A Practice Test On Insurance! Trivia Quiz

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A Practice Test On Insurance! Trivia Quiz - Quiz


Practice test on insurance trivia quiz. Insurance companies are created to ensure that entities are protected from the consequences of a risk occurring. Insured is expected to pay a premium which estimates the amount they receive when the risk occurs. Payment of premium is dependent on some rules being kept. Do take up this exciting quiz and get to learn some more about insurance in general and some of the basic rules.


Questions and Answers
  • 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.

    Correct Answer
    C. Uncertainty concerning the occurrence of loss.
    Explanation
    The correct answer is "uncertainty concerning the occurrence of loss." This definition of risk acknowledges that risk is not simply about the probability of loss, but also about the uncertainty surrounding it. It recognizes that risk involves situations where there is a lack of knowledge or predictability regarding whether a loss will occur. This definition is more comprehensive and encompasses a broader range of scenarios that can be considered as risks.

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  • 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 personʹs mental condition or state of mind.

    • D.

      The cause of loss.

    Correct Answer
    B. The relative variation of actual loss from expected loss
    Explanation
    Objective risk is defined as the relative variation of actual loss from expected loss. This means that objective risk measures the extent to which the actual outcome deviates from the expected outcome in terms of loss. It quantifies the uncertainty and unpredictability of potential losses, allowing individuals or organizations to assess and manage their exposure to risk. It does not refer to the probability of loss, the cause of loss, or uncertainty based on a person's mental condition or state of mind.

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  • 3. 

    An insurance company estimates its objective risk for 10,000 exposures at 10 percent. Assuming the probability of loss remains the same, what would happen to the objective risk if the number of exposures was 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

    Correct Answer
    A. It would decrease to 1 percent
    Explanation
    As the number of exposures increases from 10,000 to 1 million, the objective risk would decrease. This is because with a larger sample size, the estimate becomes more accurate and reliable. The probability of loss remains the same, but the larger number of exposures allows for a more precise estimation of the risk. Therefore, the objective risk would decrease to 1 percent.

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  • 4. 

    Uncertainty based on a personʹs mental condition or state of mind is known as

    • A.

      Objective risk

    • B.

      Subjective risk.

    • C.

      Objective probability

    • D.

      Subjective probability

    Correct Answer
    B. Subjective risk.
    Explanation
    Subjective risk refers to the uncertainty or perception of risk that is influenced by an individual's mental condition or state of mind. It is subjective because it varies from person to person and is based on their personal beliefs, experiences, and emotions. Objective risk, on the other hand, is based on factual data and can be measured and quantified. Therefore, subjective risk is the correct answer as it specifically relates to the uncertainty associated with an individual's mental condition or state of mind.

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  • 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.

    Correct Answer
    A. Objective probability
    Explanation
    Objective probability refers to 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. It is considered objective because it is based on empirical evidence and does not rely on personal beliefs or opinions. This type of probability is often used in statistical analysis and decision-making processes, as it provides a more reliable and unbiased estimate of the likelihood of an event occurring.

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  • 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

    Correct Answer
    C. They are objective probabilities that can be determined by deductive reasoning.
    Explanation
    A priori probabilities are objective probabilities that can be determined by deductive reasoning. This means that these probabilities are based on logical reasoning and prior knowledge, rather than subjective factors such as personal perception or individual characteristics. A priori probabilities are often used in mathematics and logic to make predictions or draw conclusions based on known information and established rules.

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  • 7. 

    An individualʹs 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

    Correct Answer
    C. A subjective probability
    Explanation
    An individual's personal estimate of the chance of loss is referred to as a subjective probability. This means that it is based on their own beliefs, opinions, and perceptions rather than being an objective or universally accepted probability. It takes into account their personal experiences, biases, and judgments, making it a subjective assessment of the likelihood of a loss occurring.

