RMI 3011: Exam 1 Questions with
complete solution
Insurance - correct answer ✔-Device for the transfer and pooling of risks
-A known small loss (premium payment) replaces a possible unknown large
loss
Risk - correct answer ✔possibility of loss
Peril - correct answer ✔-Cause of loss
Ex: Death, Disability, Collision, Fire, Legal liability
Hazard - correct answer ✔- condition that increases the likelihood of loss or
increases the size of the loss if a peril occurs
Physical Hazard - correct answer ✔-physical condition, such as ice on
sidewalks
Moral Hazard - correct answer ✔-A dishonest tendency on the part of the
person exposed to loss
Morale Hazard - correct answer ✔-indifference on the part of the person
exposed to loss as to whether a loss occurs and/or the size of the loss
Ex: Sloppy housekeeping, speeding
, Chain of Events - correct answer ✔Hazard->Peril->Loss
Pothole->Collision->Damage to car
Skydiving->Defective equipment->Lost income
Law of Large Numbers - correct answer ✔-The more units exposed to loss,
the greater will be the predictability of future loss results
For insurance to work well, the insurer needs a large number of similar
(homogenous) exposure units
Adverse Selection - correct answer ✔The tendency of poorer-than-average
risks or less-than-desirable entities to seek insurance to a greater extent than
do better risks
-Selection against the insurance company
Ex: People with poor health seek life insurance
Insurable risk or loss exposure (characteristics) - correct answer ✔-Large
number of individuals or exposure units subject to loss
-Losses definite and measurable
-Probable loss frequency and severity calculable
-No incalculable catastrophe potential
complete solution
Insurance - correct answer ✔-Device for the transfer and pooling of risks
-A known small loss (premium payment) replaces a possible unknown large
loss
Risk - correct answer ✔possibility of loss
Peril - correct answer ✔-Cause of loss
Ex: Death, Disability, Collision, Fire, Legal liability
Hazard - correct answer ✔- condition that increases the likelihood of loss or
increases the size of the loss if a peril occurs
Physical Hazard - correct answer ✔-physical condition, such as ice on
sidewalks
Moral Hazard - correct answer ✔-A dishonest tendency on the part of the
person exposed to loss
Morale Hazard - correct answer ✔-indifference on the part of the person
exposed to loss as to whether a loss occurs and/or the size of the loss
Ex: Sloppy housekeeping, speeding
, Chain of Events - correct answer ✔Hazard->Peril->Loss
Pothole->Collision->Damage to car
Skydiving->Defective equipment->Lost income
Law of Large Numbers - correct answer ✔-The more units exposed to loss,
the greater will be the predictability of future loss results
For insurance to work well, the insurer needs a large number of similar
(homogenous) exposure units
Adverse Selection - correct answer ✔The tendency of poorer-than-average
risks or less-than-desirable entities to seek insurance to a greater extent than
do better risks
-Selection against the insurance company
Ex: People with poor health seek life insurance
Insurable risk or loss exposure (characteristics) - correct answer ✔-Large
number of individuals or exposure units subject to loss
-Losses definite and measurable
-Probable loss frequency and severity calculable
-No incalculable catastrophe potential
