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Risk management 2101 prep test finish the test in the file by using your own words. thanks .. exam1_original.pdf exam2.docx Unformatted Attachment Preview TEMPLE UNIVERSITY THE FOX SCHOOL OF BUSINESS RMI 2101 - INTRODUCTION TO RISK MANAGEMENT First Exam Fall 2018 NAME_________________________________________________________________ INSTRUCTIONS: 1. All answers must be written in your blue book. You will not receive any credit for answers written on the exam itself. 2. Confine your answers to a single blue book. 3. You will have 80 minutes to complete the exam. 4. If I perceive that you are cheating, you will receive an F for the course. Keep your eyes on your own paper. 5. Raise your hand if you have a question. 6. Your cell phone is not allowed on your desk. 7. All caps, hats and hoods must be removed. RMI 2101 – First Exam – Fall 2018 Page 1 SECTION I: MULTIPLE CHOICE 2 POINTS EACH. 70 POINTS TOTAL ALL ANSWERS IN BLUE BOOK Choose the one best answer for each question. Use CAPITAL LETTERS. 1. A risk map is used to do which of the following? A. B. C. D. 2. You are the risk manager of a large manufacturing firm. Your firm has adopted and implemented the following risk management strategies to address your workers compensation loss exposure for 2017: You have decided to self-insure to pay for the losses AND you have implemented a safety program to prevent employees from getting injured on the job. Your CEO has approached you and asked you about your proposed strategy for 2018. What factor or factors will be important in your decision for 2018? In other words, what will determine if you follow the same strategy or modify/change your strategy for 2018? A. B. C. D. E. 3. The conditions of the insurance market place The number of reduced injuries The static or dynamic nature of the risk A and B only A, B and C A peril: A. B. C. D. E. 4. Identify risks under ERM Determine what risks are pure or speculative Determine what risks are diversifiable or non-diversifiable Determine what risks deserve the most attention under ERM Is the immediate cause of a loss. Increases as the probability of loss increases. Could increase the probability of loss. Could decrease the probability of loss. Could decrease the severity of loss. Gallagher in Seattle is shipping goods to Wise in Miami. The shipping contract states that the goods are to be carried by Miller Trucking Co. with FOB Chicago. The goods are hijacked and stolen at some point after they left Gallagher. Who bears the financial responsibility for this loss occurrence? A. B. C. D. E. Gallagher Wise Miller Neither Gallagher nor Wise Cannot determine from the information provided RMI 2101 – First Exam – Fall 2018 Page 2 5. The following is an excerpt from: ‘Mylan Reputation at Stake in EpiPen Controversy’, Pittsburgh Tribune-Review, 8.27.16 Discounts on EpiPens could cost Mylan up to $100 million, but calculating the damage to the pharmaceutical companys reputation from its controversial price hikes may be more difficult. Mylan found itself at the center of a storm this week as a burst of outrage over a more than 500 percent increase in the price of EpiPen since 2007 forced the company to offer subsidies to cut out-of-pocket costs for some patients buying the lifesaving allergy drug. The companys fast response to try to quell the growing uproar was praised by experts, yet the lack of a clear explanation or a reversal of the price increases left Mylan open to continued criticism. CEO Heather Bresch shifted blame for the hikes the retail price of an EpiPen two-pack is $609, up from about $94 in 2007 onto middlemen, such as pharmacies and insurance companies, and what she called the broken health care system. Her comments struck Gene Grabowski, a crisis communications expert and partner at Washington-based consulting firm Kglobal, as disingenuous. Mylans argument for the price increase is very unconvincing, Grabowski said. Its not convincing to regulators, not convincing to the media and not convincing to consumers. From an ERM perspective, this represents what type of risk? A. B. C. D. E. 6. Financial risk Business/strategic risk Net income risk Operational risk Price risk Johnny Jumpup lost his job in June of 2016. Johnny applied for and was granted unemployment insurance for up to 12 months. Johnny was not careful in his search for a new job and did not seriously look for a job until May 2017. Which of the following statement best describes this situation? A. B. C. D. E. Moral hazard because the frequency of loss is increasing Morale hazard because Johnny was careless concerning losses Moral hazard because the severity of loss is increasing Moral hazard because Johnny is required to look for a new job as a condition of receiving unemployment insurance Morale hazard because severity of the loss is increasing RMI 2101 – First Exam – Fall 2018 Page 3 7. You are up all night studying in the Tech Center for your first RMI 2101 exam from Dr. Drennan. You have heard that the class is very difficult, but you are determined to rise to the challenge. At some point in the evening, you take a study break to go to Starbucks and you simply forget to take your brand new iPhone 7 with you because you are tired and stressed out a bit. This behavior is an example of which of the following? A. B. C. D. E. 8. Your firm makes widgets. 