FIN 340 Midterm UPDATED ACTUAL
Exam Questions and CORRECT Answers
Adverse Selection - CORRECT ANSWER - The tendency for those vulnerable to loss
from a specific risk to acquire and to retain insurance to cover that loss. Ex: Property-
Californians want earthquake insurance, and life and health insurance.
Law of Large Numbers - CORRECT ANSWER - As size of the insured population
increases, actual losses will approximate the underlying probability. The sample must have mass
and homogeneity, and exposure units must be independently exposed to loss.
Risk - CORRECT ANSWER - The possibility of loss. Risks are everywhere. Some
unavoidable, some chosen.
Possibility - CORRECT ANSWER - Something could occur. It may or may not. It can't be
measured nor insured.
Probability - CORRECT ANSWER - The proportion of times that events will occur in the
long run.
Loss - CORRECT ANSWER - The undesirable end result of risk- a decline, depreciation,
or depletion in value, usually unexpected or relatively unpredictable.
Loss exposur - CORRECT ANSWER - A loss that might occur
Direct loss - CORRECT ANSWER - Loss that arises first or immediately following the
occurrence of a peril. Ex: cost to repair damaged home due to fire, medical expenses
Indirect loss - CORRECT ANSWER - Loss occurs as a secondary result following the
occurrence of a peril. Ex: Family's add living expenses, travel expenses to hospital, damaged
houses during Sept. 11th.
,Uncertainty - CORRECT ANSWER - A state of mind, not being sure about something,
subjective- varies by individual regardless of facts. Ex: Parent may someday be confined to
nursing home or a fear of getting cancer so wants disease insurance.
Peril - CORRECT ANSWER - A cause of loss. Examples: Death, fire, unemployment, old
age, flood, windstorm, and theft.
Hazard - CORRECT ANSWER - An act or condition that increases the likelihood of a loss
and/or increases the severity of a loss if a peril does occur.
3 types of hazards - CORRECT ANSWER - Physical hazard, moral hazard, and attitudinal
hazard.
1. Physical Hazard - CORRECT ANSWER - Physical condition relating to location,
structure, occupancy, exposure, and the like. Examples: High blood pressure, gas on premise,
and dangerous lobby.
2. Moral Hazard - CORRECT ANSWER - Dishonest tendency likely to increase loss
frequency and/or severity. Ex: Weakened financial condition, fraudulent claim, and arson.
3. Attitudinal Hazard- - CORRECT ANSWER - Condition of carelessness or indifference
whether a loss occurs and/or the size of loss. Ex: Laziness, poor hygiene, disorderliness, and
leaving car doors or house unlocked.
Financial vs. Nonfinancial Risks - CORRECT ANSWER - Financial Risk- Involves a loss
of money. Ex: Medical Bills
Nonfinancial Risk: Does not involve a loss of money. Ex: pain and suffering.
Particular vs. Fundamental Risk - CORRECT ANSWER - Particular Risk- Affects only
indiviudals or small groups Ex: Retirement, lightning strike.
, Fundamental risk- Affects large segments of society. Ex: Widespread unemployment, nuclear
accident.
Static vs. Dynamic Risk: - CORRECT ANSWER - Static risk- Exists apart from changes
in society or the economy. Ex: Death, fire damage to client's home.
Dynamic risk- Results from changes in society or the economy. Ex: Diet fads, new technology.
Pure vs. Speculative Risks: - CORRECT ANSWER - Pure risk- Chance of loss or no loss.
Ex: Windstorm damage to building.
Speculative risk- Chance of loss, no loss/no gain, or gain. Ex: Investment in real estate.
Gambling vs. Insurance: - CORRECT ANSWER - Gambling- Creates risk that would not
otherwise exist, outcome can be gain or loss, and risk is created by deliberate choice.
Insurance- Transfers existing risks and treats only risks that can result in loss.
Categories of pure risks (3): - CORRECT ANSWER - 1. Personal risks- A loss possibility
associated with death, injury, illness, old age, and unemployment.
2. Property risks: A loss possibility associated with the loss or destruction of property.
3. Liability risks- Possibility of loss as a result of being held legally responsible for an injury to
another, usually for bodily injury or damage to property.
Characteristics of Insurable Risk: - CORRECT ANSWER - 1. Amount of the loss must be
IMPORTANT
2. The loss must be of an ACCIDENTAL nature.
3. Future losses must be CALCULABLE.
4. The loss must be definite.
5. The loss cannot be excessively CATASTROPHIC.
Key Elements of insurance: - CORRECT ANSWER - -indemnification- Payment for
actual losses
Exam Questions and CORRECT Answers
Adverse Selection - CORRECT ANSWER - The tendency for those vulnerable to loss
from a specific risk to acquire and to retain insurance to cover that loss. Ex: Property-
Californians want earthquake insurance, and life and health insurance.
