Unit 1: General Insurance Terms and Related Concepts | Chapter 1-1: Risk Management

Question 1

An individual’s indifference or carelessness are considered:

a) Moral hazards
b) Emotional hazards
c) Stupid hazards
d) Morale hazards

Answer 1

An individual’s indifference or carelessness are considered: morale hazards.

Question 2

Of the identified types of risk, which is insurable?

a) Pure risk
b) Speculative risk
c) Assumed Risk
d) Insurable Risk

Answer 2

Of the identified types of risk, which is insurable? Pure risk

You cannot profit from insurance. Speculative risk involves the possibility of gain as well as loss, whereas “pure” risk involves the possibility of loss only. Only pure risk is an insurable exposure.

Question 3

An insurer incorporated under the laws of another state within the United States, but doing business in this state, is referred to as a/an:

a) Domestic insurer
b) Foreign insurer
c) External insurer
d) Alien insurer

Answer 3

An insurer incorporated under the laws of another state within the United States, but doing business in this state, is referred to as a/an: Foreign insurer

An insurer domiciled in another state that transacts within this state is called a foreign insurer, insuring domestic risks within this state.

Question 4

To be insurable, a loss must create:

a) A misunderstanding, therefore, all losses are insurable
b) A limited degree of discomfort
c) An element of surprise
d) A financial hardship

Answer 4

To be insurable, a loss must create: A financial hardship

The primary purpose of insurance is to protect an insured against financial devastation, therefore, only losses that impose (or could impose) a financial hardship on an insured are considered insurable exposures.

Question 5

The “law of large numbers” is an actuarial concept dealing with the prediction of future losses. Under this concept:

a) Small groups of homogeneous exposure units are analyzed annually to predict future loss.
b) A sampling of risks are examined to determine the probability of loss for a group as a whole.
c) Large groups of homogeneous exposure units are analyzed over long periods of time to develop statistics related to the probability of loss.
d) Losses are evaluated randomly.

Answer 5

The “law of large numbers” is an actuarial concept dealing with the prediction of future losses. Under this concept: Large groups of homogeneous exposure units are analyzed over long periods of time to develop statistics related to the probability of loss.

The larger the group analyzed, the more accurate predictions become.

Question 6

Risk is defined as the:

a) guarantee of loss.
b) chance or uncertainty of loss.
c) opportunity for loss.
d) probability of loss.

Answer 6

Risk is defined as the: chance or uncertainty of loss.

Risk is defined as the chance or uncertainty of loss; e.g., the chance or uncertainty of an accident resulting in property damage, bodily injury or, in the most extreme cases, death.

Question 7

The cause of loss is referred to as a/an:

a) Peril
b) Hazard
c) Pearl
d) Apparel

Answer 7

The cause of loss is referred to as a/an: Peril

Causes of loss are referred to perils.

Question 8

An insurer that “cedes” insurance to another insurance company is involved in:

a) Self-insuring.
b) Risk Assessment.
c) Reinsurance.
d) Sub-contracting.

Answer 8

An insurer that “cedes” insurance to another insurance company is involved in: Reinsurance.

Reinsurance. A common practice employed by an insurer to limit its exposure on any one subject of insurance.

Question 9

An insurer incorporated under the laws of this state is referred to as a/an:

a) Alien insurer
b) Foreign insurer
c) Domestic insurer
d) Native insurer

Answer 9

An insurer incorporated under the laws of this state is referred to as a/an: Domestic insurer

An insurer incorporated and doing business within this state is referred to as a domestic insurer.

Question 10

Homogeneous exposure units are _________ in nature.

a) opposite
b) accurate
c) predictable
d) like

Answer 10

Homogeneous exposure units are LIKE in nature.

Individuals of the same age, gender, physical make-up, medical history, personal habits and hobbies, etc. are said to be homogeneous, or like in nature. The larger the group of homogeneous exposures analyzed, the more accurate the prediction of future probability.

Question 11

A person required to be licensed to negotiate, sell, or solicit insurance is referred to as a/an:

a) Insurance Planner
b) Insurance Advisor
c) Insurance Producer
d) Insurance Councilor

Answer 11

A person required to be licensed to negotiate, sell, or solicit insurance is referred to as a/an:

Insurance Producer

This state has adopted the term “Insurance Producer.”

