Deck 7: Insuring Cars and Homes

Question 1

Speculative risk is defined as the

A) exposure to a loss.
B) possibility of either loss or gain.
C) volatility of markets.
D) downside possibility of outcomes.

Answer 1

possibility of either loss or gain.

Question 2

A risk that produces only bad outcomes, such as an accident or a fire, is called ____ risk.

A) speculative
B) marginal
C) pure
D) negative

Answer 2

pure

Question 3

Pure risk is a type of risk that exposes a person to uncertainty that

A) offers the possibility of either losses or gains.
B) produces only losses.
C) is associated with only controllable events.
D) produces only good outcomes.

Answer 3

produces only losses.

Question 4

What is the first step in the risk management process?

A) Evaluating potential losses
B) Identifying your risk exposures
C) Obtaining insurance quotes
D) Choosing the best risk management method

Question 5

As in most financial planning, the last step in developing your insurance plan is to

A) reevaluate your needs regularly.
B) determine your coverage needs.
C) choose the best package available.
D) identify top insurers.

Question 6

Frequency of loss is the

A) dollar amount of the loss if a loss occurs.
B) amount of loss as a percentage of total finances.
C) likelihood that a loss will occur.
D) method for avoiding risk.

Question 7

If a loss occurs, the dollar value of that loss is known as

A) liability risk.
B) pure risk.
C) severity of loss.
D) frequency of loss.

Question 8

Insurance is the risk management method usually most appropriate for __________________ risks.

A) high frequency and low severity
B) low frequency and high severity
C) low frequency and low severity
D) high frequency and high severity

Question 9

Which is not an appropriate risk management method?

A) Avoiding
B) Retaining
C) Transferring
D) Evaluating

Question 10

Liability risk is the risk of being held responsible for

A) your losses.
B) someone else's losses.
C) the actions of others.
D) the actions of mother nature.

Question 11

The severity of loss involves estimating

A) the likelihood that loss will occur and applying it to the value of the loss.
B) each possible loss scenario and its respective probability and taking the weighted average of the possible scenarios.
C) the worst-case value of the loss.
D) the probability of the loss and applying that to the replacement value of the loss.

Question 12

To determine the expected loss, multiply the

A) expected frequency by the expected severity.
B) frequency by the loss history.
C) probability of frequency by the value of a total loss.
D) probability of frequency by the market value of loss.

Question 13

It is impossible to avoid exposure to property and liability risks if you

A) don't own insurance.
B) don't own property.
C) go beyond your property limits.
D) own property or go beyond your property limits.

Question 14

Wearing a helmet when riding a bike is an example of risk

A) avoidance.
B) reduction.
C) transfer.
D) retention.

Question 15

Purchasing insurance is a common

A) loss control technique.
B) risk transfer method.
C) risk avoidance method.
D) loss avoidance technique.

Question 16

If you choose not to buy collision insurance for your older automobile, this is an example of risk

A) avoidance.
B) retention.
C) transfer.
D) reduction.

Question 17

In order to evaluate your potential losses, you must

A) estimate the dollar cost of potential losses and transfer the risk.
B) estimate the probability the loss will occur and estimate the dollar cost of the loss.identify your risk exposures and estimate the dollar cost of potential losses.
C) avoid the risk or reduce the risk.

Question 18

If you have a 30% chance of having your car stolen next year and the average loss of a stolen car is $12,000, then the expected cost of the loss to you would be

A) $171.
B) $400.
C)$3,600.
D)$8,400

Question 19

Jenny owns a home in a heavily wooded area. If there is a 1-in-25 chance of fire in the area, what is her expected loss given the following possible outcomes:
.Minor smoke damage: cost = $5,000, probability= 50%
.Exterior fire damage: cost = $15,000, probability= 30%
.Everything ruined: cost = $150,000, probability = 5%

A) $280
B) $580
C) $800
D) $6,800

Question 20

A person abstaining from smoking is practicing which of the following methods of risk management?

A) Risk avoidance
B) Risk reduction
C) Risk transfer
D) Risk retention

Question 21

The most common method of transferring risk is

A) avoidance.
B) buying insurance.
C) self-insurance.
D) loss control methods.

Question 22

When you purchase homeowner's insurance, you are

A) transferring the risk.
B) reducing the risk.
C) avoiding the risk.
D) retaining the risk.

