Insurance and Risk Management Test Preparation
Course Introduction
Insurance and Risk Management explores the principles, practices, and significance of managing risk in personal and business environments through insurance mechanisms. The course examines traditional and emerging forms of risk faced by individuals and organizations, providing a foundation in risk assessment, mitigation strategies, and the role of insurance products in transferring and sharing risk. Students will learn about key insurance concepts, policy structures, regulatory frameworks, and the functioning of insurance markets. The course also covers methods for identifying, evaluating, and prioritizing risks, as well as practical approaches to developing comprehensive risk management plans.
Recommended Textbook
Introduction to Risk Management and Insurance 10th Edition by Mark S. Dorfman
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1358 Verified Questions
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Chapter 1: Introduction to Enterprise Risk Management and Insurance
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71 Verified Questions
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Sample Questions
Q1) Most speculative risks are insurable.
A)True
B)False Answer: False
Q2) Which of the following best describes a pure risk?
A) An uncontrollable risk that cannot be insured
B) The outcome will either be a loss or no change
C) The outcome will be either a loss or a gain
D) A risk with three possible outcomes
Answer: B
Q3) Risk diversification is based on the principle that:
A) one should not be exposed to only one event
B) one should put all her "eggs in one basket"
C) risk can be measured subjectively
D) pure risk seldom happens
Answer: A
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Chapter 2: Risk Identification
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Sample Questions
Q1) All the following are objectives of risk management <u>except</u>:
A) to insure all exposures to loss
B) minimize reputation risk
C) minimize supply chain interruption
D) develop and maintain plant safety program
Answer: A
Q2) All of the following legal doctrines result in more individuals being held liable for negligence <u>except</u>:
A) last clear chance rule
B) contributory negligence
C) comparative negligence
D) vicarious liability
Answer: B
Q3) The damage caused by an indirect loss can be greater in amount than the damage caused by direct loss in the same occurrence.
A)True
B)False
Answer: True
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Chapter 3: Risk Assessment and Pooling
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Sample Questions
Q1) When a probability distribution of a variable is not known, it can be estimated using prior experience.
A)True
B)False
Answer: True
Q2) Why would "groom decides he doesn't want to get married" <u>not</u> be covered by a typical wedding insurance policy?
A) It is a catastrophic event, and insurance companies do not cover that.
B) The groom has the right to make that decision, and therefore it is not covered under a typical insurance policy.
C) It is not an independent outside event.
D) The risk pool size is too small.
Answer: C
Q3) A Risk Manager needs more information than just the loss frequency and loss severity to assess the risk exposure of their firm.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Risk-Handling Techniques: Loss Control, Risk
Transfer, and Loss Financing
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Sample Questions
Q1) Which of the following are examples of loss <u>reduction</u> techniques?
I. Wearing your seat belt while driving your car
II. Polio vaccinations
III. Keeping poisons locked up and out of reach of small children
IV. Wearing a helmet while skateboarding
A) I and III only
B) I, II, and III only
C) I and IV only
D) I, II, III, and IV
Q2) OSHA is a federal loss prevention law.
A)True
B)False
Q3) It is a fact that supply chains have become increasingly more complicated in the past decade, with products moving across the globe. This means that:
A) loss reduction measures also have become more important
B) there has been a growth of captive insurers
C) duplication as a risk mitigant has also become more important
D) hold-harmless agreements have become less relevant
Q4) Explain the difference between loss prevention versus loss reduction.
Q5) How do deductibles affect moral hazard?
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Chapter 5: Risk-Handling Techniques: Diversification and Hedging
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Sample Questions
Q1) Exchange rate losses arise when the value of the domestic currency falls relative to foreign currencies.
A)True
B)False
Q2) Input price risk and output price risk are both a form of commodity price risk.
A)True
B)False
Q3) Which of the following statements about the correlation coefficient is correct?
A) The correlation coefficient measures risk.
B) The correlation coefficient is a number between -1 and +1.
C) The correlation coefficient measures how two variables move relative to each other.
D) All of the above are correct.
Q4) A futures contract is:
A) selling two investments that are both expected to lose in the future
B) buying two investments that are both expected to make a profit in the future
C) taking two positions whose gains and losses will offset each other
D) an agreement to buy or sell a commodity or financial asset at a specified price on a later date
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) What are the two broad categories of the private insurance industry? Break down the broad categories into their main parts.
