Nature of Insurance

The law of large numbers enables and insurer to - Predict losses - Avoid adverse selection - Classify rates - Assure company profits

Predict losses

Which of these statements regarding insurance is false? - One way insurers deal with catastrophic loss is through reinsurance - As the number of insured units increases, the number of losses decreases - Speculative risk cannot be insured - Pure risk can be insured

As the number of insured units increases, the number of losses decreases

A condition that increases the possibility of financial loss is called a(n) - Risk - Peril - Hazard - Exposure

Hazard

Which of the following is NOT an example of risk retention? - Becoming aware of a risk and taking no action - Self-insuring a given risk - Deciding a business deal is risky but going through with it anyways - Not doing a business deal after deciding it would be too risky

Not doing a business deal after deciding it would be too risky Not doing a business deal after deciding it would be too risky is an example of risk avoidance, not retention.

What type of risk involves the potential for loss with no possibility for gain? - Speculative risk - Pure risk - Adverse risk - Morale risk

Pure risk

A hold-harmless clause is an example of risk - Avoidance - Retention - Transfer - Sharing

Transfer A hold-harmless clause found in a contract shifts liability for loss from one party to another.

A business becoming incorporated is an example of risk ___. - Reduction - Severance - Retention - Transfer

Transfer Incorporation of a business is an example of risk transfer.

Purchasing insurance is an example of risk - Transference - Avoidance - Retention - Sharing

Transference

Risk ___ is the process of analyzing exposures that create risk and designing programs to handle them. - Acceptance - Management - Administration - Transfer

Management

Which of the following can be defined as a cause of a loss? - Adversity - Risk - Hazard - Peril

Peril A peril may be defined as the cause of a loss.

According to the law of large numbers, how would losses be affected if the number of similar insured units increases? - The higher the exposure, the higher the cost of each loss - No effect on predicting losses - Predictability of losses will be improved - Ability to predict losses decreases

Predictability of losses will be improved Based on the law of large numbers, as the number of similar insured units increases, predictability of losses improves.

Which of the following can be defined as "the potential for loss"? - Hazard - Risk - Transference - Peril

Risk

An insurable risk requires - That the chance for both a loss or gain exists - The loss must be catastrophic - That the chance of loss be calculable - That the loss must be incalculable

That the chance of loss be calculable An insurable risk requires the loss to be calculable or predictable.

Which of the following involves sharing an uncertain risk with another similar group? - Transfer - Speculative - Operational - Physical

Transfer Risk transfer involves sharing an uncertain risk with another similar group.

Which of the following types of risk is insurable? - Pure - Speculative - Operational - Physical

Pure Pure risk is insurable.

For insurance purposes, similar objects which are exposed to the same group of perils are referred to as - Homogenous perils - Similar exposure units - Homogeneous exposure units - Common hazards

Homogeneous exposure units Similar objects of insurance that are exposed to the same group of perils are called homogeneous exposure units.

Which of these statements is NOT a characteristic of the law of large numbers? - Individual losses can be predicted based on past experience - Group losses can be predicted based on past experience - Losses can be predicted in large groups with a higher degree of accuracy - Rates can be calculated to compensate for losses

Rates can be calculated to compensate for losses The law of large numbers states that larger groups provide better loss predictions. The higher the exposure, the more likely the event can be predicted.

ABC Company is attempting to minimize the severity of potential losses within its company. The company is engaged in risk - Transference - Retention - Reduction - Avoidance

Reduction Risk reduction can reduce the chance that a particular loss will occur, or it can reduce the amount of a potential loss if it occurs.

An insurer has a contractual agreement which transfers a portion of its risk exposure to another insurer. What type of contractual arrangement is this? - Coinsurance contract - Mutuality agreement - Reinsurance contract - Reciprocity arrangement

Reinsurance contract Reinsurance contracts accept a portion of the risk underwritten by another insurer who has contracted for the entire coverage amount.

How can an insurance company minimize exposure to loss? - Risk concealing - Reinsuring risks - Reissuance - Risk assumption

Reinsuring risks Many insurers are able to minimize exposure to loss by reinsuring risks,

Which term describes the elimination of a hazard? - Risk avoidance - Risk retention - Risk transference - Risk pooling

Risk avoidance

Which of the following describes the act of insuring a risk against possible loss? - Risk avoidance - Risk transfer - Hazard reduction - Loss management

Risk transfer Insuring a risk against possible loss is an example of risk transfer.

What type of risk involves the potential for loss AND the possibility for gain? - Homogeneous - Adverse - Pure - Speculative

Speculative

Which one of these is NOT considered to be an element of an insurable risk? - Speculative risk - Pure risk - Loss cannot be catastrophic - Loss must be due to chance

Speculative risk Speculative risks (chance of both a loss and gain) are not insurable.