Chapter 1 Tutorial

1.

1 point

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

speculative risk.

direct loss.

indirect loss.

nondiversifiable risk.

2.

1 point

Which of the following statements about 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.

both I and II

II only

I only

neither I nor II

3.

1 point

Objective risk is defined as

uncertainty based on a person's mental condition or state of mind.

the relative variation of actual loss from expected loss.

the cause of loss.

the probability of loss.

4.

1 point

All of the following are examples of direct property losses EXCEPT

the destruction of a firm's manufacturing plant by an earthquake.

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

the vandalism of a person's automobile.

the theft of a person's jewelry.

5.

1 point

From the standpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT

The loss must be measurable.

The loss must be indeterminable.

The chance of loss must be calculable.

The loss must be unintentional.

6.

1 point

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

moral hazard.

speculative risk.

legal hazard.

particular risk.

7.

1 point

Ashley opened an all-you-can-eat buffet restaurant. The cost per-person was based upon what Ashley believed an average restaurant patron would consume. The restaurant began to lose money. Ashley concluded that her patrons had "above average" appetites, and were attracted to her restaurant because they could eat as much as they wanted while being charged an average price. A similar phenomenon exists in insurance markets. This problem is called

moral hazard.

attitudinal hazard.

adverse selection.

fundamental risk.

8.

1 point

An earthquake is an example of a

moral hazard.

physical hazard.

peril.

objective risk.

9.

1 point

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

a possibility of neither profit nor loss.

only the possibility of loss or no loss.

only the possibility of profit.

a possibility of either profit or loss.

10.

1 point

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

physical hazard.

attitudinal hazard.

moral hazard.

objective risk.

11.

1 point

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

Individuals may profit from accepting a speculative risk.

The size of an emergency fund must be increased.

Mental fear and worry are present.

Society is deprived of certain goods and services.

12.

1 point

A peril is

a moral hazard.

the probability that a loss will occur.

the cause of a loss.

a condition which increases the chance of a loss.

13.

1 point

Uncertainty based on a person's mental condition or state of mind is known as

subjective probability.

objective risk.

subjective risk.

objective probability.

14.

1 point

All of the following statements about risk retention are true EXCEPT

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

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

It may be used intentionally if commercial insurance is unavailable.

It may be used passively because of ignorance.

15.

1 point

All of the following are benefits to society that result from insurance EXCEPT

indemnification for loss.

loss prevention.

less worry and fear.

elimination of moral hazard.

16.

1 point

Traditionally, risk has been defined as

uncertainty concerning the occurrence of loss.

any situation in which the probability of loss is zero.

any situation in which the probability of loss is one.

the probability of a loss occurring.

17.

1 point

All of the following are characteristics of insurance EXCEPT

indemnification.

pooling of losses.

risk avoidance

payment of fortuitous losses.

18.

1 point

Which of the following types of risks best meets the requirements for being insurable by private insurers?

financial risks

market risks

political risks

property risks

19.

1 point

A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that the farmer sustained. Which characteristic of insurance is embodied in this agreement?

fortuitous losses

pooling of losses

indemnification

risk avoidance

20.

1 point

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

risk retention.

risk transfer.

risk avoidance.

loss control.