Introduction to Risk Management and Insurance, 10/E Mark S. Dorfman Solutions manual and test bank

Introduction to Risk Management and Insurance, 10/E Mark S. Dorfman Solutions manual and test bank

Introduction to Risk Management and Insurance, 10e (Dorfman/Cather)

Chapter 2 Risk Identification

1) The ultimate objective of ERM does not include the following:

A) hedge against a drop in the stock price of the firm

B) eliminate product recalls

C) minimize interruption in the firms supply chain

D) survival of the company

Answer: A

Diff: 2

2) Risk identification:

A) is something completely different from loss identification

B) is only relevant for firms making products that have moving parts

C) can lead to financial loss

D) is also called loss identification in the insurance industry

Answer: D

Diff: 2

3) Which of the following would not normally be identified in the risk identification process?

A) Property Risk

B) External Risk

C) Human Resource Risk

D) Pure Risk

Answer: B

Diff: 2

4) Which of the following is true about internal risks?

A) They deal with issues related to the operations of the firm.

B) They are harder to manage than external risks.

C) They are beyond the control of the risk manager.

D) They are more costly than external risks.

Answer: A

Diff: 2

5) Which of the following is true about external risks?

A) They deal with issues related to the operations of the firm.

B) They are beyond the control of the risk manager.

C) They are easier to manage than external risks.

D) They are predictable.

Answer: B

Diff: 2

6) Which of the following is true about pure risks?

A) The risk/return tradeoff is applicable to pure risks.

B) A firm cannot profit from its exposure to pure risk.

C) Risk managers must be tolerant of negative outcomes related to pure risks.

D) Pure risk is not a source of great concern for risk managers.

Answer: B

Diff: 2

7) Which of the following is true about speculative risks?

A) A firm cannot profit from its exposure to speculative risk.

B) The risk/return tradeoff is not applicable to speculative risks.

C) Risk managers must be tolerant of negative outcomes related to speculative risks.

D) Speculative risk is not a source of great concern for risk managers.

Answer: C

Diff: 2

8) Which of the following is true about direct losses?

A) Does not include smoke damage to a building

B) Is a non-financial loss

C) Has no direct liability consequences for the firm

D) Often is followed by an indirect loss due to business interruption

Answer: D

Diff: 1

9) Which of the following is true about indirect losses?

A) Includes smoke damage to a building

B) Is unrelated to business interruption

C) Often results as a consequence of a direct loss

D) Is a non-financial loss

Answer: C

Diff: 3

10) Which of the following is true about the relationship between direct and indirect losses?

A) The impact of indirect losses can be much bigger than the original direct loss.

B) They are unrelated events.

C) Direct losses are the result of an indirect loss due to business interruption.

D) Indirect losses are irrelevant compared to direct losses.

Answer: A

Diff: 2

11) If a private elementary school having a single building were to lose the building in a tornado, it is likely that the largest category of loss would be:

A) property taxes

B) indirect loss of income and continuing expenses until school returns to its normal status

C) liability loss

D) key personnel loss

Answer: B

Diff: 2

12) Which of the following is true about indirect losses?

A) A lawsuit is a good example of an indirect loss.

B) They can have a spill-over effect to other product lines.

C) They are only a result of significant property losses.

D) Indirect losses are irrelevant compared to direct losses.

Answer: B

Diff: 3

13) Which of the following is true about pure risks?

A) They are also known as hazard risks.

B) They are completely unrelated to hazard risks.

C) Are only recently being considered by risk managers.

D) Consist of Property and associated Human Resource risk only.

Answer: A

Diff: 2

14) Which of the following is an appropriate method for calculating the financial impact on the firm that results from the loss of a key employee?

A) Research comparable salaries on employment data websites

B) Never let these employees be in the same building at the same time

C) A multiple of the key person's salary

D) Calculate the net present value of the future salary owed to the employee under his/her existing employment contract

Answer: C

Diff: 2

15) Property Risk:

A) is an example of a speculative risk

B) is an example of an indirect risk

C) only relates to buildings

D) is an example of a pure risk

Answer: D

Diff: 2

16) Which of the following is not true about property risks?