80\% of your sales are to the Vermont Fishing Company [VFC]. When you send widgets to VFC, you request that they pay the invoice within 90 days of receipt of the widgets. Currently, VFC owes you $100,000. VFC was flooded during Hurricane Sandy and is expected to be shut down for at least six months due to the extensive damage to their property. As a result, there is significant doubt that you will be able to collect the $100,000. What of the following loss exposure identification methods would be best suited to identifying this risk for your firm? A. B. C. D. E. 9. Property Loss Exposure Net Income Loss Exposure Morale Hazard Physical Hazard Moral Hazard Personal inspections Risk assessment questionnaires Financial statement approach Cost of residual uncertainty Ask firms in similar industries Which of the following is (are) TRUE concerning property loss exposures? I. II. III. A. B. C. D. E. A bank has a property loss exposure for a house they loaned money to buy A tenant cannot have a property loss exposure because they are not the owner An auto repair shop has a property loss exposure for autos they have while being repaired I only II only I and III only II and III only I, II and III RMI 2101 – First Exam – Fall 2018 Page 4 Questions 10 and 11 are related: 10. Kramerica Enterprises had the misfortune of losing two very successful salespeople in a very short period. Assume that you are the owner of Kramerica. Which of the following describes the loss exposure you face because of losing the salespeople? A. B. C. D. 11. Personnel loss exposure Personal loss exposure Liability loss exposure Worker’s Compensation loss exposure What risk management technique would be the best option to help Kramerica manage this loss exposure? A. B. C. D. Not having salespeople A hold-harmless agreement for the salespeople A self-insurance plan for the salespeople A strategic plan to find and train new salespersons on an on-going continuous basis Questions 12 and 13 are based on the following information: A few years ago, Hurricane Katrina damaged the Superdome in New Orleans. The roof suffered damage, water leaked onto the field and the artificial turf on the playing field was destroyed. The building was eventually salvaged. The Superdome was [and still is] the home of the New Orleans Saints professional football team. They play their games at the facility and maintain their corporate operations on the site. During the repair and salvage operations, the games and the organization temporarily relocated to San Antonio, Texas. 12. The damage to the field and artificial turf is an example of a: A. B. C. D. 13. Personnel Loss Exposure Net Income Loss Exposure Property Loss Exposure Liability Loss Exposure The expense of moving to San Antonio is an example of a: A. B. C. D. Personnel Loss Exposure Net Income Loss Exposure Property Loss Exposure Liability Loss Exposure RMI 2101 – First Exam – Fall 2018 Page 5 14. A hard insurance market: A. B. C. D. E. 15. Lederle Pharmaceutical makes the decision to stop producing vaccines because of the high liability related to vaccine side effects. The company also successfully removes 100\% of existing vaccines from the market. What risk management strategy is illustrated here? A. B. C. D. E. 16. Might cause a firm to prefer self-insurance over buying insurance, other things equal Might cause a firm to prefer buying insurance over self-insurance, other things equal Is characterized by high prices and plentiful availability of insurance Is characterized by low prices and plentiful availability of insurance A and C only Proactive avoidance Reactive avoidance Loss prevention Loss reduction Retention Consider a very large firm with over 10,000 employees. This firm is trying to decide if they purchase an insurance contract for their health insurance benefits or self-insure their health insurance benefits. From a purely financial perspective, it is very clear that this firm would probably save money by choosing to self-insure. If this firm does decide to purchase insurance rather than self-insure, this might be due to which of the following reasons? I. II. III. A. B. C. D. E. 17. The insurance market is a hard market The insurance market is a soft market The level of subjective risk of the key decision-maker I only II only III only I and III only II and III only Analyzing past losses is frequently used to identify loss exposures. The major drawback of this statistical analysis is: A. B. C. D. Future loss exposures might not have appeared in the past The past is not a good predictor of the future. Statistical observations