Questions and Answers
Which of the following individuals would probably NOT have insurable interest in insured property?
A tornado that destroys property would be an example of...
A peril
To achieve the profitable distribution of exposures,...
Preferred risks and poor risks are balanced, with average risks in the middle
With respect to the business of insurance, a hazard is...
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Installing deadbolt locks on the doors of a home is an example of which method of handling risk?
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Which type of insurance guarantees or indemnifies owners of real or personal property or the holders of liens or other interested parties against loss or damage suffered to said property?
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What do individuals use to transfer their risk of loss to a larger group?
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A form of insurance between insurance companies is known as...
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All of the following are examples of risk retention except...
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In what type of plan would the employer pay all of the claims?
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A contract which one party undertakes to indemnify another against loss is called...
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The protection of the insurer from adverse selection is provided in part by...
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Which one of the following is NOT an element of insurability?
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Following a career change, an insured has implemented a program where he walks and jogs for 45 minutes each morning. Which method of dealing with risk does this scenario describe?
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Adverse selection is best described as...
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Events in which a person has both the chance of winning or losing are classified as...
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What describes a situation when poor risks are balanced with preferred risks, and average risks are in the middle?
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Insurance is the transfer of...
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Insurance is a contract by which one seeks to protect another from...
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Peril is most easily defined as...
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A situation in which a person can only lose or have no change represents...
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Which of the following is NOT a characteristic of an insurable risk?
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Loss potentials that are the basis for setting rates are...
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Which rating method provides an insurer with part of a rate that does not include provisions of expenses or profit and is based on historical aggregate loss?
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According to California Insurance Code, which of the following can be classified as an insurable event?
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The loss ratio compares...
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The legal definition of 'person' would NOT include which of the following?
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Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?
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In property and casualty insurance, what is the term for the amount of a loss that the insured must cover out of pocket?
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For the reported losses of an insured group to become more likely to equal the statistical probability of loss, the insured group must become...
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Which of the following is a unit of measurement an underwriter uses when determining the premium rates for insurance?
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For the purpose of insurance, risk is defined as...
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A set of legal or regulatory conditions that affect an insurer's ability to collect premiums commensurate with the level of risk incurred would be considered a(n)...
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The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as...
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Which of the following insurance options would be considered a risk-sharing arrangement?
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The type of insurance that guarantees the behavior of persons and the performance of contracts other than insurance policies is known as...
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Which of the following is NOT a goal of risk retention?
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An employer has decided to implement a self-funded plan. The company will pay the claims, but an insurer will administer the actual plan. What kind of contract is this?
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The causes of loss insured against in an insurance policy are known as...
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In property and casualty insurance, insurable interest must exist...
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Which of the following is the correct formula for computing a loss ratio?
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The risk of loss may be classified as...
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All of the following actions by a person could be described as risk avoidance EXCEPT...
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When an individual purchases insurance, what risk management technique is he or she practicing?
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Which of the following is the most common way to transfer risk?
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Events or conditions that increase the chances of an insured loss occurring are referred to as...
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Profitable distribution of exposures serves the purpose of...
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The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called...
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All of the following are insurable events as defined in the Insurance Code EXCEPT...
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An individual was involved in a head-on collision while driving home one day. He decided to never be involved in another accident and would not drive or ride in a car ever again. Which method of risk management does this describe?
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Which type of insurance includes the assumption of a contractual obligation to reimburse the insured against all or a portion of his fees, costs, and expenses related to services performed by an attorney?
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Study Notes
Basic Insurance Concepts and Principles
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Insurable Interest: An individual, like a neighbor, typically does not have insurable interest in another's insured property.
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Peril: A tornado that destroys property is classified as a peril, representing a potential cause of loss.
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Distribution of Exposures: Effective insurance involves balancing preferred risks, average risks, and poor risks to achieve profitability.
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Hazard Definition: A hazard is any condition that increases the likelihood of a loss occurring.
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Risk Reduction: Installing deadbolt locks on doors exemplifies the reduction method of managing risk.
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Title Insurance: This type of insurance protects owners of property against losses or damages to that property.
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Risk Transfer: Insurance allows individuals to transfer their risk of loss to a larger group, providing financial protection.
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Reinsurance: Insurance sold among companies is referred to as reinsurance, providing a safety net for insurers.
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Risk Retention: Action to retain certain risks except for paying premiums is a common practice; premiums are not a retention example.