A) They can cause financial harm to the firm.

B) They encompass tangible and intangible property.

C) They do not include the reputation of a firm.

D) They also refer to damage to the property of others.

Answer: C

Diff: 2

17) Losses related to intangible property does not include:

A) patents

B) inventory

C) human capital

D) reputation

Answer: B

Diff: 3

18) All of the following can result from a damaged reputation, except:

A) declined earnings

B) lower cost of capital

C) lower credit rating

D) smaller market share

Answer: B

Diff: 1

19) Why is the damage to the property of others also relevant for a firm?

A) It is a speculative risk.

B) Since a firm needs to pay for the damage to the property of others

C) Due to the complex supply chains upon which firms rely

D) It is not relevant at all.

Answer: C

Diff: 2

20) Why do supply chains complicate the ERM process?

A) They lead to higher human resource risk.

B) They lead to higher speculative risks.

C) A disruption somewhere in the supply chain affects the operations of a firm.

D) They do not complicate the ERM process at all.

Answer: C

Diff: 3

21) According to a survey, which of the following is the most challenging risk to manage?

A) Human resource risk

B) Third-party liability

C) Speculative risk

D) Reputation risk

Answer: D

Diff: 2

22) Which of the following is not true about liability risks?

A) Liability risk is where the firm may be legally responsible for the harm it causes to another person.

B) Liability risks are sometimes overlooked due to their intangible nature.

C) Only a breach of contract and criminal acts can lead to liability risk for a firm.

D) A tort can lead to a liability risk.

Answer: C

Diff: 3

23) Assume Gerald is injured because his landlord, Barbara, fails to replace burned-out light bulbs in the hallway of his apartment building. If Gerald trips and falls and then sues Barbara for his injuries, the basis of his suit most likely will be:

A) negligence

B) intentional interference

C) res ipsa loquitor

D) breach of contract (lease)

Answer: A

Diff: 2

24) All the following are objectives of risk management except:

A) to insure all exposures to loss

B) minimize reputation risk

C) minimize supply chain interruption

D) develop and maintain plant safety program

Answer: A

Diff: 2

25) All of the following legal doctrines result in more individuals being held liable for negligence except:

A) last clear chance rule

B) contributory negligence

C) comparative negligence

D) vicarious liability

Answer: B

Diff: 3

26) In a negligence lawsuit, the jury's primary function is to:

A) assist the judge in interpreting the law

B) determine the facts

C) decide guilt or innocence

D) make sure neither plaintiff nor defendant cheats in presenting their case

Answer: B

Diff: 2

27) A plaintiff will generally collect for negligence when all the following characteristics are present except:

A) injury is suffered by the plaintiff

B) plaintiff breaches a contract with the defendant

C) breach of duty owed the plaintiff

D) the breach of the duty caused the injury to the plaintiff

Answer: B

Diff: 1

28) Which of the following statements about liability losses is true?

A) They arise from two sources: the obligation to pay legal damages, and the resulting bad publicity.

B) The obligation to pay legal damages is always more expensive than the cost of defense.

C) Defense costs can be expensive, unless the court finds that the plaintiff's claims are groundless.

D) None of the above is true.

Answer: D

Diff: 3

29) In making your personal risk management decisions, which method would be the most feasible and the most economical for handling chipped windshields on your automobile?

A) Avoid (don't drive)

B) Retain (pay for them yourself)

C) Insure (file a claim under your auto insurance)

D) Expose (remove your windshield from your car)

Answer: B

Diff: 3

30) Which one of the following lists presents the three major categories of "legal liability"?

A) Breach of contract, res ipsa loquitor, torts

B) Criminal wrongs, product liability, intentional interference

C) Torts, breach of contracts, liability without fault

D) Breach of contracts, torts, criminal wrongs

Answer: D

Diff: 2

31) The "reasonable person" standard changes based upon which one of the following factors?

