Introduction to Risk Management Exam Questions
Course Introduction
Introduction to Risk Management provides an overview of the fundamental concepts, tools, and techniques used to identify, assess, and mitigate risks across various organizational contexts. This course covers types of risks including financial, operational, strategic, and compliance risks and introduces frameworks for analyzing potential impacts and developing appropriate response strategies. Students will explore risk assessment methodologies, risk control procedures, and the role of risk management in decision-making processes. Through case studies and real-world examples, the course emphasizes the importance of effective risk management in achieving organizational objectives and sustaining long-term success.
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) A peril is
A) a moral hazard.
B) the cause of a loss.
C) a condition that increases the chance of a loss.
D) the probability that a loss will occur.
Answer: B
Q2) MLX Drug Company would like to market a new hypertension drug. While the Food and Drug Administration (FDA) was testing the drug, it discovered that the drug produced a harmful side effect. When MLX learned of the FDA's test result, MLX abandoned its plan to produce and distribute the drug. MLX's reaction illustrates A) risk avoidance.
B) hedging.
C) risk transfer.
D) risk retention.
Answer: A
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Chapter 2: Insurance and Risk
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Q1) A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that each farmer sustained. Which characteristic of insurance is embodied in this agreement?
A) pooling of losses
B) fortuitous losses
C) risk avoidance
D) indemnification
Answer: A
Q2) One branch of government insurance programs has a number of distinguishing characteristics. These programs are compulsory, they are financed by mandatory contributions rather than general tax revenues, and benefits are weighted in favor of low-income groups. These government insurance programs are called
A) welfare programs.
B) social insurance programs.
C) casualty insurance programs.
D) private insurance programs.
Answer: B
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Page 4
Chapter 3: Introduction to Risk Management
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Sample Questions
Q1) Discount Department Stores is a national retail chain. The company had one large, central warehouse. At the suggestion of the risk manager, the company decided to build four smaller regional warehouses so that a loss at the central warehouse would not be a catastrophic blow to the company's distribution system. Splitting the inventory between four regional warehouses illustrates which risk management technique?
A) duplication
B) risk transfer
C) separation
D) risk avoidance
Answer: C
Q2) Laura Evans is risk manager of LMN Company. Laura decided to retain certain property loss exposures. Which of the following is a method that Laura can use to fund the retained property losses?
A) current net income
B) private insurance
C) noninsurance transfer
D) high deductibles
Answer: A
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Chapter 4: Enterprise Risk Management and Related Topics
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Q1) A bank stores depositor data electronically. The data include financial account values, social security numbers, and other information. An outside party was able to gain access to the bank's customer data through unauthorized access to the bank's computer system. The outside party was able to steal money from the accounts and to sell customer data, including social security numbers, to others. This scenario illustrates A) terrorism risk.
B) climate change risk.
C) speculative financial risk.
D) cyber-liability risk.
Q2) The relative level of surplus in the insurance industry is called the industry's A) capacity.
B) liabilities.
C) reserves.
D) admitted assets.
Q3) A grid charting the potential frequency and severity of losses is called a A) risk management information system.
B) risk management Intranet.
C) risk management web site.
D) risk map.
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Page 6
Chapter 5: Types of Insurers and Marketing Systems
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Q1) Which of the following statements about reciprocal exchanges is (are) true?
I.Reciprocal exchanges usually specialize in health insurance.
II.Reciprocal exchanges are unincorporated mutual insurance companies.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about the sale of property and liability insurance through the direct response system is (are) true?
I.Selling expenses are higher because market segmentation tends to be less precise than with other marketing methods.
II.It is the most appropriate system for selling complex products.
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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Q1) Mark has been an underwriter for 20 years. An application he recently reviewed looked odd to him. The building value in the application seemed far too high, and Mark suspected the applicant might be planning to destroy the property after it is insured. Mark hired an outside firm to investigate the applicant and to prepare a report about the applicant. This report is called a(n)
A) agent's report.
B) binder.
C) physical inspection.
D) inspection report.
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.
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Chapter 7: Financial Operations of Insurers
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Q1) JKL Insurance Company reported the following information on its accounting statements last year:
Premiums Written $90,000,000
Loss Adjustment Expenses $5,000,000
Underwriting Expenses $30,000,000
Premiums Earned $100,000,000
Incurred Losses $70,000,000
What was JKL's expense ratio last year?
A) 5.0 percent
B) 30.0 percent
C) 33.3 percent
D) 50.0 percent
Q2) Reasons for the unearned premium reserve include which of the following?
I.To pay losses that occur during the policy period.
