AINS 101- QUESTION WITH 100 % CORRECT
ANSWERS | VERIFIED.
Question 1
Which statement BEST describes the fundamental purpose of
insurance?
A. To eliminate all uncertainty from an individual's or organization's
activities
B. To transfer and pool financial consequences of certain risks among
many parties
C. To guarantee that every insured will receive a financial profit after a
loss
D. To prevent losses from occurring
ANSWER: B. To transfer and pool financial consequences of certain risks
among many parties
Rationale: Insurance does not eliminate risk or prevent every loss.
Instead, it allows individuals and organizations to transfer certain
financial consequences of loss exposures to an insurer in exchange for a
premium. The insurer pools exposures of many insureds, allowing the
,relatively few losses that occur to be funded collectively. Choice A is
incorrect because insurance does not eliminate uncertainty. Choice C is
incorrect because insurance is generally intended to indemnify rather
than create profit. Choice D is incorrect because insurance primarily
finances losses; loss prevention and loss reduction are risk-control
techniques.
Question 2
A homeowner is concerned that a fire could destroy her house. The
possibility that the house could be damaged or destroyed is best
described as a:
A. Peril
B. Loss exposure
C. Hazard
D. Claim
ANSWER: B. Loss exposure
Rationale: A loss exposure is a situation or condition that presents the
possibility of loss. The homeowner's house creates an exposure
because it could sustain property damage. A peril is the cause of a loss,
such as fire. A hazard is a condition that increases the likelihood or
,severity of a loss. A claim is a demand for payment or performance
under an insurance policy after a covered event.
Question 3
Which of the following is an example of a pure risk?
A. Investing in a newly established company
B. Purchasing shares in anticipation of a price increase
C. The possibility that a warehouse will be damaged by fire
D. Starting a business with the expectation of earning a profit
ANSWER: C. The possibility that a warehouse will be damaged by fire
Rationale: Pure risk involves the possibility of loss or no loss, but no
possibility of gain. A warehouse can burn down or remain undamaged,
but the owner does not gain financially because it did not burn.
Investment and entrepreneurial decisions involve speculative risk
because they can produce either a gain or a loss. Insurance is primarily
concerned with pure risks because they involve fortuitous potential
losses.
Question 4
, Which characteristic of a loss makes it particularly suitable for
insurance?
A. It is intentional and predictable for the insured
B. It occurs only once in an entire population
C. It is accidental or fortuitous from the insured's perspective
D. It guarantees a financial gain for the insured
ANSWER: C. It is accidental or fortuitous from the insured's perspective
Rationale: Insurable losses generally need to be fortuitous, meaning
they occur by chance rather than being deliberately caused by the
insured. If insureds could intentionally create losses and collect
insurance proceeds, insurance would become financially unsustainable
and would encourage moral hazard. Insurance is designed primarily to
respond to accidental losses rather than intentional acts.
Question 5
What is the primary economic function of pooling?
A. To ensure that every insured suffers the same amount of loss
B. To spread the financial consequences of losses among a large
number of exposure units
ANSWERS | VERIFIED.
Question 1
Which statement BEST describes the fundamental purpose of
insurance?
A. To eliminate all uncertainty from an individual's or organization's
activities
B. To transfer and pool financial consequences of certain risks among
many parties
C. To guarantee that every insured will receive a financial profit after a
loss
D. To prevent losses from occurring
ANSWER: B. To transfer and pool financial consequences of certain risks
among many parties
Rationale: Insurance does not eliminate risk or prevent every loss.
Instead, it allows individuals and organizations to transfer certain
financial consequences of loss exposures to an insurer in exchange for a
premium. The insurer pools exposures of many insureds, allowing the
,relatively few losses that occur to be funded collectively. Choice A is
incorrect because insurance does not eliminate uncertainty. Choice C is
incorrect because insurance is generally intended to indemnify rather
than create profit. Choice D is incorrect because insurance primarily
finances losses; loss prevention and loss reduction are risk-control
techniques.
Question 2
A homeowner is concerned that a fire could destroy her house. The
possibility that the house could be damaged or destroyed is best
described as a:
A. Peril
B. Loss exposure
C. Hazard
D. Claim
ANSWER: B. Loss exposure
Rationale: A loss exposure is a situation or condition that presents the
possibility of loss. The homeowner's house creates an exposure
because it could sustain property damage. A peril is the cause of a loss,
such as fire. A hazard is a condition that increases the likelihood or
,severity of a loss. A claim is a demand for payment or performance
under an insurance policy after a covered event.
Question 3
Which of the following is an example of a pure risk?
A. Investing in a newly established company
B. Purchasing shares in anticipation of a price increase
C. The possibility that a warehouse will be damaged by fire
D. Starting a business with the expectation of earning a profit
ANSWER: C. The possibility that a warehouse will be damaged by fire
Rationale: Pure risk involves the possibility of loss or no loss, but no
possibility of gain. A warehouse can burn down or remain undamaged,
but the owner does not gain financially because it did not burn.
Investment and entrepreneurial decisions involve speculative risk
because they can produce either a gain or a loss. Insurance is primarily
concerned with pure risks because they involve fortuitous potential
losses.
Question 4
, Which characteristic of a loss makes it particularly suitable for
insurance?
A. It is intentional and predictable for the insured
B. It occurs only once in an entire population
C. It is accidental or fortuitous from the insured's perspective
D. It guarantees a financial gain for the insured
ANSWER: C. It is accidental or fortuitous from the insured's perspective
Rationale: Insurable losses generally need to be fortuitous, meaning
they occur by chance rather than being deliberately caused by the
insured. If insureds could intentionally create losses and collect
insurance proceeds, insurance would become financially unsustainable
and would encourage moral hazard. Insurance is designed primarily to
respond to accidental losses rather than intentional acts.
Question 5
What is the primary economic function of pooling?
A. To ensure that every insured suffers the same amount of loss
B. To spread the financial consequences of losses among a large
number of exposure units
