Quiz - Chapter 2 INS200

What is the primary objective of risk management?

• To eliminate all risks
• To reduce the negative impact of risks
• To maximize organizational profit
• To create new risks

Answer explanation

The main objective of risk management is to minimize the negative effects of risks on individuals or organizations.

Risk __________ is defined as a systematic approach to identifying, measuring, and controlling risks that can threaten assets and earnings.

Answer explanation

Risk management is a systematic approach to managing threats to assets and earnings.

Which of the following is a pre-loss objective of risk management?

• Social responsibility
• Survival of the organization
• Reduce fear and worry
• Stability of earnings

Answer explanation

Pre-loss objectives include reducing fear and worry, complying with regulations, and minimizing potential losses.

Which method of risk management is most suitable for dealing with catastrophic risks?

• Risk avoidance
• Risk retention
• Risk transfer
• Risk acceptance

Answer explanation

Transferring risk, often through insurance, is the most effective way to handle catastrophic risks.

__________ involves distributing a firm’s assets across multiple locations to reduce loss impact.

Answer explanation

Separation helps reduce loss severity by dispersing assets to multiple locations.

Which of the following is NOT a risk identification technique?

• Physical inspection
• Hazard and Operability Study (HAZOP)
• Risk retention
• Checklist

Answer explanation

Risk retention is not a technique for identifying risks; it is a method of managing them.

Risk __________ is a qualitative and quantitative evaluation to assess the risks posed to human health or the environment.

Answer explanation

Risk assessment involves evaluating hazards to health or the environment, both qualitatively and quantitatively.

Which risk management technique involves setting aside funds to cover potential losses?

• Risk acceptance

• Risk transfer

• Risk avoidance

• Risk retention

Answer explanation

Risk retention involves setting aside funds to cover potential losses, allowing an organization to manage risks internally rather than transferring them to another party.

What is the most effective way to manage risks that cannot be avoided?

• Risk retention

• Risk elimination

• Risk transfer

• Risk creation

Answer explanation

Risk transfer is the most effective way to manage unavoidable risks, as it involves shifting the risk to another party, such as through insurance or contracts, thereby minimizing potential financial impact.

Analyze the differences between risk retention and risk transfer and explain when each method is preferable.

Answer explanation

Risk retention involves keeping the risk, while transfer shifts it to another party. Retention suits small, predictable losses; transfer is better for severe risks.