BonusChapter C Managing Risk Nickels Complete Test Bank

Understanding Business, 12e (Nickels)

Bonus Chapter C Managing Risk

1) The management of risk is a small part of global business.

2) An enterprise risk management (ERM) program has a goal of defining which risks the program will manage.

3) Companies adopt risk management procedures to minimize the chance of business failure due to unplanned events such as security breaches, terrorist attacks, and natural disasters.

4) Risk management involves minimizing the losses from unexpected events.

5) Risk management is getting much simpler thanks to the Internet.

6) SpeedyTime Delivery Service is managing risk by requiring all drivers to wear seat belts and hold a commercial driver's license, by monitoring any moving violations each driver obtains, and by keeping that information in the employee records. Additionally, SpeedyTime carries an insurance policy with a very large deductible, preferring to pay for small damages to its trucks out-of-pocket. SpeedyTime has built enterprise risk management into their organization.

7) Citrus City Groves on Florida's Gulf Coast, harvests an assortment of citrus fruits. The owners of Citrus City are right to think about how the risk of climate change might impact their crops in the future.

8) Risk is a term that refers to the chance of loss, the degree of probability of loss, and the amount of possible loss.

9) There are two different kinds of risk: passive and active.

10) Speculative risk involves a chance of either profit or loss.

11) Pure risk involves the chance of either a profit or a loss.

12) An entrepreneur takes a speculative risk when starting a new business.

13) The chance of a fire is an example of a pure risk.

14) If a pure risk occurs, a company loses money. However, if the events do not occur, the company gains nothing.

15) Businesses can often reduce the risk to which they are exposed.

16) The type of risk that is of most concern to businesspeople is speculative risk.

17) One way to lower the need for outside insurance is to self-insure.

18) The beginning of an effective risk management strategy is a good loss-prevention program.

19) Outsourcing helps some companies avoid risk.

20) Self-insurance is the practice of setting aside money to cover routine claims and buying only "catastrophe" policies to cover big losses.

21) Self-insurance makes more sense for firms that operate one large facility than it does for firms with facilities scattered all over the country.

22) Going bare is a much less risky strategy for self-insurance.

23) When a firm that is self-insuring against risk decides to cover losses straight out of its budget, it is said to be "going bare."

24) A well-designed and implemented risk-prevention program can eliminate the potential of loss.

25) All risks are insurable.

26) The federal government provides some insurance protection.

27) Federal Housing Administration (FHA) insurance provides insurance to property owners in high-crime areas.

28) The Pension Benefit Guaranty Corporation provides retirement benefits, life insurance, health insurance, and disability income insurance.

29) An uninsurable risk is one that no insurance company will cover.

30) Any risk is insurable as long as you can pay the premium.

31) Insurable interest means that the policyholder is the one at risk to suffer a loss.

32) Insurance companies will provide coverage only for losses that are accidental.

33) A terrorist attack is an example of pure risk.

34) Water sprinklers and smoke detectors can be used to minimize speculative risks.

35) Some companies are avoiding risk through the use of product recalls.

36) Typically, the only option that firms have to deal with pure risk is to buy insurance.

37) The best strategy for a profit-seeking insurance company would be to specialize in providing protection to people in a specific geographical area.

38) SpeedyTime Delivery requires their drivers to wear seat belts as they operate their trucks. This is an example of self-insuring as a risk management strategy.

39) Soap Stars, Inc. is ready to launch a new shampoo in the marketplace. They will incur a speculative risk.

40) Marshall Manufacturing has decided to stop producing football helmets due to the potential size of losses involved in product liability cases. This is an example of "avoiding risk" as an alternative risk management strategy.

41) Atlanta Appliances produces all of its products in one gigantic production facility near an earthquake fault line. Atlanta Appliances is the classic example of a firm that should use self-insurance to manage its risks.

42) An example of an uninsurable risk would be the potential losses suffered by Patrick's Pizza Pies resulting from a popular new product from Paulie's Pizza Palace.

43) Apple has an insurable interest in the lives of its top executives.

44) Molly's neighbor, Steve, is quite careless and is in danger of burning his house down. Molly tried to buy a fire insurance policy on Steve's house, so she could collect the payment when Steve inevitably burned down his own house. The insurance company would not allow Molly to purchase the policy because she did not have an insurable interest in the property.

