Basic Insurance Concepts and Principles

The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as A Legal hazard. B Legal catalyst. C Legal risk. D Legal peril.

A Legal hazard. correct! Legal hazards arise from court actions which increase the likelihood or size of a loss.

Insurance is a contract by which one seeks to protect another from A Uncertainty. B Hazards. C Loss. D Exposure.

CLoss. Correct! Insurance will protect a person, business or entity from loss.

The causes of loss insured against in an insurance policy are known as A Losses B Risks C Hazards D Perils

D Perils Correct! Perils are the causes of loss insured against in an insurance policy.

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

C Insurance. Correct! Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.

Loss potentials that are the basis for setting rates are A Loss Risks. B Loss Exposures. C Loss Probabilities. D Loss Ratios.

B Loss Exposures. Correct! In general, "loss exposure" means "loss potentials which are the basis for setting rates." The specific definition varies with the type of insurance transacted.

According to California Insurance Code, which of the following can be classified as an insurable event? A Extreme levels of loss B Pure risks C Unpredictable losses D Speculative risks

B Pure risks Correct! Any event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him/her, may be insured against. The more predictable a loss, the more insurable it becomes. Only pure risks are insurable. Speculative losses are uninsurable. Review ContentNext Question

The type of insurance that guarantees the behavior of persons and the performance of contracts other than insurance policies is known as A Performance Guaranteed insurance. B Behavioral Contract insurance. C Surety insurance. D Contract insurance.

C Surety insurance. Correct! Surety insurance includes the guaranteeing of behavior of persons and the guaranteeing of performance of contracts other than insurance policies and other than for payments secured by a mortgage, deed of trust, or other instrument constituting a lien or charge on real estate. Review ContentNext Question

Which of the following is an insurable risk? A Hail damage to the roof of a car B Fading of paint on a car C Wear and tear on a valuable Oriental rug D Loss resulting from gambling

A Hail damage to the roof of a car Correct! To be insurable, the loss must cause financial hardship, and the loss must be by accident—not certainties, like normal wear and tear.

When an individual purchases insurance, what risk management technique is he or she practicing? A Sharing B Retention C Transfer D Avoidance

C Transfer Correct! Insurance is a transfer of the risk of financial loss from a covered peril from the insured to the insurance company.

Chapter: Basic Insurance Concepts and Principles With respect to the business of insurance, a hazard is A Any condition or exposure that increases the possibility of loss. B The risk taken when performing something dangerous. C The tendency of poorer risks to seek insurance more often than better risks. D The basic reason for an insured to purchase insurance.

A Any condition or exposure that increases the possibility of loss. Correct! A hazard is any condition or exposure that increases the possibility of loss occurring. Hazards are generally classified as either physical, moral, or morale.

Chapter: Basic Insurance Concepts and Principles Which of the following is an insurable risk? A Hail damage to the roof of a car B Fading of paint on a car C Wear and tear on a valuable Oriental rug D Loss resulting from gambling

A Hail damage to the roof of a car Correct! To be insurable, the loss must cause financial hardship, and the loss must be by accident—not certainties, like normal wear and tear.

What do individuals use to transfer their risk of loss to a larger group? A Insurance B Insurable interest C Exposure D Indemnity

A Insurance Correct! Insurance is the mechanism whereby an insured is protected against loss by a specified future contingency or peril in return for the present payment of premium. Because many other individuals with the same or similar risk of loss are paying premiums, funds are available to indemnify those who actually suffer that loss.

A set of legal or regulatory conditions that affect an insurer's ability to collect premiums commensurate with the level of risk incurred would be considered a(n): A Legal hazard. B Underwriting gamble. C Legal peril. D Fiduciary risk.

A Legal hazard. Legal hazard is defined as a set of legal or regulatory conditions that affect an insurer's ability to collect premiums commensurate with the level of risk incurred.

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.

AA profitable distribution of exposures. Correct! The profitable distribution of exposures, which balances poor risks and preferred risks with standard risks in the middle, protects insurers from adverse selection.

Peril is most easily defined as A The cause of loss insured against. B An unhealthy attitude about safety. C The chance of a loss occurring. D Something that increases the chance of loss.