II.To pay premium refunds to policyholders in the event of cancellation.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 8: Government Regulation of Insurance
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Sample Questions
Q1) Which of the following is considered a nonadmitted asset for an insurer?
A) cash
B) preferred stocks
C) real estate
D) office furniture
Q2) The National Association of Insurance Commissioners (NAIC) administers an "early warning system" to help ensure insurance company solvency. This system uses data provided in the annual statement to identify companies that may pose a solvency risk.
This early warning system is called
A) the risk-based capital requirements.
B) an insurance guaranty fund.
C) the Insurance Regulatory Information System (IRIS).
D) the assessment method.
Q3) Which of the following is a principal method of ensuring the solvency of insurers?
A) requiring submission of annual financial statements to state regulators
B) tracking and investigating market conduct complaints against insurers
C) disciplining agents of the insurer for illegal sales practices
D) regulating the forms (applications and policies) employed by the insurer
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Chapter 9: Fundamental Legal Principles
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Sample Questions
Q1) Which of the following statements about a warranty in an insurance contract is (are) true?
I.It is part of the insurance contract.
II.Statements made by an insurance applicant are considered warranties rather than representations.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about the principle of insurable interest is (are) true?
I.It makes it difficult to measure the amount of an insured's loss.
II.It reduces moral hazard.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 10: Analysis of Insurance Contracts
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Q1) Kate is covered under her employer's group health plan. She is also covered as a dependent under her husband's group health plan. Under the usual coordination-of-benefits provision, how will each company respond to a claim filed by Kate?
A) Kate's plan is primary, and her husband's plan is excess.
B) Her husband's plan is primary, and Kate's plan is excess.
C) The plan of the person with the birthday earliest in the year pays first, and the other plan is excess.
D) Each plan will pay 50 percent of the claim.
Q2) In determining insurance limits and deductibles, an important concept is that insurance should be used to pay big losses rather than small losses. The objective is to insure big losses that could cause financial ruin and to exclude small losses that can be budgeted out of current income. This concept is called the
A) law of large numbers.
B) efficient loss-cost concept.
C) large-loss principle.
D) retention-transfer tradeoff.
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Page 12
Chapter 11: Life Insurance
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Q1) Which of the following statements about endowment insurance policies is (are) true?
I. The face amount is paid if the insured dies during the policy period or at the end of the policy period if the insured is still alive.
II. The use of endowment insurance has increased in recent years because of its favorable tax treatment.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about a variable universal life insurance policy is (are) true?
I. There is a minimum guaranteed interest rate for the cash value.
II.The policyowner has a variety of investment options for the savings component of the policy.
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) Marcus is concerned that inflation will erode the purchasing power of the face value of his life insurance policy. His agent suggested that Marcus add a provision that allows him to purchase one-year term insurance equal to the percentage change in the consumer price index without having to demonstrate insurability. This provision is called a(n)
A) cost-of-living rider.
B) guaranteed purchase option.
C) accelerated death benefit rider.
D) waiver-of-premium rider.
Q2) A life insurance policyholder may no longer need life insurance. Such a policyholder may sell the policy to a third party for more than its cash value. The purchaser becomes the new beneficiary and is responsible for subsequent premium payments. Such a financial transaction is called a(n)
A) collateral assignment.
B) accelerated death benefits rider.
C) absolute assignment.
D) life settlement.
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Chapter 13: Buying Life Insurance
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Sample Questions
Q1) Beth purchased a $50,000 nonparticipating whole life insurance policy. The annual premium was $1,278. The cash value of the policy after 10 years will be $13,740. The future value of $1 deposited at the start of the year for 10 years, assuming 5 percent interest, is $13.207. What is the traditional net cost of this policy, per thousand per year, over the first 10 years the policy is in force?
A) -$2.86
B) -$2.14
C) -$1.92
D) -$0.88
Q2) Which statement is true regarding using interest-adjusted cost data and purchasing life insurance?
A) Cost indices can help to determine whether a policy should be replaced.
B) The type of policy you purchase should he based solely on a cost index.
C) Small variations in cost indices should be ignored.
D) Cost indices should be used to select an insurer, not an individual policy.
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Chapter 14: Annuities and Individual Retirement Accounts
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Q1) Which of the following statements is (are) true with regard to the inflation annuity option?
I.The initial monthly payment is lower than the initial payment a fixed annuity would have provided if purchased at the same age.
II.Periodic payments to the annuitant are adjusted for inflation.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements regarding the taxation of individual annuities is (are) true?
