Risk Management and Insurance
Pre-Test Questions
Course Introduction
Risk Management and Insurance explores the fundamental principles, strategies, and tools used to identify, analyze, and mitigate risks within organizations and for individuals. The course examines the sources and types of risk including property, liability, and personal risks and introduces risk management processes such as risk assessment, risk control, and risk financing. It also covers the structure, functions, and regulatory environment of the insurance industry, delving into various types of insurance products, contract provisions, and claims procedures. Students learn how effective risk management and the appropriate use of insurance can safeguard assets and support organizational objectives, preparing them for careers in business, finance, and insurance sectors.
Recommended Textbook
Principles of Risk Management and Insurance 13th Edition by George E. Rejda
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27 Chapters
1397 Verified Questions
1397 Flashcards
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Page 2
Chapter 1: Risk and Its Treatment
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59 Verified Questions
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Sample Questions
Q1) Traditionally, risk has been defined as
A) any situation in which the probability of loss is one.
B) any situation in which the probability of loss is zero.
C) uncertainty concerning the occurrence of loss.
D) the probability of a loss occurring.
Answer: C
Q2) Which of the following is an example of a commercial risk?
A) the risk of insufficient retirement income
B) the loss of business income
C) the risk of premature death
D) the risk of being unemployed
Answer: B
Q3) A student who has skipped many classes and not studied the course material was surprised to learn there was a test when he showed-up for class. The student's mental uncertainty about whether or not he will pass the test is called
A) objective risk.
B) objective probability.
C) subjective probability.
D) subjective risk.
Answer: D
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Chapter 2: Insurance and Risk
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Sample Questions
Q1) Methods by which insurers may minimize or avoid catastrophic losses include which of the following?
I.The use of reinsurance
II.Concentrating coverage written in one geographic region
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
Q2) JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 2,000 homeowners this year?
A) The total number of claims filed by JKL policyowners should decrease.
B) The total dollar value of claims will decrease.
C) The average size of loss will decline in value.
D) The actual results will more closely approach the expected results.
Answer: D
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4
Chapter 3: Introduction to Risk Management
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60 Flashcards
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Sample Questions
Q1) Which of the following statements about self-insurance is (are) true?
I.It is a form of planned retention.
II.State law usually prohibits its use for workers compensation.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
Q2) A college professor stores class grading records on a spreadsheet on her office computer. Each time she updates a grading file she makes a printout and a backup copy of the grading file. The professor is using which risk management method to address the risk of losing her class grading records?
A) risk avoidance
B) duplication
C) separation
D) noninsurance transfer
Answer: B
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Chapter 4: Enterprise Risk Management and Related Topics
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Sample Questions
Q1) The terrorism risk in the United States
A) is of no concern to private companies.
B) is limited to attacks by foreign nationals.
C) can be addressed through risk control and insurance.
D) is an uninsurable risk.
Q2) Which of the following statements concerning the securitization of risk is (are) true?
I.Securitization increases the capacity of the insurance industry.
II.Securitization can be used to protect against catastrophic loss.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) The transfer of insurable risk to the capital markets through the creation of a financial instrument is called
A) coefficient of risk.
B) securitization of risk.
C) financial risk management.
D) enterprise risk management.
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6
Chapter 5: Types of Insurers and Marketing Systems
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Sample Questions
Q1) Jim would like to start a business raising thoroughbred racehorses. Obtaining insurance on the horses is a key concern, and he was dismayed to learn that none of the insurers authorized to operate in his state offer this specialty insurance. What is the name of the intermediary that Jim can use to place this coverage with an insurer not admitted to his state?
A) alien insurer
B) general agent
C) surplus lines broker
D) direct writer
Q2) Which of the following statements about life insurance marketing systems is true?
A) Insurance brokers are not permitted to sell life insurance.
B) Some exclusive agents who market property and liability insurance also sell life insurance.
C) Independent insurance agents are not permitted to market life insurance.
D) Financial institutions such as banks are not permitted to market life insurance.
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Chapter 6: Insurance Company Operations
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52 Flashcards
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Sample Questions
Q1) Insurers obtain data that can be used to determine rates from A) pricing pools.
B) insurance advisory organizations.
C) banks.
D) reciprocal exchanges.
Q2) All of the following statements about life insurance company investments are true
EXCEPT
A) Funds for these investments are derived primarily from premium income, investment earnings, and maturing investments that must be reinvested.
B) Income from these investments reduces the cost of insurance.
C) A primary objective in making these investments is safety of principal.
D) The majority of these investments are short-term investments.
Q3) Catastrophe bonds are made available to institutional investors in the capital markets through an entity that is specially created for that purpose. This is entity is called a
A) risk retention group.
