CA Life, Health Insurance and Securities Exam Basic Insurance Concepts and Principles

What is exposure?

A unit of measure used to determine rates charged for insurance coverage.

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

Applicant: person who is seeking insurance from an insurer

If a loss occurs, insurance policies pay the proceeds to

Beneficiary: person who receives the benefits from the insurance policy

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

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

What is Avoidance?

Method of risk management by which a person tries to eliminate risk of loss by avoiding any exposure to an event that could rive rise to such loss.

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

Perils: causes of loss insured against in an insurance policy

According to California Insurance Code, which of the following can be classified as an insurable interest?

Pure Risks: the more predictable a loss, the more insurable it becomes. Only Pure risks are insurable. Speculative losses are uninsurable.

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

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

Insurance is the transfer of

RISK: transfer of financial responsibility associated with a potential of a loss (risk) to an insurance company.

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

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

Insurance is the transfer of

Risk: Insurance is the transfer of financial responsibility associated with a potential loss to an insurance company

Adverse selection is a concept best described as

Risks with higher probability of loss seeking insurance more often that other risks. Definition: 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.

For the purpose of insurance, risk is defined as

The uncertainty or chance of loss. Risk, or the chance of loss occurring, is the basic reason for buying insurance

What is the 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 the following is NOT an example of insurable interest?

Debtor in a creditor: The three recognized areas of insurable interest are: policy owner insuring his or her own life ,life of a family member, or life of a business partner, key employee, or someone who has a financial obligation to them. A debtor does not have insurable interest in the creditor.

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

Speculative Risk: Involves the chance of gain or loss and is not insurable

Which of the following factors is NOT considered by an underwriter when determining the premium rates for an individual seeking insurance? A: Race B: Age C: Medical History D: Sex

Age, Medical History, and Sex provide sound statistical data for determining the probability of loss. Race, religion, sexual orientation, etc., are some of the factors that cannot be used because there is not sound statistical data to show that they effect the probability of loss; therefore are discriminatory.

The legal definition of "person" would not include which of the following?

A Family: a "person" is a legal entity which acts on behalf of itself, accepting legal and civil responsibility for the actions it performs and making contracts in its own name.

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

Premium: what a policyholder pays the insurance company for insurance coverage

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

Insurance: is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event

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

Loss: Insurance will protect a person, business or entity from loss