Question 1

If those who are in ill health purchase health insurance and this raises the premiums for all of the insureds,this would be an example of

Accepted Answer

This scenario describes adverse selection, which occurs when a higher proportion of individuals with a higher likelihood of making claims, such as those with pre-existing medical conditions, purchase insurance compared to those with a lower likelihood of making claims. As a result, the overall risk in the insurance pool is increased, leading to higher premiums for everyone.

Question 2

Which of the following is not an example of risk reduction?

Accepted Answer

Purchasing homeowner's insurance is not an example of risk reduction; it is an example of risk transfer, where the financial burden of a potential loss is shifted to the insurance company.

Question 3

Indemnification

Accepted Answer

Indemnification means that the insurance company will compensate you for your losses and return you to your pre-loss financial status. It does not allow the insurance company to sue you for negligence or give the insurance company first claim on court-awarded damages. It is a common feature of all types of insurance, including life insurance.

Question 4

If you lower the probability of loss by taking preventive action you are engaging in which one of the following risk management strategies?

Accepted Answer

Risk reduction is the strategy of taking preventive action to lower the probability of loss. Risk avoidance involves completely avoiding the risk, risk retention involves accepting the risk and dealing with the consequences if they occur, and risk transfer involves shifting the risk to another party (such as through insurance). Therefore, B is the best choice for the given scenario.

Question 5

Which of the following is an example of risk transfer?

Accepted Answer

Purchasing auto liability insurance transfers the risk of financial loss due to a car accident to the insurance company.

Question 6

When there is only the possibility of accidental loss,there is

Accepted Answer

Accidental loss is a type of pure risk, which refers to the risk of loss or damage without the possibility of gain or profit. Speculative risk involves a chance of both profit and loss, default risk involves the risk of default by borrowers, and fortuitous risk refers to unforeseeable events that are beyond human control.

Question 7

The author of the text suggest that you should

Accepted Answer

The author suggests that one should self-insure against minor monetary losses like cracked phone screens or minor car accidents and purchase market insurance only to cover major financial losses like a house fire or a major car accident. This way one can save money on insurance premiums and also have protection against catastrophic events.

Question 8

Personal liability coverage

Accepted Answer

Personal liability coverage protects you against legally-obligated expenses for the bodily injury or property damage your negligence has caused others. This means that if you are found liable for an accident or incident that causes bodily injury or property damage to someone else, your personal liability coverage will pay for the expenses associated with that harm.

Question 9

In which of the following losses are you not likely to have an insurable interest?

Accepted Answer

Insurable interest means that you have an economic interest in the property or person being insured. In the case of an oil spill in Alaska that destroys wildlife, you do not have a personal financial interest or relationship with the wildlife, so you would not have an insurable interest. The other options all involve losses that could result in a financial impact on you personally, and therefore you would have an insurable interest in them.

Question 10

You have an insurable interest in an event if

Accepted Answer

An insurable interest arises when an event has the potential to cause a financial loss to the insured party. Therefore, option B is the correct answer. Option A and D are irrelevant, and option C is incorrect because having no financial interest in a risk means that there is no insurable interest.

Question 11

Speculative risk

Accepted Answer

Speculative risk refers to the risk involved in an investment that has the potential for both gain and loss. This type of risk is commonly associated with investments made in financial markets, such as stocks, options, and futures. However, it can also exist in other areas, such as real estate or new business ventures. Gamblin, on the other hand, is a form of speculative risk but it is not the only one.

Question 12

The primary difference between entering into a gamble and purchasing insurance is that

Accepted Answer

Gambling is often illegal or regulated due to its nature of betting on uncertain outcomes, while insurance is a legal financial product designed to mitigate risk.

Question 13

Increasing the deductible on your homeowner's policy is an example of

Accepted Answer

Increasing the deductible on your homeowner's policy means you are agreeing to pay more out of pocket before insurance coverage begins, which is essentially taking on more of the risk yourself. This is known as risk retention.

Question 14

Quitting cigarette smoking and,thus,eliminating the cause of a loss is an example of

Accepted Answer

Quitting cigarette smoking to eliminate the cause of a loss is an example of risk avoidance, as it involves taking steps to avoid the risk entirely.

Question 15

Adverse risk selection occurs when

Accepted Answer

Adverse risk selection refers to a situation where individuals with higher than average risk are more likely to purchase insurance, leading to an imbalanced risk pool. As a result, insurers may have to charge higher premiums or limit coverage, which can exacerbate adverse selection further.

Question 16

Which of the following is an example of "pure risk"?

Accepted Answer

Pure risk refers to risks that have only two possible outcomes: loss or no loss. The risk associated with fire and theft is an example of pure risk, as there is a possibility of loss if your property is damaged or stolen, but no possibility of any gain or profit. The other options involve speculative or business risk, where there is a possibility of gain or profit in addition to the possibility of loss.

Question 17

Which of the following is the best example of risk transfer?

Accepted Answer

Purchasing life insurance is the best example of risk transfer as the policy transfers the risk of financial loss in the event of the insured's death to the insurance company.

Question 18

When insureds engage in a pooling of risk,

Accepted Answer

Pooling of risk allows individuals to share the financial consequences of uncertain events, thereby reducing the risk for each participant.

Question 19

We buy life insurance in order to transfer

Accepted Answer

Life insurance is purchased in order to transfer the pure risk of premature death to the insurance company. Pure risk involves possible loss only and no chance of gain or profit. The insurance company guarantees a payment in the event of death, providing financial protection to the insured's beneficiaries. Adverse risk and negative risk are not common terms in insurance, and speculative risk involves the possibility of gain or loss, which is not associated with life insurance.

Question 20

Property loss insurance provides protection from all but one of the following.Which one is not covered by property loss insurance?

Accepted Answer

Property loss insurance covers damage to your property caused by natural disasters, theft, and other covered events. It may also cover your financial losses due to the negligence of others or events outside of your control. However, it typically does not cover financial harm that your own negligence causes to others. Liability insurance would cover this type of risk.

Quiz 13: Property and Liability Insurance: Protecting Your Lifestyle Assets