Question 1

All of the following are perils except:
A)heart attack
B)theft
C)forgery and embezzlement
D)incorrect instructions on the label of a pesticide

Accepted Answer

Perils typically refer to events or accidents that cause damage or loss, such as heart attacks, theft, and forgery and embezzlement. Incorrect instructions on the label of a pesticide, however, are more related to liability issues or product defects rather than perils.

Question 2

Which of the following is a false statement?
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

Accepted Answer

D

Question 3

A difference between a contract issued on a "named peril" basis versus an "open peril" or "all-risk" basis is:
A)the "named peril" contract usually covers more perils
B)the "named peril" contract is usually more expensive than the "open peril" contract
C)in the "named peril" contract the insured must prove the peril is covered where in the "open peril" contract the burden of proof is on the insurer to show no coverage
D)in the "open peril" or "all risk" contract there are no exclusions to loss

Accepted Answer

In a "named peril" contract, only specific perils listed in the policy are covered, and the insured must prove that a loss was caused by one of those named perils. In an "open peril" or "all-risk" contract, all perils are covered except those specifically excluded in the policy, and the burden of proof is on the insurer to show that a loss is not covered by one of the exclusions.

Question 4

Which of the following is a true statement?
A)Insurers are significant financial intermediaries in the U.S. economy
B)Property insurers are prohibited from investing their reserve accounts in private enterprise
C)The insurance companies in the U.S. are estimated to hold approximately $5 trillion in assets
D)Both a and c above are true statements

Accepted Answer

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

Question 5

If an individual causes a loss intentionally,we would say that person is a:
A)physical hazard
B)moral hazard
C)morale hazard
D)politician

Accepted Answer

Moral hazard refers to the risk that an individual will behave in a reckless or careless manner because they are insulated from the consequences of their actions. Intentionally causing a loss indicates a moral hazard.

Question 6

All the following are direct losses except:
A)a car is stolen
B)a house suffers flood damage
C)an apartment must be rented after a house is destroyed by fire
D)a business loses $100,000 in a law suit

Accepted Answer

Direct losses refer to the immediate damage or loss of property, such as theft (A), flood damage (B), or financial loss due to a lawsuit (D). Renting an apartment (C) is an indirect loss, as it is a consequence of the direct loss (house destroyed by fire), not the immediate damage itself.

Question 7

Proximate cause means:
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

Accepted Answer

The answer of Proximate cause means:
A)the first insured peril in...

Question 8

Defective electrical wiring that may lead to a fire is an example of a:
A)named peril
B)morale hazard
C)speculative risk
D)physical hazard

Accepted Answer

Defective electrical wiring is a physical hazard as it is a condition or characteristic of a physical object that increases the probability of loss.

Question 9

"Cash flow underwriting" refers to:
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

Accepted Answer

Cash flow underwriting refers to the practice of selling insurance at inadequate prices and relying on investment income to offset losses. This approach is risky and unsustainable in the long term, as investment income is volatile and cannot be relied upon to consistently make up for underpriced policies.

Question 10

Smoking cigarettes is an example of:
A)moral hazard
B)morale hazard
C)speculate risk
D)a peril

Accepted Answer

The answer of Smoking cigarettes is an example of:
A)moral hazard
B)morale...

Question 11

Which of the following potential losses is not an example of a pure risk?
A)loss of a home by fire
B)theft of a car
C)loss of $10,000 in the stock market
D)theft of your wallet containing $100

Accepted Answer

Pure risk involves the possibility of loss with no possibility of gain. In the case of losing money in the stock market, there is also the possibility of gaining money, making it a speculative risk. The other options are examples of pure risks.

Question 12

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

Accepted Answer

Option A, C, and D are all factors that contribute to the increased cost of operating the insurance mechanism. However, option B states "losses due to uninsured flood losses," which suggests that these losses are not being covered by insurance and therefore not affecting the cost of operating the insurance mechanism.