Law of Large Numbers - CORRECT ANSWER - As size of the insured population
increases, actual losses will approximate the underlying probability. The sample must have mass
and homogeneity, and exposure units must be independently exposed to loss.
Risk - CORRECT ANSWER - The possibility of loss. Risks are everywhere. Some
unavoidable, some chosen.
Possibility - CORRECT ANSWER - Something could occur. It may or may not. It can't be
measured nor insured.
Probability - CORRECT ANSWER - The proportion of times that events will occur in the
long run.
Loss - CORRECT ANSWER - The undesirable end result of risk- a decline, depreciation,
or depletion in value, usually unexpected or relatively unpredictable.
Loss exposur - CORRECT ANSWER - A loss that might occur
Direct loss - CORRECT ANSWER - Loss that arises first or immediately following the
occurrence of a peril. Ex: cost to repair damaged home due to fire, medical expenses
Indirect loss - CORRECT ANSWER - Loss occurs as a secondary result following the
occurrence of a peril. Ex: Family's add living expenses, travel expenses to hospital, damaged
houses during Sept. 11th.
,Uncertainty - CORRECT ANSWER - A state of mind, not being sure about something,
subjective- varies by individual regardless of facts. Ex: Parent may someday be confined to
nursing home or a fear of getting cancer so wants disease insurance.
Peril - CORRECT ANSWER - A cause of loss. Examples: Death, fire, unemployment, old
age, flood, windstorm, and theft.
Hazard - CORRECT ANSWER - An act or condition that increases the likelihood of a loss
and/or increases the severity of a loss if a peril does occur.
3 types of hazards - CORRECT ANSWER - Physical hazard, moral hazard, and attitudinal
hazard.
1. Physical Hazard - CORRECT ANSWER - Physical condition relating to location,
structure, occupancy, exposure, and the like. Examples: High blood pressure, gas on premise,
and dangerous lobby.
2. Moral Hazard - CORRECT ANSWER - Dishonest tendency likely to increase loss
frequency and/or severity. Ex: Weakened financial condition, fraudulent claim, and arson.
3. Attitudinal Hazard- - CORRECT ANSWER - Condition of carelessness or indifference
whether a loss occurs and/or the size of loss. Ex: Laziness, poor hygiene, disorderliness, and
leaving car doors or house unlocked.
Financial vs. Nonfinancial Risks - CORRECT ANSWER - Financial Risk- Involves a loss
of money. Ex: Medical Bills
Nonfinancial Risk: Does not involve a loss of money. Ex: pain and suffering.
Particular vs. Fundamental Risk - CORRECT ANSWER - Particular Risk- Affects only
indiviudals or small groups Ex: Retirement, lightning strike.
, Fundamental risk- Affects large segments of society. Ex: Widespread unemployment, nuclear
accident.
Static vs. Dynamic Risk: - CORRECT ANSWER - Static risk- Exists apart from changes
in society or the economy. Ex: Death, fire damage to client's home.
Dynamic risk- Results from changes in society or the economy. Ex: Diet fads, new technology.
Pure vs. Speculative Risks: - CORRECT ANSWER - Pure risk- Chance of loss or no loss.
Ex: Windstorm damage to building.
Speculative risk- Chance of loss, no loss/no gain, or gain. Ex: Investment in real estate.
Gambling vs. Insurance: - CORRECT ANSWER - Gambling- Creates risk that would not
otherwise exist, outcome can be gain or loss, and risk is created by deliberate choice.
Insurance- Transfers existing risks and treats only risks that can result in loss.
Categories of pure risks (3): - CORRECT ANSWER - 1. Personal risks- A loss possibility
associated with death, injury, illness, old age, and unemployment.
2. Property risks: A loss possibility associated with the loss or destruction of property.
3. Liability risks- Possibility of loss as a result of being held legally responsible for an injury to
another, usually for bodily injury or damage to property.
Characteristics of Insurable Risk: - CORRECT ANSWER - 1. Amount of the loss must be
IMPORTANT
2. The loss must be of an ACCIDENTAL nature.
3. Future losses must be CALCULABLE.
4. The loss must be definite.
5. The loss cannot be excessively CATASTROPHIC.
Key Elements of insurance: - CORRECT ANSWER - -indemnification- Payment for
actual losses
