AppC
1. (p. 620) The management of risk is a small part of American business.
2. (p. 620) An enterprise risk management (ERM) program has a goal of defining which risks the program will
manage.
3. (p. 620) Managing risk includes things such as security failures, bird flu, and terrorist attacks, along with
job-related accidents.
4. (p. 620) Risk management involves minimizing the losses from unexpected events.
5. (p. 621) Risk management is getting much simpler thanks to the Internet.
6. (p. 620) Southern Deliveries has decided to manage risk by requiring drivers to wear seat belts, have a
commercial driver’s license, monitor any moving violations each driver obtains, and to be sure that this
information is kept in the employee records. Furthermore Southern has decided to carry an insurance policy
with a very large deductible, preferring to pay for small damages to its trucks out-of-pocket. Southern has built
enterprise risk management into their organization.
7. (p. 621) Fairweather Farms is located on Florida’s Gulf Coast and is primarily engaged in raising and harvesting
citrus fruit. The owners of Fairweather Farms are correct in beginning to think about how the risk of climate
change might impact their crops in the future.
8. (p. 621) Risk is a term that refers to the chance of loss, the degree of probability of loss, and the amount of
possible loss.
9. (p. 621) There are two different kinds of risk: passive and active.
10. (p. 621) Speculative risk involves a chance of either profit or loss.
11. (p. 621) Pure risk involves the chance of either a profit or a loss.
12. (p. 621) An entrepreneur takes a speculative risk when starting a new business.
13. (p. 621) The chance of a fire is an example of a pure risk.
14. (p. 621) If a pure risk occurs a company loses money; but if the events do not occur, the company gains
nothing.
15. (p. 621) Businesses can often reduce the risk to which they are exposed.
16. (p. 621) The type of risk that is of most concern to businesspeople is speculative risk.
17. (p. 621) One way to lower the need for outside insurance is to self-insure.
18. (p. 622) Product recalls can reduce risk.
19. (p. 622) The beginning of an effective risk management strategy is a good loss-prevention program.
20. (p. 622) Outsourcing helps some companies avoid risk.
21. (p. 622) Self-insurance is the practice of setting aside money to cover routine claims and buying only
“catastrophe” policies to cover big losses.
22. (p. 623) Self-insurance makes more sense for firms that operate one large facility than it does for firms with
facilities scattered all over the country.
23. (p. 623) “Going bare” is a much less risky strategy for self-insurance.
24. (p. 623) When a firm that is self-insuring against risk decides to cover losses straight out of its budget, it is said
to be “going bare.”
25. (p. 621) Proctor & Gamble Inc. is ready to launch a new shampoo in the marketplace. They will incur a
speculative risk.
26. (p. 621) The terrorist attack against the World Trade Center in 2001 is an example of pure risk.
27. (p. 621) Water sprinklers and smoke detectors can be used to minimize speculative risks.
28. (p. 621) Typically, the only option that firms have to deal with pure risk is to buy insurance.
29. (p. 622) 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.
30. (p. 622) All-Star Manufacturing has decided to stop producing football helmets due to the potential size of
losses involved in product liability cases. This is an example of avoiding risk as a risk management strategy.
31. (p. 623) Kuhlman Appliances produces all of its products in one gigantic production facility near an earthquake
fault line. Kuhlman is the classic example of a firm that should use self-insurance to manage its risks.
32. (p. 623) A well-designed and implemented risk-prevention program can eliminate the potential of loss.
33. (p. 623) All risks are insurable.
34. (p. 623) The federal government provides some insurance protection.
36. (p. 623, figure C.1) The Pension Benefit Guaranty Corporation provides retirement benefits, life insurance, health
insurance, and disability income insurance.
37. (p. 623) An uninsurable risk is one that no insurance company will cover.
38. (p. 623) Any risk is insurable as long as you can pay the premium.
39. (p. 623) “Insurable interest” means that the policyholder is the one at risk to suffer a loss.
40. (p. 623) Insurance companies will provide coverage only for losses that are accidental.
41. (p. 623) An example of an uninsurable risk would be the potential losses suffered by Domino’s Pizza resulting
from a popular new product from Pizza Hut.
42. (p. 624) The Ford Motor Company has an insurable interest in the lives of its top executives.
43. (p. 624) John has decided that his neighbor Sam is quite careless and is in danger of burning his own house
down. John tried to buy a fire insurance policy on Sam’s house so that he could collect the payment when Sam
inevitably burned down his own house. The insurance company would not allow John to purchase the policy
because he did not have an insurable interest in the property.
44. (p. 624) The best strategy for a profit-seeking insurance company would be to specialize in providing
45. (p. 624) An insurance premium is the fee charged by the insurance company in return for their promise to pay
for all or part of a loss.
46. (p. 624) An insurance policy is a written contract.
47. (p. 624) The law of large numbers states that 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.
48. (p. 624) According to the rule of indemnity, an insured person cannot collect more than the actual loss from an
insurable risk.
49. (p. 625) A stock insurance company is owned by its policyholders.
