Risk Management Strategies
What type of risk is where a party chooses to bear the financial burden of potential losses rather than shift it to an insurer?
Risk Retention
Which type of risk involves only the possibility of loss or no loss, but never a gain?
A. Pure risk
B. Speculative risk
C. Market risk
D. Investment risk
A. Pure risk
What type of risk is when an individual or organization shifts the financial impact of losses to another party, usually through the purchase of insurance.
Risk Transfer
Which of the following is an example of speculative risk?
A. Investing in real estate hoping for profit
B. A house being damaged by a hurricane
C. Theft of personal property
D. Injury from a car accident
A. Investing in real estate hoping for profit
Which of the following best illustrates risk avoidance?
A. Purchasing fire insurance on a commercial building.
B. Deciding not to open a factory in an earthquake-prone area.
C. Installing a sprinkler system to reduce potential fire damage.
D. Increasing the deductible on an auto policy to lower premiums.
B. Deciding not to open a factory in an earthquake-prone area.
Gambling at a casino is an example of:
A. Pure risk
B. Speculative risk
C. Fundamental risk
D. Particular risk
B. Speculative risk
Which of the following best demonstrates risk sharing?
A. A homeowner choosing not to build a swimming pool to eliminate liability exposures.
B. Two insurance companies jointly insuring a large commercial property.
C. A company setting aside funds to pay for small losses instead of buying insurance.
D. A business purchasing insurance to shift all financial risk to the insurer.
B. Two insurance companies jointly insuring a large commercial property.
True or False: Pure risk can result in either loss or gain.
False (it only results in loss or no loss).
A manufacturing company is concerned about the possibility of fire damaging its production facility. Instead of relocating the plant or self-insuring, management decides to install an advanced sprinkler system, implement strict housekeeping rules, and conduct monthly fire drills.
Which risk management method are these actions an example of?
A. Risk avoidance – eliminating the chance of fire by discontinuing operations
B. Risk transfer – purchasing insurance to shift the loss to an insurer
C. Risk reduction – minimizing the likelihood or severity of a fire loss
D. Risk retention – accepting the potential financial impact of a fire
C. Risk reduction – minimizing the likelihood or severity of a fire loss
Maria is considering opening a small café in her neighborhood. If successful, she could make a profit, but if it fails, she could lose her investment. At the same time, she also worries that a typhoon might damage the building she plans to lease for the café.
Which of the following best describes the types of risks Maria is facing?
A. Both are speculative risks because she may gain or lose in either situation.
B. Opening the café is speculative risk, while the possibility of typhoon damage is pure risk.
C. Both are pure risks because they involve potential loss.
D. Opening the café is pure risk, while the possibility of typhoon damage is speculative risk.
B. Opening the café is speculative risk, while the possibility of typhoon damage is pure risk.