Chapter 1 Quiz

When must insurable interest exist in a life insurance policy? A. At the time of application B. When there is a change of the beneficiary C. At the time of policy delivery D. At the time of loss

A. At the time of application In life insurance, insurable interest must exist at the time of application.

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. Investing in the stock market is not an example of risk avoidance; it creates a possibility of a loss.

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

A. Profitable distribution of exposures The profitable distribution of exposures is achieved when poor risks are balanced with preferred risks, and average risks are in the middle.

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

A. Pure risk Any event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him/her, may be insured against. The more predictable a loss, the more insurable it becomes. Only pure risks are insurable. Speculative losses are uninsurable.

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

A. Reciprocal When insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal.

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

A. Speculative risk Speculative risk involves the chance of gain and is not insurable.

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

B. A peril A peril is the cause of loss insured against in an insurance policy.

The protection of the insurer from adverse selection is provided in part by A. A reduction in coverage. B. A profitable distribution of exposures. C. A drop in applications D. Reducing costs

B. A profitable distribution of exposures. The profitable distribution of exposures, which balances poor risks and preferred risks with standard risks in the middle, protects insurers from adverse selection.

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. Any event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him/her, may be insured against. Speculative losses are uninsurable.

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

B. Homogeneous The basis of insurance is sharing risk between large homogeneous group with similar exposure to loss.

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

B. Insureds cannot be randomly selected. Granting insurance must not be mandatory, selecting insureds randomly will help the insurer to have a fair proportion of good risks to poor risks. All other statements are true.

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. Older D. Smaller

B. Larger According to the law of large numbers, the larger a group becomes, the easier it is to predict losses. Insurers use this law in order to predict certain types of losses and set appropriate premiums.

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

B. Policyowner The policyowner must have an insurable interest in the insured (or in their own life if the policyowner is also insured), in the life of a family member, or a business partner.

The risk of loss may be classified as ____. A. Certain risk and uncertain risk B. Pure risk and Speculative risk C. Named risk and un-named risk D. High risk and low Risk.

B. Pure risk and Speculative risk Pure risks involve the probability or possibility of loss with no chance for gain. Pure risks are generally insurable. Speculative risks involve uncertainty as to whether the final outcome will be gain or loss. Speculative risks are generally unissurable.

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

B. Risks with a higher probability of loss seeking insurance more often than other risks. Adverse selection means that there are more risks with higher probability of loss seeking to purchase and maintain insurance than the risks who present lower probability. Underwriters must guard against this.

Peril is most easily defined as ______. A. The chance of losing occurring B. The cause of loss insured against. C. An unhealthy attitude about safety D. Something that increases the chance of loss

B. The cause of loss insured against. Perils are the cause of loss insured against in an insurance policy.

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. The loss may be intentional. C. There must be a sufficient number of homogeneous exposure units to make losses reasonably predictable D. The loss produced by the risk must be definite.

B. The loss may be intentional. To insure intentional losses would be against public policy

Which of the following is NOT an example of a valid insurable interest? A. Business partners in each other's lives B. Child in parents' lives C. Debtor in the life of the creditor D. Employer in key employee's life

C. Debtor in the life of the creditor The 3 recognized areas in which insurable interest exists are as follows: a policyowner insuring their own life, the life of a family member (relative or spouse), or the life of a business partner, key employee, or someone who has a financial obligation to the policyowner. A debtor does not have an insurable interest in the creditor.

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

C. Driving recklessly Morale hazards arise from a state of mind that causes indifference to loss, such as carelessness.

Events or conditions that increase the chances of an insured loss occurring are referred to as A. Perils B. Exposures C. Hazard D. Risk

C. Hazard Conditions such as lifestyle and existing health, or activities such as scuba diving are hazards and may increase the chance of a loss occurring.

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

C. Loss Insurance will protect a person, business, or entity from loss.

The cause of loss insured against in an insurance policy are known as ____. A. Losses B Hazards C. Perils D. Risks

C. Perils Perils are the causes of loss insured against an insurance policy.

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

C. Purchase insurance The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company.

Which of the following fartors is NOT considered by an underwriter when determining the premium rates for an individual seeking insurance? A. Sex B. Age C. Race D. Medical History

C. Race Age, medical history, and sex provide sound statistical data for determining the probability of loss. Race, religion, sexual orientation, etc., are some factors that cannot be used because there is not sound statistical data to show that they affect the probability of loss; therefore, they are considered to be discriminatory.

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

C. Something that increases the risk of loss Hazards are conditions or situations that increase the probability of an insured loss occurring.

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

C. To reduce expenses and improve cash flow Retention usually results from three basic desires of the insured: to reduce expenses and improve cash flow, to increase control of claim reserving and claims settlements, and to fund losses that cannot be insured.

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. Which individual will pay the premium C. Whether an insurable interest exists between D. The type of policy requested

C. Whether an insurable interest exists between An insurable interest must exist at the same time the policy is issued. Some relationships are automatically resumed to qualify as an insurable Interest, e.g., spouses, parents, children and certain business relationships

Which of the following statements is NOT true concerning insurable interest as it applies to life insurance? A. A married person has an insurable interest in their spouse. B. An individual has an insurable interest in their own life. C. Business partners have an insurable interest in each other. D. A debtor has an insurable interest in the life of a lender.

D. A debtor has an insurable interest in the life of a lender. A lender has an insurable interest in the life of a debtor, not to the extent of the debt. The debtor does not have an insurable interest in the life of the lender.

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. Reduction B. Retention C. Sharing D. Avoidance

D. Avoidance Avoidance is a method of risk management by which a person tries to eliminate the risk of loss by avoiding any exposure to an event that could give rise to such loss. Risk avoidance is effective by seldom practical.

Which Insurance principle state that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost? A. Stop-loss B. Reasonable expectations C. Consideration D. Indemnity

D. Indemnity The principle of indemnity stipulates that the insured can only collect for the amount of the loss even if the policy is written with greater benefit limits.

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

D. Insurance Insurance is the mechanism whereby an insured is protected against loss by a specified future contingency or peril in return for the present payment of premium. Because many other individuals with the same or similar risk of loss are paying premiums, funds are available to indemnify those who actually suffer that loss.

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

D. Is not honest about his health on an application for insurance. Moral hazards refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.

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

D. Law of large numbers The law of large numbers, which states that the larger a group is, the more accurately losses reported will equal the underlying probability of loss, is the basis for statistical prediction of loss upon which rates for insurance are calculated.

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

D. Moral hazard An applicant that is dishonest in completing an application for insurance or submitting a fraudulent claim would be deemed a moral hazard and could be uninsurable from an underwriting standpoint.

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

D. Pure risks Any event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him/her, may be insured against. The more predictable a loss, the more insurable it becomes. Only pure risks are insurable. Speculative losses are uninsurable.

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

D. Reduction Steps taken to prevent losses from occurring are called risk reduction

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

D. The loss must be catastrophic. In order to be characterized as pure risk, the loss must be due to chance, definite, measurable, and predictable, but not catastrophic.

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

D. Transfer Insurance is a transfer of the risk of financial loss from a covered peril from the insured to the insurance company.