FIN 340 MIDTERM EXAM QUESTIONS AND 100%
CORRECT ANSWERS
157 QUESTIONS AND ANSWERS
Adverse Selection - ANSWER The tendency for those vulnerable to loss from
a specific risk to acquire and to retain insurance to cover that loss. Ex: Property-
Californians want earthquake insurance, and life and health insurance.
Law of Large Numbers - ANSWER As size of the insured population
increases, actual losses will approximate the underlying probability. The sample
must have mass and homogeneity, and exposure units must be independently
exposed to loss.
Risk - ANSWER The possibility of loss. Risks are everywhere. Some
unavoidable, some chosen.
Possibility - ANSWER Something could occur. It may or may not. It can't be
measured nor insured.
Probability - ANSWER The proportion of times that events will occur in the
long run.
Loss - ANSWER The undesirable end result of risk- a decline, depreciation, or
depletion in value, usually unexpected or relatively unpredictable.
Loss exposur - ANSWER A loss that might occur
Direct loss - ANSWER Loss that arises first or immediately following the
occurrence of a peril. Ex: cost to repair damaged home due to fire, medical
expenses
,Indirect loss - ANSWER Loss occurs as a secondary result following the
occurrence of a peril. Ex: Family's add living expenses, travel expenses to
hospital, damaged houses during Sept. 11th.
Uncertainty - ANSWER A state of mind, not being sure about something,
subjective- varies by individual regardless of facts. Ex: Parent may someday be
confined to nursing home or a fear of getting cancer so wants disease insurance.
Peril - ANSWER A cause of loss. Examples: Death, fire, unemployment, old
age, flood, windstorm, and theft.
Hazard - ANSWER An act or condition that increases the likelihood of a loss
and/or increases the severity of a loss if a peril does occur.
3 types of hazards - ANSWER Physical hazard, moral hazard, and attitudinal
hazard.
1. Physical Hazard - ANSWER Physical condition relating to location,
structure, occupancy, exposure, and the like. Examples: High blood pressure,
gas on premise, and dangerous lobby.
2. Moral Hazard - ANSWER Dishonest tendency likely to increase loss
frequency and/or severity. Ex: Weakened financial condition, fraudulent claim,
and arson.
3. Attitudinal Hazard- - ANSWER Condition of carelessness or indifference
whether a loss occurs and/or the size of loss. Ex: Laziness, poor hygiene,
disorderliness, and leaving car doors or house unlocked.
Financial vs. Nonfinancial Risks - ANSWER Financial Risk- Involves a loss of
money. Ex: Medical Bills
Nonfinancial Risk: Does not involve a loss of money. Ex: pain and suffering.
Particular vs. Fundamental Risk - ANSWER Particular Risk- Affects only
indiviudals or small groups Ex: Retirement, lightning strike.
Fundamental risk- Affects large segments of society. Ex: Widespread
unemployment, nuclear accident.
, Static vs. Dynamic Risk: - ANSWER Static risk- Exists apart from changes in
society or the economy. Ex: Death, fire damage to client's home.
Dynamic risk- Results from changes in society or the economy. Ex: Diet fads,
new technology.
Pure vs. Speculative Risks: - ANSWER Pure risk- Chance of loss or no loss.
Ex: Windstorm damage to building.
Speculative risk- Chance of loss, no loss/no gain, or gain. Ex: Investment in real
estate.
Gambling vs. Insurance: - ANSWER Gambling- Creates risk that would not
otherwise exist, outcome can be gain or loss, and risk is created by deliberate
choice.
Insurance- Transfers existing risks and treats only risks that can result in loss.
Categories of pure risks (3): - ANSWER 1. Personal risks- A loss possibility
associated with death, injury, illness, old age, and unemployment.
2. Property risks: A loss possibility associated with the loss or destruction of
property.
3. Liability risks- Possibility of loss as a result of being held legally responsible
for an injury to another, usually for bodily injury or damage to property.
Characteristics of Insurable Risk: - ANSWER 1. Amount of the loss must be
IMPORTANT
2. The loss must be of an ACCIDENTAL nature.
3. Future losses must be CALCULABLE.
4. The loss must be definite.
5. The loss cannot be excessively CATASTROPHIC.
Key Elements of insurance: - ANSWER -indemnification- Payment for actual
losses
-Ability to make reasonable estimates of future losses
-Definite monetary amounts of loss
-Possibility of adverse, random events, outside the insured's control.
