rejda--principles of risk management and insurance 11e

Chapter1RiskinOurSociety

1) Traditionally,riskhasbeendefinedasA) anysituationinwhichtheprobabilityoflossisone.B) anysituationinwhichtheprobabilityoflossiszero.C) uncertaintyconcerningtheoccurrenceofloss.D) theprobabilityofalossoccurring.

Answer: CQuestionStatus: PreviousEdition

2) ObjectiveriskisdefinedasA) theprobabilityofloss.B) therelativevariationofactuallossfromexpectedloss.C) uncertaintybasedonapersonsmentalconditionorstateofmind.D) thecauseofloss.

Answer: BQuestionStatus: PreviousEdition

3) Aninsurancecompanyestimatesitsobjectiveriskfor10,000exposurestobe10percent.Assumingtheprobabilityoflossremainsthesame,whatwouldhappentotheobjectiveriskifthenumberofexposuresweretoincreaseto1million?

A) Itwoulddecreaseto1percent.B) Itwoulddecreaseto5percent.C) Itwouldremainthesame.D) Itwouldincreaseto20percent.

Answer: AQuestionStatus: PreviousEdition

4) UncertaintybasedonapersonsmentalconditionorstateofmindisknownasA) objectiverisk.B) subjectiverisk.C) objectiveprobability.D) subjectiveprobability.


5) Thelong-runrelativefrequencyofaneventbasedontheassumptionofaninfinitenumberofobservationswithnochangeintheunderlyingconditionsiscalled

A) objectiveprobability.B) objectiverisk.C) subjectiveprobability.D) subjectiverisk.


Copyright2011PearsonEducation,Inc.

2RejdaPrinciplesofRiskManagementandInsurance,EleventhEdition

6) Whichofthefollowingstatementsaboutapriori probabilitiesiscorrect?A) Theyaresubjectiveprobabilitiesbasedonambiguityinthewayprobabilityisperceived.B) Theyaresubjectiveprobabilitiesthatmayvaryamongindividualsbecauseoffactorssuch

asage,gender,education,andtheuseofalcohol.C) Theyareobjectiveprobabilitiesthatcanbedeterminedbydeductivereasoning.D) Theyareobjectiveprobabilitiesthatcanbedeterminedbysubjectivereasoning.


7) AnindividualspersonalestimateofthechanceoflossisA) anobjectiveprobability.B) anobjectiverisk.C) asubjectiveprobability.D) anaprioriprobability.


8) AperilisA) amoralhazard.B) thecauseofaloss.C) aconditionwhichincreasesthechanceofaloss.D) theprobabilitythatalosswilloccur.


9) AnearthquakeisanexampleofaA) moralhazard.B) peril.C) physicalhazard.D) objectiverisk.


10) DensefogthatincreasesthechanceofanautomobileaccidentisanexampleofaA) speculativerisk.B) peril.C) physicalhazard.D) moralhazard.


11) FakinganaccidenttocollectinsuranceproceedsisanexampleofaA) physicalhazard.B) objectiverisk.C) moralhazard.D) attitudinalhazard.

Answer: CQuestionStatus: Revised


Chapter1RiskinOurSociety3

12) CarelessnessorindifferencetoalossisanexampleofA) physicalhazard.B) objectiveprobability.C) moralhazard.D) attitudinalhazard.

Answer: DQuestionStatus: Revised

13) Somecharacteristicsofthejudicialsystemandregulatoryenvironmentincreasethefrequencyandseverityofloss.Thishazardiscalled

A) moralhazard.B) physicalhazard.C) attitudinalhazard.D) legalhazard.


14) TaylorTobaccoCompanyisconcernedthatthecompanymaybeheldliableinacourtoflawandorderedtopayalargedamageaward.Thecharacteristicsofthejudicialsystemthatincreasethefrequencyandseverityoflossesareknownas

A) moralhazard.B) particularrisk.C) speculativerisk.D) legalhazard.

