Chapter 2

A situation in which there is ONLY a chance of loss or no loss is a

Pure risk (A situation in which there is ONLY a chance of loss or no loss is a pure risk.)

Which of the following is considered to be any situation that has the potential for loss?

Loss Exposure (Loss exposures are situations which have the potential for loss.)

Which of the following is any situation that presents the possibility of a loss?

Loss exposure (Any situation that presents the possibility of a loss is known as a loss exposure.)

Which of the following describes the increase in the probability of a loss due to an insured's dishonest tendencies?

Moral Hazard (The increase in the probability of a loss resulting from an insured's dishonest tendencies is known as moral hazard.)

Restoring an insured to the same condition as before a loss is known as

Principle of indemnity (The principle of indemnity involves making an insured whole by restoring them to the same condition as before a loss.)

All of the following circumstances must be met for loss retention to be an effective risk management technique, EXCEPT

Probability of loss is unknown (Loss retention is an effective risk management technique with all of these conditions exist ​ EXCEPT when the probability of loss is unknown. The loss MUST be predictable.)

Which of the following is NOT considered to be a definition of the term "loss"?

Probability that an event will occur (The term "loss" can be defined as all of these EXCEPT "Probability that an event will occur".)

Which of the following would NOT be accomplished with the purchase of an insurance policy?

Risk is eliminated (All of these would be accomplished with the purchase of an insurance policy EXCEPT "risk is eliminated".)

What type of risk is gambling?

Speculative Risk (Gambling is considered speculative risk.)

Which of the following is a situation where there is a possibility of either a loss or a gain?

Speculative risk (A situation in which there is a possibility of a loss or a gain is a speculative risk.)

Which of the following refers to a condition that may increase the chance of a loss?

Hazard (A hazard is a condition or situation that creates or increases a chance of loss.)

Which of the following best describes the statement "The more times an event is repeated, the more predictable the outcome becomes"?

Law of Large Numbers ("The more times an event is repeated, the more predictable the outcome becomes" is an example of the law of large numbers.)

A hazard can be best described as

a condition that may increase the likelihood of a loss occurring (A condition or situation that creates or increases a chance of loss is called a hazard. Examples include icy roads, driving while intoxicated, and improperly stored toxic waste.)

Moral hazard is described as the

increased chance of a loss because of an insured's dishonest tendencies (Moral hazard can be defined as the increased chance of a loss occurring due to the insured's dishonest tendencies.)

An insurer having a large number of similar exposure units is considered important because

the greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums (The greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums.)