Question 1

Without the insurance mechanism, the reserves needed for the economy to pay for losses would be much greater.

Accepted Answer

Insurance allows for the pooling of risk among many entities, reducing the need for each individual or company to hold large reserves to cover potential losses. This mechanism spreads the financial risk over a larger group, making it more manageable and reducing the need for extensive reserves by any single entity.

Question 2

One social cost of insurance is attributed to the fact that if it were not for insurance, certain losses would not occur.

Accepted Answer

This phenomenon is known as moral hazard, where the presence of insurance can lead individuals to take greater risks or exercise less caution than they would without insurance, potentially leading to more losses.

Question 3

Match the descriptions with their terms:
-An economic institution that reduces risk is _________________.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

The answer of Match the descriptions with their terms:
-An economic...

Question 4

Match the descriptions with their terms:
-One of the _________________ is that a loss must be determinable and measurable.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

The answer of Match the descriptions with their terms:
-One of...

Question 5

Match the descriptions with their terms:
-Insuring a small, highly-probable loss before insuring a potentially severe but unlikely loss violates the _________________.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

The answer of Match the descriptions with their terms:
-Insuring a...

Question 6

Match the descriptions with their terms:
-A contract in which one party might give up a great deal more than is received in the transaction is a/an _________________.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

An aleatory contract is one in which the performance and obligations of the parties involved depend on an uncertain event. In the context of insurance, this means that one party (the insurer) might end up providing significantly more in terms of payout compared to what the other party (the insured) pays in premiums, especially if a claim is made early in the policy term or if the claim is for a large amount.

Question 7

Match the descriptions with their terms:
-The principle of _________________ says that a person must demonstrate a loss due to an insured peril.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

The answer of Match the descriptions with their terms:
-The principle...

Question 8

Match the descriptions with their terms:
-The principle that one who has indemnified another's loss is entitled to recovery from liable parties is called _______________.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

The answer of Match the descriptions with their terms:
-The principle...

Question 9

Match the descriptions with their terms:
-The principle of _________________ imposes a higher standard of honesty on parties to an insurance agreement than is imposed in ordinary commercial contracts.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

The answer of Match the descriptions with their terms:
-The principle...

Question 10

Match the descriptions with their terms:
-A statement made by an applicant for insurance before the contract is effected is a/an _________________.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

The answer of Match the descriptions with their terms:
-A statement...

Question 11

Match the descriptions with their terms:
-_________________ has been defined as "silence when obligated to speak."
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

Concealment refers to the failure to disclose relevant information in a contract, particularly in insurance contracts, where one party is obligated to reveal all material facts to the other party.

Question 12

Match the descriptions with their terms:
-A/An _________________ is a statement saying that before the insurer is liable, a certain fact, condition, or circumstance affecting the risk must exist.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

The answer of Match the descriptions with their terms:
-A/An _________________...

Question 13

Match the descriptions with their terms:
-Implied warranties are those stated in the contract while _________________ warranties are not found in the contract but are assumed by the parties to the contract.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

Express warranties are those stated in the contract, contrasting with implied warranties which are not explicitly stated but are assumed.

Question 14

Match the descriptions with their terms:
-A/An _________________ is an agreement embodying a set of promises that are enforceable at law.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

A contract is defined as an agreement that creates obligations enforceable by law, which matches the description given.

Question 15

Match the descriptions with their terms:
-_________________ is a legal doctrine under which a person may be required to do something or refrain from doing something that is inconsistent with previous behavior.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

Estoppel is a legal principle that prevents someone from arguing something contrary to a claim they have previously made or accepted by their actions.

Question 16

Match the descriptions with their terms:
-A/An _________________ is a voluntary relinquishing of a known right.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

The answer of Match the descriptions with their terms:
-A/An _________________...

Question 17

Match the descriptions with their terms:
-The doctrine of _________________ states that policy language should be interpreted as a layperson would comprehend it and not according to the interpretation of a trained underwriter.
A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Accepted Answer

The answer of Match the descriptions with their terms:
-The doctrine...

Question 18

Insurance and gambling differ in that, in contrast to insurance,
A) gambling is always illegal,
B) gambling involves creation of new risk,
C) gambling is not an aleatory contract,
D) the gambler usually wins in the long run,
E) gambling is an example of hedging.

Accepted Answer

Gambling involves the creation of a new risk for the purpose of betting on its outcome, whereas insurance is designed to manage and mitigate existing risks.

Question 19

An exception to the principle of indemnity in about half of the United States is the concept of
A) subrogation,
B) misrepresentation,
C) valued policies.

Accepted Answer

Valued policies are an exception to the principle of indemnity in about half of the United States. Under a valued policy, the insurer agrees to pay a specified amount in the event of a total loss, regardless of the actual value of the loss. This contrasts with the principle of indemnity, which typically aims to compensate the insured only for the actual value of the loss.

Question 20

Which of the following is false?
A) An individual always has an insurable interest in his or her own life,
B) Any creditor has an insurable interest in the property of a debtor,
C) The holder of a contract who receives oil royalties has an insurable interest in the property,
D) The lessee of a building may have an insurable interest in the building even though he or she does not own it,
E) A father has an insurable interest in the life of his minor child.

Accepted Answer

The statement that any creditor has an insurable interest in the property of a debtor is false. While a creditor may have an insurable interest in the life of a debtor or in property used as collateral for a loan, they do not automatically have an insurable interest in all of the debtor's property. Insurable interest is based on a financial relationship where the insured party would suffer financial loss upon the damage or loss of the property or upon the death of the insured person.

Quiz 6: Insurance As a Risk Management Technique: Principles

Without the insurance mechanism, the reserves needed for the economy to pay for losses would be much greater.

One social cost of insurance is attributed to the fact that if it were not for insurance, certain losses would not occur.

Match the descriptions with their terms: -An economic institution that reduces risk is _________________.

Match the descriptions with their terms: -One of the _________________ is that a loss must be determinable and measurable.

Match the descriptions with their terms: -Insuring a small, highly-probable loss before insuring a potentially severe but unlikely loss violates the _________________.

Match the descriptions with their terms: -A contract in which one party might give up a great deal more than is received in the transaction is a/an _________________.

Match the descriptions with their terms: -The principle of _________________ says that a person must demonstrate a loss due to an insured peril.

Match the descriptions with their terms: -The principle that one who has indemnified another's loss is entitled to recovery from liable parties is called _______________.

Match the descriptions with their terms: -The principle of _________________ imposes a higher standard of honesty on parties to an insurance agreement than is imposed in ordinary commercial contracts.

Match the descriptions with their terms: -A statement made by an applicant for insurance before the contract is effected is a/an _________________.

Match the descriptions with their terms: -_________________ has been defined as "silence when obligated to speak."

Match the descriptions with their terms: -Implied warranties are those stated in the contract while _________________ warranties are not found in the contract but are assumed by the parties to the contract.

Match the descriptions with their terms: -A/An _________________ is an agreement embodying a set of promises that are enforceable at law.

Match the descriptions with their terms: -_________________ is a legal doctrine under which a person may be required to do something or refrain from doing something that is inconsistent with previous behavior.

Match the descriptions with their terms: -A/An _________________ is a voluntary relinquishing of a known right.

Match the descriptions with their terms: -The doctrine of _________________ states that policy language should be interpreted as a layperson would comprehend it and not according to the interpretation of a trained underwriter.

Insurance and gambling differ in that, in contrast to insurance,

An exception to the principle of indemnity in about half of the United States is the concept of

Which of the following is false?