Insurance Basics

How is insurance marketed through Direct Mail Companies?

(D) Salaried Employees Statement of fact. The salaried employee contacts the insured rather than an agent working through an insurance company

All of the following are NOT examples of insurable risk situations, except:

(A) A tenant wishes to purchase insurance coverage on improvements which he made on a building owned by the landlord Insurable risk requires an individual to have a financial interest in an item of property. Damage or destruction to this property would cause financial hardship for the insured.

"Pure risk" involves which of the following situations?

(A) Chance of loss only There is no chance of gain with pure risk, rather there is only the chance of loss. There is no such thing as "accurate profitability of distribution".

Living next to a factory that manufactures explosives would be known as what type of hazard

(A) Physical A physical hazard has tangible characteristics such as location or proximity to a specific risk.

One of the basic premises of insurance is to restore the insured to the same (or virtually the same) condition that existed prior to the loss, but with no opportunity for gain or profit.

(A) True Statement of Fact.

Is it true that the measure of liability, as stated in a property insurance policy is the amount of insurable interest on property?

(A) True Statement of fact. Both the measure of liability and insurable interest are stated as a dollar value.

Which department of an insurance company reviews the applications that have been completed and submitted by potential insureds to determine whether or not the individuals qualifies for the coverage being applied for?

(A) Underwriting This is the primary function of the underwriting department of an insurance company.

The creation of moral hazards is not included in the consideration of the social value of insurance

(B) False This statement is false because moral hazards, defined as attitudes, behaviors, or habits of individuals that are relative to a particular risk, are taken into consideration when looking at the value that insurance plays in our society.

According to the definition of an ideally insurable risk, which of the following is not a requirement?

(B) Loss must be the result of a catastrophic event Catastrophic events, which are unpredictable, are defined as those events which create a very high amount of property damage in an extremely short period of time, and are therefore uninsurable except by endorsement in some cases (e.g., flood, earthquake fire)

If an insurance company transfers part of the risk associated with a particular policy to another insurance company, this is known as:

(B) Reinsurance

Which of the following defines the structure of a stock company?

(B) The company is managed by a board of directors who are elected by shareholders who own a fixed amount of capital stock in the company This defines the ownership structure of a Stock Insurance Company

Which of the following best describes Lloyd's of London?

(C) An association which furnishes procedural and physical facilities for its members who write insurance The defines the logistical structure of Lloyd's of London which consists of syndicates made up of high worth individuals who pledge their own assets to insure risk.

Managing Risk involves all the following, except:

(C) Identifying and increasing existing hazards All are methods of managing risk except the identification of hazards, which in themselves increases the likelihood of a loss occurring due to a peril. Increasing a hazard would be contrary to the basic premise of insurance.

All of the following are true of insurance EXCEPT:

(C) It eliminates risk Insurance does not eliminate risk, but rather minimizes the possible financial loss associated with various types of insurable risks by transferring the loss from an individual to an insurance company.

Of the following which is true of insurance?

(C) It is a form of transferring risk Insurance transfers the financial risk associated with property loss, damage, or destruction from an individual (insured) to a group.

There are several types of insurance company structures. Of the following, which type has individuals that are both the policyholders and profit sharers in the company?

(C) Mutual Insurers Mutual insurers are owned by the individuals who own policies with the company and who share in profits by receiving company dividends as declared by the company.

The process whereby an insurer has an agreement with other insurers to share amounts of insurance over established retention limits is known as:

(C) Reinsurance

Which of the following best defines risk?

(C) Uncertainty of loss Risk defined in insurance terms, is the uncertainty of a loss occurring, and if it does occur, the dollar amount of the damage

Which of the following refers to the method whereby an insurance company must receive an official approval from the state DOI before it uses new rates?

(D) Prior Approval

Of the following, which is true regarding the principle of "the law of large numbers?"

(D) The predictability of losses occurring becomes more accurate as the number of insured units increases Statement of fact regarding the "Law of Large Numbers"