A) The extent and dollar amount of the injury that occurs

B) The defendant's professional status relative to the event causing the injury

C) The defendant's criminal record

D) The insurer's duty to defend the policyholder

Answer: B

Diff: 2

32) Kim's automobile is struck by a negligent motorist. She suffers bodily injuries that cause her to have $73,000 in medical expenses. She is unable to work for several weeks and loses $10,000 in wages. The repair bill to fix her car is $20,000. Choose the true statement from the following answer choices:

A) Her medical bills and lost wages are personal injuries.

B) Her repair bill for her automobile is an example of property damage.

C) Her lost wages are personal injuries, while her medical bills are bodily injuries.

D) ALL of her losses in this scenario are classified as personal injuries, since they were caused by another person.

Answer: B

Diff: 3

33) Foster is suing Geraldine and they are in a contributory negligence state. Foster's total injuries are $100,000, and the jury finds that he was 5% at fault in the incident. How much money will Foster be entitled to collect?

A) $100,000

B) $95,000

C) $0

D) $90,000

Answer: C

Diff: 3

34) Which of the following is not a tort?

A) Battery

B) Assault

C) Negligence

D) Breaking a contractual agreement

Answer: D

Diff: 2

35) To estimate potential property losses, risk managers must know:

A) the accounting book value of property

B) the replacement cost of property

C) the actual cash value of property

D) the original purchase price of property

Answer: B

Diff: 2

36) The Big Boy Toy Company's best seller is a futuristic radio-controlled car. The toy is manufactured using a custom mold designed especially for the company by a local artist. If anything were to happen to this mold, the company would have to stop manufacturing the toys until the artist could reproduce the mold. The risk manager's primary concern regarding damage to this mold is probably the:

A) indirect loss that will result while production of the toy is halted

B) expense of paying the artist to reproduce the mold

C) extra cost of manufacturing additional toys while the car cannot be manufactured

D) direct damage to employees that will be laid off while production is halted

Answer: A

Diff: 3

37) It is important for a retail store to quickly resume operations after a direct loss primarily because:

A) looting will occur

B) retail merchandise goes out of style quickly

C) most property insurance contracts demand that operations resume immediately, or as soon as possible, after a direct loss

D) customers can be quickly and permanently lost if operations do not continue

Answer: D

Diff: 2

38) Damages awarded to compensate for pain and suffering are called:

A) punitive damages

B) personal injuries

C) non-bodily injury damages

D) exemplary damages

Answer: D

Diff: 2

39) Workers' compensation covers all of the following losses except:

A) medical expenses resulting from a job related injury

B) rehabilitation expenses resulting from a job related injury

C) lost wages during a disability that results from job related injuries

D) medical expenses resulting from an at-home accident

Answer: D

Diff: 2

40) All of the following are considered a financial risk handled by financial risk management except:

A) currency risk

B) liquidity risk

C) product marketability risk

D) commodity price risk

Answer: C

Diff: 2

41) Enterprise risk management is concerned with:

A) both pure and speculative risks

B) insurance contracts

C) pure risks

D) subjective risks

Answer: A

Diff: 1

42) Which of the following is not a risk identified in a typical Vulnerability Map?

A) Hazard Risks

B) Negligence Risks

C) Operational Risks

D) Financial Risks

Answer: B

Diff: 1

43) A sushi bar is concerned about lawsuits from customers who may become ill after eating raw fish. Avoidance is not an option, since a sushi bar's main product line is raw fish. Which of the following would be the most practical loss prevention technique the restaurant could use?

A) Posting a sign in the restaurant that says "Not responsible for anything"

B) Requiring each customer to sign a legal waiver before serving them sushi

C) Posting a warning on the menu that explains the risks of consuming raw fish

D) Training servers to identify patrons who are feeling ill

Answer: C

Diff: 3

44) Which of the following statements about financial risks is not true?

A) Many financial risks are attributable to fluctuations in value.

B) Financial risks arise from events that prevent a firm from conducting its normal scope of operations.

C) An example of a financial risk is one associated with unfavorable credit rating.

D) Price risks associated with input costs are a form of financial risk.

