Insurance Final

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traditionally, risk has been defined as _____
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uncertainty concerning the occurrence of loss
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objective risk is defined as ______
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the relative variation of actual loss from expected loss
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an insurance company estimates its objective risk for 100,000 exposures to be 10%. Assuming the probability of loss remains the same, what would happento the objective risk if the number of exposures were to increase to 1 million?
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it would decrease to 1%
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uncertainty based on a person’s mental condition or state of mind is known as _____
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subjective risk
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the long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called ______
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objective probability
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which of the following statements about a priori probabilities is correct?
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they are objective probabilities that can be determined by deductive reasonins
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an individual’s personal estimate of the chance of loss is _____
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subjective probability
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a peril is ______
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the cause of a loss
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an earthquake is an example of ______
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peril
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dense fog that increases the chance of an automobile accident is an example of a ________
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physical hazard
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faking an accident to collect insurance proceeds is an example of a ______
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moral hazard
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carelessness or indifference to a loss is an example of ______
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attitudinal hazard
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some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. this hazard is called _______
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legal hazard
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Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award. The characteristics of the judicial system that increase the frequency and severity of losses are known as _______
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legal hazard
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a phrase that encompasses all of the major risks faced by a business firm is ________
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enterprise risk
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all of the following are considered financial risks EXCEPT _________
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destruction of a production facility caused by an explosion
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katelyn was just named Risk Manager of ABC Company. She has decided to create a risk management program which considers all of the risks faced by ABC – Pure, speculative, operational, and strategic – in a single risk management program. such a program is called a _______
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enterprise risk management program
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a pure risk is defined as a situation in which there is _______
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only the possibility of loss or no loss
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the premature death of an individual is an example of a ________
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pure risk
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which of the following statements about speculative risks is true?
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they may benefit society even though a loss occurs
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an automobile that is a total loss as a result of a collision is an example of which of the following types of risk?
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diversifiable
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all of the following are programs to insure fundamental risks EXCEPT _________
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auto physical damage insurance
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all of the following are examples of personal risks EXCEPT _______
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flood
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which of the following is a reason why premature death may result in economic insecurity?
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additional expenses associated with death may be incurred & the income of the deceased person’s family may be inadequate to meet its basic needs
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which of the following are often consequences of long-term disability?
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continuing medical expenses & loss or reduction of employee benefits
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all of the following are examples of direct property losses EXCEPT _______
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the cost of renting a substitute vehicle while a collision-damaged car is being repaired
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the extra expense incurred by a business to stay in operation following a fire is an example of ______
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an indirect loss
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which of the following statements about liability risks is true?
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future income and assets can be attached to pay judgments if inadequate insurance is carried
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all of the following are burdens to society because of the presence of risk EXCEPT _______
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individuals may profit from accepting a speculative risk
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loss control includes which of the following?
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loss reduction & loss prevention
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following good health habits can be categorized as ______
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loss prevention
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from the insured’s perspective, the use of deductibles in insurance contracts is an example of _______
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risk retention
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the use of fire-resistive materials when constructing a building is an example of _______
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loss control
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all of the following statements about risk retention are true EXCEPT _________
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its use is most appropriate for low-frequency, high-severity types of risks
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all of the following are methods of noninsurance transfer EXCEPT ______
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avoiding dangerous activities
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Curt borrowed $ for a boat & couldn’t pay off loan so he intentionally sunk the boat, collected from insurer and paid off loan balance. this illustrates the problem of ________
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moral hazard
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after restaurant closes, electrical system malfunctions & causes fire. Physical damage to restaurant & the amount of profit lost during repair. this is an example of _________
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indirect loss
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use of corporate form of organization to shield against personal liability claims illustrates _______
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noninsurance transfer
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the variation between the rate of loss expected to occur and the rate of loss that actually does occur is called ______
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objective risk
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williams company installed smoke detectors, sprinkler system, and fire extinguishers in its new facility. these devices are all examples of _____
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loss control
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Cathy’s car hit a patch of ice on the road. the car skidded off the road and hit a tree. the presence of the ice is best described as ______
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physical hazard
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type of risk that is present when either a profit or loss could occur is called ______
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speculative risk
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ben is concerned that if he injures someone he could be held legally responsible and required to pay damages. this type of risk is called a _________
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liability risk
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MLX Drug Company would like to market a new hypertension drug. While FDA was testing, it discovered the drug had harmful side effect. MLX abandoned plan to produce drug. This reaction illustrates ________
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risk avoidance
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All of the following are characteristics of the liability risk that most people face EXCEPT _______
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owning liability insurance eliminates the possibility of being held legally liable
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which of the following statements about chance of loss & risk is true?