B) fraternal insurance company.
C) captive insurance company.
D) special purpose reinsurance vehicle.
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Page 8
Chapter 7: Financial Operations of Insurers
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Sample Questions
Q1) Which of the following statements about schedule rating is (are) true?
I.It involves the determination of a basis rate for each exposure, which is then modified by credits or debits.
II.It is based on the assumption that certain physical characteristics of the insured's operations will influence the insured's future loss experience.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) All of the following statements about business objectives in designing a rating system are true EXCEPT
A) The rating system should encourage loss control activities.
B) The rating system should be independent of long-run changes in economic conditions.
C) The rating system should be simple to understand.
D) The rating system should be stable over short periods so that consumer satisfaction can be maintained.
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Chapter 8: Government Regulation of Insurance
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Sample Questions
Q1) The major argument in favor of an optional federal charter for insurers is that
A) small insurers need a national charter to be competitive with large insurers.
B) a federal charter will prevent insurer insolvencies.
C) a federal charter will provide greater oversight of insurer market practices.
D) national insurers are at a competitive disadvantage under the present system.
Q2) All of the following statements about insurance regulation are true EXCEPT
A) Insurance commissioners are appointed in some states and elected in some states.
B) Insurers are subject to regulation by certain federal agencies and laws.
C) The National Association of Insurance Commissioners (NAIC) can force states to adopt the model laws that it drafts.
D) An insurance commissioner can revoke or suspend an insurer's license to do business in his or her state.
Q3) Reasons for regulation of insurance include which of the following?
I.Maintaining insurer solvency
II.Ensuring reasonable rates
A) I only
B) II only
C) both I and II
D) neither I nor II
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Page 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) 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
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Chapter 10: Analysis of Insurance Contracts
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Sample Questions
Q1) James purchased liability insurance with a $100,000 limit from Insurer A. When Insurer A denied a claim that James thought should be covered, he bought a second liability insurance policy with a $150,000 limit from Insurer B. Before he cancelled the policy with Insurer A, a $60,000 loss occurred. If this loss is settled on a pro rata basis, how much must each insurer pay?
A) Insurer A will pay $10,000 and Insurer B will pay $50,000.
B) Insurer A will pay $20,000 and Insurer B will pay $40,000.
C) Insurer A will pay $24,000 and Insurer B will pay $36,000.
D) Insurer A will pay $40,000 and Insurer B will pay $20,000.
Q2) 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.
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Chapter 11: Life Insurance
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Sample Questions
Q1) Which of the following statements about limited-payment life insurance is true?
A) It is a form of term insurance.
B) It matures at the end of the premium-payment period.
C) The premium decreases each year during the premium-payment period.
D) Its use may be appropriate if a person wants paid-up life insurance during retirement.
Q2) Ann is considering the purchase of a life insurance policy with these characteristics: flexible premium payments, the insurance and savings components are separate, the interest rate credited to the cash value is tied to a changing market interest rate but a minimum interest rate is guaranteed, and a monthly administrative fee is charged. Ann is considering buying
A) whole life insurance.
B) variable life insurance.
C) universal life insurance.
D) current assumption whole life.
Q3) A common use of second-to-die life insurance is
A) insuring children.
B) insuring "double income with kids" families.
C) estate planning.
D) insuring key employees of a business.
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Page 13
Chapter 12: Life Insurance Contractual Provisions
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Sample Questions
Q1) Which of the following statements about nonforfeiture options found in life insurance policies is true?
A) Under the reduced paid-up option, the paid-up policy is term insurance.
B) Under the extended term option, the amount of term insurance is less than the face value of the surrendered cash value policy.
C) Under the reduced paid-up option, no additional premiums must be paid.
D) Unless the policyowner has selected another nonforfeiture option, the cash value option goes into effect automatically.
Q2) Janet is the beneficiary of her uncle's $200,000 life insurance policy. When her uncle died, Janet selected a settlement option that pays monthly benefits for as long as she lives. If Janet dies before receiving $200,000, payments will continue to a contingent beneficiary until a total of $200,000 has been paid. What settlement option did Janet select?
A) joint-and-survivor annuity
B) life income with guaranteed total amount
C) life income with guaranteed period
D) fixed amount option
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Page 14
Chapter 13: Buying Life Insurance
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Sample Questions
Q1) The policy reserve at the end of any given policy year is called the A) terminal reserve.
B) unearned premium reserve.
C) mean reserve.
D) initial reserve.
Q2) 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.
Q3) The average annual rate of return on a cash-value policy if it is held a specified number of years is called the policy's A) net present value.
B) interest-adjusted cost.
C) benchmark cost.
D) Linton yield.
