Household Risk Management
Sam's furniture was destroyed by a fire. The furniture cost $1200 when it was purchased, but similar new furniture now costs $1800. Assuming the furniture was 50 percent depreciated, what is the actual cash value of Sam's loss? a. $900 b. $1,800 c. $600 d. $1,200
a. $900
Which of the following statements about insurance brokers is (are) true? 1. They legally represent the insured rather than the insurance company. 2. They are prohibited from being licensed as agents. a. 1 only b. 2 only c. Both 1 and 2 d. neither 1 or 2
a. 1 only
Which of the following statements is (are) true regarding insurance agents and insurance brokers? 1. A property and liability insurance agent has the authority to bind the insurer for certain types of coverage. 2. A licensed broker who is not a licensed agent has the legal authority to bind an insurer a. 1 only b. 2 only c. both 1 and 2 d. neither 1 or 2
a. 1 only
Which of the following statements about the investments of property and liability insurers is (are) true? a. Income from investments is important in offsetting any unfavorable underwriting experience. b. Because premium income is continually being received, the investment objective of liquidity is of little c. Both of these d. Neither of these
a. Income from investments is important in offsetting any unfavorable underwriting experience.
Which of the following statements about claims settlement is true? a. Independent adjusters may be used in a geographic area where the volume of business is too low for an insurer to have its own adjusters. b. Agents are never authorized to settle claims. c. A public adjuster is a salaried employee who works for one insurer. d. A staff claims representative is hired by a policyholder to represent him or her if the policyholder does not agree with the claim settlement offered by the insurer.
a. Independent adjusters may be used in a geographic area where the volume of business is too low for an insurer to have its own adjusters.
One source of life and health insurance underwriting information is an organization that life and health insurance companies can join. As a member, life and health insurance companies report health impairments of applicants, and this information is shared with member companies. Although the information is shared, the underwriting decision of the member company is not disclosed. What is this organization called? a. Medical Information Bureau (MIB) b. Fair Issac Corporation (FICO) c. National Association of Insurance Commissioners (NAIC) d. National Association of Mutual Insurance Companies (NAMIC)
a. Medical Information Bureau (MIB)
Which of the following statements about stock insurers is true? a. Stockholders bear any losses and share in any profits b. They issue assessable policies c. They are not permitted to write property and liability insurance d. They are owned by their policyholders
a. Stockholders bear any losses and share in any profits
Which of the following conditions is (are) appropriate for using retention? a. The worst possible loss is not serious. b. Neither of these c. Losses are difficult to predict. d. Both of these
a. The worst possible loss is not serious.
Which of the following statements about state insurance guaranty funds is (are) true? a. They limit the amount that policyholders can collect if an insurer becomes insolvent. b. Both of these c. They are usually funded by general revenues of the states. d. Neither of these
a. They limit the amount that policyholders can collect if an insurer becomes insolvent.
Which of the following statements about mutual insurers is true? a. They may pay dividends to their policyholders. b. They are legally organized as partnerships. c. They have a board of directors which is selected by state insurance departments. d. They are owned by their stockholders.
a. They may pay dividends to their policyholders.
The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following? a. both of these b. more accurate prediction of future losses c. decrease in moral hazard d. neither of these
a. both of these
The primary function of an actuary is to: a. determine premium rates b. adjust claims c. negotiate reinsurance treaties d. invest insurance company assets
a. determine premium rates
Sarah owns a property and liability insurance agency. She is authorized to represent several insurance companies and she is compensated by commissions. Sarah's agency owns the expiration rights to the business she sells. Sarah is a(n): a. independent agent b. exclusive agent c. direct writer d. insurance broker
a. independent agent
A score derived from an individual's credit history and other factors that is used by many auto and homeowners insurers for underwriting and rating purposes is called a(n): a. insurance score b. expense ratio score c. CLUE score d. combined ratio score
a. insurance score
Faking an accident to collect insurance proceeds is an example of: a. moral hazard b. attitudinal hazard c. objective risk d. physical hazard
a. moral hazard
Dense fog that increases the chance of an automobile accident is an example of a: a. physical hazard b. peril c. speculative risk d. moral hazard
a. physical hazard
Loss frequency is defined as the: a. probable number of losses that may occur during some period. b. probability that a liability judgment may exceed a firm's net worth. c. probable size of the losses that may occur during some period. d. probability that any particular piece of property may be totally destroyed.
a. probable number of losses that may occur during some period.
