*******CA Life & Health Cards Chapter 1 Basic Insurance Multiple Choice

A tornado that destroys property would be an example of which of the following A) A peril B) A pure risk C) A loss D) A physical hazard

A) A peril

Which of the following is a term for a person who seeks insurance from an insurer? A) Applicant B) Agent C) Insured D) Beneficiary

A) Applicant

A tornado that destroys property would be an example of which of the following? A) A peril B) A pure risk C) A loss D) A physical hazard

A) A peril

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) Utmost good faith B) Reasonable expectations C) A warranty D) Implied warranty

A) Utmost good faith

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) A profitable distribution of exposures

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 produced by the risk must be definite B) The loss may be intentional C) The loss must not be catastrophic D) There must be a sufficient number of homogenous exposure units to make losses reasonably predictable

B) The loss may be intentional

For the purpose of insurance, risk is defined as A) An event that increases the amount of loss B) The uncertainty or chance of loss C) The certainty of loss D) The cause of loss

B) 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 liability in the event of loss C) To reduce expenses and improve cash flow D) To increase control of claim reservice and claims settlement practices

B) To minimize the insured's level of liability in the event of loss

When an individual purchases insurance, what risk management technique is he or she practicing? A) Retention B) Transfer C) Avoidance D) Sharing

B) Transfer

Units with the same or similar exposure to loss are referred to as A) Catastrophic loss exposure B) Insurable risks C) Law of large numbers D) Homogenous

D) Homogenous

The legal definition of "person" would NOT include which of the following? A) A corporation B) A family C) An individual human being D) A business entity

B) A family

Adverse selection is a concept best described as A) Only offering coverage to good risks B) Risks with higher probability of loss seeking insurance more often than other risks C) Underwriters slanting the odds in favor of the company D) Poor choices of applicants to be covered

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

Events in which a person has both the chance of winning or losing are classified as A) Retained risk B) Speculative risk C) Insurable D) Pure risk

B) Speculative risk

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 A) Sharing B) Retention C) Avoidance D) Reduction

C) Avoidance

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

D) The uncertainty or chance of loss

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 A) The gender of the applicant B) The type of policy requested C) Which individual will pay the premium D) Whether an insurable interest exists between the individuals

D) Whether an insurable interest exists between the individuals

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

A) Investing in the stock market

The risk of loss may be classified 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

B) Pure risk and speculative risk

Which of the following insurance options would be considered a risk-sharing arrangement? A) Surplus lines B) Reciprocal C) Stock D) Mutual

B) Reciprocal

Insurance is the transfer of A) Peril B) Risk C) Loss D) Hazard

B) Risk

Peril is most easily defined as A) Something that increase the chance of loss B) The cause of loss insured against C) An unhealthy attitude about safety D) The chance of loss occuring

B) 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 beneficiary C) At the time of loss D) At the time of application

D) At the time of application

The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called A) Transfer B) Reduction C) Sharing D) Avoidance

D) Avoidance

If a loss occurs, the insurance policies pay the proceeds to A) Applicant B) Insurer C) Agent D) Beneficiary

D) Beneficiary

Which of the following is NOT an example of insurable interest? A) Business partners in each other B) Employer in employee C) Child in parent D) Debtor in creditor

D) Debtor in creditor

The insurer may suspect that a moral hazard exists if the policyholder A) Is prone to depression B) Is indifferent to activities that may be dangerous C) Always drives over the speed limit D) Is not honest about his health on an application for insurance

D) Is not honest about his health on an application for insurance

The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as A) Double indemnity B) Legal risk C) Fraud D) Legal hazard

D) Legal hazard

To achieve the profitable distribution of exposures, A) The most coverage goes to average risks and preferred risks, while less goes to poor risks B) Poor risks and average risks make up the majority of coverage C) A majority of coverage goes to preferred risks D) Preferred risks and poor risks are balanced, with average risks in the middle

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

What describes a situation when poor risks are balanced with preferred risks, and average risks are in the middle? A) Adverse selection B) Equitable spread of risk C) Ideally insurable risk D) Profitable distribution of exposures

D) Profitable distribution of exposures

A situation in which a person can only lose or have no change represents A) Speculative risk B) Adverse selection C) Hazard D) Pure risk

D) Pure risk

In case of a loss, the indemnity provision in insurance policies A) Allows the insured to collect 20% more than the actual loss B) Pays the insured a percentage of the loss above and beyond the loss C) Pays the insured as much as 95% of the loss D) Restores the insured person to the same financial state as before the loss

