CFP 512 Testing UPDATED ACTUAL
Questions and CORRECT 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)
Questions and CORRECT 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)
