Corporate Risk Management
Textbook Exam Questions
Course Introduction
Corporate Risk Management explores the principles, frameworks, and techniques organizations use to identify, assess, and mitigate risks that could impact their strategic objectives. The course examines various types of risks including financial, operational, strategic, and compliance risks and discusses tools such as risk assessment matrices, hedging, insurance, and internal controls. Case studies illustrate how corporations manage uncertainties in dynamic markets, enhance resilience, and create value through proactive risk management. Emphasis is placed on governance, regulatory requirements, enterprise risk management (ERM) frameworks, and the integration of risk considerations into overall business strategy.
Recommended Textbook Principles of Risk Management and Insurance 13th Edition by George E. Rejda
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Chapter 1: Risk and Its Treatment
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Q1) All of the following are characteristics of the liability risk that most people face EXCEPT
A) a lien may be placed on your income and assets to satisfy a legal judgment.
B) substantial legal expenses may be incurred defending the claim.
C) there is no upper limit on the amount of the loss.
D) owning liability insurance eliminates the possibility of being held legally liable.
Answer: D
Q2) ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects that 8 homeowners out of every 100, on average, will report claims each year. The variation between the rate of loss that ABC expects to occur and the rate of loss that actually occurs is called
A) objective probability.
B) subjective probability.
C) objective risk.
D) subjective risk.
Answer: C
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Chapter 2: Insurance and Risk
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Q1) The premium that insurance companies charge does not cover the cost of expected losses only. The premium must also cover the cost of compensating agents and other costs of doing business. The amount added to the pure premium to cover these costs is called the
A) expense loading.
B) deductible.
C) dividend.
D) loss reserve.
Answer: A
Q2) All of the following are social costs associated with insurance EXCEPT
A) insurance company operating expenses.
B) fraudulent claims.
C) inflated claims.
D) increased cost of capital.
Answer: D
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Chapter 3: Introduction to Risk Management
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Q1) All of the following statements about avoidance are true EXCEPT
A) Certain loss exposures are never acquired.
B) Certain loss exposures may be abandoned.
C) The chance of loss for certain loss exposures may be reduced to zero.
D) It can be used for any loss exposure facing a firm.
Answer: D
Q2) Melanie was just hired as the risk manager of JKL Company. The company president asked her to make a thorough review of all of the company's loss exposures. Melanie noted that many employees were too heavily invested in stock issued by the company in their 401-k plan. Melanie suggested that the employees change some of their investment holdings to mutual funds that invest in stock issued by different companies. The risk control method that Melanie suggested is
A) risk avoidance.
B) duplication.
C) diversification.
D) separation.
Answer: C
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Chapter 4: Enterprise Risk Management and Related Topics
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Q1) A method of characterizing the relationship between two or more variables and then using the characterization to make a prediction is called
A) loss analysis.
B) time value of money analysis.
C) regression analysis.
D) capital budgeting analysis.
Q2) When announcing that an enterprise risk management program would be implemented at XYZ Company, the president of the company observed, "We must overcome the silo mentality for the program to be successful." The "silo mentality" refers to
A) over-emphasis on pure risks and ignoring speculative risks.
B) using too much of one risk treatment measure and ignoring other risk treatment methods.
C) focusing narrowly on one area and not viewing risk holistically.
D) everyone assuming someone else is responsible for managing a risk and no one taking leadership.
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Chapter 5: Types of Insurers and Marketing Systems
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Q1) Marcy advises her clients on investments, taxes, wealth management, estate issues, budgeting, and insurance. Marcy is also a licensed life insurance agent. When Marcy sells life insurance to a client, the distribution channel used is a(n)
A) stock broker.
B) financial planner.
C) insurance broker.
D) direct writer.
Q2) Which of the following statements is true about fraternal insurers?
A) They are legally organized as stock insurers.
B) They specialize in writing life and health insurance.
C) They are taxed more heavily than other types of insurers because of discriminatory marketing practices.
D) They account for the majority of life insurance in force in the United States.
Q3) Which of the following statements about stock insurers is true?
A) They issue assessable policies.
B) They are not permitted to write property and liability insurance.
C) Stockholders bear any losses and share in any profits.
D) They are owned by their policyholders.
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Chapter 6: Insurance Company Operations
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Q1) Pac-Coast Insurance (PCI) concentrates its underwriting activities in California. The company is concerned that if a catastrophic earthquake occurs, it might threaten the solvency of the company. To address this risk, PCI issued some debt securities. If a catastrophic earthquake occurs, PCI does not have to repay the full amount borrowed or pay interest. The securities PCI issued are called
A) catastrophe futures contracts.
B) interest rate swaps.
C) catastrophe bonds.
D) contingent options contracts.
Q2) The process of transferring risk to the capital markets through the use of financial instruments such as bonds, futures contracts, and options is known as
A) consolidation of risk.
