Life Agent: Section 1 - Basic Insurance Concepts And Principles

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  • 1/34 Questions

    What is the purpose of insurance?

    • Provide financial (economic) protection against losses that may be incurred due to a chance happening (occurrence) or event.
    • To protect oneself against losses. The insured has to be 21 or older.
    • To transfer risk to an insurer. The insured has to be 65 or older.
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Insurance Quizzes & Trivia
About This Quiz

This quiz assesses foundational knowledge in basic insurance concepts and principles. It covers the purpose of insurance, definitions from societal and individual perspectives, types of risks, and the nature of insurance contracts. Ideal for learners in finance and insurance sectors.

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  • 2. 

    What is physical hazard?

    • Deals with a person's state of mind

    • Associated with the law

    • Anything that poses a risk that can be seen, heard, touched, tasted, or smelled

    Correct Answer
    A. Anything that poses a risk that can be seen, heard, touched, tasted, or smelled
    Explanation
    Physical hazard refers to anything that can be perceived by the senses and has the potential to cause harm or injury. It includes risks that can be seen, heard, touched, tasted, or smelled. This definition encompasses a wide range of potential dangers, such as sharp objects, loud noises, toxic substances, and dangerous temperatures. By considering all possible sensory cues, this definition ensures that all visible, audible, tactile, gustatory, and olfactory risks are included under the umbrella of physical hazards.

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  • 3. 

    What is legal hazard?

    • Anything that deals with physicality

    • The chance of a certain risk ending up in court.

    • Deals with the mind of a person

    Correct Answer
    A. The chance of a certain risk ending up in court.
    Explanation
    Legal hazard refers to the possibility that a specific risk or danger may result in a court case or legal proceedings. It implies that the risk has the potential to lead to a legal dispute or litigation. This term is often used in insurance and risk management contexts to assess the likelihood of legal actions arising from certain hazards or risks.

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  • 4. 

    What are the two main types of risk?

    • Pure

    • Speculative

    • Peril

    Correct Answer(s)
    A. Pure
    A. Speculative
    Explanation
    The two main types of risk are pure risk and speculative risk. Pure risk refers to situations where there is only a possibility of loss or no loss at all, such as accidents or natural disasters. Speculative risk, on the other hand, involves the possibility of both gain and loss, such as investing in the stock market. Peril, mentioned in the question, is not a type of risk but rather refers to a specific cause of risk, such as fire or theft.

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  • 5. 

    What is insurable events?

    • Any contingent or unknown event, whether past or future, that may affect a person having an insurable interest, or create a liability against them.

    • Cannot be contingent events

    • Only has to be unknown event.

    Correct Answer
    A. Any contingent or unknown event, whether past or future, that may affect a person having an insurable interest, or create a liability against them.
    Explanation
    The correct answer explains that insurable events can be any contingent or unknown event, whether it has already occurred in the past or is expected to happen in the future. These events have the potential to impact a person who has an insurable interest, which means they have a financial stake in the event. Additionally, insurable events can create a liability for the person involved. The answer also clarifies that insurable events do not necessarily have to be contingent, meaning they are not dependent on another event happening, but they must be unknown.

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  • 6. 

    What is property loss exposure?

    • The degree of a loss a person/organization faces in regard to lawsuits brought by a third party.

    • The degree of loss of a person/organization faces in regard to property.

    • Presents the possibility of a financial loss to an individual or a family

    Correct Answer
    A. The degree of loss of a person/organization faces in regard to property.
    Explanation
    Property loss exposure refers to the degree of loss that a person or organization may face in relation to their property. This can include damage, destruction, or theft of property, which can result in financial loss. It does not specifically pertain to lawsuits brought by a third party or the possibility of financial loss to an individual or family.

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  • 7. 

    What is risk?

    • Uncertainty about loss exists when there is a possibility of more than one outcome.

    • Uncertainty about loss exists when there is a possibility of only one outcome.