45) An insurance premium is the fee charged by the insurance company in return for their promise to pay for all or part of a loss.

46) An insurance policy is a written contract.

47) The law of large numbers states that if a large number of people are exposed to the same risk, a predictable number of losses will occur during a given period of time.

48) According to the rule of indemnity, an insured person cannot collect more than the actual loss from an insurable risk.

49) A stock insurance company is owned by its policyholders.

50) A mutual insurance company is a nonprofit organization.

51) A mutual insurance company is owned by its policyholders.

52) An insurance company can use the law of large numbers to predict the number of people in your community that will have a car accident in a given month.

53) Insurance companies make predictions such as how recent health trends will affect the number of heart attacks that men in the United States over the age of 45 will suffer.

54) Tom and Sarah are both 24 years old and looking for car insurance. While comparing numbers, they notice the car insurance premiums charged for young male drivers are higher than the premiums for young female drivers. This is due to the rule of indemnity.

55) Donna owns a life insurance policy on her husband Mike through Securitas Mutual Life Insurance Company. As a policyholder, she also owns part of the company.

56) Property insurance covers losses from fires, accidents, or theft.

57) Liability losses result from property damage or injuries suffered by others for which the policyholder is held responsible.

58) One advantage of health savings accounts is that healthy people can use tax-deferred money to save for their future medical needs.

59) Health savings accounts are managed care plans that have a high deductible.

60) The chances of dying when young are much higher than the chances of becoming disabled when young.

61) Disability insurance replaces part of your income if you become disabled and can no longer work, but you usually must be disabled for a specified period of time before benefits are provided.

62) Workers' compensation insurance guarantees payment of wages, medical care, and rehabilitation services for employees who are injured on the job.

63) The premium charged for workers' compensation insurance is the same for all workers, regardless of their occupation.

64) Workers' compensation insurance is required in all states except Louisiana.

65) Professional liability insurance is also sometimes known as malpractice insurance.

66) Product liability insurance covers liability arising out of defective products sold.

67) Firms can take out term life-insurance policies on their top executives.

68) Most homeowners' insurance policies automatically provide adequate coverage for small home-based businesses.

69) An endorsement can provide additional coverage to a homeowner's policy for business equipment.

70) A fidelity bond covers losses resulting from a second party's failure to fulfill a contract.

71) A surety bond protects employers from employee dishonesty.

72) Risk management is concerned only with risks to individuals and businesses.

73) Worldwide risks need to be prioritized so that international funds can be spent where they can do the most good.

74) Risks such as global warming are the concern of businesses and governments primarily in the U.S.

75) It's good advice for doctors and lawyers to carry malpractice insurance.

76) John is part of a highway construction crew and frequently handles explosives. His friend Don is a bookkeeper for a retail store. The amount of workers' compensation premiums paid by John's employer will probably exceed the premiums paid by Don's employer.

77) Which of the following is a goal of enterprise risk management?

A) defining which risks the program will manage

B) deciding how to petition the government for financial help

C) assigning risk management to a lobbyist in Washington

D) refining the business plan for risk management

78) Risk management for business is critical due in part to

A) natural disasters.

B) profitability.

C) legal requirements.

D) international requirements.

79) Enterprise risk management is

A) important to business.

B) irrelevant to business.

C) only used by nonprofit organizations.

D) only used by the Department of Homeland Security.

80) Risk management is

A) only a consideration to insurance companies.

B) increasing in importance.

C) decreasing in importance.

D) used exclusively when engaging in global Internet business.

81) Sean is in charge of risk management for First Friends, Inc., a large chain of preschools on the East Coast. He has decided to build enterprise risk management into the organization. The first step Sean should take is to

A) decide on the spyware software the organization should buy.

B) send a letter to all of the staff informing them that using e-mail for personal purposes will not be allowed.

C) remove the playgrounds from all of the locations.

D) decide which risks the organization should manage.

82) ________ is a term that refers to the chance of loss, the degree of probability of loss, and the amount of possible loss.

A) Speculation

B) Hazard

C) Insurability

D) Risk

83) ________ risk involves a chance of either profit or loss.

A) Insurable

B) Managed

C) Speculative

D) Pure

84) ________ risk involves the threat of loss with no chance for profit.