Answer: DQuestionStatus: PreviousEdition

15) AphrasethatencompassesallofthemajorrisksfacedbyabusinessfirmisA) financialrisk.B) speculativerisk.C) enterpriserisk.D) purerisk.


16) Whichofthefollowingstatementsaboutfinancialriskis(are)true?I. Enterpriseriskdoesnotincludefinancialrisk.II. Financialriskiseasilyaddressedthroughthepurchaseofinsurance.

A) IonlyB) IIonlyC) bothIandIID) neitherInorII




17) AllofthefollowingareconsideredfinancialrisksEXCEPTA) thedeclineinthevalueofabondportfoliobecauseofrisinginterestrates.B) increasedcostofproductionbecauseofrisingcommodityprices.C) lossofmoneybecauseofadversemovementsincurrencyexchangerates.D) destructionofaproductionfacilitycausedbyanexplosion.


18) KatelynwasjustnamedRiskManagerofABCCompany.ShehasdecidedtocreateariskmanagementprogramwhichconsidersalloftherisksfacedbyABC-pure,speculative,operational,andstrategic-inasingleriskmanagementprogram.Suchaprogramiscalleda(n)

A) financialriskmanagementprogram.B) enterpriseriskmanagementprogram.C) fundamentalriskmanagementprogram.D) consequentialriskmanagementprogram.


19) ApureriskisdefinedasasituationinwhichthereisA) onlythepossibilityoflossornoloss.B) onlythepossibilityofprofit.C) apossibilityofneitherprofitnorloss.D) apossibilityofeitherprofitorloss.


20) TheprematuredeathofanindividualisanexampleofaA) purerisk.B) speculativerisk.C) fundamentalrisk.D) physicalhazard.


21) Whichofthefollowingstatementsaboutspeculativerisksistrue?A) Theyarealmostalwaysinsurablebyprivateinsurers.B) Theyaremoreeasilypredictablethanpurerisks.C) Theymaybenefitsocietyeventhoughalossoccurs.D) Theyinvolveonlyachanceofloss.




22) Anautomobilethatisatotallossasaresultofacollisionisanexampleofwhichofthefollowingtypesofrisk?I. SpeculativeriskII. Diversifiablerisk


Answer: BQuestionStatus: Revised

23) AllofthefollowingareprogramstoinsurefundamentalrisksEXCEPTA) federallysubsidizedfloodinsurance.B) autophysicaldamageinsurance.C) SocialSecurity.D) unemploymentinsurance.


24) AllofthefollowingareexamplesofpersonalrisksEXCEPTA) poorhealth.B) unemployment.C) prematuredeath.D) flood.


25) Whichofthefollowingisareasonwhyprematuredeathmayresultineconomicinsecurity?I. Additionalexpensesassociatedwithdeathmaybeincurred.II. Theincomeofthedeceasedpersonsfamilymaybeinadequatetomeetitsbasicneeds.



26) Whichofthefollowingareoftenconsequencesoflong-termdisability?I. ContinuingmedicalexpensesII. Lossorreductionofemployeebenefits





27) AllofthefollowingareexamplesofdirectpropertylossesEXCEPTA) thetheftofapersonsjewelry.B) thedestructionofafirmsmanufacturingplantbyanearthquake.C) thecostofrentingasubstitutevehiclewhileacollision-damagedcarisbeingrepaired.D) thevandalismofapersonsautomobile.


28) Theextraexpenseincurredbyabusinesstostayinoperationfollowingafireisanexampleofa(n)

A) fundamentalrisk.B) speculativerisk.C) directloss.D) indirectloss.


29) Whichofthefollowingstatementsaboutliabilityrisksis(are)true?I. Futureincomeandassetscanbeattachedtopayjudgmentsifinadequateinsuranceiscarried.II. Thereisanupperlimitontheamountofloss.



30) AllofthefollowingareburdenstosocietybecauseofthepresenceofriskEXCEPTA) Thesizeofanemergencyfundmustbeincreased.B) Individualsmayprofitfromacceptingaspeculativerisk.C) Societyisdeprivedofcertaingoodsandservices.D) Mentalfearandworryarepresent.


