Question 1

Bronson Casualty Company sells casualty insurance only.Which of the following coverages could you purchase from Bronson Casualty Company?

Accepted Answer

Bronson Casualty Company sells casualty insurance, which includes liability insurance. Life, fire, and marine insurance are not included in the category of casualty insurance.

Question 2

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?

Accepted Answer

Charging the same rate or a lower rate after the date of purchase would expose ABC to adverse selection, which is a problem that also impacts private insurers. Adverse selection occurs when individuals with a higher risk of needing service or making claims are more likely to purchase the warranty. This would result in ABC having to pay out more in claims and potentially losing money on the warranty program. By charging a higher fee after the date of purchase, ABC is attempting to offset this risk and ensure that it can cover the costs of any potential claims.

Question 3

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 requires Gina to purchase property insurance on the home so that the collateral supporting the loan will be protected.This scenario illustrates which of the following benefits of insurance to society?

Accepted Answer

The answer of Gina would like to buy a house.She...

Question 4

The term "multiple-line insurance" is used to describe a type of insurance that combines which of the following coverages into a single contract?

Accepted Answer

Multiple-line insurance combines property and casualty insurance into a single contract. This typically includes coverage for both damage to property and liability insurance. Workers compensation and health insurance are separate types of insurance, as are life and disability insurance, and pensions and annuities.

Question 5

LMN Insurance markets 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

Accepted Answer

Insurance policies combining property and casualty coverage in the same contract are called multiple-line policies. Mono-line policies refer to insurance policies that cover only one type of risk (e.g. only property or only auto). Multi-year policies refer to insurance policies that cover a longer period than one year. Manuscript policies are custom policies specifically tailored to meet the needs of an individual or business.

Question 6

ABC Insurance Company calculated the amount that it expected to pay in claims under 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)

Accepted Answer

The expense allowance added to cover the cost of doing business is known as expense loading. This is added to the expected claims amount to calculate the total premium that will be charged to the policyholder. Therefore, option C is the correct answer. The other options are incorrect as policyowner dividend refers to the amount returned to policyholders, rate credit refers to a discount given for lower risk, and premium is the total amount charged for an insurance policy.

Question 7

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

Accepted Answer

The distinguishing characteristics listed match those of social insurance programs, while the other options do not necessarily fit all of the criteria. Welfare programs may or may not be compulsory and are typically financed through general tax revenues, while casualty and private insurance programs are voluntary and often benefit higher-income individuals.

Question 8

All of the following are social costs associated with insurance EXCEPT

Accepted Answer

Increased cost of capital is not a social cost associated with insurance. Rather, it is a cost that is incurred by insurance companies themselves. Social costs, on the other hand, are costs that are incurred by society at large as a result of the insurance industry's activities. These costs may include things like fraudulent claims, inflated claims, and insurance company operating expenses.

Question 9

Which of the following statements is (are)true concerning private insurance?
I.Social insurance programs are private insurance programs.
II.Both individuals and businesses purchase private insurance.

Accepted Answer

Statement I is false because social insurance programs are government-sponsored programs, not private insurance. Statement II is true because both individuals and businesses can purchase private insurance policies.

Question 10

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 the farmer sustained.Which characteristic of insurance is embodied in this agreement?

Accepted Answer

The characteristic of pooling of losses is embodied in this agreement, as the losses of the individual farmers are spread over the entire group, allowing for a sharing of risk and costs.

Question 11

Which of the following statements regarding insurance and hedging is (are)true?
I.Insurance involves the transfer of insurable risk while hedging handles risk that is typically uninsurable.
II.Both insurance and hedging rely on the law of large numbers to reduce risk.

Accepted Answer

Statement I is true - insurance involves the transfer of insurable risk, while hedging handles risk that is typically uninsurable. 
Statement II is not necessarily true - while insurance relies on the law of large numbers to reduce risk, hedging can involve a variety of techniques that may not rely on the same principle.

Question 12

Alpha Insurance Company insures a broad range of risks,including whatever is not covered by fire,marine,and life insurers.Which term best describes the wide range of risks written by Alpha Insurance?

Accepted Answer

The term "casualty insurance" best describes the wide range of risks covered by Alpha Insurance, as it includes coverage for liability and other non-life related risks. Fidelity insurance only covers employee dishonesty, social insurance is a government-provided benefit system, and property insurance specifically covers damage to property.

Question 13

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?

Accepted Answer

The loss from flooding in flood plains can be catastrophic due to the high likelihood of many properties being affected simultaneously, making it challenging for insurance companies to spread the risk.

Question 14

Which of the following is a form of casualty insurance?

Accepted Answer

The answer of Which of the following is a form...

Question 15

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

Accepted Answer

The arrangement described in the scenario is reinsurance, where an insurer transfers part or all of the potential losses associated with their insurance policies to another insurer. This helps spread the risk and limit the potential losses in the event of a catastrophic event, such as an earthquake.

Question 16

All of the following are benefits to society that result from insurance EXCEPT

Accepted Answer

Insurance does not eliminate moral hazard, as it is a principle that refers to the tendency of insured individuals to take more risks than they would if they were not insured, knowing that any losses will be covered. However, insurance provides benefits such as less worry and fear, indemnification for loss, and loss prevention.

Question 17

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?

Accepted Answer

According to the law of large numbers, as the sample size increases, the actual results should approach the expected results more closely. Therefore, as JKL insures more homeowners, the number of claims filed should approach the expected rate of 14 out of 100 homeowners.

Question 18

Adverse selection occurs

Accepted Answer

Adverse selection occurs when applicants with a higher-than-average chance of loss seek insurance at standard rates. This leads to a disproportionate number of high-risk individuals in the insurance pool, causing higher overall losses for the insurer.

Question 19

Ashley opened an all-you-can-eat buffet restaurant.The cost per-person was based upon 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

Accepted Answer

The situation described in the scenario is an example of adverse selection, where one group (in this case, those with above-average appetites) is more likely to participate in a market offering a particular product or service, resulting in financial loss for the provider. Moral hazard refers to the tendency of people to take more risks or engage in more dangerous behavior when they are insured or protected from the consequences of their actions. Attitudinal hazard and fundamental risk are not relevant to the scenario.

Question 20

Which of the following statements about the insurance industry as a source of investment funds is (are)true?
I.These funds result in a lower cost of capital than would exist in the absence of insurance.
II.These funds tend to promote economic growth and full employment.

Accepted Answer

I is true because the insurance industry is able to pool risks and therefore reduce the cost of capital for businesses that need to buy insurance. This lowers the cost of capital for the economy as a whole. 
II is also true because insurance funds provide investment capital that can contribute to economic growth and job creation.

Quiz 2: Insurance and Risk