    • The possibility of someone losing without insurance.

    Correct Answer
    A. Uncertainty about loss exists when there is a possibility of more than one outcome.
    Explanation
    The correct answer is "Uncertainty about loss exists when there is a possibility of more than one outcome." This answer accurately defines risk as the presence of uncertainty regarding potential losses, which can occur when there are multiple possible outcomes. It implies that risk is not limited to a single outcome but encompasses various possibilities, highlighting the element of uncertainty involved.

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  • 8. 

    What is morbidity?

    • Deals with mortality

    • Life expectancy table

    • Probability of disease or disability

    Correct Answer
    A. Probability of disease or disability
    Explanation
    Morbidity refers to the probability or likelihood of experiencing a disease or disability. It is a measure of the overall health status of a population and is often used to assess the burden of illness in a community. This term focuses on the occurrence and impact of diseases and disabilities rather than mortality rates or life expectancy.

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  • 9. 

    What is personal (human) loss exposure?

    • Presents the possibility of a financial loss to a business because of the death of a key employee

    • Presents the possibility of a financial loss to an individual or a family

    • Loss of an important human

    Correct Answer
    A. Presents the possibility of a financial loss to an individual or a family
    Explanation
    Personal (human) loss exposure refers to the potential for a financial loss that an individual or a family may face. This can occur due to various reasons such as the death of a key earning member, disability, or illness. It highlights the vulnerability of individuals or families to financial hardships caused by unexpected events. This type of exposure emphasizes the importance of having proper insurance coverage or financial planning to mitigate the potential financial risks that may arise from personal losses.

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  • 10. 

    Insurance from the individual's point of view is:

    • To promise to substitute future financial or economic certainty for uncertainty and to replace the unknown with a sense of security.

    • An agreement (policy or certificate) whereby, for a set amount of money (the premium), one party (the insurer) agrees to pay the other party (the insured or his or her beneficiary) a set sum (the benefit) upon occurrence of some event)

    • A device or instrument that provides the funds to meet uncertainties

    Correct Answer
    A. An agreement (policy or certificate) whereby, for a set amount of money (the premium), one party (the insurer) agrees to pay the other party (the insured or his or her beneficiary) a set sum (the benefit) upon occurrence of some event)
    Explanation
    The correct answer explains that insurance from the individual's point of view is an agreement where one party (the insurer) agrees to pay a set sum to the other party (the insured or beneficiary) upon the occurrence of a specific event. This agreement is made in exchange for a set amount of money called the premium. This definition emphasizes the idea of substituting uncertainty with financial security and providing funds to meet uncertainties.

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  • 11. 

    What is speculative risk?

    • Involves the possibility of either loss or gain.

    • It is insurable

    • Not insurable

    Correct Answer(s)
    A. Involves the possibility of either loss or gain.
    A. Not insurable
    Explanation
    Speculative risk refers to a type of risk where there is a possibility of either loss or gain. Unlike pure risk, which only involves the possibility of loss, speculative risk includes the potential for both positive and negative outcomes. This type of risk is typically associated with investments and business ventures where there is a chance of earning profits or incurring losses. However, the statement that speculative risk is not insurable is incorrect. In fact, speculative risks can be insured through various financial instruments such as options and futures contracts.

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  • 12. 

    What is mortality?

    • Probability of disease or disability

    • Life expectancy and is the table used for life and annuity products.

    • Deals with when will a person die

    Correct Answer
    A. Life expectancy and is the table used for life and annuity products.
    Explanation
    The correct answer is "Life expectancy and is the table used for life and annuity products." This answer accurately describes mortality as the measure of life expectancy and the table used for life and annuity products. Mortality tables are used by insurance companies to estimate the probability of death at different ages, which helps them determine premiums and benefits for life insurance and annuity policies.

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  • 13. 

    What is liability loss exposure?

    • The degree of loss of a person/organization faces in regard to property.

