Reference no: EM131155324

Part 1:

1. Which of the following best defines strategies used to reduce expected losses? A. Loss control C. Loss reduction B. Loss prevention D. Loss avoidance

2. Which of the following is associated with the reduction of the frequency of losses? A. Loss control C. Loss prevention B. Loss reduction D. Loss avoidance

3. Insurance coverage can reduce the incentives to undertake loss control activities if insurers A. help pay for the loss control. B. pay for losses anyway. C. reduce insurance premiums after loss control is implemented. D. don't reduce insurance premiums after loss control is implemented. Loss Control and Legal Liability

4. Segregation of exposure units can reduce A. the expected frequency of losses. B. the expected severity of losses. C. both the expected frequency and expected severity of losses. D. only those losses that result from natural disasters.

5. Billy Bob earns $45,000 and faces a .007 probability of dying in a workplace accident. Jim Bob earns $41,000 and faces a .0038 probability of dying in a workplace accident. The two require the same level of skill and training. From this information, what is the implicit value of a person's life? A. $315,000 C. $1,052,631 B. $571,428 D. $1,250,000

6. Which one of the following is not a potential benefit of loss control efforts to improve workplace safety? A. Reduced expected losses B. Increased worker productivity C. Improved marginal cost of safety D. Reduced insurance premiums

7. In business liability cases, courts may apply an economic standard for negligence called cost-justified precautions. This standard is met if the business A. spent at least 10% of its revenue on safety efforts. B. undertook safety costs whenever the marginal benefit of the safety effort was greater than the marginal cost. C. undertook safety costs whenever the marginal benefit of the safety effort was less than the marginal cost. D. has purchased adequate insurance.

8. Which of the following refers to laws passed by legislative bodies? A. Statutory law C. Criminal law B. Common law D. Tort law

9. Which one of the following liability rules frequently applies to products liability cases? A. No liability C. Strict liability B. Negligence D. Absolute liability

10. Under joint and several liability, A. a defendant's spouse is equally liable for the defendant's negligence. B. a defendant has no defenses against the charge of negligence. C. a defendant can't be held fully responsible for losses he or she only partially caused. D. a defendant can be held fully responsible for losses he or she only partially caused. Examination, Lesson 3 65

11. Which one of the following is not a potential source of limited liability (or being judgment proof)? A. Bankruptcy laws B. Being elderly C. Lack of wealth D. Being incorporated (as a business)

12. Ted was injured in an accident that was caused by Judy's negligence. As a result of the accident, Ted incurred $8,000 in medical bills. He filed and won a lawsuit against Linda, and the medical bills were paid by the judgment. These medical bills are what type of damages? A. Special compensatory damages B. General compensatory damages C. Special punitive damages D. General punitive damages

13. The conditions necessary for a plaintiff to show that a defendant was negligent include all of the following except which one? A. The defendant had a duty to the plaintiff and breached the duty. B. The defendant's breach of duty was the proximate cause of the plaintiff's injury. C. The defendant intended to cause harm to the plaintiff. D. The plaintiff suffered a loss.

14. In which of the following cases is the defendant always liable? A. No liability C. Strict liability B. Absolute liability D. Negligence

15. John was speeding into an intersection when Mary negligently was making a left turn. Their cars collided, and Mary sued John for her injuries. The jury determined that John was negligent and that Mary was 30% responsible for her own injuries. Mary's actual damages were $25,000. If the contributory negligence rule applies in that jurisdiction, how much will Mary get? A. $25,000 C. $7,500 B. $17,500 D. Nothing

Part 2:

1. The market for auto insurance that provides coverage to drivers who would otherwise not be able to buy insurance is called the _______ market. A. residual C. prior approval B. voluntary D. reinsurance

2. Which of the following is not one of the main types of coverage provided under the personal auto policy? A. Liability coverage for injuries caused by the negligence of the insured driver B. Coverage for physical damage to the personal property of the negligent driver C. Coverage for losses caused to the insured by a driver without liability insurance D. Coverage for theft of the insured vehicle Personal

3. Which one of the following is not an argument favoring no-fault personal injury protection (PIP) coverage? A. Loss payments are generally made more quickly. B. Dispute resolution costs are lower. C. It provides increased incentives for auto safety. D. When fault is unclear, more people will still have first-party coverage.