Question 12

Another element of insurability is that insurance must be:

a) Inexpensive
b) Expensive
c) Affordable
d) Provided to all applicants that apply

Answer 12

Another element of insurability is that insurance must be:

Affordable

Insurance companies are charged with the responsibility of developing premiums that are affordable to consumers, but also adequate for the insurer

Question 13

An insurer from a country outside of the United States and transacting business within this state is referred to as a/an:

a) Foreign insurer
b) Alien insurer
c) Unnaturalized insurer
d) Domestic insurer
* Insurers from other countries doing business within this state are referred to as alien insurers.*

Answer 13

An insurer from a country outside of the United States and transacting business within this state is referred to as a/an:

Alien insurer

Insurers from other countries doing business within this state are referred to as alien insurers.

Question 14

_________ selection is the tendency of more poor risks to seek and maintain insurance than good risks.

a) Actuary
b) Adverse
c) Avoidance
d) Affordable

Answer 14

_________ selection is the tendency of more poor risks to seek and maintain insurance than good risks.

Adverse

• The purpose of underwriting is to protect the insurer against adverse selection. If not for underwriting, only the poor risks would seek insurance.*
• Adverse Selection is defined as the tendency of more poor risks seeking (and maintaining) insurance than good risks, i.e. if not for qualification standards, by human nature, people would not buy the insurance until it was actually needed, which would result in an insurance company not having adequate resources to pay the claims.*

Question 15

A _________ is a form of risk retention.

a) reduction
b) deductible
c) transfer
d) physical hazard

Answer 15

A _________ is a form of risk retention.

deductible

There are deductibles associated with certain types of health insurance, as well as car physical damage and homeowner or renters insurance. The higher the deductible, the lower the premium; in other words, how much financial responsibility is the insured willing to accept before the insurer pays.

Question 16

For a risk to be insurable, the risk of loss must be:

a) Reasonably expected
b) Intentional
c) Probable
d) Unexpected and unintended

Answer 16

For a risk to be insurable, the risk of loss must be:

Unexpected and unintended

For a risk (loss) to be insurable it must involve the element of chance. In other words, be unexpected and unintended.

Question 17

An insurable loss must be:

a) Indeterminate
b) Calculable
c) Determined in advance
d) Incalculable

Answer 17

An insurable loss must be:

Calculable

An insurable loss must be calculable. An insurance company must be able to calculate the actual amount of the loss to determine its financial responsibility and initially to determine the amount of premium that must be charged.

Question 18

An insurance producer is authorized to represent the __________ or the purchaser of insurance.

a) insurance company
b) Department of Consumer and Business Service
c) Director
d) actuary

Answer 18

An insurance producer is authorized to represent the __________ or the purchaser of insurance.

insurance company

While it is true that by definition, an insurance producer can represent either the insurer or the insured, in reality a licensed insurance producer cannot act under the license unless an insurer agrees to appoint him/her as its agent. In which case, an appointed agent represents the insurer in an insurance transaction.

Question 19

A condition that increases the likelihood of a loss occurring is referred to as a/an:

a) Endangerment
b) Hazard
c) Exposure
d) Extreme exposure

Answer 19

A condition that increases the likelihood of a loss occurring is referred to as a/an:

Hazard

• Driving at excessive speed, smoking, rock climbing and skydiving are situations that increase the possibility of loss, referred to as “hazards” or hazardous activity.*
• Everyone is subject to exposures on a daily basis, e.g. someone else’s poor driving habits. An individual may not have control over an exposure, but may have control in how they respond to it; whereas, an individual generally decides whether or not to participate in hazardous activities.*

Question 20

In order for an insurance company to do business in this state, the insurer must be _________, which is evidenced by a Certificate of Authority.

a) admitted
b) insured
c) a Limited Liability Company
d) solicited

Answer 20

In order for an insurance company to do business in this state, the insurer must be _________, which is evidenced by a Certificate of Authority.

admitted

Insurance producers are licensed. Insurance companies are admitted (authorized) to transact within the state through licensed insurance producers. Insurance producers are appointed by authorized insurers to sell, solicit, or negotiate insurance on behalf of the insurer, i.e. a licensed insurance producer becomes an appointed agent of the insurer.