    • Presents the possibility of a financial loss to an individual or a family

    • The degree of a loss a person/organization faces in regard to lawsuits brought by a third party.

    Correct Answer
    A. The degree of a loss a person/organization faces in regard to lawsuits brought by a third party.
    Explanation
    Liability loss exposure refers to the degree of loss that a person or organization faces in relation to lawsuits brought by a third party. This means that it represents the potential financial loss that may occur as a result of legal actions taken against an individual or organization by someone outside of their own party. It does not pertain to the loss of property or the possibility of financial loss to an individual or family.

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  • 14. 

    What is personnel loss exposure?

    • Presents the possibility of a financial loss to a business because of the death of a key employee

    • Presents the possibility of a financial loss of a friend

    • Presents the possibility of a financial loss to an individual or a family

    Correct Answer
    A. Presents the possibility of a financial loss to a business because of the death of a key employee
    Explanation
    Personnel loss exposure refers to the potential financial loss that a business may face due to the death of a key employee. This loss can occur as a result of the costs associated with finding and training a replacement, lost productivity during the transition period, and potential loss of clients or business opportunities that were dependent on the deceased employee's expertise or relationships. It highlights the importance of having contingency plans and insurance coverage in place to mitigate the financial impact of such an event.

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  • 15. 

    Why do private insures underwrite?

    • Review applications to determine whether or not risks are acceptable

    • Review applications to determine whether a person is old enough for insurance protection

    • Reduce adverse selection by eliminating risk that do not meet underwriting standards.

    • They do risk selection, classify, and rating

    Correct Answer(s)
    A. Review applications to determine whether or not risks are acceptable
    A. Reduce adverse selection by eliminating risk that do not meet underwriting standards.
    A. They do risk selection, classify, and rating
    Explanation
    Private insurers underwrite to review applications and determine if the risks involved are acceptable. This helps them assess the likelihood of claims and potential losses. By reviewing applications, insurers can also reduce adverse selection by eliminating risks that do not meet their underwriting standards. Additionally, insurers engage in risk selection, classification, and rating to effectively manage their portfolios and set appropriate premiums based on the level of risk associated with each insured individual.

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  • 16. 

    What is insurable interest?

    • Requires the policyowner to face personal risk of loss, have a legitimate financial interest in preserving the life or property, and the insurance applied for does not achieve a potential for a gain

    • The policyowner or policyholder must establish that they actually have financial interest in the life or property to be insured.

    • The policyowner or policyholder must only establish interest in the property or life that is already insured

    Correct Answer(s)
    A. Requires the policyowner to face personal risk of loss, have a legitimate financial interest in preserving the life or property, and the insurance applied for does not achieve a potential for a gain
    A. The policyowner or policyholder must establish that they actually have financial interest in the life or property to be insured.
    Explanation
    Insurable interest refers to the requirement that the policyowner must face a personal risk of loss and have a legitimate financial interest in preserving the life or property being insured. This means that the policyowner must have a stake in the insured life or property and would suffer a financial loss if it were to be damaged or lost. Additionally, the insurance applied for should not provide the policyowner with the potential for a gain. In order to establish insurable interest, the policyowner or policyholder must demonstrate that they actually have a financial interest in the life or property being insured.

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  • 17. 

    What is ideally insurable risk?

    • Not all pure risks are equally insurable

    • All pure risk is equally insurable

    • The risk is financially within reason, meets all or most of the following criteria, therefore is considered to be reasonable to insure.

    Correct Answer(s)
    A. Not all pure risks are equally insurable
    A. The risk is financially within reason, meets all or most of the following criteria, therefore is considered to be reasonable to insure.
    Explanation
    The correct answer is "Not all pure risks are equally insurable." This means that some pure risks are more suitable for insurance coverage than others. The second part of the answer explains that an ideally insurable risk is one that is financially reasonable and meets certain criteria, making it reasonable to insure. This suggests that there are specific factors that determine whether a risk is insurable or not.

