Assignment 1 Questions

All of the following are types of property insurance, EXCEPT: A. Fire and allied lines B. Crime C. Business income D. Directors and officers

D. Only directors and officers insurance is not a property insurance coverage.

A policy that combines property, crime, and liability coverages into one policy is referred to as a(n) A. Commercial package policy (CPP). B. Commercial umbrella policy. C. Workers compensation policy. D. Employee dishonesty policy.

Ans. A. A policy that combines property, crime, and liability coverages into one policy is referred to as a commercial package policy (CPP).

One of the costs of insurance is said to be opportunity costs. This means that if capital and labor were not being used in the insurance business, they could be used elsewhere and making other productive contributions to A. Society. B. The insurance industry. C. The agency system. D. Government.

Ans. A. If capital and labor were not being used in the insurance business, they could be used elsewhere and making other productive contributions to society.

Commercial general liability insurance policies written on an occurrence basis apply to bodily injury and property damage that occurs during the policy period. This provision supports the principle that insurable loss exposures must ideally be A. Definite. B. Fortuitous. C. Independent. D. Pure risks.

Ans. A. Losses that occur during the policy period are definite in time.

Though premiums are an obvious cost of insurance, many insureds believe they are too high because A. Benefits are intangible until a loss occurs. B. Premiums are not a regular cost of living. C. Insurers only use eighty cents from every premium dollar to pay losses. D. Insureds do not deliberately cause losses.

Ans. A. Many insureds believe premiums are too high because benefits are intangible until a loss occurs.

A loss exposure is A. The same thing as a peril. B. Any condition that presents the possibility of a loss. C. The same thing as a hazard. D. Any condition that precludes the chance of loss.

Ans. B. A loss exposure is any condition or situation that presents the possibility of a loss.

Another name for liability insurance is A. First-party insurance. B. Second-party insurance. C. Third-party insurance. D. Multiple-party insurance.

Ans. C. Liability insurance involves a third party, the claimant.

A recent college graduate who lives in the suburbs and drives to work daily in the city. Recognizes that owning a car creates both property damage and liability exposures for her and at the same time she has the burden of student loans. For someone with their circumstances the most practical risk management technique for dealing with her auto-related loss exposures is A.Retention. B. Avoidance. C. Loss control. D. Risk tarnsfer.

Ans. D. For someone in Sally's situation, risk transfer is the most practical technique.

From a risk management viewpoint, insurance is used to A. Isolate the cost of losses. B. Prevent the cost of losses. C. Reduce the cost of losses. D. Transfer the cost of losses.

Ans. D. Insurance is used to transfer the cost of losses from the insured to the insurer.

Which one of the following is an operating cost of insurers? A. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary B. Producers' commissions C. Increased property losses because people have insurance D. Increased liability loss payments because people have insurance

B. Producers' commissions are among the operating costs of insurers.

Which one of the following statements is correct? A. Contractors must usually provide evidence of liability insurance before a construction contract is granted. B. Insurers generally do not provide incentives to organizations to implement risk control measures. C. Insurance policies typically cannot be used to provide evidence of financial resources. D. One disadvantage of insurance is that it promotes inefficient use of policyholders' funds.

A. Contractors must usually provide evidence of liability insurance before a construction contract is granted.

Insurance deals primarily with loss exposures that are fortuitous. Which one of the following statements best characterizes fortuitous losses? A. Fortuitous losses are beyond the insured's control. B. Fortuitous loss exposures are expected. C. Fortuitous loss exposures are generally predictable. D. Fortuitous losses are intentional.

A. Fortuitous losses are beyond the insured's control.

Adhering to the characteristics of an ideally insurable loss exposure in selling insurance help assure that A. The insurer is able to charge a premium that the insured can afford to pay. B. The losses associated with it typically involve small amounts. C. The insurer can charge a high premium for the coverage. D. The insurer is able to predict the amount and timing of each future loss.

Ans. A. Adhering to the characteristics of an ideally insurable loss exposure in selling insurance help assure that the insurer is able to charge a premium that the insured can afford to pay.

Which one of the following statements is correct? A. Contractors must usually provide evidence of liability insurance before a construction contract is granted. B. Insurers generally do not provide incentives to organizations to implement risk control measures. C. Insurance policies typically cannot be used to provide evidence of financial resources. D. One disadvantage of insurance is that it promotes inefficient use of policyholders' funds.

Ans. A. Contractors must usually provide evidence of liability insurance before a construction contract is granted.

For a loss exposure to be ideally insurable it must be definite in A. Time, cause, and location. B. Value, extent, and consequences. C. Duration, damage, and cost. D. Scope, origin, and coverage.

Ans. A. For a loss exposure to be ideally insurable it must be definite in time, cause, and location.

Which one of the following statements is correct regarding characteristics of ideally insurable loss exposures? A. Ideally, loss exposures should be spread across a large number of similar exposure units within the same period. B. Intertemporal risk transfer, the spreading of risk through time, requires a large number of similar exposure units. C. One requirement of the law of large numbers is that past events occur under different circumstances in the future. D. Loss exposures such as homes and automobiles generally will not meet the ideally insurable requirement that the exposure be of a large number of similar exposure units.

Ans. A. Ideally, loss exposures should be spread across a large number of similar exposure units within the same period.

Retention is often used in combination with insurance as a way of treating loss exposures. One of the major downsides of individuals using retention alone is A. The unavailability of insurer loss control services. B. The potential for financial ruin. C. The record keeping associated with retained losses. D. Availability of insurer loss settlement services.

Ans. B. Correct. One of the major downsides of individuals using retention alone is the potential for financial ruin.

Coverage for miscellaneous types of property such as movable property, goods in domestic transit, and property used in transportation and communication, typically is provided by A. Auto physical damage insurance. B. Inland marine insurance. C. Crime insurance. D. Business income insurance.

Ans. B. Coverage for miscellaneous types of property, such movable property, goods in domestic transit, and property used in transportation and communication, typically is provided by inland marine insurance.

For insurers to utilize pooling most effectively and present catastrophic losses, the insured exposure units need to be A. Correlated. B. Independent. C. Adjacent. D. Different.

Ans. B. For insurers to utilize pooling most effectively and present catastrophic losses, the insured exposure units need to be independent.

Which one of the following statements is correct with respect to characteristics of insurable loss exposures? A. If the insured has control over whether or when a loss will occur, the risk is attractive to insure. B. If losses are not fortuitous, premiums could increase for all policyholders. C. If a loss is fortuitous, the chance of loss could increase as soon as a policy is issued. D. Private insurance is suitable for risks where the probability and timing of loss is known.

Ans. B. If losses are not fortuitous, premiums could increase for all policyholders.

The primary role of insurance is to A. Make a profit for the insurance company's shareholders. B. Indemnify individuals and organizations for covered losses. C. Eliminate risk for insureds and society. D. Meet an insured's risk management requirements.

Ans. B. Indemnify individuals and organizations for covered losses.

Which one of the following statements is correct regarding the benefits provided by insurance? A. The reduction in losses paid by insurers due to risk control measures benefits individual insureds, but not society as a whole. B. Insurance helps reduce the financial burden to society by compensating accident victims. C. The primary role of insurance is to meet mandatory insurance requirements. D. Insurance reduces the financial consequences of loss exposures, but not the related uncertainty.

Ans. B. Insurance helps reduce the financial burden to society by compensating accident victims.

Liability coverage for loss exposures arising from a business organization's premises and operations, its products, or its completed work is typically provided by A. Professional liability insurance. B. Commercial general liability insurance. C. Auto liability insurance. D. Personal liability insurance.

Ans. B. Liability coverage for loss exposures arising from a business organization's premises and operations, its products, or its completed work is typically provided by commercial general liability insurance.

Life insurance that provides coverage for a specified period with no cash value is called A. Universal life. B. Term life insurance. C. Whole life. D. Long-term care insurance.

Ans. B. Life insurance that provides coverage for a specified period with no cash value is called term insurance.

Some loss exposures are not easy to retain, avoid, or control. What risk management technique is frequently used to treat such exposures? A. Reinsurance B. Transfer C. Prevention D. Reunderwriting

Ans. B. The risk management technique of transfer is often used to treat loss exposures that are not easily treated by retention, avoidance, or control.

Which one of the following is true regarding a homeowners policy? A. It only provides property coverage. B. It only provides liability coverage. C. Most include coverage for theft of contents within the home. D. It excludes losses caused by wind and lightning.

Ans. C. A homeowners policy provides both property and liability coverage. This includes coverage for theft of personal property as well as perils such as wind and lightning.

Which one of the following is an example of a fortuitous loss? A. Insureds intentionally set a fire and burn their house down. B. An insured demolishes a deck that has been allowed to rot. C. An unknown vandal spray-paints graffiti on the insured's garage. D. The value of an insured's home decreases due to a lack of maintenance.

Ans. C. An example of a fortuitous loss is when an unknown vandal spray-paints graffiti on the insured's garage.

Which one of the following is an opportunity cost of insurance? A. The payment of commissions to agents B. An insurer's loss on invested premiums C. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary D. The cost of claims payments that would not have been necessary if insureds' carelessness had not caused losses

Ans. C. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary is an example of an opportunity cost of insurance.

Coverage for money, securities, and other property from various causes of loss such as burglary, robbery, theft, and employee dishonesty typically is provided by A. Professional liability insurance. B. Ocean marine insurance. C. Commercial crime insurance. D. Inland marine insurance.

