Enterprise Risk Management
Final Test Solutions
Course Introduction
Enterprise Risk Management (ERM) explores the frameworks, strategies, and processes organizations use to identify, assess, and manage risks that could impact the achievement of their objectives. The course covers risk identification, risk assessment techniques, risk response planning, and the integration of risk management into organizational decision-making. Students learn about various risk types including financial, operational, strategic, and reputational risks along with regulatory requirements and best practices for developing effective ERM programs. Emphasis is placed on real-world case studies and using ERM to enhance value, resilience, and sustainability within complex organizational environments.
Recommended Textbook
Introduction to Risk Management and Insurance 10th Edition by Mark S. Dorfman
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Chapter 1: Introduction to Enterprise Risk Management and Insurance
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Sample Questions
Q1) The first step in the Risk Management Process is choosing appropriate risk handling techniques.
A)True
B)False
Answer: False
Q2) Diversifiable risk is defined as:
A) risk with two possible outcomes
B) risk with three possible outcomes
C) an individual's perception of risk
D) none of the above
Answer: D
Q3) Loss prevention and control:
A) eliminate risk
B) are an alternative to self insurance
C) reduce the probability and severity of loss
D) directly minimize the probability of a natural disaster occurring
Answer: C
Page 3
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Chapter 2: Risk Identification
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Sample Questions
Q1) What are the requirements for a plaintiff to prove negligence against a defendant?
Answer: The plaintiff must show 1) the defendant had a legal duty to protect the plaintiff, 2) the defendant failed to perform that duty, 3) an injury was the result of the defendant's failure to do his or her duty.
Q2) Which of the following statements about financial risks is not true?
A) Many financial risks are attributable to fluctuations in value.
B) Financial risks arise from events that prevent a firm from conducting its normal scope of operations.
C) An example of a financial risk is one associated with unfavorable credit rating.
D) Price risks associated with input costs are a form of financial risk.
Answer: B
Q3) A breach of contract legally is known as a "tort."
A)True
B)False
Answer: False
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Chapter 3: Risk Assessment and Pooling
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Sample Questions
Q1) The variance is independent of the shape of the probability distribution.
A)True
B)False
Answer: False
Q2) Risk Pooling is the ability to reduce the risk of a unit by making more accurate predictions about a large pool of units.
A)True
B)False
Answer: True
Q3) Which of the following statements about the risk pooling is correct?
A) Risk pooling works best if the parties involved have heterogeneous risk characteristics.
B) Risk pooling works best if the number of parties involved is small.
C) Risk pooling works best if the loss experience of the parties involved is statistically dependent.
D) Risk pooling, assuming some assumptions are met, reduce overall risk.
Answer: D
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Chapter 4: Risk-Handling Techniques: Loss Control, Risk Transfer,
and Loss Financing
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Sample Questions
Q1) There are no clear rules for choosing an appropriate risk-handling technique.
A)True
B)False
Q2) Which of the following statements about loss prevention is correct?
A) All losses can be prevented.
B) Some losses cannot be prevented.
C) Loss prevention activities aim to minimize the impact of losses.
D) All of the above are correct.
Q3) All of the following are examples of loss financing, <u>except</u>:
A) raising capital through selling stocks and bonds on the capital market
B) insurance
C) hedging
D) risk retention
Q4) Risk avoidance is the best risk management tool when the change of loss is ________ and the potential severity of loss is ________.
A) low, low
B) high, high
C) low, high
D) high, low
Q5) Explain the difference between loss prevention versus loss reduction.
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Chapter 5: Risk-Handling Techniques: Diversification and Hedging
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Sample Questions
Q1) Which of the following statements about bearing risk collectively is correct?
A) Bearing risk collectively means that the risk is spread over a larger group.
B) Bearing risk collectively results in a more cost-efficient outcome.
C) Bearing risk collectively is an application of risk diversification.
D) All of the above are correct.
Q2) Which of the following statements about bearing risk collectively is correct?