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  • 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

    Correct Answer
    B. The cause of a loss
    Explanation
    The correct answer is "the cause of a loss" because a peril refers to a specific event or circumstance that leads to damage or loss. It is the direct cause of an insurance claim or a loss that triggers coverage. Perils can include natural disasters, accidents, theft, or any other event that results in financial or physical harm. Therefore, the cause of a loss is the most appropriate explanation for the term "peril".

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  • 9. 

    An earthquake is an example of a

    • A.

      Moral hazard

    • B.

      Peril

    • C.

      Physical hazard

    • D.

      Objective risk

    Correct Answer
    B. Peril
    Explanation
    An earthquake is an example of a peril because it refers to a specific event or cause that can result in damage, loss, or harm. Perils are typically categorized as events that are beyond human control and can cause risk or danger. In the case of an earthquake, it is a natural disaster that can lead to destruction and pose a threat to human life and property. Therefore, it aligns with the definition of a peril.

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  • 10. 

    The 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.

    Correct Answer
    C. Physical hazard
    Explanation
    A physical hazard refers to a condition or situation that increases the likelihood of an accident or loss. In this case, the dense fog is a physical hazard because it reduces visibility on the road, making it more difficult for drivers to see and react to other vehicles or obstacles. This increases the risk of an automobile accident occurring.

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  • 11. 

    Faking an accident to collect insurance proceeds is an example of a

    • A.

      Physical hazard

    • B.

      Objective risk

    • C.

      Moral hazard

    • D.

      Morale hazard

    Correct Answer
    C. Moral hazard
    Explanation
    Faking an accident to collect insurance proceeds is an example of a moral hazard. A moral hazard refers to a situation where an individual or entity is more likely to take risks or engage in dishonest behavior because they are protected or insured against the negative consequences of their actions. In this case, the person faking the accident is knowingly engaging in fraudulent behavior to receive insurance money, taking advantage of the protection provided by insurance coverage. This behavior increases the risk for insurance companies and affects the overall fairness and cost of insurance for everyone involved.

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  • 12. 

    Indifference to loss because of the existence of insurance is an example of a

    • A.

      Physical hazard

    • B.

      Objective probability

    • C.

      Moral hazard

    • D.

      morale hazard

    Correct Answer
    D. morale hazard
    Explanation
    Morale hazard refers to a situation where an individual's behavior changes due to the presence of insurance or other forms of protection. In this case, the indifference to loss because of the existence of insurance suggests that the person may not take necessary precautions or may engage in riskier behavior because they know they are protected. This behavior can lead to increased losses or damages, thus making it an example of morale hazard.

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  • 13. 

    Some characteristics of the judicial system and regulatory environment increase the frequency and severity of a loss. This hazard is called

    • A.

      Moral hazard

    • B.

      Physical hazard

    • C.

      Morale hazard

    • D.

      Legal hazard

    Correct Answer
    D. Legal hazard
    Explanation
    Legal hazard refers to the risks and liabilities associated with the legal system and regulatory environment. It occurs when certain characteristics of the judicial system and regulatory environment increase the likelihood and severity of losses. This can include factors such as ambiguous or changing laws, complex regulations, and a lack of enforcement or accountability. Legal hazards can lead to increased litigation, fines, penalties, and legal expenses for individuals or organizations, ultimately resulting in financial losses.

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  • 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.

    Correct Answer
    D. Legal hazard.
    Explanation
    Legal hazard refers to the characteristics of the judicial system that increase the frequency and severity of losses. In this scenario, Taylor Tobacco Company is worried about being held liable in court and having to pay a substantial damage award. This situation aligns with the concept of legal hazard, as it involves the potential legal risks and liabilities that the company may face in the court system.

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  • 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

    Correct Answer
    C. Enterprise risk
    Explanation
    Enterprise risk refers to the comprehensive range of risks that a business firm may encounter. It includes financial risk, speculative risk, and pure risk, along with other types of risks such as operational, strategic, legal, and reputational risks. By using the term "enterprise risk," the answer suggests that it encompasses all the major risks faced by a business firm, making it the most appropriate choice among the given options.