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Chapter 14: Annuities and Individual Retirement Accounts
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Sample Questions
Q1) Some insurers offer a single-premium deferred annuity that does not begin paying benefits until an advanced age, such as 85. This product is called
A) endowment insurance.
B) equity-indexed annuity.
C) life income with guaranteed payments annuity.
D) longevity insurance.
Q2) Which of the following statements is (are) true about a longevity annuity (longevity insurance)?
I.If the annuitant dies during the deferral period, the purchase price of the annuity is forfeited.
II.Longevity insurance is an example of an immediate annuity.
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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Sample Questions
Q1) Prior to passage of the Affordable Care Act, insurance policies typically contained a provision excluding coverage for impairments that were present or were treated during a specified period prior to the effective date of the policy. This provision is a(n)
A) time limit on certain defenses.
B) preexisting-conditions clause.
C) benefit period provision.
D) incontestable clause.
Q2) Prior to passage of the Affordable Care Act, insurers could go back to the date a health insurance policy became effective and render the policy void due to a clerical error. This practice, which is prohibited under the Affordable Care Act except in cases of fraud or intentional misrepresentation of a material fact, is called
A) estoppel.
B) retention.
C) rescission.
D) reformation.
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Page 17
Chapter 16: Employee Benefits: Group Life and Health Insurance
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Sample Questions
Q1) Which of the following statements regarding recent developments in employer-sponsored health plans is (are) true?
I.Preferred provider organizations (PPOs) continue to dominate group health insurance markets.
II.The number of employers offering medical benefits to workers who retire early has increased.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) 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.
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Page 18
Chapter 17: Employee Benefits: Retirement Plans
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Sample Questions
Q1) Which of the following statements concerning defined benefit and defined contribution pension plans is (are) true?
I.The employer bears the investment risk with a defined contribution plan.
II.Defined benefit plans favor workers who enter the plan at older ages.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about Roth 401(k) plans is true?
I.Contributions to a Roth 401(k) plan are made with before-tax dollars.
II.Qualified distributions from a Roth 401(k) are received income-tax free.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) Under a unit-benefit formula, benefits are a function of both
A) earnings and years of service.
B) age and earnings.
C) age and gender.
D) years of service and position within a firm.
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Chapter 18: Social Insurance
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Sample Questions
Q1) All of the following statements about the Medicare Prescription Drug Plan are true EXCEPT
A) Medicare prescription drug coverage is available to all Medicare beneficiaries.
B) Medicare prescription drug coverage is funded exclusively through the Part A payroll tax.
C) The Medicare prescription drug program provides financial help for beneficiaries with limited income and financial resources.
D) In addition to the initial deductible, there is a coverage gap where the beneficiary must pay the entire cost of prescription drugs.
Q2) All of the following persons are eligible for survivor benefits under Social Security EXCEPT
A) dependent parents age 62 or older.
B) a surviving brother or sister, age 60 or older.
C) a surviving spouse age 60 or older.
D) a surviving spouse with eligible children younger than age 16.
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Chapter 19: The Liability Risk
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Sample Questions
Q1) Liability may arise because of a method of collecting oil or natural gas. Under this collection method, a high-pressure flow of fluid is injected underground. This collection method is called
A) clear cutting.
B) flow mining.
C) hydraulic fracturing.
D) slurry mining.
Q2) Which of the following statements about the immunity of governmental entities is (are) true?
I.Governmental entities are more likely to be immune from liability when performing proprietary functions than when performing governmental functions.
II.Many courts have eliminated the immunity of government entities.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 20: Auto Insurance
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Sample Questions
Q1) Gary purchased a Personal Auto Policy (PAP) that included collision coverage. Gary lost control of his vehicle on an icy road. He slid across the center line into oncoming traffic. Another vehicle hit his car, causing severe damage to it. Ignoring any deductible, what is the insurer's liability for damage to Gary's car?
A) the greater of the actual cash value or the amount necessary to repair or replace the vehicle
B) the replacement cost of the vehicle
C) the lesser of the actual cash value or the amount necessary to repair or replace the vehicle
D) the original purchase price of the vehicle
Q2) Which of the following statements about the payment of defense costs by the PAP is (are) true?
I.They are paid in addition to the policy limits.
II.They are payable even after the limit of liability is exhausted.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Page 22
Chapter 21: Auto Insurance (continued)
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Sample Questions
Q1) Defects of financial responsibility laws include which of the following?
I.Accident victims may not be fully compensated for their injuries.
II.They apply only to property damage losses, not to bodily injury claims.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about uninsured motorists coverage is true?
A) An innocent motorist must establish that the uninsured motorist is legally liable.
B) The amount of coverage in most states must be at least $300,000.
C) Property damage is covered in all states but bodily injury is not covered in all states.