Answer: B

Diff: 3

45) Most financial risks are insurable.

Answer: FALSE

Diff: 1

46) Leasing is an example of risk identification.

Answer: FALSE

Diff: 2

47) A person can be found negligent even though his failure to perform some act was unintentional.

Answer: TRUE

Diff: 2

48) A breach of contract legally is known as a "tort."

Answer: FALSE

Diff: 2

49) Loss reduction and loss prevention are not the same thing.

Answer: TRUE

Diff: 2

50) Risk avoidance and loss prevention are the same thing.

Answer: FALSE

Diff: 1

51) The plaintiff in a negligence suit is the party who allegedly injured the defendant.

Answer: FALSE

Diff: 1

52) The damage caused by an indirect loss can be greater in amount than the damage caused by direct loss in the same occurrence.

Answer: TRUE

Diff: 1

53) If assumption of the risk is established, it means the defendant usually must pay for damages.

Answer: FALSE

Diff: 2

54) Workers' compensation insurance covers both job-related injuries and occupational diseases.

Answer: TRUE

Diff: 2

55) From the employer's standpoint, workers' compensation insurance may be seen as a substitute for other types of liability insurance.

Answer: TRUE

Diff: 2

56) An ethics violation is an example of a strategic risk.

Answer: TRUE

Diff: 1

57) All external losses are random.

Answer: FALSE

Diff: 2

58) Provide a statement of the overall goal of the risk management function.

Answer: The overall goal of the risk management function is to make efficient pre-loss decisions to prepare for the post-loss financial consequences of losses in order to minimize the overall impact (disruption) to the firm and dollar losses.

Diff: 2

59) What is the difference between compensation for personal injuries and punitive damages?

Answer: Personal injury damages pay for damages to a person's rights, such as a loss of reputation or release of confidential information. Punitive damages are awards made to plaintiffs as a means of punishing defendants for outrageously offensive acts. Punitive damages imply gross negligence or the total disregard for the plaintiff's safety.

Diff: 2

60) What are the requirements for a plaintiff to prove negligence against a defendant?

Answer: The plaintiff must show 1) the defendant had a legal duty to protect the plaintiff, 2) the defendant failed to perform that duty, 3) an injury was the result of the defendant's failure to do his or her duty.

Diff: 2

61) Given a broad definition of legal liability, what are the three legal categories for describing situations in which one person injures another? Which ones are generally insurable?

Answer: The three categories are: torts (a civil wrong done to another), breach of contract (breaking a legally enforceable contract), and criminal wrongs (crimes against society). Many torts are insurable. Criminal wrongs and breaches of contracts are not.

Diff: 2

 

Chapter 1

Introduction to Enterprise
Risk Management and Insurance

I. SUGGESTED CLASSROOM TIME: 60–75 MINUTES

II. CHAPTER OVERVIEW

This chapter lays the groundwork for all that follows in the book, introducing the modern concept of enterprise risk management (ERM). ERM differs in several important ways from traditional risk management and has been hailed as a giant step forward in business management. The reasons for the growth of ERM are detailed here, along with several pertinent examples.

The methods of classifying risk are detailed, along with a discussion of the risk-averse nature of most human beings. A discussion of several of the key methods by which firms and individuals protect themselves for risk then follows.

The most significant issue covered in this chapter is the risk management process, the process by which economic entities identify, assess, and treat their exposures to loss. Finally, a description of ERM is presented, laying out both the exposures and the key differences from traditional risk management.

III. LECTURE OUTLINE

A. Introduction: Enterprise Risk Management, with its entity-wide focus, differs from traditional Corporate Risk Management, which had a focus on pure risk.

B. Why Interest in Risk Management Is Growing

1. Catastrophe loss events, such as Hurricane Katrina and the September 11 event

2. Corporate financial failures, such as Enron and Washington Mutual

3. Shrinking employee benefits, leading to a loss of confidence in the whole concept of 401(k) plans

C. Methods of Classifying Risk

1. Pure risk, where only loss is possible, versus speculative risk, where both gain and loss are possible

2. Diversifiable risks, risks that can be offset by diversification, versus non-diversifiable risks

a. Risk pooling may be used to capture advantages of diversification

b. Some, including insurer, use the Law of Large Numbers to benefit from pooling

D. Risk Aversion: Most human beings are risk-averse, i.e., risk avoiders, yet most understand that there are risk/return trade-offs in many activities. Higher risk can bring higher returns.

