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Exam 24: Extension: Managing Risk

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Question 1

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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.

A) speculative
B) pure
C) insurable
D) managed

E) C) and D)
F) B) and C)

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Question 2

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

A) True
B) False

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Question 3

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

Sasha has a small jewelry business with only four employees. He started his business the month before last and so far he makes just enough to pay his bills each week. Yesterday, just before the end of his first quarter in business, he received a notice from the government indicating that he needed to provide evidence of workers' compensation insurance. Sasha:

The Ford Motor Company has an insurable interest in the lives of its top executives.

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.

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.

UPS requires their delivery people to wear seat belts as they drive their trucks. This is an example of self-insuring as a risk management strategy.

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

Explain the four ways of managing risk.

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. -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.

The federal government provides some insurance protection.

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

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

If a pure risk occurs a company loses money; but if the events do not occur, the company gains nothing.

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

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

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

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. -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, WillB. Safe, told Waata:

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