FIN 407 CH. 8

18. 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 policies.

36. Aleatory is a characteristic of insurance that means that monetary values 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.

40. Co-payments are loss-sharing arrangements 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.

48. 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.

26. 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.

29. 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.

30. 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 insurable interest states that insured person must be subject to emotional or financial hardship resulting from damage, loss, or destruction to obtain insurance.

45. 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.

11. 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

12. The law of large numbers states that the greater the number of exposures, the closer actual results will approach the probable results expected from an indefinite number of exposures.

True

13. 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

14. A named-perils policy provides protection against losses caused only by the perils specifically listed in the policy.

True

17. 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

20. The insurance process depends on the establishment of fair and accurate premiums for insureds.

True

21. In order to prevent fraud, insurance companies' policies state whether a loss is covered and how much will be paid for that loss.

True

23. 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

24. If a loss is less likely to occur or is less severe than other potential losses, the premium will be more affordable.

True

25. A valid contract exists only if it is based on mutual assent or a meeting of the minds of the contracting parties.

True

27. 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

28. 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

3. Insurance allows individuals to protect themselves against certain risks of financial loss.

True

31. 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

1. 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 policyowner, 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

2. 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 policyowner 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

2. 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

6. 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

22. 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.

7. 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.

53. Exposures that are high in frequency yet low in potential severity are best handled by insurance.

False—Exposures that are low in frequency but high in potential severity are best handled by insurance.

55. 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.

59. Express authority gives the agent the power to perform any 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.

56. 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 the insured.

44. 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.

15. 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.

16. Moral hazard is indifference to a loss due to the existence of insurance.

False—Morale hazard is indifference to a loss due to the existence of insurance.

52. 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.

19. All pure risks are considered to be insurable.

False—Several conditions must exist before a pure risk is considered to be an insurable one.

8. Subjective risk is 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.

47. 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.

1. Proper insurance coverage, both private and social, is essential to a client's financial plan.

True

10. Objective risk is the relative variation of an actual loss from an expected loss.

True

32. A warranty is a promise made by the insured to the insurer.

True

33. Representations are statements made by the insured to the insurer in the application process.

True

34. In practice, most insurers do not void coverage on the grounds of concealment because it is very difficult to prove.

True

35. Insurance is a contract of adhesion.

True

37. Exclusions are a necessary part of every insurance contract because not every peril or property can be covered in every policy.

True

38. Replacement cost is the current cost of replacing property with new materials of like kind and quality.

True

39. A deductible is a stated amount of money the insured is required to pay on a loss before the insurer will make any payments under the policy conditions.

True

4. Pure risks are those that, when they occur, may only result in a loss or no loss.

True

41. Coinsurance defines the percentage of financial responsibility that the insured and the insurer must share under the policy.

True

42. 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

43. Damage to property can result in 1 of 2 types of financial losses: direct and indirect.

True

46. Risk management is a systematic process for identifying, evaluating, and managing pure risk exposures faced by a firm or individual.

True

49. Risk reduction consists of activities that reduce the frequency or severity of losses.

True

5. Actuarial science allows insurance companies to estimate losses and, thus, to estimate premiums for each person in a pool.

True

50. 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

51. Passive risk retention is being unaware of a risk and, thus, taking no steps to manage it.

True

54. 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

57. The form and content of insurance contracts are generally governed by state law.

True

58. A general agent is an independent businessperson who represents only 1 insurer for a designated territory.

True

9. Low subjective risk often results in less prudent conduct, whereas high subjective risk may result in more prudent conduct.

True

4. An individual's personal assessment of the chance of loss is an example of A. a prior probability B. subjective probability C. objective risk D. objective probability

b

3. Which of the following statements concerning the insurance term indemnity is CORRECT? I. Subrogation is the right, upon paying the insured the 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