CFP 512 TESTING QUESTIONS AND ANSWERS
Which of the following statements regarding the principles of risk and insurance are
CORRECT?
1. Risk is a condition in which there is a possibility of an adverse result from the expected
desired outcome.
2. A hazard is the cause of a financial loss and is the actual event for which the individual
purchases insurance.
3. A peril is a condition that increases the probability that a financial loss will occur.
4. Pure risk involves only the chance of loss or no loss.
CORRECT ANSWER 1 and 4
Risk is the condition in which there is a possibility of an adverse result from the expected
desired outcome. A peril is the cause of a financial loss, and a hazard is a condition that
increases the chance of financial loss. Pure risk is the risk that only involves the chance of
loss or no loss.
Which of the following statements best describes a morale hazard?
A)
An unintentional tort in the form of an action or omission that leads to the injury of
another party
B)
A condition of carelessness or indifference on the part of an individual as to whether a loss
occurs and/or the size of a loss if one does occur
C)
A false and material statement made by an applicant for insurance, providing a basis for
the insurer to void the contract
D)
An act or condition that increases the likelihood of the occurrence of a peril and/or
increases the severity of a loss if a peril does occur
CORRECT ANSWER B
A morale hazard is a condition of carelessness or indifference as to whether a loss occurs
and/or the size of a loss if one does occur. A homeowner's failure to lock the house doors
at night is considered a morale hazard because it increases the probability of theft or loss.
Which of the following are methods of managing risk?
,Avoidance
Retention
Reduction
Transfer
CORRECT ANSWER All of the above
All of these are risk management techniques. Avoidance and reduction are methods of risk
control. Retention and transfer are methods of risk financing.
Which of the following statements regarding self-insurance by a business is CORRECT?
The organization should have enough homogeneous exposure units to make losses
unpredictable.
B)
The self-insurer must be able to competently manage the investment of the self-insurance
fund.
C)
Self-insurance is a method of risk transfer.
D)
Most firms are good candidates for self-insurance.
CORRECT ANSWER The self-insurer must be able to competently manage the
investment of the self-insurance fund. Relatively few firms are good candidates for self-
insurance, which is a method of risk retention. The organization that self-insures should
have enough homogeneous exposure units to make losses somewhat predictable.
Which of the following is the role of the legislative branch in regulating the insurance
industry within a state?
A)
Passing laws relative to the insurance industry
B)
Creating model legislation relative to the insurance industry
C)
Interpreting and applying the laws in place relative to the insurance industry
D)
Enforcing the laws in place relative to the insurance industry
, CORRECT ANSWER The answer is passing laws relative to the insurance industry. The
legislative branch votes on and passes laws relative to the insurance industry. These laws
are enforced by the executive branch, and disputes concerning the interpretation or
application of the law is handled by the judicial branch. The National Association of
Insurance Commissioners provides model legislation that may or may not be enacted by
the several states.
An insurance contract requires an exchange of value to be considered a legally binding
document. What is the term used to describe this requirement?
A)
Legal form
B)
Legal object
C)
Legal capacity
D)
Consideration
CORRECT ANSWER The answer is consideration. Consideration occurs when there is an
exchange of value. The insurance contract requires an exchange of value to be legally
binding. For most insurance, the promise to pay the premium is usually sufficient
consideration to make the contract binding; however, for life insurance, the premium
must be paid before the insurance contract is binding for the insurer. The submission of a
completed insurance application (offer) plus the payment of the first premium
(consideration) to the insurance company will generally create a binding contract if the
application would pass standard underwriting requirements.
Barbara left her car parked on top of a hill while visiting at a friend's house.
Unfortunately, she forgot to apply her emergency brake, and her car rolled down the hill,
injuring two children who were playing.
Which of the following doctrines may influence Barbara's liability in this situation?
A)
Assumption of risk
B)
Strict liability
C)
Negligence
D)
, Attractive nuisance
CORRECT ANSWER The answer is negligence. The doctrine of attractive nuisance is
exemplified by a homeowner not fencing in a below-ground swimming pool and then
children drowning in the pool. Barbara, by failing to apply her emergency brake at the top
of a hill, was negligent.
Which of the following describes the tendency of persons with a higher-than-average
chance of loss to seek insurance at standard rates, which, if not controlled by
underwriting, results in higher-than-expected loss levels?
A)
Adverse selection
B)
Moral hazard
C)
Physical hazard
D)
Contributory negligence
CORRECT ANSWER This describes adverse selection. Physical hazard is a physical
condition that increases the chance of loss. Under the doctrine of contributory negligence,
if any negligence on the part of the injured party contributes to the injury, it absolves the
other party of liability. A moral hazard is a result of individuals being unethical or
misrepresenting themselves to obtain insurance or to induce the payment of claims.
Using a seatbelt when driving, wearing a helmet when riding a bicycle, and installing a
home security system are all examples of which risk management method?
A)
Risk reduction
B)
Risk transfer
C)
Risk avoidance
D)
Risk retention
CORRECT ANSWER The answer is risk reduction. These are all examples of risk
reduction. Risk avoidance would not involve avoiding driving or riding a bicycle at all. Risk
retention would be choosing not to use a seatbelt or wear a helmet, or not installing a
security system and taking one's chances. Risk transfer often involves insurance.
