Chapter 1 - Principles Of Insurance
This chapter reviews basic principles that provide a foundation for the insurance industry. They range from the concept of risk, to the idea that individuals and businesses can minimize losses by transferring and sharing risks, to the application of the law of large numbers. Various principles also determine why some risks of loss are insurable whereas others are not.
- 1.
LaTonya purchases a house from John. She borrows $75,000 from First City Bank that, along with her $25,000 down payment, equals the $100,000 purchase price of the home. Who has an insurable interest in this home? Choose all that apply.
- A.
LaTonya
- B.
John
- C.
LaTonya's son, who would like to inherit the home some day
- D.
First City Bank
Correct Answer
D. First City BankExplanation
A and D are correct. Insurable interest exists when there is an actual economic interest in the safety or preservation of the subject of the insurance from loss or destruction or financial damage or impairment. LaTonya has an insurable interest in the home because she owns it. First City Bank has an insurable interest as long as it carries a mortgage on the home.Rate this question:
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- 2.
Highpoint Industries has an automatic sprinkler system installed in its office building. This is an example of which risk management method?
- A.
Avoidance
- B.
Reduction
- C.
Retention
- D.
Transfer
Correct Answer
B. ReductionExplanation
B is correct. A sprinkler system can reduce the severity of fires, but it does not prevent them altogether.Rate this question:
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- 3.
Benson Pharmaceutical Company decides not to manufacture a new drug after determining that it has serious potential side effects. This is an example of which risk management method?
- A.
Transfer
- B.
Retention
- C.
Avoidance
- D.
Reduction
Correct Answer
C. AvoidanceExplanation
C is correct. By not producing the drug, Benson avoids the risk of being sued by consumers who are injured by the drug.Rate this question:
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- 4.
Because she has always been in good health, Donna decides to cancel her health insurance policy. This is an example of which risk management method?
- A.
Retention
- B.
Control
- C.
Avoidance
- D.
Transfer
Correct Answer
A. RetentionExplanation
A is correct. By not carrying health insurance, Donna is retaining the risk of financial loss from unexpected medical expenses.Rate this question:
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- 5.
The tread on Alan's automobile tires is very thin. This is an example of what type of hazard?
- A.
Physical
- B.
Moral
- C.
Morale
- D.
Obvious
Correct Answer
A. PhysicalExplanation
A is correct. Worn tread is a physical condition that reduces Alan's ability to control or stop his vehicle.Rate this question:
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- 6.
Which of the following is a hazard as opposed to a peril?
- A.
Fire
- B.
Lightning
- C.
Wet pavement
- D.
Flood
Correct Answer
C. Wet pavementExplanation
C is correct. Wet pavement is not by itself a cause of loss (or peril), but it increases the chances of automobile collisions, which are a cause of loss.Rate this question:
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Mar 22, 2023Quiz Edited by
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Feb 24, 2009Quiz Created by
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