ExamFX Ch. 1 Basic Insurance Concepts and Principles

All of the following are insurable events as defined in the insurance code EXCEPT A. an insured is sued for libel and slander B. an insured loses a large sum in a poker game C. a guest trips and breaks his leg at the insured's house D. an insured goes to the hospital for a broken arm

An insured loses a large sum of money in a poker game 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. Speculative losses are uninsurable.

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

A family 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.

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

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

Which of the following is a term for a person who seeks insurance from an insurer? A. Applicant B. Agent C. Insured D. Beneficiary

Applicant The applicant is the person who is seeking insurance from an insurer.

When must insurable interest exist in a life insurance policy? A. At the time of loss B. At the time of application C. At the time of policy delivered D. When there is a change of the beneficiary

At the time of application

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. Avoidance B. Reduction C. Sharing D. Retention

Avoidance

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

Avoidance

Which of the following is NOT an example of insurable interest? A. Employer in employee B. Child in parent C. Debtor in creditor D. Business partners in each other

Debtor in creditor The three recognized areas in which insurable interest exists are as follows: a policyowner insuring his or her own life, the life of a family member, or the life of a business partner, key employee, or someone who has a financial obligation to them.

Which of the following is considered to be a morale hazard? A. Driving recklessly B. Smoking C. Working as a firefighter D. Engaging in illegal activities

Driving recklessly Morale hazards arise from a state of mind that causes indifference to loss, such as carelessness

Events or conditions that increase the chances of an insured loss occurring are referred to as A. risks B. perils C. hazards D. exposures

Hazards Conditions such as lifestyle and existing health, or activities such as scuba diving are hazards and may increase the chance of a loss occurring.

Units with the same or similar exposure to loss are referred to as A. Homogeneous B. Catastrophic loss exposure C. Insurable risks D. Law of large numbers

Homogeneous The basis of insurance is sharing risk between a large homogeneous group with similar exposure to loss

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

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

Which statement regarding insurable risks is NOT correct? A. The insurable risk needs to be statistically predictable B. An insurable risk must involve a loss that is definite as to cause, time, place and amount C. Insureds cannot be randomly selected D. Insurance cannot be mandatory

Insureds cannot be randomly selected

The insurer may suspect that a moral hazard exists if the policyholder A. Is prone to depression B. Is indifferent to activities that may be dangerous C. Always drives over the speed limit D. Is not honest about his health on an application for insurance

Is not honest about his health on an application for insurance Moral hazards refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer

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

Law of large numbers 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.

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

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 or risk incurred.

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

Legal hazard 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. Exposure B. Uncertainty C. Hazards D. Loss

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

An individual's tendency to be dishonest would be indicative of A. Morale hazard B. Pure hazard C. Physical hazard D. Moral hazard

Moral hazard An applicant that is dishonest in completing an application for insurance or submitting fraudulent claims would be deemed a moral hazard and could be uninsurable from an underwriting standpoint

A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents what type of hazard? A. moral B. legal C. physical D. morale

Morale A morale hazard is someone who has an indifferent attitude towards an insurance company. He is careless or irresponsible because he knows his loss will be covered by insurance.

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

Perils

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

Policyowner 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

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

Preferred risks and poor risks are balanced, with average risks in the middle Balancing poor risks and preferred risks with average risks in the middle creates profitable distribution of exposures

What is the term for the fee a policyowner must pay to the insurance company to maintain coverage? A. Benefit B. Premium C. Installment D. Commission

Premium The premium is what a policyholder pays the insurance company for insurance coverage

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

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

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

Protecting the insurer against adverse selection 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 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

Purchase insurance The most effective way to handle risk is to transfer it so that the loss is borne by another party.

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

Pure risk and speculative risk 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.

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

Pure risks 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.

Which of the following factors is NOT considered by an underwriter when determining the premium rates for an individual seeking insurance? A. Sex B. Race C. Age D. Medical history

Race Age, medical history, and sex provide sound statistical data for determining the probability of loss. Race, religion, sexual orientation, ect... are considered to be discriminatory

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

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

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 food from his diet. Which method of dealing with risk does this scenario describe? A. Retention B. Reduction C. Transfer D. Avoidance

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

In case of a loss, the indemnity provision in insurance policies A. pays the insured as much as 95% of the loss B. restores an insured person to the same financial state as before the loss C. allows the insured to collect 20% more than the actual loss D. Pays the insured a percentage of the loss above and beyond the loss

Restores an insured person to the same financial state as before the loss Indemnity (sometimes referred to as reimbursement) is a provision in an insurance policy that states that in the event of loss, an insured or beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract.

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

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

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

Risks with higher probability of loss seeking insurance more often than other risks Adverse selection means 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.

Hazard is best defined as A. a deliberate attempt to deceive B. something that increases the risk of loss C. the uncertainty of loss D. neglect to communicate a material fact

Something that increases the risk of loss Hazards are conditions or situations that increase the probability of an insured loss occurring.

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

Speculative Risk Speculative risk involves the chance of gain or loss and is not insurable

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 occuring D. something that increase the chance of loss

The cause of loss insured against

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 a sufficient number of homogeneous exposure units to make losses reasonably predictable C. The loss produced by the risk must be definite

The loss may be intentional

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

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

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

The uncertainty or chance of loss Risk, or the chance of loss occurring, is the basic reason for insurance

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

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

If an applicant for a life insurance policy and person to be insured by the policy are two different people, the underwriter would be concerned about A. the gender of the applicant B. the type of policy requested C. Which individual will pay the premium D. Whether an insurable interest exists between the individuals

Whether an insurable interest exists between the individuals An insurable interest must exist at the time the policy is issued. Some relationships are automatically presumed to qualify as an insurable interest.

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

premiums 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