Ch.2 - Nature of Insurance

According to the law of large numbers, how would losses be affected if the number of similar insured units increases?

a. The higher the exposure, the higher the cost of each loss

b. No effect on predicting losses

c. Predictability of losses will be improved

d. Ability to predict losses decreases

A business becoming incorporated is an example of risk

How can an insurance company minimize exposure to loss?

a. risk concealing

b. reinsuring risks

d. risk assumption

An insurer has a contractual agreement which transfers a portion of its risk exposure to another insurer. What type of contractual arrangement is this?

a. coinsurance contract

b. mutuality contract

c. reinsurance contract

d. reciprocity contract

Which term describes the elimination of a hazard?

a. risk avoidance

b. risk retention

c. risk transference

Which of these statements regarding insurance is false?

a. One way insurers deal with catastrophic loss is through reinsurance

b. As the number of units increases, the number of losses decreases

c. Speculative risk cannot be insured

d. Pure risk can be insured

For insurance purposes, similar objects which are exposed to the same group of perils are referred to as

a. homogenous perils

b. similar exposure units

c. homogeneous exposure units

d. common hazards

Risk is the process of analyzing exposures that create risk and designing programs to handle them.

Which of the following can be defined as a cause of a loss?

Which of these statements is NOT a characteristic of the law of large numbers?

a. Individual losses can be predicted based on past experience

b. Group losses can be predicted based on past experience

c. Losses can be predicted in large groups with a higher degree of accuracy

d. Rates can be calculated to compensate for losses

Which of the following can be defined as "the potential for loss"?

The law of large numbers enables an insurer to

a. predict losses

b. avoid adverse selection

c. classify rates

d. assure company profits

What type of risk involves the potential for loss with possibility for gain?

a. speculative risk

A hold-harmless clause is an example of risk

Which of the following describes the act of insuring a risk against possible loss?

a. Risk avoidance

b. Risk transfer

c. Hazard reduction

d. Loss management

ABC Company is attempting to minimize the severity of potential losses within its company. The company is engaged in risk

An insurable risk requires

a. that the chance for both a loss or gain exists

b. the loss must be catastrophic

c. that the chance of loss be calculable

d. that the loss must be incalculable

What type of risk involves the potential for loss AND the possibility for gain?

Which of the following is NOT an example of risk retention?

a. Becoming aware of a risk and taking no action

b. Self-insuring a given risk

c. Deciding a business deal is risky but going through with it anyways

d. Not doing a business deal after deciding it would be too risky

Purchasing insurance is an example of risk

Which one of these is NOT considered to be an element of an insurable risk?

a. Speculative risk

c. Loss cannot be catastrophic

d. Loss must be due to chance