Fin 381 Risk and Insurance
Spring 2000 Dr. Gudikunst NAME____________________________
Mid-Term Examination 1a
Instructions: Do all work in this test packet. Write answers in margin beside question number for T-F
and Multiple Choice.
TRUE-FALSE
1. The most common method of dealing with those risks facing an individual is probably risk retention.
2. The term "pure risk" describes a situation in which there is no chance of gain, but the possibility of loss
or no loss only.
3. Insurers can partially eliminate morale hazard through the use of deductibles and other policy
provisions which require the insured to bear a part of a loss.
4. The two fundamental characteristics of the insurance mechanism are transfer or shifting of risk and the
sharing of losses on some equitable basis.
5. From the standpoint of the individual, insurance is a device in which a small certain cost is substituted
for a large uncertain loss.
6. Insurance mobilizes funds for investment, since greater reserves must be maintained with insurance
than would be the case if it did not exist.
7. Insurance cannot exist without a sufficiently large number of exposures to make losses predictable.
8. Through the law of large numbers and a reduction in uncertainty, insurers are able to charge each
individual a premium that is less than the expected value of his or her loss.
9. Risk retention deserves serious consideration when the maximum loss potential is small.
10. The most important consideration in determining how to deal with a given risk is the potential severity
of the loss and one's ability to bear it.
11. With a limited number of dollars available for the purchase of insurance, the sophisticated insurance
buyer will spend these dollars to protect exposures in which the probability of loss is high.
12. The first step in the risk management process is identification of the risks facing the organization.
13. Social insurance programs place primary emphasis on social adequacy of benefits rather than on equity
in cost and benefits.
14. The term "casualty insurance" is generally interpreted to include the fields of liability insurance, life
insurance, accident and health insurance, and burglary and robbery insurance.
15. Public guarantee insurance programs are generally provided in connection with some aspect of
regulation.
