Insurance Concepts Quiz: Tornado Damage & Risk Events

Questions and Answers

What does pure risk represent?

A situation in which a person can only lose or have no change.

What does insurance seek to protect against?

Loss.

What do individuals use to transfer risk of loss to a larger group?

Insurance.

How does insurance function?

It protects against loss by collecting premiums from many individuals to indemnify those who suffer loss. Signup and view all the answers

What is a contract which one party undertakes to indemnify another against loss called?

Insurance. Signup and view all the answers

The legal definition of 'person' would NOT include which of the following?

A family Signup and view all the answers

How is the risk of loss classified?

Pure risk and speculative risk. Signup and view all the answers

What does insurance transfer?

Risk. Signup and view all the answers

How is risk defined for insurance purposes?

The uncertainty or chance of loss. Signup and view all the answers

What are events that have both chances of winning or losing classified as?

Speculative risk. Signup and view all the answers

A tornado that destroys property would be an example of which of the following?

A peril Signup and view all the answers

What are the causes of loss insured against in an insurance policy known as?

Perils. Signup and view all the answers

What is the growing tendency of individuals to file lawsuits known as?

Legal hazard. Signup and view all the answers

What are events or conditions that increase the chances of an insured loss occurring referred to as?

Hazards. Signup and view all the answers

With respect to insurance, what is a hazard?

Any condition or exposure that increases the possibility of loss. Signup and view all the answers

What kind of hazard includes legal or regulatory conditions affecting an insurer's ability to collect premiums?

Legal hazard. Signup and view all the answers

What must the insured group become for reported losses to be more likely to equal the statistical probability of loss?

Larger. Signup and view all the answers

What law is the foundation of the statistical prediction of loss for insurance rates?

Law of large numbers. Signup and view all the answers

What are loss potentials that form the basis for setting rates called?

Loss exposures. Signup and view all the answers

What is the unit of measurement an underwriter uses when determining premium rates?

Exposure. Signup and view all the answers

Which rating method does NOT include provisions for expenses or profit?

Lost costs rating. Signup and view all the answers

What risk management method is described by an insured adopting healthier habits?

Reduction. Signup and view all the answers

Which of the following is an insurable risk?

Hail damage to the roof of a car Signup and view all the answers

What method does an individual use to prevent loss by not exposing oneself to risk?

Avoidance. Signup and view all the answers

Which of the following is NOT an element of insurability?

Risk of loss is speculative Signup and view all the answers

What does installing deadbolt locks on doors represent?

Reduction. Signup and view all the answers

Which of the following events is NOT insurable according to the Insurance Code?

An insured loses a large sum in poker Signup and view all the answers

According to California Insurance Code, which of the following can be classified as an insurable event?

Pure risk Signup and view all the answers

Which of the following is NOT a characteristic of an insurable risk?

The loss must be catastrophic Signup and view all the answers

What risk management technique prevents a specific loss by avoiding the activity?

Avoidance. Signup and view all the answers

Which of the following is NOT a goal of risk retention?

To minimize the insured's level of liability in the event of loss Signup and view all the answers

All of the following are examples of risk retention EXCEPT:

Premiums Signup and view all the answers

What is the most common way to transfer risk?

Purchase insurance. Signup and view all the answers

What is considered a risk-sharing arrangement?

Reciprocal. Signup and view all the answers

What risk management technique is practiced when someone purchases insurance?

Transfer. Signup and view all the answers

Which of the following individuals would probably NOT have insurable interest in insured property?

Neighbor Signup and view all the answers

When must insurable interest exist in property and casualty insurance?

At the time of loss. Signup and view all the answers

What does a profitable distribution of exposure refer to?

A situation when poor risks are balanced with preferred risks. Signup and view all the answers

What type of contract involves an employer implementing a self-funded plan with insurer administration?

Administrative Service Only (ASO). Signup and view all the answers

What protects insurers from adverse selection?

A profitable distribution of exposures. Signup and view all the answers

What is the formula for computing a loss ratio?

(incurred losses + loss adjusting expense) / earned premium. Signup and view all the answers

What is the process an insurer uses to evaluate applications called?

Underwriting. Signup and view all the answers

What does the loss ratio compare?

