Which of the following is a basic characteristic of insurance?
A) pooling of losses B) avoidance of risk C)
payment of intentional losses D) certainty about specific
losses that will occur
Answer: A
Which of the following is implied by the pooling of losses?
A) sharing of losses by an entire group B) inability
to predict losses with any degree of accuracy C)
substitution of actual loss for average loss D) increase of
objective risk
Answer: A
According to the law of large numbers, what happens as the number of
exposure units increases?
A) Actual results will increasingly differ from probable
results. B) Actual results will more closely approach
probable results. C) Nondiversifiable risk will
decrease. D) Objective risk will increase.
Answer: B
According to the law of large numbers, what should happen as an
insurer increases the number of units insured?
A) The amount the insurer expects to pay in claims should
decrease. B) Underwriting expenses should decrease.
C) Actual results will more closely approach expected
results. D) The insurer's profitability should become more
variable.
Answer: C
Characteristics of a fortuitous loss include which of the following?
The loss is certain to occur. The loss occurs as a
result of chance. A) I only B) II only C)
both I and II D) neither I nor II
Answer: B
From the viewpoint of the insurer, all of the following are
characteristics of an ideally insurable risk EXCEPT
A) The loss must be accidental. B) The loss should be
catastrophic. C) The premium must be economically
feasible. D) There must be a large number of exposure
units.
Answer: B
From the standpoint of the insurer, which of the following is a
characteristic of an ideally insurable risk?
A) The loss must be intentional. B) There must be a
small number of unique loss exposures. C) The chance of
loss must be calculable. D) The loss must be
indeterminable.
Answer: C
Why is a large number of exposure units generally required before a
pure risk is insurable?
A) It prevents the insurer from losing money. B) It
eliminates intentional losses. C) It minimizes moral
hazard. D) It enables the insurer to predict losses more
accurately.
Answer: D
The requirement that losses should be accidental and unintentional in
order to be insurable results in which of the following?
Decrease in moral hazard More accurate prediction of
future losses A) I only B) II only C)
both I and II D) neither I nor II
Answer: C
Which of the following is implied by the requirement that a loss
should be determinable and measurable to be insurable?
The loss must be definite as to place. The loss must
be definite as to amount. A) I only B) II
only C) both I and II D) neither I nor II
Answer: C
Methods by which insurers may minimize or avoid catastrophic losses
include which of the following?
The use of reinsurance Concentrating coverage written
in one geographic region A) I only B) II only
C) both I and II D) neither I nor II
Answer: A
Which of the following types of risks best meets the requirements for
being insurable by private insurers?
A) most market risks B) property risks C)
financial risks D) political risks
Answer: B
Reasons why market, financial, and production risks are often
uninsurable include which of the following?
The potential to produce a catastrophic loss is great.
The chance of loss cannot be accurately estimated. A) I
only B) II only C) both I and II D) neither
I nor II
Answer: C
Which of the following types of risks is normally uninsurable by
private insurers?
A) personal risks B) property risks C)
liability risks D) political risks
Answer: D
Which of the following is a result of adverse selection?
A) The insurer's financial results will be substantially
improved. B) Persons most likely to have losses are also most
likely to seek insurance at standard rates. C) It is
unnecessary for the insurance company to use underwriting.
D) Insurance can be written only by the federal government.
Answer: B
The tendency for unhealthy people to seek life or health insurance at
standard rates is an example of
A) moral hazard. B) fundamental risk. C)
attitudinal hazard. D) adverse selection.
Answer: D
Which of the following statements regarding insurance and gambling is
(are) true?
Insurance is used to handle existing pure risks, while
gambling creates a new speculative risk. Insurance usually
involves risk avoidance, while gambling typically involves only risk
reduction. A) I only B) II only C) both I
and II D) neither I nor II
Answer: A
In addition to marketing life insurance, life insurers typically sell
which of the following products?
Retirement annuities Disability income insurance
A) I only B) II only C) both I and II
D) neither I nor II
Answer: C
Inland marine insurance provides coverage for
A) goods being shipped on land. B) premature death of
members of the armed forces. C) goods being shipped on
ocean-going vessels. D) liability exposures of nonprofit
organizations.