D) Restores the insured person to the same financial state as before the loss

Which of the following statements is NOT true concering insurable interest as it applies to life insurance? A) A debtor has an insurable interest in the life of a lender B) Business partners have insurable interest in each other C) A husband or wife has an insurable interest in their spouse D) An individual has an insurable interest in his or her own life

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

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) Legal hazard B) Underwriting gamble C) Legal peril D) Fiduciary risk

A) Legal hazard

What is the term for the causes of loss insured against in an insurance policy? A) Perils B) Losses C) Risks D) Hazards

A) Perils

What is the term for the fee a policyowner must pay to the insurance companies to maintain coverage? A) Premium B) Installment C) Commission D) Benefit

A) Premium

A situation in which a person can only experience a loss and no gain presents what type of risk? A) Pure risk B) Speculative risk C) Adverse selection D) Hazard

A) Pure risk

According to California Insurance Code, which of the following can be classified as an insurable event? A) Pure risks B) Unpredictable losses C) Speculative risks D) Extreme levels of loss

A) Pure risks

Which of the following 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

A) Race

All of the following are insurable events as defined in the insurance code EXCEPT A) An insured is sued for libel and slander B) An insured loses a large sum in a poker game C) A guest trips and breaks his leg in the insured's house D) An insured goes to the hospital for a broken arm

B) 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) Reasonable B) Indemnity C) Stop-loss D) Consideration

B) Indemnity

Insurance is a contract by which one seeks to protect another from A) Hazards B) Loss C) Exposure D) Uncertainty

B) Loss

In case of a loss, the indemnity in insurance policies A) Pays the insured as much as 95% of the loss B) Restores an insured person to 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

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

Events or conditions that increase the chances of an insured loss occurring are referred to as A) Risks B) Perils C) Hazards D) Exposures

C) Hazards

Profitable distribution of exposures serves the purpose of A) Preventing the insurer from being estopped B) Helping the insurer determine payable benefits C) Protecting the insurer against adverse selection D) Helping the insurer select only the ideally insurable risks

C) Protecting the insurer against adverse selection

Installing deadbolt locks on the doors of a home is an example of which method of handling risk? A) Transfer B) Self-insurance C) Reduction D) Avoidance

C) Reduction

Hazard is best defined as A) Neglect to communicate a material fact B) A deliberate attempt to deceive C) Something that increases the risk of loss D) The uncertainty of loss

C) Something that increases the risk of loss

All of the following are examples of risk retention EXCEPT A) Premiums B) Deductibles C) Copayments D) Self-insurance

A) Premiums

A contract which one party undetakes to indemnify another against a loss is called A) Indemnity B) Insurance C) Adverse Selection D) RIsk

B) Insurance

What do individuals use to transfer their risk of loss to a larger group? A) Indemnity B) Insurance C) Insurable interest D) Exposure

B) Insurance

Which statement regarding insurable risks is NOT correct? A) An insurable risk must involve loss that is definite as to cause, time, place, and amount B) Insureds cannot be randomly selected C) Insurance cannot be mandatory D) The insurable risk needs to be statistically predictable

B) Insureds cannot be randomly selected

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) More active B) Larger C) Smaller D) Older

B) Larger

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? A) Retention B) Reduction C) Transfer D) Avoidance

B) Reduction

Which of the following is NOT a characteristic of pure risk? A) The loss must be catastrophic B) The loss must be due to chance C) The loss must be measurable in dollars D) The loss exposure must be large

A) The loss must be catastrophic

Which of the following is NOT a goal of risk retention? A) To minimize the insured's level of liability in the event of a loss B) To reduce expenses and improve cash flow C) To increase control of claim reserving and claims settlement D) To fund losses that cannot be insured

A) To minimize the insured's level of liability in the event of a loss

Which of the following individuals must have insurable interest in the insured? A) Beneficiary B) Underwriter C) Producer D) Policyowner

D) Policyowner

Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated? A) Law of group evaluation B) Law of large numbers C) Law of masses D) Law of averages

B) Law of large numbers

A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents what type of hazard? A) Physical B) Morale C) Moral D) Legal

B) Morale

All of the following are examples or risk retention EXCEPT A) Self-insurance B) Premiums C) Deductibles D) Copayments

B) Premiums

Which of the following is considered to be a morale hazard? A) Smoking B) Working as a firefighter C) Engaging in illegal activities D) Driving recklessly

D) Driving recklessly

An individual's tendency to be dishonest would be indicative of a A) Morale hazard B) Pure hazard C) Physical hazard D) Moral hazard

D) Moral hazard

Which of the following is the most common way to transfer risk? A) Increase control of claims B) Lessen the possibility of loss C) Name a beneficiary D) Purchase insurance

D) Purchase insurance