Chapter 8 Fin 407
The tendency of persons expecting to need dental work to seek dental insurance is an example of A. Adverse selection B. Morale hazard C. Fundamental risk D. Moral hazard
A.
A flood is an example of a A. Peril B. Risk C. Moral hazard D. Physical hazard
A. A flood is an example of a peril, as the flood is the cause of a loss.
A peril is A. The cause of a loss B. The probability that a loss will occur C. A condition that creates or increases the chance of a loss D. A moral hazard
A. A peril is the cause of a loss (fire, theft).
When must an insurable interest exist for a property insurance policy? A. Both at the time of loss and at the inception of the policy B. At the time the loss settlement process takes place C. At the inception of the policy D. At the time of loss
A. Generally, a property insurance policy will not be issued unless there is an insurable interest in the property, and there will only be an insurance payment if the insured has an insurable interest at the time of loss.
All of the following are steps in the risk management process EXCEPT A. Implementing a risk management plan based on unexposed risk B. Periodically evaluating and reviewing the risk management program C. Evaluating the identified risks as to the probability of outcome and potential loss D. Identifying the risks to which the company is exposed
A. Implementing a risk management plan based on selected alternatives is a step in the risk management process.
Rainy conditions, which increases the chance of an automobile accident, are an example of a A. Physical hazard B. Peril C. Risk D. Morale hazard
A. Rain increases the probability that a loss may occur and is a physical hazard.
The use of higher deductibles by the insured in insurance contracts is one example of A. Risk retention B. Risk avoidance C. Risk reduction D. Risk transfer
A. The use of increased deductibles is a form of risk retention.
An Individuals personal assessment of the chance of loss is an example of A. Prior probability B. Subjective probability C. Objective risk D. Objective probability
B.
Which of the following statements describes adverse selection? A. Insurers refuse applications from applicant with bad credit histories. B. People most likely to suffer losses are most likely to see insurance. C. Insureds change agents when service is bad D. Insurers charge higher premiums to insured who are higher risks
B. Adverse selection is where those most likely to suffer losses are also most likely to seek the insurance.
Failure to lock the house because of the existence of insurance is an example of a A. Moral hazard B. Morale hazard C. Speculative hazard D. Physical hazard
B. Failure to lock the house is morale hazard if due to insurance coverage.
Loss severity is A. The probability that a liability judgement may exceed the individual's net worth B. The probable size or damage of the losses that may occur C. The probable number of losses that may occur during a period D. The probability that any particular property may be totally lost or destroyed
B. Loss severity is the probable size or damage of the loss if it occurs.
Falsely claiming a theft in order to collect insurance proceeds is an example of a A. Moral hazard B. Morale hazard C. Speculative hazard D. Physical hazard
B. Moral hazard Is dishonesty. Morale hazard is indifference due to insurance coverage (leaving the car unattended and running while going into the post office to mail a letter).
The risk of premature death is an example of a A. Physical hazard B. Pure risk C. Speculative risk D. Fundamental risk
B. The risk of premature death is a pure risk and may be insurance with life insurance.
If a loss is less likely to occur or is less severe than other potential losses, the premiums will be more affordable.
True
When must an insurable interest exist for a life insurance policy? A. Both at the time of death and at the inception of the policy B. At the time the beneficiary is paid C. At the inception of the policy D. At the time of death
C. A life insurance policy will not be issued unless the applicant has an insurable interest in the insured. The beneficiary need not have an insurable interest.
Robin's stereo was stolen. The stereo cost $3,000 when purchased. A similar new stereo now costs $2,400. Assuming the stereo was 50% depreciated, what is the actual cash value of Robin's loss? A. $400 B. $800 C. $1,200 D. $1,500
C. Actual cash equals replacement cost minus depreciation: $2,400 x 50% = $1,200.
In order to prevent fraud, insurance companies' policies state whether a loss is covered and how much will be paid for that loss.