Question 23

Self-insurance is another name for

A) risk retention.
B) risk reduction.
C) risk avoidance.
D) risk averseness.

Question 24

What is the equation for estimating expected, or average, loss?

A) Expected loss = Expected frequency × Expected severity
B) Expected loss = Expected frequency + Expected severity
C) Expected loss = Expected frequency ? Expected severity
D) Expected loss = Expected frequency/Expected severity

Question 25

Vickie owns a small grocery store. She knows that inexpensive items, such as gum and candy, are often stolen, so she anticipates the cost into her budget. For Vickie, the risk of shoplifting is considered

A) low frequency and low severity.
B) low frequency but high severity.
C) high frequency but low severity.
D) high frequency and high severity.

Question 26

All of the following are loss reduction methods except

A) wearing old clothes when you do yard work.
B) wearing a seat belt when in a motor vehicle.
C) constructing your home with fire-resistant materials.
D) taking a defensive driving course.

Question 27

___________is the risk of being held legally responsible for injuries to another person or their property.

A) Liability risk
B) Risk retention
C) Speculative risk
D) Pure risk

Question 28

Risk pooling is based on the

A) law of averages.
B) law of large numbers.
C) normal distribution of risk.
D) historical averages.

Question 29

The price an insurer charges a policyholder for insurance protection is called the

A) coinsurance.
B) premium.
C) insurable interest.
D) copayment.

Question 30

Which is a characteristic of property risk in flood zones?

A) Nonrandom
B) Unpredictable
C) Correlated
D) Systematic

Question 31

A suicide would be classified as a

A) nonrandom risk.
B) correlated risk.
C) unpredictable risk.
D) idiosyncratic risk.

Question 32

If your home has a value of $75,000, you cannot insure it for $100,000. This is based on the

A) law of reciprocity.
B) law of averages.
C) principle of indemnity.
D) principle of insurability.

Question 33

The amount of a loss that must be paid by an insured before the insurance company will pay any insurance benefit is known as the

A) premium.
B) deductible.
C) coinsurance.up-front fee.

Question 34

Correlated risks are

A) a perfect storm of risks that happen at the same time.
B) isolated risks that affect a distinct group of policyholders.
C) risks that affect a large number of policyholders in the same area.
Risks that affect a distinct group of policyholders in different areas.

Question 35

The principal of indemnity, which underlies insurance law, says you should

A) not be able to recover more from insurance than what you have lost.
B) be able to command a premium on what you have lost.
C) be reasonably compensated for pain and suffering through loss.
D) not be able to recover up to what you have lost.

Question 36

Jerome insured his home for $120,000. He purchased it for $125,000 and the recent fair market value is $110,000. He recently had a kitchen fire that extended its damage to the foundation. It looks like his home is beyond repair. What is the most he can recover from his insurance policy?

A) $110,000
B) $115,000
C) $120,000
D) $125,000

Question 37

If an agent added a rider to a policy, the coverage for loss most likely would have

A) increased.
B) decreased.
C) stayed the same.
D) been nullified.

Question 38

If there is an exclusion on your policy, it identifies losses that ________ covered under the policy.

A) are
B) are notwill be
C) used to be

Question 39

A deductible is the

A) proportion of the loss the insured must pay after the insurance company pays an initial amount.
B) amount of a loss the insurer must reimburse the insured after a loss.
C) proportion of the loss the insurer must pay before the insured pays any of the cost.
D) amount of a loss the insured must pay before the insurance company will pay any insurance benefits.

Question 40

The principle of indemnity means that an

A) insured can only purchase an insurance policy that covers actual losses.
B) insurance company will only pay the policyholder up to the face amount of the policy.
C) insurance company will reimburse the insured only for actual losses.
D) insured can only purchase insurance to cover his or her own property.

Question 41

A deductible requires the policyholder to pay

A) a percentage of the year's claim.
B) a fixed dollar amount out of pocket before the insurance company is obligated to pay anything.
C) the amount in excess of the insurance company's negotiated amount for the claim.
D) a fixed percentage amount of every claim.

Question 42

Insurance policies often include terms and conditions that increase the predictability of the loss to the insurer and _______ premium costs to the insured.

A) increase
B) reduce
C) do not affect
D) ignore

Question 43

The law of large numbers holds that as the size of a pool of identical risks _______, the loss per person becomes ________ predictable.