A) Bearing risk collectively is not very cost-efficient.
B) Bearing risk collectively only works for small groups.
C) Bearing risk collectively is bearing risk as part of a large group.
D) All of the above are correct.
Q3) When two investments have a negative correlation coefficient it means that they are bad investments.
A)True
B)False
Q4) Which of the following statements about the covariance is correct?
A) The covariance measures risk.
B) The covariance is a number between -1 and +1.
C) The covariance measures how two variables move relative to each other.
D) All of the above are correct.
Q5) Explain the importance of the correlation coefficient for diversification.
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Chapter 6: Fundamentals of Insurance
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Sample Questions
Q1) Most investment income of insurance companies comes from medium to high risk investments in order to reduce the price of insurance as much as possible.
A)True
B)False
Q2) All of the following are perils <u>except</u>:
A) heart attack
B) theft
C) forgery and embezzlement
D) incorrect instructions on the label of a pesticide
Q3) Which of the following statements is <u>not</u> correct about the insurance premium?
A) The forecast of policyholders' losses is the starting point for the calculation of the risk premium for an insurance policy.
B) The fair rate of return, which is a part of the insurance premium, is governed by law.
C) Loading expenses increases the insurance premium.
D) Most investment income of insurance companies comes from low risk investments, which reduces the insurance premium.
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Chapter 7: Insurable Perils and Insuring Organizations
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Sample Questions
Q1) Which of the following statements is false?
A) Assessment mutuals provide primarily fire and windstorm insurance.
B) A stock insurance company is a profit-making venture in both life and property insurance.
C) Dividends are paid to stockholders of stock companies.
D) In stock companies, non-insured stockholders bear none of the risk of loss.
Q2) A stock insurer is managed by:
A) an attorney-in-fact
B) an agency supervisor
C) a fraternal representative
D) representatives chosen by shareholders
Q3) Mutual insurance companies legally are nonprofit organizations.
A)True
B)False
Q4) Which of the following is not a type of mutual insurance organization?
A) Assessment
B) Advanced-premium
C) Perpetual
D) Reciprocal
Q5) How do a reciprocal exchange and a mutual insurance company differ?
Page 9
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Chapter 8: Insurance Functions
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Sample Questions
Q1) When a $1 million insured loss occurs and $300,000 of the loss is reinsured, the policy holder of the primary company will receive:
A) $1 million from the primary company
B) $1,000,000 from the primary insurer and $300,000 from the reinsurer
C) $700,000 from the primary insurer and $300,000 from the reinsurer
D) fifty percent of the loss from each company
Q2) Which of the following is not a duty of an insurance agent?
A) Duty to make a profit in the long run for the insurance agency and the insurer
B) Carefully handling all money and keeping proper records
C) Carefully conveying all relevant information
D) Duty not to enrich himself by self-dealing at the principal's expense
Q3) Which of the following is not a type of reinsurance arrangement?
A) Facultative reinsurance
B) Treaty reinsurance
C) Pro-rata reinsurance
D) Cooperative reinsurance
Q4) When a reinsurer cedes coverage to another reinsurer, it is called retrocession.
A)True
B)False
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Chapter 9: Insurance Markets: Economics and Issues
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Sample Questions
Q1) When the consumer purchases insurance, several key decisions are made. What are these key decisions?
Q2) Briefly explain the role of the courts and the law in providing consumer protection relative to insurance products.
Q3) Choose the true statement.
A) FAIR plans were developed to provide insurance to automobile drivers when coverage is otherwise unavailable.
B) FAIR plans are now found in all states.
C) FAIR plans require that each property owner that requests it, be given an inspection of his property and an offer of insurance at an appropriate rate or written notice of improvements needed before insurance can be offered.
D) In general, FAIR plans have shown underwriting gains in most states in most years.
Q4) Most markets involve two parties. How many does the insurance market have?
