Quiz - Chapter 3 INS200

What is the main goal of risk control?

• To increase the risk level
• To minimize the frequency and severity of losses
• To maximize profit
• To eliminate all risks

Answer explanation

Risk control aims to reduce both the frequency and severity of potential losses.

Which of the following is an example of loss prevention?

• Installing fire alarms
• Purchasing insurance
• Investing in high-risk assets
• Accepting all risks

Answer explanation

Loss prevention techniques aim to reduce the frequency of loss, such as installing fire alarms.

Which risk financing technique involves transferring the financial consequences of loss to another party?

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

Answer explanation

Risk transfer, such as through insurance, moves the financial burden of loss to another party.

Why is risk retention considered a viable option for minor risks?

• It is inexpensive and manageable
• It completely eliminates risk
• It generates profits
• It avoids legal complications

Answer explanation

Retaining minor risks is practical when the cost of transferring or mitigating the risk is higher than the potential loss.

What is the primary difference between risk control and risk financing?

• Risk control reduces loss frequency, while risk financing funds losses
• Risk control eliminates all risks, while risk financing avoids them
• Risk control increases risks, while risk financing reduces them
• Risk control generates revenue, while risk financing incurs losses

Answer explanation

Risk control minimizes losses through preventive measures, while risk financing provides funds to cover potential losses.

Which of the following is a risk financing technique aimed at paying for retained losses?

• Risk reduction
• Risk pooling
• Self-insurance
• Risk elimination

Answer explanation

Self-insurance involves setting aside funds to cover losses instead of purchasing external insurance.

Risk __________ involves setting aside funds internally to cover potential losses.

Answer explanation

Risk retention means bearing the cost of loss directly instead of transferring it.

Loss __________ aims to reduce the severity of loss if it occurs.

Answer explanation

Loss reduction techniques focus on minimizing the impact of an incident rather than preventing it entirely.

A (An) __________ policy involves pooling the risks of multiple policyholders to reduce the financial impact on an individual.

Answer explanation

Insurance policies work by pooling risks to spread financial loss among a group.

Explain the significance of combining risk control and risk financing in a comprehensive risk management strategy.

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Answer explanation

Combining risk control and risk financing minimizes the frequency and severity of losses while providing funds for unexpected incidents.