Question 21

For a loss to be insurable, the loss must be:

a) Uncertain as it relates to time and place
b) Definite as to time and place
c) Total and absolute
d) Witnessed by an non-interested third party

Answer 21

For a loss to be insurable, the loss must be:

Definite as to time and place

An insurable loss must be definite as to time and place. This requirement is imposed to assist in the prevention of fraud.

Question 22

The purchase of insurance is a form of risk:

a) Consolidation
b) Transfer
c) Development
d) Absorption

Answer 22

The purchase of insurance is a form of risk:

Transfer

The purchase of insurance does not necessarily transfer the risk, but the financial responsibility associated with the risk (loss).

Question 23

Speculative risk involves:

a) No gain no loss
b) The possibility of gain as well as loss
c) The possibility of loss only
d) The possibility of gain only

Answer 23

Speculative risk involves:

• No gain no loss
• The possibility of gain as well as loss
• The possibility of loss only
• The possibility of gain only

Speculative risk involves the possibility of gain as well as loss. You cannot profit from insurance, therefore speculative risk (speculation) is not insurable.

Question 24

Insurance is a contract, whereby one party (the insurer) agrees to ___________ the insured or the insured’s beneficiary in the event of an insured loss.

a) reward
b) remunerate
c) indemnify
d) enable

Answer 24

Insurance is a contract, whereby one party (the insurer) agrees to ___________ the insured or the insured’s beneficiary in the event of an insured loss.

indemnify

Indemnify. Insurance is a product of indemnification - to make one whole again; to put a person back in the same financial condition after a loss that was enjoyed before the loss. An insured cannot profit from insurance.

Question 25

In order for an insurance producer to act on behalf of an insurance company, the insurance producer must be ____________ by that insurer.

a) Acknowledged
b) Appointed
c) Accepted
d) Contracted

Answer 25

In order for an insurance producer to act on behalf of an insurance company, the insurance producer must be ____________ by that insurer.

Appointed

An insurance producer is not allowed to solicit, negotiate, or otherwise act on behalf of an insurer unless the insurance producer is an appointed agent of the insurer.

Question 26

• *_________ is the chance or uncertainty of loss. It is the chance that an individual will have an accident or die**
• *before life expectancy, that your house will be destroyed by fire, or that you will be involved in an automobile**
• *accident, causing bodily injury, property damage, or both.**

Answer 26

Risk is the chance or uncertainty of loss. It is the chance that an individual will have an accident or die
before life expectancy, that your house will be destroyed by fire, or that you will be involved in an automobile
accident, causing bodily injury, property damage, or both.

Question 27

• *Another term used to identify risk is __________. This is a situation or condition that presents the**
• *possibility of loss, e.g. someone else’s poor driving habits, Acts of God; wind, lightning, flood, etc. Each of**
• *us have ___________ to loss on a daily basis and while you may not have control over the act, you do have some control over how you deal with it**

Answer 27

Exposure

Another term used to identify risk is exposure. Exposure is a situation or condition that presents the
possibility of loss, e.g. someone else’s poor driving habits, Acts of God; wind, lightning, flood, etc. Each of
us have exposure to loss on a daily basis and while you may not have control over the act, you do have some
control over how you deal with it.

Question 28

What are the two types of Risks?

Answer 28

1. Pure Risk
2. Speculative Risk

Only Pure Risk** may be insured. Pure Risk provides the potential for loss only. **Speculative Risk may involve the potential for gain as well as loss, i.e. insuring against gambling or business profits or losses. The purpose of insurance is to make a person whole again only. Therefore, insurance is a product of indemnification. To indemnify, simply stated, means to restore to the same financial condition after a loss as the insured enjoyed before the loss.

Question 29

Insurance is a product of _____________.

Answer 29

indemnification

insurance is a product of indemnification. To indemnify, simply stated, means to restore to the same financial condition after a loss as the insured enjoyed before the loss.

Question 30

What are the elements of an Insurable Risk?

Answer 30

In order for a risk to be insurable, several additional elements must be present:

• The risk must be unexpected and unintended;
• The loss must be definite as to time and place. The loss of a dwelling due to fire or death of an individual are examples of a definite loss;
• The loss must be calculable. Determining the replacement value of
  a dwelling; first, to know what premium to charge and secondarily, to determine the financial obligation in the event of a loss.
• The loss must create a financial hardship for the individual involved. Insignificant financial losses are not
  insurable; and
• The cost of the insurance must be affordable to the insured.