4. Henry is driving Lisa's automobile. He runs a stop sign and causes an accident. Henry and Lisa both have a personal automobile insurance policy. How will the liability coverage between these two policies most likely be coordinated? A. Henry's policy is primary, while Lisa's policy is excess. B. Lisa's policy is primary, while Henry's policy is excess. C. Henry's and Lisa's policy pay equal shares. D. Only Henry's policy is obligated to provide liability coverage, since he is the at-fault driver.

5. Insurance coverage for flood damage is available through the National Flood Insurance Program. How does the program operate? A. Private insurers sell and service the policies, with the federal government bearing the risk. B. Private insurers sell and service the policies while sharing the risk with the federal government. C. Private insurers underwrite the risk, with the federal government acting as a reinsurer only in the event of a bad loss experience. D. All polices are sold and serviced by the federal government, which also bears the risk.

6. Which of the following statements is true of compulsory automobile insurance? A. It's unconstitutional. B. It enjoys strong enforcement. C. It's similar to a flat or sales tax in its impact on policyholders. D. It has a regressive impact on the distribution of income.

7. Driver classes may be based on which of the following factors? A. Age C. Sexual orientation B. Race D. Religion

8. Which of the following losses is most likely to be excluded from coverage in a homeowner's insurance policy? A. Theft of personal property B. Damage from lightning strike C. Property loss due to an intentional act D. Fire loss

9. What is the main reason that homeowner's insurance policies commonly exclude coverage for earthquake and flood? A. Not many people need this coverage. B. The losses tend to be correlated across policyholders. C. Moral hazard D. The government can provide this coverage more cost effectively.

10. When Kathy buys a single-premium whole life policy, she A. makes the same premium payment each year of the policy period. B. makes the same premium payment each year for a limited number of years and is then covered for her whole life. C. makes the same premium payment each year for her whole life and is covered for her whole life. D. pays the entire premium in a lump sum when the policy is issued and is then covered for her whole life.

11. In the context of life insurance policies, which of the following equations is incorrect? A. Cash value policies = Term insurance + Savings plan B. Potentially taxable = Receipt - Net cost C. Death protection = Death benefit - Cash value D. Death protection = Death benefit

12. Which of the following is not a tax benefit of cash value life insurance? A. Death benefits aren't taxable income. B. Life insurance premiums paid are tax deductible in the United States. C. The annual increase in the cash value while the policy is in force isn't taxed. D. Returns earned on the savings component are tax deferred until surrender.

13. As a rule of thumb, insurance coverage should equal A. 6 to 10 times annual income. B. 6 to 10 times net worth. C. 6 to 10 times monthly income. D. 6% to 10% of expected annual retirement income.

14. An annuity that pays only until the annuitant dies is called a _______ annuity. A. straight life C. whole life B. term D. universal

15. A policy that pays the face amount of the policy if the insured dies and also pays the face amount if the insured survives the policy term is called a/an _______ policy. A. whole life C. endowment B. universal life D. term life

Part 3:

1. The most common types of voluntary benefits offered by employers include all of the following, except A. medical insurance. B. life insurance. C. disability insurance. D. automobile insurance.

2. Cafeteria benefit plans are also known as A. flexible spending accounts. B. Section 125 plans. C. noncontributory plans. D. "free lunch" plans. Employee-Employer Relationships

3. Which of the following is not one of the reasons commonly suggested explaining why firms provide employee benefits instead of simply paying higher cash wages? A. Employers don't have enough cash to pay higher wages. B. Employer-provided benefits promote employee productivity. C. Percentage loadings for administrative expenses in group insurance premiums are lower than for individual insurance. D. They provide tax savings for both employer and employee.

4. The cost of employee benefits represents, on average, _______ of private employers' total compensation costs. A. 5%-10% C. 20%-25% B. 10%-15% D. 35%-40%

5. Many group medical expense coverage and medical plans contain a stop loss clause, which places a ceiling on the A. amount a hospital or physician can charge the insurance provider. B. amount the provider will pay for any given medical problem or condition. C. out-of-pocket maximum costs to be incurred by the employee. D. out-of-pocket maximum costs to be incurred by the employer.