A) decreases; more
B) increases; more
C) increases; less
D) remains the same; more

Question 44

If Sharon Johnson, a 49-year-old experienced driver, and Tia Young, a 16-year-old new driver, were both applying for an auto insurance policy in town, they would be placed in

A) the same risk classification.
B) the same premium class.
C) different risk classifications.
D) different correlated risk classes.

Question 45

Maryanne has chosen a homeowner's insurance policy with a low premium that meets her financial needs. Her home was broken into, and $5,000 worth of possessions were stolen. If her deductible is $3,000 and she did not have an alarm system. How much will her insurance company pay for the loss?

A) $0
B) $2,000
C) $3,000
$5,00

Question 46

If you want insurance coverage for your art collection, you will need to purchase which of the following?

A) A homeowner's insurance policy
B) A rider on your homeowner's insurance policy
C) A personal property insurance policy
D) You cannot insure your art collection because the risk of theft is too great.
'

Question 47

Lucy McCain bought supplemental coverage for an additional premium on her policy. She purchased a(n)

A) exclusion.
B) rider.deductible.
C) addendum.

Question 48

Christopher's house is insured for $250,000, and he has been paying premiums for the past 10 years. Chris's home was wiped out in a hurricane. The face value of the policy is $250,000, the remaining mortgage is $115,000, and the appraised value is $210,000. How much can he recover from his insurance company for the loss?

A) $95,000
B) $115,000
C) $210,000
D) $250,000

Question 49

For homeowners, the risk of being held legally responsible for losses incurred by visitors to their home is called

A) liability risk.
B) real property risk.
C) personal property risk.
D) umbrella risk.

Question 50

For homeowners, the risk that your home will be damaged by fire, rain, wind, hail, or another natural occurrence is called

A) liability risk.
B) real property risk.
C) personal property risk.
D) umbrella risk.

Question 51

People who rent homes or apartments can purchase insurance that covers

A) all property and liability risks.
B) personal property and liability losses but not damage to the building itself.
C) personal property losses only.
D) liability risk only.

Question 52

A swimming pool on your property normally invokes a special liability standard known as

A) the principle of indemnity.
B) contributory negligence.
C) strict liability.
D) variable liability.

Question 53

If a person bears some fault for his or her own injury, this is known as

A) contributory indemnity.
B) contributory negligence.
C) strict liability.
D) variable liability.

Question 54

The standard homeowner's insurance policy pays for the _______ value of your home.

A) replacement
B) depreciated
C) amortized mortgage
D) face

Question 55

A laptop computer that is stolen from Vanessa's home while on vacation is covered under her

A) homeowner's insurance policy in full.
B) homeowner's insurance policy, subject to the deductible.
C) auto insurance policy, subject to the deductible.
D) umbrella liability insurance policy.

Question 56

Most homeowner's insurance policies provide _____ in basic personal liability coverage.

A) $10,000
B) $100,000
C) $500,000
D) $1,000,000

Question 57

Homeowner's insurance premiums are based on the

A) replacement amount of coverage you select.
B) face value of the policy.
C) expected loss and risk characteristics of the insured.
D) expected loss average of the insurance pool.

Question 58

Whenever children are injured by an "attractive nuisance" on your property, the standard of _______ applies.

A) large numbers
B) strict liability
C) indemnity
D) insurability

Question 59

If a cable repair technician decides to climb on your roof to check the wiring and jump off, you probably _____ be responsible for his injuries because of the ______.

A) will; assumption of risk
B) will not; assumption of risk
C) will; attractive nuisance
D) will not; attractive nuisance

Question 60

No-fault medical coverage in the liability section of a homeowner's policy means

A) both parties are assumed to be equally at fault and no claims are filed.
B) the insurer will pay the loss without requiring the injured party to prove negligence.
C) that everyone must file under their own policy. no fault is assumed by the homeowner or the injured.
D) no party is assumed to be at fault, unless claims are adjudicated in court.

Question 61

When you apply for homeowner's insurance, the insurance company will normally look up your loss history on a national electronic database called the _____ database.

A) Comprehensive Loss Underwriting Exchange
B) Comprehensive National Underwriting Association
C) National Underwriters' Exchange Registry
D) National Loss

Question 62

________ is/are the single most valuable asset(s) owned by most families.

A) Retirement accounts
B) Mutual fund investments
C) Home equityVehicles

Question 63

Carol lost all her belongings in a burglary. She has a $150,000 face value homeowner's policy with a $500 deductible. The appraised value of her various insured personal property is $77,000. How much will she receive from insurance?