are not good predictors of the future Inflation will change the dollar loss predictions. RMI 2101 – First Exam – Fall 2018 Page 6 18. The distance of a private home to the nearest fire station or fire house could be considered a physical hazard because: A. B. C. D. E. Frequency of the loss could be increased Severity of the loss could be increased The probability of the loss is higher Dynamic risk is higher It cannot be considered a physical hazard. Questions 19 and 20 are based on the following information: Assume that Foxconn is the only factory that manufactures the iPad2 for Apple Inc. Foxconn was rocked by a huge explosion in the building where the iPad 2 is assembled. Several key employees were killed and dozens more were injured. Production for the iPad 2 was halted to allow officials to investigate the cause of this accident and ensure the safety of the workers. 19. From the point of view of Apple, which of the following statement is (are) TRUE? A. B. C. D. E. F. 20. This represents operational risk for Apple This represents a financial risk for Apple This represents a pure risk for Apple This represents a speculative risk for Apple A and C are TRUE B and D are TRUE From the point of view of Foxconn, which of the following statements is (are) TRUE? I. II. III. A. B. C. D. E. Foxconn suffers both property loss and personal loss Foxconn suffers both property loss and personnel loss Foxconn has a property loss that will create a net income loss II only I and II only I and III only II and III only I, II and III RMI 2101 – First Exam – Fall 2018 Page 7 21. A firm decides to begin a fire management program that teaches staff to identify and also to reduce anything that could either cause a fire or make a fire worse. With respect to the loss in question, this program would decrease which of the following? A. B. C. D. 22. Severity Frequency Expected loss All of the above [A, B and C] You have signed a 10 year lease to rent space for your retail store. The terms of your lease state that your monthly rental is $5000 per month for the entire lease. After three full years into the lease, a fire completely destroys the building. The fair market value of your space at the time of the fire is $6000. Rather than wait for the building to be repaired, you move to another location and sign a new lease at the fair market value. Based on this, which of the following is (are) TRUE? I. II. III. A. B. C. D. E. 23. You suffer a loss of use The owner of the building suffers a leasehold interest loss of $1000 per month for 7 years You suffer a leasehold interest loss of $1000 per month for 7 years II only III only I and II only I and III only I, II and III The following is an excerpt from: ‘Most Small Businesses Lack Disaster Recovery Plan, Survey Finds’, Columbus Dispatch, 3.1.17 Local information technology company R. Dorsey & Co. Inc. was hit by fire in 2009 at the building where it operated in Grandview Heights. Owner Bob Dorsey said the company was prepared by having data stored offsite, so it was able to resume operations quickly. But, still, insurance didnt cover all the losses, he said. What risk control option is illustrated here and what loss exposure is it addressing? A. B. C. D. E. Separation of exposure units, property loss exposure Avoidance, property loss exposure Loss prevention, net income loss exposure Risk transfer of the financing type, property loss exposure Separation of exposure units, net income loss exposure RMI 2101 – First Exam – Fall 2018 Page 8 24. The following is an excerpt from: ‘Four Years After Quake: Japan Inc. Better Prepared to Function in Disasters’, Nikkei English News [Japan], 3.11.15 Production stoppages were not the only problems companies faced after the earthquake. Roads, ports and other transportation infrastructure were destroyed, preventing goods from being shipped. Seven & i Holdings built a facility beneath an Ito-Yokado distribution center in Saitama Prefecture to store fuel for delivery vehicles. It has stockpiled enough fuel to cover 10 days worth of deliveries to more than 5,000 convenience stores and supermarkets in the greater Tokyo area. It is considering building similar storage stations elsewhere. What risk control option is illustrated here and what loss exposure is it addressing? A. B. C. D. E. 25. Consider the concept of moral hazard. Which of the following statements best describes the nature of moral hazard in health insurance? A. B. C. D. 26. Loss prevention, net income loss exposure Avoidance, property loss exposure Duplication of exposure units, net income loss exposure Post-loss loss reduction, property loss exposure Duplication of exposure units, liability loss exposure Individuals with health insurance engage in careless behavior causing them to get sick Individuals with health insurance use more health care goods and services than those without health insurance Individuals file false claims and commit insurance fraud with health insurance A, B and C are all