6. Monica works for a firm that has a pension plan. Her employer's contributions vary from year to year depending on how well the firm is doing. For example, in 2007 when the firm had net income of $1,000,000, it contributed $2,000 to her pension. In 2008 when the firm had net income of $2,000,000, they contributed $4,000 to her pension. What kind of plan does Monica have? A. Profit sharing plan C. 401(k) plan B. Money purchase plan D. ESOP

7. A retirement plan in which the employer promises to pay the employees a retirement benefit equal to 2% of their final salary for every year of service is an example of a A. defined contribution plan. C. contributory plan. B. 401(k) plan. D. defined benefit plan.

8. Workers' compensation laws have which two important features? A. (1) Employers pay benefits unless there was employer fault or negligence, and (2) employees aren't allowed to sue employers for injuries under tort law. B. (1) Employers pay benefits without regard to employer fault or negligence, and (2) employees are required to sue employers for injuries under tort law. C. (1) Employers pay benefits unless there was employer fault or negligence, and (2) employees can choose to sue employers for injuries under tort law. D. (1) Employers pay benefits without regard to employer fault or negligence, and (2) employees aren't allowed to sue employers for injuries under tort law.

9. If an employer decides to use cliff vesting, what is the maximum length of service that can be required of an employee before vesting occurs? A. 3 years C. 7 years B. 5 years D. 10 years

10. Which of the following categories of workers is not eligible for Social Security (OASDI) benefits? A. Retired persons age 62 and over who have 40 quarters of coverage B. Unmarried children age 18 and under of deceased participants who had at least 6 quarters of coverage during the 13 quarters preceding death C. Spouses, under age 60, of deceased, fully insured workers with no dependent children D. Disabled workers with at least 20 quarters of coverage during the 40 quarters preceding the onset of disability

11. Medicare Part A provides which of the following benefits? A. Inpatient hospital services C. Pharmaceutical expenses B. Physicians' services D. Free homeopathic remedies

12. Due in large part to _______, workers' compensation costs continue to increase. A. undocumented workers B. rising medical costs C. inflation D. the declining value of the U.S. dollar

13. Which of the following is not one of the main types of workers' compensation benefits? A. Pain and suffering compensation B. Payment of medical expenses C. Payment for lost income due to disability D. Death benefits

14. Under workers' compensation laws, injured workers who are unable to work can typically receive benefits equal to A. 100% of their pre-injury wage. B. 100% of the state's average weekly wage. C. 2/3 of their pre-injury wage, capped at 100% of the state's average wage. D. 3/4 of their pre-injury wage, capped at 100% of the state's average wage.

15. Which one of the following programs is not financed with OASDHI payroll taxes? A. Social Security disability benefits C. Medicare Part A B. Social Security survivor benefits D. Medicare Part B

Part 4:

1. Which of the following statements is true of diversifiable risk? A. It can be eliminated in a carefully constructed portfolio. B. It can't be eliminated. C. It affects the opportunity cost of capital. D. It increases the opportunity cost of capital.

2. Which of the following risks faced by a business is most likely to be nondiversifiable? A. An explosion at the firm's plant B. Worker injury C. Reduced earnings due to poor economic conditions D. A class-action product liability claim

3. Which of the following equations is correct? A. Discount rate = Risk-free rate - Risk premium B. Discount rate = Risk-free rate ? Risk premium C. Discount rate = Risk-free rate ÷ Risk premium D. Discount rate = Risk-free rate + Risk premium Business Risk Management-Theory

4. Which of the following equations is correct? A. Adjusted NPV = NPV + Cost of issuing securities B. Adjusted NPV = NPV - Cost of issuing securities C. Adjusted NPV = NPV ÷ Cost of issuing securities D. Adjusted NPV = NPV ? Cost of issuing securities

5. Corporate risk reduction increases shareholder wealth by A. increasing expected net cash flows. B. decreasing expected net cash flows. C. decreasing the corporate cost of capital. D. increasing the corporate cost of capital.

6. Which of the following statements is true of the tax treatment of uninsured losses? A. It's the same as the financial reporting of uninsured losses. B. It allows for a firm to choose when the loss will be deducted. C. It's the same for insurance companies and non-insurance companies. D. It requires that the loss be deducted in the year it's paid.

7. The main advantage of using debt financing is the A. effect on cost of capital. B. availability of interest tax shields. C. lower probability of financial distress. D. reduced variability of earnings.

