HS 311
Fundamentals of Insurance Planning
Questions and Answers| Latest Update| Pass Guaranteed
1. Which term best describes the uncertainty concerning the occurrence of a
loss?
A. Peril
B. Hazard
C. Risk
D. Exposure
Correct Answer: C. Risk
Rationale: Risk is defined as uncertainty regarding the occurrence of a loss. A peril
is the cause of loss (fire, windstorm), and a hazard is a condition that increases the
chance or severity of loss.
2. A frayed electrical cord in a home is an example of which of the following?
A. Peril
B. Physical hazard
C. Morale hazard
D. Speculative risk
Correct Answer: B. Physical hazard
,Rationale: A physical hazard is a physical condition that increases the likelihood or
severity of a loss. A frayed cord increases the chance of a fire (the peril).
3. Indifference to loss because a person has insurance, causing them to be
careless, best describes:
A. Moral hazard
B. Morale hazard
C. Legal hazard
D. Peril
Correct Answer: B. Morale hazard
Rationale: Morale hazard is carelessness or indifference to a loss because of the
existence of insurance. Moral hazard involves dishonesty or intent to cause or
exaggerate a loss.
4. Which of the following is an example of a speculative risk rather than a pure
risk?
A. Risk of a house fire
B. Risk of premature death
C. Risk of investing in the stock market
D. Risk of a car accident
Correct Answer: C. Risk of investing in the stock market
Rationale: Speculative risk involves the chance of loss, no loss, or gain, as in
investing. Pure risk involves only the chance of loss or no loss, such as fire, death,
or accident.
5. Which risk management technique involves the purchase of insurance?
A. Risk avoidance
B. Risk transfer
C. Risk retention
D. Risk reduction
Correct Answer: B. Risk transfer
,Rationale: Purchasing insurance transfers the financial consequences of risk to an
insurer in exchange for a premium, making it a risk transfer technique.
6. Installing a sprinkler system to reduce the severity of a potential fire loss is an
example of:
A. Avoidance
B. Retention
C. Loss control (reduction)
D. Transfer
Correct Answer: C. Loss control (reduction)
Rationale: Loss control includes loss prevention (reducing frequency) and loss
reduction (reducing severity). A sprinkler system reduces the severity of a fire loss.
7. Self-insuring against small, predictable losses through a deductible is an
example of which risk management technique?
A. Risk avoidance
B. Risk retention
C. Risk transfer
D. Risk sharing
Correct Answer: B. Risk retention
Rationale: Retention means the individual or firm retains the financial burden of a
risk, often appropriate for losses that are frequent but low in severity, such as
amounts within a deductible.
8. Which of the following is a requirement for a risk to be considered ideally
insurable from the insurer's perspective?
A. The loss must be intentional
B. There must be a large number of similar exposure units
C. The loss must be catastrophic to the insurer
D. The probability of loss must be unknown
Correct Answer: B. There must be a large number of similar exposure units
, Rationale: An ideally insurable risk requires a large number of similar,
independent exposure units so the law of large numbers allows the insurer to
predict losses accurately.
9. The principle that predicts loss experience becomes more accurate as the
number of exposure units increases is known as:
A. Law of large numbers
B. Adverse selection
C. Principle of indemnity
D. Principle of subrogation
Correct Answer: A. Law of large numbers
Rationale: The law of large numbers states that as the number of similar exposure
units increases, the actual results (losses) will more closely approach the expected
results, improving predictability.
10. Which of the following losses would generally be considered uninsurable by
private insurers?
A. Loss from an accidental house fire
B. Loss from a catastrophic, widespread flood affecting an entire region
simultaneously
C. Loss of life due to accidental death
D. Loss of a vehicle due to theft
Correct Answer: B. Loss from a catastrophic, widespread flood affecting an
entire region simultaneously
Rationale: Catastrophic losses that affect a large number of exposure units
simultaneously violate the requirement of independent, non-correlated losses,
making them difficult for private insurers to underwrite without special programs.
11. A pure risk is best defined as a situation in which:
A. There is a chance of gain, loss, or no loss
B. There is only a chance of loss or no loss
C. The loss is always certain to occur
D. The loss can be predicted precisely for each individual
Fundamentals of Insurance Planning
Questions and Answers| Latest Update| Pass Guaranteed
1. Which term best describes the uncertainty concerning the occurrence of a
loss?
