Kentucky Casualty Insurance Exam
Questions and Correct Answers
Insurance - CORRECT ANSWERS-a transfer of risk of loss from an individual or a business entity
to an insurance company, which, in turn, spreads the costs of unexpected losses to many
individuals.
Risk - CORRECT ANSWERS-the uncertainty of chance of a loss occurring
Pure Risk - CORRECT ANSWERS-Refers to situations that can only result in a loss or no change.
There is no opportunity for financial gain. This risk is the only type of risk that insurance
companies are willing to accept.
Speculative Risk - CORRECT ANSWERS-Involves the opportunity for either loss or gain. An
example of speculative risk is gambling. These types of risks are not insurable.
Methods of dealing with risk - CORRECT ANSWERS-Avoidance, Retention, Sharing, Reduction,
Transfer
Avoidance - CORRECT ANSWERS-eliminating exposure to a loss
For example, if a person wanted to avoid the risk of dying in an airplane crash, they might
choose to never fly in an airplane
Retention - CORRECT ANSWERS-Planned assumption of risk by an insured through the use of
deductibles, co-payments, or self-insurance. The purpose is to 1)reduce expenses and improve
cash flow 2)increase control of claim reserving and claims settlements 3)fund for losses that
cannot be insured
Sharing - CORRECT ANSWERS-A method of dealing with risk for a group of individual persons or
businesses with the same or similar exposure to loss who share the losses that occur within that
group. An example is a reciprocal insurance exchange
Reduction - CORRECT ANSWERS-an attempt to lessen the possibility or severity of a loss. It
would include actions such as installing smoke detectors, having annual physical or changing
lifestyle
Transfer - CORRECT ANSWERS-The most effective way to handle risk. The loss is borne by
another party. Insurance is the most common method of this.
Law of Large Numbers - CORRECT ANSWERS-the larger the number of individuals that are
randomly drawn from a population, the more representative the resulting group will be of the
entire population and the more predictable the actual loss will be.
,Elements of Insurable Risk - CORRECT ANSWERS--the loss must be due to chance
-the loss must be definite and measurable
-the loss must be predictable
-the loss cannot be catastrophic
-the loss exposures to be insured must be large
-the insurance must not be mandatory
3 Requirements to Prove Insurable Interest - CORRECT ANSWERS-Legitimate financial interest,
no potential for gain, must be a potential for loss
Peril - CORRECT ANSWERS-a specific cause of loss. Example: wind, fire, hail and explosions
Named Peril - CORRECT ANSWERS-a term used in property insurance to describe the breadth of
coverage provided under an insurance policy form that lists specific covered perils
Open Peril - CORRECT ANSWERS-a term used in property insurance to describe the breadth of
coverage provided under an insurance policy form that insures against any risk of loss that is
not specifically excluded
3 Types of Hazards - CORRECT ANSWERS-Physical, Moral, Morale
Physical Hazard - CORRECT ANSWERS-A condition of the subject of insurance that creates or
increases the chance of loss, such as structural defects, occupancy, poor housekeeping or
location.
Moral Hazard - CORRECT ANSWERS-a dishonest predisposition on the part of an insured that
increases the chance of loss. This could include an applicant who has been previously convicted
of arson, falsifying an insurance claim, etc
Morale Hazard - CORRECT ANSWERS-Applicants who demonstrate a careless attitude that could
increase the chance of loss that would be greater than would otherwise be the case.
Contract - CORRECT ANSWERS-An agreement between two or more parties that is enforceable
by law
Elements of a valid contract - CORRECT ANSWERS-agreement(offer and acceptance),
consideration, competent parties, legal purpose
Offer and acceptance - CORRECT ANSWERS-In insurance, the applicant usually makes the offer
when submitting the application. Acceptance takes place when an insurer's underwriter
approves the application and issues a policy.
Consideration - CORRECT ANSWERS-The binding force in a contract that requires something of
value to be exchanged for the transfer of risk. The consideration on the part of the insured is
, the representations made in the application and the payment of premium; the consideration on
the part of the insurer is the promise to pay in the event of loss.
Indemnity - CORRECT ANSWERS-A provision in an insurance policy that states that in the event
of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss,
and is not allowed to gain financially because of the existence of an insurance contract.
Contract of Adhesion - CORRECT ANSWERS-A "take it or leave it" contract
Aleatory Contract - CORRECT ANSWERS-a contract where the values exchanged may not be
equal but depend on an uncertain event
Personal contract - CORRECT ANSWERS-A contract between an individual and an insurer.
Unilateral contract - CORRECT ANSWERS-only one of the parties to the contract is legally bound
to do anything
Conditional contract - CORRECT ANSWERS-Requires that certain conditions must be met by the
policyowner and the company in order for the contract to be executed, and before each party
fulfills its obligations.
Parts of Insurance Contract - CORRECT ANSWERS-Declarations
Definitions
Insuring Agreement
Additional Coverage
Conditions
Endorsements
Exclusions and policy limits
Representations - CORRECT ANSWERS-Statements made by the applicant on the insurance
application that are believed to be true, but are not guaranteed to be true.
Misrepresentation - CORRECT ANSWERS-untrue statements on the application. They can void
the contract.
Material misrepresentation - CORRECT ANSWERS-A statement that, if discovered, would alter
the underwriting decision of the insurance company. If they are intentional, they are
considered fraud
Warranty - CORRECT ANSWERS-an absolutely true statement upon which the validity of the
insurance policy depends
Questions and Correct Answers
Insurance - CORRECT ANSWERS-a transfer of risk of loss from an individual or a business entity
to an insurance company, which, in turn, spreads the costs of unexpected losses to many
individuals.