31) Losscontrolincludeswhichofthefollowing?I. LossreductionII. Lossprevention





32) FollowinggoodhealthhabitscanbecategorizedasA) lossprevention.B) riskretention.C) noninsurancetransfer.D) personalinsurance.

Answer: AQuestionStatus: Revised

33) Fromtheinsuredsperspective,theuseofdeductiblesininsurancecontractsisanexampleofA) risktransfer.B) losscontrol.C) riskavoidance.D) riskretention.


34) Theuseoffire-resistivematerialswhenconstructingabuildingisanexampleofA) risktransfer.B) losscontrol.C) riskavoidance.D) riskretention.


35) AllofthefollowingstatementsaboutriskretentionaretrueEXCEPTA) Itmaybeusedintentionallyifcommercialinsuranceisunavailable.B) Itmaybeusedpassivelybecauseofignorance.C) Itsuseismostappropriateforlow-frequency,high-severitytypesofrisks.D) Itsuseresultsincostsavingsiflossesarelessthanthecostofinsurance.


36) AllofthefollowingaremethodsofnoninsurancetransferEXCEPTA) enteringintoahold-harmlessagreement.B) avoidingdangerousactivities.C) hedgingriskusingfuturescontracts.D) incorporatingabusiness.




37) Curtborrowedmoneyfromabanktopurchaseafishingboat.Hepurchasedpropertyinsuranceontheboat.Curthaddifficultymakingloanpaymentsbecausehedidnotcatchmanyfish,andfishpriceswerelow.Curtintentionallysunktheboat,collectedfromhisinsurer,andpaidofftheloanbalance.Thisscenarioillustratestheproblemof

A) adverseselection.B) moralhazard.C) nondiversifiablerisk.D) attitudinalhazard.


38) Jennaopenedasuccessfulrestaurant.Onenight,aftertherestauranthadclosed,afirestartedwhentheelectricalsystemmalfunctioned.Inadditiontothephysicaldamagetotherestaurant,Jennaalsolostprofitsthatcouldhavebeenearnedwhiletherestaurantwasclosedforrepairs.Thelostprofitsareanexampleof

A) directloss.B) nondiversifiablerisk.C) speculativerisk.D) indirectloss.


39) Bradstartedapestcontrolbusiness.Toprotecthispersonalassetsagainstliabilityarisingoutofthebusiness,Bradincorporatedthebusiness.Bradsuseofthecorporateformoforganizationtoshieldagainstpersonalliabilityclaimsillustrates

A) fundamentalrisk.B) noninsurancetransfer.C) riskretention.D) objectiverisk.


40) ABCInsuranceCompanyplanstosellhomeownersinsuranceinfiveWesternstates.ABCexpectsthat8homeownersoutofevery100,onaverage,willreportclaimseachyear.ThevariationbetweentherateoflossthatABCexpectstooccurandtherateoflossthatactuallydoesoccuriscalled

A) objectiveprobability.B) subjectiveprobability.C) objectiverisk.D) subjectiverisk.




41) WilliamsCompanyinstalledsmokedetectors,asprinklersystem,andfireextinguishersinitsnewmanufacturingfacility.Thesedevicesareallexamplesof

A) losscontrol.B) noninsurancetransfer.C) riskavoidance.D) riskretention.


42) TyndalProductsCompanyproducescereal.Thecompanyhasenteredintocontractstodeliver500,000boxesofcerealduringthenext18months.Thecompanyisconcernedthatthepricesoftwoingredients,cornandwheat,mayincreaseoverthenext18months.Thecompanyusedgrainfuturescontractstohedgethepriceriskassociatedwiththesecommodities.Tyndalsuseofhedgingillustrateswhichriskmanagementtechnique?

A) noninsurancetransferB) riskavoidanceC) riskretentionD) riskassumption


43) Cathyscarhitapatchoficeontheroad.Thecarskiddedofftheroadandhitatree.Thepresenceoficeontheroadisbestdescribedasa(n)

A) peril.B) subjectiverisk.C) physicalhazard.D) indirectloss.