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  • 18. 

    What is a peril?

    • A hazard

    • The actual cause of the loss

    • An immediate specific event causing loss and giving rise to risk

    Correct Answer(s)
    A. The actual cause of the loss
    A. An immediate specific event causing loss and giving rise to risk
    Explanation
    The correct answer is "An immediate specific event causing loss and giving rise to risk." A peril refers to a specific event or cause that leads to loss or damage. It can be an accident, natural disaster, or any other event that poses a risk and results in financial loss or damage to property. This definition aligns with the given answer options, as it describes a peril as both the actual cause of the loss and an immediate specific event causing loss and giving rise to risk.

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  • 19. 

    What is profitable distribution?

    • Balancing higher risks with lower risks so that the losses average out into the normal range.

    • Balancing lower risks with higher risks so that the losses average out into the normal range.

    • They must select a broad base of risks where the average loss (claims) falls within normal range.

    Correct Answer(s)
    A. Balancing higher risks with lower risks so that the losses average out into the normal range.
    A. They must select a broad base of risks where the average loss (claims) falls within normal range.
    Explanation
    Profitable distribution refers to the practice of balancing higher risks with lower risks in order to mitigate potential losses. By selecting a broad base of risks, the average loss or claims can be kept within a normal range. This strategy helps to ensure that any losses incurred are offset by the gains from lower-risk investments, ultimately resulting in overall profitability.

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  • 20. 

    What are the dimensions of loss exposure?

    • The type of value (asset) exposed to loss (key employee, breadwinner)

    • The peril that causes loss

    • How long the loss lasts

    • The extant of the potential financial consequences (depletion of savings).

    Correct Answer(s)
    A. The type of value (asset) exposed to loss (key employee, breadwinner)
    A. The peril that causes loss
    A. The extant of the potential financial consequences (depletion of savings).
    Explanation
    The dimensions of loss exposure include the type of value (asset) that is exposed to loss, such as a key employee or breadwinner. It also includes the peril that causes the loss, as well as the extent of the potential financial consequences, such as the depletion of savings. These factors determine the overall impact and severity of the loss exposure.

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  • 21. 

    What is loss exposure?

    • The possibility of a loss

    • People are exposed to various types on a daily basis

    • Actual cause of the loss

    Correct Answer(s)
    A. The possibility of a loss
    A. People are exposed to various types on a daily basis
    Explanation
    Loss exposure refers to the possibility of experiencing a loss. It encompasses the potential risks and hazards that individuals or entities face in their daily lives. This can include financial losses, physical damages, or any other negative consequences that may arise. The statement also mentions that people are exposed to various types of losses on a daily basis, indicating that loss exposure is a common occurrence in our lives.

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  • 22. 

    What is a hazard?

    • Actual cause of the loss

    • Anything that increase the chance/likelihood that loss will occur, or the severity of a loss that does occur.

    • Does not actually case the damage

    Correct Answer(s)
    A. Anything that increase the chance/likelihood that loss will occur, or the severity of a loss that does occur.
    A. Does not actually case the damage
    Explanation
    The correct answer is "Anything that increases the chance/likelihood that a loss will occur, or the severity of a loss that does occur, but does not actually cause the damage." This definition accurately describes a hazard as something that poses a potential risk or threat, increasing the probability or impact of a loss, without directly causing the damage itself. Hazards can include natural disasters, unsafe conditions, or human actions that contribute to the potential for harm or loss.

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  • 23. 

    What are the types of hazards?

    • Moral

    • Personal

    • Morale

    • Physical

    • Legal

    Correct Answer(s)
    A. Moral
    A. Morale
    A. Physical
    A. Legal
    Explanation
    The correct answer includes four types of hazards: moral, morale, physical, and legal. Moral hazards refer to situations where individuals or organizations may act unethically or dishonestly. Morale hazards involve risks associated with low motivation or lack of commitment, which can lead to errors or accidents. Physical hazards include dangers to health and safety, such as exposure to harmful substances or dangerous working conditions. Legal hazards refer to risks related to non-compliance with laws and regulations, which can result in legal consequences or penalties.

