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Question 1 of 10
1. Question
What is this type of probability, which refers to the long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in the underlying conditions?
Correct
Objective probabilities can be determined in two ways. First, they can be determined by deductive reasoning. These probabilities are called priori probabilities. Second, objective probabilities can be determined by inductive reasoning rather than by deduction.
Incorrect
Objective probabilities can be determined in two ways. First, they can be determined by deductive reasoning. These probabilities are called priori probabilities. Second, objective probabilities can be determined by inductive reasoning rather than by deduction.
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Question 2 of 10
2. Question
Diversifiable risk is a risk that affects only individuals or small groups and not the entire economy. Which of the following scenarios can be classified as a diversifiable risk?
I. Car thefts
II. Rapid inflation
III. Hurricanes
IV. RobberiesCorrect
Diversifiable risk is a risk that can be reduced or eliminated by diversification. Examples include car thefts, robberies, and dwelling fires. Only individuals and business firms that experience such losses are affected, not the entire economy.
Incorrect
Diversifiable risk is a risk that can be reduced or eliminated by diversification. Examples include car thefts, robberies, and dwelling fires. Only individuals and business firms that experience such losses are affected, not the entire economy.
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Question 3 of 10
3. Question
Persons owning a property are exposed to property risks-the risk of having property damaged or destroyed from numerous cases. What are the major types of loss associated with the destruction or theft of property?
I. Direct loss
II. Partial loss
III. Consequential loss
IV. Substantial lossCorrect
There are two major types of loss associated with the destruction or theft of property:
(1) A direct loss is defined as a financial loss that results from the physical damage, destruction, or theft of the property.
(2) An indirect loss or consequential loss is a financial loss that results indirectly from the occurrence of direct physical damage or theft loss.Incorrect
There are two major types of loss associated with the destruction or theft of property:
(1) A direct loss is defined as a financial loss that results from the physical damage, destruction, or theft of the property.
(2) An indirect loss or consequential loss is a financial loss that results indirectly from the occurrence of direct physical damage or theft loss. -
Question 4 of 10
4. Question
Loss reduction is a risk control technique, which is defined as a strict loss prevention effort that can reduce the frequency of losses. Which of the following scenarios can be considered as a loss reduction technique?
I. A department store can install a sprinkler system so that a fire will be promptly extinguished, thereby reducing the severity of loss
II. Auto accidents can be reduced if motorists take a safe-driving course and drive defensively
III. A manufacturer may store finished goods in two warehouses in different cities. If one warehouse is damaged or destroyed by a fire, tornado, or other peril, the finished goods in the other warehouse are unharmed
IV. A community warning system can reduce the number of injuries and deaths from an approaching tornadoCorrect
Other examples of loss reduction technique include the following:
(1) A plant can be constructed with fire-resistant materials to minimize fire damage.
(2) Fire doors and firewalls can be used to prevent the fire from spreading.Incorrect
Other examples of loss reduction technique include the following:
(1) A plant can be constructed with fire-resistant materials to minimize fire damage.
(2) Fire doors and firewalls can be used to prevent the fire from spreading. -
Question 5 of 10
5. Question
What is this risk financing technique, which is defined as a special form of planned retention by which part or all of a given loss exposure is retained by the firm?
Correct
Another name for self-insurance is self-funding, which expresses more clearly the idea that losses are funded and paid for by the firm. For example, a large corporation may self-insure or fund part or all of the group health insurance benefits paid to employees.
Incorrect
Another name for self-insurance is self-funding, which expresses more clearly the idea that losses are funded and paid for by the firm. For example, a large corporation may self-insure or fund part or all of the group health insurance benefits paid to employees.
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Question 6 of 10
6. Question
Transfer of risk by contracts is another technique for managing risk, wherein undesirable risks can be transferred by contracts. Which of the following scenarios can be considered as a transfer of risk by contracts?
I. If a firm is a sole proprietorship, the owner’s assets can be attached by creditors for the satisfaction of debts. If a firm incorporates, personal assets can not be attached by creditors for payment of the firm’s debts. In essence, by incorporation, the liability of the stockholders is limited, and the risk of the firm having insufficient assets to pay business debts is shifted to the creditors.
II. The risk of defective stereo can be transferred to the retailer by purchasing a service contract, which makes the retailer responsible for all repair after the warranty expires.
III. The risk of a rent increase can be transferred to the landlord by a long-term lease.
IV. The portfolio manager of a pension fund may hold a substantial position in long-term U.S. treasury bonds. If interest rates rise, the value of the treasury bonds will decline. To hedge that risk, the portfolio manager can sell treasury bond futures.Correct
Other examples of transfer of risk by contracts include the following:
(1) The risk of a price increase in construction costs can be transferred to the builder by having a guaranteed price in the contract.
