Insurance Risk Assessment & Management 3 — Questions and Answers
Question 1: A business decides not to offer a product because the liability exposure is too great. This risk management strategy is called:
- Risk transfer
- Risk avoidance (Correct answer)
- Risk reduction
- Risk retention
Correct answer: Risk avoidance
Risk avoidance involves eliminating the activity or exposure that creates the risk entirely, such as not offering a product to avoid its associated liability.
Question 2: Which of the following is an example of a physical hazard?
- Fraudulent misrepresentation on an application
- Indifference to loss due to insurance coverage
- Icy roads that increase accident likelihood (Correct answer)
- Poor financial management of a business
Correct answer: Icy roads that increase accident likelihood
A physical hazard is a tangible condition that increases the probability of a loss, such as icy roads, faulty wiring, or defective machinery.
Question 3: What is 'moral hazard' in the context of insurance?
- A physical condition that increases loss frequency
- Dishonest or fraudulent behavior that increases the chance of loss (Correct answer)
- The tendency to take more risks because of insurance coverage
- A legal obligation to disclose material facts
Correct answer: Dishonest or fraudulent behavior that increases the chance of loss
Moral hazard refers to dishonest behavior or intentional misconduct by the insured that increases the probability or severity of a loss.
Question 4: Which risk assessment tool plots risks on a grid based on their probability and potential impact?
- Risk register
- Loss run report
- Risk matrix (Correct answer)
- Actuarial table
Correct answer: Risk matrix
A risk matrix (also called a heat map) is a visual tool that categorizes risks by plotting their likelihood against their potential severity.
Question 5: An insured who neglects to maintain their property because 'insurance will cover it' is demonstrating:
- Moral hazard
- Morale hazard (Correct answer)
- Physical hazard
- Speculative risk
Correct answer: Morale hazard
Morale hazard (also called attitudinal hazard) is the indifference or carelessness that arises from knowing that insurance will cover losses.
Question 6: In risk management, what does 'frequency' refer to?
- The dollar cost of each individual loss
- How often losses are expected to occur over a period (Correct answer)
- The number of policyholders in a risk pool
- The rate at which premiums are charged
Correct answer: How often losses are expected to occur over a period
Loss frequency measures how often a particular type of loss is expected to occur within a defined time period.
Question 7: Which of the following is NOT a characteristic of an insurable risk?
- The loss must be accidental and unintentional
- There must be a large number of similar exposure units
- The loss must be speculative in nature (Correct answer)
- The loss must be measurable and definite
Correct answer: The loss must be speculative in nature
Insurable risks must be pure risks (chance of loss or no loss), not speculative risks (which also include the possibility of gain).
Insurance Risk Assessment & Management 3
A business decides not to offer a product because the liability exposure is too great.
This risk management strategy is called: