Chapter $1$:

Application Questions

Assume that the chance of loss is $3$ percent for two different fleets of trucks. Explain how it is possible that objective risk for both fleets can be different even though the chance of loss is identical.

Several types of risk are present in the U$.$S$.$ economy. For each of the following, identify the type of risk that is present. Explain your answer.

a$.$ The Department of Homeland Security alerts the nation of a possible attack by terrorists.

b$.$ A house may be severely damaged in a fire.

c$.$ A family head may be totally disabled in a plant explosion.

d$.$ An investor purchases $100$ shares of Microsoft stock.

e$.$ A river that periodically overflows may cause substantial property damage to thousands of homes in the floodplain.

f$.$ Home buyers may be faced with higher mortgage payments if the Federal Reserve raises interest rates at its next meeting.

g$.$ A worker on vacation plays the slot machines in a casino.

There are several techniques available for managing risk. For each of the following risks, identify an appropriate technique, or combination of techniques, that would be appropriate for dealing with the risk.

a$.$ A family head may die prematurely because of a heart attack.

b$.$ An individual's home may be totally destroyed in a hurricane.

c$.$ A new car may be severely damaged in an auto accident.

d$.$ A negligent motorist may be ordered to pay a substantial liability judgment to someone who is injured in an auto accident.

e$.$ A surgeon may be sued for medical malpractice.

Andrew owns a gun shop in a high$-$crime area. The store does not have a camera surveillance system. The high cost of burglary and theft insurance has substantially reduced his profits. A risk management consultant points out that several methods other than insurance can be used to handle the burglary and theft exposure. Identify and explain two noninsurance methods that could be used to deal with the burglary and theft exposure.

Risk managers use a number of methods for managing risk. For each of the following, what method for handling risk is used? Explain your answer.

a$.$ The decision not to carry earthquake insurance on a firm's manufacturing plant

b$.$ The installation of an automatic sprinkler system in a hotel

c$.$ The decision not to produce a product that might result in a product liability lawsuit

d$.$ Requiring retailers who sell the firm's product to sign an agreement releasing the firm from liability if the product injures someone