E. Protection from Risk: Insurance, Employee Benefits, and Risk Management

1. The default strategy is retention, to retain the possible loss. This is called passive retention when the subject has not identified the exposure or underestimates the potential severity of the exposure.

2. A better alternative is personal insurance protection. (A later chapter looks at the possible costs of this strategy.)

a. Social insurance

b. Private insurance

2. Employee benefit plans offset particular risks, such as health care costs and retirement.

3. Corporate risk management looks at the exposures of a firm and seeks to treat them in a logical manner.

F. The Risk Management Process (Note: The term process implies an ongoing activity.)

1. Establish risk management goals

a. Pre-loss, e.g., prevent loss, be cost effective

b. Post-loss, e.g., survive, minimize disruption

2. Identify potential loss exposures (the KEY step)

a. Property, e.g., buildings, contents

b. Liability, e.g., products, professional

c. Human resources, e.g., employee benefits, worker safety

d. Indirect, e.g., building codes, business interruption

3. Measure potential losses

a. Frequency

b. Severity

4. Choose risk-handling techniques

a. Avoidance, i.e., frequency and severity are both zero

b. Loss control, i.e., prevention and reduction

c. Transfer

d. Financing

5. Implement techniques and monitor effectiveness

G. Enterprise Risk Management

1. Characteristics

a. Top-down focus

b. Broad scope

c. Portfolio perspective

d. Systematic process of identification, assessment, treatment

2. Types of exposures

a. Pure risk

b. Operational, e.g., supply chains, distribution chains

c. Financial, e.g., credit risk, currency risk

d. Strategic, e.g., product development

3. Chief risk officer, a new concept and a new occupant of the “C-Suite”

IV. ANSWERS TO REVIEW QUESTIONS

1. Describe how the scope of risks encompassed in enterprise risk management differs from those of traditional corporate risk management. Traditional corporate risk management had a focus on pure risks only, mainly those things that could be insured. Enterprise risk management has a broader scope, taking into consideration financial risks, operational risks, and strategic risks.

2. Explain why interest in risk management has increased dramatically in the United States in recent years. There are several factors, including catastrophic events such as the September 11, 2001, event in New York, corporate financial failures, and shrinking employee benefits. The latter has resulted in the shift of many pension plans to a government agency that oversees failed pension plans.

3. How did the corporate scandal at Enron prompt the accounting profession to take a leading role in the call for improvements in corporate risk management? One of the key factors in the failure of Enron was the use of fraudulent financial statements to increase the market value of Enron stock. When the company failed, these odd numbers came to light, and there were calls for not only better accounting procedures but also better management oversight.

4. Describe the difference between pure and speculative risks. Provide an example of each. Pure risks involve only the possibility of loss. Examples are loss of a building to fire or the premature death of a family head. Speculative risks involve the possibility of gain as well as loss. Examples are gambling, investing in the stock market, and starting a business.

5. Describe the process of risk diversification, noting the two conditions that must exist for diversification to be effective. Risk diversification involves spreading the losses in a group among all the members of the group. There must be a large number of members, and the potential that a loss will affect more than a few members of the group at one time must be small.

6. Explain why auto and life insurance are two types of risk that are well suited to diversification by insurers through the use of risk pooling. In both cases there are a large number of exposure units and a very small probability that multiple members of the group will suffer loss at the same time.

7. Explain why damage from floods and wars are two types of risk that are not well suited to diversification by insurers through the use of risk pooling. These are not well-suited because there is a large probability that numerous members of the group will be subject to loss at the same time.

8. Financial advisors encourage investors to hold a well-diversified portfolio of investments. Explain whether this level of diversification can protect an investor if:

a. one of her stock holdings is a firm with an unsuccessful new product launch, or

b. the global economy falls into a recession.

In the case of a., a well-diversified investor would normally be protected. In the case of b., the investor faces market risk, a condition that might affect all of her holdings.

9. Describe the concept of risk aversion. Is it an equally appropriate strategy for dealing with pure and speculative risks? Risk aversion, generally the approach taken by human beings, causes one to shy away from risk. It can be an equally appropriate strategy for dealing with both pure and speculative risk, although with pure risk one gives up any opportunity for gain.

10. Describe the alternatives available to people and firms across the globe to protect themselves from adverse loss exposures. Generally there are four alternatives: 1) retention, best for exposures with small potential financial consequences; 2) personal insurance protection, best for exposures with significant potential financial consequences; 3) employee benefits plans, targeted to specific exposures such as retirement and health care expenses; and 4) corporate risk management, appropriate to a firm with significant loss exposures.

11. How does social insurance differ from private insurance? In your answer, explain why some loss exposures are insured better through social insurance than through private insurance. Social insurance is generally mandatory and involves programs sponsored by the government but not for government employees. Most of the perils covered by social insurance programs are of a catastrophic nature, that is, neither individuals nor private insurance companies can take them on. Examples are unemployment and old age.

12. Explain why it may be advantageous for people to get insurance protection from employee benefit plans instead of buying individual insurance policies. Because employee benefit plans have tax advantages for both the employee and the employer, they may be advantageous. The typical perils covered, such as health care expenses and old age, can be treated by risk pooling, giving the group arrangements an advantage over any individual effort.

13. List and briefly describe the five steps in the risk management process.

1) Formulate risk management objectives. What do you want to achieve through risk-management efforts?

2) Identify loss exposures. What is at risk, and what perils and hazards are related?

3) Measure potential loss severity. Most risk-management efforts, and dollars, are going to be directed to the exposures with the greatest potential severity.

4) Choose risk-handling techniques. What strategies will be best to deal with the identified exposures?

5) Implement techniques and monitor their effectiveness. Did what we chose work as we expected? Was it cost effective?

14. Describe four different types of risk that need to be addressed by the risk manager in a typical corporation. Discuss whether each of these four types of risk are equally important across different industries.

1) Pure risks—those where only loss is possible

2) Financial risks—such as currency exchange risk

3) Operational risks—such as supply chain exposures or critical dependencies

4) Strategic risks—such as product development and construction delays

No, these are not equally important across different industries. For an importer, currency exchange risk might be the most significant exposure. For a local restaurant, this is unlikely to be a problem.

15. Describe the difference between loss frequency and loss severity. Loss frequency is the number of losses that occur, and loss severity is the financial consequences of the losses. Together, these make up the expected value of an entity’s losses.

16. Describe the three broad categories of risk-handling techniques used by risk managers. In your answer, provide at least two specific examples of each technique.

1) Avoidance or loss control—trying to affect the frequency or severity of losses. Examples are loss prevention, loss reduction, and salvage.

2) Transfer—trying to get some other entity to bear the loss. Examples are contractual provisions such as hold-harmless and indemnity agreements.

3) Financing—trying to offset or share losses. Examples are insurance and self-insured retentions (SIRs).

17. Explain why it is necessary to monitor the effectiveness of the chosen risk-handling techniques of the risk management process on a continuous basis. Periodically, two questions are asked about any risk-handling technique: 1) Is it effective in reducing or financing losses? and 2) Is it cost effective? If these cannot be answered in the affirmative, then the risk manager must go in another direction.

18. While no single, universally accepted definition of ERM exists, describe four characteristics that commonly are attributed to a well-designed ERM program. Well-designed ERM programs have these characteristics: 1) They have a top-down focus; 2) they are broad in scope; 3) they have a portfolio perspective; and 4) they involve a systematic process of exposure identification, assessment, and treatment.

19. List and describe the four areas of risk encompassed in an enterprise risk-management program. For each risk area, provide an example of a recent risk event that has been described in the popular business media.