50. (p. 625) A mutual insurance company is a nonprofit organization.
51. (p. 625) A mutual insurance company is owned by its policyholders.
52. (p. 624) An insurance company can use the law of large numbers to predict the number of people in your
community that will have a car accident in a given month.
53. (p. 624) The car insurance premium charged for young male drivers is higher than the premium for young
female drivers. This is due to the rule of indemnity.
54. (p. 624) 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.
55. (p. 625) Cary owns a life insurance policy on her husband Jay through Mutual of Cincinnati Life Insurance
Company. As a policyholder, she also owns part of the company.
56. (p. 625) Property insurance covers losses from fires, accidents, or theft.
57. (p. 625) Liability losses result from property damage or injuries suffered by others for which the policyholder
is held responsible.
58. (p. 625) Typically, Health Maintenance Organizations (HMOs) offer members more flexibility in the choice of
doctors and health care than other forms of health insurance providers.
59. (p. 625) Health maintenance organizations put an emphasis on helping members stay healthy instead of on
treating illnesses.
60. (p. 625) A managed care HMO system is more expensive than comprehensive health insurance providers.
61. (p. 625–626) To save money, HMOs usually must approve treatment before it is given.
62. (p. 626) Preferred Provider Organizations (PPOs) offer medical care that is usually more expensive than
HMOs.
63. (p. 626) Preferred Provider Organizations (PPOs) offer members the opportunity to choose their own
physicians.
64. (p. 626) One advantage of medical savings accounts is that healthy people can use tax-deferred money to save
for their future medical needs.
65. (p. 626) Medical savings accounts are managed care plans that have a high deductible.
66. (p. 626) The use of medical savings accounts is expected to lower overall health costs in the U.S.
67. (p. 626) The chances of dying when young are much higher than the chances of becoming disabled when
young.
68. (p. 626) Disability insurance replaces part of your income if you become disabled and can no longer work, but
you usually must be disabled for a specified period of time before benefits are provided.
69. (p. 626) Professional liability insurance is also sometimes known as malpractice insurance.
70. (p. 627) Product liability insurance covers liability arising out of defective products sold.
71. (p. 627) Taking on risk can allow an entrepreneur to prosper.
72. (p. 627) Firms can take out term life-insurance policies on their top executives.
73. (p. 627) Most homeowners’ insurance policies automatically provide adequate coverage for small home-based
businesses.
74. (p. 627) An endorsement provides additional coverage to a homeowner’s policy for business equipment.
75. (p. 627, figure C.2) A fidelity bond covers losses resulting from a second party’s failure to fulfill a contract.
76. (p. 627, figure C.2) A surety bond protects employers from employee dishonesty.
77. (p. 625) Hap has health coverage through a Health Maintenance Organization (HMO). He is likely to be very
pleased with the amount of flexibility he has to choose his doctor and his health care options.
78. (p. 626) It’s good advice for doctors and lawyers to carry malpractice insurance.
79. (p. 626) Workers’ compensation insurance guarantees payment of wages, medical care, and rehabilitation
services for employees who are injured on the job.
80. (p. 626) The premium charged for workers’ compensation insurance is the same for all workers, regardless of
their occupation.
82. (p. 626) Harmon works on a highway construction crew and frequently handles explosives. His friend Willie
works as a bookkeeper for a retail store. The amount of workers’ compensation premiums paid by Harmon’s
employer will probably exceed the premiums paid by Willie’s employer.
83. (p. 627) The risk of environmental harm reaches international proportions in issues such as global warming and
nuclear power.
84. (p. 627) Risk management is concerned only with risks to individuals and businesses.
85. (p. 627) Worldwide risks need to be prioritized so that international funds can be spent where they can do the
most good.
86. (p. 627) Risks such as global warming are the concern of businesses and governments primarily in the U.S.
87. (p. 628–629) The 1986 explosion at the Chernobyl nuclear power plant in what was then the Soviet Union
caused much concern throughout the world. In fact, nuclear fallout from this event was a real issue for many
parts of the world. This is an example of how risk management needs to extend beyond the protection of
individuals and businesses to evaluate worldwide risks.
88. (p. 620) Which of the following is a goal of enterprise risk management?
D. refining the business plan for risk management
89. (p. 620) Risk management for business is critical due in part to:
D. international requirements.
90. (p. 621) Rapid change makes it difficult to keep up with all types of risk including:
D. employee location risk.
91. (p. 620) Risk management has become more important because of:
D. larger numbers of employees in the average company.
92. (p. 620) Enterprise risk management is :
D. only used by the Department of Homeland Security.
93. (p. 620) Risk management is:
D. used only when engaging in global Internet business.
94. (p. 620) Airlines likely consider risk management to be more important because of:
D. the decrease in price of jet fuel.
Nickels – Chapter C… #94
95. (p. 620) Jonathon is in charge of risk management for Learnit Corp., a large chain of preschools in the
mid-west. He has decided to build enterprise risk management into the organization. The first step Jonathon
should take is to: