Ch 1. Basic insurance concepts and principles.

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Events in which a person has both the chance of winning or losing our classified as A. Speculative risk. B. Pure risk. C. Insurable. D. Retained risk.

A. Speculative risk. Speculative risk involves the chance of gain or loss and is not insurable

Which insurance principal state that if a policy allows for greater compensation, then the financial loss incurred, the insured may only receive benefits for the amount lost? A. Consideration. B. Indemnity. C. Reasonable expectations. D. Stop loss.

B. Indemnity. The principle of indemnity stipulates that the insured can only collect for the amount of the loss, even if the policy is written with greater benefit limits

The risk of loss may be classified as A. Named risk and unnamed risk. B. Pure risk and speculative risk. C. High risk and low risk. D. Certain risk and uncertain risk.

B. Pure risk and speculative risk. Pure risk involve the probability or possibility of loss with no chance of gain. Pure risk are generally insurable. Speculative risk involved uncertainty as to whether the final outcome will be gain or loss. Speculative risk are generally on insurable.

Insurance is the transfer of A. Peril B. Risk. C. Loss. D. Hazard.

B. Risk. Insurance is a transfer of risk of loss from an individual or a business entity to an insurance company. Hazards are conditions that increase the probability of an insured loss occurring, and perils are causes of loss. Losses cannot be transferred.

Events or conditions that increase the chance of an insured loss occurring are referred to as A. Peril. B. Exposures. C. Hazards. D. Risks.

C. Hazards. Condition such as a life and existing health, or activities, such as scuba diving or hazards, and may increase the chance of a loss occurring

A contract which one party undertakes to identify another agent loss is called A. Adverse selection. B. Risk. C. Insurance. D. Indemnity.

C. Insurance. Insurance is a contract, whereby one undertakes to identify another against loss, damage, or liability arising from a contingent or unknown event

Which statement regarding insurable risks is not correct? A. The insurable risk needs to be statistically predictable B. Insurance cannot be mandatory. C. Insured cannot be randomly selected. D. In insurable risk must involve a loss that is definite as to cause, time, place and amount.

C. Insured cannot be randomly selected. Granting insurance must not be mandatory, selecting insurance randomly will help the insurer to have a fair proportion of good risks to poor risks. All other statements are true.

Which of the following is not a characteristic of pure risk? A. The loss exposure must be large. B. The loss must be measurable in dollars. C. The last must be catastrophic. D. The loss must be due to chance.

C. The loss must be catastrophic. In order to be characterized as pure risk, the loss must be due to chance, definite, measurable, and predictable, but not catastrophic

Which of the following statements is not true concerning insurable interest as it applies to life insurance? A. A business partner have an insurable interest in each other. B. An individual has an insurable interest in their life. C. A married person has an insurable interest in their spouse. D. A has insurable interest in the life of a lender.

D. A debtor has an insurable interest in the life of a Lender. A lender has an insurable interest in the life of a debtor, but only to the extent of the debt. The debt does not have an insurable interest in the life of the Lender.

An individual was involved in a head-on collision while driving home one day. His injuries were not serious, and he recovered. However, he decided that in order to never be involved in another accident, he would not drive or ride in a car ever again. Which method of risk management does this describe? A. Retention. B. Reduction. C. Sharing. D. Avoidance.

D. Avoidance. Avoidance is a method of risk management by which a person tries to eliminate risk of loss by avoiding any exposure to an event that could give rise to such loss. Risk avoidance is affective, but seldom practical.

To achieve the profitable distribution of exposures, A. A majority of coverage goes to preferred risks. B. Poor risks and risks make up the majority of coverage. C. The coverage goals to average risks and preferred risks while less less goes to poor risks. D. Preferred risks and risks are balanced with risks in the middle.

D. Preferred risks and poor risks are balanced, with average risks in the middle. Balancing poor risks and preferred risks with average risks in the middle, create a profitable distribution of exposures

The insurer must be able to rely on the statements in the application, and the insured must be able to rely on the insurer to pay valid claims. In the forming of an insurance contract, this is referred to as. A. Implied warranty. B. Reasonable expectations. C. A warranty. D. Utmost Good faith.

D. Upmost good faith. The insurer must be able to rely on the statements given by the insured in the application. The insured must be able to rely on the insurer promise to pay covered losses.


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