chapter 1

Premium rates set by insurance companies are regulated at which level of government? Federal State Local None of the above

State

Insurance coverage relies on the law of large numbers, meaning events that are statistically difficult to predict for a specific individual are more predictable for a large number of individuals. events that are statistically difficult to predict for a large number of individuals are more predictable for an individual. insurers can statistically predict whether an individual will suffer a loss more accurately than they can statistically predict whether a large number of individuals will suffer losses. insurers can adequately predict the losses expected for an individual but are unable to predict the losses expected for large numbers of individuals.

events that are statistically difficult to predict for a specific individual are more predictable for a large number of individuals

Antonio's television was stolen. The television cost $1,500 when it was first bought, but it now has a fair market value of $750. If Antonio has a homeowners policy that covers losses for personal property at actual cash value (ACV), what amount is Antonio entitled to recover? $600 $750 $1,500 The current retail price for a new replacement television

$750

Ashley owns a home with a $400,000 replacement value. This February, a blizzard causes $75,000 in damages to the home. Ashley has an insurance policy with 80 percent coinsurance and a $1,000 deductible. How much will the insurer pay if Ashley carries $300,000 of coverage? $60,000.00 $69,312.50 $70,312.50 $75,000.00

69,312.50 [$300,000 ÷ (0.80 × $400,000)) )] × $75,000 = $70,312.50 − $1,000 deductible = $69,312.50

All of the following statements regarding insurance policies are correct EXCEPT: Adverse selection is the tendency of those who most need insurance to purchase insurance policies while those with the least perceived risk are less likely to pay the necessary premiums for insurance. An endorsement is a modification or change to a life or health insurance policy. Co-payments are loss-sharing arrangements whereby the insured pays a flat dollar amount or percentage of the loss in excess of the deductible. Deductibles serve as motivation for an insured to take precautions to avoid losses or to prevent the filing of false claims.

An endorsement is a modification or change to a life or health insurance policy.

Which of the following statements is (are) correct regarding insurance contracts? I. The principle of insurable interest is closely aligned with the principle of indemnity, in that both limit the insured from experiencing a gain using insurance. II. A subrogation clause in an insurance policy requires that the insured relinquish a claim against a negligent third party if the insurer has already indemnified the insured. I only II only Both I and II Neither I and II

Both I and II

Which of the following is a risk reduction technique? Purchasing life insurance Parking your car at the end of the parking lot, away from other cars Choosing not to go skydiving Buying a warranty on your new TV

Parking your car at the end of the parking lot, away from other cars

All of the following statements regarding risk are correct EXCEPT: Objective risk is the difference between the expected and actual losses. Particular risk is a risk that will impact a large group of individuals simultaneously. Subjective risk is the risk that an individual perceives based on that person's prior experiences. Speculative risk is the chance of loss, no loss, or a profit.

Particular risk is a risk that will impact a large group of individuals simultaneously.

Icy roads and wet floors that increase the likelihood of a loss occurring are known as which type of hazard? Physical hazard Character hazard Moral hazard Morale hazard

Physical hazard

The immediate cause and reason for a loss occurring, such as a hurricane, is referred to as a(n) hazard. insurable risk. peril. risk.

peril.