Basic Insurance Concepts & Principles

Which of the following individuals must have insurable interest in the insured?

Policyowner

To achieve the profitable distribution of exposures,

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?

Profitable distribution of exposures

Profitable distribution of exposures serves the purpose of

Protecting the insurer against adverse selection

Which of the following is the most common way to transfer risk?

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 insurance options would be considered a risk-sharing arrangement?

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

In case of a loss, the indemnity provision in insurance policies

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

A situation in which a person can only lose or have no change represents

A Pure risk Pure risk refers to situations that can only result in a loss or no change. Pure risk is the only type insurance companies are willing to accept.

Which of the following is NOT an example of a valid insurance interest?

Debtor in the life of the creditor

Hazards

Events or conditions that increase the chances of an insured loss occurring are referred to as

Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?

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.

Not all loses 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 following EXCEPT

The loss may be intentional