Chapter 2: Nature of Insurance

Reinsuring risks

How can an insurance company minimize exposure to loss?

transfer

A business becoming incorporated is an example of risk ____.

reduction

ABC Company is attempting to minimize the severity of potential losses within its company. The company is engaged in risk

Predictability of losses will be improved

According to the law of large numbers, how would losses be affected if the number of similar insured units increases?

that the chance of loss be calculable

An insurable risk requires

Reinsurance contract

An insurer has a contractual agreement which transfers a portion of its risk exposure to another insurer. What type of contractual arrangement is this?

Homogeneous exposure units

For insurance purposes, similar objects which are exposed to the same group of perils are referred to as

Speculative

Health care costs can be better controlled by utilizing preadmission testing. Preadmission testing can reduce the

transference

Purchasing insurance is an example of risk

management

Risk ____ is the process of analyzing exposures that create risk and designing programs to handle them.

predict losses

The Law of Large numbers enables an insurer to

Pure risk

What type of risk involves the potential for loss with no possibility for gain?

risk

Which of the following can be defined as "the potential for loss"?

Peril

Which of the following can be defined as a cause of a loss?

Risk transfer

Which of the following describes the act of insuring a risk against possible loss?

Not doing a business deal after deciding it would be too risky

Which of the following is NOT an example of risk retention?

As the number of insured units increases, the number of losses decreases

Which of these statements regarding insurance is false?

Speculative risk

Which one of these is NOT considered to be an element of an insurable risk?

Risk avoidance

Which term describes the elimination of a hazard?