General Insurance Concepts Flashcard

Front

What is the primary purpose of insurance?

Back

To transfer financial risk to an insurer

Answer explanation

The primary purpose of insurance is to transfer financial risk to an insurer, allowing policyholders to protect themselves from potential losses without eliminating all risks.

Front

Which of the following is an example of a pure risk? Options:

• Starting a new business
• Winning a lottery
• A home burning down
• Investing in the stock market

Back

A home burning down

Answer explanation

A home burning down is a pure risk because it involves a chance of loss with no potential for gain. In contrast, starting a business, winning a lottery, and investing in stocks involve uncertainties that can lead to profit.

Front

What is the term for the cause of a loss?

Back

Peril

Answer explanation

The term 'peril' refers to the specific cause of a loss, such as fire or theft. In contrast, 'risk' is the chance of loss, 'hazard' increases the likelihood of a peril, and 'indemnity' relates to compensation for loss.

Front

Which type of hazard involves dishonesty or intent to cause loss?

Back

Moral hazard

Answer explanation

Moral hazard refers to situations where a party engages in dishonest behavior or takes risks because they do not bear the full consequences of their actions, leading to potential loss for others.

Front

What is the most common form of risk transfer?

Back

Insurance

Answer explanation

The most common form of risk transfer is insurance, as it allows individuals and businesses to transfer the financial burden of risks to an insurer, providing protection against potential losses.

Front

When must insurable interest exist for property insurance?

Back

At the time of loss

Answer explanation

Insurable interest must exist at the time of loss for property insurance to ensure that the insured has a legitimate stake in the property. This protects against moral hazard and ensures claims are valid.

Front

What does indemnity ensure?

Back

The insured is restored to their pre-loss financial condition

Answer explanation

Indemnity ensures that the insured is restored to their pre-loss financial condition, meaning they receive compensation for their loss without profiting from it. This principle prevents unjust enrichment.

Front

Which loss valuation method considers depreciation?

Back

Actual Cash Value (ACV)

Answer explanation

The Actual Cash Value (ACV) method accounts for depreciation, calculating the value of an item based on its replacement cost minus depreciation. This distinguishes it from other methods like Stated Amount and Agreed Value.

Front

What is the first event in an unbroken chain of events leading to a loss called?

Back

Proximate cause

Answer explanation

The first event in an unbroken chain of events leading to a loss is called the proximate cause. It is the primary factor that sets off the sequence of events resulting in damage or loss.

Front

What is the purpose of deductibles in insurance?

Back

To reduce small claims and encourage loss control

Answer explanation

Deductibles serve to reduce small claims by requiring policyholders to pay a portion of the loss, which encourages them to manage risks and control losses, ultimately benefiting the insurance system.