True
All of the following statements regarding the legal characteristics of insurance contracts are correct EXCEPT A. Insurance contracts are conditional in nature; that is, the insurer is required to compensate the insured only if certain conditions are met B. An insurance contract is a contract of adhesion, meaning that the insurer prepares all contract details and the policy-owner must accept the policy as written C. If a court finds that the terms of a policy are ambiguous, the construction most favorable to the insurer will prevail D. Insurance contracts are considered contracts of indemnity
C. Because insurance policies are contract of adhesion (drafted by the insurer), if a court finds the terms of a policy to be ambiguous, the construction most favorable to the insured will prevail.
Which of the following statements concerning the insurance team indemnity is CORRECT? I. Subrogation is the right, upon paying the insured amount of a loss, to try to collect from a responsible third party. II. A contract of indemnity entitles the insured to payment only to the extent of financial loss or legal liability A. I only B. II only C. Both I and II D. Neither I nor II
C. Both I and II are correct.
Which of the following statements concerning the legal requirements of insurance as a contract is (are) CORRECT? I. The agreement by which insurance is effected is a contract in which the insurer, in consideration of the payment of a specified sum by the policy-owner, agrees to make good on the losses suffered through the occurrence of a designated unfavorable contingency. II. To be valid and enforceable, insurance contracts must meet 4 general legal requirements: an offer by one party and an acceptance by another party; a legal purpose or objective; legal competence of both parties; and a consideration exchanged by both parties to the agreement. A. I only B. II only C. Both I and II D. Neither I nor II
C. Both I and II are correct.
All of the following are ways in which individuals or businesses may respond to pure risk exposures EXCEPT A. Risk transfer B. Risk reduction C. Risk withdrawal D. Risk retention
C. Individuals and businesses may respond to pure risk exposures through risk avoidance, risk reduction, risk retention (assumption), and/or risk transfer.
Loss frequency is A. The probability that a liability judgement may exceed the individual's net worth B. The probability that any particular property may be totally lost or destroyed C. The probable number of losses that may occur during a period D. The probable size of the losses that may occur
C. Loss frequency is the actual or expected number of losses that have occurred or are expected to occur during a period of time.
False statements made by an applicant for insurance are generally considered to be A. Breaches of warranty B. Lack of offer and acceptance C. Misrepresentations D. Concealments
C. Statements made by an applicant are usually considered to be representations, not warranties. Material misrepresentation may cause a contract to be voidable.
All of the following insurance rating agencies evaluate the financial condition of insurers EXCEPT A. Moody's Investors Service B. AM Best, Inc. C. National Association of Insurance Commissioners (NAIC) D. Standard & Poor's
C. The NAIC is not an insurance rating agency; it is an association of state insurance regulators.
Which of the following is(are) fundamental purposes of the principle indemnity? I. Reduce moral hazard II. Prevent the insured from profiting from insurance. A. I only B. II only C. Both I and II D. Neither I nor II
C. The principle of indemnity prevents profiting from insurance, thus reducing the risk of moral hazard.
In practice, most insurers do not void coverage on the grounds on concealment because it is very difficult to prove.
True
Insurance allows individuals to protect themselves against certain risks of financial loss.
True
Insurance is a contract of adhesion.
True
What is the effect of an insurance policy being adhesive? A. The insurer can refuse to pay claims unless the insured has complied with all policy provisions. B. The insured cannot assign the policy without the insurer's consent. C. The insurer can require the insured to pay premiums D. The insured gets the benefit of the doubt if a policy contains any ambiguities or uncertainties.
D. Adhesiveness means the insured had no opportunity to negotiate terms and, therefore, ambiguities will be decided against the writer (insurance) of the contract.
A contract is which the values exchanged may not be equal is a(n) A. Contract of adhesion B. Conditional contract C. Unilateral contract D. Aleatory contract
D. An aleatory contract is one in which there is an unequal exchange of monetary values. Insurance policies are considered to be aleatory contract.
Insurance rating agencies such as AM Best Co., evaluate an insurance company's A. Underwriting practices B. Employment policies C. Policy-owners D. Financial condition
D. Insurance rating agencies rate the financial condition of insurance companies. They examine factors such as recent performance, financial statements, leverage, and management stability.
