Risk Management Test Bank
Course Introduction
Risk Management is an interdisciplinary course that introduces students to the fundamental concepts, tools, and techniques used to identify, assess, and manage risks in various organizational contexts. The course covers the risk management process, including risk identification, evaluation, mitigation strategies, and monitoring. Students explore both qualitative and quantitative methods for risk assessment, learn about regulatory and ethical considerations, and examine real-world case studies from sectors such as finance, healthcare, engineering, and project management. By the end of the course, students will develop critical thinking skills and practical knowledge to implement effective risk management strategies, supporting informed decision-making and organizational resilience.
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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Sample Questions
Q1) Which of the following statements about hedging is (are) true?
I.Hedging is a form of risk transfer.
II.Hedging is used to address the risk of unfavorable price fluctuations.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
Q2) All of the following statements about risk retention are true EXCEPT
A) It may be used intentionally if commercial insurance is unavailable.
B) It may be used passively because of ignorance.
C) Its use is most appropriate for low-frequency, high-severity types of risks.
D) Its use results in cost savings if losses are less than the cost of insurance.
Answer: C
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Chapter 2: Insurance and Risk
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Q1) Why is a large number of exposure units generally required before a pure risk is insurable?
A) It prevents the insurer from losing money.
B) It eliminates intentional losses.
C) It minimizes moral hazard.
D) It enables the insurer to predict losses more accurately.
Answer: D
Q2) Reasons why market, financial, and production risks are often uninsurable include which of the following?
I.The potential to produce a catastrophic loss is great.
II.The chance of loss cannot be accurately estimated.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
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Chapter 3: Introduction to Risk Management
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Sample Questions
Q1) Brenda identified all of the pure loss exposures her family faces. Then she analyzed these loss exposures, developed a plan to treat these risks, and implemented the plan. The process Brenda conducted is called
A) personal insurance programming.
B) personal estate planning.
C) personal financial planning.
D) personal risk management.
Answer: D
Q2) Morris Company self-insures its workers compensation loss exposure. The risk manager of Morris Company is concerned about the possible impact of a single catastrophic claim. She decided to set a retention limit of $500,000 per-claim, and to purchase insurance that will be begin to pay once Morris Company has paid $500,000 on a single claim. The insurance the risk manager purchased is called A) captive insurance.
B) excess insurance.
C) primary insurance.
D) umbrella insurance.
Answer: B
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Chapter 4: Enterprise Risk Management and Related Topics
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Sample Questions
Q1) Uncertainty pertaining to the organization's goals and objectives and the organization's strengths, weaknesses, opportunities, and threats is called
A) operational risk.
B) strategic risk.
C) subjective risk.
D) pure risk.
Q2) Terrorists attacked the World Trade Center on September 11, 2001. The attack simultaneously created large losses for life insurers, property insurers, workers compensation insurers, health insurers, and liability insurers. What name is given to an event that simultaneously creates large losses in several lines of insurance?
A) speculative loss
B) clash loss
C) retroactive loss
D) consequential loss
Q3) The first step in the enterprise risk management process is
A) risk analysis.
B) implementing and monitoring the program.
C) risk identification.
D) selection of risk treatment measures.
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Page 6
Chapter 5: Types of Insurers and Marketing Systems
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Q1) ABC Term Life Insurance Company uses an interesting marketing system-it has no agents. Instead, the company markets its coverages through television and radio ads, newspaper inserts, and the Internet. The type of marketing system that ABC Term Life Insurance Company uses is called the
A) mass merchandising system.
B) mixed marketing system.
C) direct response system.
D) worksite marketing system.
Q2) A plan for selling individually underwritten property and liability insurance to members of a group is called
A) direct response.
B) multiple distribution.
C) niche marketing.
D) mass merchandising.
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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Sample Questions
Q1) Ross studied engineering in college. After graduation, he went to work for an insurance company. Ross visits properties insured by his company. He conducts inspections and makes recommendations about alarm systems, sprinkler systems, and building construction. In what functional area does Ross work?
A) underwriting
B) loss control
C) information systems
D) claims adjusting
Q2) Common sources of underwriting information for life and health insurance include all of the following EXCEPT
A) the application.
B) a physical examination.
C) the Medical Information Bureau.
D) the applicant's income tax return.
Q3) The primary function of an actuary is to
A) adjust claims.
B) determine premium rates.
C) negotiate reinsurance treaties.
D) invest insurance company assets.
