Risk & Loss
The roof of Robbie's home was badly damaged by hail and had to be replaced. Fortunately, Robbie's insurance covered losses caused by hail. In this situation, hail is a(n):
a. exposure
b. hazard
c. peril
d. risk
c. peril
An individual chooses a homeowner's insurance policy with a $2,500 deductible instead of a $500 deductible to reduce the annual premium. The use of this deductible is an example of which risk management technique?
a. Risk Avoidance
b. Risk Transfer
c. Risk Retention
d. Risk Sharing
c. Risk Retention
Which of the following is not a characteristic of an insurable risk?
A. The loss must be accidental
B. The loss must be catastrophic to the insurer
C. The loss must be measurable
D. There must be a large number of similar exposure units
B. The loss must be catastrophic to the insurer
(Catastrophic losses are generally uninsurable.)
Which of the following conditions in an apartment building is a physical hazard?
a. fire
b. landlord with a bad attitude
c. slippery stairways
d. stained flooring
c. slippery stairways
A hazard is a condition that increases the likely number of losses or the likely severity of a loss. Slippery stairways are a physical hazard because they increase the likelihood that someone could slip and be injured.
Theodore pays an annual premium to the insurance company that covers many of the risks associated with his business. What risk management technique is Theodore using?
a. risk avoidance
b. risk control
c. risk sharing
d. risk transfer
d. risk transfer
By buying insurance, Sybil transfers certain risks to an insurance company in exchange for paying a premium.
T/F: Adverse selection occurs when high-risk individuals are more likely to purchase insurance than low-risk individuals.
True
A homeowner who leaves his house doors unlocked while away in the belief that his homeowners insurance will cover his losses if thieves break in and steal his possessions is an example of a ______.
a. Legal hazard
b. Physical hazard
c. Moral hazard
d. Morale hazard
d. Morale hazard
Failure to take reasonable measures to reduce the chance of a loss because the loss is covered by insurance demonstrates a morale hazard.
Which of the following is an example of risk transfer?
a. Derek decides not to buy a motorcycle.
b. Leslie shovels her sidewalk immediately after every snowstorm.
c. Lucia has a burglar alarm installed in her home.
d. Sybil buys an auto insurance policy.
d. Sybil buys an auto insurance policy.
Using insurance to cover a risk is a classic example of transferring a risk. The insured party with the risk transfers it to the insurance company in exchange for a premium
The law of large numbers helps insurance companies to:
A. Reduce customer premiums
B. Predict individual losses
C. Predict overall loss frequency more accurately
D. Avoid all risk
C. Predict overall loss frequency more accurately
What term refers to a situation or circumstance in which a loss is possible, regardless of whether a loss occurs?
a. Peril
b. Exposure
c. Subjective Risk
d. Direct Loss
b. Exposure
A construction company decides not to bid on a new project that involves drilling in a highly unstable geological region due to the high likelihood of equipment damage. Which risk management technique is the company employing?
A. Risk Sharing
B. Risk Avoidance
C. Risk Retention
D. Risk Control
B. Risk Avoidance
Which of the following best describes the relationship between adverse selection and underwriting?
A. Underwriting increases adverse selection
B. Adverse selection eliminates the need for underwriting
C. Underwriting helps identify and control adverse selection
D. Underwriting and adverse selection are unrelated
C. Underwriting helps identify and control adverse selection
A small manufacturing company relies on a single, aging hydraulic stamping press to produce a key component. The owner, knowing the press is essential and has an outdated lubrication system (a **physical condition**), is secretly relieved that the press is fully insured for its replacement cost (a **state of mind**). When a worker, rushing to leave early (an **attitude of indifference**), accidentally overloads the press, it seizes up, suffering a catastrophic mechanical failure (the **cause of loss**). The resulting closure of the factory floor for three weeks (the **undesirable result**) is estimated to cost the company over $100,000 in lost business. In this scenario, which option correctly identifies the **Peril**, the **Morale Hazard**, and the **Loss Exposure**?
A. Peril: Worker rushing to leave early; Morale Hazard: The aging hydraulic stamping press; Loss Exposure: The owner's secret relief about the insurance.
B. Peril: The aging hydraulic stamping press; Morale Hazard: The worker rushing to leave early; Loss Exposure: The outdated lubrication system.
C. Peril: Catastrophic mechanical failure; Morale Hazard: The worker rushing to leave early; Loss Exposure: The potential for business interruption.
D. Peril: Catastrophic mechanical failure; Morale Hazard: The owner's secret relief about the insurance; Loss Exposure: The $100,000 in lost business.
C. Peril: Catastrophic mechanical failure; Morale Hazard: The worker rushing to leave early; Loss Exposure: The potential for business interruption.
Catastrophic mechanical failure is the direct cause of the loss (Peril). The worker's indifference is Morale Hazard. The situation that *could* lead to financial loss (factory reliance) is the Loss Exposure.
A global logistics firm invests heavily in a new, mandatory, real-time GPS tracking system for all of its trucks. This system actively monitors driver speed, harsh braking, and required rest times, aiming to reduce the total number of severe accidents. This investment is a form of **Risk Control**. What is the most direct and specific financial benefit this action provides to the firm’s annual commercial auto insurance policy (Risk Transfer)?
A. It converts the catastrophic, uncertain financial risk of a major accident into a predictable, fixed annual expense (the premium).
B. It allows the firm to significantly increase its insurance deductible, thereby maximizing its use of active Risk Retention for catastrophic losses.
C. It functions as a Loss Reduction measure by providing immediate post-accident location data, which reduces the total severity of claims.
D. It reduces the frequency of accidents, resulting in lower expected losses for the insurer, which directly justifies a reduced annual insurance premium.
D. It reduces the frequency of accidents, resulting in lower expected losses for the insurer, which directly justifies a reduced annual insurance premium.
The core function of Loss Prevention is to reduce the probability of loss, which is the key data point insurers use to calculate premiums, providing a direct financial return on the control investment.
A group of homeowners in a coastal area has formed a mutual insurance pool to cover potential flood damage to their properties. They decide to purchase a policy that will cover the damage from a flood event that could occur once every 50 years, and the risk of flooding is fairly consistent across the area. Which of the following characteristics makes the risk of flood damage insurable for this group?
A) The losses can be predicted and are spread across a large number of similar homes.
B) The flood is a catastrophic event with massive financial consequences for all policyholders.
C) There are a large number of policyholders, but the risk is unique to individual homes, not shared.
D) Flood damage is an intentional act that can be prevented through government regulations.
A) The losses can be predicted and are spread across a large number of similar homes.