AThe cause of loss insured against. Correct! Perils are the causes of loss insured against in an insurance policy.

Which rating method provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expense) or profit and is based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time? A Profit rating B Components rating C Loss costs rating D Provision rating

C Loss costs rating correct! Loss costs is a rating method developed by ISO that provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expense) or profit and are based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time.

Chapter: Basic Insurance Concepts and Principles The loss ratio compares A Premiums to interest rates. B Premiums to company expenses. C Premium income to losses. D Losses to interest rates.

C Premium income to losses. Correct! Loss ratio compares the premium incomes to losses, including claims paid and claim-related expenses

The loss ratio compares A Premiums to interest rates. B Premiums to company expenses. C Premium income to losses. D Losses to interest rates.

C Premium income to losses. Correct! Loss ratio compares the premium incomes to losses, including claims paid and claim-related expenses

Which of the following is NOT a goal of risk retention? A To increase control of claim reserving and claims settlements B To fund losses that cannot be insured C To minimize the insured's level of liability in the event of loss D To reduce expenses and improve cash flow

CTo minimize the insured's level of liability in the event of loss Correct! Retention usually results from three basic desires of the insured: to reduce expenses and improve cash flow, to increase control of claim reserving and claims settlements, and to fund losses that cannot be insured.

Chapter: Basic Insurance Concepts and Principles What do individuals use to transfer their risk of loss to a larger group? A Insurable interest B Exposure C Indemnity D Insurance

Correct! Insurance is the mechanism whereby an insured is protected against loss by a specified future contingency or peril in return for the present payment of premium. Because many other individuals with the same or similar risk of loss are paying premiums, funds are available to indemnify those who actually suffer that loss.

Chapter: Basic Insurance Concepts and Principles Which of the following is the correct formula for computing a loss ratio? A (Incurred expenses + loss adjusting expenses)/earned premium B (Incurred losses - loss adjusting expense)/earned premium C Loss adjusting expenses - incurred expenses D (Incurred losses + loss adjusting expense)/earned premium

D (Incurred losses + loss adjusting expense)/earned premium Correct! Loss ratio equals (incurred losses + loss adjusting expense)/earned premium

Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated? A Law of masses B Law of averages C Law of group evaluation D Law of large numbers

DLaw of large numbers Correct! The law of large numbers, which states that the larger a group is, the more accurately losses reported will equal the underlying probability of loss, is the basis for statistical prediction of loss upon which rates for insurance are calculated.

An employer has decided to implement a self-funded plan. The company will pay the claims, but an insurer will administer the actual plan. What kind of contract is this? A Administrative Service Only B Self-Funding Administration C Partial Administration D Employer Administrative Assistance

A Administrative Service Only Correct! In self-funding plans, employers may choose to administer the actual plan. This is called "Administrative Service Only" (ASO).

The risk management technique that is used to prevent a specific loss by not exposing yourself to that activity is called A Avoidance. B Transfer. C Reduction. D Sharing.

AAvoidance. Correct! Risk avoidance is elimination of risk of loss by avoiding any exposure to an event that could give rise to such loss.

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

DA peril correct! A peril is the cause of loss insured against in an insurance policy.

Taking a defensive driving course or installing deadbolt locks on the doors of a home are examples of which of the following? A Loss avoidance B Risk transfer C Self-insurance D Risk reduction

DRisk reduction Correct! Steps taken to prevent losses from occurring are called risk reduction.

Adverse selection is a concept best described as A Risks with higher probability of loss seeking insurance more often than other risks. B Underwriters slanting the odds in favor of the company. C Poor choices of applicants to be covered. D Only offering coverage to good risks.

A Risks with higher probability of loss seeking insurance more often than other risks. Correct! Adverse selection means that there are more risks with higher probability of loss seeking to purchase and maintain insurance than the risks who present lower probability. Underwriters must guard against this.

Chapter: Basic Insurance Concepts and Principles When an individual purchases insurance, what risk management technique is he or she practicing? A Avoidance B Sharing C Retention D Transfer

D Transfer Correct! Insurance is a transfer of the risk of financial loss from a covered peril from the insured to the insurance company.

