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Questions and Answers
Which of the following individuals would probably NOT have insurable interest in insured property?
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 tornado that destroys property would be an example of...
A peril
To achieve the profitable distribution of exposures,...
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...
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?
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?
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?
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...
A form of insurance between insurance companies is known as...
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All of the following are examples of risk retention except...
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?
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...
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...
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?
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?
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...
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...
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?
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...
Insurance is the transfer of...
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Insurance is a contract by which one seeks to protect another from...
Insurance is a contract by which one seeks to protect another from...
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Peril is most easily defined as...
Peril is most easily defined as...
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A situation in which a person can only lose or have no change represents...
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?
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...
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?
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?
According to California Insurance Code, which of the following can be classified as an insurable event?
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The loss ratio compares...
The loss ratio compares...
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The legal definition of 'person' would NOT include which of the following?
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?
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?
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...
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?
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...
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)...
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...
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?
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...
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?
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?
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...
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...
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?
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...
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...
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?
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?
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...
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...
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...
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...
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?
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?
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.