A pure risk occurs where there is A. A possibility of either profit or loss B. A possibility of neither profit nor loss C. Only the possibility of profit D. Only the possibility of loss or no loss
D. Pure risk is loss or no loss, Only pure risk are insurable.
The sharing of risk across two or more insurance providers is known as A. Secondary insurance B. Pooled insurance C. Comprehensive risk exposure D. Reinsurance
D. Reinsurance is insurance for insurance companies.
Risk management is concerned with A. Pure and speculative risks B. Pure risks that are uninsurable C. Pure risks that are insurable D. Pure risks that are insurable or uninsurable
D. Risk management is concerned with all risks that are pure risks.
The basic functions of a risk manager include I. Identifying potential losses II. Selecting the appropriate risk management techniques III. Implementing a risk management plan A. I only B. II only C. III only D. All of the above
D. Statements I, II, and III are all basic functions of a risk manager.
A pure risk has 3 possible outcomes, while a speculative risk has 2.
False- A pure risk has 2 possible outcomes, while a speculative risk has 3.
An insurable risk can include one that could cause the insurer to become financially insolvent.
False- A risk that could cause the insurer to become financially insolvent is not an insurable risk.
A speculative risk is one where only profit or no loss may occur.
False- A speculative risk is one where profit, loss, or no loss may occur.
Adverse selection is the tendency of lower-than-average risks to purchase or renew insurance policies.
False- Adverse selection is the tendency of higher-than-average risks to purchase or renew insurance.
Aleatory is a characteristic of insurance that means the monetary value exchanged by each party in an insurance agreement are equal.
False- Aleatory is a characteristic of insurance which means that monetary values exchanged by each party in an insurance agreement are unequal.
Co-payments are loss-sharing agreements whereby the insured pays a percentage if the loss is less than the deductible.
False- Co-payments are loss-sharing arrangements whereby the insured pays a percentage of the loss in excess of the deductible.
Insurance is necessary for each and every risk of loss an individual faces.
False- Contrary to popular belief, insurance is not necessary, nor is it feasible, for each and every risk of loss an individual faces.
Exposures that are high in frequency yet low in potential severity are best hauled by insurance.
False- Exposures that are low in frequency but high in potential severity are best handled by insurance.
For life insurance, an insurable interest is necessary at the time of death of the insured.
False- For life insurance, an insurable interest is needed only when the policy is issued.
Express authority gives the agent the power to perform and incidental act required in fulfilling obligations of the agency agreement.
False- Implied authority gives the agent the power to perform any incidental act required in fulfilling obligations of the agency agreement.
Insurance provides that the insurer will pay for expected losses and thus provide financial security to the insured.
False- Insurance provides that the insurer will pay for unexpected losses, and thus provide financial security to be insured.
Liability risk is not especially dangerous from a financial standpoint because there is an upper limit on the amount of loss one can suffer.
False- Liability risk is especially dangerous from a financial standpoint because there is no upper limit on the amount of loss one can suffer.
Morale hazard is a character flaw or level of dishonesty an individual possesses that causes or increases the chance for loss.
False- Moral hazard is a character flaw or level of dishonesty an individual possesses that causes or increases the chance for loss.
Moral hazard is indifference to a loss due to the existence of insurance.
False- Moral hazard is indifference to a loss due to the existence of insurance.
Most people have the right amount of insurance coverage and, therefore, are adequately insured.
False- Most people do not have the right amount of insurance coverage and, therefore, are over or underinsured.
Pure self-insurance uses stop-loss insurance to limit the overall exposure to the risk.
False- Protected self-insurance uses stop-loss insurance to limit the overall exposure to the risk.
All pure risks are considered to be insurable.
False- Several conditions must exist before a pure risk is considered to be an insurable one.
Subjective risk has a particular person's perception of risk and varies little among individuals.
False- Subjective risk is a particular person's perception of risk, varying greatly among individuals.
The first step in the risk management process is to identify all possible pure risk exposures.
False- The first step in the risk management process is to determine the objectives of the risk management program.