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  • 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

    Correct Answer
    D. Neither I nor II
    Explanation
    Both statements I and II are false.

    Statement I is false because enterprise risk does include financial risk. Financial risk is a type of enterprise risk that refers to the potential for financial loss or instability due to factors such as market fluctuations, economic conditions, or poor financial management.

    Statement II is false because financial risk cannot be easily addressed through the purchase of insurance alone. While insurance can help mitigate certain types of financial risks, such as property damage or liability claims, it cannot eliminate or fully address all financial risks. Financial risk management requires a comprehensive approach that includes strategies such as diversification, hedging, and effective financial planning.

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  • 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.

      Loss of profits after a physical damage loss occurs

    Correct Answer
    D. Loss of profits after a physical damage loss occurs
    Explanation
    Loss of profits after a physical damage loss occurs is not considered a financial risk because it pertains to the operational aspect of a business rather than the financial aspect. Financial risks typically involve fluctuations in financial markets or currencies that can directly impact the value of investments or result in monetary losses. However, the loss of profits after physical damage is a consequence of a specific event and does not involve financial market or currency risks.

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  • 18. 

    Katelyn was just named Risk Manager of ABC Company. She has decided to create a risk management program that 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

    Correct Answer
    B. Enterprise risk management program
    Explanation
    An enterprise risk management program is a comprehensive approach to managing all types of risks faced by a company, including pure, speculative, operational, and strategic risks. This program takes into account all aspects of the organization and aims to identify, assess, and mitigate risks across the entire enterprise. By implementing an enterprise risk management program, Katelyn will be able to effectively manage and address all the different types of risks faced by ABC Company, ensuring the organization's overall stability and success.

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  • 19. 

    A pure risk is defined as a situation in which there is

    • A.

      Only the possibility of loss or no loss

    • B.

      Only the possibility of profit

    • C.

      A possibility of neither profit nor loss

    • D.

      A possibility of either profit or loss

    Correct Answer
    A. Only the possibility of loss or no loss
    Explanation
    A pure risk is a situation where there is only the possibility of loss or no loss. This means that there is no possibility of gaining a profit or experiencing a neutral outcome. In a pure risk scenario, the outcome can only result in either a loss or no loss, with no potential for any positive outcome.

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  • 20. 

    The premature death of an individual is an example of a

    • A.

      Pure risk

    • B.

      Speculative risk

    • C.

      Fundamental risk

    • D.

      Physical hazard.

    Correct Answer
    A. Pure risk
    Explanation
    The premature death of an individual is an example of a pure risk because it involves the possibility of loss or no loss, with no chance of gain. It is an uncertain event that can only result in a negative outcome, such as financial loss for the deceased's family or dependents. This type of risk cannot be controlled or avoided, only mitigated through measures like life insurance.

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  • 21. 

    Which of the following statements about speculative risks is true?

    • A.

      They are almost always insurable by private insurers

    • B.

      They are more easily predictable than pure risks

    • C.

      Their occurrence may benefit society

    • D.

      They involve only a chance of loss

    Correct Answer
    C. Their occurrence may benefit society
    Explanation
    Speculative risks refer to situations where there is a possibility of both gain and loss. Unlike pure risks, which involve only a chance of loss, speculative risks can result in positive outcomes. This means that their occurrence may benefit society, as they provide opportunities for individuals or organizations to make profits or gain advantages. However, speculative risks are not always insurable by private insurers, as the potential for gain makes it difficult to determine the insurable interest. Therefore, the correct statement is that their occurrence may benefit society.

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  • 22. 

    An automobile that is a total loss as a result of a collision is an example of which of the following types of risk? I. Speculative risk II. Fundamental risk

    • A.

      I only

    • B.

      II only

    • C.

      Both I and II

    • D.

