Insurance P&C-Unit 1

ELEMENTS OF INSURABILITY The risk that involves the chance of both loss and gain is:

A) speculative risk. B) pure risk. C) impure risk. D) whole risk. Click for Answer and Explanation Answer: A Speculative risk involves the chance of both loss and gain. For example, the placement of a bet at a racetrack is a speculative risk.

OTHER INSURANCE TERMS Which of the following best defines a hazard?

A) Uncertainty of a loss. B) Cause of a loss. C) Unexpected loss. D) Condition that increases the chance of a loss. Click for Answer and Explanation Answer: D A hazard is a condition that increases the chance of a loss.

RISK, EXPOSURE How is uncertainty regarding loss BEST described?

A) Hazard. B) Peril. C) Risk. D) Insurance. Click for Answer and Explanation Answer: C In the strict insurance definition, risk is the uncertainty regarding financial loss. Insurance is used to minimize the risk of uncertainty by spreading the risk over a large enough number of similar exposures to predict the individual chance of loss.

OTHER INSURANCE TERMS Which one of the following is an example of a peril?

A) Indifference. B) Illness. C) Earthquake. D) Gasoline stored on the premises. Click for Answer and Explanation Answer: C A peril is the actual cause of a loss. Examples of perils are fire, wind, hail, collision, and earthquake.

MANAGING RISK Which of the following is an example of reduction as a method of handling risk?

A) Reducing coverage. B) Buying insurance to reduce the risk. C) Installing a burglar alarm. D) Increasing a deductible. Click for Answer and Explanation Answer: C Reduction may be accomplished through loss prevention and loss control. A burglar alarm will control or reduce the loss.

OTHER INSURANCE TERMS Which one of the following is considered a hazard?

A) Trash. B) Lightning. C) Fire. D) Explosion. Click for Answer and Explanation Answer: A A hazard is a situation or factor that increases the possibility of a loss.

ELEMENTS OF INSURABILITY If John's father transfers ownership of a house to John, which one of the following statements regarding insurance on the house is CORRECT?:

A) John's father must assign his policy to John as well. B) John can buy insurance because he has an insurable interest. C) John must purchase the house from his father to obtain an insurable interest in it. D) John's father must retain his policy on the house. Click for Answer and Explanation Answer: B A person has an insurable interest in property when the loss of or damage to the property will result in financial loss to the person. Because John's father has transferred ownership of the house to John, he now owns and controls the property. Any loss or damage to the house will result in a financial loss to John. Therefore, John has an insurable interest in the house and should obtain insurance on the house in his name. Some companies will consider approving an assignment of an insurance policy from the old owner to the new owner, but this is not a universal practice.

OTHER INSURANCE TERMS Fire would be an example of a:

A) peril. B) hazard. C) loss. D) risk. Click for Answer and Explanation Answer: A Perils include events such as fire, wind, hail, or collision with another car. A hazard is a situation or condition that increases the possibility of a loss occurring . Hazards may be classified as physical (a material, structural, or operational feature), moral (dishonest or character defects), or morale (relating to the attitude of the insured). Risk is the uncertainty regarding the occurrence of financial loss.

MANAGING RISK Transferring is a method of handling risk. Which of the following best describes the concept of transfer?

A) Purchasing insurance. B) Increasing a deductible to share the loss with the insurance company. C) Signing a hold harmless agreement to share the liability. D) Buying a car with a friend to share the risk. Click for Answer and Explanation Answer: A Transfer means shifting the risk of a loss to another, usually an insurance company.

MANAGING RISK Self-insurance is an example of what kind of risk treatment?

A) Reduction. B) Transference. C) Retention. D) Avoidance. Click for Answer and Explanation Answer: C Self-insurance is a form of risk retention because the individual personally retains the risk and must accept the economic loss if the risk becomes a reality.

OTHER INSURANCE TERMS What is the actual cause of a loss?

A) Risk. B) Peril. C) Hazard. D) Proximate cause. Click for Answer and Explanation Answer: B The actual cause of a loss is called a peril and is identified or referred to in the insurance policy. Perils include such events as fire, wind, hail, and collision with another car. A named peril policy provides coverage only if a loss is caused by one of the perils specifically named or identified in the policy. An open perils policy provides coverage for all and any risks, unless specifically excluded.

ELEMENTS OF INSURABILITY Which of the following is NOT an element of an insurable risk?

A) The loss must be catastrophic. B) The loss must be due to chance. C) The loss must be accidental from the insured's perspective. D) The loss must have a determinable value. Click for Answer and Explanation Answer: A One of the criteria for an insurable risk is that it is not catastrophic. A principle of insurance holds that only a small portion of a given group will experience loss at any one time. Risks that would adversely affect large numbers of people or large amounts of property, such as wars, are typically not insurable.

MANAGING RISK Treating risk by purchasing insurance is an example of what type of risk management?

A) Transfer. B) Avoidance. C) Reduction. D) Retention. Click for Answer and Explanation Answer: A Purchasing insurance is the most common method of transferring risk. The burden of carrying the risk and indemnifying the financial or economic loss is transferred from the individual to the insurance company through the insurance contract.

MANAGING RISK Robert and Carolyn live in a busy city and decide that not owning a car is the solution to not experience having a car stolen. Which of the following methods describes this philosophy?

