Ch.1 basic insurance concepts and principles

If an applicant for a life insurance policy and person to be insured by the policy are two different people, the underwriter would be concerned about

Whether an insurance interest exists between the individuals

For the reported losses of an insured group to become more likely to equal the statistical probability of loss for the particular class, the insured group must become

Larger

A set of legal or regulatory conditions that affect an insurers ability to collect premiums commensurate with the level of risk incurred would be considered a(n)

Legal hazard

What describes a situation when poor risks are balanced with preferred risks and average risks are in the middle

Profitable distribution of exposure

Which of the following is the most common way to transfer risks

Purchase insurance

What is true about insurable risk

Insurance must not be mandatory, needs to be statistically predictable, and must involve loss that is definite as to cause, time, place and amount

The insurer may suspect that a moral hazard exists if the policyholder

Is not honest about his health on an application for insurance

A tornado that destroys property would be an example of?

A peril

Which of the following is a term for a person who seeks insurance from an insurer?

Applicant

When must insurable interest exist in a life insurance policy?

At the time of application

A person who doesn't lock the doors or doesn't repair leaks shows an indifferent attitude. This person presents what type of hazard?

Morale

Which of the following is considered to be a morale hazard

Driving recklessly

Units with the same or similar exposure to loss are referred to as

Homogeneous

Which of the follow individuals must have insurable interest in the insured

Policyowner

To achieve the profitable distribution of exposure

Preferred risks and poor risks are balanced, with average risks in the middle

The cause of loss insured against in an insurance policy are known as

Perils

Peril is most easily defined as

The cause of loss insured against

When an individual purchases insurance, what risk management technique is he or she practicing

Transfer

What are the three goals of risk retention

Reduce expenses and improve cash flow, increase control of claim reserving and claims settlements, and to fund losses that cannot be insured

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 mins each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe?

Reduction

In case of a loss, the indemnity provision in insurance policies

Restores an insured person to the same financial state as before the loss

Insurance is the transfer of

Risk

For the purpose of insurance, risk is defined as

The uncertainty or chance of loss

An individual's tendency to be dishonest would be indicative of a

Moral hazard

What is the term for the fee a policyowner must pay to the insurance company to maintain coverage

Premium

Profitable distribution of exposures serves the purpose of

Protecting the insurer against adverse selection

A situation in which a person can only lose or have no change represents

Pure risk

The risk of loss may be classified as

Pure risk and speculative risk

The growing tendency of individuals to file lawsuits and to claim tremendous amounts of alleged damages is known as

Legal hazard

What are characteristics of pure risk

Loss must be measured in dollars, must be large and must be due to chance

The protection of the insurer from adverse selection is provided in part by

A profitable distribution of exposure

A contract which one party undertakes to indemnify another against loss is called

Insurance

Which of the following insurance options would be considered a risk-sharing arrangement

Reciprocal

adverse selection is a concept best described as

Risks with higher probability of loss seeking insurance more often than other risks

Insurance is a contract by which one seeks to protect another from

Loss

Does a debtor have insurable interest in the life of the lender

No

Which of the following insurance options would be considered a risk-sharing arrangement?

Reciprocal