Question 1

Which of the following types of risks is normally uninsurable by private insurers?
A)personal risks
B)property risks
C)liability risks
D)political risks

Accepted Answer

Political risks are typically uninsurable by private insurers due to the uncertainty and complexity of political situations. These risks include war, expropriation, currency restrictions, and government intervention, among others. Insurers may offer coverage for some political risks, but coverage is typically limited and expensive. Personal, property, and liability risks are generally insurable by private insurers, although there may be limitations and exclusions depending on the specific policy and circumstances.

Question 2

From the standpoint of the insurer,which of the following is a characteristic of an ideally insurable risk?
A)The loss must be intentional.
B)There must be a small number of unique loss exposures.
C)The chance of loss must be calculable.
D)The loss must be indeterminable.

Accepted Answer

An ideally insurable risk is one where the chance of loss can be calculated or estimated with some level of confidence. This allows insurance companies to properly price the risk and avoid adverse selection. The other options listed are not characteristics of an ideally insurable risk.

Question 3

Characteristics of a fortuitous loss include which of the following?
I.The loss is certain to occur.
II.The loss occurs as a result of chance.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

A fortuitous loss is a loss that occurs as a result of chance. It is not certain to occur, as it is unexpected and accidental. Therefore, only statement II is a characteristic of a fortuitous loss.

Question 4

Which of the following is implied by the pooling of losses?
A)sharing of losses by an entire group
B)inability to predict losses with any degree of accuracy
C)substitution of actual loss for average loss
D)increase of objective risk

Accepted Answer

Pooling of losses involves spreading the risk of losses across a larger group of individuals or entities, thereby sharing the losses among the group. This means that any individual member of the group is only responsible for a portion of the total losses incurred. This sharing of losses among the group is what is implied by the pooling of losses.

Question 5

Methods by which insurers may minimize or avoid catastrophic losses include which of the following?
I.The use of reinsurance
II.Concentrating coverage written in one geographic region
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

The use of reinsurance is a method by which insurers can transfer some portion of their potential catastrophic losses to other companies, thereby minimizing their own exposure. Concentrating coverage in one geographic region, on the other hand, is a practice that increases an insurer's exposure to catastrophic losses and does not minimize or avoid them.

Question 6

Which of the following statements regarding insurance and gambling is (are)true?
I.Insurance is used to handle existing pure risks,while gambling creates a new speculative risk.
II.Insurance usually involves risk avoidance,while gambling typically involves only risk reduction.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Statement I is true as insurance is used to handle unexpected losses or pure risks, while gambling is a voluntary activity that creates a new speculative risk. Statement II is not true as both insurance and gambling involve risk reduction to some extent.

Question 7

According to the law of large numbers,what should happen as an insurer increases the number of units insured?
A)The amount the insurer expects to pay in claims should decrease.
B)Underwriting expenses should decrease.
C)Actual results will more closely approach expected results.
D)The insurer's profitability should become more variable.

Accepted Answer

The law of large numbers states that as the sample size increases, the actual results will more closely approach the expected results. Therefore, as an insurer increases the number of units insured, the actual results should become more predictable and closer to the expected results. This can help the insurer better manage their risk and make more accurate predictions about their claims and profitability.

Question 8

From the viewpoint of the insurer,all of the following are characteristics of an ideally insurable risk EXCEPT
A)The loss must be accidental.
B)The loss should be catastrophic.
C)The premium must be economically feasible.
D)There must be a large number of exposure units.

Accepted Answer

The insurer generally prefers risks that are not catastrophic, as they would lead to a large number of claims and potentially bankrupt the insurer. Therefore, insurable risks should not be catastrophic.

Question 9

Which of the following is classified as casualty insurance?
A)workers compensation insurance
B)fire insurance
C)marine insurance
D)life insurance

Accepted Answer

Casualty insurance usually covers losses resulting from accidents or unexpected events. Workers compensation insurance provides benefits to employees who are injured or become ill as a direct result of their job. It covers medical expenses, lost wages, and rehabilitation expenses. Therefore, workers compensation insurance is classified as casualty insurance. The other options (B) fire insurance, (C) marine insurance, and (D) life insurance are not classified as casualty insurance.

Question 10

The tendency for unhealthy people to seek life or health insurance at standard rates is an example of
A)moral hazard.
B)fundamental risk.
C)attitudinal hazard.
D)adverse selection.

Accepted Answer

Adverse selection is the tendency for individuals with higher risks or likelihood of making claims to seek insurance at a higher rate than those with lower risks. In this case, unhealthy people are more likely to make claims on life or health insurance policies, which is why they seek insurance at standard rates. This can result in higher costs for the insurance company and potentially higher premiums for other policyholders.

Question 11

Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable?
I.The loss must be definite as to place.
II.The loss must be definite as to amount.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

The requirement that a loss should be determinable and measurable to be insurable implies that the loss must be definite as to both place (I) and amount (II), as insurers need to be able to calculate the amount of coverage needed and where to provide coverage.

Question 12

In addition to marketing life insurance,life insurers typically sell which of the following products?
I.Retirement annuities
II.Disability income insurance
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Life insurers typically sell retirement annuities and disability income insurance in addition to marketing life insurance. Retirement annuities are an investment product that provides a guaranteed income stream during retirement, while disability income insurance provides income replacement in case of a disability preventing an individual from working.