A) 1
B) 2
C) 3
D) 4
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Chapter 10: Insurance Regulation
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Sample Questions
Q1) The main outcome of the Gramm-Leach-Bliley Act of 1999 is to allow:
A) banks, insurers and security dealers to openly compete with one another
B) banks, insurers and security dealers to form financial services holding companies
C) insurers to choose between state or federal regulation
D) banks to evade the provisions of the Glass-Steagall Act
Q2) What is the purpose of the interest maintenance reserve?
A) To absorb losses arising from sales of assets for less than their cost (capital losses)
B) To absorb losses arising from the insolvency of debtors (credit losses)
C) To absorb losses caused by changes (increases) in interest rates on government securities
D) To absorb losses caused by guaranty fund assessments made against insurer assets
Q3) Which of the following best describes the two sources of insurance regulation?
A) State governments and the federal government
B) Insurance law and the administration of that law
C) Contracts and the court system
D) Administrative bodies and the court system
Q4) Explain briefly the purpose of the McCarran Act.
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Chapter 11: Insurance Contracts
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Sample Questions
Q1) In which case is there no insurable interest?
A) Barbie's 25% ownership in an oil well
B) A dry cleaner in its customers' clothes
C) A bank (creditor) in property used to secure a loan
D) A school principal in the lives of the students attending his school
Q2) Jerry has a property insurance policy on a building that would cost $200,000 to replace. His insurance policy is written on an actual cash value basis. His building suffers fire damage that has a replacement cost of $50,000. The building is 2 years old, with an estimate useful life of 20 years. How much will he collect for the fire damage?
A) $5,000
B) $10,000
C) $25,000
D) $45,000
Q3) In property insurance, to collect for a loss, insurable interest must exist:
A) at the beginning of the contract
B) at all times
C) when the insurer waives it
D) at the time of the loss
Q4) Explain the purpose of the declaration page found in insurance contracts.
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Chapter 12: The Personal Auto Policy
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Sample Questions
Q1) Antonius accidentally runs over his friend Shaq while Shaq is walking across the street. The police declare the accident to be Antonius' fault. Where could Shaq have his injuries covered?
A) Antonius' PAP Medical Payments Coverage
B) Antonius' PAP Liability Coverage
C) Shaq's PAP Medical Payments Coverage
D) Both B and C
Q2) To have your bodily injuries covered under your Uninsured Motorist Coverage, you must have been at fault in the auto accident that caused your bodily injuries.
A)True
B)False
Q3) What is the difference between a single limit and a split limit in expressing liability limits in the PAP?
Q4) Underinsured Motorist coverage:
A) is the same as Uninsured Motorist coverage
B) is automatically included in the PAP's Part C coverage
C) pays for property damage you cause when victims have no coverage
D) none of the above
Q5) Explain the purpose of Uninsured Motorist coverage.
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Chapter 13: Homeowners Insurance
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Sample Questions
Q1) The HO policy's Mortgage Clause continues to protect the lender (mortgagee) even if the insured/homeowner has committed fraud against the insurer.
A)True
B)False
Q2) Britney and Kevin were painting their backyard fence with a spray gun. A strong gust of wind blew paint on the neighbor's house. The neighbor sued them for all the clean-up costs. Which of the following is true about Britney and Kevin's HO policy?
A) This liability is covered by their HO policy.
B) This liability is not covered by their HO policy because the damage occurred off their premises.
C) This liability is not covered by their HO policy because the damages are not bodily injuries.
D) This type of incident is specifically excluded by the HO policy.
Q3) The liability coverage of the HO policy commits the insurer to defend lawsuits brought against the homeowner, even if the lawsuits are frivolous and groundless.
A)True B)False
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Page 15
Chapter 14: Professional Financial Planning
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Sample Questions
Q1) Financial planners:
A) should be knowledgeable of many topics
B) will make decisions for their clients
C) can assist people in the financial planning process
D) A and C above
Q2) For most people, the greatest need for life insurance is to retire the debts of the primary wage earner.
