LOMA 281 UPDATED Questions and
CORRECT Answers
Pure risk - CORRECT ANSWER - Risks that involve either a loss or no loss
Speculative risk - CORRECT ANSWER - Risk that can result in a loss, gain or no change
Insurance - CORRECT ANSWER - A method for transferring risk from an individual to an
insurance company
Premium - CORRECT ANSWER - The amount that the insured pays in exchange for a
promise of money
Risk pooling - CORRECT ANSWER - Insurers collect premiums from all insured people
and spread the cost of the relatively few anticipated losses among all insureds
Annuity - CORRECT ANSWER - A financial product under which an insurer promises to
make a series of periodic payments to a named person or entity in exchange for a premium or
series of premiums
Policy benefit - CORRECT ANSWER - The amount of money that an insurer promises to
pay if a covered loss occurs
Third Party Policy - CORRECT ANSWER - An insurance policy that one person
purchases on the life of another person
Contract of indemnity - CORRECT ANSWER - An insurance policy under which the
amount of the policy benefit payable for a covered loss is based on the actual amount of financial
loss that results from the covered event, as determined at the time of the event
,Valued contracts - CORRECT ANSWER - An insurance policy that specifies the amount
of the policy benefit that will be payable when a covered loss occurs, regardless of the actual
amount of the loss that was incurred
Face amount (face value) - CORRECT ANSWER - The amount of the policy benefit that
is payable if the insured dies while the policy is in force
Law of large numbers - CORRECT ANSWER - Mathematical theory which states that
typically the more times we observe a particular event, the more likely it is that our observed
results will approximate the true probability that the event will occur
Reinsurance - CORRECT ANSWER - Insurance that one insurance company (the direct
writer) purchases from another insurance company (the reinsurer) to transfer all or part of the
risk on insurance policies that the direct writer has insured
Retention limit - CORRECT ANSWER - The maximum amount of insurance that an
insurer is willing to carry at its own risk without transferring some of the risk to a reinsurer. The
direct writer cedes anything above that limit to a reinsurer in a reinsurance transaction of other
risk transfer mechanisms
Direct writer - CORRECT ANSWER - The insurance company that purchases reinsurance
to transfer all or part of the risks on insurance policies the company issued
Retrocessionaire - CORRECT ANSWER - A reinsurance company that accepts risks
transferred from another reinsurer in a reinsurance transaction
Medical risk factor - CORRECT ANSWER - A physical or psychological characteristic
that may increase the likelihood of loss
Moral hazard - CORRECT ANSWER - A characteristic that exists when the reputation,
financial position, or criminal record of an application or a proposed insured indicates that the
person may act dishonestly in the insurance transaction
,Antiselection - CORRECT ANSWER - The tendency of individuals who believe they have
a greater than average likelihood of loss to seek insurance protection to a greater extent than do
other individuals
Risk class - CORRECT ANSWER - A grouping of insureds who represent a similar level
of risk to the insurer
Preferred Risks - CORRECT ANSWER - A proposed insured who presents a significantly
lower than average likelihood of loss
Substandard risk - CORRECT ANSWER - A proposed insured who has a significantly
greater than average likelihood of loss but is still found to be insurable
Substandard premium rates - CORRECT ANSWER - A higher than standard premium rate
charged insureds who are classified as substandard rates
Preferred premium rates - CORRECT ANSWER - A lower than standard premium rate
charged insureds who are classified as preferred risks
Declined risks - CORRECT ANSWER - A proposed insured who is considered to present a
risk that is too great for the insurer to cover
Stock insurer - CORRECT ANSWER - Can issue shares of stock, owned by stockholders
who have voting rights in the company, stockholders may receive shares of operating profits
(stock dividends)
Mutual insurer - CORRECT ANSWER - Owned by policy owners, policy owners have
membership rights (voting rights), policy owners may periodically receive an amount of money
known as a policy dividend
, Fraternal benefit society - CORRECT ANSWER - Owned by members of a fraternal lodge
system, provides social and insurance benefits only to fraternal members and their families,
legally required to have a representative form of government
Solvent - CORRECT ANSWER - A company with the financial capacity to pay its debts
and contractual obligations when due
Dodd-Frank Act - CORRECT ANSWER - legislation passed in 2010 reforming regulation
of financial institutions
Federal insurance office - CORRECT ANSWER - A new federal agency created by the
Dodd Frank Act with the federal authority to monitor the insurance industry
State insurance department - CORRECT ANSWER - An administrative agency in each
state that is responsible for making sure that companies operating in the state comply with
applicable regulatory requirements
Insurance commissioner - CORRECT ANSWER - The individual responsible for directing
the operations of the state insurance department
National association of insurance commissioners (NAIC) - CORRECT ANSWER -A
nongovernmental association of the insurance commissioners of all the states whose primary
function is to promote uniformity of state insurance regulation by developing model laws and
regulations as guidelines for the states
Life and health insurance guaranty association - CORRECT ANSWER - An organization
that protects policy owners, insureds, beneficiaries, annuitants, payees, and assignees against
losses that may result from the impairment or insolvency of a life or health insurer that does
business in the state. Insurers are required to participate in a state's guaranty association in order
