Question 1

All of the following are costs to society arising from an insurance system's operation except:

Accepted Answer

A) payments for losses caused by fraudulent claims 
B) payments for losses caused by exaggerated claims 
C) use of land, labor and capital to operate the insurance companies 
D) payments for losses caused by windstorms such as tornadoes 
A) payments for losses caused by fraudulent claims 
B) payments for losses caused by exaggerated claims 
C) use of land, labor and capital to operate the insurance companies 
D) payments for losses caused by windstorms such as tornadoes

Question 2

Insurance companies utilize the law of large numbers to reduce the chance of loss for their insureds.

Accepted Answer

A) True 
 B)False

Question 3

The International Financial Reporting Standards definition of "insurance contract" specifically includes insurance contracts that have a low degree of risk transfer.

Accepted Answer

A) True 
 B)False

Question 4

Why are a large number of exposure units generally required for a risk to be insurable?

Accepted Answer

A) It prevents the insurer from losing money 
B) It guarantees that losses will be unintentional and measurable 
C) It enables the insurer to better predict the frequency and severity of losses (moderate) 
D) It minimizes physical hazards 
A) It prevents the insurer from losing money 
B) It guarantees that losses will be unintentional and measurable 
C) It enables the insurer to better predict the frequency and severity of losses (moderate) 
D) It minimizes physical hazards

Question 5

Proximate cause means:

Accepted Answer

A) the first insured peril in a chain of events leading to a loss 
B) the event nearest the peril in time 
C) the event nearest the peril in space 
D) the event nearest the loss in time and space 
A) the first insured peril in a chain of events leading to a loss 
B) the event nearest the peril in time 
C) the event nearest the peril in space 
D) the event nearest the loss in time and space

Question 6

What is the difference between moral hazard,morale hazard,and physical hazard?

Accepted Answer

A hazard increases the severity or the f

Question 7

The law of large numbers allows the insurer to predict aggregate dollar losses in advance of their occurrence.

Accepted Answer

A) True 
 B)False

Question 8

A peril is defined as:

Accepted Answer

A) the proximate cause of the loss 
B) the chance a loss will occur 
C) a morale hazard 
D) a contingency that increases the chance of a loss 
A) the proximate cause of the loss 
B) the chance a loss will occur 
C) a morale hazard 
D) a contingency that increases the chance of a loss

Question 9

If a person installs an automatic sprinkler system to prevent serious fire damage,this action can be considered "insurance" as defined in the text

Accepted Answer

A) True 
 B)False

Question 10

The aggregate increased cost to society of operating the insurance mechanism includes all of the following except:

Accepted Answer

A) cost of operating the insurance company 
B) losses due to uninsured flood losses 
C) the occurrence of intentional losses to collect insurance 
D) the tendency for insureds to exaggerate the amount of actual losses in the claim process 
A) cost of operating the insurance company 
B) losses due to uninsured flood losses 
C) the occurrence of intentional losses to collect insurance 
D) the tendency for insureds to exaggerate the amount of actual losses in the claim process

Question 11

"Loss" and "chance of loss" are terms with the same meaning.

Accepted Answer

A) True 
 B)False

Question 12

In general,aggregate losses must be predictable in advance for an insurance system to work properly.

Accepted Answer

A) True 
 B)False

Question 13

What are considered the benefits and the costs to society of operating an insurance mechanism?

Accepted Answer

The costs of operating the insurance mec

Question 14

"Cash flow underwriting" refers to:

Accepted Answer

A) a combined ratio of 100% 
B) insurance companies raising the price of insurance as long as individuals are willing to pay for it 
C) refusing to sell insurance to certain geographic areas because of their expected high losses 
D) selling insurance at inadequate prices and offsetting the loss with investment income 
A) a combined ratio of 100% 
B) insurance companies raising the price of insurance as long as individuals are willing to pay for it 
C) refusing to sell insurance to certain geographic areas because of their expected high losses 
D) selling insurance at inadequate prices and offsetting the loss with investment income

Question 15

Rusty is the president of The Huge Insurance Company. His Vice-President in charge of Finance comes to him one day and says "Rusty,our combined ratio for the year is 95%." Rusty replies,"Wooo hooo,profit sharing bonuses for everyone!" Why isn't Rusty upset about this combined ratio?

