True and False
Experience has demonstrated that utility theory is a highly effective approach to risk management decisions, both in theory and in practice.
For the average organization, risk management decisions are typical of the type that decision theorists characterize as decision making under uncertainty.
- There are relatively few situations in risk management decision-making where the expected value approach will not be appropriate.
- A major implication of Pascal’s wager in risk management decisions is the suggestion that the magnitude of a potential loss may be a major consideration in the decision.
- 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.
- Insurance should be considered as a last resort in risk management, and should be used only when absolutely necessary.
- With limited funds available for the purchase of insurance, the sophisticated insurance buyer’s will spend these funds to insure exposures for which the probability of loss is highest.
- Contributions to a business firm’s self-insurance reserve are not deductible for federal tax purposes, but losses paid by the firm are deductible.
- Ratings assigned to insurers by A. M. Best and Company are determined through a survey of the company’s existing and former policyholders.
- In selecting an insurer, the most important consideration should be the cost of its products and the company’s attitude toward claim payment and cancellation of insureds.
- When both the potential severity and the probability of loss are high, the most appropriate techniques for dealing with the exposure are avoidance and reduction.
- The rules of risk management imply that the cause of a loss is more important than its effect.
- The rule “Don’t risk more than you can afford to lose” suggests that losses of the same magnitude are equally important.
- The cost of risk is generally measured in terms of opportunity cost.
- Decisions relating to risk control measures are sometimes dictated by factors other than cost.
16 In ranking insurance coverages, the most logical approach is to consider coverages required by law “Essential,” those required by contract “Important,” and all others “Optional.”
- Premiums paid to a wholly owned captive are not generally deductible for tax purposes.
- The exposure for which insurance is most appropriate are those with a low frequency and high severity.
- The Internal Revenue Code does not allow a tax deduction for self-insured losses.
The powers of a risk retention group are generally more limited than those of an insurance purchasing group.