8. The federal government imposes _______ taxes on insurance purchased from insurers domiciled outside of the United States. A. sin C. excise B. premium D. non-patriot

9. U.S. corporations can carry losses _______ years forward and 2 years backwards. A. 10 C. 22 B. 20 D. 25

10. An admitted insurer in a particular state A. can be domestic, foreign, or alien. B. is always a domestic insurer. C. isn't always licensed to sell insurance in the state. D. faces stricter regulation than nonadmitted insurers.

11. Which of the following refers to the decision to accept the uncertainty (variability) associated with a particular risk exposure? A. Risk retention C. Risk sharing B. Risk reduction D. Risk mitigation

12. Which one of the following firms is more likely to use retention? A. A closely held firm B. A firm with a high level of financial leverage C. A publicly traded and widely held firm D. A small firm

13. Which one of the following is an example of an aggregated approach to risk management? A. Hedging exchange rate risk B. Hedging interest rate risk C. Purchasing a high level of liability insurance D. Using derivatives to stabilize fluctuations in revenue

14. A bundled insurance policy with a single overall retention limit can help a firm A. avoid the problem of two contracts providing duplicate coverage. B. develop simpler contracts. C. avoid purchasing unnecessary coverage. D. understand the disaggregated loss distributions.

15. A disaggregated risk management approach will generally result in A. higher transaction costs. C. lower expected losses. B. lower transaction costs. D. higher expected losses.

Part 5:

1. An insurance contract provision that stipulates the policyholder will pay the first $100,000 of each loss is an example of a/an A. aggregate deductible. B. stop loss provision. C. per occurrence deductible. D. loss cap.

2. Which of the following is a tool useful in displaying how a particular insurance contract apportions losses between the insurer and the insured? A. Exposure diagram C. Aggregation graph B. Coverage chart D. Occurrence diagram 3. Both property and liability policies typically have A. annual aggregate limits. C. layering coverage. B. per occurrence limits. D. excess policies.

4. The portion of a property insurance policy that summarizes the types and locations of covered property, policy limits, and premiums rates is called the A. coverage form. C. policy conditions. B. policy package. D. policy declarations.

5. Loss of income associated with a curtailment or cessation of operations following physical damage to property can be insured with which of the following? A. Extra expense coverage C. Business interruption coverage B. Causes of loss form D. Umbrella policy

6. LT properties has four excess policies covering a large building it owns. Each policy is from a different insurer and has a policy limit of $10 million. The first policy has an attachment point of $5 million, the second policy attachment point of $15 million, the third policy has an attachment point of $25 million, and the fourth policy has an attachment point of $35 million. This type of insurance purchasing is referred to as _______ coverage. A. attachment C. blanket B. layering D. umbrella

7. Call option A has an exercise price of $20. Call option B has an exercise price of $15. If all other characteristics of these options are identical and they are on the same underlying asset, which option will have a higher price? A. Call option A will have a higher price. B. Call option B will have a higher price. C. Call option A and call option B will have the same price. D. It's impossible for two options on the same underlying asset to have different exercise prices.

8. Which of the following statements is true about a futures contract? A. The payoff is equal to the difference between the price of the underlying asset and the futures price. B. The payoff is the same as that of a call option. C. Futures contracts always require delivery of the underlying asset to complete the contract. D. The futures price is paid by the buyer at the outset of the contract.

9. Basis risk exists when the hedging instrument A. is likely to increase in value over time. B. is likely to decrease in value over time. C. has a high level of volatility. D. differs in value from the item being hedged.

10. When there's an increase in a put option price, the A. price of the underlying asset increases. B. volatility in return of the underlying asset increases. C. time to maturity decreases. D. interest rates decrease.

11. Which of the following statements is true about the notional principal for swap contracts? A. It's an accurate measure of the amount of money at risk. B. It's usually double the amount of money at risk. C. It's usually an inaccurate measure of the amount of money at risk. D. It's the expected value of the payout of the contract.

12. The cost of carry relationship is illustrated by which of the following equations? A. Forward price = Spot price at time t + Cost of carry B. Forward price + Spot price at time t = Cost of carry C. Forward price ? Spot price at time t = Cost of carry D. Forward price = Spot price at time t ? Cost of carry

13. A.J. Manufacturing has an agreement with the Bank of St. Croix whereby A.J. can borrow up $3.5 million should the manufacturing plant suffer a severe fire or windstorm. The interest rate on the loan is guaranteed to not be greater than 7 percent. This is an example of A. contingent debt. C. a letter of credit. B. contingent equity. D. a line of credit.

