Insurance Fundamentals - Module A

An insurance contract must comply with the "Principle of Indemnity" Jarron's friend Nick accidentally destroys Jarron's laptop computer. Nick pays Jarron for the damage, but Jarron also submits a claim to his insurance company for the laptop. The claim will be:

Denied because Jarron has already been paid for the damage.

The attempt to restore an insured to his or her financial condition before a loss occurred is BEST described as

Indemnification

an insured has fabricated a claim so that it would appear to be legitimate, this would be a ____ Hazard

Moral hazard

Meg has been in very good health in the past 3 years. She has been exercising, her blood pressure is at a prefect level and her cholesterol is the envy of all her friends. Because Meg is feeling so healthy, she decides to cancel her health insurance policy. This is an example of which risk management methods.

Risk Retention

A slippery floor is an example of

a physical hazard

Which of the following best demonstrates a morale hazard? a) a recent purchaser of auto insurance drives less carefully, knowing that the insurer will cover any losses that occur b) a person who fails to pay their premium and their insurance policy is cancelled c) a person with low morale seeks psychological counseling after filing a false insurance claim d) a person with insurance seeks payment of a claim after intentionally causing a loss

a) a recent purchaser of auto insurance drives less carefully, knowing that the insurer will cover any losses that occur.

Which of the following would be an example of a moral hazard? a) embezzlement b) ineptitude c) carelessness d) apathy.

a) embezzlement

Which of the following is a true statement regarding the "Law of Large Numbers"? a) the law of large numbers states that as the number of insured units increases, the ability to predict losses increases b) the law of large numbers requires risk pools to be made up of large numbers of individual risks that have little in common in order to make a mathematical predication of losses c) the law of large numbers proves that writing insurance on a large number of risks, makes an insurance company profitable d) When the Law of large numbers is utilized, the principle of indemnity is never violated.

a) the law of large numbers states that as the number of insured units increases, the ability to predict losses increases

Which of the following statements is NOT true concering the Law of Large Numbers a) the size of the sample group is not relevant to the accuracy of the results b) Insurance is based on the Law of Large Numbers c) The larger the sample group, the more predictable results d) the larger the sample group, the more accurate results.

a) the size of the sample group is not relevant to the accuracy of the results

Risk is best defined as:

an uncertainty of loss

Adverse selection occurs when

applicants are accepted by the insurer with little to no attention given to underwriting

Which of the following is not a common risk management technique a) assume the risk through deducibles or self-insurance b) Multiply the risk by engaging in hazardous activities c) Avoid the risk by avoiding the activiity or selling the property which created the risk d) Share the risk with others

b) multiply the risk by engaging in hazardous activities

Which of the following is most likely to be uninsurable? a) an international cargo shipping company concerned about loses occurring in the middle of the ocean b) the purchaser of a new home wants to protect herself from a possible drop in the housing prices c) a business is worried about loss of profits if the factory catches on fire d) the owner of business is worried about possible damage to business property done by violent strikers.

b) the purchaser of a new home wants to protect herself from a possible drop in housing prices

The principle of indemnity is illustrated by which of the following a) limits recovery to actual cash value b) requires an insured to assign any rights of recovery against a third party c) restores an insured to the same condition enjoyed before a loss d) allows an insured to profit from a loss

c) restores an insured to the same condition enjoyed before a lsoss

Which of the following is NOT a hazard a) oily rags left beside the hot water heater b) matches within reach of a small child c) wet leaves lying on a sidewalk d) a fire started in the waste basket.

d) a fire started in a waste basket

Which of the following most accurately describes reinsurance a) when an insured switches coverage to a different insurer before the original policy expires b) when the risk is split between two or more insurance companies c) when two separate policies are used to cover the same building d) when an insurance company buys insurance for some of the risks for which it has issued coverage.

d) when an insurance company buys insurance for some of the risks for which it has issued coverage

A church has had the woodwork in the building refinished and new stain and varnish has been applied. The workers placed the rags and brushes that were used to apply the varnish in a small closet and closed the door, creating the possibility of spontaneous combustion. Which of the following terms best describes this condition?

hazard

The attempt to restore an insured to his or her financial condition before a loss occurred is best described as

indemnification

When a person purchases several insurance policies to provide more coverage on a risk than the value of the possible loss, it is known as

overinsurance

Horatio is a business owner who is part of a business owners group that is buying old commercial buildings in their small city and refurbishing them. Horatio has bought a beautiful historical building made mostly of wood. He knows that he should install a sprinkler system right away to prevent a fire. What risk management strategy is Horatio using?

risk reduction

A 100-year flood is an example of which of the following types of risk

static risk

What is the PRIMARY source of information used by insurance companies during the underwriting process?

the application for insurance

All of the following are characteristics of an insurable risk, EXCEPT a) the loss must be catastrophic in nature b) the loss must be definite and definable c) the law of large numbers should apply d) the insurer should be able to calculate the chance of loss

the loss must be catastophic in nature

Max lives in a large apartment complex where there is no guard station or gate. Several hundred people live in the complex so its very easy to determine the schedules of the neighbors living around him. One morning Max leaves for work at 6:30AM as he usually does, but he forgets to lock the front door. Later that morning someone comes into the apartment and steals Max's computer. What was the peril in this situation?

the theft of the computer

Which of the following is true regarding pure and speculative risks

with pure risk there is only the possibility of loss