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  • 24. 

    What is pure risk?

    • There is no possibility of gain or profit from a pure risk.

    • Involves the possible outcome of: loss or no loss.

    • Involves the possibility for either loss or gain.

    • Only risk that insurance companies accepts

    Correct Answer(s)
    A. There is no possibility of gain or profit from a pure risk.
    A. Involves the possible outcome of: loss or no loss.
    A. Only risk that insurance companies accepts
    Explanation
    Pure risk refers to a situation where there is no possibility of gain or profit. It involves the possible outcome of either a loss or no loss. This type of risk is the only risk that insurance companies accept because it involves only potential losses and no opportunity for gain.

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  • 25. 

    Insurance is:

    • A contract whereby one undertakes indemnify another against loss, damage, or liability arising from a contingent or unknown event.

    • A device or instrument that provides the funds to meet uncertainties

    • A substitution/exchange of a small certain loss (premium) for a large uncertain loss (claim). Layman's definition.

    • May be referred to as a written instrument, contract, or a policy

    • A social device that transfers risk from an individual to a group (insurer), thus pooling a large number of individuals (pure risks). Funds to cover the individual losses are raised by collecting premiums in exchange for assuming the losses up to a predetermined limit. Conceptual definition.

    Correct Answer(s)
    A. A contract whereby one undertakes indemnify another against loss, damage, or liability arising from a contingent or unknown event.
    A. A substitution/exchange of a small certain loss (premium) for a large uncertain loss (claim). Layman's definition.
    A. May be referred to as a written instrument, contract, or a policy
    A. A social device that transfers risk from an individual to a group (insurer), thus pooling a large number of individuals (pure risks). Funds to cover the individual losses are raised by collecting premiums in exchange for assuming the losses up to a predetermined limit. Conceptual definition.
    Explanation
    Insurance is a contract in which one party agrees to compensate another party for any losses, damages, or liabilities that may occur from an unforeseen event. It is also a mechanism that allows individuals to exchange a small, known loss (premium) for the potential of a larger, uncertain loss (claim). Insurance can be referred to as a written instrument, contract, or policy. Additionally, it is a social device that transfers risk from an individual to a group, pooling together a large number of individuals facing pure risks. The funds needed to cover individual losses are collected through premiums, and the insurer assumes the responsibility of the losses up to a predetermined limit.

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  • 26. 

    What are the risk situations?

    • Property

    • Financial

    • Liability

    • Personal (human) and Personnel Loss Exposure

    Correct Answer(s)
    A. Property
    A. Liability
    A. Personal (human) and Personnel Loss Exposure
    Explanation
    The risk situations mentioned in the question include property, liability, personal (human), and personnel loss exposure. These are all different types of risks that individuals or organizations may face. Property risk refers to the potential loss or damage to physical assets. Liability risk involves the possibility of legal obligations or claims against an individual or organization. Personal (human) risk relates to the safety and well-being of individuals, such as accidents or health issues. Personnel loss exposure refers to the risk of losing valuable employees or facing workforce-related challenges.

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  • 27. 

    What is moral hazard?

    • Deals with alcoholism and drug addiction

    • Associated with mental attitudes, behaviors, ethics and habits

    • Deals with a person's state of mind

    Correct Answer(s)
    A. Deals with alcoholism and drug addiction
    A. Associated with mental attitudes, behaviors, ethics and habits
    Explanation
    Moral hazard refers to the risk that individuals or organizations may behave irresponsibly or take excessive risks because they are protected from the consequences of their actions. It is not specifically related to alcoholism and drug addiction or a person's state of mind. Instead, it is associated with a broader range of factors such as attitudes, behaviors, ethics, and habits that can lead to irresponsible behavior in various contexts.

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  • 28. 

