Basic Insurance Concepts and Principles

All of the following actions by a person could be described as risk avoidance EXCEPT a. Investing in the stock market b. Refusing to scuba dive. c. Never flying in an airplane d. Not driving after being in an accident.

Investing in the stock market

Insurance is the transfer of a. Loss b. Hazard c. Peril d. Risk

Risk

The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as a. Fraud b. Legal hazard c. Double indemnity d. Legal risk

Legal hazard

Following a career change, an insured is no longer erquired to perform many physical acitivites, so he has implemented a program where he walks and jogs 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 a. Retention b. Reduction c. Transfer d. Avoidance

Reduction

Installing deadbolt locks on the doors of a home is an example of which method of handling risk? a. Avoidance b. Transfer c. Self-insurance d. Reduction

Reduction

Peril is most easily defined as a. Something that increases the chance of loss b. The cause of loss insured against c. An unhealthy attitude about safety d. The chance of a loss occurring

The cause of loss insured against

When must insurable interest exist in a life insurance policy? a. At the time of policy delivery b. When there is a change of the beneficary c. At time of loss d. At the time of application

At the time of application

Not all losses are insurable, and there are certain requirements that must be met before a risk is a proper subject for insurance. These requirements include all of the following EXCEPT a. The loss must not be catastrophic b. There must be a sufficient number of homogeneous exposure units to make losses reasonably predictable c. The loss produced by the risk must be definite d. The loss may be intentional

The loss may be intentional

Which of the following individuals must have insurable interest in the insured? a. Producer b. Policyowner c. Beneficiary d. Underwriter

Policyowner

A situation in which a person can only lose or have no change represents a. Pure risk b. Speculative risk c. Adverse Selection d. Hazard

Pure risk

Which of the following factors is NOT considered by an underwriter when determining the premium rates for an individual seeking insurance? a. Race b. Age c. Medical history d. Sex

Race

Which of the following is NOT an example of insurable interest? a. Child in parent b. Debtor in creditor c. Business partners in each other d. Employer in employee

Debtor in creditor

What do individuals use to transfer the risk of loss to a larger group? a. Insurance b. Insurable interest c. Exposure d. Indemnity

Insurance

To achieve the profitable distribution of exposures, a. Preferred risks and poor risks are balanced, with average risks in the middle b. The most coverage goes to average risks and preferred risks, while less goes to poor risks c. Poor risks and average risks make up the majority of coverage d. A majority of coverage goes to preferred risks

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

Profitable distribution of exposures serves the purpose of a. Preventing the insurer from being estopped. b. Helping the insurer determine payable benefits. c. Proctecting the insurer against adverse selection d. Helping the insurer select only the ideally insurable risks.

Proctecting the insurer against adverse selection.

For the purpose of insurance, risk is defined as a. The certainty of loss b. The cause of loss c. An event that increases the amount of loss d. The uncertainty or chance of loss

The uncertainty or chance of loss

Which of the following is NOT a goal of risk retention? a. To fund losses that cannot be insured b. To minimize the insured's level of liablity in the event of loss c. To reduce expenses and improve cash flow d. To increase control of claim reserving and claim settlements

To minimize the insured's level of liablity in the event of loss

When an individual purchases insurance, what risk management technique is he or she practicing? a. Avoidance b. Sharing c. Retention d. Transfer

Transfer

The legal defintinon of "person" would NOT include which of the following? a. A business entity b. A corporation c. A family d. An individual human being

A family

The protection of the insurer from adverse selection is provided in part by a. A profitable distribution of exposures b. Reducing costs c. A drop in applicants d. A reduction in coverage

A profitable distribution of exposures

The causes of loss insured against in an insurance policy are known as a. Perils b. Losses c. Risks d. Hazards

Perils

A contract which one party undertakes to indemnify another against loss is called a. Indemnity b. Insurance c. Adverse Selection d. Risk

Insurance

All of the following are examples of risk retention EXPCEPT a. Premiums b. Deductibles c. Copayments d. Self-insurance

Premiums

A tornado that destroys property would be an example of which of the following? a. A loss b. A physical hazard c. A peril d. A pure risk

A peril

Which of the following statements is NOT true concerning insurable interest as it applies to life insurance? a. Business partners have an insurable interest in each other. b. A husband or wife has an insurable interest in their spouse. c. An individual has an insurable interest in his or her own life. d. A debtor has an insurable interest in the life of a lender.