Answer: A
Which of the following is classified as casualty insurance?
A) workers compensation insurance B) fire
insurance C) marine insurance D) life insurance
Answer: A
Which of the following is a form of casualty insurance?
A) fire insurance B) general liability insurance
C) inland marine insurance D) ocean marine
insurance
Answer: B
Which of the following statements regarding private insurance and
government insurance is (are) true?
Private insurance programs include life and health insurance
and property and liability insurance. Social insurance
programs are government insurance programs that are voluntary and
financed entirely by contributions from covered employers.
A) I only B) II only C) both I and II
D) neither I nor II
Answer: A
All of the following are benefits to society that result from
insurance EXCEPT
A) less worry and fear. B) elimination of moral
hazard. C) indemnification for loss. D) loss
prevention.
Answer: B
Which of the following statements about the insurance industry as a
source of investment funds is (are) true?
These funds result in a lower cost of capital than would exist
in the absence of insurance. These funds tend to promote
economic growth and full employment. A) I only B)
II only C) both I and II D) neither I nor II
Answer: C
All of the following are social costs associated with insurance EXCEPT
A) insurance company operating expenses. B)
fraudulent claims. C) inflated claims. D)
increased cost of capital.
Answer: D
A group of farmers agreed that if any farmer suffered a property
loss, the loss would be spread over the entire group. In this way,
each farmer is responsible for the average loss of the group rather
than the actual loss that each farmer sustained. Which characteristic
of insurance is embodied in this agreement?
A) pooling of losses B) fortuitous losses C)
risk avoidance D) indemnification
Answer: A
XYZ Insurance Company writes coverage for most perils which can
damage property. XYZ, however, does not write flood insurance on
property located in flood plains. Which requirement of an ideally
insurable risk might be violated if XYZ wrote flood insurance on
property located in flood plains?
A) There must be a large number of similar exposure
units. B) The loss should not be catastrophic. C)
The chance of loss must be calculable. D) The losses must
be determinable and measurable.
Answer: B
ABC Appliance offers a warranty requiring an annual fee. The warranty
may be purchased at the time of sale or at any time within the first
year after the appliance was purchased. The warranty fee after the
date of purchase is twice the time-of-purchase fee. When asked why the
fee was higher after the date of purchase, ABC's president said,
"Buying a warranty is voluntary. We've noted that those who buy
the warranty after the purchase date have a greater need for
service." Charging the same rate or a lower rate after the date
of purchase would expose ABC to what problem that also impacts private insurers?
A) excessive premiums B) reduced claims C)
bad investments D) adverse selection
Answer: D
Insurance companies collect premiums in advance. Since the premiums
collected are not needed to pay losses and expenses immediately, the
funds can be loaned to business firms. Because of this fact, insurance
benefits society by
A) enhancing credit. B) providing a source of
investment funds. C) indemnifying losses. D)
providing an incentive for loss prevention.
Answer: B
LMN Insurance sells homeowners insurance. The LMN homeowners policy
combines property and casualty insurance in the same contract.
Insurance policies combining property and casualty coverage in the
same contract are called
A) mono-line policies. B) multi-year policies.
C) multiple-line policies. D) manuscript policies.
Answer: C
One branch of government insurance programs has a number of
distinguishing characteristics. These programs are compulsory, they
are financed by mandatory contributions rather than general tax
revenues, and benefits are weighted in favor of low-income groups.
These government insurance programs are called
A) welfare programs. B) social insurance
programs. C) casualty insurance programs. D) private
insurance programs.
Answer: B
Gina would like to buy a house. She will pay 10 percent of the cost
of the house as a down payment and borrow the other 90 percent from a
mortgage lender. The home will serve as collateral for the loan. The
lender will not make the loan to Gina unless the home is insured.
Using insurance to secure the collateral for a loan illustrates which
of the following benefits of insurance to society?
