Reference no: EM13844806

Question 1

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.

I only

II only

neither I nor II

both I and II

Question 2

Dense fog that increases the chance of an automobile accident is an example of

a peril.

a physical hazard.

a speculative risk.

a moral hazard.

Question 3

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

Actual results will more closely approach expected results.

The amount the insurer expects to pay in claims should decrease.

The insurer's profitability should become more variable.

Underwriting expenses should decrease.

Question 4

Cal was just hired as XYZ Company's first risk manager. Cal would like to employ the risk management process. The first step in the process Cal should follow is to

identify potential losses faced by XYZ Company.

implement and administer a risk management plan for XYZ Company.

evaluate potential losses faced by XYZ Company.

formulate a treatment plan for XYZ Company's loss exposures.

Question 5

Discount Department Stores is a national retail chain. The company had one large, central warehouse. At the suggestion of the risk manager, the company decided to build four smaller regional warehouses so that a loss at the central warehouse would not be a catastrophic blow to the company's distribution system. Splitting the inventory between four regional warehouses illustrates which risk management technique?

loss prevention

loss reduction

risk avoidance

risk transfer

Question 6

Kate is covered under her employer's group health plan. She is also covered as a dependent under her husband's group health plan. Under the usual coordination-of-benefits provision, how will each company respond to a claim filed by Kate?

Kate's plan is primary, and her husband's plan is excess.

Each plan will pay 50 percent of the claim.

Her husband's plan is primary, and Kate's plan is excess.

The plan of the person with the birthday earliest in the year pays first, and the other plan is excess.

Question 7

When must an insurable interest legally exist in life insurance?

both at the time of the insured's death and at the inception of the policy

only at the time the beneficiary is paid

only at the time of the insured's death

only at the inception of the policy

Question 8

A peril is

the probability that a loss will occur.

a moral hazard.

the cause of a loss.

a condition which increases the chance of a loss.

Question 9

When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?

only at the inception of the policy

only at the time of the loss

only at the time the loss settlement process takes place

both at the time of the loss and at the inception of the policy

Question 10

The portion of a property and liability insurance contract that contains information about the property or activity to be insured is called the

declarations.

conditions.

insuring agreement.

exclusions.

Question 11

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

neither I nor II

II only

I only

both I and II

Question 12

Skip to question text.

Eric's property was damaged in an accident. He phoned his agent to see if the loss was covered under his property insurance policy. The agent said, "As long as the cause of loss is not specifically excluded in the policy, the loss is covered." Based on the agent's answer, what type of insuring agreement appears in the policy?

extended-perils coverage

named-perils coverage

"open-perils" coverage

unconditional coverage

Question 13

Loss frequency is defined as the

probability that a liability judgment may exceed a firm's net worth.

probable number of losses that may occur during some period.

probability that any particular piece of property may be totally destroyed.

probable size of the losses that may occur during some period.

Question 14

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?

The total dollar value of claims will decrease.

The actual results will more closely approach the expected results.

The average size of loss will decline in value.

The total number of claims filed by JKL policyowners should decrease.

Question 15

Connie has a major medical policy with a $200 deductible. She is required to pay 25 percent of covered expenses in excess of the deductible. The insurer will pay 75 percent of expenses in excess of the deductible. If Connie has eligible medical expenses of $10,000, how much will be paid by her insurer?

$9,800

$7,500

$7,300

$7,350

Question 16

The property and liability insurance industry fluctuates between periods of increasing insurance rates and tight underwriting standards, and decreasing insurance rates and loosening underwriting standards. Profitability in the industry follows these cyclical movements. What is this pattern of fluctuations called?

the accounting cycle

the claims cycle

the underwriting cycle

the business cycle

Question 17

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?

Correct!

avoidance

noninsurance transfer

loss reduction

passive retention

Question 18

Low-frequency, low-severity loss exposures are best handled by

insurance.

avoidance.

retention.

noninsurance transfer.

Question 19

Which of the following types of loss exposures may be appropriately handled through the purchase of insurance?

I. High-frequency, low-severity loss exposures

II. Low-frequency, high-severity loss exposures

I only

II only

both I and II

neither I nor II

Question 20

From the insured's perspective, the use of deductibles in insurance contracts is an example of

risk transfer.

risk avoidance.

risk retention.

risk control.

Question 21

Which of the following statements about captive insurance companies is (are) true?

I. A captive insurance company established by a U.S. company must be domiciled in the United States.

II. A captive insurance company may be owned by several parents.

II only

neither I nor II

I only

both I and II

Question 22

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(n)

enterprise risk management program.

consequential risk management program.

financial risk management program.

fundamental risk management program.

Question 23

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 "held harmless" for any damages. The restaurant owner's use of the hold-harmless agreement in the lease is an example of

self-insurance.

retention.

insurance.

noninsurance transfer.

Question 24

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

There must be a large number of exposure units.

The loss should be catastrophic.

The loss must be accidental.

The premium must be economically feasible.

Question 25

What is the legal significance of a material misrepresentation in an insurance application?

The contract is voidable at the insurer's option.

The contract is automatically voided from its inception.

The insurer is immediately entitled to a higher premium.

Loss payments are reduced by the degree of the misrepresentation.

Question 26

Janet hit a wall causing a large dent in the fender of her car. She was busy at work and delayed reporting the damage to her insurer for 9 months. The insurer denied the claim, stating, "Although such a loss is usually covered, you are required under the terms of the contract to provide prompt notification in case of loss." The prompt notification requirement is an example of a(n)

condition.

definition.

declaration.

insuring agreement.