The law requires that only the offeror be legally competent when entering into a contract.
False- The law requires that both the offeror and the offeree be legally competent when entering into a contract.
The principle of insurable interest states that a person is entitled to compensation only to the extent that financial loss has been suffered.
False- The principle of indemnity, not insurable interest, states that a person is entitled to compensation only to the extent that financial loss has been suffered.
The principle of indemnity states that a person must be subject to emotional or financial hardship resulting from damage, loss, or destruction to obtain insurance.
False- The principle of insurance interest states that insured person must be subject to emotional or financial hardship resulting from damage, loss or destruction to obtain insurance.
When purchasing life insurance and annuity products, the consumer ideally will use a company that has received a top-tier rating from at least one of the insurer rating agencies.
False- When purchasing life insurance and annuity products, the consumer ideally will use a company that has received a top-tier rating from the majority of the insurer rating agencies, but at a minimum, any company that has received a low-tier rating from any of the agencies should be avoided.
A contract that is deemed to have an illegal purpose or a purpose that is against the benefit of public interest in general is invalid.
True
A deductible is a stated amount of money insured is required to pay on a loss before the insurer will make any payments under the policy conditions.
True
A general agent is an independent businessperson who represents only 1 insurer for a designated territory.
True
A named-perils policy provides protection against losses caused only by the perils specifically listed in the policy.
True
A physical hazard is a tangible condition or circumstance that increases the probability of a peril occurring and/or the severity of damages that result from a peril.
True
A valid contract exists only if it is based on mutual assent or a meeting of the minds of the contracting parties.
True
A warranty is a promise made by the insured to the insurer.
True
Actuarial science allows insurance companies to estimate losses and, thus, to estimate premiums for each person in a pool.
True
An open-perils policy is one in which all perils or causes of loss are covered unless they are specifically listed under the exclusions section of the policy.
True
Because risk management is an ongoing process, the plan must be reviewed to identify new exposures as property is acquired or sold and life situations change.
True
Coinsurance defines the percentage of financial responsibility that the insured and the insurer must share under the policy.
True
Damage to property can result in 1 of 2 types of financial losses: direct and indirect.
True
Exclusions are a necessary part of every insurance contract because not every peril or property can be covered in every policy.
True
Insurance is a contract of indemnity, which means that a person is entitled to compensation only to the extent that an actual financial loss has been suffered.
True
Low subjective risk often results in less prudent conduct, whereas high subjective risk may result in more prudent conduct.
True
Objective risk is the relative variation of an actual loss from an expected loss.
True
Passive risk retention is being unaware of a risk, thus, taking no steps to mange it.
True
Proper insurance coverage, both private and social, is essential to a client's financial plan.
True
Pure risks are those that, when they occur, may only result in a loss or no loss.
True
Replacement cost is the current cost of replacing property with new materials of like kind and quality.
True
Representations are statements made by the insured to the insurer in the application process.
True
Risk management is a systematic process of identifying, evaluating, and managing pure risk exposures faced by a firm or individual.
True
Risk reduction consists of activities that reduce the frequency of severity of losses.
True
The National Association of Insurance Commissioners (NAIC) is a voluntary association of state insurance regulators whose purpose is to increase the effectiveness of insurance regulation through the development of common standards, practices, and model legislation.
True
The chance of loss is more commonly referred to as the probability of loss and is a measure of the long-run frequency with which an event occurs.
True
The form and content of insurance contracts are generally governed by state law.
True
The insurance process depends on the establishment of fair and accurate premiums for insureds.
True
The law of large numbers states that the greater the number of exposures, the closer actual results will approach the probable result expected from an indefinite number of exposures.
True
The principle of utmost good faith requires that the insured and the insurer both are forthcoming with all relevant facts about the insured risk and the coverage provided for that risk.
True
There are three main types of pure risk that can interrupt one's earned income stream: dying too soon, living too long, and accidents and illness.
True
When a person or firm is exposed to risk and decides to bear all or part of the financial burden if a loss occurs, this is known as risk retention.
True