    What is adverse selection?

    • Appears whenever an individual has the freedom to buy or not to buy, to choose the amount of plan of insurance, and to continue or to discontinue being insured.

    • The process by which consumers with the greatest probability of loss are most likely to purchase and maintain insurance in force

    • When the insurer selects based upon age, sex, and gender

    • Can accept or decline

    • Can accept at a higher premium, or with conditions or limitations determined by the underwriter

    • Based rejections on frequency and severity

    Correct Answer(s)
    A. Appears whenever an individual has the freedom to buy or not to buy, to choose the amount of plan of insurance, and to continue or to discontinue being insured.
    A. The process by which consumers with the greatest probability of loss are most likely to purchase and maintain insurance in force
    A. Can accept or decline
    A. Can accept at a higher premium, or with conditions or limitations determined by the underwriter
    A. Based rejections on frequency and severity
    Explanation
    Adverse selection refers to the situation where individuals who are more likely to experience losses are more likely to purchase and maintain insurance coverage. This occurs when individuals have the freedom to decide whether or not to buy insurance, choose the amount of coverage, and continue or discontinue their insurance. Insurers may have to accept or decline applicants, offer coverage at a higher premium or with specific conditions, or reject applicants based on the frequency and severity of potential losses.

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  • 29. 

    Insurance defined by the society is:

    • There must be an existence of a sharing of losses by members of the group

    • An agreement (policy or certificate) whereby, for a set amount of money (the premium), one party (the insurer) agrees to pay the other party (the insured or his or her beneficiary) a set sum (the benefit) upon occurrence of some event)

    • A social device whereby individuals transfer the financial risk associated with death, illness, injury, or disability to a group of persons, and which involves accumulation of funds by the group from these individuals to meet the uncertainty of financial losses associated with death, illness, injury, or disability.

    Correct Answer(s)
    A. There must be an existence of a sharing of losses by members of the group
    A. A social device whereby individuals transfer the financial risk associated with death, illness, injury, or disability to a group of persons, and which involves accumulation of funds by the group from these individuals to meet the uncertainty of financial losses associated with death, illness, injury, or disability.
    Explanation
    Insurance is defined as a social device where individuals transfer the financial risk of death, illness, injury, or disability to a group of people. This involves the accumulation of funds from individuals in the group to meet the uncertainty of financial losses associated with these events. Additionally, there must be a sharing of losses by members of the group. This means that when a member of the group experiences a loss, the financial burden is spread among all members.

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  • 30. 

    What is morale hazard?

    • Examples are reckless driving, socializing, paying bills late, etc.

    • Deals with mental attitudes, behaviors, ethics, and habits

    • Deals with a person's state of mind.

    Correct Answer(s)
    A. Examples are reckless driving, socializing, paying bills late, etc.
    A. Deals with a person's state of mind.
    Explanation
    Morale hazard refers to a person's state of mind and how it influences their behavior, ethics, and habits. Examples such as reckless driving, socializing, and paying bills late can be seen as manifestations of morale hazard as they reflect a disregard for potential consequences and a lack of responsibility. This concept highlights the importance of considering an individual's mindset and attitudes when assessing their behavior and decision-making.

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  • 31. 

    What is indemnity?

    • In property and casualty, the meaning is to restore the insured to the same financial position they occupied prior to the loss.

    • In life and health, the value of a person's life is represented by their present and future earning power.

    • To prevent the insured from profiting from a loss

    • Allows the insured to gain or be in a better position than before the loss

    • To reduce moral hazards.

    • To make the insured whole again

    Correct Answer(s)
    A. In property and casualty, the meaning is to restore the insured to the same financial position they occupied prior to the loss.
    A. In life and health, the value of a person's life is represented by their present and future earning power.
    A. To prevent the insured from profiting from a loss
    A. To reduce moral hazards.
    A. To make the insured whole again
    Explanation
    The term "indemnity" refers to the act of restoring the insured individual to the same financial position they were in before experiencing a loss in the property and casualty insurance context. In life and health insurance, the value of a person's life is determined by their current and future earning potential. The purpose of indemnity is to prevent the insured from benefiting financially from a loss, to minimize moral hazards, and to ensure that the insured is made whole again after the loss.