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two individuals may perceive differently the risk inherent in a given activity
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a risk that affects only individuals or small groups and not the entire economy is called a ______
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diversifiable risk
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all of the following are commercial risks EXCEPT ______
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the risk of insufficient retirement income
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all of the following are characteristics of insurance EXCEPT
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risk avoidance
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Which of the following is implied by the pooling of losses?
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sharing of losses by an entire group
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According to the law of large numbers, what happens as the number of exposure units increases?
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actual results will more closely approach probable results
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According to the law of large numbers, what should happen as an insurer increases the number of units insured?
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actual results will more closely approach expected results
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Characteristics of a fortuitous loss include which of the following?
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the loss occurs as a result of chance
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From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT
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the loss should be catastrophic
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From the standpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT
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the loss must be indeterminable
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Why is a large number of exposure units generally required before a pure risk is insurable?
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it enables the insurer to predict losses more accurately
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The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following?
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decrease in moral hazard & more accurate prediction of future losses
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Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable?
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the loss must be definite as to place & amount
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Methods by which insurers may minimize or avoid catastrophic losses include which of the following?
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the use of reinsurance
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Which of the following types of risks best meets the requirements for being insurable by private insurers?
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property risks
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Reasons why market, financial, and production risks are often uninsurable include which of the following?
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the potential to produce a catastrophic loss is great & the chance of loss cannot be accurately estimated
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Which of the following types of risks is normally uninsurable by private insurers?
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market risks
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Which of the following is a result of adverse selection?
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persons most likely to have losses are also most likely to seek insurance at standard rates
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The tendency for unhealthy people to seek life or health insurance at standard rates is an example of
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adverse selection
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Which of the following statements regarding insurance and gambling is (are) true?
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insurance is used to handle existing pure risks, while gambling creates a new speculative risk
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In addition to marketing life insurance, life insurers typically sell which of the following products?
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retirement annuities & disability income insurance
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Inland marine insurance provides coverage for A) goods being shipped on land
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goods being shipped on land
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All of the following are classified as casualty insurance EXCEPT
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life insurance
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Which of the following is a form of casualty insurance?
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general liability insurance
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The term 屎multiple-line insurance屎 is used to describe a type of insurance that combines which of the following coverages into a single contract?
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property and casualty insurance
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All of the following are benefits to society that result from insurance EXCEPT
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elimination of moral hazard
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Which of the following statements about the insurance industry as a source of investment funds is (are) true?
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these funds result in a lower cost of capital than would exist in the absence of insurance & these funds tend to promote economic growth and full employment
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All of the following are social costs associated with insurance EXCEPT
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increased cost of capital
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A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that the farmer sustained. Which characteristic of insurance is embodied in this agreement?
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pooling of losses
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XYZ Insurance Company writes coverage for most perils which can damage property. XYZ, however, does not write flood insurance on property located in flood plains. Which requirement of an ideally insurable risk might be violated if XYZ wrote flood insurance on property located in flood plains?
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the loss should not be catastrophic
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ABC Appliance offers a warranty requiring an annual fee. The warranty may be purchased at the time of sale or at any time within the first year after the appliance was purchased. The warranty fee after the date of purchase is twice the time-of-purchase fee. When asked why the fee was higher after the date of purchase, ABC使s president said, 屎Buying a warranty is voluntary. We使ve noted that those who buy the warranty after the purchase date have a greater need for service.屎 Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers?
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adverse selection
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Alpha Insurance Company insures a broad range of risks, including whatever is not covered by fire, marine, and life insurers. Which term best describes the wide range of risks written by Alpha Insurance?
