Ch 1 & 2 Practice Flashcards
ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects that 8 homeowners out of every 100, on average, will report claims each year. The variation between the rate of loss that ABC expects to occur and the rate of loss that actually does occur is called
A. objective probability.
B. subjective probability.
C. objective risk.
D. subjective risk.
C
An automobile that is a total loss as a result of a collision is an example of which of the following types of risk?
I. Speculative Risk
II. Diversifiable Risk
II only
Brad started a pest control business. To protect his personal assets against liability arising out of the business, Brad incorporated the business. Brad’s use of the corporate form of organization to shield against personal liability claims illustrates:
A. Fundamental risk
B. Noninsurance transfer
C. Risk retention
D. Objective risk
B
Why is a large number of exposure units generally required before a pure risk is insurable?
A. It prevents the insurer from losing money
B. It eliminates intentional losses
C. It minimizes moral hazard
D. It enables the insurer to predict losses more accurately
D
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 that car. From a risk management perspective, dropping the physical damage insurance on the car is best described as:
A. Increasing the use of avoidance in the risk management program
B. Increasing the use of noninsurance transfer in the risk management program
C. Increasing the use of retention in the risk management program
D. Increasing the use of risk control in the risk management program
C
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
II only
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’s president said, “Buying a warranty is voluntary, We’ve noted that those who buy the warranty after the purchase date have a greater need for service.” Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers?
A. Excessive premiums
B. Reduced claims
C. Bad investments
D. Adverse selection
D
RST Company has production facilities in Salt Lake City and Cleveland. The probability that in any given year a fire will damage the production facility in Salt Lake City is 5 percent. The probability that in any given year a fire will damage the Cleveland production facility is 4 percent. What is the probability that BOTH production facilities will be damaged by fire in any given year?
A. 0.20 percent
B. 2.00 percent
C. 4.50 percent
D. 9.00 percent
A