A) Minimum

B) Pure

C) Speculative

D) Managed

85) Which type of risk management strategy is a company using when it installs mirrors and surveillance cameras to spot and prevent shoplifting?

A) avoiding the risk

B) insuring against the risk

C) assuming the risk

D) reducing the risk

86) Some businesses will set aside money to cover routine losses and buy "catastrophe" policies to cover big losses. This is an example of which of the following?

A) avoiding the risk

B) self-insuring against the risk

C) reducing the risk

D) loss-prevention program

87) A firm that chooses to self-insure and cover losses out of its budget is said to

A) fly blind.

B) roll boxcars.

C) go bare.

D) internalize risk.

88) An insurance company would not be willing to insure a risk if it

A) results from political disruptions.

B) has a measurable loss.

C) results from an accident.

D) has a low probability of occurring.

89) A policyholder must have a(n) ________ in what is being insured, meaning that the policyholder must be the one at risk to suffer an economic loss.

A) speculative interest

B) uncertain stake

C) unsecured holding

D) insurable interest

90) ________ is the armor individuals, businesses, and nonprofit organizations use to protect themselves from various financial risks.

A) A good accountant

B) Investment in AAA bonds

C) Insurance

D) Indemnity

91) Organizations spend about ________ percent of gross domestic product on insurance premiums.

A) 2

B) 5

C) 10

D) 20

92) Sadly, during a war many civilians watch as everything they have is destroyed. Insurance companies will view this type of loss as

A) an insurable risk.

B) an uninsurable risk.

C) a demonstration of the law of large numbers.

D) a rule of indemnity.

93) Amusement parks often have a minimum height restriction on some of their most thrilling rides. This risk management strategy is done in an effort to

A) minimize the speculative risk associated with an injury.

B) reduce the risk associated with a potential accident.

C) self-insure against a catastrophic accident.

D) create the perception of a more exciting ride.

94) Brad has decided to increase the size of his auto repair business, although he realizes that this decision brings added risk. This is an example of ________ risk.

A) speculative

B) pure

C) insurable

D) managed

95) Arturo is worried about the risk of potential flooding to his restaurant. He decides to buy insurance to cover this ________ risk.

A) speculative

B) pure

C) uninsurable

D) managed

96) Robert, owner and operator of a local nursing home, is designing an addition. Though, he realized that water sprinklers and smoke detectors were now required by state regulations, it was not a problem for him. His existing structure already had sprinklers and detectors because he felt that this was an effective strategy to

A) self-insure against the risk of fire loss.

B) minimize the speculative risk of a fire.

C) reduce the risk of a fire loss.

D) avoid the risk of a fire loss.

97) AutoPROs recalled thousands of tires when several people died in traffic accidents blamed on faulty tires. This is an example of which of the following?

A) avoiding the risk

B) self-insuring against the risk

C) reducing the risk

D) a loss-prevention program

98) In an effort to minimize the cost of conventional property/casualty insurance, Epic Electronics decided to manage their risk by self-insuring. The most likely way Epic would try to do this would be to

A) cover small and medium-sized losses itself, and carry conventional insurance only for catastrophic losses.

B) carry insurance for the small, routine losses and pay for any highly unusual major losses with its own funds.

C) buy an insurance policy that covers all risks.

D) establish a well-monitored loss-prevention program.

99) Ernesto is opening a new car wash. The required investment of money and time is sizable and although he has high hopes, Ernesto is taking a speculative risk. What does this mean?

A) His investment involves a chance of profit or loss.

B) His risk can be shifted to an insurance company if he buys product liability insurance.

C) He would be best advised to self-insure his exposure to malpractice liability.

D) His insurance premium would be based on the law of large numbers.

100) Simon owns several gas stations. He realizes that among the several risks associated with this type of business is the risk of minor damage to cars from dirty or contaminated fuel. He also knows that there is a small chance of a major loss if a fire occurred at one of his gas stations. Simon wants to control his insurance costs while still maintaining a reasonable risk management program. He is considering self-insurance. If he decides to use this approach, he will probably

A) rely entirely on a strategy of risk avoidance.

B) decide to cover both types of risk himself.

C) decide to self-insure for the smaller, more routine, losses associated with the damage caused by dirty or contaminated fuel, but seek coverage from an insurance company for the potentially much larger loss from a fire.