Question 27

A risk manager is concerned with which of the following?

I. Identifying potential losses

II. Selecting the appropriate techniques for treating loss exposures

II only

neither I nor II

I only

both I and II

Question 28

Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of

utmost good faith.

subrogation.

warranty.

insurable interest.

Question 29

Loss severity is defined as the

probable size of the losses which may occur during some period.

probable number of losses which may occur during some period.

probability that any particular piece of property may be totally destroyed.

Probability that a liability judgment may exceed a firm's net worth.

Question 30

Why does the insured get the benefit of the doubt if an insurance policy contains any ambiguities or uncertainties?

because insurance contracts are aleatory

because insurance contracts are conditional

because insurance contracts are contracts of adhesion

because insurance contracts are unilateral

Question 31

Which of the following statements about the use of deductibles is (are) true?

I. They represent risk retention by insurance purchasers.

II. They tend to increase the cost of adjusting small claims.

II only

neither I nor II

I only

both I and II

Question 32

Sam's furniture was destroyed by a fire. The furniture cost $1200 when it was purchased, but similar new furniture now costs $1800. Assuming the furniture was 50 percent depreciated, what is the actual cash value of Sam's loss?

$1200

$1800

$900

$600

Question 33

Skip to question text.

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?

indemnification

risk avoidance

fortuitous losses

pooling of losses

Question 34

A pure risk is defined as a situation in which there is

a possibility of neither profit nor loss.

only the possibility of profit.

a possibility of either profit or loss.

only the possibility of loss or no loss.

Question 35

Uncertainty based on a person's mental condition or state of mind is known as

objective risk.

subjective risk.

objective probability.

subjective probability.

Question 36

All of the following are burdens to society because of the presence of risk EXCEPT

Society is deprived of certain goods and services.

Risk provides an incentive for people to engage in loss control.

The size of an emergency fund must be increased.

Mental fear and worry are present.

Question 37

All of the following are potential advantages of retention EXCEPT

encouragement of loss prevention.

increased cash flow.

protection from catastrophic losses.

lower expenses.

Question 38

Skip to question text.

Jenna opened a successful restaurant. One night, after the restaurant had closed, a fire started when the electrical system malfunctioned. In addition to the physical damage to the restaurant, Jenna lost profits that could have been earned while the restaurant was closed for repairs. The lost profits are an example of

nondiversifiable risk.

direct loss.

speculative risk.

indirect loss.

Question 39

Which distinct legal characteristic of insurance contracts states that only the insurer's promise to perform is legally enforceable?

aleatory contracts

contracts of adhesion

unilateral contracts

personal contracts

Question 40

All of the following are social costs associated with insurance EXCEPT

insurance company operating expenses.

increased cost of capital.

inflated claims.

fraudulent claims.

Question 41

Faking an accident to collect insurance proceeds is an example of

attitudinal hazard.

objective risk.

moral hazard.

physical hazard.

Question 42

Fundamental purposes of the principle of indemnity include which of the following?

I. To reduce physical hazards

II. To prevent the insured from profiting from insurance

II only

both I and II

I only

neither I nor II

Question 43

Lisa has three fire insurance policies on her office building. The policy from company A is for $400,000, and the policies from companies B and C are for $100,000 each. If Lisa has a $360,000 loss, how much of the loss will be covered by each policy if the loss is settled on a pro rata basis by the insurers?

policy A: $240,000; policies B and C: $60,000 each

policy A: $160,000; policies B and C: $100,000 each

policy A: $360,000; policies B and C: nothing

each policy: $120,000

Question 44

David owns a commercial building with a replacement cost of $4 million. The building is insured on a replacement cost basis for $2.4 million under a fire insurance policy that has an 80 percent coinsurance clause. How much will David collect if the building sustains a covered fire loss with a replacement cost of $80,000?

$50,000

$66,667

$80,000

$60,000

Question 45

Ashley opened an all-you-can-eat buffet restaurant. The cost per-person was based on what Ashley believed an average restaurant patron would consume. The restaurant began to lose money. Ashley concluded that her patrons had "above average" 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

attitudinal hazard.

nondiversifiable risk.

legal hazard.

adverse selection.

Question 46

A contract in which the values exchanged are not equal because chance is involved is called a(n)

unilateral contract.

aleatory contract.

contract of adhesion.

conditional contract.

Question 47

Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new manufacturing facility. These devices are all examples of

risk control.

risk avoidance.

risk retention.

noninsurance transfer.

Question 48

Exclusions are used in insurance policies for all of the following reasons EXCEPT

to waive policy conditions.

to reduce moral hazard.

to eliminate coverage not needed by typical insureds.

to eliminate coverage for uninsurable perils.

Question 49

Traditionally, risk has been defined as

any situation in which the probability of loss is zero.

uncertainty concerning the occurrence of loss.

the probability of a loss occurring.

any situation in which the probability of loss is one.

Question 50

Kevin has three liability policies which provide for contribution by equal shares if other insurance applies to a loss. How much will each policy pay for a $3,000,000 liability judgment if policy A provides $500,000 of coverage, policy B provides $1,000,000 of coverage, and policy C provides $3,000,000 of coverage?

Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay $1,500,000.

Policy A will pay nothing, policy B will pay $1,000,000, and policy C will pay $2,000,000.

Policy A will pay $500,000, policies B and C will each pay $1,000,000, and Kevin must pay the remaining $500,000.

Each policy will pay $500,000, and Kevin must pay the remaining $1,500,000.