Which type of insurance guarantees or indemnifies owners of real or personal property or the holders of liens or other interested parties against loss or damage suffered to said property? A Commercial Property insurance B Surety insurance C Contract insurance D Title insurance

DTitle insurance Correct! Title insurance includes insuring, guaranteeing or indemnifying owners of real or personal property or the holders of liens or others interested parties against loss or damage suffered to said property.

Chapter: Basic Insurance Concepts and Principles The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as A Legal hazard. B Legal catalyst. C Legal risk. D Legal peril.

A Legal hazard. correct! Legal hazards arise from court actions which increase the likelihood or size of a loss.

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

C A peril Correct! A peril is the cause of loss insured against in an insurance policy.

A situation in which a person can only lose or have no change represents A Pure risk. B Speculative risk. C Adverse selection. D Hazard.

APure risk. Correct! Pure risk refers to situations that can only result in a loss or no change. Pure risk is the only type insurance companies are willing to accept.

The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as A Legal peril. B Legal hazard. C Legal catalyst. D Legal risk.

B Legal hazard. Correct! Legal hazards arise from court actions which increase the likelihood or size of a loss.

Which one of the following is NOT an element of insurability? A Loss must be expected B Risk of loss is speculative C Loss is calculable D Risk of loss must represent a financial hardship

B Risk of loss is speculative A speculative risk has a chance of gain, as well as a chance of loss. For the insured, insurance should not be about making gains; it's about taking care of losses.

Which one of the following is NOT an element of insurability? A Loss must be expected B Risk of loss is speculative C Loss is calculable D Risk of loss must represent a financial hardship

B Risk of loss is speculative Correct! A speculative risk has a chance of gain, as well as a chance of loss. For the insured, insurance should not be about making gains; it's about taking care of losses.

Events in which a person has both the chance of winning or losing are classified as A Retained risk. B Speculative risk. C Insurable. D Pure risk.

B Speculative risk. Correct! Speculative risk involves the chance of gain or loss and is not insurable.

Which of the following is the correct formula for computing a loss ratio? A (Incurred losses - loss adjusting expense)/earned premium B Loss adjusting expenses - incurred expenses C (Incurred losses + loss adjusting expense)/earned premium D (Incurred expenses + loss adjusting expenses)/earned premium

C (Incurred losses + loss adjusting expense)/earned premium Correct! Loss ratio equals (incurred losses + loss adjusting expense)/earned premium

Which of the following individuals would probably NOT have insurable interest in insured property? A Home owner's spouse B Mortgage company C Neighbor D Home owner

C Neighbor Correct! A neighbor would not have a financial interest in insured property.

The process an insurer uses to evaluate applications and determine if a policy should be issued and on what terms, conditions, and rates is known as A Rating. B Acceptance. C Underwriting. D Coding.

C Underwriting. Correct! Underwriting is the process of reviewing applications for insurance and deciding if a policy should or should not be issued.

Following a career change, an insured is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe? A Reduction B Transfer C Avoidance D Retention

A Reduction The insured's change in lifestyle and habits would likely reduce the chances of health problems.

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

C Larger. Correct! 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 loss B A physical hazard C A peril D A pure risk

C A peril Correct! A peril is the cause of loss insured against in an insurance policy.

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

All of the following actions by a person could be described as risk avoidance EXCEPT A Taking a flu shot each year. B Investing in the stock market. C Refusing to scuba dive. D Never flying in an airplane.

B Investing in the stock market. correct! Investing in the stock market is not an example of risk avoidance; it creates a possibility of a loss.

Chapter: Basic Insurance Concepts and Principles Which of the following insurance providers would be considered a risk sharing arrangement? A Surplus lines B Reciprocal C Stock D Mutual

B Reciprocal Correct! When insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal.

Chapter: Basic Insurance Concepts and Principles Which of the following is NOT a goal of risk retention? A To fund losses that cannot be insured B To minimize the insured's level of liability in the event of loss C To reduce expenses and improve cash flow D To increase control of claim reserving and claims settlements

B To minimize the insured's level of liability in the event of loss Correct! Retention usually results from three basic desires of the insured: to reduce expenses and improve cash flow, to increase control of claim reserving and claims settlements, and to fund losses that cannot be insured.

The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as A Legal catalyst. B Legal risk. C Legal peril. D Legal hazard.

