Nature of Insurance
The law of large numbers enables and insurer to - Predict losses - Avoid adverse selection - Classify rates - Assure company profits
Predict losses
Which of these statements regarding insurance is false? - One way insurers deal with catastrophic loss is through reinsurance - As the number of insured units increases, the number of losses decreases - Speculative risk cannot be insured - Pure risk can be insured
As the number of insured units increases, the number of losses decreases
A condition that increases the possibility of financial loss is called a(n) - Risk - Peril - Hazard - Exposure
Hazard
Which of the following is NOT an example of risk retention? - Becoming aware of a risk and taking no action - Self-insuring a given risk - Deciding a business deal is risky but going through with it anyways - Not doing a business deal after deciding it would be too risky
Not doing a business deal after deciding it would be too risky Not doing a business deal after deciding it would be too risky is an example of risk avoidance, not retention.
What type of risk involves the potential for loss with no possibility for gain? - Speculative risk - Pure risk - Adverse risk - Morale risk
Pure risk
A hold-harmless clause is an example of risk - Avoidance - Retention - Transfer - Sharing
Transfer A hold-harmless clause found in a contract shifts liability for loss from one party to another.
A business becoming incorporated is an example of risk ___. - Reduction - Severance - Retention - Transfer
Transfer Incorporation of a business is an example of risk transfer.
Purchasing insurance is an example of risk - Transference - Avoidance - Retention - Sharing
Transference
Risk ___ is the process of analyzing exposures that create risk and designing programs to handle them. - Acceptance - Management - Administration - Transfer
Management
Which of the following can be defined as a cause of a loss? - Adversity - Risk - Hazard - Peril
Peril A peril may be defined as the cause of a loss.
According to the law of large numbers, how would losses be affected if the number of similar insured units increases? - The higher the exposure, the higher the cost of each loss - No effect on predicting losses - Predictability of losses will be improved - Ability to predict losses decreases
Predictability of losses will be improved Based on the law of large numbers, as the number of similar insured units increases, predictability of losses improves.
Which of the following can be defined as "the potential for loss"? - Hazard - Risk - Transference - Peril
Risk
An insurable risk requires - That the chance for both a loss or gain exists - The loss must be catastrophic - That the chance of loss be calculable - That the loss must be incalculable
That the chance of loss be calculable An insurable risk requires the loss to be calculable or predictable.
Which of the following involves sharing an uncertain risk with another similar group? - Transfer - Speculative - Operational - Physical
Transfer Risk transfer involves sharing an uncertain risk with another similar group.
Which of the following types of risk is insurable? - Pure - Speculative - Operational - Physical
Pure Pure risk is insurable.
For insurance purposes, similar objects which are exposed to the same group of perils are referred to as - Homogenous perils - Similar exposure units - Homogeneous exposure units - Common hazards
Homogeneous exposure units Similar objects of insurance that are exposed to the same group of perils are called homogeneous exposure units.
Which of these statements is NOT a characteristic of the law of large numbers? - Individual losses can be predicted based on past experience - Group losses can be predicted based on past experience - Losses can be predicted in large groups with a higher degree of accuracy - Rates can be calculated to compensate for losses
Rates can be calculated to compensate for losses The law of large numbers states that larger groups provide better loss predictions. The higher the exposure, the more likely the event can be predicted.
ABC Company is attempting to minimize the severity of potential losses within its company. The company is engaged in risk - Transference - Retention - Reduction - Avoidance
Reduction Risk reduction can reduce the chance that a particular loss will occur, or it can reduce the amount of a potential loss if it occurs.
An insurer has a contractual agreement which transfers a portion of its risk exposure to another insurer. What type of contractual arrangement is this? - Coinsurance contract - Mutuality agreement - Reinsurance contract - Reciprocity arrangement
Reinsurance contract Reinsurance contracts accept a portion of the risk underwritten by another insurer who has contracted for the entire coverage amount.
How can an insurance company minimize exposure to loss? - Risk concealing - Reinsuring risks - Reissuance - Risk assumption
Reinsuring risks Many insurers are able to minimize exposure to loss by reinsuring risks,
Which term describes the elimination of a hazard? - Risk avoidance - Risk retention - Risk transference - Risk pooling
Risk avoidance
Which of the following describes the act of insuring a risk against possible loss? - Risk avoidance - Risk transfer - Hazard reduction - Loss management
Risk transfer Insuring a risk against possible loss is an example of risk transfer.
What type of risk involves the potential for loss AND the possibility for gain? - Homogeneous - Adverse - Pure - Speculative
Speculative
Which one of these is NOT considered to be an element of an insurable risk? - Speculative risk - Pure risk - Loss cannot be catastrophic - Loss must be due to chance
Speculative risk Speculative risks (chance of both a loss and gain) are not insurable.