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casualty insurance
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LMN Insurance markets homeowners insurance. The LMN homeowners policy combines property and casualty insurance in the same contract. Insurance policies combining property and casualty coverage in the same contract are called
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multiple-line policies
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One branch of government insurance programs has a number of distinguishing characteristics. These programs are compulsory, they are financed by mandatory contributions rather than general tax revenues, and benefits are weighted in favor of low-income groups. These government insurance programs are called
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social insurance programs
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Gina would like to buy a house. She will pay 10 percent of the cost of the house as a down payment and borrow the other 90 percent from a mortgage lender. The home will serve as collateral for the loan. The lender requires Gina to purchase property insurance on the home so that the collateral supporting the loan will be protected. This scenario illustrates which of the following benefits of insurance to society?
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enhancement of credit
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ABC Insurance Company calculated the amount that it expected to pay in claims under each policy sold. Rather than selling the insurance for the amount it expected to pay in claims, ABC added an allowance to cover the cost of doing business, including commissions, taxes, and acquisition expenses. This allowance is called a(n)
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expense loading
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JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 2,000 homeowners this year?
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the actual results will more closely approach the expected results
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Apex Insurance Company wrote a large number of property insurance policies in an area where earthquake losses could occur. When the president of Apex was asked if she feared that a severe earthquake might put the company out of business, she responded, 屎Not a chance. We transferred most of that risk to other insurance companies.屎 An arrangement by which an insurer that initially writes insurance transfers to another insurer part or all of the potential losses associated with such insurance is called
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reinsurance
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Bronson Casualty Company sells casualty insurance only. Which of the following coverages could you purchase from Bronson Casualty Company?
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liability insurance
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Which of the following statements regarding insurance and hedging is (are) true?
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insurance involves the transfer of insurable risk while hedging handles risk that is typically uninsurable
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Ashley opened an all-you-can-eat buffet restaurant. The cost per-person was based upon what Ashley believed an average restaurant patron would consume. The restaurant began to lose money. Ashley concluded that her patrons had 屎above average屎 appetites, and were attracted to her restaurant because they could eat as much as they wanted while being charged an average price. A similar phenomenon exists in insurance markets. This problem is called
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adverse selection
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Which of the following statements is (are) true concerning private insurance?
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both individuals and businesses purchase private insurance
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Adverse selection occurs
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when applicants with a higher-than-average chance of loss seek insurance at standard rates
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Risk management is concerned with
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the identification and treatment of loss exposures
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A situation or circumstance in which a loss is possible, regardless of whether a loss occurs, is called a
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loss exposure
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All of the following are risk management objectives prior to the occurrence of loss EXCEPT
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continuing operations after a loss
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Preloss objectives of risk management include which of the following?
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preparing for potential losses in the most economical way & reduction of anxiety
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A risk manager is concerned with
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identifying potential losses & selecting the appropriate techniques for treating losses
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Sources of information that can be used by a risk manager to identify pure loss exposures include all of the following EXCEPT
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currency exchange rates
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Loss severity is defined as the
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probable size of the losses which may occur during some period
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Loss frequency is defined as the
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probable number of losses that may occur during some period
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The worst loss that could ever happen to a firm is referred to as the
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maximum possible loss
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The worst loss that is likely to happen is referred to as the
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probable maximum loss
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All of the following statements about avoidance are true EXCEPT
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it can be used for any loss exposure facing a firm
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Abandoning an existing loss exposure is an example of
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avoidance
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Which of the following conditions is (are) appropriate for using retention?
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the worst possible loss is not serious
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Which of the following statements regarding the use of retention is (are) true?
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retention is best used for loss exposures that have a low frequency and high severity & a financially strong firm can have a higher retention level than a firm whose financial position is weak
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All of the following statements about captive insurers are true EXCEPT
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they increase the volatility of the parent company’s earnings
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Which of the following statements about self-insurance is (are) true?
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it is a form of planned retention
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All of the following are potential advantages of retention EXCEPT
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protection from catastrophic losses
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A restaurant owner leased a meeting room at the restaurant to a second party. The lease specified that the second party, not the restaurant owner, would be responsible for any liability arising out of the use of the meeting room, and that the restaurant owner would be 屎held harmless屎 for any damages. The restaurant owner使s use of the hold-harmless agreement is an example of
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noninsurance transfer
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All of the following are disadvantages of noninsurance transfers EXCEPT
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the only potential losses that can be transferred are those that are not commercially insurable
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ABC Insurance retains the first $1 million of each property damage loss and purchases insurance for that part of any property loss that exceeds $1 million. The insurance for property losses above $1 million is called
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excess insurance
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Which of the following statements about the use of deductibles is (are) true?
