Part 2 Test Item File For Principles of Risk Management and Insurance Eleventh Edition Contents Chapter 1 Risk in Our Society 1 Chapter 2 Insurance and Risk 12 Chapter 3 Introduction to Risk Management 21 Chapter 4 Advanced Topics in Risk Management 32 Chapter 5 Types of Insurers and Marketing Systems 43 Chapter 6 Insurance Company Operations 53 Chapter 7 Financial Operations of Insurers 63 Chapter 8 Government Regulation of Insurance 74 Chapter 9 Fundamental Legal Principles 84 Chapter 10 Analysis of Insurance Contracts 95 Chapter 11 Life Insurance 104 Chapter 12 Life Insurance Contractual Provisions 117 Chapter 13 Buying Life Insurance 129 Chapter 14 Annuities and Individual Retirement Accounts 139 Chapter 15 Individual Health Insurance Coverages 149 Chapter 16 Employee Benefits Group Life and Health Insurance 160 Chapter 17 Employee Benefits Retirement Plans 171 Chapter 18 Social Insurance 181 Chapter 19 The Liability Risk 194 Chapter 20 Homeowners Insurance Section I 204 Chapter 21 Homeowners Insurance Section II 215 Chapter 22 Auto Insurance 225 Chapter 23 Auto Insurance and Society 236 Chapter 24 Other Property and Liability Insurance Coverages 245 Chapter 25 Commercial Property Insurance 254 Chapter 26 Commercial Liability Insurance 264 Chapter 27 Crime Insurance and Surety Bonds 273 Chapter 1 Risk in Our Society 1 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 Question Status Previous Edition 2 Objective risk is defined as A the probability of loss B the relative variation of actual loss from expected loss C uncertainty based on a person s mental condition or state of mind D the cause of loss Answer B Question Status Previous Edition 3 An insurance company estimates its objective risk for 10 000 exposures to be 10 percent Assuming the probability of loss remains the same what would happen to the objective risk if the number of exposures were to increase to 1 million A It would decrease to 1 percent B It would decrease to 5 percent C It would remain the same D It would increase to 20 percent Answer A Question Status Previous Edition 4 Uncertainty based on a person s mental condition or state of mind is known as A objective risk B subjective risk C objective probability D subjective probability Answer B Question Status Previous Edition 5 The long run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called A objective probability B objective risk C subjective probability D subjective risk Answer A Question Status Previous Edition Copyright 2011 Pearson Education Inc 2 Rejda Principles of Risk Management and Insurance Eleventh Edition 6 Which of the following statements about a priori probabilities is correct A They are subjective probabilities based on ambiguity in the way probability is perceived B They are subjective probabilities that may vary among individuals because of factors such as age gender education and the use of alcohol C They are objective probabilities that can be determined by deductive reasoning D They are objective probabilities that can be determined by subjective reasoning Answer C Question Status Previous Edition 7 An individual s personal estimate of the chance of loss is A an objective probability B an objective risk C a subjective probability D an a priori probability Answer C Question Status Previous Edition 8 A peril is A a moral hazard B the cause of a loss C a condition which increases the chance of a loss D the probability that a loss will occur Answer B Question Status Previous Edition 9 An earthquake is an example of a A moral hazard B peril C physical hazard D objective risk Answer B Question Status Previous Edition 10 Dense fog that increases the chance of an automobile accident is an example of a A speculative risk B peril C physical hazard D moral hazard Answer C Question Status Previous Edition 11 Faking an accident to collect insurance proceeds is an example of a A physical hazard B objective risk C moral hazard D attitudinal hazard Answer C Question Status Revised Copyright 2011 Pearson Education Inc Chapter 1 Risk in Our Society 12 Carelessness or indifference to a loss is an example of A physical hazard B objective probability C moral hazard D attitudinal hazard Answer D Question Status Revised 13 Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss This hazard is called A moral hazard B physical hazard C attitudinal hazard D legal hazard Answer D Question Status Revised 14 Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award The characteristics of the judicial system that increase the frequency and severity of losses are known as A moral hazard B particular risk C speculative risk D legal hazard Answer D Question Status Previous Edition 15 A phrase that encompasses all of the major risks faced by a business firm is A financial risk B speculative risk C enterprise risk D pure risk Answer C Question Status Previous Edition 16 Which of the following statements about financial risk is are true I Enterprise risk does not include financial risk II Financial risk is easily addressed through the purchase of insurance A I only B II only C both I and II D neither I nor II Answer D Question Status Previous Edition Copyright 2011 Pearson Education Inc 3 4 Rejda Principles of Risk Management and Insurance Eleventh Edition 17 All of the following are considered financial risks EXCEPT A the decline in the value of a bond portfolio because of rising interest rates B increased cost of production because of rising commodity prices C loss of money because of adverse movements in currency exchange rates D destruction of a production facility caused by an explosion Answer D Question Status Previous Edition 18 Katelyn was just named Risk Manager of ABC Company She has decided to create a risk management program which considers all of the risks faced by ABC pure speculative operational and strategic in a single risk management program Such a program is called a n A financial risk management program B enterprise risk management program C fundamental risk management program D consequential risk management program Answer B Question