      Neither I nor II

    Correct Answer
    D. Neither I nor II
    Explanation
    An automobile that is a total loss as a result of a collision does not fall under either speculative risk or fundamental risk. Speculative risk refers to situations where there is a possibility of gain or loss, such as investing in the stock market. Fundamental risk, on the other hand, refers to risks that are inherent in the nature of an activity or event, such as the risk of a natural disaster. The given scenario does not involve speculation or inherent risk, but rather a specific event (collision) resulting in a total loss, making it unrelated to either speculative or fundamental risk.

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  • 23. 

    All of the following are programs to insure fundamental risks EXCEPT

    • A.

      Federally subsidized flood insurance

    • B.

      Auto physical damage insurance.

    • C.

      Social Security

    • D.

      Unemployment insurance

    Correct Answer
    B. Auto physical damage insurance.
    Explanation
    Auto physical damage insurance is not a program that insures fundamental risks. It is a type of insurance coverage that protects against damage to a vehicle caused by accidents, theft, or other incidents. On the other hand, federally subsidized flood insurance, Social Security, and unemployment insurance are all programs designed to provide financial protection against fundamental risks such as floods, retirement, and job loss respectively.

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  • 24. 

    All of the following are examples of personal risks EXCEPT

    • A.

      Poor health

    • B.

      Unemployment.

    • C.

      Premature death

    • D.

      Flood.

    Correct Answer
    D. Flood.
    Explanation
    The given options are examples of personal risks that individuals may face in their lives. Poor health, unemployment, and premature death are all personal risks that can have significant impacts on an individual's well-being and financial stability. However, flood is not typically considered a personal risk, but rather a natural disaster that can affect a larger group of people or a community.

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  • 25. 

    Which of the following is a reason why premature death may result in economic insecurity? I. Additional expenses associated with death may be incurred. II. The income of the deceased personʹs family may be inadequate to meet its basic needs

    • A.

      I only

    • B.

      II only

    • C.

      Both I and II

    • D.

      Neither I nor II

    Correct Answer
    C. Both I and II
    Explanation
    Premature death can lead to economic insecurity due to both reasons I and II. Additional expenses associated with death, such as funeral costs, medical bills, and legal fees, can create a financial burden for the deceased person's family. Moreover, the income of the deceased person's family may be inadequate to meet its basic needs, resulting in further economic instability. Therefore, both reasons contribute to the economic insecurity caused by premature death.

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  • 26. 

    Which of the following is often consequences of long-term disability? I. Continuing medical expenses II. Loss or reduction of employee benefits

    • A.

      I only

    • B.

      II only

    • C.

      Both I and II

    • D.

      Neither I nor II

    Correct Answer
    C. Both I and II
    Explanation
    Long-term disability can result in both continuing medical expenses and loss or reduction of employee benefits. When someone is disabled for an extended period of time, they may require ongoing medical treatment and care, leading to continuing medical expenses. Additionally, they may lose or have their employee benefits reduced, such as health insurance, retirement contributions, or paid time off, as a result of being unable to work. Therefore, both options I and II are often consequences of long-term disability.

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  • 27. 

    All of the following are examples of direct property losses EXCEPT

    • A.

      The theft of a personʹs jewelry

    • B.

      The destruction of a firmʹs manufacturing plant by an earthquake

    • C.

      The cost of renting a substitute vehicle while a collision-damaged car is being repaired

    • D.

      The vandalism of a personʹs automobile

    Correct Answer
    C. The cost of renting a substitute vehicle while a collision-damaged car is being repaired
    Explanation
    The cost of renting a substitute vehicle while a collision-damaged car is being repaired is not considered a direct property loss because it is an indirect consequence of the damage. Direct property losses refer to the physical damage or destruction of property, such as the theft of jewelry, the destruction of a manufacturing plant by an earthquake, or the vandalism of an automobile. Renting a substitute vehicle is a financial expense incurred as a result of the damage, rather than a direct loss of property.

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  • 28. 

    The extra expense incurred by a business to stay in operation following a fire is an example of a(n)

    • A.

      Fundamental risk

    • B.