A)True
B)False
Q3) What are the main financial planning problems encountered in the "early adult" years?
Q4) The needs-based approach should be used to determine whether life insurance is needed and how much.
A)True
B)False
Q5) When a person dies, the gross estate is:
A) taxed at the rate of 50%
B) adjusted for certain gifts made during the decedent's lifetime
C) subject to the federal estate and gift tax
D) not taxed if death bed gifts are made to eligible children
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Chapter 15: Life Insurance Policies
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Sample Questions
Q1) Assume that all of the life insurance policies listed below have a $50,000 face value, are sold by the same insurer, and have identical expense and mortality rates. Which of these, sold to a 27 year old female, should be the least expensive?
A) Term life
B) Whole life
C) Universal life
D) Cannot be determined from the given information
Q2) Which of the following is <u>not</u> a reason to buy cash-life insurance?
A) Forced savings
B) Tax savings
C) Professional investment management
D) Protection against declaration of bankruptcy
Q3) Which of the following is <u>not</u> a feature of universal life insurance?
A) Single-year term
B) Flexibility of premium payment
C) Ability to benefit from interest rate increases
D) Flexibility of death benefits
Q4) In general, what are the uses for term life insurance? Provide examples.
Q5) What are the advantages of saving with cash value whole life insurance?
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Chapter 16: Standard Life Insurance Contract Provisions and Options
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Sample Questions
Q1) Cheryl buys a life insurance policy with a two-year incontestable clause, and dies three years later. When she dies, her insurer discovers that she lied on application for coverage about her diabetes. What will happen?
A) The insurer will pay the claim.
B) The insurer will void the policy and not pay the claim because Cheryl made a material misrepresentation on her application.
C) The insurer will void the policy and not pay the claim based on the principle of indemnity.
D) Both B and C above
Q2) An insured must pay the specified interest rate to borrow his own "savings" when a loan is made on a whole life policy.
A)True
B)False
Q3) List and describe briefly the various settlement options under life insurance contracts.
Q4) Explain briefly the operation of the guaranteed insurability rider, the waiver of premium rider, and the double indemnity rider.
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Chapter 17: Annuities
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Sample Questions
Q1) Explain how an annuity 10 years certain would work.
Q2) The amount paid for an annuity divided by the expected return from the annuity is the:
A) FICA deduction ratio
B) rate of return on the annuity
C) exclusion ratio
D) none of the above
Q3) Which annuity provides for a built-in reduction of monthly payments after a specified event occurs?
A) Joint annuity
B) Joint and last survivor annuity
C) Pure reduction annuity
D) Joint and one-half survivor annuity
Q4) A cash refund annuity would have lower monthly benefits per $1,000 of premium than an installment refund annuity.
A)True
B)False
Q5) In an annuity, the risk of dying too soon is transferred to the insurer.
A)True
B)False
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Chapter 18: Health Insurance and Disability Income
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Sample Questions
Q1) The waiting period in disability income insurance:
A) eliminates payment for minor illness
B) provides larger benefits to the insured
C) provides indirect loss coverage
D) integrates employment sick days with the disability plan
Q2) Which statement is true?
A) Spending for physicians' services in the U.S. has increased over time.
B) Spending for hospital services in the U.S. has increased over time.
C) Health care spending in the U.S. has increased over time.
D) All of the above
Q3) A "guaranteed renewable" health insurance policy is also known as a "noncancellable" policy.
A)True
B)False
Q4) HMOs are health insurers specializing in cancer insurance. A)True B)False
Q5) Explain how a typical major medical contract works.
Q6) What is the difference between an HMO and a PPO in providing health care?
Q7) Distinguish between cost shifting and cost containment in health care.
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Chapter 19: Employee Benefits
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Sample Questions
Q1) Explain how employees are taxed on group life insurance supplied as an employee benefit.
Q2) Because medical expenses may be covered by more than one policy, health insurance policies normally contain a ________ clause to prevent unnecessary termination of the insured.