B) avoidance of risk.
C) securitization of risk.
D) compartmentalization of risk.
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Chapter 7: Financial Operations of Insurers
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Q1) A manufacturing company just hired a new risk manager, and she has instituted several employee safety programs. She has persuaded the insurer writing the company's workers compensation insurance to base the premium on the company's actual loss experience during the current coverage period rather than on the company's historical performance. This type of plan is called a(n)
A) retrospectively rated plan.
B) class rated plan.
C) experience rated plan.
D) judgment rated plan.
Q2) All of the following statements about class rating are true EXCEPT
A) Exposures with similar characteristics are placed in the same underwriting class.
B) The rate charged for each class reflects the average loss experience for that class.
C) The complexity of class rating makes it inappropriate for personal lines coverages.
D) It is based on the assumption that future losses to insureds will be determined by the same classification factors currently in use.
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Chapter 8: Government Regulation of Insurance
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Q1) 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.
Q2) An insurance company chartered in another country has been licensed to operate in your state. In your state, the insurer would be considered a(n)
A) nonadmitted insurer.
B) foreign insurer.
C) alien insurer.
D) reciprocal insurer.
Q3) Fly-By-Night Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If Fly-By-Night becomes insolvent, which of the following will help pay the unpaid claims of the insurer?
A) guaranty fund
B) premium rebates
C) risk-based capital
D) admitted assets
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Page 10
Chapter 9: Fundamental Legal Principles
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Q1) The voluntary relinquishment of a legal right is called
A) subrogation.
B) adhesion.
C) estoppel.
D) waiver.
Q2) A pharmaceutical company employs a young chemist who is responsible for three new patents last year and for the development of the company's two best-selling drugs. The company purchased a large life insurance policy on the chemist. In this case, the insurable interest requirement was met because of a(n)
A) ownership interest.
B) close family relationship.
C) pecuniary interest.
D) economic family relationship.
Q3) When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?
A) only at the time of the loss
B) only at the inception of the policy
C) only at the time the loss settlement takes place
D) both at the time of the loss and at the inception of the policy
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Page 11
Chapter 10: Analysis of Insurance Contracts
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Questions
Q1) Maria's home was damaged by an earthquake. As Maria has open-perils coverage on her home, she was surprised to learn that her loss was not covered. Which section of a property insurance policy specifies which perils, property, and types of losses are not covered?
A) the declarations
B) the exclusions
C) the conditions
D) the insuring agreement
Q2) 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.
Q3) An elimination (waiting) period is an example of a(n) A) exclusion.
B) deductible.
C) other-insurance provision.
D) coinsurance provision.
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Page 12
Chapter 11: Life Insurance
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Q1) All of the following statements about ordinary life insurance are true EXCEPT
A) Premiums are level throughout the policy period.
B) The face amount of the policy is paid if the insured lives to age 65.
C) There is a build-up of cash value that can be borrowed by the policyholder.
D) It offers the policyholder the flexibility to meet a wide variety of financial objectives.
Q2) Most family heads need substantial amounts of life insurance. However, with limited income, money spent on life insurance reduces the amount of discretionary income available for other high-priority needs. What an insured person gives up when he or she purchases life insurance instead of using the premium dollars for other purposes is called the
A) estimated cost of life insurance.
B) net cost of life insurance.
C) real (inflation-adjusted) cost of life insurance.
D) opportunity cost of buying life insurance.
Q3) Which of the following is a noneconomic cost associated with premature death?
A) reduction in the standard of living
B) loss of a parental role model
C) additional expenses, such as uninsured medical bills
D) loss of the deceased breadwinner's future earnings
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Page 13
Chapter 12: Life Insurance Contractual Provisions
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Q1) Which of the following statements is true regarding an automatic premium loan provision?
A) Its purpose is to prevent a policy from lapsing because of nonpayment of premium.
B) Interest does not have to be paid on an automatic premium loan.
C) If the provision is used, the insured must show evidence of insurability to resume regular premium payments.
D) An automatic premium loan, unlike a regular policy loan, is forgiven if the insured dies before the loan is repaid.
Q2) The transfer of all ownership rights in a life insurance policy can be accomplished through a(n)
A) absolute assignment.
B) irrevocable beneficiary designation.
C) incontestable clause.
D) participating-policy provision.
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14
Chapter 13: Buying Life Insurance
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Q1) Marshall is interested in determining the cost per thousand of his life insurance policy. Which of the following will provide Marshall the most meaningful measure of the cost per thousand dollars per year of his life insurance?
A) the needs approach
B) the traditional net cost method
C) the human life value approach
D) the surrender cost index
Q2) Purposes of life insurance policy reserves include which of the following?
