1.3 Definitions

Which of the following would be considered a moral hazard in underwriting a health insurance risk? A) A family history of diabetes B) A serious heart ailment C) Excessive dieting D) A hazardous occupation

C) Excessive dieting Explanation Moral hazards are habits or lifestyles of applicants that could pose additional risk for the insurer. These hazards are evaluated carefully when underwriting health insurance policies.

Dying too soon is an example of A) a peril B) a speculative risk C) a physical hazard D) a moral hazard

a peril Explanation A peril is the direct cause of a loss. For example, a married woman who is expecting her first child may purchase insurance to protect her spouse and child in the event that she suffers an accident or early death. Reference: 1.3 in the License Exam Manual

Which of the following is the definition of risk? A) The uncertainty about whether a loss will occur B) The transfer of insurance to a different insurer C) An insurance term for a claim D) The measurement of a loss

Explanation A risk is the possibility that a loss that is covered by insurance will happen.

Which of the following types of risk is insurable? A) Pure risks B) Partial risks C) Whole risks D) Speculative risks

A) Pure risks Explanation Only pure risks are insurable because they involve only the chance of loss; there is never a possibility of gain or profit. The risk associated with the chance of injury from an accident is an example of pure risk. There is no opportunity for gain if the event does not occur, only the opportunity for loss if it does occur. Insurance is concerned with the economic problems created by pure risks.

A peril is A) an exposure B) a moral hazard C) a type of risk D) a cause of loss

D) a cause of loss Explanation A peril is a cause of loss, such as illness, injury, or premature death. Insurance is purchased to transfer the financial loss of a covered peril from an individual or business to an insurance company.

Which of the following statements regarding exposure is NOT true? A) It is measured in degrees. B) It is measured in units. C) It is the risk assumed by the insurer. D) It is used to determine insurance premiums.

A) It is measured in degrees. Explanation Exposure is the degree of risk an insurance company is willing to assume and pay out in the event of a loss. Insurance premiums are calculated by multiplying the rate and the number of exposure units.

Filing a fraudulent health insurance claim is an example of A) a morale hazard B) a physical hazard C) a peril D) a moral hazard

A) a morale hazard Explanation A moral hazard is a subjective characteristic of the insured that increases the chance of loss. Careless actions or behaviors are example of morale hazards. A peril is the specific event causing a loss. A hazard is any factor that gives rise to a peril.

All of the following are types of hazards in life insurance EXCEPT A) physical B) moral C) morale D) direct

B) Insurers will not insure risks that are catastrophic in nature. Explanation To be insurable, a risk must involve the chance of loss that is fortuitous and outside the insured's control.

With regard to insurable risks, which of the following statements is NOT correct? A) Only pure risks are insurable. B) Insurers will not insure risks that are catastrophic in nature. C) An insurable risk must involve loss that is within the insured's control. D) An insurable risk must be measurable.

B) Insurers will not insure risks that are catastrophic in nature. Explanation To be insurable, a risk must involve the chance of loss that is fortuitous and outside the insured's control.

Which of the following statements regarding insurance is NOT true? A) All types of insurance are based on the law of large numbers. B) There are no physical hazards in life and health insurance. C) All types of insurance indemnify the insured against financial loss. D) All types of insurance are implemented through a contractual agreement between the insurance owner and the insurer.

B) There are no physical hazards in life and health insurance. Explanation There are many types of physical hazards in life and health insurance, such as diabetes and heart and lung conditions. These can be identified through tests and medical equipment.

The type of risk that involves the chance of both loss and gain is A) whole risk B) speculative risk C) impure risk D) pure risk

B) speculative risk Explanation Speculative risk involves the chance of both loss and gain. For example, the placement of a bet at a racetrack is a speculative risk.

With regard to insurance, risk can be defined as A) uncertainty regarding financial gain B) uncertainty regarding loss C) certainty regarding financial gain D) certainty regarding loss

B) uncertainty regarding loss Explanation Risk refers to the uncertainty of financial loss. Insurance replaces the uncertainty of risk with certain guarantees of financial stability.

Floods, heart attacks, theft, and choking are all examples of A) hazards B) risks C) perils D) exposures

C) perils Explanation A peril is something that causes a loss. It can be within or beyond a person's control. Death, accidents, and sickness are also examples of perils.

Which of the following statements best summarizes the function of insurance? A) It is a form of legalized gambling. B) It protects against living too long. C) It spreads financial risk over a diverse group of people who are exposed to different risks. D) It spreads financial risk over a large group so as to minimize the loss to any one individual.

D) It spreads financial risk over a large group so as to minimize the loss to any one individual. Explanation The function of insurance is to safeguard against financial loss by having the losses of a few paid by the contributions of many who are exposed to the same risk.