Examfx Quiz for Ch. 1

The protection of the insurer from adverse selection is provided in part by: A.) A profitable distribution of exposures B.) Reducing costs C.) A drop in applicants D.) A reduction in coverage

A.) A profitable distribution of exposures Rationale: The profitable distribution of exposures, which balances poor risks and preferred risks with standard risks in the middle, protects insurers from adverse selection.

The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as: A.) Legal hazard B.) Doubly indemnity C.) Legal risk D.) Fraud

A.) Legal hazard Rationale: Legal hazards arise from court actions which increase the likelihood or size of a loss.

For the reported losses of an insured group to become more likely to equal the statistical of probability for that particular class, the insured group must become: A.) More active B.) Larger C.) Smaller D.) Older

B.) Larger Rationale: According to the law of large numbers, the larger a group becomes, the easier it is to predict losses. Insurers use this law in order to predict certain types of losses and set appropriate premiums.

A tornado that destroys property would be an example of which of the following? A.) A peril B.) A pure risk C.) A loss D.) A physical hazard

A.) A peril Rationale: A peril is the cause of loss insured against in an insurance policy.

Which of the following is NOT a characteristic of pure risk? A.) The loss must be catastrophic B.) The loss must be due to chance C.) The loss must be measurable in dollars D.) The loss exposure must be large

A.) The loss must be catastrophic Rationale: In order to be characterized as pure risk, the loss must be due to chance, definite, measurable, and predictable, but not catastrophic.

Which of the following individuals must have insurable interest in the insured? A.) Producer B.) Policyowner C.) Beneficiary D.) Underwriter

B.) Policyowner Rationale: The policyowner must have an insurable interest in the insured (his/her own life if the policyowner and the insured is the same person), or in the life of a family member or a business partner.

If an applicant for a life insurance policy and the potential insured are two different people, what would be the underwriter's main concern? A.) Which individual will pay the premium B.) Whether an insurable interest exists between the individuals C.) The gender of the applicant D.) The type of policy requested

B.) Whether an insurable interest exists between the individuals Rationale: An insurable interest must exist at the time the policy is issued. Some relationships are automatically presumed to qualify as an insurable interest, e.g., spouses, parents, children and certain business relationships.

A contract which one party undertakes to indemnify another against loss is called: A.) Indemnity B.) Insurance C.) Adverse Selection D.) Risk

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

If a loss occurs, insurance policies pay the proceeds to: A.) Beneficiary B.) Applicant C.) Insurer D.) Agent

A.) Beneficiary Rationale: The beneficiary is the person who receives the benefits from the insurance policy.

The risk of loss may be classified as: A.) Named risk and unnamed risk. B.) High risk and low risk C.) Pure risk and speculative risk D.) Certain risk and uncertain risk

C.) Pure risk and speculative risk Rationale: Pure risks involve the probability or possibility of loss with no chance for gain. Pure risks are generally insurable. Speculative risks involve uncertainty as to whether the final outcome will be gain or loss. Speculative risks are generally uninsurable.

Not all losses are insurable, and there are certain requirements that must be met before a risk is a proper subject for insurance. These requirements include all of the following EXCEPT: A.) The loss must not be catastrophic B.) There must be sufficient number of homogeneous exposure units to make losses reasonably predictable C.) The loss produced by the risk must be definitie. D.) The loss may be intentional

D.) The loss may be intentional Rationale: To insure intentional losses would be against public policy.

Which of the following is the most common way to transfer risk? A.) Name a beneficiary B.) Purchase insurance C.) Increase control of claims D.) Lessen the possibility of loss

B.) Purchase insurance Rationale: The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company.