Risk Management and Insurance Exam
Bank
Course Introduction
Risk Management and Insurance explores the fundamental concepts and practices used to identify, assess, and mitigate risks facing individuals, businesses, and organizations. The course introduces students to the principles of risk assessment, methods for transferring or reducing risk, and the role of insurance as a key risk management tool. Topics include the structure and operation of insurance markets, types of insurance products (such as property, liability, life, and health insurance), policy analysis, underwriting, pricing, and claims settlement. Students will also examine strategies for effective risk control and evaluate how risk management decisions can contribute to organizational stability and financial security.
Recommended Textbook Principles of Risk Management and Insurance 13th Edition by George E. Rejda
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1397 Verified Questions
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Chapter 1: Risk and Its Treatment
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Sample Questions
Q1) Some members of Congress are concerned that if one or two large U.S. banks fail, it could lead to the collapse of the entire U.S. financial sector. This risk is called
A) objective risk.
B) systemic risk.
C) enterprise risk.
D) subjective risk.
Answer: B
Q2) Jim and Paula Franklin started a dry cleaning business. The business may be successful or it may fail. The type of risk that is present when either a profit or loss could occur is called
A) pure risk.
B) subjective risk.
C) nondiversifiable risk.
D) speculative risk.
Answer: D
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Chapter 2: Insurance and Risk
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Sample Questions
Q1) ABC Appliance offers a warranty requiring an annual fee. The warranty may be purchased at the time of sale or at any time within the first year after the appliance was purchased. The warranty fee after the date of purchase is twice the time-of-purchase fee. When asked why the fee was higher after the date of purchase, ABC's president said, "Buying a warranty is voluntary. We've noted that those who buy the warranty after the purchase date have a greater need for service." Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers?
A) excessive premiums
B) reduced claims
C) bad investments
D) adverse selection
Answer: D
Q2) The tendency for unhealthy people to seek life or health insurance at standard rates is an example of
A) moral hazard.
B) fundamental risk.
C) attitudinal hazard.
D) adverse selection.
Answer: D
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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 source of information a risk manager could use to help identify pure loss exposures?
A) commodity prices
B) physical inspections
C) currency exchange rates
D) interest rate movements
Answer: B
Q2) Which of the following statements about a personal risk management program is (are) true?
I.Insurance and retention are the only techniques used to handle potential losses.
II.The steps in a personal risk management process are the same steps used by businesses.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
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Chapter 4: Enterprise Risk Management and Related Topics
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Sample Questions
Q1) A comprehensive risk management program that addresses an organization's pure risks, speculative risks, strategic risks, and operational risks is called a(n)
A) risk management information system.
B) financial risk management plan.
C) speculative risk management plan.
D) enterprise risk management plan.
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) A property and casualty insurer in which the salesperson is an employee of the insurer, not an independent contractor, is called a
A) fraternal insurance company.
B) risk retention group.
C) direct writer.
D) captive insurance company.
Q2) Which of the following statements about Lloyds of London (are) true?
I.The majority of the business underwritten by Lloyds of Londo? Is for unusual risks, such as valuable race horses and professional athletes.
II.Lloyds of Londo? Is a group of underwriters who underwrit? Insurance, not a? Insurance company.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 6: Insurance Company Operations
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Sample Questions
Q1) Functions of an insurance company's legal department include which of the following?
I.Lobbying for legislation favorable to the insurance industry.
II.Drafting policy provisions.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Most insurance companies require their marketing representatives to submit an evaluation of the prospective insured. This important source of underwriting information is called the
A) application.
B) agent's report.
C) inspection report.
D) physical inspection.
Q3) Insurers obtain data that can be used to determine rates from A) pricing pools.
B) insurance advisory organizations.
C) banks.
D) reciprocal exchanges.
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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 is (are) true concerning investments of property and casualty insurers and life insurers?
I.Property and casualty insurance companies place greater emphasis on liquidity than do life insurers.
II.Life insurance company investments are, on average, of longer duration than property and casualty insurance company investments.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Page 9
Chapter 8: Government Regulation of Insurance
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Sample Questions
Q1) One method of ensuring the solvency of insurers is a periodic review, every three to five years, of insurers that operate on a multistate basis. This review is coordinated by the NAIC. This review is called a(n)
A) annual report.
B) early warning system.
C) field examination.
D) inspection report.
Q2) The purpose of the Financial Analysis Solvency Tracking (FAST) system employed by the NAIC is to
A) prioritize insurance companies for additional regulatory action.
B) quicken the approval of rates in prior approval states.
C) speed-up the claims settlement process for insurers charged with delaying claims payments.