A) $74,500
B) $75,000
C) $76,500
D) $77,000

Question 64

Brenda experienced a fire that caused $60,000 of damage on a home that is appraised at $120,000. She has an $80,000 face value homeowner's policy. Her policy has a $500 deductible and has an 80% coinsurance requirement. How much will her insurer reimburse her for the repair?

A) $39,500
B) $47,500
C) $59,500
D) $23,500

Question 65

Insurance purchased to cover personal property and liability but not damage to the landlord's building is called ________ insurance.

A) umbrella
B) renter's
C) homeowner's
D) limited liability

Question 66

Which risk is not a category of home risks?

A) Personal property risk
B) Real property risk
C) Contributory negligence risk
D) Liability risk

Question 67

A failure to fulfill a legal duty that causes injury to another person or that person's property is considered

A) negligence.
B) liability.
C) property risk.
D) personal risk.

Question 68

What legal rule applies when the victim of negligence is found to have had a part in causing his or her own injury?

A) Contributory negligence
B) Assumption of risk
C) Strict liability
D) Causal negligence

Question 69

An umbrella policy is a policy purchased to

A) provide coverage for rain, snow, and hail damage.
B) supplement other liability insurance coverage.
C) supplement other property and liability insurance coverage.
D) provide excess personal property coverage.

Question 70

In trying to protect his increasing net worth, Arbuckle Farnsworth is worried about lawsuits stemming from accidents and situations not covered by his modest liability limit on his homeowner's policy. Which type of insurance should he consider purchasing in addition to his current policy?

A) Scheduled property insurance
B) Strict liability insurance
C) Umbrella insurance
Rider insurance

Question 71

Why do insurers use credit history as a factor in rating auto and homeowner's insurance?

A) People with bad credit are likely to make fraudulent claims on their insurance.
B) People with bad credit are less likely to pay their insurance premiums.
C) There is a statistical correlation between high credit scores and a person being financially responsible and having fewer claims.
D) People with good credit histories are likely to live in less risky areas.

Question 72

Peeta owns valuable antique musical instruments that have been in her family for generations. In order to insure these items, her insurance company required her to provide a specific list of the insured property with written appraisals from an expert. The property on such a list is called

A) special property.
B) excluded property.
C) real property.
D) scheduled property.

Question 73

All else being equal, a ______ deductible will lead to a(n) _____ premium on an insurance policy.

A) higher; lower
B) lower; lower
C) higher; higher
D) lower; unchanged

Question 74

If you have a(n) ___ credit score, you will probably pay a _____ than average rate for your auto and homeowner's insurance.

A) low; lower
B) high; lower
C) high; higher
D) average; higher

Question 75

State laws requiring drivers who have been in a traffic accident to show proof of insurance or the ability to pay a claim are known as

A) interstate commerce laws.
B) financial responsibility laws.
C) indemnity laws.
D) compulsory automobile insurance laws.

Question 76

States with no-fault automobile insurance laws have seen

A) reductions in insurance premiums and litigation costs.
B) increases in insurance premiums and litigation costs.
C) reductions in premiums but higher litigation costs.
D) increases in premiums but lower litigation costs.

Question 77

The primary reason that young men pay higher rates for insurance than young women is that

A) women are better drivers.
B) young women are less likely to use cell phones while driving.
C) young women drive fewer miles per year than do young men.
D) young women drive safer cars.

Question 78

If you are_____________, you will probably have a lower auto insurance premium than if you were___________.

A) single and smoke cigarettes; single and do not smoke
B) married and do not smoke cigarettes; single and smoke
C) married and smoke cigarettes; married and do not smoke.
D) single and smoke cigarettes; married and do not smoke
E) married and smoke cigarettes; married and do not smoke

Question 79

Which of the following statements regarding state automobile insurance laws is true?

A) Some states have compulsory automobile insurance laws but all states have financial responsibility laws.
B) All states have both compulsory automobile insurance laws and financial responsibility laws.
C) All states have compulsory automobile insurance laws and some states have financial responsibility laws.
D) Some states have compulsory automobile insurance laws and some states have financial responsibility laws.

Question 80

Which is not a component of the bodily injury coverage category of a typical auto insurance policy?

A) Bodily injury liability
B) Medical expenses
C) Comprehensive physical damage
D) Uninsured motorists