Chapter 1 Questions: Basic insurance concepts and principals

Profitable distribution of exposures serves the purpose of

Protecting the insurer against adverse selection

Insurance is the transfer of

risk

What is the most common way to transfer risk

purchase insurance

A set of legal or regulatory conditions that affect an insurers ability to collect premiums commensurate with the level of risk incurred would be considered a

Legal hazard

Which of the following is a term for a person who seeks insurance from an insurer

Applicant

If a loss occurs, insurance policies pay the proceeds to

Beneficiary

Which of the following is not an example of an insurable interest

Debtor in creditor

A contract which one party undertakes to indemnify another against loss is called

Insurance

The insurer may suspect that a moral hazard exists if the policyholder

Is not honest about his health on an application for insurance

Insurance is a contract by which one seeks to protect another from

Loss

The causes of loss insured against in an insurance policy are known as

Perils

To achieve the profitable distribution of exposures

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

What is the term for the fee a policy owner must pay to the insurance company to maintain coverage?

Premium

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?

Reduction

If an applicant for a life insurance policy and the potential insured are two different people, what would be the underwriter's main concern?

The existence of insurable interest between the applicant and the insured

A hazard is best defined as:

Something that increases the risk of loss

Units with the same or similar exposure to loss are referred to as

homogeneous

The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as...

legal hazard

Which of the following is considered to be a morale hazard

Driving recklessly

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 tornado that destroys property would be an example of which of the following?

peril

All of the following are examples of risk retention except

premiums

Events in which a person has both the chance of winning or losing are classified as

Speculative risk

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

The loss may be intentional.

Which of the following is not a characteristic of pure risk

The loss must be catastrophic

According to the California insurance code, which of the following can be classified as an insurable event

Pure risks

Which if the following insurance options would be considered a risk sharing arrangement

Reciprocal

Adverse selection is a concept best described as

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

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

Utmost good faith