Nature Of Insurance
The law of large numbers enables an insurer to
Predict losses
How can an insurance company minimize exposure to loss?
Reinsuring risks
Which type of risk involves the potential for loss and the possibility for gain?
Speculative
Risk reduction is
lowers the chance of loss by taking measures to lessen the frequency or severity of losses that may occur. ex. reduce the risk of getting injured in a car accident by taking public transportation
Risk transfer is
making someone else responsible for risk (insurance)
An insurable risk requires
that the chance of loss be calculable
Purchasing insurance is an example of risk
transference
Risk Pooling (Loss Sharing)
When a large group of people spread a risk for a small certain cost. It transfers risk from an individual to a group. Ex. doctors pooling their money to cover malpractice exporsures
Which of the following can be defined as "the potential for loss?" A. Hazard B. Risk C. Transference D.
B.
Which of the following can be defined as a cause of loss? A. Adversity B. Risk C. Hazard D. Peril
D.
Which of the following describes the act of insuring a risk against possible loss? A. Risk avoidance B. Risk transfer C. Hazard reductions D. Loss management
B.
Which of these statements regarding insurance is false? A. One way insurers deal with catastrophic loss is through reinsurance B. As the number of insured units increases, the number of losses decreases C. Speculative risk cannot be insured D. Pure risk can be insured
B.
Which of the following is NOT an example of risk retention? A. Becoming aware of a risk and taking no action B. Self-insuring a given risk C. Deciding a business deal is risky but going with it anyways D. Not doing a business deal after deciding it would be too risky
D.
Which of these statements is NOT a characteristic of the law of large numbers? A. Individual losses can be predicted based on past experience B. Group losses can be predicted based on past experience C. Losses can be predicted in large groups with higher degree of accuracy D. Rates can be calculated to compensate for losses
D.
For insurance purposes, similar objects which are exposed to the same group of perils are referred to as
Homogenous exposure units
Risk ____ is the process of analyzing exposures that create risk and designing programs to handle them.
Management
According to the law of large numbers, how would losses be affected if the number of similar insured units increases?
Predictability of losses will be improved
ABC insurance company is attempting to minimize the severity of potential losses within its company. The company is engaged in risk
Reduction
A business becoming incorporated is an example of risk ____.
Transfer
Risk retention is
accepting that some risks simply arise in the course of one's life and consciously retaining that risk - you retain the risk of getting injured in a car accident by driving without insurance (self insure)
Risk Avoidance is
avoiding the risk altogether. ex. avoid the risk of being in a car accident by never leaving the house
Which type of risk involves the potential for loss with no possibility for gain?
Pure
A hold-harmless clause is an example of risk
"transfer". A hold-harmless clause found in a contract shifts liability for loss from one party to another.
Which of the following types of risk is insurable?
Pure
Which of the following involves sharing an uncertain risk with another similar group? A. Transfer B. Speculative C. Operational D. Physical
A.
Which one of these is NOT considered to be an element of an insurable risk? A. Speculative risk B. Pure risk C. Loss cannot be catastrophic D. Loss must be due to chance
A.
An insurer has a contractual agreement which transfers a portion of its risk exposure to another insurer. What type of contractual arrangement is this?
Reinsurance contract
Principle of Indemnity
involves making an insured whole by restoring them to the same condition as before a loss