Ans. C. Coverage for money, securities, and other property from various causes of loss such as burglary, robbery, theft, and employee dishonesty typically is provided by commercial crime insurance.

Bill has a custom-built vehicle looks like a sausage sandwich on wheels. He plans to drive it to special events at schools around the country where it will serve as a mobile billboard to promote his product. Bill is surprised to learn that insurers are reluctant to insure his vehicle because it fails to meet one of the ideal characteristics of an insurable risk. Which characteristic is Bill's vehicle least likely to meet? A. Definite and measurable B. Independent and not catastrophic C. Large number of similar exposure units D. Pure risk

Ans. C. Since Bill's vehicle is custom-made and used for an unusual purpose, there are not a large number of similar exposure units.

Sometimes the existence of insurance encourages losses. The result of this phenomenon is that it A. Increases competition in the industry. B. Reduces agents' commissions. C. Increases the total cost of insurance. D. Reduces the term of many policies.

Ans. C. Sometimes the existence of insurance encourages losses.The result of this phenomenon is that it increases the total cost of insurance.

Term life insurance A. Provides lifetime protection. B. Accrues a cash value. C. Provides protection for a specified period with no cash value. D. Allows the policyholder to borrow against policy savings.

Ans. C. Term life insurance provides protection for a specified period with no cash value.

The primary role of insurance is to A. Make a profit for the insurance company's shareholders. B. Educate individuals and organizations about loss prevention. C. Indemnify individuals and organizations for covered losses. D. Sell insurance policies to individuals and organizations.

Ans. C. The primary role of insurance is to indemnify individuals and organizations for covered losses.

Insurance is not the only risk management transfer technique. When circumstances are appropriate, transfer can be accomplished through A. Loss prevention. B. Avoidance. C. Retention. D. Noninsurance transfer techniques.

Ans. D. A transfer technique that does not involve the use of insurance is a noninsurance transfer.

Private insurers are reluctant to provide windstorm insurance on coastal properties. This is because the loss exposures fail to meet the criterion that ideally insurable exposures must be A. A large number of similar exposure units. B. Definite and measurable. C. Fortuitous. D. Independent and not catastrophic.

Ans. D. Because many properties can be damaged in the same hurricane or tropical storm, coastal properties are not independent, and potential losses are catastrophic.

Claim buildup is considered to be among which one of the following costs of insurance? A. Premiums paid B. Operating costs C. Opportunity costs D. Increased losses

Ans. D. Claim buildup is considered to be among the increased losses costs of insurance.

Which one of the following statements is correct? A. Insurers are prohibited from investing in social projects. B. Insurance provides a source of investment funds for insurers but not for policyholders. C. Insurers cannot invest premium income because it must be available to pay claims. D. Insurers' investment income helps keep premiums at a reasonable level.

Ans. D. Insurers' investment income helps keep premiums at a reasonable level.

As a single mother on a very tight budget, Ciara is tempted to skimp on her insurance. However, her friend Mehmet tells her not to skimp on insurance, because it will help manage her cash flows. Which one of the following examples best illustrates Mehmet's point? A. Ciara finds it difficult to come up with a $787 auto insurance premium every six months. B. Ciara needs her car to get to her job, and she needs her job to make car payments and pay for her car insurance. C. When her car's transmission goes out a month after the warranty expires, Ciara is faced with an $1,100 repair bill. D. When her car's windshield breaks, Ciara has to pay only $100 of the $600 cost of replacing it.

Ans. D. Since the windshield loss is covered, the financial effect on Ciara's cash flow is reduced to the amount of her deductible.

If a customer slips and falls in an insured's store, which one of the following would provide protection in the event of a lawsuit? A. Commercial property insurance B. Workers compensation insurance C. Commercial crime insurance D. Commercial general liability (CGL) insurance

Ans. D. liability loss exposures faced by an organization, including its premises, operations, and products.

Which one of the following is an operating cost of insurers? A.An insured's funds that could be invested elsewhere if purchasing insurance were not necessary B. Producers' commissions C. Increased property losses because people have insurance D. Increased liability loss payments because people have insurance

Ans: B. Producers' commissions are among the operating costs of insurers.

A construction pays less than its competitors for workers' compensation insurance because the company has had substantially fewer employee injuries than other firms in its class. This illustrates which one of the following benefits of insurance? A. Comply with legal requirements B. Efficient use of insured's resources C. Promote loss control activity D. Reduce social burden

Ans: C. Premium savings provide an incentive for an insured to control losses.

Some life insurance policies provide benefits not found in other life insurance policies. Which of the following life insurance policies would contain a cash value accumulation? A. Whole life insurance B. Permanent life insurance C. Universal life insurance D. All of the above

D. All listed are life insurance policies that contain a cash value accumulation.