A) Transfer. B) Loss control. C) Avoidance. D) Retention. Click for Answer and Explanation Answer: C An individual may avoid the risk of a loss by not engaging in an activity or owning property. By not owning a car, Robert and Carolyn will not risk having it stolen.

ELEMENTS OF INSURABILITY Which one of the following statements pertaining to risk is NOT correct?

A) Uncertainty regarding financial loss is the definition of risk; therefore, it is characteristic of both pure and speculative risks. B) Only pure risks are insurable. C) A stock market venture is an example of a pure risk. D) Pure risk involves only the chance of loss; there is never a possibility of gain or profit. Click for Answer and Explanation Answer: C A stock market venture involves the chance of both gain and loss and is, therefore, a speculative risk. Pure risk involves only the chance of loss.

OTHER INSURANCE TERMS Dishonesty on the part of an insured is an example of:

A) a moral hazard. B) a peril. C) a physical hazard. D) a morale hazard. Click for Answer and Explanation Answer: A A peril is the specific event that causes a loss. A hazard is any factor that increases the chance of loss. A moral hazard involves dishonesty on the part of the insured (e.g., planning arson to collect the insurance claim). A morale hazard involves carelessness or indifference, such as not using a seatbelt or not locking one's door.

INSURANCE The purpose of insurance is to:

A) eliminate hazards. B) reduce adverse selection. C) transfer risk. D) eliminate risk. Click for Answer and Explanation Answer: C The purpose of insurance is to protect against losses caused by pure risk. This is accomplished through the insurance contract, which requires one party to pay a specified sum to another if a previously identified event occurs. For the cost of a premium, a person or entity can purchase protection offered by the insurance contract and transfer risk to the insurer.

OTHER INSURANCE TERMS Driving too fast and not wearing a seat belt are examples of:

A) morale hazard. B) physical hazard. C) risk. D) moral hazard. Click for Answer and Explanation Answer: A Hazards may be classified as physical (a material, structural, or operational feature), moral (dishonest or character defects), or morale (relating to the attitude of the insured). Driving too fast and not wearing a seat belt indicate a thoughtless, careless, or arrogant attitude on the part of the driver. Risk is the uncertainty regarding the occurrence of financial loss.

ELEMENTS OF INSURABILITY Which one of the following risks is insurable?

A) Partial. B) Pure. C) Speculative. D) Whole. Click for Answer and Explanation Answer: B Only pure risks are insurable because they involve the chance of loss only.

OTHER INSURANCE TERMS Which one of the following hazards can be described as a careless as a careless attitude or general indifference on the part of the insured toward the occurrence of loss?

A) Legal. B) Morale. C) Physical. D) Moral. Click for Answer and Explanation Answer: B A hazard is a situation or factor that increases the possibility of a loss occurring. A morale hazard is a careless attitude or general indifference on the part of the insured toward the occurrence of loss.

RISK, EXPOSURE A condition or situation that presents a possibility of loss is a (an):

A) proximate cause. B) law of large numbers. C) named certainty. D) exposure. Click for Answer and Explanation Answer: D A condition or situation that presents a possibility of loss is an exposure. Insurance policies are designed to cover loss, either a direct loss or an indirect loss.

RISK, EXPOSURE A chance, possibility, or uncertainty of loss is known as a:

A) proximate cause. B) risk. C) hazard. D) peril. Click for Answer and Explanation Answer: B Risk is the uncertainty regarding the occurrence of financial loss. A peril is the actual cause of a loss and is specifically identified in the policy. A hazard is a situation or condition that may increase the possibility of a loss occurring. Proximate cause is the action that produces a loss through an unbroken chain of events.

LAW OF LARGE NUMBERS The law of large numbers states that the:

A) smaller the number of risks combined into one group, the less uncertainty there will be as to the amount of loss that will be incurred. B) smaller the number of risks combined into one group, the larger the loss will be to any one individual in that group. C) larger the number of risks combined into one group, the smaller the loss will be to any one individual in that group. D) larger the number of risks combined into one group, the less uncertainty there will be as to the amount of loss that will be incurred. Click for Answer and Explanation Answer: D The law of large numbers operates under the principle that the larger the number of similar risks combined into one group, the less uncertainty there will be as to the amount of loss that group will incur. Thus, an insurance company is able to determine in advance the approximate number of claims it will receive in a given time period for a given risk and place its business on a nonspeculative basis.

ELEMENTS OF INSURABILITY Which of the following is NOT an example of an insurable interest?

A) Person's interest in the home she owns. B) Dry cleaner's interest in his customers' clothing in his custody, care, or control. C) Person's interest in property she hopes that her uncle will leave to her in his will. D) Person's interest in the improvements he has added to his leased apartment. Click for Answer and Explanation Answer: C A person does not have an insurable interest in property that he neither possesses nor owns.

RISK, EXPOSURE With regard to insurance, risk can be defined as:

A) certainty regarding loss. B) uncertainty regarding financial gain. C) certainty regarding financial gain. D) uncertainty regarding loss. Click for Answer and Explanation Answer: D Risk refers to the uncertainty of financial loss. Insurance replaces the uncertainty of risk with certain guarantees of financial stability.

OTHER INSURANCE TERMS Faulty wiring causes a fire that destroys a building. The faulty wiring is considered to be a(an):

A) peril. B) indirect cause. C) proximate cause. D) hazard. Click for Answer and Explanation Answer: D A hazard is a situation or factor that increases the possibility of a loss occurring or increases the probable size of a loss.