Chapter Bonus C – Managing Risk
125. According to the Law of Large Numbers, if 26 out of 100 homes are likely to sustain
earthquake damage in a 30-year period of time in San Jose, California, and 12 out of 100
homes in the same location are likely to be damaged due to flooding during the same time
period, the premium for earthquake coverage will be ____________.
A. higher than the premium for flood insurance.
B. lower than the premium for flood insurance.
C. equal to or lower than the premium for flood insurance.
D. equal to or higher than the premium for flood insurance.
Feedback: The Law of Large Numbers says that if a large group of people or organizations in
a well defined area are exposed to a natural disaster or unplanned event, then a large number
of damage claims are likely to occur. If only a few people or organizations are affected by an
unplanned disaster, then the premium may not be as high due to fewer claims. If there are
more homes that can be damaged from a potential earthquake event than a flood, over a
defined period of time, the premiums for earthquakes will be higher.
126. 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.
A. rule of 80
B. rule of indemnity
C. law of legal compliance
D. law of large numbers
Feedback: The rule of indemnity states that a policyholder cannot expect payment by two
different insurance companies for the same claim.
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147. Explain the four ways of managing risk.
148.
Chapter Bonus C – Managing Risk
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Explain the difference between speculative risk and pure risk. Which type of risk is of
more concern to businesspeople?
149. Explain what makes the acceptance of risk possible for insurance companies.
150.
Chapter Bonus C – Managing Risk
Discuss the difference between HMOs and PPOs.
151. Explain the benefits of workers’ compensation. Who is required to carry this type of
insurance?
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152. 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.
Feedback: An uninsurable risk is one that no insurance company will cover. Examples of
things that you cannot insure include market risks (e.g., losses that occur because of price
changes, style changes, or new products that make your product obsolete); political risks (e.g.,
losses from war or government restrictions on trade); some personal risks (such as loss of a
job, NOT a decrease in sales at the store); and some risks of operation such as a strike or
equipment malfunction.
153.
Chapter Bonus C – Managing Risk
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One of Waata’s staff members had 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. Watta 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.
Feedback: The rule of indemnity says that an insured person or organization cannot collect
more than the actual loss from an insurable risk. One cannot gain from risk management; one
can only minimize losses. One cannot, for example, buy two insurance policies and collect
from both for the same loss.
154. 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.
Feedback: Workers’ compensation insurance guarantees payment of medical care for
employees who are injured on the job. Employers in all 50 states are required to provide this
insurance.
155.
Chapter Bonus C – Managing Risk
Waata carries health insurance for his family and his staff and their families. While it is a
bit more expensive, the policy allows everyone to choose their own doctor. Further,
members of the plan have to pay a deductible each year before the insurance will pay any
bills. Waata and his staff and families have health insurance with a(n):
A. HMO.
B. DOC.
C. RSO.
D. PPO.
Feedback: Preferred provider organizations (PPOs) contract with hospitals and physicians,
but unlike an HMO, a PPO does not require its members to choose only from those
physicians. Members usually have to pay a deductible before the PPO will pay any bills.
Some people feel that the added expense of PPOs over HMOs is worth the freedom to select
their own physicians.
156. 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
Feedback: Public liability insurance provides protection for businesses against losses
resulting from personal injuries or damage to the property of others for which the insured is
responsible. Waata was responsible for the spilled coffee and the burn.