D) decide to cover the risk of fire himself, and take out an insurance policy to cover the risk of contaminated fuel.

101) DeMario was turned down when he attempted to buy a life insurance policy on his former Introduction to Business instructor. The most likely reason the insurance company turned down his attempt to insure the life of his former instructor was that

A) the chance of the loss could not be measured.

B) he did not have an insurable interest in the instructor's life.

C) the instructor had already taken out a policy.

D) the loss would not be accidental.

102) The National Highway Traffic Safety Administration (NHTSA) provides consumers with recall notices for all makes and models of cars, trucks, motorcycles, and even school buses. In terms of risk management, the purpose of the NHTSA service is

A) to reduce risk.

B) to avoid risk.

C) to self-insure against risk.

D) to make available the opportunity for vehicle owners to purchase insurance against risk.

103) New Dimensions Athletic Association was formed to administer youth soccer leagues and tournaments in a popular urban area. All board members recently resigned stating that they could no longer assume the risk of participating on a board that did not insure its volunteer members against serious player injuries and other unanticipated problems. Collectively, these members are

A) self-insuring against risk.

B) avoiding risk.

C) participating in risk reduction.

D) filing a grievance against the association.

104) Aqua Sprinkler Systems experienced increasing sales for several years. The firm expanded its product offerings, and now serves both commercial and residential customers. Which of the following situations would be considered an uninsurable risk for Aqua Sprinkler Systems?

A) a fire that destroys its warehouse

B) employee sues company due to injury on the job

C) equipment theft that causes work downtime

D) drought-resistant grass technology that disrupts sales

105) Risky Business Insurance Company insures business clients against unexpected disasters such as tornadoes and floods. The company operates in several regions in the U.S., and negotiates contracts following standard insurance industry guidelines. A strategic business guideline that the company would follow is

A) The amount of loss should be equal to or less than a loss covered by a competitor company.

B) There should be documentation that clearly attests to the fact that the loss of buildings, equipment, and even lives is not measurable.

C) The company's clients should be dispersed among several geographic areas so that the lack of natural disasters in some areas will compensate for more natural disasters in other areas.

D) All insurance companies that sell similar insurance would equally divide the number of claims, so as not to compete unfairly against each other.

106) The ________ says that an insured person cannot collect more than the actual loss from an insurable risk.

A) law of large numbers

B) rule of indemnity

C) law of diminishing returns

D) rule of finite loss coverage

107) A ________ insurance company is owned by stockholders, just like any other investor-owned company. A ________ insurance company is owned by its policyholders.

A) stock; mutual

B) corporate; stock

C) stock; corporate

D) mutual; limited liability

108) There have been a series of large judgments in product liability cases against companies producing hair dryers. If this trend continues, insurance companies will respond by ________ the premiums charged for liability insurance for hair dryer manufacturers.

A) lowering

B) canceling

C) increasing

D) underwriting

109) Which of the following statements best reflects the concept behind the rule of indemnity?

A) If a large number of people are exposed to the same risk, a predictable number of losses will occur during a given period of time.

B) If a written contract exists between the insured and an insurance company, the insured is entitled to receive the maximum amount stated in the contract in the event of a loss.

C) If an insurance company's premiums generate excess funds, these excess funds must be returned to the policyholders in the form of dividends or reductions in future premiums.

D) An insured person cannot collect more than the actual loss from an insurable risk.

110) Erin received a letter from her employer's insurance company inquiring if her children had health insurance coverage from another provider. According to the ________, the insurance provider has the right to this information.

A) rule of 80

B) rule of indemnity

C) law of legal compliance

D) law of large numbers

111) Home-based business owners add a ________ to their homeowner's insurance policy to ensure that they have adequate coverage.

A) deductible unit

B) compensation clause

C) rider

D) tag

112) ________ insurance replaces part of your income if you become unable to work for an extended period of time.

A) Product liability

B) Workers' compensation

C) Professional liability

D) Disability

113) ________ insurance guarantees payment of wages, medical care, and rehabilitation services for employees who are injured on the job.

A) Product liability

B) Workers' compensation

C) Professional liability

D) Malpractice

114) ________ insurance provides benefits to the survivors of workers who die as a result of work-related injuries.

