Principles of Insurance TEST

Question 1

Principles of Insurance - Unit Test
Question

The law of large numbers

1: prohibits insurance with extremely high premiums
2: states that the more examples used to develop a statistic, the more reliable the statistic will be
3: states that there must be an adequate spread of risk for insurance to be effective
4: states that large risks should be transferred to an insurance company

Answer 1

The law of large numbers says that the more examples used to develop a statistic, the more reliable the statistic will be. Insurers use the law of large numbers to predict the number of losses that will occur so they can charge the correct premium.

Question 2

Principles of Insurance - Unit Test
Question

A risk that involves both the possibility of loss and the possibility of gain is

a morale risk
a pure risk
a speculative risk
an insurable risk

Answer 2

Correct Answer!

A speculative risk involves both the possibility of loss and the possibility of gain. Speculative risks are not insurable. A pure risk involves only the possibility of loss.

Question 3

LaTonya purchases a house from John. She borrows $75,000 from First City Bank which, along with her $25,000 down payment, equals the $100,000 purchase price of the home.

Who has an insurable interest in this home?

LaTonya
Both LaTonya and First City Bank
First City Bank
John

Answer 3

Correct Answer!

To have an insurable interest, an individual or business must have a chance of financial loss or a financial interest in the property. Both LaTonya, who owns the home, and First City Bank, which provided the mortgage, have insurable interests. John does not have an insurable interest because he no longer owns the home.

Question 4

Principles of Insurance - Unit Test
Question

Highpoint Industries has an automatic sprinkler system installed in its office building.

This is an example of which risk management method?
	Avoidance
	Reduction
	Transfer
	Control

Answer 4

guess: control

Sorry, but that is incorrect. Please try again.

Correct: Reduction!!!

A sprinkler system can reduce the severity of fires, but it does not prevent them altogether or reduce the number that occur.

Question 5

Principles of Insurance - Unit Test
Question
Benson Pharmaceutical Company decides not to manufacture a new drug after determining that it has serious potential side effects.

This is an example of which risk management method?
	Control
	Avoidance
	Retention
	Transfer

Answer 5

Avoidance: Correct Answer

By not producing the drug, Benson avoids the risk of being sued by consumers who are injured by the drug.

Question 6

Question
Since she has always been in good health, Donna decides to cancel her health insurance policy. This is an example of which risk management method?

Retention
Avoidance
Control
Transfer

Answer 6

Retention: Correct

By not carrying health insurance, Donna is retaining the risk of financial loss from unexpected medical expenses.

Question 7

Question
Which of the following represent pure risks?

Terry places a bet on the outcome of a basketball game.

Neither of these

Margaret’s dog is temperamental. She’s afraid it will bite a neighbor someday, and she will be held responsible.

Both of these

Answer 7

A: Margaret’s dog….

bad guess: Neither of these

A pure risk is one that involves only the possibility of loss. Terry placing a bet is an example of a speculative risk in which there exists both the possibility of gain and the possibility of loss.