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Page 8
Chapter 7: Financial Operations of Insurers
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Q1) Under one method of estimating a loss reserve, the reserve is based on life expectancy, duration of disability, and similar factors. This method of estimating loss reserves is called the
A) judgment method.
B) tabular value method.
C) loss ratio method.
D) average value method.
Q2) Under one type of merit rating, the class or manual rate is adjusted upward or downward based on past loss history. This type of merit rating is called
A) schedule rating.
B) judgment rating.
C) experience rating.
D) retrospective rating.
Q3) Which of the following statements about judgment rating is true?
A) It involves the manual rating of exposures.
B) It is used when the loss exposures are so diverse that a class rate cannot be calculated.
C) It is a form of experience rating.
D) It is only used when credible loss statistics are available.
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Page 9
Chapter 8: Government Regulation of Insurance
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Sample Questions
Q1) The risk-based capital requirements for life insurers are based on a formula that considers four types of risk. One risk reflects whether the insurer will have enough surplus if claims are higher than expected. This risk is called
A) asset risk.
B) insurance risk.
C) interest rate risk.
D) business risk.
Q2) The risk-based capital requirements for life insurers are based on a formula that considers four types of risk. One risk reflects a range of uncertainties that life insurers face including such things as bad management decisions and guaranty fund assessments. This risk is called
A) asset risk.
B) insurance risk.
C) interest rate risk.
D) business risk.
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10
Chapter 9: Fundamental Legal Principles
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Sample Questions
Q1) The general rule that ambiguity in insurance contracts is construed against the insurer is reinforced by an important legal principle. This principle states the insured is entitled to coverage under a policy that he or she would assume the policy would provide, and exclusions must be conspicuous, plain, and clear. This principle is known as
A) the principle of utmost good faith.
B) the principle of reasonable expectations.
C) the principle of subrogation.
D) the principle of indemnity.
Q2) A false material statement made by an applicant for insurance is an example of A) concealment.
B) breach of warranty.
C) lack of offer and acceptance.
D) misrepresentation.
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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Sample Questions
Q1) As an alternative to coinsurance, rate discounts can be given as the amount of insurance to value increases. This alternative is called
A) graded rates.
B) agreed value coverage.
C) retrospective rating.
D) manual rating.
Q2) Janet hit a wall causing a large dent in the fender of her car. She was busy at work and delayed reporting the damage to her insurer for 9 months. When she finally reported the claim, her insurer denied payment, stating, "Although such a loss is usually covered, you are required under the terms of the contract to provide prompt notification in case of loss." The prompt notification requirement is an example of a(n)
A) declaration.
B) definition.
C) insuring agreement.
D) condition.
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Chapter 11: Life Insurance
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Sample Questions
Q1) Which of the following statements about variable universal life insurance is (are) true?
I.Variable universal life insurance has fixed premium payments.
II.Variable universal life insurance allows the policyowner to decide where the premiums are invested.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) The human life value is defined as the
A) present value of a deceased breadwinner's future gross income.
B) future value of a deceased breadwinner's past earnings.
C) present value of the family's share of a deceased breadwinner's future earnings.
D) future value of the family's share of a deceased breadwinner's future earnings.
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13
Chapter 12: Life Insurance Contractual Provisions
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Q1) A life insurance contractual provision protects the beneficiary by not permitting the insurer to introduce outside information to deny payment of the claim. Such outside information might be notes that the agent took while the insured completed the application. This contractual provision is the
A) entire contract clause.
B) incontestable clause.
C) reinstatement clause.
D) change-of-plan provision.
Q2) Which of the following statements about life insurance policy loans is (are) true?
I.Interest is not required on a life insurance policy loan, as the policyholder is borrowing his or her own money.
II.If there is an outstanding loan when the insured dies, payment to the beneficiary is reduced by the amount of the loan.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 13: Buying Life Insurance
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Sample Questions
Q1) Actuaries at Term Life Insurance Company calculated the net single premium per thousand for a five-year term policy for a man age 32 to be $5.04. To calculate the net level premium for this policy, the net single premium should be
A) divided by 5.
B) divided by the future value life annuity due factor for $1 for five years.
C) divided by the present value life annuity due factor for $1 for five years.
D) divided by the present value ordinary life annuity factor for $1 for five years.
Q2) The gross premium for life insurance is equal to
A) the present value of the future death claim plus an expense loading.
B) the present value of the future death claim less the sum of the premiums paid when death occurs.
C) the present value of the future death claim less the present value of the expected dividends.