Question 13

Which of the following is a basic characteristic of insurance?
A)pooling of losses
B)avoidance of risk
C)payment of intentional losses
D)certainty about specific losses that will occur

Accepted Answer

Pooling of losses is a basic characteristic of insurance where many individuals or businesses transfer the risk of facing financial losses to an insurer. The insurer collects premiums from all policyholders and uses the funds to pay for the losses of those who experience them. This spreads the risk and makes it more affordable for individuals or businesses to handle losses that may occur. Avoidance of risk is not a characteristic of insurance as insurance is meant to transfer risk, not avoid it. Payment of intentional losses is not a characteristic of insurance either, as insurance policies cover only accidental or unintentional losses. Certainty about specific losses that will occur is also not a characteristic of insurance, as insurance policies are meant to cover unforeseeable losses.

Question 14

Reasons why market,financial,and production risks are often uninsurable include which of the following?
I.The potential to produce a catastrophic loss is great.
II.The chance of loss cannot be accurately estimated.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Market, financial, and production risks are often uninsurable because both options I and II are valid. The chance of loss cannot be accurately estimated for these types of risks, and the potential to produce a catastrophic loss is great. Therefore, both reasons make it difficult to provide insurance coverage for these risks.

Question 15

Which of the following is a result of adverse selection?
A)The insurer's financial results will be substantially improved.
B)Persons most likely to have losses are also most likely to seek insurance at standard rates.
C)It is unnecessary for the insurance company to use underwriting.
D)Insurance can be written only by the federal government.

Accepted Answer

Adverse selection occurs when those who are most likely to have losses are also most likely to seek insurance at standard rates. This can result in higher claims costs for the insurer, which can lead to increased premiums for all policyholders.

Question 16

Inland marine insurance provides coverage for
A)goods being shipped on land.
B)premature death of members of the armed forces.
C)goods being shipped on ocean-going vessels.
D)liability exposures of nonprofit organizations.

Accepted Answer

Inland marine insurance typically provides coverage for goods that are being transported on land, such as by truck or train. It is designed to protect against loss or damage to these goods during transport.

Question 17

Why is a large number of exposure units generally required before a pure risk is insurable?
A)It prevents the insurer from losing money.
B)It eliminates intentional losses.
C)It minimizes moral hazard.
D)It enables the insurer to predict losses more accurately.

Accepted Answer

A large number of exposure units is required before a pure risk is insurable because it enables the insurer to predict losses more accurately. With a larger pool of exposure units, the insurer can better predict the probability and severity of losses, which helps them to price policies accurately and avoid losses. Without a sufficient number of exposure units, the insurer may not be able to accurately predict and price the risk, leading to potential losses for the insurer.

Question 18

The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following?
I.Decrease in moral hazard
II.More accurate prediction of future losses
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

The requirement that losses should be accidental and unintentional reduces the likelihood of intentional damage, thus decreasing moral hazard. Additionally, since insurers can more accurately predict the likelihood and severity of accidental losses, they can set premiums that are more reflective of the risk. This results in a more accurate prediction of future losses. Therefore, both I and II are correct.

Question 19

Which of the following types of risks best meets the requirements for being insurable by private insurers?
A)most market risks
B)property risks
C)financial risks
D)political risks

Accepted Answer

Property risks, such as damages from fire or theft, are typically considered insurable by private insurers because they meet the criteria of being measurable, accidental, and having a large pool of potential policyholders. Market, financial, and political risks are less likely to be insurable due to their unpredictable nature and lack of standardized measures.

Question 20

According to the law of large numbers,what happens as the number of exposure units increases?
A)Actual results will increasingly differ from probable results.
B)Actual results will more closely approach probable results.
C)Nondiversifiable risk will decrease.
D)Objective risk will increase.

Accepted Answer

The law of large numbers states that as the number of exposure units increases, the actual results will more closely approach probable results. This means that the larger the sample size or the more exposure units there are, the more accurate the predictions will be. As a result, insurers use this principle to reduce risk and make more accurate predictions about losses.

Quiz 2: Insurance and Risk

Which of the following types of risks is normally uninsurable by private insurers?

From the standpoint of the insurer,which of the following is a characteristic of an ideally insurable risk?

Characteristics of a fortuitous loss include which of the following? I.The loss is certain to occur. II.The loss occurs as a result of chance.

Which of the following is implied by the pooling of losses?

Methods by which insurers may minimize or avoid catastrophic losses include which of the following? I.The use of reinsurance II.Concentrating coverage written in one geographic region

Which of the following statements regarding insurance and gambling is (are) true? I.Insurance is used to handle existing pure risks,while gambling creates a new speculative risk. II.Insurance usually involves risk avoidance,while gambling typically involves only risk reduction.

According to the law of large numbers,what should happen as an insurer increases the number of units insured?

From the viewpoint of the insurer,all of the following are characteristics of an ideally insurable risk EXCEPT

Which of the following is classified as casualty insurance?

The tendency for unhealthy people to seek life or health insurance at standard rates is an example of

Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable? I.The loss must be definite as to place. II.The loss must be definite as to amount.

In addition to marketing life insurance,life insurers typically sell which of the following products? I.Retirement annuities II.Disability income insurance

Which of the following is a basic characteristic of insurance?

Reasons why market,financial,and production risks are often uninsurable include which of the following? I.The potential to produce a catastrophic loss is great. II.The chance of loss cannot be accurately estimated.

Which of the following is a result of adverse selection?

Inland marine insurance provides coverage for

Why is a large number of exposure units generally required before a pure risk is insurable?

The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following? I.Decrease in moral hazard II.More accurate prediction of future losses

Which of the following types of risks best meets the requirements for being insurable by private insurers?

According to the law of large numbers,what happens as the number of exposure units increases?