Insurance Concepts Practice Questions

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

*Pure risk*

The risk of loss may be classified as

*Pure risk and Speculative Risk*

Hazard is best defined as

*Something that increases the risk of loss*

Profitable distribution serves the purpose of

*Protecting the insurer against adverse selection*

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.

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 fatty foods from his diet. Which method of dealing with risk does this scenario describe?

*Reduction*

Installing deadbolt locks on the doors of a home is an example of which method of handling risk?

*Reduction* Steps taken to prevent losses from occurring

If an applicant for a life insurance policy and person to be insured by the policy are two different people, the underwriter would be concerned about

*Whether an insurable interest exists between the individuals* An insurable interest must exist at the time the policy is issued. Some relationships are automatically presumed to qualify as an insurable interest, e.g., spouses, parents, children and certain business relationships.

Peril is most easily defined as

The cause of loss insured against in an insurance policy

If a loss occurs, insurance policies pay the proceeds to

*Beneficiary* The beneficiary is the person who receives the benefits from the insurance policy.

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amounts lost?

*Indemnity* The principle of indemnity stipulates that the insured can only collect for the amount of the loss even if the policy is written with greater benefit limits.

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

*Loss*

Adverse selection is a concept best described as

*Risks with higher probability of loss seeking insurance more often than other risks* Adverse selection means that there are more risks with higher probability of loss seeking to purchase and maintain insurance than the risks who present lower probability. Underwriters must guard against this.

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

*Law of Large Numbers*

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

*Policyowner* Policyowner must have an insurable interest in the insured, i.e. in his/her own life if the policyowner and the insured is the same person, or in the life of a family member or a business partner.

To achieve the profitable distribution of exposures,

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

When must insurable interest exist in a life insurance policy?

*At the time of application*

The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called

*Avoidance* Risk avoidance is elimination of risk of loss by avoiding any exposure to an event that could give rise to such loss