associated with moral hazard in health insurance. Barbara is writing a final paper for her RMI class. It is due in three days and she is almost finished. Her hard drive crashes and she losses her entire paper. She has no hardcopy and no backup on a disk or a zip drive. She was obviously not paying attention in class! What risk management technique should she have used in this situation? A. B. C. D. E. Duplication of exposure units Risk transfer of the financing type Passive retention Separation of exposure units Avoidance RMI 2101 – First Exam – Fall 2018 Page 9 27. Rob and Barbara take a plane trip from Philadelphia to Dallas to see the Iggles play the Cowboys for a recent playoff game. The probability that the plane will crash is 0.006. Barbara appears very anxious before the flight. She says she is really scared that the plane is going to crash and is obviously nervous. Rob is quite confident and comfortable about his trip (and about the outcome of the game). Which risk is different for Rob than it is for Barbara? A. B. C. D. 28. Refer to the analysis in question #27. Which risk is the same for both Barbara and Rob? A. B. C. D. 29. Speculative Subjective Objective Static Speculative Subjective Objective Static A trucking firm has the following probability distribution for severity due to trucking accidents. How would you define the maximum probable loss? Dollar Loss per Accident 1,000 3,000 5,000 10,000 A. B. C. D. E. 30. Probability of Dollar Loss 0.50 0.30 0.15 0.05 A 50\% chance that losses are than $5,000 An 80\% chance that losses are $3,000 $10,000 A 30\% chance that losses will be $3,000 $19,000 Which of the following characteristics of an exposure are associated with a higher risk charge? A. B. C. D. High maximum possible loss Little past data for estimation High expected frequency High expected severity RMI 2101 – First Exam – Fall 2018 Page 10 31. The degree of objective risk can be measured by the following ratio actual losses - expected losses . Using the law of large numbers we know expected losses that A. B. C. D. 32. Actual losses minus expected loses will produce profit for the firm or individual Risk is a variability concept As the number of observations increases the degree of objective risk will decrease As the number of observations increases the degree of objective risk will increase. Suppose you are comparing the degree of risk for the two firms, Manaka and Drennan. From their respective loss frequency distributions, we have the following information concerning “inventory shrinkage” per month. For MANAKA the mean is equal to 18 and the variance is equal to 9. For DRENNAN the mean is equal to 8 and the variance is equal to 4. Using the BEST measure to compare the degree of risk for these two companies, which company faces more risk? A. B. C. D. E. 33. Manaka because their coefficient of variation is higher than Drennan. Manaka because their variance is higher than Drennan. Drennan because their coefficient of variation is higher than Manaka. Drennan because their variance is higher than Manaka Both face the same risk since their coefficients of variation are equal Which of the following would result in an increased pure premium for an insurance firm who is selling auto insurance? [other things equal] A. B. C. D. E. The insurer put more resources toward an expensive advertisement campaign The insurer decides to only insure drivers who have excellent driving records The insurer has less confidence in their estimate of expected loss A, B and C would all increase the pure premium None of the above would increase the pure premium RMI 2101 – First Exam – Fall 2018 Page 11 34. The Ajax Company has a fleet of 500 cars. They estimate that 5 of their cars will be stolen this year. The actual results for Ajax could range from 4 to 6 cars stolen this year. The Charger Company has a fleet of 1000 cars. They estimate that 100 of their cars will be stolen this year. The actual results for Charger could range from 95 to 105 cars stolen this year. Based on this information, who faces the most risk? A. B. C. D. E. 35. Ajax faces the most risk because they have a higher probability of loss Ajax faces the most risk because they have a higher measure of objective risk Charger faces the most risk because they have a higher probability of loss Charger faces the most risk because they have a higher measure of objective risk. Charger faces the most risk because they have more cars in their fleet. Refer to question 34 above. Now suppose Charger Company ALWAYS has 100 cars stolen each year and Ajax Company has not changed. Who faces the most risk? A. B. C. D. E. Charger faces the most risk because they have a higher probability of loss Ajax faces the most risk because they have a higher probability of loss Ajax faces the most risk because they have a higher measure of objective risk Charger faces the most risk because they have a higher measure of objective risk. Charger faces ... Purchase answer to see full attachment