(2) If a manufacturer of scaffolds inserts a hold-harmless clause in a contract with a retailer, the retailer agrees to hold the manufacturer harmless in case a scaffold collapses and someone is injured.Incorrect
Other examples of transfer of risk by contracts include the following:
(1) The risk of a price increase in construction costs can be transferred to the builder by having a guaranteed price in the contract.
(2) If a manufacturer of scaffolds inserts a hold-harmless clause in a contract with a retailer, the retailer agrees to hold the manufacturer harmless in case a scaffold collapses and someone is injured. -
Question 7 of 10
7. Question
What is this type of government insurance, which is financed entirely or in large part by mandatory contributions from employers, employees, or both, and not primarily by the general revenues of government?
Correct
Under a social insurance program, the contributions are usually earmarked for special trust funds; the benefits, in turn, are paid from these funds. Also, the right to receive benefits is ordinarily derived from or linked to the recipient’s past contributions or coverage under the program; the benefits and contributions generally vary among the beneficiaries according to their prior earnings, but the benefits are heavily weighted in favor of low-income groups.
Incorrect
Under a social insurance program, the contributions are usually earmarked for special trust funds; the benefits, in turn, are paid from these funds. Also, the right to receive benefits is ordinarily derived from or linked to the recipient’s past contributions or coverage under the program; the benefits and contributions generally vary among the beneficiaries according to their prior earnings, but the benefits are heavily weighted in favor of low-income groups.
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Question 8 of 10
8. Question
Inflated claims are one of the social costs of insurance, which is defined as the submission of inflated or padded claims. Although the loss is not intentionally caused by the insured, the dollar amount of the claim may exceed the actual financial loss. Which of the following scenarios are examples of inflated claims?
I. Attorneys for plaintiffs sue for high-liability judgments that exceed the true economic loss of the victim
II. Auto accidents are faked or staged to collect benefits
III. Dishonest claims inflate or pad an insurance claim to cover a required deductible
IV. Insureds inflate the amount of damage in auto collision claims so that the insurance payment will cover the collision deductibleCorrect
Inflated claims must be recognized as an important social cost of insurance. Premiums must be increased to pay the additional losses. As a result, disposable income and the consumption of other goods and services are reduced.
Other examples of inflated claims include the following:
(1) Disabled persons ofter malinger to collect disability-income benefits for a longer duration.
(2) Insureds exaggerate the amount and value of property stolen from a home or business.Incorrect
Inflated claims must be recognized as an important social cost of insurance. Premiums must be increased to pay the additional losses. As a result, disposable income and the consumption of other goods and services are reduced.
Other examples of inflated claims include the following:
(1) Disabled persons ofter malinger to collect disability-income benefits for a longer duration.
(2) Insureds exaggerate the amount and value of property stolen from a home or business. -
Question 9 of 10
9. Question
What is this type of risk control technique, which refers to having back-ups or copies of important documents or property available in case a loss occurs?
Correct
Examples of duplication technique include the following:
(1) Back-up copies of key business records, in case the original records are lost or destroyed.
(2) Back-ups of an important property may also be kept on hand. If a key part of an assembly breaks down, having the part available immediately will prevent the assembly from shutting down until the part can be obtained.Incorrect
Examples of duplication technique include the following:
(1) Back-up copies of key business records, in case the original records are lost or destroyed.
(2) Back-ups of an important property may also be kept on hand. If a key part of an assembly breaks down, having the part available immediately will prevent the assembly from shutting down until the part can be obtained. -
Question 10 of 10
10. Question
Noninsurance transfers are methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party. Which of the following are disadvantages of noninsurance transfers in a risk management program?
I. The potential loss may be shifted to someone who is in a better position to exercise loss control
II. Noninsurance transfers often coss more than insurance
III. The transfer of potential loss may fail because the contract language is ambiguous. Also, there may be no court precedents for the interpretation of a contract tailor-made to fit the situation
IV. If the party to whom the potential loss is transferred is unable to pay the loss, the firm is still responsible for the claimCorrect
In a risk management program, noninsurance transfers have several disadvantages:
(1) The transfer of potential loss may fail because the contract language is ambiguous. Also, there may be no court precedents for the interpretation of a contract tailor-made to fit the situation.
(2) If the party to whom the potential loss is transferred is unable to pay the loss, the firm is still responsible for the claim.
(3) An insurer may not give credit for the transfers, and insurance costs may not be reduced.Incorrect
In a risk management program, noninsurance transfers have several disadvantages:
(1) The transfer of potential loss may fail because the contract language is ambiguous. Also, there may be no court precedents for the interpretation of a contract tailor-made to fit the situation.
(2) If the party to whom the potential loss is transferred is unable to pay the loss, the firm is still responsible for the claim.
(3) An insurer may not give credit for the transfers, and insurance costs may not be reduced.