Benefits of insurance: - ANSWER 1. Pays claims when losses occur
2. Peace of mind
3. Basis for credit
CORRECT ANSWERS
157 QUESTIONS AND ANSWERS
Adverse Selection - ANSWER The tendency for those vulnerable to loss from
a specific risk to acquire and to retain insurance to cover that loss. Ex: Property-
Californians want earthquake insurance, and life and health insurance.
Law of Large Numbers - ANSWER As size of the insured population
increases, actual losses will approximate the underlying probability. The sample
must have mass and homogeneity, and exposure units must be independently
exposed to loss.
Risk - ANSWER The possibility of loss. Risks are everywhere. Some
unavoidable, some chosen.
Possibility - ANSWER Something could occur. It may or may not. It can't be
measured nor insured.
Probability - ANSWER The proportion of times that events will occur in the
long run.
Loss - ANSWER The undesirable end result of risk- a decline, depreciation, or
depletion in value, usually unexpected or relatively unpredictable.
Loss exposur - ANSWER A loss that might occur
Direct loss - ANSWER Loss that arises first or immediately following the
occurrence of a peril. Ex: cost to repair damaged home due to fire, medical
expenses
,Indirect loss - ANSWER Loss occurs as a secondary result following the
occurrence of a peril. Ex: Family's add living expenses, travel expenses to
hospital, damaged houses during Sept. 11th.
Uncertainty - ANSWER A state of mind, not being sure about something,
subjective- varies by individual regardless of facts. Ex: Parent may someday be
confined to nursing home or a fear of getting cancer so wants disease insurance.
Peril - ANSWER A cause of loss. Examples: Death, fire, unemployment, old
age, flood, windstorm, and theft.
Hazard - ANSWER An act or condition that increases the likelihood of a loss
and/or increases the severity of a loss if a peril does occur.
3 types of hazards - ANSWER Physical hazard, moral hazard, and attitudinal
hazard.
1. Physical Hazard - ANSWER Physical condition relating to location,
structure, occupancy, exposure, and the like. Examples: High blood pressure,
gas on premise, and dangerous lobby.
2. Moral Hazard - ANSWER Dishonest tendency likely to increase loss
frequency and/or severity. Ex: Weakened financial condition, fraudulent claim,
and arson.
3. Attitudinal Hazard- - ANSWER Condition of carelessness or indifference
whether a loss occurs and/or the size of loss. Ex: Laziness, poor hygiene,
disorderliness, and leaving car doors or house unlocked.
Financial vs. Nonfinancial Risks - ANSWER Financial Risk- Involves a loss of
money. Ex: Medical Bills
Nonfinancial Risk: Does not involve a loss of money. Ex: pain and suffering.
Particular vs. Fundamental Risk - ANSWER Particular Risk- Affects only
indiviudals or small groups Ex: Retirement, lightning strike.
Fundamental risk- Affects large segments of society. Ex: Widespread
unemployment, nuclear accident.
, Static vs. Dynamic Risk: - ANSWER Static risk- Exists apart from changes in
society or the economy. Ex: Death, fire damage to client's home.
Dynamic risk- Results from changes in society or the economy. Ex: Diet fads,
new technology.
Pure vs. Speculative Risks: - ANSWER Pure risk- Chance of loss or no loss.
Ex: Windstorm damage to building.
Speculative risk- Chance of loss, no loss/no gain, or gain. Ex: Investment in real
estate.
Gambling vs. Insurance: - ANSWER Gambling- Creates risk that would not
otherwise exist, outcome can be gain or loss, and risk is created by deliberate
choice.
Insurance- Transfers existing risks and treats only risks that can result in loss.
Categories of pure risks (3): - ANSWER 1. Personal risks- A loss possibility
associated with death, injury, illness, old age, and unemployment.
2. Property risks: A loss possibility associated with the loss or destruction of
property.
3. Liability risks- Possibility of loss as a result of being held legally responsible
for an injury to another, usually for bodily injury or damage to property.
Characteristics of Insurable Risk: - ANSWER 1. Amount of the loss must be
IMPORTANT
2. The loss must be of an ACCIDENTAL nature.
3. Future losses must be CALCULABLE.
4. The loss must be definite.
5. The loss cannot be excessively CATASTROPHIC.
Key Elements of insurance: - ANSWER -indemnification- Payment for actual
losses
-Ability to make reasonable estimates of future losses
-Definite monetary amounts of loss
-Possibility of adverse, random events, outside the insured's control.
Benefits of insurance: - ANSWER 1. Pays claims when losses occur
2. Peace of mind
3. Basis for credit
