exam 3

Question 1

means that an individual is aware of the risk and deliberately plans to retain all or part of it

Answer 1

active retention

Question 2

The tendency of persons with a higher-than-average chance of loss to seek insurance at standard rates

Answer 2

adverse selection

Question 3

A technique to manage risk by avoiding it

Answer 3

avoidance

Question 4

financial loss that results from the physical damage, destruction, or theft of the property, such as fire damage to a home

Answer 4

direct loss

Question 5

changed federal law that earlier prevented banks, insurers, and investment firms from competing outside their core area. The federal Reserve has umbrella authority over bank affiliates that engage in underwriting insurance

Answer 5

Financial Modernization Act

Question 6

a loss that is unforeseen, unexpected, and occur as a result of chance

Answer 6

fortuitous losses

Question 7

A technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling futures contracts on an organized exchange

Answer 7

hedging

Question 8

a type 2 loss, prevention and retention are the most appropriate risk management techniques

Answer 8

High-frequency, low-severity

Question 9

Restoring the insured to his or her approximate financial position prior to the occurrence of the loss

Answer 9

indemnification

Question 10

a financial loss that results indirectly from the occurrence of a direct physical damage or theft loss. The additional living expenses after a fire

Answer 10

indirect loss

Question 11

the pooling of fortuitous losses by transfer of such risks to insurers

Answer 11

insurance

Question 12

activities to reduce the frequency of losses

Answer 12

Loss prevention

Question 13

activities to reduce the severity of losses

Answer 13

Loss reduction

Question 14

type 3 loss Transfer is the most appropriate risk management technique

Answer 14

Low-frequency, high-severity

Question 15

dishonesty or character defects in an individual that increase the frequency or severity of loss

Answer 15

moral hazard

Question 16

a method other than insurance by which a pure risk and its potential financial consequences are transferred to another party

Answer 16

noninsurance transfer

Question 17

The long run relative frequency of an event base on the assumptions of an infinite number of observations and of no change in the underlying conditions

Answer 17

objective probability

Question 18

The relative variation of actual loss from expected loss

Answer 18

objective risk

Question 19

means risks may be unknowingly retained because of ignorance, indifference, or laziness

Answer 19

passive retention

Question 20

ruled insurance was not interstate commerce, and that the states had the right to regulate the industry rather than the federal government

Answer 20

Paul v. Virginia

Question 21

the cause of the loss

Answer 21

peril

Question 22

a physical condition that increases the frequency or severity of the loss

Answer 22

physical hazard

Question 23

spreading the losses incurred by the few over the entire group

Answer 23

pooling of losses

Question 24

the Insurers right to sue a liable party.

Answer 24

principle of subrogation

Question 25

used to manage catastrophic loss, disperses coverage over large geographic area, or using financial instruments, such as catastrophe bonds. an insurance company can transfer its coverage to another insurer

Answer 25

reinsurance

Question 26

an individual or business firm retains part or all of the losses that can result from a given risk

Answer 26

retention

Question 27

A pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position

Answer 27

risk transfer

Question 28

all or part of the given loss exposure is retained by the firm

Answer 28

Self-insurance

Question 29

ruled that insurance was interstate commerce when conducted across state lines and was subject to federal antitrust law

Answer 29

South-Eastern Underwriters Association case

Question 30

a situation in which either profit or loss is possible (gambling)

Answer 30

speculative risk

Question 31

An individual’s personal estimate of the chance of loss

Answer 31

subjective probability

Question 32

Uncertainty based on a person’s mental condition or state of mind

Answer 32

subjective risk

Question 33

the inducement of a policy owner to drop an existing policy and replace it with a new one that provides little or no economic benefit to the client. Prohibited practice under insurance law

Answer 33

twisting

Question 34

the practice of giving an individual a premium reduction or some other financial advantage not stated in the policy as an inducement to purchase the policy. Insurance laws prohibit this practice

Answer 34

rebating