14. Experience-rated policies are beneficial to the insurer because they help to reduce A. adverse selection. C. fraud. B. moral hazard. D. insurer insolvency.

15. An oil refinery has recently suffered an explosion. The refinery has estimated its cost from this explosion to be approximately $50 million. Uncertainty still exists, though, regarding the actual amount and timing of the loss payments. An insurer has agreed, for a price, to assume all responsibility for the payment of this loss. This is an example of a/an A. retrospectively rated policy. C. incurred loss retro policy. B. premium financing arrangement. D. loss portfolio transfer.

Part 6:

1. Regression seeks to develop a cost equation. Which of the following represents a cost equation based on linear regression? A. Y = α + βX C. Y = α ?βX B. Y = α - βX D. Y = α ÷ βX

2. The _______ distribution is often used to approximate the frequency of accident losses. A. normal C. Poisson B. gamma D. lognormal

3. If the normal distribution is used to estimate losses when the true loss distribution is in fact positively skewed, which of the following errors will occur? A. The maximum probable loss will be overestimated. B. The maximum probable loss will be underestimated. C. The standard deviation will be underestimated. D. The standard deviation will be overestimated.

4. The correlation coefficient is always within the range between A. -2.0 and +1.0. C. 0 and +1.0. B. -1.0 and 0. D. -1.0 and +1.0.

5. When a risk manager is choosing between two alternative, mutually exclusive methods of financing losses that have different patterns of expenditures, but don't materially affect the variability of any of the firm's cash flows, the appropriate cost of capital for discounting these expenditures is the A. risk free rate. B. opportunity cost. C. opportunity cost of capital, adjusted upward to reflect additional risk. D. opportunity cost of capital, adjusted downward to reflect reduced risk.

6. A hold harmless agreement is a contract between two parties in which A. both parties agree to indemnify each other for any losses incurred. B. both parties agree to buy insurance against any potential losses that might arise out of the activity they are engaged in. C. one party agrees not to make the other party pay for any losses that might arise out of some activity. D. one party agrees to reimburse the other party for any losses that might arise out of some activity.

7. If a group of shareholders file a lawsuit on behalf of the corporation against the directors and officers of the corporation, it's called a/an _______ lawsuit. A. direct action C. indemnity B. nuisance D. derivative

8. Roaster Coaster Inc. manufactures rolling hotdog vending stands. One of the hotdog vending stands comes off the production line defective. It eventually starts a fire at an amusement park. The fire causes a minor panic that results in a few children being injured as the crowd runs away from the fire. This is an example of a _______ defect. A. hidden C. manufacturing B. design D. warning

9. When foreseeable risks of harm presented by a product could easily have been prevented, it's said to have a _______ defect. A. design C. warning B. manufacturing D. strict

10. Under the most recent commercial general liability policies, environmental damage is A. covered only if it was "sudden and intentional." B. excluded from coverage under the policy. C. covered if the pollution was gradual. D. covered if the policyholder was unaware that it was occurring.

11. The principle that product liability suits must be brought within a certain number of years is called A. assumed risk. C. regressivity. B. unforeseeable misuse. D. the statute of repose.

12. If the directors and officers of a corporation cause the shareholders to suffer a loss, A. they're personally liable for the total amount of the losses. B. they aren't liable if they can show that they acted with reasonable business judgment. C. they can never be held personally liable because of the limited liability rule. D. they can be liable only up to the limit of their investment in the corporation.

13. When a corporation has debt financing and limited liability, a liability claim in excess of the equity value of the firm will A. expose shareholders to claims on their personal assets. B. result in shareholders losing only part of their investment in the firm, since bondholders will pay some of the cost. C. result in shareholders losing all of their investment in the firm. D. be paid only after the shareholders have paid back their debt to the bondholders.

14. Which of the following statements about the liability of businesses for actions of independent contractors is true? A. A business that hires an independent contractor can always be held vicariously liable for the negligent actions of the contractor. B. A business that hires an independent contractor will never be held vicariously liable for the negligent actions of the contractor. C. A business that hires an independent contractor can be held liable for the actions of the contractor if the contractor is acting as an employee. D. A business can avoid liability by delegating to an independent contractor the duty to keep the public safe.

15. Protecting the public safety constitutes a/an A. hold harmless agreement. C. indemnity agreement. B. certificate of insurance. D. nondelegable duty.