Apex Insurance Company wrote a large number of property insurance policies in an area where earthquake losses could occur. When the president of Apex was asked if she feared that a severe earthquake might put the company out of business, she responded, "Not a chance. We transferred most of that risk to other insurance companies." 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: a. reinsurance b. speculating c. hedging d. loss avoidance
a. reinsurance
Which of the following is a principal method of ensuring the solvency of insurers? a. requiring submission of annual financial statements to state regulators b. regulating the forms (applications and policies) employed by the insurer c. tracking and investigating market conduct complaints against insurers d. tracking and investigating market conduct complaints against insurers
a. requiring submission of annual financial statements to state regulators
Morgan was hired by an insurance company after she graduated from college. Upon completion of a training program, Morgan was assigned to a territory where she adjusts claims of the insurer's policyowners. Morgan is a(n) a. staff claims representative b. public adjustor c. agent d. independent adjustor
a. staff claims representative
Which of the following is an example of consequential (indirect) loss? a. the cost of renting a substitute vehicle while a collision-damaged car is being repaired b. the destruction of a firm's manufacturing plant by an earthquake c. the theft of a person's jewelry d. the vandalism of a person's automobile
a. the cost of renting a substitute vehicle while a collision-damaged car is being repaired
JKL Insurance Company 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 insures 2,000 homeowners this year? a. the average size of loss will decline in value b. actual results will more closely approach the expected results c. total dollar value of claims will decrease d. total number of claims filed by JKL policyowners should decrease
b. actual results will more closely approach the expected results
The tendency for unhealthy people to seek life or health insurance at standard rates is an example of: a. attitudinal hazard b. adverse selection c. moral hazard d. fundamental risk
b. adverse selection
A contract in which the values exchanged are not equal because chance is involved is called a(n) a. unilateral contract b. aleatory contract c. contract of adhesion d. conditional contract
b. aleatory contract
Carelessness or indifference to a loss is an example of: a. objective probability b. attitudinal hazard c. physical hazard d. moral hazard
b. attitudinal hazard
Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions? a. because insurance contracts are contracts of adhesion b. because insurance contracts are conditional c. because insurance contracts are unilateral d. because insurance contracts are aleatory
b. because insurance contracts are conditional
All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT: a. contractual right. b. former ownership of property. c. secured creditors. d. potential legal liability.
b. former ownership of property.
Fly-By-Night Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If Fly-By-Night becomes insolvent, which of the following will help pay the unpaid claims of the insurer? a. risk-based capital b. guaranty fund c. premium rebates d. admitted assets
b. guaranty fund
Which of the following types of loss exposures are best handled by the use of avoidance? a. low-frequency, high-severity loss exposures b. high-frequency, high-severity loss exposures c. low-frequency, low-severity loss exposures d. high-frequency, low-severity loss exposures
b. high-frequency, high-severity loss exposures
Which of the following statements regarding insurance and gambling is (are) true? a. insurance usually involves risk avoidance, while gambling typically involved only risk reduction b. insurance is used to handle existing pure risks, while gambling created a new speculative risk c. neither of these
b. insurance is used to handle existing pure risks, while gambling created a new speculative risk
The long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called: a. subjective probability b. objective probability c. subjective risk d. objective risk
b. objective probability
When must an insurable interest legally exist in life insurance? a. only at the time the beneficiary is paid b. only at the inception of the policy c. both at the time of the insured's death and at the inception of the policy d. only at the time of the insured's death
b. only at the inception of the policy
An earthquake is an example of a(n): a. physical hazard b. peril c. objective risk d. moral hazard
b. peril
Loss severity is defined as the: a. probability that any particular piece of property may be totally destroyed. b. probable size of the losses which may occur during some period. c. probable number of losses which may occur during some period. d. probability that a liability judgment may exceed a firm's net worth.
b. probable size of the losses which may occur during some period.