44) JimandPaulaFranklinstartedadrycleaningbusiness.Thebusinessmaybesuccessfuloritmayfail.Thetypeofriskthatispresentwheneitheraprofitorlosscouldoccuriscalled

A) purerisk.B) subjectiverisk.C) nondiversifiablerisk.D) speculativerisk.


45) Benisconcernedthatifheinjuressomeoneordamagessomeonespropertyhecouldbeheldlegallyresponsibleandrequiredtopaydamages.Thistypeofriskiscalleda

A) speculativerisk.B) liabilityrisk.C) nondiversifiablerisk.D) propertyrisk.




46) MLXDrugCompanywouldliketomarketanewhypertensiondrug.WhiletheFoodandDrugAdministration(FDA)wastestingthedrug,itdiscoveredthatthedrugproducedaharmfulsideeffect.WhenMLXlearnedoftheFDAstestresult,MLXabandoneditsplantoproduceanddistributethedrug.MLXsreactionillustrates

A) riskavoidance.B) hedging.C) risktransfer.D) riskretention.


47) ABCHealthInsuranceCompanysellshealthinsuranceinonestate.Recently,thatstateslegislaturepassedalawforbiddinghealthinsurersfromconsideringanindividualshealthhistorywhenselectingapplicantstoinsure.ThischangeinlawwillincreasethepossibilityofunprofitableresultsforABC.Thistypeofhazardisanexampleof

A) physicalhazard.B) legalhazard.C) moralhazard.D) attitudinalhazard.


48) AllofthefollowingarecharacteristicsoftheliabilityriskthatmostpeoplefaceEXCEPTA) alienmaybeplacedonyourincomeandassetstosatisfyalegaljudgment.B) substantiallegalexpensesmaybeincurreddefendingtheclaim.C) thereisnoupperlimitontheamountoftheloss.D) owningliabilityinsuranceeliminatesthepossibilityofbeingheldlegallyliable.


49) Whichofthefollowingstatementsaboutchanceoflossandriskis(are)true?I. Ifthechanceoflossisidenticalfortwogroups,theobjectiveriskmustbethesame.II. Twoindividualsmayperceivedifferentlytheriskinherentinagivenactivity.



50) AriskthataffectsonlyindividualsorsmallgroupsandnottheentireeconomyiscalledaA) diversifiablerisk.B) purerisk.C) speculativerisk.D) nondiversifiablerisk.

Answer: AQuestionStatus: New



51) AllofthefollowingarecommercialrisksEXCEPTA) thelossofbusinessincome.B) theriskofinsufficientretirementincome.C) theriskofbeingsued.D) theriskofpropertydamage.

Answer: BQuestionStatus: New


Chapter2InsuranceandRisk

1) AllofthefollowingarecharacteristicsofinsuranceEXCEPTA) riskavoidance.B) poolingoflosses.C) paymentoffortuitouslosses.D) indemnification.


2) Whichofthefollowingisimpliedbythepoolingoflosses?A) sharingoflossesbyanentiregroupB) inabilitytopredictlosseswithanydegreeofaccuracyC) substitutionofactuallossforaveragelossD) increaseofobjectiverisk


3) Accordingtothelawoflargenumbers,whathappensasthenumberofexposureunitsincreases?

A) Actualresultswillincreasinglydifferfromprobableresults.B) Actualresultswillmorecloselyapproachprobableresults.C) Nondiversifiableriskwilldecrease.D) Objectiveriskwillincrease.


4) Accordingtothelawoflargenumbers,whatshouldhappenasaninsurerincreasesthenumberofunitsinsured?

A) Theamounttheinsurerexpectstopayinclaimsshoulddecrease.B) Underwritingexpensesshoulddecrease.C) Actualresultswillmorecloselyapproachexpectedresults.D) Theinsurersprofitabilityshouldbecomemorevariable.