1) Pure risk, for example the explosion that damaged the BP oil well that spilled oil in the U.S. Gulf Coast

2) Financial risk, for example the major derivatives losses at some of the most respected investment brokers

3) Operational risk, for example the loss of business for BP after the oil spill because they could not pump as much oil

4) Strategic risk, for example the loss of business for BP as a result of negative public reaction to the spill (this is often called reputation risk)

V. ANSWERS TO OBJECTIVE QUESTIONS

1. Which of the following have led to a growing interest in risk management?

a. The terrorist attacks of September 11, 2001

b. Corporations that filed fraudulent financial statements that overstated earnings

c. Shrinking wages and employee benefit plans during the 2008 recession

d. All of the above

2. Auto collision claims are an example of which of the following?

a. Pure risks that can be diversified across a large group of drivers

b. Speculative risks than can be diversified across a large group of drivers

c. Pure risks that cannot be diversified across a large group of drivers

d. Speculative risks that cannot be diversified across a large group of drivers

3. Which of the following is not a speculative risk?

a. An investor who invests in common stock

b. An entrepreneur who starts a new company

c. A business that develops a new product line

d. A lawsuit filed against a firm by a client who slips on the firm’s icy steps

4. Risk aversion

I. is the tendency of a person to prefer less risk instead of more risk when faced with risky decisions.

II. is a more appropriate strategy for pure risks than for speculative risks.

a. I only

b. II only

c. Both I and II

d. Neither I nor II

5. Which of the following statements about insurance is correct?

a. Insurance is available in all countries across the world.

b. Insurance is a common technique used by individuals to protect against risk.

c. Private insurance is available for non-diversifiable risks like unemployment.

d. a and b are correct.

e. b and c are correct.

6. Which of the following statements about employee benefits are correct?

I. Workers are granted favorable tax treatment on the employee benefits that they receive from their employers.

II. Employee benefits account for over half of the compensation paid by employers in the United States.

a. I only

b. II only

c. Both I and II

d. Neither I nor II

7. Which of the following is a step in the risk-management process?

a. Identifying all possible sources of financial loss

b. Setting the goals of the risk management program

c. Choosing the most efficient ways to handle the firm’s loss exposures

d. Measuring the frequency and severity of all loss exposures

e. All of the above

8. A building’s owner inserts a provision in the lease that makes the tenant legally responsible for clearing snow and ice from the building’s sidewalks. This provision is an example of which of the following?

a. Loss prevention

b. Loss reduction

c. Loss transfer

d. Self-insurance

9. ACA is a leading global automaker. ACA has to stop production of a popular vehicle when a labor strike shuts down the factories of BBB Company, the sole supplier of auto transmissions to ACA. The lost production resulting from this supply chain disruption is an example of a(n) __________ that is borne by ACA.

a. hazard risk

b. financial risk

c. operational risk

d. strategic risk

10. Which of the following is not a characteristic of an ERM program?

a. The decisions of the ERM department are monitored by the firm’s board of directors.

b. The ERM program focuses only on pure risk.

c. The ERM department evaluates the loss exposures of the firm as a portfolio of risk.

d. The ERM department typically uses a systematic process modeled after the risk management process to identify, assess, and treat the firm’s risks.

VI. IDEAS FOR INSTRUCTORS AND TEACHING METHODS

1. Have the class look at Review Question 19 and research a recent incident in Business Insurance, The National Underwriter, or The Wall Street Journal. Are they able to identify the strategic and operational risks? Is it sometimes difficult to tell these two types apart? (Hint: Strategy involves the questions of what will be done and in what time frame. Operations involves the methods to be used and the personnel, human resources, to be deployed.)

2. Discuss whether a Chief Risk Officer is a necessity for an ERM program or whether a traditional risk manager can be retrained. Is this a function that should be outsourced, perhaps to an insurance broker or a consultant?

3. Risk aversion leads persons to pay more for insurance than their expected value of loss. Discuss why that is so. Ask the class for examples they have seen of persons whose actions appear to indicate that they are risk seekers.