      Speculative risk.

    • C.

      Direct loss

    • D.

      Indirect loss

    Correct Answer
    D. Indirect loss
    Explanation
    The extra expense incurred by a business to stay in operation following a fire is considered an indirect loss. This is because it is not a direct result of the fire itself, but rather a consequence of the fire. The fire may have caused damage to the business's infrastructure or equipment, leading to the need for additional expenses to keep the business running. This type of loss is not a fundamental or speculative risk, as it is a specific and tangible consequence of the fire incident.

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  • 29. 

    Which of the following statements about liability risks is (are) true? I. Future income and assets can be attached to pay judgments if inadequate insurance is carried. II. There is an upper limit on the amount of loss.

    • A.

      I only

    • B.

      II only

    • C.

      Both I and II

    • D.

      Neither I nor II

    Correct Answer
    A. I only
    Explanation
    If inadequate insurance is carried, future income and assets can be attached to pay judgments. This means that if someone does not have enough insurance coverage to pay for a liability claim, their personal assets and future income can be used to satisfy the judgment. On the other hand, the statement about there being an upper limit on the amount of loss is not true. Liability risks do not have a set upper limit on the amount of loss that can be incurred. Therefore, only statement I is true.

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  • 30. 

    All of the following are burdens to society because of the presence of risk EXCEPT

    • A.

      The size of an emergency fund must be increased.

    • B.

      Individuals may profit from accepting a speculative risk

    • C.

      Society is deprived of certain goods and services

    • D.

      Mental fear and worry are present.

    Correct Answer
    B. Individuals may profit from accepting a speculative risk
    Explanation
    Accepting a speculative risk refers to taking on a risk that has the potential for both profit and loss. While it may be true that individuals can profit from accepting speculative risks, it does not necessarily burden society as a whole. The other options, such as increasing the size of an emergency fund, the deprivation of goods and services to society, and the presence of mental fear and worry, all represent burdens to society due to the presence of risk.

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  • 31. 

    Loss control includes which of the following? I. Loss reduction; II. Loss prevention

    • A.

      I only

    • B.

      II only

    • C.

      Both I and II

    • D.

      Neither I nor II

    Correct Answer
    C. Both I and II
    Explanation
    Loss control includes both loss reduction and loss prevention. Loss reduction refers to the measures taken to minimize the impact of losses that have already occurred, such as implementing strategies to recover from financial losses or mitigate the effects of a natural disaster. On the other hand, loss prevention involves the actions and strategies put in place to prevent losses from happening in the first place, such as implementing safety protocols, security measures, and risk management practices. Therefore, both loss reduction and loss prevention are integral components of loss control.

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  • 32. 

    Following good health habits can be categorized as

    • A.

      Loss prevention

    • B.

      Loss retention.

    • C.

      Noninsurance transfer

    • D.

      Personal insurance

    Correct Answer
    A. Loss prevention
    Explanation
    Loss prevention refers to the measures taken to minimize or prevent the occurrence of accidents, injuries, or losses. By following good health habits, individuals can reduce the risk of illness, injury, or other health-related issues, thereby preventing potential losses. This includes practices such as maintaining a balanced diet, exercising regularly, getting enough sleep, practicing good hygiene, and avoiding harmful habits like smoking or excessive alcohol consumption. These habits help individuals to proactively take care of their health and prevent potential losses in terms of physical and mental well-being.

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  • 33. 

    From the insuredʹs perspective, the use of deductibles in insurance contracts is an example of

    • A.

      Risk transfer

    • B.

      Loss control

    • C.

      Risk avoidance

    • D.

      Risk retention.

    Correct Answer
    D. Risk retention.
    Explanation
    The use of deductibles in insurance contracts is an example of risk retention because it requires the insured to bear a portion of the loss before the insurance coverage kicks in. By having a deductible, the insured retains some of the risk associated with potential losses. This helps to reduce the insurance company's exposure to small claims and encourages the insured to be more cautious and responsible in preventing losses. Therefore, deductibles promote risk retention by transferring a portion of the risk back to the insured.

