Chapter One: Handling Risk

Which of the following best describes reinsurance?

It spreads risk from one insurer to another. The purpose of reinsurance is to spread risk to another insurer when an insurer incurs too much loss.

Samantha is concerned about driving to work on major highways. She does not purchase insurance, nor avoid the major highways. What method of handling risk is Samantha using?

Retention Risk retention is when a person chooses not to take proactive steps to transfer, avoid or reduce the risk.

Which method of handling risk is insurance?

Transfer Insurance is a transfer of risk from the insured to the insurer.

Insurance is which method of handling risk?

Transfer Risk transfer is the essence of insurance. Risk is transferred from one party to another. The party assuming the risk, the insurer, charges a small premium in exchange for providing benefits to the party relieved of the risk, the insured, in the event of a covered loss.

Flu shots and annual physical exams are examples of what method of handling risk?

Reduction Minimize the loss exposure to a risk. Getting a flu shot is intended to prevent the chance of getting sick with the flu. Annual physical exams are a good way of proactively keeping a check on a person's health, and to catch medical problems before they worsen.

What method of handling risk is used when an insurance policy requires the insured to pay a deductible before the insurance begins to pay benefits?

Sharing

Beth is required to pay a $400 deductible on her health insurance claim. Which method of handling risk is demonstrated here?

Sharing Risk sharing is utilized in health insurance policies by using deductibles.

Which of the following is a method of handling risk?

Sharing The methods of handling risk include: avoidance, retention, sharing, reduction and transfer.

JKL Insurer transfers risk to PQR Insurer. JKL Insurer transfers some other risks to GHI Insurer. When JKL Insurer has a loss on risks transferred to both PQR and GHI Insurers, which insurer(s) pays the claims?

JKL, PQR, and GHI Insurers When a claim is submitted on a risk that was reinsured, the ceding company pays the portion of the loss equivalent to the risk retained. The ceding company then submits a claim for any portion of the loss that was reinsured to the reinsurer. In this example, JKL is the ceding company, and PQR and GHI are reinsurers. Since JKL Insurer needs to submit claims on risks that were transferred to both PQR and GHI Insurers, the claims will be paid by all insurers because JKL Insurer is responsible for paying a portion of the loss equivalent to the amount of risk retained, and the portion of risks that were transferred are paid by the reinsurers (PQR and GHI).

Which of the following is NOT a method of handling risk?

Reinsurance Methods of handling risk include transfer, avoidance, reduction, retention and sharing, but not reinsurance.

All of the following are methods of handling risk except:

Reinsurance Methods of handling risk include: transfer, avoidance, reduction, retention and sharing.

A person who does not take steps to transfer, avoid or reduce exposure to risk is engaging in which method of handling risk?

Retention Risk retention is when a person chooses not to take proactive steps to transfer, avoid or reduce the risk.

Debbie's insurance policy require her to pay a deductible before the insurer begins to pay benefits. This method of handling risk is called:

Sharing Risk sharing is utilized in health insurance policies with deductibles, a portion of the loss that the insured is required to pay before the insurer pays.

Reinsurance is defined as:

Spreading risk from one insurer to another When an insurer incurs too much loss, it can spread risk to another insurer.

Aaron decides to work from his home to minimize her chances of getting in a collision. What method of handling risk is Aaron using?

Avoidance Aaron's decision not to drive allows him to avoid the risk of a car accident.

Deliberately steering clear of exposure to risk describes which of the following methods of handling risk?

Avoidance Risk avoidance is deliberately steering clear of exposure to a risk.

Adverse selection occurs when:

A poorer than average risk seeks insurance Adverse selection is the tendency for poorer than average risks to seek insurance, as opposed to a healthy person.

ABC Insurer transfers risk to DEF Insurer. ABC Insurer decides to transfer some other risks to LMO Insurer. When ABC Insurer needs to submit a claim on risks that were reinsured to DEF Insurer, which insurer(s) pays the claims?

ABC and DEF Insurers einsurance is a way insurers cooperate to prevent bankruptcy. The insurer that accepts the additional risk is termed the reinsurer. The insurer that gives the risk to the reinsurer is termed the ceding company or primary insurer. When a claim is submitted on a risk that was reinsured, the ceding company pays the portion of the loss equivalent to the risk retained. The ceding company then submits a claim for any portion of the loss that was reinsured to the reinsurer.

Judith is injured in a car accident. She incurs a covered loss of $50,000. She is required to pay $3,000 before the insurer will cover 80% of the covered loss. Which of the following terms best describes the $3,000 Judith must pay?

Deductible A deductible is the amount an insured must pay before the insurer will begin to pay benefits.