RMIN Chapter 2

Reasons why market, financial, and production risks are often uninsurable include

1. The potential to produce a catastrophic loss is great 2. The chance of loss cannot be accurately estimated

The requirement that losses should be accidental and unintentional in order to be insurable results in

1. decrease in moral hazard 2. more accurate prediction of future losses

What is implied by the requirement that a loss should be determinable and measurable to be insurable?

1. the loss must be definite as to place 2. the loss must be definite as to amount

According to the law of large numbers, what should happen as an insurer increases the number of units insured?

Actual results will more closely approach expected results

Persons most likely to have losses are also most likely to seek insurance at a standard rate is a result of?

Adverse selection

Why is a large number of exposure units generally required before pure risk is insurable?

It enables the insurer to predict losses more accurately

JKL estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL injures 2,000 homeowners this year?

The actual results will more closely approach the expected results

From the viewpoint of the insurer, which of the following is a characteristic of an ideally insurable risk?

The chance of loss must be calculable

According to the law of large numbers, what should happen as an insurance company increases the number of loss exposures that is insures

The difference between actual and expected results should decrease

Characteristic of a fortuitous loss?

The loss occurs as a result of chance

According to the law of large numbers, what happens as the number of exposure units increases?

actual results will more closely approach probable results

Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers?

adverse selection

The tendency for unhealthy people to seek life or health insurance at standard rates is an example of

adverse selection

Which of the following statements about the insurance industry as a source of investment funds are true? a) these funds result in a lower cost of capital than would exist in the absence of insurance b) these funds end to promos economic growth and full employment

both are true

Workers compensation insurance is classified as

casualty insurance

general liability insurance is a form of

casualty insurance

Gina would like to buy a home. The home will serve as collateral for the loan. The lender requires Gina to purchase property insurance on the home so that the collateral supporting the loan will be protected. This scenario illustrates

enhancement of credit

ABC calculated the amount that it expected to pay in claims under each policy sold. Rather than selling the insurance for the amount it expected to pay in claims, ABC added an allowance to cover the cost of doing business, including commissions, taxes, and acquisition expenses. This allowance is called

expense loading

The premium that insurance companies charge does not cover the cost of expected losses only. The premium must also cover the cost of compensating agents and other costs of doing business. The amount added to the pure premium to cover these costs is called the

expense loading

All government insurance is social insurance

false

Social insurance programs are always written by private insurers

false

Inland marine insurance provides coverage for

goods being shipped on land

Benefits from society that result from insurance include

less worry and fear, indemnification for loss, and loss prevention

The LMN homeowners policy combines property and casualty insurance in the same contract. Insurance policies combining property and casualty in the same contract are called

multiple-line policies

What type of risk is normally uninsurable by private insurers?

political risks

Which of the following is a characteristic of insurance a) pooling of losses b) avoidance of risk c) payment of intentional losses d) certainty about specific losses that will occur

pooling of losses

Life insurance is an example of

private insurance

Which of the following types of risks best meets the requirements for being insurable by private insurers? a) market risk b) property risk c) financial risk d) political risk

property risk

Insurance companies collect premiums in advance of loss, and the funds collected are not needed to pay immediate losses and expenses; these funds can be loaned to businesses. Because of this fact, insurance benefits society by

providing a source of investment funds

An arrangement by which an insurer that initially writes insurance transfers to another insurer part or all of the potential losses associated with such insurance is called

reinsurance

An insurance company that sells earthquake insurance in an area where earthquakes are possible has subjected itself to risk of insolvency if a severe earthquake occurs. An insurer can safely sell earthquake insurance in this area if it shifts the risk of catastrophic loss to another insurer. The shifting of insured risk from one insurer to another is called

reinsurance

In addition to marketing life insurance, life insurers typically sell

retirement annuities and disability income insurance

What is implied by 'the pooling of losses'

sharing of losses by an entire group

One branch of government insurance programs has a number of distinguishing characteristics. These programs are compulsory, they are financed by mandatory contributions rather than general tax revenues, and benefits are weighted in favor of low-income groups. These government insurance programs are

social insurance programs

If insurers were to provide indemnification for losses that were deliberately cause, which characteristic of ideally insurable risks would not be met?

the loss must be accidental and unintentional

From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT a) the loss must be accidental b) the loss should be catastrophic c) the premium must be economically feasible d) there must be a large number of exposure units

the loss should be catastrophic

XYZ insurance company writes coverage for most perils which can damage property. They do not write flood insurance on a property located in flood plains. Which requirement of an ideally insurable risk might be violated if XYZ wrote flood insurance on property located in flood plains?

the loss should not be catastrophic

Methods by which insurers may minimize or avoid catastrophic losses include

the use of reinsurance

Individuals and businesses purchase private insurance

true

Insurance involves the transfer of insurable risk while hedging handles risk that is typically uninsurable

true

Insurance is used to handle existing pure risks, while gambling creates a new speculative risk

true

Insurance reduces objective risk while hedging involves only risk transfer and not risk reduction

true

Private insurance includes life and health insurance and property and liability insurance

true

Social costs associated with insurance include insurance company operating expenses, fraudulent claims, and inflated claims

true

Adverse selection occurs

when applicants with a higher-than-average chance of loss seek insurance at standard rates