From the insured's perspective, the use of deductibles in insurance contracts is an example of a. risk avoidance b. risk retention c. risk control d. risk transfer
b. risk retention
Which of the following is implied by the pooling of losses? a. inability to predict losses with any degree of accuracy b. sharing of losses by an entire group c. increase of objective risk d. substitution of actual loss for average loss
b. sharing of losses by an entire group
Uncertainty based on a person's mental condition or state of mine is known as: a. objective probability b. subjective risk c. objective risk d. subjective probability
b. subjective risk
From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT: a. the premium must be economically feasible b. the loss should be catastrophic c. there must be a large number of exposure units d. the loss must be accidental
b. the loss should be catastrophic
Fundamental purposes of the principle of indemnity include which of the following (check all that apply): a. to require deductibles in all property insurance policies b. to reduce moral hazard c. to reduce physical hazards d. to prevent the insured from profiting from insurance e. to settle property insurance losses on a replacement cost basis
b. to reduce moral hazard d. to prevent the insured from profiting from insurance
Under one type of rating law, insurers are free to change rates and to use modified rates immediately. However, the new rate must be filed with regulators within a specified period, such as 60 days after the modified rate is employed. This type of rating law is called: a. file-and-use b. use-and-file c. flex rating d. prior approval
b. use-and-file
All of the following statements about the methods of regulating insurance are true EXCEPT: a. The courts regulate insurance in many ways, including the interpretation of policy clauses and provisions. b. All states have insurance laws that regulate the operations of insurers. c. Insurers are totally exempt from regulation by federal agencies and laws. d. State insurance commissioners, through administrative rulings, have considerable power over insurers doing business in their states.
c. Insurers are totally exempt from regulation by federal agencies and laws.
Which of the following statements concerning social insurance benefits is (are) correct? a. Both of these b.Neither of these c. Social insurance benefits are financed entirely or in part by mandatory contributions by covered employers and employees, and not by general revenues of the government. d. Social insurance benefits are heavily weighted in favor of upper-income groups because of their higher earnings.
c. Social insurance benefits are financed entirely or in part by mandatory contributions by covered employers and employees, and not by general revenues of the government.
What is the legal significance of a material misrepresentation in an insurance application? a. The contract is automatically voided from its inception. b. The insurer is immediately entitled to a higher premium. c. The contract is voidable at the insurer's option. d. Loss payments are reduced by the degree of the misrepresentation.
c. The contract is voidable at the insurer's option.
According to the law of large numbers, what happens as the number of exposure units increases? a. nondiversifiable risk will decrease b. objective risk will increase c. actual results will more closely approach probable results d. actual results will increasingly differ from probable results
c. actual results will more closely approach probable results
BBB Auto Club provides emergency road service and other services to its members. BBB Auto Club charges a higher membership fee to new members than it charges to members who are renewing their membership. When asked to explain this pricing policy, the auto club president noted, "New members often sign-up prior to taking a long road trip, so we have to charge more as first-year members have higher service utilization rates." A similar phenomenon observed in insurance markets is called: a. risk aversion b. moral hazard c. adverse selection d. attitudinal hazard
c. adverse selection
A peril is: a. moral hazard b. condition that increases the chance of loss c. cause of a loss d. probability that a loss will occur
c. cause of the loss
From the standpoint of the insurer, which of the following is a characteristic of an ideally insurable risk? a. there must be a small number of unique loss exposures b. the loss must be indeterminable c. chance of loss must be calculable d. loss must be intentional
c. chance of loss must be calculable
Why is a large number of exposure units generally required before a pure risk is insurable? a. it minimizes moral hazard b. it eliminated intentional losses c. it enables the insurer to predict losses more accutately d. it prevent the insurer from losing money
c. it enables the insurer to predict losses more accurately
The worst loss that could ever happen to a firm is referred to as the: a. frequency of loss. b. probable maximum loss. c. maximum possible loss. d. severity of loss.
c. maximum possible loss.