D Legal hazard. Correct! Legal hazards arise from court actions which increase the likelihood or size of a loss.

Insurance is the transfer of A Peril. B Risk. C Loss. D Hazard.

B Risk. Correct! Insurance is the transfer of financial responsibility associated with a potential of a loss (risk) to an insurance company.

Events or conditions that increase the chances of an insured loss occurring are referred to as A Exposures. B Risks. C Peri ls. D Hazards.

D Hazards. Correct! Hazards are conditions or situations that increase the probability of an insured loss occurring.

Following a career change, an insured is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe? A Reduction B Transfer C Avoidance D Retention

A Reduction Correct! The insured's change in lifestyle and habits would likely reduce the chances of health problems.

Chapter: Basic Insurance Concepts and Principles In what type of plan would the employer pay all of the claims? A Self-funded B Nondistributed C Employer Service Only D Noncontributory

A Self-funded Correct! Employers pay all claims in self-funded plans.

Which of the following insurance providers would be considered a risk sharing arrangement? A Reciprocal B Stock C Mutual D Surplus lines

A Reciprocal correct! When insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal.

Chapter: Basic Insurance Concepts and Principles The type of insurance that guarantees the behavior of persons and the performance of contracts other than insurance policies is known as A Behavioral Contract insurance. B Surety insurance. C Contract insurance. D Performance Guaranteed insurance.

B Surety insurance. Correct! Surety insurance includes the guaranteeing of behavior of persons and the guaranteeing of performance of contracts other than insurance policies and other than for payments secured by a mortgage, deed of trust, or other instrument constituting a lien or charge on real estate.

Events or conditions that increase the chances of an insured loss occurring are referred to as A Risks. B Perils. C Hazards. D Exposures.

C Hazards. correct! Hazards are conditions or situations that increase the probability of an insured loss occurring.

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

D Larger. Correct! 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.

Adverse selection is a concept best described as A Risks with higher probability of loss seeking insurance more often than other risks. B Underwriters slanting the odds in favor of the company. C Poor choices of applicants to be covered. D Only offering coverage to good risks.

A Risks with higher probability of loss seeking insurance more often than other risks. Adverse selection means that there are more risks with higher probability of loss seeking to purchase and maintain insurance than the risks who present lower probability. Underwriters must guard against this.

To achieve the profitable distribution of exposures, A The most coverage goes to average risks and preferred risks, while less goes to poor risks. B Poor risks and average risks make up the majority of coverage. C A majority of coverage goes to preferred risks. D Preferred risks and poor risks are balanced, with average risks in the middle.

D Preferred risks and poor risks are balanced, with average risks in the middle. Correct! Balancing poor risks and preferred risks with average risks in the middle creates a profitable distribution of exposures.

Chapter: Basic Insurance Concepts and Principles All of the following actions by a person could be described as risk avoidance EXCEPT A Taking a flu shot each year. B Investing in the stock market. C Refusing to scuba dive. D Never flying in an airplane.

B Investing in the stock market. Correct! Investing in the stock market is not an example of risk avoidance; it creates a possibility of a loss.

What describes a situation when poor risks are balanced with preferred risks, and average risks are in the middle? A Ideally insurable risk B Profitable distribution of exposures C Adverse selection D Equitable spread of risk

B Profitable distribution of exposures Correct! The profitable distribution of exposures is achieved when poor risks are balanced with preferred risks, and average risks are in the middle.

The legal definition of "person" would NOT include which of the following? A A business entity B A corporation C A family D An individual human being

C A family Correct! A person is a legal entity which acts on behalf of itself, accepting legal and civil responsibility for the actions it performs and making contracts in its own name. Persons include individual human beings, associations, organizations, corporations, partnerships, and trusts.

Taking a defensive driving course or installing deadbolt locks on the doors of a home are examples of which of the following? A Loss avoidance B Risk transfer C Self-insurance D Risk reduction

D Risk reduction Correct! Steps taken to prevent losses from occurring are called risk reduction.

In what type of plan would the employer pay all of the claims? A Nondistributed B Employer Service Only C Noncontributory D Self-funded

D Self-funded Correct! Employers pay all claims in self-funded plans.