Which of the following statements regarding the principles of risk and insurance are
CORRECT?
1. Risk is a condition in which there is a possibility of an adverse result from the expected
desired outcome.
2. A hazard is the cause of a financial loss and is the actual event for which the individual
purchases insurance.
3. A peril is a condition that increases the probability that a financial loss will occur.
4. Pure risk involves only the chance of loss or no loss.
CORRECT ANSWER 1 and 4
Risk is the condition in which there is a possibility of an adverse result from the expected
desired outcome. A peril is the cause of a financial loss, and a hazard is a condition that
increases the chance of financial loss. Pure risk is the risk that only involves the chance of
loss or no loss.
Which of the following statements best describes a morale hazard?
A)
An unintentional tort in the form of an action or omission that leads to the injury of
another party
B)
A condition of carelessness or indifference on the part of an individual as to whether a loss
occurs and/or the size of a loss if one does occur
C)
A false and material statement made by an applicant for insurance, providing a basis for
the insurer to void the contract
D)
An act or condition that increases the likelihood of the occurrence of a peril and/or
increases the severity of a loss if a peril does occur
CORRECT ANSWER B
A morale hazard is a condition of carelessness or indifference as to whether a loss occurs
and/or the size of a loss if one does occur. A homeowner's failure to lock the house doors
at night is considered a morale hazard because it increases the probability of theft or loss.
Which of the following are methods of managing risk?
,Avoidance
Retention
Reduction
Transfer
CORRECT ANSWER All of the above
All of these are risk management techniques. Avoidance and reduction are methods of risk
control. Retention and transfer are methods of risk financing.
Which of the following statements regarding self-insurance by a business is CORRECT?
The organization should have enough homogeneous exposure units to make losses
unpredictable.
B)
The self-insurer must be able to competently manage the investment of the self-insurance
fund.
C)
Self-insurance is a method of risk transfer.
D)
Most firms are good candidates for self-insurance.
CORRECT ANSWER The self-insurer must be able to competently manage the
investment of the self-insurance fund. Relatively few firms are good candidates for self-
insurance, which is a method of risk retention. The organization that self-insures should
have enough homogeneous exposure units to make losses somewhat predictable.
Which of the following is the role of the legislative branch in regulating the insurance
industry within a state?
A)
Passing laws relative to the insurance industry
B)
Creating model legislation relative to the insurance industry
C)
Interpreting and applying the laws in place relative to the insurance industry
D)
Enforcing the laws in place relative to the insurance industry
, CORRECT ANSWER The answer is passing laws relative to the insurance industry. The
legislative branch votes on and passes laws relative to the insurance industry. These laws
are enforced by the executive branch, and disputes concerning the interpretation or
application of the law is handled by the judicial branch. The National Association of
Insurance Commissioners provides model legislation that may or may not be enacted by
the several states.
An insurance contract requires an exchange of value to be considered a legally binding
document. What is the term used to describe this requirement?
A)
Legal form
B)
Legal object
C)
Legal capacity
D)
Consideration
CORRECT ANSWER The answer is consideration. Consideration occurs when there is an
exchange of value. The insurance contract requires an exchange of value to be legally
binding. For most insurance, the promise to pay the premium is usually sufficient
consideration to make the contract binding; however, for life insurance, the premium
must be paid before the insurance contract is binding for the insurer. The submission of a
completed insurance application (offer) plus the payment of the first premium
(consideration) to the insurance company will generally create a binding contract if the
application would pass standard underwriting requirements.
Barbara left her car parked on top of a hill while visiting at a friend's house.
Unfortunately, she forgot to apply her emergency brake, and her car rolled down the hill,
injuring two children who were playing.
Which of the following doctrines may influence Barbara's liability in this situation?
A)
Assumption of risk
B)
Strict liability
C)
Negligence
D)
, Attractive nuisance
CORRECT ANSWER The answer is negligence. The doctrine of attractive nuisance is
exemplified by a homeowner not fencing in a below-ground swimming pool and then
children drowning in the pool. Barbara, by failing to apply her emergency brake at the top
of a hill, was negligent.
Which of the following describes the tendency of persons with a higher-than-average
chance of loss to seek insurance at standard rates, which, if not controlled by
underwriting, results in higher-than-expected loss levels?
A)
Adverse selection
B)
Moral hazard
C)
Physical hazard
D)
Contributory negligence
CORRECT ANSWER This describes adverse selection. Physical hazard is a physical
condition that increases the chance of loss. Under the doctrine of contributory negligence,
if any negligence on the part of the injured party contributes to the injury, it absolves the
other party of liability. A moral hazard is a result of individuals being unethical or
misrepresenting themselves to obtain insurance or to induce the payment of claims.
Using a seatbelt when driving, wearing a helmet when riding a bicycle, and installing a
home security system are all examples of which risk management method?
A)
Risk reduction
B)
Risk transfer
C)
Risk avoidance
D)
Risk retention
CORRECT ANSWER The answer is risk reduction. These are all examples of risk
reduction. Risk avoidance would not involve avoiding driving or riding a bicycle at all. Risk
retention would be choosing not to use a seatbelt or wear a helmet, or not installing a
security system and taking one's chances. Risk transfer often involves insurance.
