Principles of Insurance Exam Questions and Answers Rated A+

Principles of Insurance Exam Questions and Answers Rated A+ With regard to insurance, risk can be defined as: A) uncertainty regarding loss. B) certainty regarding loss. C) uncertainty regarding financial gain. D) certainty regarding financial gain. Answer: A Risk refers to the uncertainty of financial loss. Insurance replaces the uncertainty of risk with certain guarantees of financial stability. A condition or situation that presents a possibility of loss is a (an): A) law of large numbers. B) named certainty. C) exposure. D) proximate cause. Answer: C A condition or situation that presents a possibility of loss is an exposure. Insurance policies are designed to cover loss, either a direct loss or an indirect loss. How is uncertainty regarding loss best described? A) Peril. B) Risk. C) Insurance. D) Hazard. Answer: B In the strict insurance definition, risk is the uncertainty regarding financial loss. Insurance is used to minimize the risk of uncertainty by spreading the risk over a large enough number of similar exposures to predict the individual chance of loss. A chance, possibility, or uncertainty of loss is known as a: A) hazard. B) peril. C) proximate cause. D) risk. Answer: D Risk is the uncertainty regarding the occurrence of financial loss. A peril is the actual cause of a loss and is specifically identified in the policy. A hazard is a situation or condition that may increase the possibility of a loss occurring. Proximate cause is the action that produces a loss through an unbroken chain of events. Self-insurance is an example of what kind of risk treatment? A) Reduction. B) Transference. C) Retention. D) Avoidance. Answer: C Self-insurance is a form of risk retention because the individual personally retains the risk and must accept the economic loss if the risk becomes a reality. Treating risk by purchasing insurance is an example of what type of risk management? A) Avoidance. B) Reduction. C) Retention. D) Transfer. Answer: D Purchasing insurance is the most common method of transferring risk. The burden of carrying the risk and indemnifying the financial or economic loss is transferred from the individual to the insurance company through the insurance contract. Robert and Carolyn live in a busy city and decide that not owning a car is the solution to not experience having a car stolen. Which of the following methods describes this philosophy? A) Loss control. B) Avoidance. C) Retention. D) Transfer. Answer: B An individual may avoid the risk of a loss by not engaging in an activity or owning property. By not owning a car, Robert and Carolyn will not risk having it stolen. Sharing is a method of handling risk. Which of the following phrases best describes the concept of sharing? A) Purchasing insurance. B) Increasing a deductible to share the loss with the insurance company. C) Signing a hold harmless agreement to share the liability. D) Buying a car with a friend to share the risk. Answer: A Sharing (also known as transfer) is the method of risk being distributed among a number of persons. Each person bears a portion of the risk in relation to what he has invested. Which of the following is an example of reduction as a method of handling risk? A) Reducing coverage. B) Buying insurance to reduce the risk. C) Installing a burglar alarm. D) Increasing a deductible. Answer: C Reduction may be accomplished through loss prevention and loss control. A burglar alarm will control or reduce the loss.