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. Correct! 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.

Chapter: Basic Insurance Concepts and Principles Loss potentials that are the basis for setting rates are A Loss Ratios. B Loss Risks. C Loss Exposures. D Loss Probabilities.

C Loss Exposures. correct! In general, "loss exposure" means "loss potentials which are the basis for setting rates." The specific definition varies with the type of insurance transacted.

The causes of loss insured against in an insurance policy are known as A Risks B Hazards C Perils D Losses

C Perils correct! Perils are the causes of loss insured against in an insurance policy.

Chapter: Basic Insurance Concepts and Principles Adverse selection is a concept best described as AOnly offering coverage to good risks. BRisks with higher probability of loss seeking insurance more often than other risks. CUnderwriters slanting the odds in favor of the company. DPoor choices of applicants to be covered.

correct! Adverse selection means that there are more risks with higher probability of loss seeking to purchase and maintain insurance than the risks who present lower probability. Underwriters must guard against this.

For the purpose of insurance, risk is defined as A The uncertainty or chance of loss. B The certainty of loss. C The cause of loss. D An event that increases the amount of loss.

A The uncertainty or chance of loss. correct! Risk, or the chance of loss occurring, is the basic reason for buying insurance.

A situation in which a person can only lose or have no change represents A Adverse selection. B Hazard. C Pure risk. D Speculative risk.

C Pure risk. Pure risk refers to situations that can only result in a loss or no change. Pure risk is the only type insurance companies are willing to accept.

In property and casualty insurance, what is the term for the amount of a loss that the insured must cover out of pocket, and the insurer will only pay for the additional amount of the loss above this limit? A Deductible B Self-insured retention C Coinsurance D Primary amount

A Deductible Correct! In property insurance, the amount of loss retained by the insured is called the deductible; in liability insurance, it is called retention. Most property coverages include a deductible; most liability policies do not include retention.

The risk of loss may be classified as A Pure risk and speculative risk. B Certain risk and uncertain risk. C Named risk and un-named risk. D High risk and low risk.

A Pure risk and speculative risk. Correct! 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.

Which type of insurance includes the assumption of a contractual obligation to reimburse the insured against all or a portion of his fees, costs, and expenses related to or arising out of services performed by or under the supervision of an attorney who is an active member of the bar of any jurisdiction or jurisdictions of the United States? A Contract insurance B Legal insurance C Errors and Omission insurance D Professional Liability insurance

B Legal insurance Correct! Legal insurance includes the assumption of a contractual obligation to reimburse the insured against all or a portion of his fees, costs, and expenses related to or arising out of services performed by or under the supervision of an attorney who is an active member of the bar of any jurisdiction or jurisdictions of the United States, in which these legal services are performed. Review ContentNext Question

Which of the following is NOT a goal of risk retention? A To minimize the insured's level of liability in the event of loss B To reduce expenses and improve cash flow C To increase control of claim reserving and claims settlements D To fund losses that cannot be insured

A To minimize the insured's level of liability in the event of loss correct! Retention usually results from three basic desires of the insured: to reduce expenses and improve cash flow, to increase control of claim reserving and claims settlements, and to fund losses that cannot be insured.

Insurance is the transfer of A Hazard. B Peril. C Risk. D Loss.

C Risk. correct! Insurance is the transfer of financial responsibility associated with a potential of a loss (risk) to an insurance company.

Chapter: Basic Insurance Concepts and Principles Insurance is the transfer of A Loss. B Hazard. C Peril. D Risk.

D Risk. Correct! Insurance is the transfer of financial responsibility associated with a potential of a loss (risk) to an insurance company.

Chapter: Basic Insurance Concepts and Principles 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 Correct! A peril is the cause of loss insured against in an insurance policy.

A set of legal or regulatory conditions that affect an insurer's ability to collect premiums commensurate with the level of risk incurred would be considered a(n): A Fiduciary risk. B Legal hazard. C Underwriting gamble. D Legal peril.

B Legal hazard. Correct! Legal hazard is defined as a set of legal or regulatory conditions that affect an insurer's ability to collect premiums commensurate with the level of risk incurred.