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  • 34. 

    The use of fire-resistive materials when constructing a building is an example of

    • A.

      Risk transfer

    • B.

      Loss control

    • C.

      Risk avoidance

    • D.

      Risk retention.

    Correct Answer
    B. Loss control
    Explanation
    The use of fire-resistive materials when constructing a building is an example of loss control because it aims to minimize or prevent losses caused by fire. By using materials that are resistant to fire, the risk of fire damage is reduced, and the potential losses that could occur as a result of a fire are controlled. Loss control measures are proactive steps taken to mitigate or minimize potential losses, and in this case, the use of fire-resistive materials is a preventative measure to control the potential loss caused by fire.

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  • 35. 

    All of the following statements about risk retention are true EXCEPT

    • A.

      It may be used intentionally if commercial insurance is unavailable.

    • B.

      It may be used passively because of ignorance

    • C.

      Its use is most appropriate for low-frequency, high-severity types of risks.

    • D.

      Its use results in cost savings if losses are less than the cost of insurance.

    Correct Answer
    C. Its use is most appropriate for low-frequency, high-severity types of risks.
    Explanation
    Risk retention refers to the strategy of accepting and managing risks within an organization instead of transferring them to an insurance company. The given answer states that "Its use is most appropriate for low-frequency, high-severity types of risks," which is incorrect. In reality, risk retention is more suitable for risks that are low in severity and high in frequency. For high-severity risks, it is often more cost-effective to transfer the risk through insurance rather than retaining it.

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  • 36. 

    All of the following are methods of noninsurance transfer EXCEPT

    • A.

      Entering into a hold-harmless agreement

    • B.

      Avoiding dangerous activities

    • C.

      Hedging risk using futures contracts

    • D.

      Incorporating a business

    Correct Answer
    B. Avoiding dangerous activities
    Explanation
    The correct answer is "avoiding dangerous activities". This is because all the other options listed - entering into a hold-harmless agreement, hedging risk using futures contracts, and incorporating a business - are methods of noninsurance transfer. Avoiding dangerous activities, on the other hand, does not involve transferring risk to another party but rather eliminating or minimizing the risk altogether.

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  • 37. 

    Curt borrowed money from a bank to purchase a fishing boat. He purchased property insurance on the boat. Curt had difficulty making loan payments because he did not catch much fish, and fish prices were low. Curt intentionally sunk the boat, collected from his insurer, and paid off the loan balance. This scenario illustrates the problem of

    • A.

      Adverse selection

    • B.

      Moral hazard

    • C.

      Fundamental risk

    • D.

      Morale hazard.

    Correct Answer
    B. Moral hazard
    Explanation
    This scenario illustrates the problem of moral hazard. Moral hazard refers to the tendency of individuals to take on more risk or engage in reckless behavior when they are protected from the consequences of their actions. In this case, Curt intentionally sunk the boat knowing that he would be able to collect from his insurer and pay off his loan balance. This behavior is a result of the insurance coverage giving him a sense of security and allowing him to take on the risk without facing the full consequences.

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  • 38. 

    Jenna opened a successful restaurant. One night, after the restaurant had closed, a fire started when the electrical system malfunctioned. In addition to the physical damage to the restaurant, Jenna also lost profits that could have been earned while the restaurant was closed for repairs. The lost profits are an example of

    • A.

      Direct loss

    • B.

      Fundamental risk

    • C.

      Speculative risk

    • D.

      Indirect loss

    Correct Answer
    D. Indirect loss
    Explanation
    The lost profits that Jenna experienced while the restaurant was closed for repairs are considered an indirect loss. This is because the fire and the resulting physical damage to the restaurant are the direct losses. However, the lost profits are an additional consequence of the fire, as they are a result of the restaurant being unable to operate during the repair period. Therefore, the lost profits are not directly caused by the fire itself, but rather indirectly caused by it.