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  • 32. 

    What is the law of large numbers?

    • The larger the number of similar units the more predicable the loss

    • The larger the group size the better for the insurance company to create prices

    • Used to predict losses and to establish rates

    • The insured benefits

    • Mortality and morbidity tables are based on the law of large numbers

    Correct Answer(s)
    A. The larger the number of similar units the more predicable the loss
    A. Used to predict losses and to establish rates
    A. The insured benefits
    A. Mortality and morbidity tables are based on the law of large numbers
    Explanation
    The law of large numbers states that as the number of similar units increases, the more predictable the loss becomes. This means that with a larger sample size, insurance companies can better predict and estimate the potential losses they may face. It is also used to establish rates for insurance policies. Additionally, the insured benefits from this law as it allows for more accurate pricing and coverage. Mortality and morbidity tables, which are used in insurance underwriting, are based on the principles of the law of large numbers.

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  • 33. 

    Insurable interest:

    • Must be proven with the applicant/policyowner and insured are two different people.

    • In life insurance you have financial interest in the other person continuing to live

    • In health insurance you could suffer or be exposed to a financial loss

    • Lack of insurable interest could be voidable by the other party

    • No on can be insured without their consent

    • Lack of insurable interest voids the contract

    • In life and health, insurable interest must be proven at the time of application

    • In property and casualty, insurable interest must be proven at the time of application and again at the time of claim but not in the meantime

    Correct Answer(s)
    A. Must be proven with the applicant/policyowner and insured are two different people.
    A. In life insurance you have financial interest in the other person continuing to live
    A. In health insurance you could suffer or be exposed to a financial loss
    A. No on can be insured without their consent
    A. Lack of insurable interest voids the contract
    A. In life and health, insurable interest must be proven at the time of application
    A. In property and casualty, insurable interest must be proven at the time of application and again at the time of claim but not in the meantime
    Explanation
    Insurable interest is a fundamental principle in insurance that states that the applicant/policyowner must have a financial interest in the insured person. This is because in life insurance, the policyowner has a financial interest in the other person continuing to live, while in health insurance, the policyowner could suffer a financial loss if the insured person becomes ill or injured. Additionally, insurance contracts require the consent of the insured person, and lack of insurable interest can void the contract. In life and health insurance, insurable interest must be proven at the time of application, while in property and casualty insurance, it must be proven at the time of application and again at the time of claim.

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  • 34. 

    Ideally insurable risks must be:

    • Due to chance

    • Loss can be accidental

    • Definite, in time, place, and cause. Also measurable in financial terms and chance of loss measurable in frequency and severity.

    • Must be accidental from insured's viewpoint

    • Law of large numbers must apply

    • Creates insured economic hardship

    • Loss cannot be catastrophic

    • Loss must be random and independent

    Correct Answer(s)
    A. Due to chance
    A. Definite, in time, place, and cause. Also measurable in financial terms and chance of loss measurable in frequency and severity.
    A. Must be accidental from insured's viewpoint
    A. Law of large numbers must apply
    A. Creates insured economic hardship
    A. Loss cannot be catastrophic
    A. Loss must be random and independent
    Explanation
    Insurable risks must meet several criteria to be considered ideally insurable. They must be due to chance and the loss must be accidental. The risks should be definite in terms of time, place, and cause, and should also be measurable in financial terms. The chance of loss should be measurable in terms of frequency and severity. From the insured's viewpoint, the loss must be accidental. The law of large numbers must apply, meaning that the risk should affect a large number of similar individuals or assets. The risk should also create economic hardship for the insured. The loss cannot be catastrophic, and it must be random and independent.

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