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they represent risk retention by insurance purchasers
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Which of the following statements about an excess insurance plan is true?
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the insurer does not participate in a loss until it exceeds the amount the firm has decided to retain
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Factors a risk manager must consider in selecting an insurer include which of the following?
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the availability of risk management services & the financial strength of the insurer
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An insurance policy specifically written and designed to meet the needs of an insurance purchaser is called a(n)
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manuscript policy
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All of the following are disadvantages of using insurance in a risk management program EXCEPT
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it results in considerable fluctuations in earnings after losses occur
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Which of the following types of loss exposures may be appropriately handled through the purchase of insurance?
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low frequency, high severity
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Which of the following types of loss exposures are best handled by the use of avoidance?
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high frequency, high severity
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Low-frequency, low-severity loss exposures are best handled by
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retention
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All of the following statements about the administration of a risk management program are true EXCEPT
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if a risk management program is properly designed, periodic review of the program is unnescessary
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Cal was just hired as XYZ Company使s first risk manager. Cal would like to employ the risk management process. The first step in the process Cal should follow is to
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identify potential losses faced by XYZ Company
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Members of Mid-South Petroleum Distributors, a trade group, had trouble obtaining affordable pollution liability insurance. The members formed a group captive that is exempt from many state laws that apply to other insurers. This group captive is called a(n)
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risk retention group
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Laura Evans is risk manager of LMN Company. Laura decided to retain certain property losses. All of the following are methods which Laura can use to fund retained property losses EXCEPT
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private insurance
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Parker Department Stores has been hurt in recent months by a large increase in shoplifting losses. Parker使s risk manager concluded that while the frequency of shoplifting losses was high, the severity is still relatively low. What is (are) the appropriate risk management technique(s) to apply to this problem?
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loss control and retention
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Barb, who is self-employed, is the main breadwinner for her family. Barb does not have disability income insurance because she has never stopped to consider the impact of a long-term disability upon her family. Barb使s treatment of the risk of disability is best described as
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passive retention
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Ryan decided to review his personal risk management program. His car is 10 years old, and he would receive little money from his insurer if the car was damaged or destroyed. Ryan decided to drop the physical damage insurance on the car. From a risk management perspective, dropping the physical damage insurance on the car is best described as
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increasing the use of retention in the risk management program
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To better understand her company使s operations, a risk manager asked a production manager to draw a diagram tracing the steps in the production and distribution of the company使s products. Such a diagram, which is useful in risk identification, is called a
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flowchart
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) In reviewing his company使s operations, a risk manager noticed that all of the company使s finished goods were stored in a single warehouse. The risk manager recommended that the finished goods be divided among three warehouses to prevent all of the finished goods from being destroyed by the same peril. Dividing the finished goods among three warehouses illustrates
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risk control
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Which of the following statements about a personal risk management program is (are) true? I. Insurance and retention are the only techniques used to handle potential losses. II. The steps in a personal risk management process are the same steps used by businesses.
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the steps in a personal risk management process are the same steps used by businesses
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Bev lives in the suburbs and works downtown. She drives to work, and her most direct route to work would require her to pass through an area where carjackings and drive-by-shootings are common. Bev does not drive through this area. Instead, she uses a route which adds 10 minutes to her commute. Which risk management technique is Bev using with respect to the risk of injury while driving through the dangerous area?
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avoidance
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Which statement about a company使s cost of risk is (are) true?
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cost of risk includes insurance premiums and retained losses & reducing the cost of risk increases profitability
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A useful measure for an organization is the total of the organization使s expenditures for treating loss exposures including retained losses, loss control expenses, insurance premiums, and other related expenses. This measure is called the organization使s
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cost of risk
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Mark owns a 1998 sedan. The last time Mark renewed his auto insurance, he decided to drop the physical damage insurance on this vehicle. How is Mark dealing with the auto physical damage exposure in his personal risk management program?
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planned retention
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Purchasing health insurance illustrates the use of which personal risk management technique?
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risk transfer
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Which of the following statements about captive insurance companies is (are) true?
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a captive insurance company may be owned by several parents
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Which of the following is least likely to occur during a 屎hard屎 insurance market period?
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higher insurer profits

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