Chapter 1

Question 1

A unique point about this type of insurance company is that it is run by someone known as an “attorney in fact” (not an attorney at law which is a lawyer):

Answer 1

Select one: a. mutual insurer b. stock company c. reciprocal insurer d. fraternal benefit insurer Feedback The correct answer is: reciprocal insurer

Question 2

Risk is the:

Answer 2

Select one: a. cause of the loss b. uncertainty or chance of loss Feedback The correct answer is: uncertainty or chance of loss

Question 3

Chance of a windstorm causing a loss to one’s property is:

Answer 3

Select one: a. risk b. hazard c. uninsurable d. peril Feedback A windstorm is a peril. The chance of a windstorm occurring is a risk.

Question 4

Uncertainty of loss is:

Answer 4

Select one: a. peril b. risk c. uninsurable d. insurance Feedback The definition of “risk” is chance of loss or uncertainty of loss. The correct answer is: risk

Question 5

A stock company is referred to as a:

Answer 5

Select one: a. Non-participating company. b. Participating company. Feedback See Page 1-10, Line 30. A stock company is non-participating because the policyholders do not participate in the dividends.

Question 6

Insurance:

Answer 6

Select one: a. controls risk b. transfers risk Feedback The correct answer is: transfers risk

Question 7

The primary concept behind insurance is:

Answer 7

Select one: a. transfer of risk b. risk elimination Feedback The correct answer is: transfer of risk

Question 8

Indemnity is:

Answer 8

Select one: a. coming out ahead b. making whole Feedback The correct answer is: making whole

Question 9

Which is true regarding insurance companies?

Answer 9

Select one: a. Mutuals are owned by the policy holders, have the management members chosen by the policy holders, and pay dividends to the policy holders. b. Stock companies are managed by the policy owners. c. Stock companies are owned by the policy holders but mutuals are owned by the stock holders. d. Stock companies and mutuals both pay dividends to the policy holders. Feedback The correct answer is: Mutuals are owned by the policy holders, have the management members chosen by the policy holders, and pay dividends to the policy holders.

Question 10

Restoring the Insured to the financial condition prior to a loss is:

Answer 10

Select one: a. direct loss b. illegal c. indemnification d. peril Feedback Indemnification is making whole but not coming out ahead. Another way of saying that is that the Insured is being restored to the financial condition that existed prior to the loss occurring. The correct answer is: indemnification

Question 11

The National Association of Insurance Commissioners (NAIC):

Answer 11

Select one: a. merely advises the state insurance commissioners b. passes laws and adopts regulations that apply in every state Feedback The correct answer is: merely advises the state insurance commissioners

Question 12

Which of the following is considered to be a “participating” Insurer?

Answer 12

Select one: a. a mutual insurer b. a fraternal insurer c. a stock insurer d. a government insurer Feedback A mutual is a “participating” insurer because the policyholders participate in the profits. The correct answer is: a mutual insurer

Question 13

Each of the following is generally considered to be an insurable risk EXCEPT:

Answer 13

Select one: a. measurable b. economic c. catastrophic d. accidental Feedback Although there are exceptions, insurance companies prefer to NOT insure catastrophes. This isn’t a perfect correct answer, but “catastrophic” is the “best” answer. The correct answer is: catastrophic

Question 14

The transfer of pure risk is:

Answer 14

Select one: a. indemnification b. insurance Feedback The correct answer is: insurance

Question 15

A company that has purchased a fire policy on its building has decreased its:

Answer 15

a. risk with respect to a loss b. likelihood of a loss occurring Feedback The correct answer is: risk with respect to a loss

Question 16

Insurance covers:

Answer 16

Select one: a. pure risk b. speculative risk c. catastrophic losses d. noneconomic losses Feedback Speculative losses, such as gambling, are not insurable. Nor are noneconomic and catastrophic losses. Thus, insurance covers pure risk - the risk that creates a loss with no chance of a gain. The correct answer is: pure risk

Question 17

To avoid the concentration of insurance risks, an insurer should:

Answer 17

Select one: a. cover only one Insured. b. raise premiums. c. spread the risk. d. reduce the number of policies sold. Feedback Spreading the risk refers to insuring a variety of risks in a variety of areas. Insurance companies attempt to avoid a concentration of risks, such as insuring persons only in hurricane regions. The correct answer is: spread the risk.

Question 18

Indemnification is:

Answer 18

Select one: a. making whole. b. making a profit. Feedback The correct answer is: making whole.

Question 19

A risk management technique which transfers risk is:

Answer 19

Select one: a. peril b. insurance c. assignment d. mediation Feedback Transfer of risk is one of the definitions of insurance. The correct answer is: insurance

Question 20

Which best demonstrates indemnification?

Answer 20

Select one: a. An Insured demands a new car when the old car is destroyed b. After a loss, an Insured collects from both her insurance and another person’s insurance c. After a fire, a homeowner is paid retail prices for personal property as well as the cost of rebuilding the structure d. After a car wreck, an injured person is paid for medical expenses and vehicle damages Feedback The correct answer is: After a car wreck, an injured person is paid for medical expenses and vehicle damages

Question 21

Uncertainty of future outcomes is:

Answer 21

Select one: a. insurance b. risk Feedback The correct answer is: risk

Question 22

Uncertainty of future outcomes is:

Answer 22

Select one: a. risk b. insurance Feedback The correct answer is: risk

Question 23

The Law of Large Numbers:

Answer 23

Select one: a. Is used to determine premiums based on historical loss figures. b. Prohibits a particular Insurer from issuing more than its fair share of the policies in any particular market. Feedback This is an example of how you are going to have to “process” the information you have learned by applying that information to a particular questions. The test writers are constantly changing questions but rarely test on a new topic. So, we have to be flexible and quick on our feet so that we can recognize something that is stated in a new manner. By predicting losses based on historical figures, the Law of Large Numbers assists the Insurer in setting premium rates. You can do this!

Question 24

Each of the following involves pure risk EXCEPT:

Answer 24

Select one: a. flood b. drought c. loss in the stock market d. bodily injury Feedback The correct answer is: loss in the stock market

Question 25

The Lutheran-run insurance companies are examples of:

Answer 25

Select one: a. stock insurers b. mutual insurers c. reciprocals d. fraternal benefit insurers Feedback The correct answer is: fraternal benefit insurers

Question 26

The Law of large Numbers allows insurers to:

Answer 26

Select one: a. predict losses accurately b. eliminate premiums Feedback The correct answer is: predict losses accurately