A debtor has an insurable interest in the life of a lender.

All of the following are insurable events as defined in the Insurance Code EXCEPT a. An insured goes to the hospital for a broken arm b. An insured is sued for libel and slander c. An insured loses a large sum in poker game d. A guest trips and breaks his leg in the insured's house.

An insured loses a large sum in a poker game.

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost? a. Indemnity b. Stop-loss c. Consideration d. Reasonable expectations

Indemnity

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 a. Smaller b. Older c. More Active d. Larger

Larger

Insurance is a contract by which one seeks to protect another from a. Hazards b. Loss c. Exposure d. Uncertainty

Loss

The risk of loss may be classifed as a. High risk and low risk b. Pure risk and speculative risk c. Certain risk and uncertain risk d. Named risk and un-named risk

Pure risk and speculative risk

According to California Insrance Code, which of the following can be classified as an insurable event? a. Extreme levels of loss b. Pure risks c. Unpredictable losses d. Speculative

Pure risks

Which of the following insurance options would be considered a risk-sharing arrangement? a. Surplus lines b. Reciprocal c. Stock d. Mutual

Reciprocal

In case of a loss, the indemnity provision insurance policies a. Pays the insured a percentage of the loss above and beyond the loss b. Pays the insured as much as 95% of the loss c. Restores an insured person to the same financial state as before the loss d. Allows the insured to collect 20% more than the actual loss

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

Hazard is best defined as a. The uncertainty of loss b. Neglect to communicate a material fact c. A deliberate attempt to deceive d. Something that increases the risk of loss

Something that increases the risk of loss

The insurer must be able to rely on the statements in the application, and the insured must be able to rely on the insurer to pay valid claims. In the forming of an insurance contract, this is referred to as a. Reasonable expectations b. A warranty c. Implied Warranty d. Utmost good faith

Utmost good faith

An individual was invloved in a head-on collision while driving home one day. His injutries were not serious, and he recovered. However, he deicded 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? a. Avoidance b. Reduction c. Sharing d. Retention

Avoidance

The risk managment technique that is used to prevent a specific loss by not exposing oneself to that avtivity is called a. Avoidance b. Transfer c. Reduction d. Sharing

Avoidance

Which statement regarding insurable risks is NOT correct? a. Insurance cannot be mandatory b. The insurable risk needs to be statistically predictable c. An insurable risk must involve a loss that is definite as to cause, time, place and amount d. Insureds cannot be randomly selected

Insureds cannot be randomly selected

If an applicant for a life insurance policy and the potential insured are two different people, the underwriter would be concerned about a. Which individual will pay the premium b. Whether an insurable interest exists between the individuals c. The gender of the applicant d. The type of policy requested

Whether an insurable interest exists between the individuals

A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents whaty type of hazard? a. Moral b. Legal c. Physical d. Morale

Morale

What describes a situation when poor risks and balanced with preferred risks, and average risks are in the middle? a. Equitable spread of risk b. Ideally insurable risk c. Profitable distribution of exposures d. Adverse selection

Profitable distribution of exposures.

Which of the following is the most common way to transfer risk? a. Name a beneficiary b. Purchase insurance c. Increase control of claims d. Lessen the possibility of loss

Purchase insurance

In case of a loss, the indemnity provision in insurance policies a. Pays the insured as much as 95% of the loss b. Restores an insured person the same financial state as before the loss c.Allows the insured to collect 20% more than the actual loss d. Pays the insured a percentage of the loss above and beyond the loss

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

When an individual purchases insurance, what risk management technique is he or she practicing? a. Retention b. Transfer c. Avoidance d. Sharing

Transfer

The insurer may suspect that a moral hazard exists if the policyholder a. Always drives over the speed limit b. Is not honest about his health on an application for insurance c. Is prone to depression d. Is indifferent to activites that may be dangerous

Is not honest about his health on an application for insurance

Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated? a. Law of large numbers b. Law of masses c. Law of averages d. Law of group evaulation

Law of large numbers

The risk of loss may be classified as a. Named risk and un-named risk b. High risk and low risk c. Pure risk and speculative risk d. Certain risk and uncertain risk

Pure risk and speculative risk

An individual's tendency to be dishonest would be indicative of a a. Moral hazard b. Morale hazard c. Pure hazard d. Physical hazard

Moral hazard

Events or conditions that increase the chances of an insured loss occuring are referred to as a. Risks b. Perils c. Hazards d. Exposures

Hazards