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

All of the following circumstances must be met for loss retention to be an effective risk management technique, EXCEPT a. loss cannot be catastrophic b. probability of loss is unknown c. highly predictable losses d. loss must be measurable

b. probability of loss is unknown loss retention is a effective risk management technique will all of these conditions exist EXCEPT when the probability of loss is unknown. The loss MUST be predictable.

A hazard can be best described as a. the potential for loss b. The tendency for poorer than average risks to seek out insurance c. A condition that may increase the likelihood of a loss occurring d. a risk that has the potential for both loss and gain.

c. A condition that may increase the likelihood of a loss occurring A condition or situation that creates or increases a chance of loss is called a hazard. Examples include icy roads, driving while intoxicated, and improperly stored toxic waste.

Which of the following describes the increase in the probability of a loss due to an insured's dishonesty tendencies? a. Morale hazard b. Physical hazard c. Moral hazard d. Speculative hazard

c. Moral hazard The increase in the probability of a loss resulting from an insured's dishonest tendencies is know as moral hazard.

Which of the following refers to a condition that may increase the chance of a loss? a. adverse selection b. Hazard c. risk d. Peril

b. Hazard hazard is a condition or situation that creates or increases a chance of loss.

Which of the following would NOT be accomplished with the purchase of an insurance policy? a. Greater peace of mind b. Risk is eliminated c. Payments made for covered losses d. Uncertainty is reduced.

b. Risk is eliminated All of these would be accomplished with the purchase of an insurance policy except "risk is eliminated."

Which of the following is a situation where there is a possibility of either a loss or a gain? a. hazard b. pure risk c. speculative risk d. peril

c. speculative risk a situation in which there is a possibility of a loss or a gain is a speculative risk.

A situation in which there is ONLY a chance of loss or no loss is a a. pure risk b. particular risk c. speculative risk d. fundamental risk

a. pure risk A situation in which there is ONLY a chance of loss or no loss is a pure risk.

An insurer having a large number of similar exposure units is considered important because a. The insurer can decrease its reserves b. The greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums c. its financial rating will improve d. the greater the number insured, the more premiums it collects

b. The greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums the greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums.

Moral hazard is described as the a. increased chance of loss because of an insured's recklessness b. increased ability to predict loss because of a higher exposure to loss c. increased risk of adverse selection d. increased chance of a loss because of an insured's dishonest tendencies

d. increased chance of a loss because of an insured's dishonest tendencies Moral hazard can be defined as the increased chance of a loss occurring due to the insured's dishonest tendencies.

Which of the following best describes the statement, "the more times an event is repeated, the more predictable the outcome becomes"? a. Law of large numbers b. Adverse selection c. Average variance d. Speculative retention

a. Law of large numbers the more times an event is repeated, the more predictable the outcome becomes," is an example of the law of large numbers.

Which of the following is NOT considered to be a definition of the term "loss"? a. Probability that an event will occur b. An insurable event that takes place which results in a payment made by the insurance company c. Unintentional decrease in the value of an asset due to a peril d. The amount an insurance company must pay because of an insurable event

a. Probability that an event will occur The term "loss" can be defined as all of these EXCEPT "probability that can event will occur."

Which of the following is NOT considered a definition of risk? a. The potential for loss b. The cause of loss c. Exposure to danger d. Uncertainty

b. The cause of loss Something that can cause a loss, such as an earthquake or tornado, is referred to as a peril, not a risk.

Which of the following is considered to be any situation that has the potential for loss? a. Low of large number b. adverse selection c. Loss exposure d. Risk transfer

c. Loss exposure Loss exposures are situations which have the potential for loss.

Which of the following is NOT an element of an insurable risk? a. Loss must be due to chance b. Loss frequency must be predictable c. Loss must be measurable d. Loss must be catastrophic

d. Loss must be catastrophic All of these are elements of an insurable risk except "loss must be catastrophic."

Restoring an insured to the same condition as before a loss is known as a. Law of large numbers b. Fiduciary retention c. Adverse selection d. Principle of indemnity

d. Principle of indemnity The principle of indemnity involves making an insured whole by restoring them to he same condition as before a loss.