5) Characteristicsofafortuitouslossincludewhichofthefollowing?I. Thelossiscertaintooccur.II. Thelossoccursasaresultofchance.




Chapter2InsuranceandRisk13

6) Fromtheviewpointoftheinsurer,allofthefollowingarecharacteristicsofanideallyinsurableriskEXCEPT

A) Thelossmustbeaccidental.B) Thelossshouldbecatastrophic.C) Thepremiummustbeeconomicallyfeasible.D) Theremustbealargenumberofexposureunits.


7) Fromthestandpointoftheinsurer,allofthefollowingarecharacteristicsofanideallyinsurableriskEXCEPT

A) Thelossmustbeunintentional.B) Thechanceoflossmustbecalculable.C) Thelossmustbeindeterminable.D) Thelossmustbemeasurable.


8) Whyisalargenumberofexposureunitsgenerallyrequiredbeforeapureriskisinsurable?A) Itpreventstheinsurerfromlosingmoney.B) Iteliminatesintentionallosses.C) Itminimizesmoralhazard.D) Itenablestheinsurertopredictlossesmoreaccurately.


9) Therequirementthatlossesshouldbeaccidentalandunintentionalinordertobeinsurableresultsinwhichofthefollowing?I. DecreaseinmoralhazardII. Moreaccuratepredictionoffuturelosses



10) Whichofthefollowingisimpliedbytherequirementthatalossshouldbedeterminableandmeasurabletobeinsurable?I. Thelossmustbedefiniteastoplace.II. Thelossmustbedefiniteastoamount.





11) Methodsbywhichinsurersmayminimizeoravoidcatastrophiclossesincludewhichofthefollowing?I. TheuseofreinsuranceII. Concentratingcoveragewritteninonegeographicregion



12) Whichofthefollowingtypesofrisksbestmeetstherequirementsforbeinginsurablebyprivateinsurers?

A) marketrisksB) propertyrisksC) financialrisksD) politicalrisks


13) Reasonswhymarket,financial,andproductionrisksareoftenuninsurableincludewhichofthefollowing?I. Thepotentialtoproduceacatastrophiclossisgreat.II. Thechanceoflosscannotbeaccuratelyestimated.



14) Whichofthefollowingtypesofrisksisnormallyuninsurablebyprivateinsurers?A) personalrisksB) propertyrisksC) liabilityrisksD) marketrisks


15) Whichofthefollowingisaresultofadverseselection?A) Theinsurersfinancialresultswillbesubstantiallyimproved.B) Personsmostlikelytohavelossesarealsomostlikelytoseekinsuranceatstandardrates.C) Itisunnecessaryfortheinsurancecompanytouseunderwriting.D) Insurancecanbewrittenonlybythefederalgovernment.




16) Thetendencyforunhealthypeopletoseeklifeorhealthinsuranceatstandardratesisanexampleof

A) moralhazard.B) fundamentalrisk.C) attitudinalhazard.D) adverseselection.


17) Whichofthefollowingstatementsregardinginsuranceandgamblingis(are)true?I. Insuranceisusedtohandleexistingpurerisks,whilegamblingcreatesanewspeculativerisk.II. Insuranceusuallyinvolvesriskavoidance,whilegamblingtypicallyinvolvesonlyriskreduction.



18) Inadditiontomarketinglifeinsurance,lifeinsurerstypicallysellwhichofthefollowingproducts?I. RetirementannuitiesII. Disabilityincomeinsurance



19) InlandmarineinsuranceprovidescoverageforA) goodsbeingshippedonland.B) prematuredeathofmembersofthearmedforces.C) goodsbeingshippedonocean-goingvessels.D) liabilityexposuresofnonprofitorganizations.


20) AllofthefollowingareclassifiedascasualtyinsuranceEXCEPTA) lifeinsurance.B) generalliabilityinsurance.C) workerscompensationinsurance.D) burglaryandtheftinsurance.