Accepted Answer

A) The company probably made enough money on its investments to make up for the underwriting losses 
B) The company has actually made a profit on its insurance business 
C) Rusty is not very bright and doesn't understand what the combined ratio really means 
D) The combined ratio is not an important indicator of underwriting results 
A) The company probably made enough money on its investments to make up for the underwriting losses 
B) The company has actually made a profit on its insurance business 
C) Rusty is not very bright and doesn't understand what the combined ratio really means 
D) The combined ratio is not an important indicator of underwriting results

Question 16

Insurance creates morale hazards.

Accepted Answer

A) True 
 B)False

Question 17

Which statement about the mathematically fair price for insurance is true?

Accepted Answer

A)  People who will pay no more than the mathematically fair price for insurance are considered to be risk neutral. 
B) People who will pay no more than the mathematically fair price for insurance are considered to be risk seeking. 
C) When everyone pays the mathematically fair price for insurance, subsidization is reduced or eliminated. 
D) The mathematically fair price is impossible to calculate. 
A)  People who will pay no more than the mathematically fair price for insurance are considered to be risk neutral. 
B) People who will pay no more than the mathematically fair price for insurance are considered to be risk seeking. 
C) When everyone pays the mathematically fair price for insurance, subsidization is reduced or eliminated. 
D) The mathematically fair price is impossible to calculate.

Question 18

An insurance contract creates duties for the insurer,but only the insured has contractual rights.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is a false statement?

Accepted Answer

A) Risk averse people will pay an insurance premium that is greater than the mathematically fair chance of loss in order to relieve themselves of uncertainty 
B) A risk seeker is willing to assume risk 
C) The mathematically fair price for insurance is the objective risk for the insurer multiplied by the maximum possible loss 
D) Insurance is never a mathematically fair trade because the insurer adds several operating and other costs to loss costs when it calculates the premium 
A) Risk averse people will pay an insurance premium that is greater than the mathematically fair chance of loss in order to relieve themselves of uncertainty 
B) A risk seeker is willing to assume risk 
C) The mathematically fair price for insurance is the objective risk for the insurer multiplied by the maximum possible loss 
D) Insurance is never a mathematically fair trade because the insurer adds several operating and other costs to loss costs when it calculates the premium

Question 20

Defective electrical wiring that may lead to a fire is an example of a:

Accepted Answer

A) named peril 
B) morale hazard 
C) speculative risk 
D) physical hazard 
A) named peril 
B) morale hazard 
C) speculative risk 
D) physical hazard

Exam 1: Fundamentals and Terminology

All of the following are costs to society arising from an insurance system's operation except:

Insurance companies utilize the law of large numbers to reduce the chance of loss for their insureds.

The International Financial Reporting Standards definition of "insurance contract" specifically includes insurance contracts that have a low degree of risk transfer.

Why are a large number of exposure units generally required for a risk to be insurable?

Proximate cause means:

What is the difference between moral hazard,morale hazard,and physical hazard?

The law of large numbers allows the insurer to predict aggregate dollar losses in advance of their occurrence.

A peril is defined as:

If a person installs an automatic sprinkler system to prevent serious fire damage,this action can be considered "insurance" as defined in the text

The aggregate increased cost to society of operating the insurance mechanism includes all of the following except:

"Loss" and "chance of loss" are terms with the same meaning.

In general,aggregate losses must be predictable in advance for an insurance system to work properly.

What are considered the benefits and the costs to society of operating an insurance mechanism?

"Cash flow underwriting" refers to:

Rusty is the president of The Huge Insurance Company. His Vice-President in charge of Finance comes to him one day and says "Rusty,our combined ratio for the year is 95%." Rusty replies,"Wooo hooo,profit sharing bonuses for everyone!" Why isn't Rusty upset about this combined ratio?

Insurance creates morale hazards.

Which statement about the mathematically fair price for insurance is true?

An insurance contract creates duties for the insurer,but only the insured has contractual rights.

Which of the following is a false statement?

Defective electrical wiring that may lead to a fire is an example of a:

Defining the Insurable Event

Risk Management

Financial Services Companies

Insurance Occupations

the Insurance Market: the Economic Problem

Insurance Regulation

Insurance Contracts

Basic Property and Liability Insurance Contracts

Homeowners Insurance

the Personal Auto Policy

Professional Financial Planning

Life Insurance Policies

Standard Life Insurance Contract Provisions And Options

Annuities

Medical Expense and Disability Insurance

Advanced Topics in Risk Management

Commercial Property Insurance

Commercial Liability Insurance

Bonding,Crime Insurance and Reinsurance

Employee Benefits

Social Security

Unemployment and Workers Compensation Insurance

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