D) the net premium less the expense loading.
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Chapter 14: Annuities and Individual Retirement Accounts
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Q1) Which statement is true regarding IRA distributions?
A) The minimum distribution rules apply to Roth IRAs, but not to traditional IRAs.
B) Distributions from a Roth IRA are taxed at the individual's marginal tax rate.
C) The IRA penalty tax applies to all traditional IRA distributions before age 59.5 with no exceptions.
D) Unless a life annuity is issued, a retiree may still be alive when the IRA account is exhausted.
Q2) Which of the following statements is (are) true with respect to an equity-indexed annuity?
I.The maximum percentage gain is usually capped.
II.There is no downside protection against loss of principal if the annuity is held to term.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 15: Health-Care Reform; Individual Health Insurance Coverages
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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) All of the following statements about the tax treatment of Health Savings Accounts (HSAs) are true EXCEPT
A) Contributions to a qualified HSA are tax deductible.
B) Distributions from a qualified HSA used to fund medical expenses are taxable income.
C) Investment income in a qualified HSA accumulates income tax free.
D) Distributions from a qualified HSA prior to age 65 for nonmedical purposes are subject to a 10 percent penalty tax.
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Page 17
Chapter 16: Employee Benefits: Group Life and Health Insurance
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Sample Questions
Q1) High deductible group health insurance plans have all of the following characteristics EXCEPT
A) health savings accounts or health reimbursement arrangements.
B) high dollar deductibles.
C) low coverage limits.
D) coinsurance.
Q2) Under one type of HMO, the physicians are employees of the HMO and are paid a salary and sometimes an incentive bonus to hold down costs. This type of HMO is called a(n)
A) individual practice association (IPA).
B) staff model.
C) group model.
D) network model.
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) Winslow Corporation has many long-term employees. The company has never had a pension plan. Recently, a new management team was hired. The new president said he would like to start a pension plan through which he could reward the long-term service provided by many employees. Which of the following types of plans should Winslow Corporation adopt?
A) section 403(b) plan
B) section 401(k) plan
C) money-purchase plan
D) defined benefit plan
Q2) Which of the following statements about Section 401(k) plans is true?
A) Elective salary deferrals to these plans are free of federal income taxation until the funds are actually withdrawn.
B) These plans are exempt from rules that prevent discrimination in favor of highly compensated employees.
C) There is no limit on the actual percentage of salary that can be deferred by highly compensated employees under a qualified plan.
D) If an employee takes the funds made available to him or her in cash, the money received is not taxable.
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Chapter 18: Social Insurance
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Q1) Which of the following statements about the financial status of Medicare Part A is (are) true?
I.Part A has serious financial problems.
II. Reforms instituted by Congress have reduced total Part A expenditures in recent years.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following is a current problem with workers compensation programs?
A) declining involvement of lawyers in workers compensation claims
B) exclusion of deaths and injuries attributable to terrorism
C) exclusion of benefits for occupational illness
D) overuse of opiate prescription drugs in workers compensation.
Q3) Which of the following is a reason that social insurance programs exist?
A) to compete with private insurance programs
B) to provide a base of economic security
C) to provide needs-tested benefits to low-income individuals
D) to reduce involvement of the government in insurance markets
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20
Chapter 19: The Liability Risk
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Q1) A defendant who is only slightly liable may be required to pay the full amount of damages under which of the following?
A) the joint and several liability rule
B) the collateral source rule
C) arbitration
D) res ipsa loquitor
Q2) Unmanned aircraft systems are gaining in popularity. These systems are creating new liability exposures. Unmanned aircraft systems are also known as A) rockets.
B) hovercraft.
C) ultralights.
D) drones.
Q3) All of the following are proposed solutions to the medical malpractice problem EXCEPT
A) shortening the statute of limitations for filing lawsuits.
B) eliminating arbitration panels to resolve disputes.
C) placing limitations on contingent fees charged by attorneys.
D) placing limitations on damage awards.
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Chapter 20: Auto Insurance
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Questions
Q1) Sarah purchased a Personal Auto Policy with liability limits of 50/100/25. Sarah ran a stop sign and hit a van. The van sustained $15,000 in damages. The following bodily injuries were suffered by passengers in the van: Passenger #1, $15,000; Passenger #2, $60,000; and Passenger #3, $10,000. Sarah sustained $5,000 in medical expenses, and Sarah's car sustained $10,000 in damages. How much will Sarah's insurer pay under Part A: Liability Coverage?