Q2) Private insurance can be classified according to coverage. Distinct types mentioned in the text include all the following <u>except</u>:
A) Property
B) Commercial Lines
C) Auto
D) Submarine
Q3) Which of the following is the correct calculation of the insurance premium?
A) Insured Loss Claims + Loading Expenses + Fair Rate of Return - Investment Income
B) Insured Loss Claims + Loading Expenses + Investment Income - Fair Rate of Return
C) Insured Loss Claims - Loading Expenses - Investment Income + Fair Rate of Return
D) Insured Loss Claims - Loading Expenses + Fair Rate of Return + Investment Income
Q4) Explain briefly why insurance functions as an antimonopoly device.
Q5) Discuss the building blocks of an insurance premium.
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8
Chapter 7: Insurable Perils and Insuring Organizations
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Sample Questions
Q1) Reciprocal exchanges provide a considerable amount of automobile insurance.
A)True
B)False
Q2) Which of the following is not an evaluation criterion to determine whether a risk classification is appropriate?
A) Separation
B) Reliability
C) Incentive Value
D) Simplicity
Q3) From the viewpoint of an insurer, the prerequisites of an ideally insurable risk include all the following <u>except</u>:
A) the loss must be capable of being determined and measured
B) there must be a large, homogeneous group of exposure units
C) the loss should not be subject to catastrophic hazard
D) the peril should be such that the probability of loss is high
Q4) Competition would totally eliminate subsidization in insurance pools if there were no regulator restricting competition between insurance companies.
A)True
B)False
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Chapter 8: Insurance Functions
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Sample Questions
Q1) Which of the following is not a duty of the agent?
A) No self-dealing at principal's expense
B) Forwarding all premiums to the principal
C) Not submitting any type of business the insurer does not want
D) To guarantee the insurance buyer that the insurer will write them a policy at an affordable rate
Q2) In reinsurance, the reinsurer is also known as the "ceding" company.
A)True
B)False
Q3) When a primary insurer "cedes" coverage to a reinsurer, the process is called:
A) reinsurance
B) automatic coverage
C) retrocession
D) cession
Q4) Pro-rata reinsurance coverage may be either facultative or treaty.
A)True
B)False
Q5) List some of the reasons why insurance companies engage in the reinsurance transaction.
Q6) What is the difference between an agent and a broker?
Page 10
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Chapter 9: Insurance Markets: Economics and Issues
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Sample Questions
Q1) The role of the court is to promote the consumer's interest, while the role of the insurance commissioner is to promote the insurer's interest.
A)True
B)False
Q2) Which of the following is not a source of consumer protection in the insurance industry?
A) Insurance commissioners
B) Laws
C) Politicians
D) Courts
Q3) Consumers that have done some research to gather insurance information:
A) make the insurance market less efficient
B) probably will get better subsequent information from insurance companies
C) probably will just get "razzle-dazzle" from insurance companies
D) probably wasted their time
Q4) Insurance companies that have funny TV commercials:
A) make the insurance market more efficient
B) attract more attention of regulators
C) waste money of the insured
D) make themselves less reputable
Page 11
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Chapter 10: Insurance Regulation
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Sample Questions
Q1) Which one of the following is not a reason for the regulation of insurance?
A) To prevent insurer insolvencies
B) To promote social goals
C) The unequal knowledge and bargaining power of the parties to the contract
D) To stabilize the economy
Q2) Currently, the extent of the federal government's right to exercise regulatory authority over insurance companies is dictated by:
A) SEUA case
B) Paul v. Virginia decision
C) Robinson-Patman Act
D) McCarran-Ferguson Act
Q3) Which of the following is not a stated purpose of regulation?
A) Promote competition among the largest insurers in the state
B) Maintain insurer solvency
C) Deal with unique pricing problems that do not allow for full and unrestrained competition
D) Promote social goals
Q4) "Prior-approval" price regulation is known as "use-and-file" regulation.
A)True
B)False
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Chapter 11: Insurance Contracts
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85 Flashcards
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Sample Questions
Q1) Which of the following items is <u>not</u> a benefit of standard insurance policies?
A) Smaller insurers can offer cheaper insurance than larger companies if standard policies are used.
B) Litigation should be reduced as policy meaning becomes understood.
C) Consumers are more likely to learn the meaning of standard policies.