A. Peril
B. Hazard
C. Risk
D. Exposure
Correct Answer: C. Risk
Rationale: Risk is defined as uncertainty regarding the occurrence of a loss. A peril
is the cause of loss (fire, windstorm), and a hazard is a condition that increases the
chance or severity of loss.
2. A frayed electrical cord in a home is an example of which of the following?
A. Peril
B. Physical hazard
C. Morale hazard
D. Speculative risk
Correct Answer: B. Physical hazard
,Rationale: A physical hazard is a physical condition that increases the likelihood or
severity of a loss. A frayed cord increases the chance of a fire (the peril).
3. Indifference to loss because a person has insurance, causing them to be
careless, best describes:
A. Moral hazard
B. Morale hazard
C. Legal hazard
D. Peril
Correct Answer: B. Morale hazard
Rationale: Morale hazard is carelessness or indifference to a loss because of the
existence of insurance. Moral hazard involves dishonesty or intent to cause or
exaggerate a loss.
4. Which of the following is an example of a speculative risk rather than a pure
risk?
A. Risk of a house fire
B. Risk of premature death
C. Risk of investing in the stock market
D. Risk of a car accident
Correct Answer: C. Risk of investing in the stock market
Rationale: Speculative risk involves the chance of loss, no loss, or gain, as in
investing. Pure risk involves only the chance of loss or no loss, such as fire, death,
or accident.
5. Which risk management technique involves the purchase of insurance?
A. Risk avoidance
B. Risk transfer
C. Risk retention
D. Risk reduction
Correct Answer: B. Risk transfer
,Rationale: Purchasing insurance transfers the financial consequences of risk to an
insurer in exchange for a premium, making it a risk transfer technique.
6. Installing a sprinkler system to reduce the severity of a potential fire loss is an
example of:
A. Avoidance
B. Retention
C. Loss control (reduction)
D. Transfer
Correct Answer: C. Loss control (reduction)
Rationale: Loss control includes loss prevention (reducing frequency) and loss
reduction (reducing severity). A sprinkler system reduces the severity of a fire loss.
7. Self-insuring against small, predictable losses through a deductible is an
example of which risk management technique?
A. Risk avoidance
B. Risk retention
C. Risk transfer
D. Risk sharing
Correct Answer: B. Risk retention
Rationale: Retention means the individual or firm retains the financial burden of a
risk, often appropriate for losses that are frequent but low in severity, such as
amounts within a deductible.
8. Which of the following is a requirement for a risk to be considered ideally
insurable from the insurer's perspective?
A. The loss must be intentional
B. There must be a large number of similar exposure units
C. The loss must be catastrophic to the insurer
D. The probability of loss must be unknown
Correct Answer: B. There must be a large number of similar exposure units
, Rationale: An ideally insurable risk requires a large number of similar,
independent exposure units so the law of large numbers allows the insurer to
predict losses accurately.
9. The principle that predicts loss experience becomes more accurate as the
number of exposure units increases is known as:
A. Law of large numbers
B. Adverse selection
C. Principle of indemnity
D. Principle of subrogation
Correct Answer: A. Law of large numbers
Rationale: The law of large numbers states that as the number of similar exposure
units increases, the actual results (losses) will more closely approach the expected
results, improving predictability.
10. Which of the following losses would generally be considered uninsurable by
private insurers?
A. Loss from an accidental house fire
B. Loss from a catastrophic, widespread flood affecting an entire region
simultaneously
C. Loss of life due to accidental death
D. Loss of a vehicle due to theft
Correct Answer: B. Loss from a catastrophic, widespread flood affecting an
entire region simultaneously
Rationale: Catastrophic losses that affect a large number of exposure units
simultaneously violate the requirement of independent, non-correlated losses,
making them difficult for private insurers to underwrite without special programs.
11. A pure risk is best defined as a situation in which:
A. There is a chance of gain, loss, or no loss
B. There is only a chance of loss or no loss
C. The loss is always certain to occur
D. The loss can be predicted precisely for each individual
