True / False Questions

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

1. 1. 2
   2. 5
   3. 10
   4. 20

2. Bill 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.
   1. speculative
   2. pure
   3. insurable
   4. managed

3. lberto is worried about the risk of potential flooding to his restaurant. He decides to buy insurance to cover this    risk.
   1. speculative
   2. pure
   3. uninsurable
   4. managed

4. In designing an addition to his successful nursing home, Steve realized that water sprinklers and smoke detectors were now required by state regulations. His existing structure already had sprinklers and detectors because he felt that this was an effective strategy to:
   1. self-insure against the risk of fire loss.
   2. minimize the speculative risk of a fire.
   3. reduce the risk of a fire loss.
   4. avoid the risk of a fire loss.

5. Firestone and Ford recalled thousands of tires when several people died in traffic accidents blamed on faulty tires. This is an example of which of the following?
   1. Avoiding the risk
   2. Self-insuring against the risk
   3. Reducing the risk
   4. A loss-prevention program

6. In an effort to minimize the cost of conventional property/casualty insurance, XYZ Electronics decided to manage their risk by self-insuring. The most likely way XYZ would try to do this would be to:
   1. cover small and medium-sized losses itself, and carry conventional insurance only for catastrophic losses.
   2. carry insurance for the small, routine losses and pay for any highly unusual major losses with its own funds.
   3. buy an insurance policy that covers all risks.
   4. establish a well-monitored loss-prevention program.

7. Sadly, during a war many civilians watch everything they have destroyed. Insurance companies will view this type of loss as:
   1. an insurable risk.
   2. an uninsurable risk.
   3. a demonstration of the law of large numbers.
   4. a rule of indemnity.
8. Abraham is excited about opening his car wash facility. The required investment of money and time is sizable and although he has high hopes, Abraham is taking a speculative risk. This means that:
   1. his investment involves a chance of profit or loss.
   2. his risk can be shifted to an insurance company if he buys product liability insurance.
   3. he would be best advised to self-insure his exposure to malpractice liability.
   4. his insurance premium would be based on the law of large numbers.
9. 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:
   1. minimize the speculative risk associated with an injury.
   2. reduce the risk associated with a potential accident.
   3. self-insure against a catastrophic accident.
   4. create the perception of a more exciting ride.

10. Harold 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. Harold 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:
    1. rely entirely on a strategy of risk avoidance.
    2. decide to cover both types of risk himself.
    3. 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.
    4. decide to cover the risk of fire himself, and take out an insurance policy to cover the risk of contaminated fuel.

11. Nancy owns a high-fashion boutique and one source of competitive advantage in the past has been her ability to spot the latest trends, stock the store with those items, and sell out before the next new trend becomes popular. Unfortunately, this year Nancy missed on what would be "hot" and is now stuck with mountains of clothing and accessories that did not sell. All of her cash is invested in this clothing and at the moment she is unable to restock the store with the next season's clothes. Nancy is likely not worried because:
    1. her business insurance policy will cover the losses she is forced to take on this merchandise.
    2. she has a rich uncle who will invest in the business so she can buy new merchandise and she will have a sale to move the old merchandise.
    3. trends come back quickly so she will keep the clothes to sell later.
    4. she is doing much less advertising.
12. Demetrius 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:
    1. the chance of the loss could not be measured.
    2. he did not have an insurable interest in the instructor's life.
    3. the instructor had already taken out a policy.
    4. the loss would not be accidental.

13. 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:
    1. to reduce risk.
    2. to avoid risk.
    3. to self-insure against risk.
    4. to make available the opportunity for vehicle owners to purchase insurance against risk.
14. The Best West Soccer 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:
    1. self-insuring against risk.
    2. avoiding risk.
    3. participating in risk reduction.
    4. filing a grievance against the association.
15. Green Gardens Sprinkler Systems Company 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 Green Gardens?
    1. A fire that destroys its warehouse.
    2. Employee sues company due to injury on the job.
    3. Equipment theft that causes work downtime.
    4. Drought resistant grass technology that disrupts sales.
16. 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:
    1. The amount of loss should be equal to or less than a loss covered by a competitor company.
    2. There should be documentation that clearly attests to the fact that the loss of buildings, equipment, and even lives is not measurable.
    3. 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.
    4. All insurance companies that sell similar insurance would equally divide the number of claims, so as not to compete unfairly against each other.

17. The                      says that an insured person cannot collect more than the actual loss from an insurable risk.
    1. law of large numbers
    2. rule of indemnity
    3. law of diminishing returns
    4. rule of finite loss coverage

18. A  insurance company is owned by stockholders, just like any other investor- owned company. A   insurance company is owned by its policyholders.
    1. stock; mutual
    2. corporate; stock
    3. stock; corporate
    4. mutual; limited liability

19. There have been a series of large judgments in product liability cases against companies producing hairdryers. If this trend continues, insurance companies will respond by        the premiums charged for liability insurance for hairdryer manufacturers.
    1. lowering
    2. canceling
    3. increasing
    4. underwriting

20. Which of the following statements best reflects the concept behind the rule of indemnity?
    1. 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.
    2. 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.
    3. 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.
    4. An insured person cannot collect more than the actual loss from an insurable risk.

21. Rebecca received a letter in the mail 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.
    1. rule of 80
    2. rule of indemnity
    3. law of legal compliance
    4. law of large numbers

22. Home-based business owners add a            to their homeowner's insurance policy to ensure that they have adequate coverage.
    1. deductible unit
    2. compensation clause
    3. rider
    4. tag

23.      insurance replaces part of your income if you become unable to work for an extended period of time.
    1. Product liability
    2. Workers' compensation
    3. Professional liability
    4. Disability