A) coordination of benefits
B) reinstatement
C) pro-rata
D) cost containment
Q3) Mary Jane divorces her husband Dustin. Dustin was previously covered by Mary Jane's group health insurance plan offered by her employer. How long can Dustin continue his health coverage, according to COBRA provisions?
A) 0 months
B) 18 months
C) 24 months
D) 36 months
Q4) What are the rules to be considered a qualified plan?
Q5) Explain the difference between a defined contribution and a defined benefit plan.
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Chapter 20: Social Security
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Sample Questions
Q1) Which one of the following is not a characteristic of Social Security?
A) Benefits are individually selectable by the covered individual.
B) Participation is compulsory.
C) It can operate on a pay-as-you-go basis with no prefunding.
D) Legislative activity may change the benefits.
Q2) Describe the characteristics of a government insurance program.
Q3) To have one quarter of coverage in the Social Security program, you must have:
A) worked 3 months
B) worked 4 months
C) earned a certain amount of covered income
D) been retired at least 3 months
Q4) The Social Security "black-out" period occurs between the time:
A) the insured worker retires and the time retirement benefits begin
B) survivor benefits end and the time retirement benefits begin
C) the insured worker becomes disabled and the time disability benefits begin
D) a disabled worker recovers from disability and the time he/she is able to earn 100% of his/her pre-disability wages
Q5) The eligibility test for Social Security is known as the "needs" test.
A)True
B)False
Page 22
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Chapter 21: Unemployment and Workers Compensation Insurance
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Sample Questions
Q1) Explain how a worker can be disqualified for unemployment benefits.
Q2) Which of the following is false concerning unemployment insurance?
A) It is experience-rated.
B) It originated in the Social Security Act of 1935.
C) It is paid for by both the employee and employer in the form of a wage-based tax.
D) It does not provide benefits to a worker who voluntarily quits a job.
Q3) Experience rating of the unemployment program has which of the following effects?
A) Penalizes good employers that never fire employees
B) Encourages short-term layoffs and causes an unstable workforce
C) Charges employers more when the economy is weak, thus charging for poor experience when companies can least afford it
D) Provides funds to continue employment instead of dismissing employees
Q4) What is the federal covered maximum wage for unemployment insurance taxation?
A) $700
B) $7,000
C) $70,000
D) $700,000
Q5) What are the general types of benefits provided under workers' compensation?
Page 23
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Chapter 22: Commercial Property Insurance
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Sample Questions
Q1) The amount an insurer charges per $100 of exposed property value is called the:
A) rate
B) premium
C) expense ratio
D) funding ratio
Q2) A bailees' customer policy is a type of ocean marine insurance.
A)True
B)False
Q3) Which of the following types of business income coverage would pay for losses due to the destruction of your supplier of raw goods or a buyer of your products?
A) Dependent properties business income form
B) Additional insured interruption
C) Consequential business interruption
D) Suppliers' protection and interruption
Q4) What is the difference between class rating and schedule rating?
Q5) Reporting forms for inventory insurance require the insured:
A) to purchase insurance equal to 100% of the inventory's value
B) to purchase insurance equal to 80% of the inventory's value
C) to report inventory values with scrupulous honesty
D) to have very stable inventory levels
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Chapter 23: Commercial Liability Insurance
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Sample Questions
Q1) The liability insurance policy currently used by many business firms is known as the Commercial General Liability Policy.
A)True
B)False
Q2) A "state of the art" defense would mean a product manufactured using current technology could not be judged against the performance of a product using improved technology unavailable at the time the product was made.
A)True
B)False
Q3) Which of the following is false concerning Environmental Impairment Liability (EIL) coverage?
A) It is expensive and difficult to place.
B) Most small firms do not need it since they are immune from liability.
C) The content of the insurance contract is subject to negotiation between insureds and insurers.
D) Federal laws impose legal responsibility on polluters.
Q4) Explain the idea behind business liability umbrella policies.
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