A) enhancement of credit B) reduction of fear and
worry C) source of investment funds D) incentives
for loss prevention
Answer: A
ABC Insurance Company calculated the amount that it expected to pay
in claims for each policy sold. Rather than selling the insurance for
the amount it expected to pay in claims, ABC added an allowance to
cover the cost of doing business, including commissions, taxes, and
acquisition expenses. This allowance is called a(n)
A) policyowner dividend. B) premium. C)
expense loading. D) rate credit.
Answer: C
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 total number of claims filed by JKL policyowners should
decrease. B) The total dollar value of claims will
decrease. C) The average size of loss will decline in
value. D) The actual results will more closely approach the
expected results.
Answer: D
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) hedging. B) speculating. C)
reinsurance. D) loss avoidance.
Answer: C
According to the law of large numbers, what should happen as an
insurance company increases the number of loss exposures that it insures?
A) Fewer losses should be expected to occur. B) The
amount of premiums needed to cover losses should decrease.
C) The volatility of the insurance company's underwriting
results should increase. D) The difference between actual
and expected results should decrease.
Answer: D
Which of the following statements regarding insurance and hedging is
(are) true?
Insurance involves the transfer of an insurable risk while
hedging handles risk that is typically uninsurable.
Insurance transactions can reduce objective risk, while hedging
typically involves only risk transfer and not risk reduction.
A) I only B) II only C) both I and II
D) neither I nor II
Answer: C
Ashley opened an all-you-can-eat buffet restaurant. The price
per-person was based on what Ashley believed an average restaurant
patron would consume. The restaurant began to lose money. Ashley
concluded that her patrons had "above average" appetites,
and were attracted to her restaurant because they could eat as much as
they wanted while being charged an average price. A similar phenomenon
exists in insurance markets. This problem is called
A) legal hazard. B) adverse selection. C)
attitudinal hazard. D) nondiversifiable risk.
Answer: B
Which of the following statements concerning social insurance
benefits is (are) correct?
Social insurance benefits are heavily weighted in favor of
upper-income groups because of their higher earnings.
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. A) I only
B) II only C) both I and II D) neither I nor
II
Answer: B
Adverse selection occurs
A) when an insurance company loses money on its
investments. B) when insurance purchasers buy insurance but
do not have a loss. C) when catastrophic losses occur as a
result of a natural disaster. D) when applicants with a
higher-than-average chance of loss seek insurance at standard
rates.
Answer: D
Which of the following statements regarding insurance and hedging is true?
A) Both insurance and hedging deal only with pure risks.
B) Insurance reduces objective risk while hedging involves only
risk transfer and not risk reduction. C) Hedging reduces
objective risk while insurance involves only risk reduction and not
risk transfer. D) Both insurance and hedging reduce
objective risk but do not involve the transfer of risk.
Answer: B
Which of the following is an example of private insurance?
A) unemployment insurance B) Social Security
C) life insurance D) federal deposit insurance
Answer: C
If insurers were to provide indemnification for losses that were
deliberately caused, which characteristic of ideally insurable risks
would not be met?
A) The loss must be accidental and unintentional. B)
The loss must be determinable and measurable. C) The loss
should not be catastrophic. D) There must be a large number
of similar exposure units.
Answer: A
An insurance company that sells earthquake insurance in an area where
earthquakes are possible has subjected itself to the risk of
insolvency if a severe earthquake occurs. An insurer can safely sell
earthquake insurance in this area if it shifts the risk of
catastrophic loss to another insurer. The shifting of insured risk
from one insurer to another insurer is called
A) underwriting. B) casualty insurance. C)
coinsurance. D) reinsurance.
Answer: D
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) expense loading. B) deductible. C)
dividend. D) loss reserve.
Answer: A
A discount store chain is concerned that cashiers might steal money
from cash registers. To provide protection against theft by the
cashiers, the discount store chain can purchase a
A) fidelity bond. B) liability insurance policy.
C) surety bond. D) business income insurance
policy.
Answer: A
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) attitudinal hazard. B) adverse selection.
C) risk aversion. D) moral hazard.
Answer: B