I.The exclusion ratio is the percentage of the annuity income that is taxable.
II.After the net cost of the annuity has been paid to the annuitant, the total annuity payment is taxable.
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 health savings accounts (HSAs) is true?
A) There are no limits to annual contributions that an individual may make to his or her HSA.
B) Once an individual has reached age 65 or is covered by Medicare, no additional contributions to the HSA may be made.
C) The health insurance plan covering the HSA account beneficiary is not permitted to use a deductible.
D) HSAs offer no tax benefits for the individual who establishes the account.
Q2) The Affordable Care Act requires that most U.S. citizens and legal residents have qualifying health insurance or pay a financial penalty. This provision of the Affordable Care Act is known as the
A) Health Insurance Marketplace option.
B) public option.
C) individual mandate.
D) premium subsidy option.
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Page 17
Chapter 16: Employee Benefits: Group Life and Health Insurance
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Q1) Which of the following statements about group insurance underwriting principles is true?
A) Employees should be required to remit premiums directly to the insurance company.
B) The average age of the group should ideally increase over time.
C) A group should be formed for the specific purpose of obtaining insurance.
D) A flow of people through the group is desirable.
Q2) An HMO physician who determines if medical care from a specialist is necessary is called a(n)
A) capitator.
B) internist.
C) network facilitator.
D) gatekeeper.
Q3) Marv is covered by a group health insurance plan at work. His employer funds the entire cost of the group health insurance. Because of this characteristic, the group health insurance plan can be described as
A) defined benefit.
B) contributory.
C) defined contribution.
D) noncontributory.
18
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Chapter 17: Employee Benefits: Retirement Plans
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Q1) Which of the following is a common investment mistake that many retirement plan participants make?
A) not investing heavily enough in common stock issued by the employer
B) investing too heavily in common stock when close to retirement
C) participating in an employer-sponsored retirement plan to obtain matching employer contributions
D) participating in an employer-sponsored retirement plan and contributing the maximum amount allowed
Q2) Which of the following statements is (are) true with respect to profit-sharing plans?
I.There is no limit on the amount that an employer can contribute annually to an employee's account under a profit sharing plan.
II.Profit sharing plans offer greater funding flexibility for employers than under other qualified plans.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 18: Social Insurance
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Q1) 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.
Q2) Which of the following statements about problems and issues in workers compensation insurance is (are) true?
I.Uncertainties created by the increasing use of medical marijuana is a growing problem for employers.
II.Enactment of the Affordable Care Act led many employers to stop offering medical benefits as part of the workers compensation coverage on their employees.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 19: The Liability Risk
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Q1) Steve was involved in an auto accident. Both drivers were partially at fault for the accident. Steve's actual damages were $50,000. He was judged to be 60 percent at fault. If Steve's state has a pure comparative negligence law, how much will Steve collect?
A) $0
B) $20,000
C) $30,000
D) $50,000
Q2) Which of the following statements about the legal obligations of a property owner is (are) true?
I.A property owner must inspect the premises for the benefit of an invitee and correct any unsafe conditions.
II.A property owner has the right to set a trap designed to injure a trespasser.
A) I only
B) II only
C) both I and II
D) neither I nor II
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21
Chapter 20: Auto Insurance
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Q1) Which of the following statements about the liability limits of the PAP is (are) true?
I.The policy can be written with split limits of liability.
II.Prejudgment interest is considered part of the damage award and is subject to the policy limit of liability.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) John occasionally borrows the car of his friend, Sophie. Sophie has a PAP with liability limits of 100/300/50. John also has a PAP, and his liability limits 250/500/50. John had an accident while using Sophie's car and was found to be legally liable for $300,000 in bodily injury liability for injuries suffered by one person. How much will be paid by each policy?
A) Sophie's policy will pay $150,000, John's policy will pay $150,000.
B) Sophie's policy will pay $50,000, John's policy will pay $250,000.
C) Sophie's policy will pay $100,000, John's policy will pay $200,000.
D) John's policy will pay the entire amount.
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Page 22
Chapter 21: Auto Insurance (continued)
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Q1) Arguments often used against no-fault automobile insurance laws include all of the following EXCEPT
A) It is often difficult to determine which driver was negligent when a multiple-vehicle accident occurs.
B) Many injured persons will not be compensated for their full losses because payments for pain and suffering will be eliminated.
C) The defects of the negligence system are exaggerated, and the system needs only to be reformed.
D) Claims of efficiency and premium saving are exaggerated, and automobile insurance premiums might actually increase.