Earned premium to losses. Signup and view all the answers

How is adverse selection best described?

Risk with higher probability of loss seeking insurance more often than other risks. Signup and view all the answers

Which term refers to the ability of two parties to rely on one another?

Utmost good faith Signup and view all the answers

In case of a loss, the indemnity provision in insurance policies:

Restores an insured person to the same financial state as before the loss. Signup and view all the answers

Which statement is not true concerning insurable interest as it applies to life insurance?

A debtor has an insurable interest in the life of a lender. Signup and view all the answers

Which of the following insurance providers would be considered a risk-sharing arrangement?

Reciprocal Signup and view all the answers

Installing deadbolt locks on the doors of a home is an example of which method of handling risk?

Reduction Signup and view all the answers

For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become:

Larger Signup and view all the answers

What is insurance primarily the transfer of?

Risk Signup and view all the answers

If an applicant for a life insurance policy and the person to be insured by the policy are two different people, the underwriter would be concerned about:

Whether an insurable interest exists between the individuals. Signup and view all the answers

When must insurable interest exist in a life insurance policy?

At the time of application Signup and view all the answers

What type of hazard is presented by a person who shows an indifferent attitude towards risk, such as not locking doors?

Morale Signup and view all the answers

Study Notes

Basic Insurance Concepts

Pure Risk: A situation where there is only a possibility of loss with no chance for gain.
Insurance Definition: A contract designed to protect an individual from loss caused by specified future events in exchange for premium payments.
Transfer of Risk: Individuals use insurance to shift the risk of loss to a larger group, enabling collective management of potential losses.

Types of Risk

Loss: The financial detriment one seeks protection against through insurance contracts.
Risk Classification: Includes pure risk (no possibility of gain) and speculative risk (possibility of gain or loss).

Legal Entities

Definition of Person: Includes individual humans, business entities, corporations, and various organizations; does not include families.

Risk Evaluation

Insurance as a Financial Tool: Transfers financial responsibility of potential loss to an insurance company.
Events that Increase Loss Chances: Classified as hazards; these include physical, moral, or morale hazards.

Insurable Events and Legal Hazards

Perils: Conditions or events that cause loss, insured against within policies.
Legal Hazards: Arise from court actions, which could increase the likelihood or size of claims.

Mathematical Principles

Law of Large Numbers: Indicates that as the size of the insured group increases, predictions of loss become more accurate, aiding in determining appropriate premiums.
Loss Ratio Formula: Represents the relationship between incurred losses plus adjustment expenses and earned premiums.

Risk Management Techniques

Reduction: Actions taken to minimize potential losses, such as implementing security measures.
Avoidance: Completely refraining from activities that pose risk.
Transfer: Purchasing insurance is the primary method to shift risk away from the insured.

Insurability Criteria

Elements of Insurable Risk: Must be calculable, represent potential financial hardship, and be expected occurrences. Risks that are speculative are not insurable.
Insurable Interest: Must be present at the application for life insurance and is defined as the stake an individual has in not losing the insured property or person.

Risk-Sharing Arrangements: Individuals share their risks through reciprocal insurers, impacting how claims are managed collectively.
Exposure Measurement: Insurers use exposure as a unit of measure when calculating insurance premiums.

Adverse Selection and Good Faith

Adverse Selection: Occurs when high-risk individuals are more likely to seek insurance, leading to imbalanced risk pools.
Utmost Good Faith: The principle requiring both parties in insurance contracts to fully disclose relevant information.

Claims and Indemnity

Indemnity Provision: Ensures that an insured person is restored to their pre-loss financial condition, without profiting from the insurance claim.
Insured Group Size: Lastly, for reported losses to reflect statistical probabilities accurately, the insured group must be larger.

Risk Retention Approaches

Risk Retention: Involves accepting responsibility for potential losses, as seen through deductibles and copayments rather than full insurance coverage.
Common Misconceptions: Speculative risks do not qualify for insurance coverage, which focuses only on pure risks.

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Description

Test your understanding of basic insurance concepts including pure risk, the definition of insurance, and the transfer of risk. This quiz also covers types of risk and the legal entities involved in insurance. Sharpen your knowledge on how insurance serves as a financial tool for loss management.

Basic Insurance Concepts Quiz