D) quickly address market conduct complaints by consumers.
Q3) Which of the following is a method used to help ensure the solvency of insurers?
A) commercial lines deregulation
B) risk-based capital standards
C) use of credit-based insurance scores
D) use of no filing required rating laws
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Page 10
Chapter 9: Fundamental Legal Principles
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Sample Questions
Q1) 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
Q2) What is the practical effect of an insurance contract being a contract of adhesion?
A) The insurer can refuse to pay claims if the insured has not complied with all policy provisions.
B) The insured can assign the policy only with the insurer's consent.
C) The insurer can sue the insured for failure to pay any premiums.
D) The policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties.
Q3) Which of the following is a fundamental purpose of the principle of indemnity?
A) to reduce moral hazard
B) to minimize physical hazards
C) to settle property insurance losses on a replacement cost basis
D) to require deductibles in all property insurance policies
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11
Chapter 10: Analysis of Insurance Contracts
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Sample Questions
Q1) Laura's medical insurance policy includes a $500 deductible. Laura is required to pay 20 percent of covered expenses in excess of the deductible, and her insurer will pay 80 percent of covered expenses in excess of the deductible. Laura was hospitalized and her covered medical expenses were $10,500. How much of the $10,500 will be paid by the insurer?
A) $7,500
B) $7,900
C) $8,000
D) $10,000
Q2) David owns a commercial building with a replacement cost of $4 million. The building is insured on a replacement cost basis for $2.4 million under a fire insurance policy that has an 80 percent coinsurance clause. How much will David collect if the building sustains a covered fire loss with a replacement cost of $80,000?
A) $50,000
B) $60,000
C) $66,667
D) $80,000
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Page 12
Chapter 11: Life Insurance
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Sample Questions
Q1) Which of the following statements about yearly renewable term insurance is (are) true?
I.It requires evidence of insurability for renewal.
II.It is most appropriate when an insured needs lifetime protection.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements is (are) true regarding the results of the 2014 study by the Life Insurance Market Research Association (LIMRA) on the adequacy of life insurance owned by households in the United States?
I.The average household is adequately insured against the risk of premature death.
II.The average household is significantly underinsured against the risk of premature death.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Page 13
Chapter 12: Life Insurance Contractual Provisions
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Sample Questions
Q1) Amy purchased a life insurance policy with the intent of committing suicide to pay all the debts that were burdening her family. If she commits suicide 9 months after the policy is purchased, and the insurer is able to prove that her death was a suicide, how much will be paid by the insurance company?
A) nothing, because the policy is void
B) the premiums paid for the policy
C) the policy's cash value
D) the face value of the policy
Q2) Cal purchased a whole life policy 6 years ago. The policy requires annual premium payments. Cal forgot to pay the premium that was due 2 weeks ago. He wonders if his life insurance is still in force. Which life insurance policy provision is designed to keep the policy in force for a short time even if the premium payment is late?
A) waiting period
B) grace period
C) guaranteed purchase option
D) reinstatement clause
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Chapter 13: Buying Life Insurance
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Sample Questions
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) The average annual rate of return on a cash-value policy if it is held a specified number of years is called the policy's
A) net present value.
B) interest-adjusted cost.
C) benchmark cost.
D) Linton yield.
Q3) A factor that can be ignored when determining the cost of life insurance is A) time value of money.
B) premiums paid.
C) settlement options.
D) dividends.
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Chapter 14: Annuities and Individual Retirement Accounts
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Sample Questions
Q1) Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). If Juanita is alive 20 years later, how much of the $6,000 received during the year is taxable?
A) nothing
B) $3,000
C) $4,500
D) $6,000
Q2) Rita is 66 years old. She earned $20,000 this year working part-time at a store and her modified adjusted gross income was $28,000. Rita is considering making a $3,000 contribution to her traditional IRA. Which of the following statements is true regarding this contribution?
A) Rita cannot contribute to her traditional IRA because she is over age 65.
B) Rita can make a $3,000 contribution to her traditional IRA, but it is not tax deductible. C) Rita can make a $3,000 contribution to her traditional IRA, but it is only partially tax deductible.
D) Rita can make a $3,000 contribution to her traditional IRA, and it is fully tax deductible.
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Page 16
Chapter 15: Health-Care Reform; Individual Health Insurance Coverages
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Sample Questions
Q1) Which of the following statements about eligibility requirements for qualified Health Savings Accounts (HSAs) is (are) true?
I.Only individuals who are eligible for Medicare benefits can establish a qualified HSA.
II.Applicants must be covered by a high deductible health plan and not be covered by any other comprehensive health plan to establish a qualified HSA.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements concerning individual medical expense insurance is (are) correct?