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  • 39. 

    Brad started a pest control business. To protect his personal assets against liability arising out of the business, Brad incorporated the business. Bradʹs use of the corporate form of organization to shield against personal liability claims illustrates

    • A.

      Fundamental risk

    • B.

      Noninsurance transfer

    • C.

      Risk retention

    • D.

      Objective risk.

    Correct Answer
    B. Noninsurance transfer
    Explanation
    Brad's decision to incorporate his pest control business is an example of a noninsurance transfer. By incorporating the business, Brad is transferring the risk of personal liability claims to the corporation. This means that if the business faces any legal claims or debts, Brad's personal assets will not be at risk. Instead, the corporation will be responsible for handling any liabilities. This is a way for Brad to protect his personal assets from potential losses and is a common strategy used by business owners to minimize their personal liability.

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  • 40. 

    ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects that 8 homeowners out of every 100, on average, will report claims each year. The variation between the rate of loss that ABC expects to occur and the rate of loss that actually does occur is called

    • A.

      Objective probability

    • B.

      Subjective probability

    • C.

      Objective risk

    • D.

      Subjective risk

    Correct Answer
    C. Objective risk
    Explanation
    Objective risk refers to the actual variation between the expected rate of loss and the actual rate of loss. In this case, ABC Insurance Company expects that 8 homeowners out of every 100 will report claims each year. However, the actual rate of loss may vary from this expectation. The objective risk captures this variation and represents the difference between the expected and actual outcomes. It is a measure of the uncertainty and potential financial loss that ABC Insurance Company may face in selling homeowners insurance in the five Western states.

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  • 41. 

    Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new manufacturing facility. These devices are all examples of

    • A.

      Loss control

    • B.

      Noninsurance transfer

    • C.

      Risk avoidance

    • D.

      Risk retention

    Correct Answer
    A. Loss control
    Explanation
    The smoke detectors, sprinkler system, and fire extinguishers installed by Williams Company in its new manufacturing facility are all examples of loss control measures. Loss control refers to the actions taken to minimize or prevent losses from occurring. In this case, the company is implementing safety measures to control and reduce the risk of fire-related losses. These devices are specifically designed to detect and control fires, helping to mitigate potential damages and losses.

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  • 42. 

    Tyndal Products Company produces cereal. The company has entered into contracts to deliver 500,000 boxes of cereal during the next 18 months. The company is concerned that the prices of two ingredients, corn, and wheat, may increase over the next 18 months. The company used grain futures contracts to hedge the price risk associated with these commodities. Tyndalʹs use of hedging illustrates which risk management technique

    • A.

      Noninsurance transfer

    • B.

      Risk avoidance

    • C.

      Risk retention

    • D.

      Risk assumption

    Correct Answer
    A. Noninsurance transfer
    Explanation
    Tyndal Products Company uses grain futures contracts to hedge the price risk associated with corn and wheat. By entering into these contracts, the company is transferring the risk of price increases to another party (the futures contract counterparty). This is a form of noninsurance transfer, as the company is not using insurance to manage the risk, but rather a financial instrument.

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  • 43. 

    Cathyʹs car hit a patch of ice on the road. The car skidded off the road and hit a tree. The presence of ice on the road is best described as a

    • A.

      Peril

    • B.

      Subjective risk

    • C.

      Physical hazard

    • D.

      Indirect loss

    Correct Answer
    C. Physical hazard
    Explanation
    The presence of ice on the road is best described as a physical hazard. This is because ice on the road poses a direct danger to drivers by making the road slippery and increasing the risk of accidents, as demonstrated by Cathy's car skidding off the road and hitting a tree. A physical hazard refers to any condition or substance that can cause harm or injury to individuals or property. In this case, the ice on the road is a physical hazard that directly caused the accident.

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  • 44. 

    Jim and Paula Franklin started a dry cleaning business. The business may be successful or it may fail.The type of risk that is present when either a profit or loss could occur is called

    • A.