21) Whichofthefollowingisaformofcasualtyinsurance?A) fireinsuranceB) generalliabilityinsuranceC) inlandmarineinsuranceD) oceanmarineinsurance


22) Thetermmultiple-lineinsuranceisusedtodescribeatypeofinsurancethatcombineswhichofthefollowingcoveragesintoasinglecontract?

A) workerscompensationandhealthinsuranceB) lifeanddisabilityinsuranceC) propertyandcasualtyinsuranceD) pensionsandannuities


23) AllofthefollowingarebenefitstosocietythatresultfrominsuranceEXCEPTA) lessworryandfear.B) eliminationofmoralhazard.C) indemnificationforloss.D) lossprevention.


24) Whichofthefollowingstatementsabouttheinsuranceindustryasasourceofinvestmentfundsis(are)true?I. Thesefundsresultinalowercostofcapitalthanwouldexistintheabsenceofinsurance.II. Thesefundstendtopromoteeconomicgrowthandfullemployment.



25) AllofthefollowingaresocialcostsassociatedwithinsuranceEXCEPTA) insurancecompanyoperatingexpenses.B) fraudulentclaims.C) inflatedclaims.D) increasedcostofcapital.




26) Agroupoffarmersagreedthatifanyfarmersufferedapropertyloss,thelosswouldbespreadovertheentiregroup.Inthisway,eachfarmerisresponsiblefortheaveragelossofthegroupratherthantheactuallossthatthefarmersustained.Whichcharacteristicofinsuranceisembodiedinthisagreement?

A) poolingoflossesB) fortuitouslossesC) riskavoidanceD) indemnification


27) XYZInsuranceCompanywritescoverageformostperilswhichcandamageproperty.XYZ,however,doesnotwritefloodinsuranceonpropertylocatedinfloodplains.WhichrequirementofanideallyinsurableriskmightbeviolatedifXYZwrotefloodinsuranceonpropertylocatedinfloodplains?

A) Theremustbealargenumberofsimilarexposureunits.B) Thelossshouldnotbecatastrophic.C) Thechanceoflossmustbecalculable.D) Thelossesmustbedeterminableandmeasurable.


28) ABCApplianceoffersawarrantyrequiringanannualfee.Thewarrantymaybepurchasedatthetimeofsaleoratanytimewithinthefirstyearaftertheappliancewaspurchased.Thewarrantyfeeafterthedateofpurchaseistwicethetime-of-purchasefee.Whenaskedwhythefeewashigherafterthedateofpurchase,ABCspresidentsaid,Buyingawarrantyisvoluntary.Wevenotedthatthosewhobuythewarrantyafterthepurchasedatehaveagreaterneedforservice.ChargingthesamerateoralowerrateafterthedateofpurchasewouldexposeABCtowhatproblemthatalsoimpactsprivateinsurers?

A) excessivepremiumsB) reducedclaimsC) badinvestmentsD) adverseselection


29) AlphaInsuranceCompanyinsuresabroadrangeofrisks,includingwhateverisnotcoveredbyfire,marine,andlifeinsurers.WhichtermbestdescribesthewiderangeofriskswrittenbyAlphaInsurance?

A) fidelityinsuranceB) casualtyinsuranceC) socialinsuranceD) propertyinsurance




30) LMNInsurancemarketshomeownersinsurance.TheLMNhomeownerspolicycombinespropertyandcasualtyinsuranceinthesamecontract.Insurancepoliciescombiningpropertyandcasualtycoverageinthesamecontractarecalled

A) mono-linepolicies.B) multi-yearpolicies.C) multiple-linepolicies.D) manuscriptpolicies.


31) Onebranchofgovernmentinsuranceprogramshasanumberofdistinguishingcharacteristics.Theseprogramsarecompulsory,theyarefinancedbymandatorycontributionsratherthangeneraltaxrevenues,andbenefitsareweightedinfavoroflow-incomegroups.Thesegovernmentinsuranceprogramsarecalled

A) welfareprograms.B) socialinsuranceprograms.C) casualtyinsuranceprograms.D) privateinsuranceprograms.