Q2) A no-fault law under which benefits are paid to an accident victim without regard to fault and the accident victim can still sue the negligent driver who caused the accident is referred to as a(n)
A) pure no-fault law.
B) add-on no-fault law.
C) modified no-fault law.
D) choice no-fault law.
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Chapter 22: Homeowners Insurance, Section I
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Q1) The purpose of the appraisal clause in the Homeowners 3 policy is to
A) determine the appropriate amount of homeowners insurance to purchase.
B) set a value on the home for estate purposes if the homeowner dies.
C) settle valuation disputes between the insurer and insured after a loss has occurred.
D) determine a mortgage lender's insurable interest after a loss has occurred.
Q2) Linda wants to purchase a homeowners policy. She has some valuable personal property to which internal policy limits apply. Her agent said that she could obtain coverage under her homeowners policy by attaching a list of this valuable property with specific amounts of insurance. Such a listing is called a(n)
A) binder.
B) schedule.
C) application.
D) warranty.
Q3) If there is a conflict between state law and a provision in a homeowners policy,
A) the policy wording takes precedence.
B) the state law takes precedence.
C) the policyholder is entitled to whichever provides broader coverage.
D) the policy is null and void.
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Chapter 23: Homeowners Insurance, Section II
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Sample Questions
Q1) Liability arising out of which of the following is covered under the personal injury endorsement to the homeowners policy?
A) bodily injury
B) property damage
C) slander
D) professional liability
Q2) Tom and Tammy Evans were ready to purchase a home. The home was to serve as collateral for their mortgage loan. Two insurers declined to insure the home, citing "an adverse CLUE report." Why would an insurer reject a homeowners insurance application because of an adverse CLUE report?
A) because the previous owner had defaulted on the mortgage loan
B) because the home is located in an area where the zoning law had been changed
C) because there had been property insurance claims filed on the home's previous owner
D) because the home is located in an area that does not have a certified fire department
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Chapter 24: Other Property and Liability Insurance Coverages
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Q1) Perils insured under Dwelling Property 1 (basic form) include which of the following?
I.Earthquake
II.Smoke
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) The basic purpose of FAIR plans is to provide
A) property insurance to persons who cannot obtain it in normal markets.
B) automobile insurance to persons who cannot obtain it in normal markets.
C) health insurance to persons who cannot afford it in normal markets.
D) workers compensation insurance to employers who do business in several states.
Q3) 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.
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Page 26
Chapter 25: Commercial Property Insurance
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Q1) All of the following statements about inland marine forms are true EXCEPT
A) A mail coverage form covers securities in transit by first-class mail, registered or certified mail, or express mail.
B) A commercial articles coverage form is used to insure photographic equipment and musical instruments.
C) A jewelers block coverage form is used by individuals to insure jewelry limited in coverage by the homeowners form.
D) The signs coverage form covers neon, mechanical, and electrical signs.
Q2) A firm wishing to insure a single shipment of merchandise sent by a common carrier would purchase a(n)
A) annual transit policy.
B) trip transit policy.
C) bailee's liability policy.
D) equipment floater.
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Chapter 26: Commercial Liability Insurance
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Q1) Some directors and officers (D&O) liability policies include an insuring agreement tcovers the legal liability of a corporation arising out of the wrongful acts of directors and officers. This coverage for the corporation is called
A) blanket coverage.
B) corporate reimbursement coverage.
C) personal liability of directors and officers coverage.
D) entity coverage.
Q2) Which of the following statements is (are) true concerning the self-insured retention (SIR) under a commercial umbrella liability policy?
I.The SIR applies to claims covered by the umbrella policy but not by any underlying insurance.
II.The SIR only applies to those claims for which the underlying policy has paid first, and the umbrella policy is paying on an excess basis.
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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Q1) Tenth National Bank extended a $2 million loan to ABC Development Company. Tenth National accepted a mortgage on a building as collateral for the loan. The mortgagee's signature on the loan, however, was a forgery. The resulting loss is covered by which financial institution bond coverage?
A) Insuring Agreement A- Fidelity
B) Insuring Agreement D-Forgery or Alteration
C) Insuring Agreement E-Securities
D) Insuring Agreement G-Fraudulent Mortgages
Q2) Jack, owner of Jack's Bar and Grill, was robbed while attempting to deposit receipts at his bank's night depository. Jack had purchased an ISO commercial crime coverage form. This loss would be covered under which insuring agreement?
A) Inside the Premises-Theft of Money and Securities
B) Outside the Premises
C) Money Orders and Counterfeit Currency
D) Inside the Premises-Robbery or Safe Burglary of Other Property
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