Chapter: Basic Insurance Concepts and Principles A set of legal or regulatory conditions that affect an insurer's ability to collect premiums commensurate with the level of risk incurred would be considered a(n): A Fiduciary risk. B Legal hazard. C Underwriting gamble. D Legal peril.

B Legal hazard. correct! Legal hazard is defined as a set of legal or regulatory conditions that affect an insurer's ability to collect premiums commensurate with the level of risk incurred.

Which rating method provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expense) or profit and is based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time? A Provision rating B Profit rating C Components rating D Loss costs rating

D Loss costs rating correct! Loss costs is a rating method developed by ISO that provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expense) or profit and are based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time.

The loss ratio compares A Losses to interest rates. B Premiums to interest rates. C Premiums to company expenses. D Premium income to losses.

D Premium income to losses. Correct! Loss ratio compares the premium incomes to losses, including claims paid and claim-related expenses

Chapter: Basic Insurance Concepts and Principles Following a career change, an insured is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe? A Transfer B Avoidance C Retention D Reduction

D Reduction Correct! The insured's change in lifestyle and habits would likely reduce the chances of health problems.

Peril is most easily defined as A Something that increases the chance of loss. B The cause of loss insured against. C An unhealthy attitude about safety. D The chance of a loss occurring.

B The cause of loss insured against. Correct! Perils are the causes of loss insured against in an insurance policy.

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

A Purchase insurance. Correct! 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.

All of the following are examples of risk retention EXCEPT A Self-insurance B Premiums C Deductibles D Copayments

B Premiums Correct! Retention is a planned assumption of risk, or acceptance of responsibility for the loss by an insured through the use of deductibles, copayments, or self-insurance.

The type of insurance that guarantees the behavior of persons and the performance of contracts other than insurance policies is known as A Behavioral Contract insurance. B Surety insurance. C Contract insurance. D Performance Guaranteed insurance.

B Surety insurance. Correct! Surety insurance includes the guaranteeing of behavior of persons and the guaranteeing of performance of contracts other than insurance policies and other than for payments secured by a mortgage, deed of trust, or other instrument constituting a lien or charge on real estate.

For the purpose of insurance, risk is defined as A An event that increases the amount of loss. B The uncertainty or chance of loss. C The certainty of loss. D The cause of loss.

B The uncertainty or chance of loss. Correct! Risk, or the chance of loss occurring, is the basic reason for buying insurance.

An individual was involved in a head-on collision while driving home one day. His injuries were not serious, and he recovered. However, he decided that in order to never be involved in another accident, he would not drive or ride in a car ever again. Which method of risk management does this describe? A Sharing B Retention C Avoidance D Reduction

C Avoidance Correct! Avoidance is a method of risk management by which a person tries to eliminate risk of loss by avoiding any exposure to an event that could give rise to such loss. Risk avoidance is effective but seldom practical.

Profitable distribution of exposures serves the purpose of A Preventing the insurer from being estopped. B Helping the insurer determine payable benefits. C Protecting the insurer against adverse selection. D Helping the insurer select only the ideally insurable risks.

C Protecting the insurer against adverse selection. Correct! A profitable distribution of exposures exists when poor risks are balanced with preferred risks, with the standard risks in the "middle." The purpose behind distributing risks in this manner is to protect the insurer from adverse selection.

Which type of insurance guarantees or indemnifies owners of real or personal property or the holders of liens or other interested parties against loss or damage suffered to said property? A Surety insurance B Contract insurance C Title insurance D Commercial Property insurance

C Title insurance Correct! Title insurance includes insuring, guaranteeing or indemnifying owners of real or personal property or the holders of liens or others interested parties against loss or damage suffered to said property.

With respect to the business of insurance, a hazard is A The risk taken when performing something dangerous. B The tendency of poorer risks to seek insurance more often than better risks. C The basic reason for an insured to purchase insurance. D Any condition or exposure that increases the possibility of loss.

D Any condition or exposure that increases the possibility of loss. Correct! A hazard is any condition or exposure that increases the possibility of loss occurring. Hazards are generally classified as either physical, moral, or morale.

Insurance is a contract by which one seeks to protect another from A Exposure. B Uncertainty. C Hazards. D Loss.

D Loss. Correct! Insurance will protect a person, business or entity from loss.