D) Data collection and loss rate computation are easier and more accurate.
Q2) Building has been in use 15 years.
A) $70,000
B) $45,000
C) $30,000
D) $15,000
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 what a contract of adhesion is. How does the doctrine of reasonable expectations influence adhesion?
Q5) 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) If you rent a car while on vacation, you have coverage for any collision damage to the rental car under your own PAP, assuming you have purchased such coverage on your owned automobiles.
A)True
B)False
Q2) A PAP may be canceled at any time for any reason if the insurance company no longer wants to insure you.
A)True
B)False
Q3) When you have an auto accident that is your fault, your PAP's Liability coverage will pay for all of the following except:
A) bodily injuries of your family members riding with you
B) bodily injuries of non-family members who are passengers in your car at the time of the accident
C) bodily injuries of your best friend who is a passenger in your car at the time of the accident
D) the cost to repair or replace property belonging to others that you damaged in the accident
Q4) Explain the purpose of Uninsured Motorist coverage.
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Chapter 13: Homeowners Insurance
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Sample Questions
Q1) You have an HO policy with the following limits: A = $50,000 (dwelling)
B = $5,000 (other structures)
C = $25,000 (personal property).
A tornado strikes your property. You lose your house, which is worth $40,000 at the time of the loss. You also lose an unattached shed worth $8,000, and personal property worth $30,000. You will collect:
A) $78,000
B) $70,000
C) $58,000
D) none of the above
Q2) In homeowner's insurance, coinsurance is:
A) an agreement between two or more insurance companies to jointly cover a large risk
B) a contractual agreement to make the insured bear a portion (usually small) of every loss
C) a contractual agreement to prevent over-insurance
D) a contractual agreement that penalizes the insured when under-insured
Q3) Explain the concept of concurrent causation as it applies to collapse.
Q4) What is meant by "Medical Payments to others"? Why does the coverage exist?
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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) Which of the following needs for life insurance would be considered permanent?
A) Education fund for surviving children
B) Income fund for surviving children
C) Debt-retirement fund
D) Burial fund
Q3) Life insurance policy owners have several ways by which to access the cash savings in their life insurance policies while the insured is still alive. Which of the following is not one of those ways?
A) Invest cash value in the insurer's stock and then receive shareholder dividends
B) Participating policy dividends
C) Withdraw the cash value
D) Take a lump sum settlement if the insured is terminally ill
Q4) What are the main financial planning problems encountered in the "early adult" years?
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Chapter 15: Life Insurance Policies
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Sample Questions
Q1) The excess interest provision in life insurance means that the cash value will increase:
A) faster than the guaranteed rate if the insurer actually earns a greater return than the guaranteed rate
B) faster than the guaranteed rate even if the insurer does not earns a greater return than the guaranteed rate
C) faster than it would with a universal or variable life policy
D) slower than the guaranteed rate
Q2) A disadvantage of using a whole life policy for saving is:
A) earnings outside the policy can be greater
B) federal income tax must be paid on the yearly cash value increases
C) creditor protection is available if bankruptcy occurs
D) since premiums must be paid to keep the policy in force, there is the semi-compulsory nature of saving
Q3) There is more Individual Life Insurance Coverage in the United States compared to Group Life Insurance Coverage.
A)True
B)False
Q4) In general, what are the uses for term life insurance? Provide examples.
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Chapter 16: Standard Life Insurance Contract Provisions and Options
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Sample Questions
Q1) Dallas took out a loan against her life insurance policy's cash value. She died before the loan could be repaid. The face value of the policy was $150,000. The insurer will pay Dallas' beneficiary:
A) $150,000
B) $150,000 minus the amount Dallas owed on the loan
C) $0
D) the total premiums Dallas paid in before she died
Q2) The contract feature that waives life insurance premiums if the insured becomes permanently disabled is the:
A) disability assignment rider
B) premium waiver clause
C) disability income option rider
D) waiver of premium rider
Q3) A life insurer has a legal obligation to make a policyholder loan if requested by an insured.
A)True B)False
Q4) The irrevocable beneficiary cannot be changed by the owner.
A)True
B)False
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Chapter 17: Annuities
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Sample Questions
Q1) A cash refund annuity would have lower monthly benefits per $1,000 of premium than an installment refund annuity.
A)True
B)False
Q2) A variable annuity is usually paid for on a deferred basis.