A) $90,000
B) $100,000
C) $115,000
D) $125,000
Q2) Which of the following situations would be covered by the liability section of an unendorsed PAP if the insured is legally liable?
A) The insured injures a pedestrian while operating a friend's new motorcycle.
B) The insured backs into and damages the garage door of his rented house.
C) The insured intentionally runs into another motorist's car after the driver cut in front of him.
D) The insured damages a parked car while driving a dump truck for his employer.
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Page 22
Chapter 21: Auto Insurance (continued)
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Q1) Which of the following statements about joint underwriting associations for insuring high-risk drivers is (are) true?
I.Underwriting losses are proportionately shared by all auto insurers based on premiums written in the state.
II.Each company participating in a joint underwriting association sets it own rates.
A) I only
B) II only
C) both I and II
D) neither I nor II
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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23
Chapter 22: Homeowners Insurance, Section I
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Q1) Which of the following is (are) included among the duties of an insured following a loss covered under the Homeowners 3 policy?
I.To file a proof of loss within a specified time period after the insurer's request
II.To prepare an inventory of damaged personal property
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) 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 statements regarding Section II coverage under the Homeowners 3 policy is true?
A) Medical payments to others are covered regardless of whether the insured is legally liable.
B) Legal defense costs incurred by the insurer to defend the insured reduce the per-occurrence limit of liability available.
C) The insurer is not required to defend the insured against a groundless, false, or fraudulent lawsuit.
D) Any amount paid under medical payments coverage reduces the personal liability limit available for the same claim.
Q2) Liability arising out of which of the following is covered under the personal injury endorsement to the homeowners policy?
A) property damage liability
B) false arrest
C) bodily injury
D) business liability
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25
Chapter 24: Other Property and Liability Insurance Coverages
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Q1) Which of the following statements about federal flood insurance is true?
A) It is available even if property has been previously flooded.
B) It is unavailable in high-risk flood areas.
C) It is available only for residences, not for businesses.
D) Waiting periods are not used in the federal flood insurance program.
Q2) Which of the following coverages are provided by an unendorsed ISO Dwelling Program form?
I.Theft of personal property
II.Named-perils coverage for personal property
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) All of the following are considered floods under the federal flood insurance program EXCEPT
A) the overflow of tidal waters.
B) the accumulation of surface water after a heavy rain.
C) a mudslide caused by an accumulation of water after a heavy rain.
D) the discharge of water from a home appliance, such as a water heater or washing machine.
Page 26
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Chapter 25: Commercial Property Insurance
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Q1) Which of the following statements about the causes-of-loss special form of the ISO commercial package policy is (are) true?
I.The causes-of-loss special form provides open perils coverage and insures against direct physical loss.
II.The causes-of-loss special form excludes loss caused by earthquake.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) There are a number of implied warranties in ocean marine insurance. One implied warranty is that the vessel is properly constructed and maintained, and that it is properly equipped for the voyage to be undertaken. This implied warranty is the warranty of A) seaworthiness.
B) barratry.
C) no deviation from planned course.
D) legal purpose.
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Chapter 26: Commercial Liability Insurance
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Q1) Which of the following is (are) covered under an unendorsed Commercial General Liability Policy?
I.False arrest of a customer wrongly accused of shoplifting
II.Publication of material that violates an individual's right to privacy
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Jennifer was just asked to serve on the Board of an insurance company. Jennifer is concerned that if the company is mismanaged, the policyowners, stockholders, and employees might sue the management team. What type of liability insurance will protect Jennifer from such claims if she accepts a position on the insurance company's Board?
A) commercial general liability insurance
B) employment-related practices liability insurance
C) workers compensation and employer liability insurance
D) directors and officers liability insurance
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Chapter 27: Crime Insurance and Surety Bonds
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Q1) A burglar took some blank checks during a break-in at XYZ Company. He was careful to make sure that the theft would be difficult to discover. Three months later, he wrote himself a check for $20,000 and signed the company treasurer's name on the check. After the check was cashed, the loss was discovered. Which commercial crime coverage form would cover this loss?
A) Inside the Premises-Theft of Money and Securities
B) Money Orders and Counterfeit Currency
C) Forgery or Alteration
D) Outside the Premises
Q2) XYZ Insurance Company markets a wide range of coverages. One type of coverage provides monetary compensation if a bonded party fails to perform certain acts. This coverage is called
A) property insurance.
B) liability insurance.
C) a fidelity bond.
D) a surety bond.
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