B) the home's actual cash value.
C) the home's appraised value for property tax purposes.
D) the home's replacement cost.
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Chapter 23: Homeowners Insurance, Section II
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Sample Questions
Q1) Which of the following statements about the personal property replacement cost endorsement used with the homeowners policy is (are) true?
I.The damaged or destroyed property must be repaired or replaced, no matter the size of the loss.
II.It is designed primarily for antiques and fine art.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) All of the following are exclusions in the homeowners policy that apply to medical payments to others (Coverage F) EXCEPT
A) bodily injury resulting from nuclear radiation.
B) bodily injury to persons who are social guests at the insured location.
C) bodily injury to persons eligible to receive workers compensation benefits.
D) bodily injury to residents of the household who are in the care of an insured.
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25
Chapter 24: Other Property and Liability Insurance
Coverages
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Sample Questions
Q1) Which of the following statements about coverage under the federal flood insurance program is (are) true?
I.Subsidized coverage is available for contents, but not for dwellings.
II.A $10,000 deductible applies to each loss.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about mobile home insurance is (are) true?
I.Coverage for the mobile home may be written on either a replacement cost basis or an actual cash value basis, depending on how much the mobile home has depreciated.
II.An additional coverage pays, up to a specified dollar limit, for the cost of transporting the mobile home to a safe place when it is endangered by a covered peril.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 25: Commercial Property Insurance
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Sample Questions
Q1) Which of the following statements about the equipment breakdown protection coverage form is (are) true?
I.The covered cause of loss is a breakdown of covered equipment, including boilers, machinery, and electrical and mechanical equipment.
II.It provides coverage for the reasonable cost of expediting permanent repair or replacement of damaged property.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) One type of commercial property insurance excludes perils that are covered by the basic coverages. Some businesses buy this coverage to fill coverage gaps, including flood and earthquake, and to cover property in other countries. This type of insurance is called
A) protection and indemnity insurance.
B) building and personal property coverage form.
C) difference in conditions insurance.
D) builders risk coverage form.
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Chapter 26: Commercial Liability Insurance
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Sample Questions
Q1) Jennifer was just asked to serve on the Board of an insurance company. Jennifer is concerned that if the company is mismanaged, the policyowners, stockholders, and employees might sue the management team. What type of liability insurance will protect Jennifer from such claims if she accepts a position on the insurance company's Board?
A) commercial general liability insurance
B) employment-related practices liability insurance
C) workers compensation and employer liability insurance
D) directors and officers liability insurance
Q2) An employee of Nelson Manufacturing was injured by a defective machine Nelson purchased from Clark Corporation. The employee's tort action against Clark was successful. Clark, in turn, sued Nelson, alleging that Nelson failed to provide proper operating instructions to the employee. This claim (Clark vs. Nelson) is covered under Part Two of Nelson's workers compensation and employer liability policy. Such claims are called
A) third-party over cases.
B) absolute liability cases.
C) joint-and-several liability cases.
D) mass tort cases.
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Page 28
Chapter 27: Crime Insurance and Surety Bonds
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Sample
Questions
Q1) National Bank believed it had been properly authorized to transfer $250,000 to the off-shore account of one of its corporate customers. The authorization was fraudulent, however, and the transferred funds were stolen. Under which commercial crime coverage insuring agreement would such a loss be covered?
A) Money Orders and Counterfeit Currency
B) Forgery or Alteration
C) Outside the Premises
D) Computer and Funds Transfer Fraud
Q2) A burglar took some blank checks during a break-in at XYZ Company. He was careful to make sure that the theft would be difficult to discover. Three months later, he wrote himself a check for $20,000 and signed the company treasurer's name on the check. After the check was cashed, the loss was discovered. Which commercial crime coverage form would cover this loss?
A) Inside the Premises-Theft of Money and Securities
B) Money Orders and Counterfeit Currency
C) Forgery or Alteration
D) Outside the Premises
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