Chapter 2: Nature Of Insurance

28 Questions | Total Attempts: 30

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Chapter 2: Nature Of Insurance

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Questions and Answers
  • 1. 
    Which of the following is considered to be an event or condition that increases the probability of an insured's loss?
    • A. 

      Risk 

    • B. 

      Hazard

    • C. 

      Indemnity

    • D. 

      Peril

  • 2. 
    An individual who removes the risk of losing money in the stock market by never purchasing stocks is said to be engaging in
    • A. 

      Risk reduction

    • B. 

      Risk transference

    • C. 

      Risk avoidance

    • D. 

      Risk retention

  • 3. 
    Insurance represents the process of risk
    • A. 

      Selection

    • B. 

      Avoidance

    • C. 

      Transference

    • D. 

      Assumption

  • 4. 
    All of the following are examples of pure risk EXCEPT
    • A. 

      Losing money at a casino

    • B. 

      Injured while playing football

    • C. 

      Falling at a casino ad breaking a hip

    • D. 

      Jewelry stolen during a home robbery

    • E. 

      Option 5

  • 5. 
    How do insurers predict the increase of individual risks?
    • A. 

      Law of large numbers

    • B. 

      U.S. Census

    • C. 

      Average mortality incidents

    • D. 

      Experience of morbidity

  • 6. 
    What is known as the immediate specific event causing loss and giving rise to risk?
    • A. 

      Peril

    • B. 

      Hazard

    • C. 

      Loss factor

    • D. 

      Liability

  • 7. 
    Insurance companies determine risk exposure by which of the following?
    • A. 

      Insurable interest

    • B. 

      Insurance exchanges

    • C. 

      Law of large numbers and risk pooling

    • D. 

      Population table data

  • 8. 
    The cause of a loss is referred to as a(n)
    • A. 

      Hazard

    • B. 

      Adversity

    • C. 

      Peril

    • D. 

      Risk

  • 9. 
    People with higher loss exposure have the tendency to purchase insurance more often than those at average risk. This is called
    • A. 

      Risk retention

    • B. 

      Preexisting conditions

    • C. 

      Law of large numbers

    • D. 

      Adverse selection

  • 10. 
    A condition or situation that creates or increases a chance of loss
  • 11. 
    Types of hazards include:
  • 12. 
    The unintentional decrease in the value of an asset due to a peril
  • 13. 
    An immediate, specific event which causes loss, such as an earthquake or tornado. [Blank] can also be referred to as the accident itself
  • 14. 
    The potential for loss
  • 15. 
    A risk that presents both the chance for loss or gain. [Blank] are not insurable. Example: gambling
  • 16. 
    Is the only insurable risk and present a potential for loss only, such as injury, illness, and death.
  • 17. 
    Elements of Insurable Risk:
    • A. 

      Loss must be due to chance - outside of the insured's control

    • B. 

      Loss must be definite  and measurable - time, place, amount and when payable

    • C. 

      Loss must be predictable - able to estimate the average frequency and severity

    • D. 

      Loss cannot be catastrophic - must be reasonable, 1 trillion dollar policy is not reasonable

    • E. 

      Loss exposure to be insured must be large - ideally, common enough that the insurer can pool may homogeneous, or similar, exposure units (law of large numbers)

    • F. 

      Loss must be randomly selected - Fair proportion of good and poor risks (adverse selection)

  • 18. 
    The larger the amount of exposures that are combines into a group, the more certainty there is to the amount of loss incurred in any given period
  • 19. 
    The Law of Large Numbers allow:
    • A. 

      Prediction of individual and group losses based on past experience

    • B. 

      Predicting gains in large groups

    • C. 

      An increased degree of accuracy in predicting losses in large groups

    • D. 

      Predicting pure risks

  • 20. 
    Any situation that presents the possibility of a loss
  • 21. 
    Similar objects that are exposed to the same group of perils. Example: insuring a large number of homes in the same geographical area against hail damage.
  • 22. 
    The tendency for poorer than average risks to seek out insurance. Insurers must minimize [Blank]. Example: a person who takes 12 prescriptions is a poor risk. If an insurer cannot compensate poor risks with better than average risks, then its loss experience will increase and its ability to pay claims may be compromised.
  • 23. 
    The process of analyzing exposures that create risk and designing programs to handle them
  • 24. 
    Treatment of Risk - how people deal with risk
    • A. 

      Avoidance - avoid the risk all together

    • B. 

      Reduction - take precautions; minimizing severity of a potential loss

    • C. 

      Retention (Self Insure) - accepting a risk and confronting it if it occurs. ex: you would retain the risk of getting injured in a car accident by driving without insurance

    • D. 

      Transfer (Transference) - make someone else responsible for a loss. ex: buying auto insurance transfers the cost associated with a car accident from the driver to the insurance company. Buying insurance is the best way to transfer risk.

    • E. 

      Risk Pooling (Loss sharing) - When a large group of people spread a risk for a small certain cost. Ex: doctors pooling their money to cover malpractice exposures

  • 25. 
    Insurers deal with catastrophic loss through reinsurance, which is defined as a contractual arrangement that transfers exposure from one insurer to another insurer
  • 26. 
    Involves making an insured whole by restoring them to the same condition as before a loss
  • 27. 
    A method of determining the financial value of a person's life based on computing the current value of a person's future earnings for a certain period of time. Ex: main income earner for a family makes 50,000 a year. Family wants to make sure they are protected for 10 years in case something happens to the main income earner. $50,000 (current income) X10 years (protection) = $500,000 insurance policy
  • 28. 
    A method of determining a person's financial value based on the amount of money needed for current and future expenses. These expenses include final expenses, spouse's income, mortgage etc. Ex: a family wants to ensure they can take care of 5 years of annual expenses of something were to happen to the main income earner, and they have an average of $60,000 (expenses) X 5 years (protection) = $300,000 insurance policy.