Basic Insurance Concepts and Principles
Installing deadbolt locks on the doors of a home is an example of which method of handling risk?
Reduction
A contract which one party undertakes to indemnify another against loss is called...
Insurance
What do individuals use to transfer their risk of loss to a larger group?
Insurance
Insurance is the transfer of...
Risk
Adverse selection is a concept best described as...
Risks with higher probability of loss seeking insurance more often than other risks
Which of the following is the correct formula for computing a loss ratio?
(incurred losses + loss adjusting expense)/earned premium
In property and casualty insurance, what is the term for the amount of a loss that the insured must cover out of pocket, and the insurer will only pay for the additional amount of the loss above this limit?
Deductible
All of the following actions by a person could be described as risk avoidance EXCEPT...
Investing in the stock market
Peril is most easily defined as...
The cause of loss insured against
For the purpose of insurance, risk is defined as...
The uncertainty or chance of loss
The legal definition of "person" would NOT include which of the following?
A family
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?
Avoidance
The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called...
Avoidance
Which of the following is a unit of measurement an underwriter uses when determining the premium rates for insurance?
Exposure
The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as...
Legal hazard
To achieve the profitable distribution of exposures,...
Preferred risks and poor risks are balanced, with average risks in the middle
Following a career change, an insured is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe?
Reduction
Events in which a person has both the chance of winning or losing are classified as...
Speculative risk
Which of the following is NOT a characteristic of an insurable risk?
The loss must be catastrophic
A situation in which a person can only lose or have no change represents...
Pure risk
A tornado that destroys property would be an example of...
A peril
The protection of the insurer from adverse selection is provided in part by
A profitable distribution of exposures
An employer has decided to implement a self-funded plan. The company will pay the claims, but an insurer will administer the actual plan. What kind of contract is this?
Administrative Service Only
All of the following are insurable events as defined in the Insurance Code EXCEPT...
An insured loses a large sum in a poker game
In property and casualty insurance, insurable interest must exist...
At the time of loss
Events or conditions that increase the chances of an insured loss occurring are referred to as...
Hazards
For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become...
Larger
Which of the following individuals would probably NOT have insurable interest in insured property?
Neighbor
The causes of loss insured against in an insurance policy are known as...
Perils
When an individual purchases insurance, what risk management technique is he or she practicing?
Transfer
All of the following are examples of risk retention except...
Premiums
What describes a situation when poor risks are balanced with preferred risks, and average risks are in the middle?
Profitable distribution of exposures
Profitable distribution of exposures serves the purpose of...
Protecting the insurer against adverse selection
Which of the following is the most common way to transfer risk?
Purchase insurance
With respect to the business of insurance, a hazard is...
Any condition or exposure that increases the possibility of loss
Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?
Law of large numbers
The loss ratio compares...
Premium income to losses
The risk of loss may be classified as...
Pure risk and speculative risk
According to California Insurance Code, which of the following can be classified as an insurable event?
Pure risks
Which of the following insurance options would be considered a risk-sharing arrangement?
Reciprocal
Which type of insurance includes the assumption of a contractual obligation to reimburse the insured against all or a portion of his fees, costs, and expenses related to or arising out of services performed by or under the supervision of an attorney who is an active member of the bar of any jurisdiction or jurisdictions of the United States?
Legal insurance
Insurance is a contract by which one seeks to protect another from...
Loss
Loss potentials that are the basis for setting rates are...
Loss Exposures
Which rating method provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expense) or profit and is based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time?
Loss costs rating
The type of insurance that guarantees the behavior of persons and the performance of contracts other than insurance policies is known as...
Surety inusrance
Which type of insurance guarantees or indemnifies owners of real or personal property or the holders of liens or other interested parties against loss or damage suffered to said property?
Title insurance
Which of the following is NOT goal of risk retention?
To minimize the insured's level of liability in the event of loss
A set of legal or regulatory conditions that affect an insurer's ability to collect premiums commensurate with the level of risk incurred would be considered a(n)...
Legal hazard
A form of insurance between insurance companies is known as...
Reinsurance
Which one of the following is NOT an element of insurability?
Risk of loss is speculative
In what type of plan would the employer pay all of the claims?
Self-funded