Principles of Insurance

One of your clients owned a small restaurant. He hired a person to burn it down to collect the insurance. Which type of hazard is exhibited by this action?

Moral

A policy holder asked his agent to raise his deductible. What method of handling risk is this request?

Retention

Bensen Company decides not to purchase insurance to protect itself from potential lawsuits. This is an example of which risk management method?

Retention

Since she has always been in good health, Donna decides to cancel her health insurance policy. This is an example of which risk management method?

Retention

Law of large number

1. Predicting losses accurately allows the insurer to charge the appropriate premium 2. The more example used to develop any statistic, the more reliable 3. Predicting the number of losses accurately allows the insurer to provide large amounts

Elements of insurable risk

1. the risk of loss is a pure risk 2. the cost of insurance must be affordable 3. the lost must be calculable

Which of the following statements best defines a hazard?

A condition that increase the chance of a loss

Which of the following statements best defines an exposure?

A condition that presents the possibility of a loss

Janice thinks her next door neighbor's house will burn down someday because the neighbor is so careless with his charcoal grill. Janice wants to buy a fire insurance policy on her neighbor's house so she can make some money in her hunch proves correct. The principle what would prevent her from doing so is

An insurable interest

Highpoint Industries has an automatic sprinkler system installed in its office building. This is an example of which risk management method?

Control

Which of the following increases the chances of a loss?

Hazard

A speculative risk is one that

Involves the risk of loss or gain

One of your clients owned a small restaurant. He leaves the doors unlocked because he knows if anything is stolen, it will be covered by his insurance policy. Which type of hazard is exhibited by this action?

Morale

The risk of having an auto accident can be avoided by

Never getting in an automobile

Which is the actual cause of a loss?

Peril

Goodall Woodworking Corporation has a burglar alarm system installed at its manufacturing plant. This is an example of which risk management method?

Reduction

Which of the following terms is defined as the uncertainty of future outcome?

Risk

An individual who decides not to buy insurance is using what risk management method?

Risk retention

Which of the following is an element of insurability?

The risk of loss is a pure risk

What are the elements of insurability?

The risk of loss must represent a financial hardship, the cost of insurance must be affordable, and the risk of loss is calculable

A vehicle owner buys an insurance policy on her vehicle. This represents which method of handling risk?

Transfer

Which of the following types of risk is insurable?

Pure risk

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?

Avoidance

LaTonya purchases a house from John. She borrows $75k from First City Bank which, along with her $25k down payment, equals the $100,000 purchase price of the home. Who has an insurable interest in this home?

Both LaTonya and First City Bank

The purchase of insurance is an example of what method of risk management?

Risk transfer

A risk that involves both the possibility of a loss and the possibility of a gain is

Speculative Risk

The law of large numbers

States that the more examples used to develop a statistic, the more reliable the statistic will be

An insurance company surveys 5 million auto owners to develop a statistic on how many will suffer tire damage each year. This concept of predicting future losses to determine premium is known as

The law of large numbers

Edgar, an insurance actuary, knows that his ability to predict his company's future losses improves as the amount of past loss data he has increases. This principle is known as

The law of large numbers