      Pure risk

    • B.

      Subjective risk.

    • C.

      Fundamental risk

    • D.

      Speculative risk

    Correct Answer
    D. Speculative risk
    Explanation
    Speculative risk is the correct answer because it refers to a situation where both profit and loss are possible outcomes. In the case of Jim and Paula Franklin's dry cleaning business, they can either experience success and make a profit or face failure and incur a loss. This type of risk involves uncertainty and the possibility of gaining or losing something of value.

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  • 45. 

    Ben is concerned that if he injures someone or damages someoneʹs property he could be held legally responsible and required to pay damages. This type of risk is called a

    • A.

      Speculative risk

    • B.

      Liability risk

    • C.

      Fundamental risk

    • D.

      Property risk

    Correct Answer
    B. Liability risk
    Explanation
    The correct answer is liability risk. Liability risk refers to the potential for legal responsibility and financial obligation if a person causes harm or damage to someone else or their property. In this scenario, Ben is worried about the possibility of being held legally responsible and having to pay damages if he injures someone or damages their property. This aligns with the concept of liability risk.

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  • 46. 

    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 FDAʹs test result, MLX abandoned its plan to produce and distribute the drug. MLXʹs reaction illustrates

    • A.

      Risk avoidance

    • B.

      Hedging

    • C.

      Risk transfer

    • D.

      Risk retention

    Correct Answer
    A. Risk avoidance
    Explanation
    MLX's reaction of abandoning its plan to produce and distribute the drug after learning about the harmful side effect discovered by the FDA demonstrates risk avoidance. Risk avoidance refers to the strategy of completely avoiding or eliminating a risk by not engaging in the activity or project that poses the risk. In this case, MLX chose to avoid the risk associated with the harmful side effect by not proceeding with the production and distribution of the drug.

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  • 47. 

    ABC Health Insurance Company sells health insurance in one state. Recently, that stateʹs legislature passed a law forbidding health insurers from considering an individualʹs health history when selecting applicants to insure. This change in law will increase the possibility of unprofitable results for ABC. This type of hazard is an example of

    • A.

      Physical hazard

    • B.

      Legal hazard

    • C.

      Moral hazard

    • D.

      Morale hazard

    Correct Answer
    B. Legal hazard
    Explanation
    The correct answer is legal hazard. A legal hazard refers to the risk or potential loss that a company faces due to changes in laws or regulations. In this case, the state legislature passing a law that forbids health insurers from considering an individual's health history when selecting applicants to insure creates a legal hazard for ABC Health Insurance Company. This change in law increases the possibility of unprofitable results for ABC, as they may be forced to insure individuals who are more likely to have higher medical costs without being able to assess their health history.

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  • 48. 

    All of the following are characteristics of the liability risk that most people face EXCEPT

    • A.

      Lien may be placed on your income and assets to satisfy a legal judgment.

    • B.

      Substantial legal expenses may be incurred defending the claim.

    • C.

      There is no upper limit on the amount of the loss

    • D.

      Owning liability insurance eliminates the possibility of being held legally liable

    Correct Answer
    D. Owning liability insurance eliminates the possibility of being held legally liable
    Explanation
    The correct answer is owning liability insurance eliminates the possibility of being held legally liable. This statement is incorrect because owning liability insurance does not eliminate the possibility of being held legally liable. Liability insurance provides financial protection in case of a legal claim, but it does not absolve the individual from legal responsibility.

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  • 49. 

    Which of the following statements about the chance of loss and risk is (are) true? I. If the chance of loss is identical for two groups, the objective risk must be the same. II. Two individuals may perceive differently the risk inherent in a given activity.

    • A.

      I only

    • B.

      II only

    • C.

      Both I and II

    • D.

      Neither I nor II

    Correct Answer
    B. II only
    Explanation
    يا رب النجاح في الدنيا والاخره

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Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Mar 21, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Jan 07, 2013
    Quiz Created by
    A7mad4me
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