I.Once the deductible is satisfied, no additional deductible is payable during the calendar year.
II.Family deductibles are substantially higher than individual deductibles.
A) I only
B) II only
C) both I and II
D) neither I nor II
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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 about HMO managed care plans is (are) true?
I.There is an emphasis on controlling costs.
II.They provide narrow, limited, medical services to members.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Nancy's employer provides an interesting employee benefit plan. Each employee is given 250 employee benefit credits to spend. A wide array of benefits is available, and the employee uses benefit credits to select the benefits that he or she wants. This type of employee benefit plan is called a(n)
A) defined benefit plan.
B) cafeteria plan.
C) employee selection plan.
D) contributory plan.
Q3) Advantages of cafeteria plans include all of the following EXCEPT
A) simplicity of benefit administration.
B) employees can select benefits that best match their needs.
C) reduced taxes for employees.
D) greater employer control over increasing benefit costs.
Page 18
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Chapter 17: Employee Benefits: Retirement Plans
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Q1) Which of the following statements is (are) true with respect to SIMPLE retirement plans?
I.Only large employers can start a SIMPLE plan, provided the employer does not maintain another qualified plan.
II.SIMPLE plans are exempt from most nondiscrimination and administrative rules that apply to qualified plans.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Lynn works for a state university. In addition to the university's regular retirement plan, Lynn participates in another retirement savings plan. She elected to have $5,000 of her salary withheld and contributed to a tax-sheltered annuity with an insurer. The type of plan that Lynn established is called a
A) SIMPLE plan.
B) 403(b) plan.
C) defined benefit plan.
D) Keogh plan.
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Chapter 18: Social Insurance
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Q1) Which of the following statements about the financing of the Social Security program is (are) true?
I.Although the self-employed pay an OASDI tax rate that is twice the employee rate, they are allowed certain deductions that reduce the effective tax rate.
II.The earnings base on which OASDI taxes are paid increases annually based on changes in average wages in the national economy.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about unemployment insurance benefits is true?
A) Benefits are a flat amount regardless of a worker's previous wages.
B) Because of federal legislation, the maximum benefit is the same in all states.
C) Most states pay regular benefits for a maximum duration of 26 weeks.
D) Under the extended benefits program, the federal government continues benefit payments for up to 3 years for workers who have exhausted their regular benefits.
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Chapter 19: The Liability Risk
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Sample Questions
Q1) A homeowner was repairing the deck on the back of his home. He left power tools on the deck when he quit working for the day. A neighbor's child saw the power tools. He came on to the deck, and started to play with a power saw. He cut off two of his fingers. A property owner may be held liable for creating a condition that entices children to enter the property where they are injured under the doctrine of A) sovereign immunity.
B) attractive nuisance.
C) family purpose.
D) respondeat superior.
Q2) All of the following are categories of torts EXCEPT
A) intentional torts.
B) breach of contract.
C) strict liability.
D) negligence.
Q3) All of the following are examples of tort reform proposals EXCEPT
A) modifying the collateral source rule.
B) eliminating caps on noneconomic damages.
C) regulation of attorney fees.
D) imposing penalties to deter frivolous lawsuits.
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Page 21
Chapter 20: Auto Insurance
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Sample Questions
Q1) Patricia purchased a Personal Auto Policy (PAP). Her car was rear-ended by a driver who fled the scene. Patricia suffered whiplash, migraine headaches, and she was unable to work. Which of the following coverages will cover her lost work earnings?
A) medical payments
B) uninsured motorists
C) underinsured motorists
D) bodily injury liability
Q2) Gary purchased a Personal Auto Policy (PAP) that included collision coverage. Gary lost control of his vehicle on an icy road. He slid across the center line into oncoming traffic. Another vehicle hit his car, causing severe damage to it. Ignoring any deductible, what is the insurer's liability for damage to Gary's car?
A) the greater of the actual cash value or the amount necessary to repair or replace the vehicle
B) the replacement cost of the vehicle
C) the lesser of the actual cash value or the amount necessary to repair or replace the vehicle
D) the original purchase price of the vehicle
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Chapter 21: Auto Insurance (continued)
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Sample Questions
Q1) Some insurers are experimenting with the use of an electronic device that can be installed in a vehicle to track driving behavior. The insurers then use the information to help determine the appropriate auto insurance premium to charge. Such devices are called
A) data recorders.
B) radar detectors.
C) original equipment manufacturer parts.
D) thresholds
Q2) A number of benefits are payable under no-fault plans. Under one provision, benefits are paid for tasks normally performed by the insured, including such things as lawn care, housework, and home repairs. These tasks are called
A) home health care services.