Question 31

What are the five methods of handling risk?

Answer 31

Inherent in our society is exposure to risk. We are exposed to risk everyday, i.e. death due to an automobile
accident, a grease fire that damages the kitchen cabinets, etc. The following are the generally accepted
methods of handling risk:

• Risk Avoidance. Avoid the possibility of loss. If you don’t ride in a vehicle, you may avoid the possibility of an automobile accident.
• Risk Retention. Risk retention could be viewed as self-insuring. A deductible is a form of risk retention (Car, homeowners and health insurance may have deductibles). A deductible is the amount of risk retained by the insured.
• Risk Sharing. Risk sharing is evident in health insurance, property insurance, and other policies with co-insurance requirements.
• Risk Reduction. Living healthy lifestyles reduces the risk of premature death. Installing a fire protective sprinkler system has the potential of reducing the severity of a fire loss. Installing a burglar alarm system in your home helps to discourage theft.
• Risk Transfer. Transferring financial responsibility for a loss to an insurance company. The insurance company accepts responsibility for financial loss through an agreement (insurance policy) in exchange for valuable consideration (premium).

Question 32

The Law of Large Numbers

Insurance companies employ mathematicians, referred to as ____________. These mathematicians perrform statistical analysis of historical data.

Answer 32

Actuaries

Insurance companies employ mathematicians, referred to as actuaries**. **Actuaries do statistical analysis of
historical data.

Question 33

Insurance is a ______________ for spreading the chance for financial loss among large numbers of people. Essentially, individuals within the group share the risk and the insurance company administers the contracts, by collecting an appropriate premium from all those insured so that when a loss does occur there are adequate reserves to restore the claimant to a whole position.

Answer 33

Social Device

Insurance is a social device for spreading the chance for financial loss among large numbers of people.
Essentially, individuals within the group share the risk and the insurance company administers the contracts,
by collecting an appropriate premium from all those insured so that when a loss does occur there are adequate
reserves to restore the claimant to a whole position.

Question 34

Groups surveyed by actuaries are _______________ in nature.

Answer 34

homogeneous

Groups surveyed by actuaries are homogeneous in nature. Homogeneous exposures are like in nature; in other words, the same (or similar) exposure to loss.

Question 35

A ___________ is the cause of a loss. Fire and lightning are examples of perils we give consideration to when insuring against the loss of our homes, while accident and illness are perils insured against when purchasing life and/or health insurance.

Answer 35

Peril

A peril is the cause of a loss. Fire and lightning are examples of perils we give consideration to when insuring
against the loss of our homes, while accident and illness are perils insured against when purchasing life and/or
health insurance.

Question 36

• *___________ increase the likelihood that a peril will occur. Driving recklessly, skydiving, scuba diving, and**
• *smoking are all examples of ____________ that increase the likelihood of a peril occurring.**

Answer 36

Hazards

Hazards increase the likelihood that a peril will occur. Driving recklessly, skydiving, scuba diving, and
smoking are all examples of hazards that increase the likelihood of a peril occurring.

Question 37

The ability to predict future losses with some degree of accuracy is _______________________. Certain types of perils do not allow for this type of prediction and therefore, are generally ____________ from coverage, e.g. war, nuclear events, earthquakes, and floods are examples of excluded perils.

Answer 37

an essential element of insurance and excluded

The ability to predict future losses with some degree of accuracy is an essential element of insurance. Certain types of perils do not allow for this type of prediction and therefore, are generally excluded from coverage, e.g. war, nuclear events, earthquakes, and floods are examples of excluded perils.

NOTE: Earthquake and flood insurance are available by endorsement and stand-alone purchase.

Question 38

Physical Hazard
A physical hazard exists because of your relationship with an object, to a condition, occupancy, or use of
property. A loose stair rail, an untied shoelace, or a faulty brake line on your vehicle are examples of physical
hazards.

Answer 38

Physical Hazard
A physical hazard exists because of your relationship with an object, to a condition, occupancy, or use of
property. A loose stair rail, an untied shoelace, or a faulty brake line on your vehicle are examples of physical
hazards.

Question 39

An individual’s indifference or carelessness are considered morale hazards. Leaving a vehicle unlocked and
unattended may invite theft, or knowingly taking risk without consideration for the consequences may be
considered morale hazards.