Question 13

All the following are direct losses except:
A)a house is burglarized
B)a store loses $200,000 in sales because a fire closes it down for two weeks
C)a corporation must pay $1 million in ransom when its CEO is kidnapped
D)an delivery truck needs $15,000 in repairs after a collision

Accepted Answer

Direct losses refer to immediate, tangible damages resulting from an event. Choices A, C, and D involve direct costs to repair, replace, or recover physical assets or persons. Choice B, however, represents an indirect loss, as it pertains to lost sales or revenue, not a direct physical loss or damage.

Question 14

Which of the following is NOT a direct social benefit of the insurance mechanism?
A)increased business and social stability
B)better allocation of society's resources
C)better choice of optimum size of business operations
D)lower federal and state income taxes

Accepted Answer

Lower federal and state income taxes are not a direct social benefit of the insurance mechanism, as insurance primarily focuses on compensating for individual or collective losses and reducing financial risks. While insurance can indirectly contribute to better resource allocation, business stability, and decision-making, its primary objective is to provide financial protection and security to individuals, businesses, and communities. Lowering taxes is not a direct consequence of the existence or function of insurance.

Question 15

It may be correctly claimed that insurers usually do not pay for losses because:
A)it is the insured's money that is used to pay the claims
B)most insurers do not pay claims until the insured sues them
C)almost all claims are caused by fraud
D)insurers estimate claims actuarially in advance in order to avoid payments

Accepted Answer

Insurers collect premiums from their policyholders and pool that money to pay for claims. When a claim is made, the money used to pay it essentially comes from the collective premiums of all the insured individuals, not directly from the insurer's own funds.

Question 16

A peril is defined as:
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

Accepted Answer

A peril is the proximate cause of the loss, meaning it is the direct cause of the loss event.

Question 17

Which of the following is not a hazard?
A)storing one ton of dynamite in a garage
B)bad diet (eating lots of junk food)
C)skating on thin ice
D)getting shot accidentally while deer hunting

Accepted Answer

The answer of Which of the following is not a...

Question 18

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

Accepted Answer

Payments for losses caused by windstorms such as tornadoes are not costs to society arising from an insurance system's operation because they are the reasons why the insurance exists in the first place. Insurance companies are designed to protect against losses caused by natural disasters and other unforeseeable events. Therefore, payments for such losses are not a negative consequence of the insurance system, but rather a benefit. Choices A, B, and C are all costs that arise from the insurance system's operation.

Question 19

Which of the following factors is not considered when an insurance rate or premium is calculated?
A)the cost of the actual losses
B)the cost of the insurance salesman and other company expenses
C)investment earnings on prepaid premiums
D)McCarran-Ferguson Act

Accepted Answer

The McCarran-Ferguson Act is a federal law that gives states the power to regulate insurance. It is not a factor considered when calculating insurance rates or premiums, as it pertains to the regulatory structure of the industry rather than the financial aspects. The cost of actual losses, the cost of company expenses, and investment earnings on prepaid premiums are all factors that can impact the calculated premium for an insurance policy.

Question 20

Assume 1000 students all healthy,all age 22,and all male,form a life insurance pool to pay $500 to the beneficiaries of any member who dies in the next 365 days.The chance of loss or probability of death for the members of this group is .002.To join the pool a member must pay: (disregard interest earnings and reserves and assume expenses of operating the insurance pool are 30% of losses).
A)$1
B)$1.30
C)$3
D)$2.28

Accepted Answer

The answer of Assume 1000 students all healthy,all age 22,and...

Quiz 1: Fundamentals and Terminology

All of the following are perils except:

Which of the following is a false statement?

A difference between a contract issued on a "named peril" basis versus an "open peril" or "all-risk" basis is:

Which of the following is a true statement?

If an individual causes a loss intentionally,we would say that person is a:

All the following are direct losses except:

Proximate cause means:

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

"Cash flow underwriting" refers to:

Smoking cigarettes is an example of:

Which of the following potential losses is not an example of a pure risk?

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

All the following are direct losses except:

Which of the following is NOT a direct social benefit of the insurance mechanism?

It may be correctly claimed that insurers usually do not pay for losses because:

A peril is defined as:

Which of the following is not a hazard?

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

Which of the following factors is not considered when an insurance rate or premium is calculated?