A) Health

B) Professional liability

C) Workers' compensation

D) Malpractice

115) The risk of environmental harm is ________ in its proportions on issues such as global warming.

A) local

B) regional

C) national

D) international

116) A characteristic of a health savings account that distinguishes it from other types of health care coverage is that it

A) is not tax-deferred.

B) allows people to save money for medical expenses in a tax-deferred account.

C) covers only emergency procedures.

D) provides unlimited access to routine medical services (such as office visits) and minor medical tests and procedures (such as blood tests and X-rays) at no cost.

117) Workers' compensation insurance

A) covers people who are found liable for professional negligence.

B) provides coverage against liability arising out of products sold.

C) is only required by 48 states.

D) guarantees payment of wages and medical costs for employees who are injured on the job.

118) Risk management now includes the evaluation of

A) worldwide risks such as global warming.

B) worldwide issues such as poverty.

C) European issues such as the value of the euro.

D) political risks in South America.

119) Lyla owns a small jewelry business with only four employees. She opened her business recently and makes just enough to pay her bills each week. Yesterday, just before the end of her first quarter in business, she received a notice from the government indicating that she needed to provide evidence of workers' compensation insurance. Lyla

A) realized she was required to provide this insurance so she immediately got a policy.

B) is not required to carry workers' compensation because she has less than ten employees.

C) doesn't need workers' compensation because her business is in Louisiana.

D) doesn't need workers' compensation because she is not in the construction business.

120) Antonio is a silversmith and works with various metals. At the end of the day, he reclaims and separates each metal by using an inexpensive toxic acid though other methods are available. The risk of fire as well as health dangers to Antonio is unknown. What should Antonio do?

A) Dispose of the used acid by pouring it down the drain since the government will take care of any environmental issues that come from polluting the water.

B) Get a fire insurance policy and make sure to visit the doctor regularly.

C) Switch to another potentially less dangerous method of separating each metal.

D) Pour it out in back of the studio in the gutter.

121) Explain the four ways of managing risk.

122)  Explain the difference between speculative risk and pure risk. Which type of risk is of more concern to businesspeople?

123) Explain what makes the acceptance of risk possible for insurance companies.

124) Explain the benefits of workers' compensation. Who is required to carry this type of insurance?

Mini-Case

The Bookworm is a bookstore and café located on a busy downtown main street in Denver. The owner, Waata Reader, prides himself on the vast selection of books available in the store. The store has three stories, with both stairs and an elevator to each level. In the back of the first floor is the café, which serves pastries and coffee drinks. Many times customers will linger there over a cup of coffee, deciding which book to purchase. Waata has expanded several times and now has 22 people on the staff.

125) Bookworm sales have been down for the last year due to new competition from a national chain and Waata is understandably concerned. He recently called his insurance agent to see if this downturn in sales was covered by his business policy. The agent, Will B. Safe, told Waata

A) he could submit a claim and most likely the company would cover it.

B) market risks are uninsurable and in fact, his business policy does not cover those.

C) personal risks such as the decrease in his store's sales are not insurable.

D) the company would definitely cover Waata's losses.

126) One of Waata's staff members has been out on sick leave because she had an emergency appendectomy. She brought the hospital bills in to Waata for his opinion. It seems she had been covered by two health insurance policies for some time and now she thinks she may be able to collect from both companies in payment for the operation. Waata assured his employee that

A) she could look forward to a check from both companies once they had paid the medical bills.

B) because of the rule of indemnity she would not be able to profit from her operation.

C) because of the law of large numbers both insurance companies would pay her directly.

D) because her risk was insurable, she would be able to collect from both insurance policies.

127) When one of Waata's employees was stocking a particularly high shelf one morning; he reached a bit too far and fell off the ladder. Luckily he just broke his arm and returned to work later that day. His medical bills due to this accident were covered under

A) workers' compensation.

B) disability insurance.

C) liability insurance.

D) his own health insurance.

128) One afternoon Waata was called to the café. One of Waata's staff had inadvertently spilled hot coffee on a customer's arm and the customer was left with a burn. Waata sent the customer off to the local hospital for treatment knowing that his ________ insurance would cover the claim.

A) extended product liability

B) malpractice

C) public liability

D) major medical