B) hospice services.
C) activities of daily living.
D) essential services expenses.
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Chapter 22: Homeowners Insurance, Section I
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Sample Questions
Q1) Which of the following statements about the Homeowners 6 (unit-owners form) policy is true?
A) It includes personal liability coverage.
B) It covers personal property on an open-perils basis.
C) It covers the dwelling on an open-perils basis.
D) It is designed for tenants who rent an apartment or a home.
Q2) Which of the following types of water damage is covered under an unendorsed Homeowners 3 policy?
A) damage from a flood caused by torrential rain
B) damage from water backing up through a drain
C) damage from water below the surface of the ground that seeps into a basement
D) damage from water that overflows from a malfunctioning washing machine
Q3) Glenda insured her home for its full replacement cost under an unendorsed Homeowners 3 policy. Which of the following statements is true?
A) The dwelling and other structures are covered on a named-perils basis.
B) Losses to personal property are settled on a replacement cost basis.
C) The personal property is covered on an open-perils basis.
D) Losses to the dwelling and other structures are settled on a replacement cost basis.
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24
Chapter 23: Homeowners Insurance, Section II
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Q1) Which of the following statements about the additional coverages included in Section II of the homeowners policy is true?
A) Damage to property of others is covered only if the insured is legally liable.
B) Damage to property arising out of a business engaged in by the insured is covered.
C) Interest that accrues on a judgment after the judgment is awarded but before the judgment is paid is covered under claims expenses.
D) First aid expenses incurred by the insured for a bodily injury covered under the policy are not covered.
Q2) Which of the following statements about an earthquake endorsement for a homeowners policy is (are) true?
I.The endorsement also covers landslides and volcanic eruptions.
II.The coverage for earthquakes is written without a deductible.
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 types of property covered under the Personal Articles Floater is true?
A) Golfer's equipment is covered only in the United States.
B) Furs are covered on a blanket basis without the necessity to schedule individual items.
C) A higher premium must be paid to insure musical instruments if they are played for pay.
D) Coverage for silverware and goldware is not available under the Personal Articles Floater.
Q2) Valerie's home does not qualify for coverage under a standard homeowners policy. Valerie would like to have "open-perils" (all-risks) coverage on her dwelling and named-perils coverage on her personal property. Which of the following policies should Valerie purchase?
A) Dwelling Property 1-Basic Form
B) Dwelling Property 2- Broad Form
C) Dwelling Property 3-Special Form
D) All of these policies provide "open perils" coverage on the dwelling and named-perils coverage on personal property.
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Page 26
Chapter 25: Commercial Property Insurance
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Sample Questions
Q1) Rick is risk manager of Herald News, a daily newspaper in a competitive market. Rick wants to make sure that if Herald's printing facility is damaged or destroyed, the paper will continue to be published. What type of insurance can Rick purchase to cover the added cost of continuing to print the paper after a physical damage loss has occurred?
A) contingent business income coverage
B) product liability insurance
C) business income from dependent properties coverage
D) extra expense coverage
Q2) Which of the following types of forms is used to insure fluctuations in business personal property, such as inventory and finished goods?
A) accounts receivable coverage form
B) a value reporting form
C) difference in conditions insurance
D) business income insurance
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Chapter 26: Commercial Liability Insurance
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Sample Questions
Q1) Which of the following losses is generally covered under a commercial umbrella policy?
A) liability arising out of workers compensation laws
B) liability arising out of pollution
C) liability arising out of use of a business auto
D) the cost of recalling defective products
Q2) Which of the following statements about workers compensation insurance is (are) true?
I.Under the workers compensation part of the policy, the insurer agrees to pay the benefits required by the workers compensation law of any state listed in the policy declarations.
II.The employers liability part of the policy provides workers compensation benefits when employees are working in states other than those listed in the policy declarations.
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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Sample Questions
Q1) Two tellers of a Tenth National Bank branch colluded to embezzle $40,000 over a six-month period. State bank examiners detected the embezzlement during a routine bank examination. Tenth National purchased a financial institution bond. Under which of the following insuring agreements is this loss covered?
A) Insuring Agreement A-Fidelity
B) Insuring Agreement B-On Premises
C) Insuring Agreement C-In Transit
D) Insuring Agreement D-Forgery or Alteration
Q2) Which of the following statements is (are) true with regard to the ISO commercial crime coverage forms?
I.The discovery version only covers losses which occur during the policy period.
II.The loss-sustained version covers losses which occur during the policy period and the loss is discovered during the policy period or within one year after the policy expires.
A) I only
B) II only
C) both I and II
D) neither I nor II
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