Nature of Insurance, Rick, Perils, and Hazards

Question 1

All of the following are examples of pure risk EXCEPT
<> jewelry during a home robbery
<> Falling at a casino and breaking a hip
<> Losing money at a casino
<> Injured while playing football

Answer 1

~ Losing money at a casino
Pure risk is a category of risk in which loss is only possible outcome, which is the opposite of speculative risk. Gambling is considered a speculative risk where there is a chance of either gain or loss.

Question 2

Which of the following is considered to be an event or condition that increases the probability of an insured's loss?
<> Peril
<> Indemnity
<> Rick
<> Hazard

Answer 2

~Hazards

~ Hazards are events or conditions that increase the likelihood of an insured’s loss.

Question 3

People with higher loss exposure have tendency to purchase insurance more often than those at average risk. This is called
<> risk retention
<> adverse selection 
<> preexisting conditions
<> law of large numbers

Answer 3

~Adverse selection
Adverse selection is the tendency of persons with higher loss exposure to purchase insurance more often than those at average risk.

Question 4

The cause of a loss is referred to as a(n)
<> hazard
<> adversity
<> risk
<> peril

Answer 4

~ Peril
A peril is an event or circumstance that causes or may potentially cause a loss. Examples of perils include fire, flooding, hailstorms, tornado, hurricane, auto accident or home accident such as falling.

Question 5

An example of risk sharing would be
<> Doctors pooling their money to cover malpractice exposures
<> Adding more security to a high-risk building
<> buying an insurance policy to cover potential liabilities
<> choosing not to invest in the stock market

Answer 5

~Doctors pooling their money to cover malpractice exposures

Doctors pooling their money to cover malpractice exposures is an example of risk sharing

Question 6

How do insurers predict the increase of individual risks?
<> Experience of morbidity 
<> Law of large numbers
<> U.S Census
<> Average mortality incidents

Answer 6

~ Law of large numbers

The law of large numbers helps insurance companies predict the increase of individual risks.

Question 7

Insurance represents the process of risk
<> assumption
<> transference
<> selection
<> avoidance

Answer 7

~transference

Insurance involves the transfer of risk

Question 8

Insurance companies determine risk exposure by which of the following?
<> Insurance exchanges 
<> Law of large numbers and risk pooling
<> Population table data
<> insurable interest

Answer 8

~Law of large numbers and risk pooling

All forms of insurance determine exposure through risk pooling and the law of large numbers.

Question 9

An individual who removes the risk of losing money in the stock market by never purchasing stocks is said to be engaging in
<> Risk transference
<> Risk avoidance 
<> Risk reduction
<> Risk retention

Answer 9

~Risk avoidance
Risk avoidance is a risk management technique that seeks to eliminate any possibility of risk through hazard prevention, or the discontinuation of activities determined to entail any level of risk

Question 10

What is known as the immediate specific event causing loss and giving rise to risk?
<> Peril
<> Loss factor
<> Hazard
<> Liability

Answer 10

~Peril
A peril is defined as the immediate specific event causing loss and giving rise to risk. A peril is the cause of a risk. For example, when a building burns, fire is the peril. when a person dies, death is the peril. When an individual is injured in an accident, the accident is the peril. When a person becomes ill from a disease is the peril.