Chapter 2: Nature of Insurance, Risk, Perils and Hazards

Risk _____ is the process of analyzing exposures that create risk and designing programs to handle them.

Management

Law of Large Numbers

A principle stating that the larger the number of similar exposure units considered, the more closely the losses reported will equal the underlying probability of loss.

Which of these statements regarding insurance is false? One way of insurers deal with catastrophic loss is through reinsurance. As the number of insured units increases, the number of losses decreases. Speculative risk cannot be insured Pure risk can be insured

As the number of insured units increases, the number of losses decreases.

For insurance purposes, similar objects which are exposed to the same group of perils are referred to as

Homogeneous Exposure Units

Which of the following is NOT an example of risk retention?

Not doing a business deal after deciding it would be too risky

Which of the following is NOT and example of risk retention?

Not doing a business deal after deciding it would be too risky

Which of the following can be defined as a cause of a loss?

Peril

The law of large numbers enables an insurer to

Predict losses

According to the law of large numbers, how would losses be affected if the number of similar insured units increases?

Predictability of losses will be improved

What type of risk involves the potential for loss with no possibility for gain?

Pure Risk (Insurable Risk)

Which of these statements is NOT a characteristic of the law of large numbers?

Rates can be calculated to compensate for losses

Which of these statements is NOT a characteristic of the law of large numbers?

Rates can be calculated to compensate for losses.

ABC Company is attempting to minimize the severity of potential losses within its company. The company is engaged in risk

Reduction

An insurer has a contractual agreement which transfers a portion of its risk exposure to another insurer. What type of contractual agreement is this?

Reinsurance Contract

How can an insurance company minimize exposure to loss?

Reinsuring risks (Reinsurance)

A hold-harmless clause is an example of risk

Transfer

Purchasing insurance is an example of risk

Transference

Risk

Uncertainty regarding loss; the probability of loss occurring for an insured or prospect.

Speculative Risk

is a type of risk that involves the chance of both loss and gain; it is not insurable.

Pure Risk

is a type of risk that involves the chance of loss only; there is no opportunity for gain. insurable.

Peril

is the immediate specific event causing loss and giving rise to risk.

An insurable risk requires

that the chance of loss be calculable

A business becoming incorporated is an example of risk ____. reduction severance retention transfer

transfer

What type of risk involves the potential for a loss AND the possibility for gain?

Speculative

Which one of these is NOT considered to be an element of an insurable risk?

Speculative Risk

An Insurable Risk requires

That the chance of loss be calculable.

Which of these statements regarding insurance is false?

As the number of insured units increases, the number of losses decreases

Which of the following can be defined as "the potential for loss"?

Risk

Which of the following describes the act of insuring a risk against possible loss?

Risk Avoidance

Which term describes the elimination of a hazard?

Risk Avoidance

Which term describes the elimination of a hazard?

Risk avoidance

A business becoming incorporated is an example of risk

Transfer