to be licensed in that state
CORRECT Answers
Pure risk - CORRECT ANSWER - Risks that involve either a loss or no loss
Speculative risk - CORRECT ANSWER - Risk that can result in a loss, gain or no change
Insurance - CORRECT ANSWER - A method for transferring risk from an individual to an
insurance company
Premium - CORRECT ANSWER - The amount that the insured pays in exchange for a
promise of money
Risk pooling - CORRECT ANSWER - Insurers collect premiums from all insured people
and spread the cost of the relatively few anticipated losses among all insureds
Annuity - CORRECT ANSWER - A financial product under which an insurer promises to
make a series of periodic payments to a named person or entity in exchange for a premium or
series of premiums
Policy benefit - CORRECT ANSWER - The amount of money that an insurer promises to
pay if a covered loss occurs
Third Party Policy - CORRECT ANSWER - An insurance policy that one person
purchases on the life of another person
Contract of indemnity - CORRECT ANSWER - An insurance policy under which the
amount of the policy benefit payable for a covered loss is based on the actual amount of financial
loss that results from the covered event, as determined at the time of the event
,Valued contracts - CORRECT ANSWER - An insurance policy that specifies the amount
of the policy benefit that will be payable when a covered loss occurs, regardless of the actual
amount of the loss that was incurred
Face amount (face value) - CORRECT ANSWER - The amount of the policy benefit that
is payable if the insured dies while the policy is in force
Law of large numbers - CORRECT ANSWER - Mathematical theory which states that
typically the more times we observe a particular event, the more likely it is that our observed
results will approximate the true probability that the event will occur
Reinsurance - CORRECT ANSWER - Insurance that one insurance company (the direct
writer) purchases from another insurance company (the reinsurer) to transfer all or part of the
risk on insurance policies that the direct writer has insured
Retention limit - CORRECT ANSWER - The maximum amount of insurance that an
insurer is willing to carry at its own risk without transferring some of the risk to a reinsurer. The
direct writer cedes anything above that limit to a reinsurer in a reinsurance transaction of other
risk transfer mechanisms
Direct writer - CORRECT ANSWER - The insurance company that purchases reinsurance
to transfer all or part of the risks on insurance policies the company issued
Retrocessionaire - CORRECT ANSWER - A reinsurance company that accepts risks
transferred from another reinsurer in a reinsurance transaction
Medical risk factor - CORRECT ANSWER - A physical or psychological characteristic
that may increase the likelihood of loss
Moral hazard - CORRECT ANSWER - A characteristic that exists when the reputation,
financial position, or criminal record of an application or a proposed insured indicates that the
person may act dishonestly in the insurance transaction
,Antiselection - CORRECT ANSWER - The tendency of individuals who believe they have
a greater than average likelihood of loss to seek insurance protection to a greater extent than do
other individuals
Risk class - CORRECT ANSWER - A grouping of insureds who represent a similar level
of risk to the insurer
Preferred Risks - CORRECT ANSWER - A proposed insured who presents a significantly
lower than average likelihood of loss
Substandard risk - CORRECT ANSWER - A proposed insured who has a significantly
greater than average likelihood of loss but is still found to be insurable
Substandard premium rates - CORRECT ANSWER - A higher than standard premium rate
charged insureds who are classified as substandard rates
Preferred premium rates - CORRECT ANSWER - A lower than standard premium rate
charged insureds who are classified as preferred risks
Declined risks - CORRECT ANSWER - A proposed insured who is considered to present a
risk that is too great for the insurer to cover
Stock insurer - CORRECT ANSWER - Can issue shares of stock, owned by stockholders
who have voting rights in the company, stockholders may receive shares of operating profits
(stock dividends)
Mutual insurer - CORRECT ANSWER - Owned by policy owners, policy owners have
membership rights (voting rights), policy owners may periodically receive an amount of money
known as a policy dividend
, Fraternal benefit society - CORRECT ANSWER - Owned by members of a fraternal lodge
system, provides social and insurance benefits only to fraternal members and their families,
legally required to have a representative form of government
Solvent - CORRECT ANSWER - A company with the financial capacity to pay its debts
and contractual obligations when due
Dodd-Frank Act - CORRECT ANSWER - legislation passed in 2010 reforming regulation
of financial institutions
Federal insurance office - CORRECT ANSWER - A new federal agency created by the
Dodd Frank Act with the federal authority to monitor the insurance industry
State insurance department - CORRECT ANSWER - An administrative agency in each
state that is responsible for making sure that companies operating in the state comply with
applicable regulatory requirements
Insurance commissioner - CORRECT ANSWER - The individual responsible for directing
the operations of the state insurance department
National association of insurance commissioners (NAIC) - CORRECT ANSWER -A
nongovernmental association of the insurance commissioners of all the states whose primary
function is to promote uniformity of state insurance regulation by developing model laws and
regulations as guidelines for the states
Life and health insurance guaranty association - CORRECT ANSWER - An organization
that protects policy owners, insureds, beneficiaries, annuitants, payees, and assignees against
losses that may result from the impairment or insolvency of a life or health insurer that does
business in the state. Insurers are required to participate in a state's guaranty association in order
to be licensed in that state