Barb, who is self-employed, is the main breadwinner for her family. Barb does not have disability income insurance because she has never stopped to consider the impact of a long-term disability upon her family. Barb's treatment of the risk of disability is best described as: a. risk transfer. b. risk avoidance. c. passive retention. d. active retention.
c. passive retention.
Grace is a life insurance agent. She is attempting to sell a large life insurance policy, but the prospective purchaser is having second thoughts. To persuade the prospective purchaser, Grace said, "I will earn a $1,000 commission if you buy this policy. I'll give you $500 of my commission if you buy the policy." In most states, what illegal sales practice will Grace be guilty of if she splits her commission with the purchaser? a. backdating b. churning c. rebating d. twisting
c. rebating
Liability items on an insurer's balance sheet that reflect obligations that must be met in the future are called: a. surplus b. pre-paid expenses c. reserves d. nonadmitted assets
c. reserves
Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of: a. warranty b. utmost good faith c. subrogation d. insurable interest
c. subrogation
Some members of Congress are concerned that if one or two large U.S. banks fail, it could lead to the collapse of the entire U.S. financial sector. This risk is called: a. enterprise risk b. subjective risk c. system risk d. objective risk
c. system risk
objective risk is defined as: a. the cause of loss b. uncertainty based on a person's mental condition or state of mind c. the relative variation of actual loss from expected loss d. the probability of loss
c. the relative variation of actual loss from expected loss.
By misrepresenting the true facts, Gretchen was able to convince someone to replace an existing life insurance policy with another company and to purchase a new policy from the company that Gretchen represents. Gretchen has engaged in an illegal sales practice called: a. retaliating b. rebating c. twisting d. twisting
c. twisting
Traditionally, risk has been defined as: a. any situation in which probability of loss is zero b. any situation in which the probability of loss is one. c. uncertainty concerning the occurrence of loss d. the probability of a loss occurring
c. uncertainty concerning the occurrence of loss
Why are insurance contracts said to be contracts of adhesion? a. The values exchanged by the parties to the contract are not equal. b. Only one party makes a legally enforceable promise. c. Only one party makes a legally enforceable promise. d. One party writes the contract, and the other party must accept the entire contract as written.
d. One party writes the contract, and the other party must accept the entire contract as written.
Which of the following statements about the regulation of insurance company investments is (are) true? a. Both of these b. Life insurers can invest an unlimited amount of their assets in common stocks. c. Neither of these d. The purpose of regulating insurance company investments is to prevent insurers from making unsound investments which could threaten their solvency.
d. The purpose of regulating insurance company investments is to prevent insurers from making unsound investments which could threaten their solvency.
Why does the insured get the benefit of the doubt if an insurance policy contains any ambiguities or uncertainties? a. because insurance contracts are conditional b. because insurance contracts are aleatory c. because insurance contracts are unilateral d. because insurance contracts are contracts of adhesion
d. because insurance contracts are contracts of adhesion
A risk that affects only individuals or small groups and not the entire economy is called a: a. pure risk b. nondiversifiable risk c. speculative risk d. diversifiable risk
d. diversifiable risk
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: a. deductible b. dividend c. loss reserve d. expense load
d. expense load
A pure risk is defined as a situation in which there is: a. possibility of neither profit nor loss b. possibility of wither profit or loss c. only the possibility of profit d. only the possibility of loss or no loss
d. only the possibility of loss or no loss
Which of the following is a basic characteristic of insurance? a. certainty about specific losses that will occur b. avoidance of risk c. payment of intentional losses d. pooling of losses
d. pooling of losses
An individual's personal estimate of the chance of loss is a(n): a. objective probability b. a priori probability c. objective risk d. subjective probability
d. subjective probability