32) Ginawouldliketobuyahouse.Shewillpay10percentofthecostofthehouseasadownpaymentandborrowtheother90percentfromamortgagelender.Thehomewillserveascollateralfortheloan.ThelenderrequiresGinatopurchasepropertyinsuranceonthehomesothatthecollateralsupportingtheloanwillbeprotected.Thisscenarioillustrateswhichofthefollowingbenefitsofinsurancetosociety?

A) enhancementofcreditB) reductionoffearandworryC) sourceofinvestmentfundsD) incentivesforlossprevention


33) ABCInsuranceCompanycalculatedtheamountthatitexpectedtopayinclaimsundereachpolicysold.Ratherthansellingtheinsurancefortheamountitexpectedtopayinclaims,ABCaddedanallowancetocoverthecostofdoingbusiness,includingcommissions,taxes,andacquisitionexpenses.Thisallowanceiscalleda(n)

A) policyownerdividend.B) premium.C) expenseloading.D) ratecredit.




34) JKLInsuranceCompanyestimatesthat14outofevery100homeownersitinsureswillfileaclaimeachyear.Lastyear,JKLinsured200homeowners.Accordingtothelawoflargenumbers,whatshouldhappenifJKLinsures2,000homeownersthisyear?

A) ThetotalnumberofclaimsfiledbyJKLpolicyownersshoulddecrease.B) Thetotaldollarvalueofclaimswilldecrease.C) Theaveragesizeoflosswilldeclineinvalue.D) Theactualresultswillmorecloselyapproachtheexpectedresults.


35) ApexInsuranceCompanywrotealargenumberofpropertyinsurancepoliciesinanareawhereearthquakelossescouldoccur.WhenthepresidentofApexwasaskedifshefearedthatasevereearthquakemightputthecompanyoutofbusiness,sheresponded,Notachance.Wetransferredmostofthatrisktootherinsurancecompanies.Anarrangementbywhichaninsurerthatinitiallywritesinsurancetransferstoanotherinsurerpartorallofthepotentiallossesassociatedwithsuchinsuranceiscalled

A) hedging.B) speculating.C) reinsurance.D) lossavoidance.


36) BronsonCasualtyCompanysellscasualtyinsuranceonly.WhichofthefollowingcoveragescouldyoupurchasefromBronsonCasualtyCompany?

A) lifeinsuranceB) fireinsuranceC) marineinsuranceD) liabilityinsurance

Answer: DQuestionStatus: New

37) Whichofthefollowingstatementsregardinginsuranceandhedgingis(are)true?I. Insuranceinvolvesthetransferofinsurableriskwhilehedginghandlesriskthatistypicallyuninsurable.II. Bothinsuranceandhedgingrelyonthelawoflargenumberstoreducerisk.





38) Ashleyopenedanall-you-can-eatbuffetrestaurant.Thecostper-personwasbaseduponwhatAshleybelievedanaveragerestaurantpatronwouldconsume.Therestaurantbegantolosemoney.Ashleyconcludedthatherpatronshadaboveaverageappetites,andwereattractedtoherrestaurantbecausetheycouldeatasmuchastheywantedwhilebeingchargedanaverageprice.Asimilarphenomenonexistsininsurancemarkets.Thisproblemiscalled

A) moralhazard.B) adverseselection.C) attitudinalhazard.D) fundamentalrisk.


39) Whichofthefollowingstatementsis(are)trueconcerningprivateinsurance?I. Socialinsuranceprogramsareprivateinsuranceprograms.II. Bothindividualsandbusinessespurchaseprivateinsurance.



40) AdverseselectionoccursA) whenaninsurancecompanylosesmoneyonitsinvestments.B) whenindividualsintentionallybringaboutalossinordertocollectfromaninsurer.C) whencatastrophiclossesoccurasaresultofanaturaldisaster.D) whenapplicantswithahigher-than-averagechanceoflossseekinsuranceatstandard

rates.Answer: DQuestionStatus: New


rejda--principles of risk management and insurance 11e

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