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Self-Funded Plans: In a self-funded insurance plan, the employer assumes responsibility for all claims made.
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Insurance Contract: An insurance policy is a contract in which one party indemnifies another against financial losses.
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Adverse Selection Protection: To mitigate adverse selection, a balanced distribution of risk exposures is crucial.
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Insurability Elements: Insurable risks must not be speculative; a speculative risk implies uncertainty in potential losses.
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Risk Reduction Example: Implementing a fitness and dietary program after a career change demonstrates the risk reduction approach.
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Adverse Selection: This phenomenon arises when individuals with higher risks are more prone to seeking insurance coverage.
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Speculative Risk: Events presenting both winning and losing outcomes are classified as speculative risks.
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Distribution of Exposures: A profitable distribution is achieved when poor and preferred risks balance each other.
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Definition of Insurance: Insurance fundamentally involves the transfer of risk from an individual to a group or insurance company.
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Loss Definition: Insurance contracts are designed to protect against various forms of loss.
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Perils in Insurance: Perils are specifically identified causes of loss in insurance policies.
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Pure Risk: A scenario where a person can only lose or maintain their current state (no gain) illustrates pure risk.
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Characteristics of Insurable Risk: An insurable risk should not necessarily involve a catastrophic loss.
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Setting Insurance Rates: Loss exposures are critical in determining the rates charged by insurers.
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Loss Costs Rating: This rating method calculates rates excluding expenses and profits, focusing on historical loss data.
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Insurable Events: According to California Insurance Code, only pure risks are recognized as insurable events.
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Loss Ratio: The loss ratio computes losses against premium income, providing insight into an insurance company's profitability.
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Legal Definition of "Person": In legal terms, a family does not qualify as a "person."
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Foundational Law: The law of large numbers is fundamental for statistical loss predictions that underpin insurance rates.
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Deductibles: In property and casualty insurance, a deductible is the amount the insured must cover prior to insurer payout.
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Insured Group Size: The probability of reported losses aligning with statistical projections increases as the insured group grows.
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Underwriting Measurement: Exposure serves as a standard measurement for underwriters to assess insurance premium rates.
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Risk Uncertainty: Risk, for insurance purposes, is defined as the uncertainty or chance of a potential loss.
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Legal Hazards: Conditions that legally affect an insurer's capacity to collect premiums proportionate to risk are classified as legal hazards.
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Trend of Litigation: Increasing lawsuits and claims for large damages exemplify a growing legal hazard in insurance.
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Risk-Sharing Arrangement: A reciprocal insurance arrangement represents a collaborative risk-sharing method.
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Surety Insurance: This insurance ensures the conduct of individuals and fulfillment of contracts beyond standard policies.
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Goals of Risk Retention: Risk retention aims to enable some level of liability in loss situations, not to minimize levels of liability outright.
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Administrative Service Only Contracts: These contracts involve self-funded plans administered by insurers, which manage claims processing.
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Causes of Loss: Perils are specifically the causes of loss covered under an insurance policy.
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Insurable Interest Requirement: Legally, insurable interest must be present at the moment a loss occurs.
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Loss Ratio Computation: The correct formula for calculating loss ratio is (incurred losses + loss adjustment expense)/earned premium.
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Classification of Loss Risks: Risks of loss are categorized as pure or speculative risks.
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Risk Avoidance Actions: Actions such as investing in the stock market cannot be classified under risk avoidance.
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Risk Management Technique: Purchasing insurance is the primary method individuals use to transfer their risks.
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Most Common Risk Transfer Method: Acquiring insurance is the most prevalent way to manage and transfer risk.
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Hazards Definition: Events or conditions that elevate the risk of loss are identified as hazards.
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Adverse Selection Protection: These precautions shield insurers from the dangers posed by adverse selection.
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Avoidance Method: The risk management technique of avoiding specific activities to prevent loss is called avoidance.
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Non-Insurable Events: Examples like losing money in a poker game do not qualify as insurable events per the Insurance Code.
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Extreme Avoidance Scenario: A person avoiding all car travel after a minor accident exemplifies the avoidance risk management technique.
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Legal Insurance: This type of insurance covers costs associated with legal services and representation by licensed attorneys.
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Description
This quiz covers essential concepts and principles of insurance, focusing on what constitutes insurable interest and various types of risks. Each flashcard presents a key term or question that is fundamental to understanding insurance dynamics. Test your knowledge and deepen your grasp of the insurance field with these informative cards.