Answer 39

An individual’s indifference or carelessness are considered morale hazards. Leaving a vehicle unlocked and
unattended may invite theft, or knowingly taking risk without consideration for the consequences may be
considered morale hazards.

Question 40

Deliberately causing a loss to collect on the insurance. A person’s tendency to intentionally be involved in
unethical (possibly illegal) actions are considered moral issues.

Answer 40

Deliberately causing a loss to collect on the insurance. A person’s tendency to intentionally be involved in
unethical (possibly illegal) actions are considered moral issues.

Question 41

Insurance companies carefully screen applicants for insurance policies in an effort to prevent adverse selection
against the insurer. Adverse selection is the tendency of more poor risks to seek and maintain insurance
than good risks, which would result in higher claims experience and ultimately higher premium rates for all
insureds.

Answer 41

Insurance companies carefully screen applicants for insurance policies in an effort to prevent adverse selection
against the insurer. Adverse selection is the tendency of more poor risks to seek and maintain insurance
than good risks, which would result in higher claims experience and ultimately higher premium rates for all
insureds.

Question 42

Insurance companies market a ________________________ against financial catastrophe.

Answer 42

variety of products to protect consumers

Insurance companies market a variety of products to protect consumers against financial catastrophe.

Question 43

Insurers offer policies to protect against ______________ and to cover ______________, ______________, to protect an insured and his/her family, business, or both, and ___________ products

Answer 43

Insurers offer policies to protect against the loss of property** and to cover l_iability exposures_, **life and health
insurance** to protect an insured and his/her family, business, or both, and **annuities products

Question 44

_____________ Insurance provides coverage to cover the risk of loss to property, which includes real and personal property, as well as business property exposures.

Answer 44

• *Property insurance** provides coverage to cover the risk of loss to property, which includes real and personal
• *property, as well as business property exposures.**

Question 45

___________ Insurance provides protection against liability claims that may be brought against the insured. Automobile liability exposures, general liability, workers’ compensation coverage, crime coverage, surety, and fidelity are examples of casualty exposures.

Answer 45

• *Casualty insurance** provides protection against liability claims that may be brought against the insured.
• *Automobile liability exposures, general liability, workers’ compensation coverage, crime coverage, surety, and**
• *fidelity are examples of casualty exposures.**

Question 46

_______ Insurance is designed to protect an insured’s family, business, or both against premature death of the insured. This type of insurance provides the needed resources to pay off outstanding debt, pay off existing mortgages, providing for college funding, emergency funds, and income replacement or, in a business environment, to provide for business continuation.

Answer 46

• *Life insurance is designed to protect an insured’s family, business, or both against premature death of**
• *the insured**.

This type of insurance provides the needed resources to pay off outstanding debt, pay off existing mortgages, providing for college funding, emergency funds, and income replacement or, in a business environment, to provide for business continuation.

Question 47

__________ Insurance protects the insured against financial losses resulting from illness or accident, to provide protection for loss of income due to a disability, or financial assistance in long-term care situations.

Answer 47

• *Health insurance** protects the insured against financial losses resulting from illness or accident, to provide
• *protection for loss of income due to a disability, or financial assistance in long-term care situations**.

Question 48

Oregon Specific Requirements:

• *Each state will have an entity (division, department, etc.) designated to implement, oversee and enforce**
• *the insurance regulations (laws and rules) within that state. The state will also designate an individual as**
• *having overall oversight responsibilities. This state utilizes the following:**

Department refers to what?

Director refers to what?

Answer 48

Department: Refers to the Department of Consumer and Business Services (DCBS). The Division of
Financial Regulation (DFR) is one of the divisions under DCBS. DFR has oversight responsibility over
insurance and investment securities within this state. DFR resulted from the merger of the Insurance
and Securities Divisions.

Director: The Director of DCBS has overall responsibility. The Insurance Division of DFR is under the
direct responsibility of the Insurance Commissioner.

Question 49

Insurers that only write one line of insurance are referred to as “__________” companies, while an insurer that writes more than one line (property and casualty) is referred to as a “__________” company.

Answer 49

Monoline

Multiline

Insurers that only write one line of insurance are referred to as “monoline**” companies, while an insurer that writes more than one line (property and casualty) is referred to as a “**multiline” company.