A)True
B)False
Q3) Life annuities may be classified according to all but which one of the following criteria?
A) When liquidation payments begin
B) Method of paying premiums
C) Number of lives insured
D) Maximum number of payments guaranteed
Q4) Life income annuities could be beneficial to all of the following persons <u>except</u>:
A) individuals just beginning retirement
B) childless couples without close living relatives
C) individuals in poor health
D) couples with adult children who are helping to support their parents
Q5) How do insurers classify annuities to describe their benefits?
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Chapter 18: Health Insurance and Disability Income
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Sample Questions
Q1) How does Blue Cross health insurance cover hospitalization?
A) By covering a specific number of days in the hospital
B) It pays up to 80% of all usual and customary charges in a semi-private room
C) It pays a flat dollar amount per day of hospitalization, regardless of the actual charges incurred
D) Hospitalization coverage is not provided by Blue Cross policies
Q2) Which of the following is not typically included in a major medical insurance policy?
A) Large deductible
B) Participating provision
C) Large number of exclusions
D) High face amount
Q3) HMOs:
A) are the same as PPOs but cover only groups of individuals
B) collect a capitation payment for each insured and provide "comprehensive" health and preventive care
C) tend to be found mostly in rural areas
D) provide a reduced fee if the insured has zero claims during the preceding policy year
Q4) Distinguish between cost shifting and cost containment in health care.
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Page 20
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) Which of the following is/are advantages of tax-deferred income benefits? I.
Postponing tax payments allows interest to accrue on dollars owed to the government.
II. Deferral allows compound interest to also accumulate on a tax-deferred basis.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) 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
Q4) What are the rules to be considered a qualified plan?
Q5) Explain the difference between a PPO and an HMO.
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Chapter 20: Social Security
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Sample Questions
Q1) Which of the following groups would <u>not</u> be covered by Social Security?
A) Doctors in private practice
B) Professional athletes
C) Coal miners
D) Certain exempt state employees
Q2) Medicare covers all the following <u>except</u>:
A) 95% of the cost of all outpatient prescriptions
B) operating room costs
C) payment for doctor bills
D) outpatient therapy
Q3) Which of the following is not a characteristic of a public assistance program benefits?
A) Based on demonstrated need
B) Subject to change
C) Fully funded
D) Funded by general taxes
Q4) Medicare has three coverage parts; one part is mandatory, the other two are optional.
A)True
B)False
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Chapter 21: Unemployment and Workers Compensation Insurance
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Sample Questions
Q1) 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.
Q2) Unemployment benefits are usually available in which of the following situations?
A) Worker voluntarily quits to find a better job
B) Worker fired for theft
C) Worker is laid-off when employer becomes bankrupt
D) Worker is participating in a strike
Q3) What is the federal covered maximum wage for unemployment insurance taxation?
A) $700
B) $7,000
C) $70,000
D) $700,000
Q4) Explain how a worker can be disqualified for unemployment benefits.
Q5) List and explain briefly the purposes of the workers' compensation laws.
Page 23
Q6) Explain the economic significance for the existence of unemployment insurance.
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Chapter 22: Commercial Property Insurance
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Sample Questions
Q1) 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
Q2) Jana loans a leather jacket to Brenda. Brenda must return the jacket to Jana in one week. This arrangement is called a/an:
A) mortgage
B) agency rent
C) assignment
D) bailment
Q3) The CPP's building and personal property insurance form is designed to cover residential property for individuals.
A)True
B)False
Q4) What is the difference between a general average and a particular average in ocean marine insurance?
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Chapter 23: Commercial Liability Insurance
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Q1) No-fault insurance assumes that the defendant is always at fault, and is thus a form of strict liability insurance.
A)True
B)False
Q2) Libel committed by a business can result in a lawsuit that asks the business to pay:
A) personal injury damages
B) bodily injury damages
C) loss of consortium damages
D) dram shop benefits
Q3) Indhar suffers minor injuries when Monica negligently crashes her car into his. Monica is also slightly injured in the accident. Both of them have automobile liability policies in force. Under the no-fault liability system:
A) Indhar will be compensated by Monica's automobile liability insurer
B) Indhar will be compensated by his liability insurer, which will also compensate Monica
C) Indhar and Monica will each collect from the Federal Emergency Management Agency
D) each will collect from their own auto insurance policy
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