I.Legal test of the insurer's solvency
II.Formal recognition of the obligation to pay future claims
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) To level a net single premium (NSP), the NSP is divided by
A) the maximum number of years the premium could be paid.
B) the ordinary life annuity factor for the premium payment period.
C) the present value of a life annuity due of $1 for the premium payment period.
D) the deferred life annuity factor for the premium payment period.
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Page 15
Chapter 14: Annuities and Individual Retirement Accounts
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Q1) During the funding period, the premiums paid for a variable annuity are used to purchase
A) annuity units.
B) immediate participation shares.
C) mutual fund shares.
D) accumulation units.
Q2) Which of the following statements is (are) true with regard to IRAs?
I.Contribution limits are higher for workers aged 50 and older.
II.The minimum distribution rules after attainment of age 70.5 do not apply to Roth IRAs.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) Under an equity-indexed annuity, what name is given to the percentage increase in the stock index that is credited to the contract?
A) the expense rate
B) the exclusion ratio
C) the indexing method
D) the participation rate
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Page 16
Chapter 15: Health-Care Reform; Individual Health Insurance Coverages
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Q1) Under the Affordable Care Act, which of the following statements are true?
I.Health insurers cannot use pre-existing conditions exclusions.
II.Health insurers cannot impose annual benefit limits and lifetime benefit limits.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Barb was injured in an auto accident. She was totally disabled and collected disability income benefits for 8 months. She would like to return to work on a part-time basis to see if her recovery is complete. During this period, her insurer will pay reduced disability income benefits. This type of disability is called
A) recurrent disability.
B) presumptive disability.
C) permanent disability.
D) partial disability.
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Chapter 16: Employee Benefits: Group Life and Health Insurance
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Q1) An HMO physician who determines if medical care from a specialist is necessary is called a(n)
A) capitator.
B) internist.
C) network facilitator.
D) gatekeeper.
Q2) Under older group medical expense plans, physicians were paid a fee for each covered service and were reimbursed on the basis of reasonable and customary charges, up to a maximum limit. These older group medical expense plans were called
A) service medical plans.
B) managed care plans.
C) point-of-service plans.
D) indemnity plans.
Q3) Which of the following statements about group term life insurance is true?
A) It usually is written in the form of 5-year level term insurance.
B) An employee who leaves the group is usually not permitted to convert to individual coverage.
C) Experience rating is used in group term life insurance plans.
D) It represents only a small percentage of the group life insurance in force.
Page 18
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Chapter 17: Employee Benefits: Retirement Plans
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Q1) Which of the following statements concerning retirement plans for the self-employed is true?
I. They can be used by owners of incorporated businesses only.
II. With certain exceptions, the same rules that apply to qualified corporate plans apply to retirement plans for the self-employed.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Rita went to work for a manufacturing company. The company offers a defined-benefit pension plan. The retirement benefit is equal to 1.5 percent multiplied by years of service with the company, and the result is multiplied by average salary in the three highest consecutive years of paid employment with the company. The benefit formula used at Rita's company is a
A) flat dollar amount for all employees.
B) flat percentage of annual earnings.
C) flat dollar amount for each year of service.
D) unit-benefit formula.
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19
Chapter 18: Social Insurance
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Q1) Which of the following statements about the coverage of health care services under Part A of Medicare is (are) true?
I.Services in the patient's home are covered if the patient requires skilled care and meets certain conditions.
II.Hospice care is available for beneficiaries with a terminal illness.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about the Social Security cost-of-living adjustment is (are) true?
I.The amount of the adjustment is limited to a maximum of 2.5 percent annually.
II.Increases are based on changes in the consumer price index.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 19: The Liability Risk
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Q1) 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
Q2) Louise was in a hurry and tried to cross the street in the middle of the block rather than at a street corner. A car struck her. Even though Louise placed herself in danger, she may still be able to collect for her injuries if the driver had an opportunity to avoid hitting her but failed to do so. This rule is called the
A) last clear chance rule.
B) collateral sources rule.
C) alternative dispute resolution rule.
D) joint and several liability rule.
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21
Chapter 20: Auto Insurance
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Q1) The purpose of the Miscellaneous-Type Vehicle Endorsement to the PAP is to
A) add coverage for newly-acquired autos.
B) provide coverage for when the insured is using someone else's auto with the permission of the owner.
C) insure motorcycles, mopeds, motor scooters, and similar vehicles.
D) provide coverage for when the insured is using someone else's auto without the permission of the owner.
Q2) Which of the following statements concerning the collision damage waiver when renting an auto is true?