Risk - CORRECT ANSWERS-the uncertainty of chance of a loss occurring
Pure Risk - CORRECT ANSWERS-Refers to situations that can only result in a loss or no change.
There is no opportunity for financial gain. This risk is the only type of risk that insurance
companies are willing to accept.
Speculative Risk - CORRECT ANSWERS-Involves the opportunity for either loss or gain. An
example of speculative risk is gambling. These types of risks are not insurable.
Methods of dealing with risk - CORRECT ANSWERS-Avoidance, Retention, Sharing, Reduction,
Transfer
Avoidance - CORRECT ANSWERS-eliminating exposure to a loss
For example, if a person wanted to avoid the risk of dying in an airplane crash, they might
choose to never fly in an airplane
Retention - CORRECT ANSWERS-Planned assumption of risk by an insured through the use of
deductibles, co-payments, or self-insurance. The purpose is to 1)reduce expenses and improve
cash flow 2)increase control of claim reserving and claims settlements 3)fund for losses that
cannot be insured
Sharing - CORRECT ANSWERS-A method of dealing with risk for a group of individual persons or
businesses with the same or similar exposure to loss who share the losses that occur within that
group. An example is a reciprocal insurance exchange
Reduction - CORRECT ANSWERS-an attempt to lessen the possibility or severity of a loss. It
would include actions such as installing smoke detectors, having annual physical or changing
lifestyle
Transfer - CORRECT ANSWERS-The most effective way to handle risk. The loss is borne by
another party. Insurance is the most common method of this.
Law of Large Numbers - CORRECT ANSWERS-the larger the number of individuals that are
randomly drawn from a population, the more representative the resulting group will be of the
entire population and the more predictable the actual loss will be.
,Elements of Insurable Risk - CORRECT ANSWERS--the loss must be due to chance
-the loss must be definite and measurable
-the loss must be predictable
-the loss cannot be catastrophic
-the loss exposures to be insured must be large
-the insurance must not be mandatory
3 Requirements to Prove Insurable Interest - CORRECT ANSWERS-Legitimate financial interest,
no potential for gain, must be a potential for loss
Peril - CORRECT ANSWERS-a specific cause of loss. Example: wind, fire, hail and explosions
Named Peril - CORRECT ANSWERS-a term used in property insurance to describe the breadth of
coverage provided under an insurance policy form that lists specific covered perils
Open Peril - CORRECT ANSWERS-a term used in property insurance to describe the breadth of
coverage provided under an insurance policy form that insures against any risk of loss that is
not specifically excluded
3 Types of Hazards - CORRECT ANSWERS-Physical, Moral, Morale
Physical Hazard - CORRECT ANSWERS-A condition of the subject of insurance that creates or
increases the chance of loss, such as structural defects, occupancy, poor housekeeping or
location.
Moral Hazard - CORRECT ANSWERS-a dishonest predisposition on the part of an insured that
increases the chance of loss. This could include an applicant who has been previously convicted
of arson, falsifying an insurance claim, etc
Morale Hazard - CORRECT ANSWERS-Applicants who demonstrate a careless attitude that could
increase the chance of loss that would be greater than would otherwise be the case.
Contract - CORRECT ANSWERS-An agreement between two or more parties that is enforceable
by law
Elements of a valid contract - CORRECT ANSWERS-agreement(offer and acceptance),
consideration, competent parties, legal purpose
Offer and acceptance - CORRECT ANSWERS-In insurance, the applicant usually makes the offer
when submitting the application. Acceptance takes place when an insurer's underwriter
approves the application and issues a policy.
Consideration - CORRECT ANSWERS-The binding force in a contract that requires something of
value to be exchanged for the transfer of risk. The consideration on the part of the insured is
, the representations made in the application and the payment of premium; the consideration on
the part of the insurer is the promise to pay in the event of loss.
Indemnity - CORRECT ANSWERS-A provision in an insurance policy that states that in the event
of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss,
and is not allowed to gain financially because of the existence of an insurance contract.
Contract of Adhesion - CORRECT ANSWERS-A "take it or leave it" contract
Aleatory Contract - CORRECT ANSWERS-a contract where the values exchanged may not be
equal but depend on an uncertain event
Personal contract - CORRECT ANSWERS-A contract between an individual and an insurer.
Unilateral contract - CORRECT ANSWERS-only one of the parties to the contract is legally bound
to do anything
Conditional contract - CORRECT ANSWERS-Requires that certain conditions must be met by the
policyowner and the company in order for the contract to be executed, and before each party
fulfills its obligations.
Parts of Insurance Contract - CORRECT ANSWERS-Declarations
Definitions
Insuring Agreement
Additional Coverage
Conditions
Endorsements
Exclusions and policy limits
Representations - CORRECT ANSWERS-Statements made by the applicant on the insurance
application that are believed to be true, but are not guaranteed to be true.
Misrepresentation - CORRECT ANSWERS-untrue statements on the application. They can void
the contract.
Material misrepresentation - CORRECT ANSWERS-A statement that, if discovered, would alter
the underwriting decision of the insurance company. If they are intentional, they are
considered fraud
Warranty - CORRECT ANSWERS-an absolutely true statement upon which the validity of the
insurance policy depends