D) The coverage is very expensive and beyond the affordability of all but wealthy insureds.
Q3) New Jersey's dollar-a-day auto insurance coverage is limited to
A) elderly individuals.
B) Medicaid recipients.
C) drivers under age 25.
D) high-risk drivers.
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Chapter 22: Homeowners Insurance, Section I
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Sample Questions
Q1) Cal is renting an apartment. Which homeowners policy is specially designed to insure renters?
A) HO-2
B) HO-3
C) HO-4
D) HO-6
Q2) Michelle had four matching end tables in her home. A fire damaged the home, destroying two of the end tables. Michelle's home was covered by an unendorsed Homeowners 3 policy. Which of the following is true with regard to the settlement for the end tables in this case?
A) Loss to a pair or set is excluded under the policy.
B) The insurer will pay the difference in actual cash value of the property before and after the loss.
C) The insurer will pay the replacement cost of the loss.
D) If a partial loss to a pair or set occurs, the insurer is liable for replacement of the entire pair or set.
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Chapter 23: Homeowners Insurance, Section II
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Q1) Which of the following statements about endorsements to the homeowners policy is (are) true?
I.The purpose of the inflation guard endorsement is to help prevent home owners from being under-insured.
II.The purpose of the watercraft endorsement is to provide coverage for watercraft when they are used outside the United States.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements concerning the scheduled personal property endorsement with agreed value loss settlement is (are) true?
I.The endorsement provides open-perils ("all-risks") coverage on the scheduled property. II.Losses under the endorsement are settled on an actual cash value basis.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 24: Other Property and Liability Insurance Coverages
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Sample Questions
Q1) Tina purchased a personal umbrella policy with a $1 million limit. Her insurer required her to carry liability limits of 250/500/50 under her auto insurance policy. The personal umbrella policy was written with a $1,000 self-insured retention. Tina was responsible for an auto accident in which the other driver was severely injured. The other driver's bodily injuries were $400,000 and the property damage was $20,000. How much will the insurer pay under Tina's umbrella policy?
A) nothing
B) $149,000
C) $150,000
D) $170,000
Q2) All of the following are characteristics of inland marine floater policies EXCEPT
A) Coverage can be specifically tailored to the specific type of personal property insured.
B) Coverage applies only when the property is at a specified location, such as the insured's home.
C) The amount of insurance can be selected by the purchaser.
D) Broader coverage can be obtained through an inland marine floater policy.
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Page 26
Chapter 25: Commercial Property Insurance
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Q1) Which of the following statements about the building and personal property coverage form is (are) true?
I.A limited amount of coverage is provided for pollutant cleanup and removal at the described premises if the release or discharge of the pollutant results from a covered cause of loss.
II.Fire department service charges are specifically excluded because they are a normal cost of doing business.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) One type of commercial property insurance excludes perils that are covered by the basic coverages. Some businesses buy this coverage to fill coverage gaps, including flood and earthquake, and to cover property in other countries. This type of insurance is called
A) protection and indemnity insurance.
B) building and personal property coverage form.
C) difference in conditions insurance.
D) builders risk coverage form.
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Chapter 26: Commercial Liability Insurance
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Sample Questions
Q1) Bay Gallery owns a building on Wharf Street. Bay Gallery purchased a Commercial General Liability Policy with no endorsements. All of the following claims would be covered under the policy EXCEPT
A) An artist sued the gallery for slander after an employee of the gallery said the artist's work looks like it was painted by an intoxicated monkey.
B) A customer is injured when a painting falls from the wall and strikes the customer.
C) A customer is injured after falling on a slippery floor at the gallery.
D) An employee of the gallery accidentally started a fire that caused extensive damage to the building.
Q2) All of the following are coverage options under the physical damage coverage in the Business Auto Coverage Form EXCEPT
A) comprehensive coverage.
B) specified causes-of-loss coverage.
C) collision coverage.
D) property damage liability coverage.
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28
Chapter 27: Crime Insurance and Surety Bonds
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Sample Questions
Q1) Al's Electric Service is an electric contracting company in Metro City. The owner of the company, Al Richards, posted a bond guaranteeing that all work performed by his company will comply with local building codes. This bond is an example of a
A) fiduciary bond.
B) license and permit bond.
C) contract bond.
D) judicial bond.
Q2) Two tellers of a Tenth National Bank branch colluded to embezzle $40,000 over a six-month period. State bank examiners detected the embezzlement during a routine bank examination. Tenth National purchased a financial institution bond. Under which of the following insuring agreements is this loss covered?
A) Insuring Agreement A-Fidelity
B) Insuring Agreement B-On Premises
C) Insuring Agreement C-In Transit
D) Insuring Agreement D-Forgery or Alteration
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