I. It relieves the renter from legal liability to third parties arising out of operation of the rented car.
II. It relieves the renter from legal liability for the vehicle if it is damaged or stolen.
A) I only
B) II only
C) both I and II
D) neither I nor II
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22
Chapter 21: Auto Insurance (continued)
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Q1) Ben lives in a state that has a no-fault auto insurance law. Another motorist failed to yield the right of way, and hit his car. Ben filed a claim with his own insurer. He also contacted a lawyer to discuss suing the other driver. The lawyer told Ben that while lawsuits resulting from auto accidents are permitted in the state, Ben's injuries were not severe enough to provide legal standing for a lawsuit. What type of no-fault law is in effect in the state where Ben lives?
A) pure no-fault
B) add-on no-fault
C) choice no-fault
D) modified no-fault
Q2) Amber believes that her auto insurance premium is too high. Which of the following would most likely lower Amber's premium?
A) Amber could increase her physical damage deductible.
B) Amber could move from the rural area where she lives to an urban or suburban area.
C) Amber could increase the amount of liability insurance that she carries.
D) Amber could add "other-than-collision loss" coverage to her policy.
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Chapter 22: Homeowners Insurance, Section I
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Q1) Shauna purchased a condominium unit. Which homeowners policy is specially designed for condominium unit owners?
A) HO-2
B) HO-3
C) HO-4
D) HO-6
Q2) Cal is renting an apartment. Which homeowners policy is specially designed to insure renters?
A) HO-2
B) HO-3
C) HO-4
D) HO-6
Q3) Jose and Maria would like "open-perils" coverage on their home and their personal property. Which unendorsed homeowners form provides this coverage?
A) Homeowners 2
B) Homeowners 3
C) Homeowners 4
D) Homeowners 5
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Chapter 23: Homeowners Insurance, Section II
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Q1) Which of the following losses would be covered under the medical payments coverage of the Homeowners 3 policy?
A) injuries to another person arising out of the insured's negligent operation of an automobile
B) medical payments resulting from the transmission of a communicable disease
C) injury to a resident employee at the insured's home
D) workers compensation medical payments
Q2) Which of the following situations would be covered under Section II of a homeowners policy?
I.The insured is sued by his girlfriend because he infected her with the AIDS virus.
II.The insured's son is sued after a friend suffered serious injury as a result of using illegal drugs sold to him by the son.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 24: Other Property and Liability Insurance Coverages
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Q1) Which of the following statements about the federal flood insurance program is true?
A) Under the write-your-own program, each insurer services the policies it writes.
B) The regular portion of the program does not allow the purchase of higher amounts of coverage than are available under the emergency portion of the program.
C) No coverage is available for property owners in areas where flooding has occurred previously.
D) The maximum amount of coverage that can be written on any single dwelling is $25,000.
Q2) Carolyn is considering the purchase of a large (60-foot) boat. She called her insurance agent to see if she needs a separate policy for the boat. The agent said that a special category of insurance policies was designed to insure large watercraft. These policies are called
A) yacht insurance policies.
B) flood insurance policies.
C) floater policies.
D) Dwelling Property 3 (special form) policies.
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Chapter 25: Commercial Property Insurance
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Q1) Which of the following statements about the building and personal property coverage form is (are) true?
I.A limited amount of coverage is provided for pollutant cleanup and removal at the described premises if the release or discharge of the pollutant results from a covered cause of loss.
II.Fire department service charges are specifically excluded because they are a normal cost of doing business.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following is covered under the building and personal property coverage form?
A) the insured's stock and inventory when located inside the insured building
B) vehicles owned by the insured
C) aircraft and watercraft owned by the insured
D) a manufacturing building owned by a key customer or key supplier of the insured.
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Chapter 26: Commercial Liability Insurance
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Q1) David started a public accounting firm. David is concerned that accountants on his staff may give incorrect accounting advice, and the accounting firm may be sued. What type of liability insurance should David purchase to protect against such claims?
A) errors and omissions insurance
B) directors and officers liability insurance
C) general liability insurance
D) employers liability insurance
Q2) Which of the following statements is (are) true concerning the self-insured retention (SIR) under a commercial umbrella liability policy?
I.The SIR applies to claims covered by the umbrella policy but not by any underlying insurance.
II.The SIR only applies to those claims for which the underlying policy has paid first, and the umbrella policy is paying on an excess basis.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
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Chapter 27: Crime Insurance and Surety Bonds
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Q1) Which of the following statements about various types of surety bonds is true?
A) A judicial bond guarantees that a public official will faithfully perform his or her duties for the protection of the public.
B) A payment bond guarantees that the bonded person will appear in court.
C) A license and permit bond guarantees that the bonded party will comply with all the laws and regulations governing his or her activities.
D) A bid bond guarantees that the principal will complete a construction project on time.
Q2) Which of the following statements is (are) true with respect to financial institution bonds?
I.Fidelity coverage covers losses resulting from the dishonest acts of employees.
II.Financial institutions usually insure their crime exposures through financial institutions bonds.
A) I only
B) II only
C) both I and II
D) neither I nor II
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