Characteristic of Insurance

An insurance pool needs a small group of similar exposures for predictive accuracy.

• True

• False

Insured losses ideally should be accidental losses.

• True

• False

Most speculative risks are insurable.

• True

• False

According to the law of large numbers, what happens as the number of exposure units increases?

• Actual results will increasingly differ from probable results.

• Actual results will more closely approach probable results.

• Fundamental risk will decrease.

• Objective risk will increase.

From the viewpoint of the insurer, all of the following are characteristics of an insurable risk

EXCEPT

• The loss must be accidental.

• The loss should be catastrophic.

• The premium must be economically feasible.

• There must be a large number of exposure units.

Why is a large number of exposure units generally required before a pure risk is insurable?

• It prevents the insurer from losing money.

• It eliminates intentional losses.

• It minimizes moral hazard.

• It enables the insurer to predict losses more accurately.

All of the following are characteristics of insurance EXCEPT

• risk avoidance.

• pooling of losses.

• payment of unforeseen losses.

• indemnification.

Which of the following is implied by the pooling of losses?

• sharing of losses by an entire group

• inability to predict losses with any degree of accuracy

• substitution of actual loss for average loss

• increase of objective risk

According to the law of large numbers, what should happen as an insurer increases the number of

units insured?

• The amount the insurer expects to pay in claims should decrease.

• Underwriting expenses should decrease.

• Actual results will more closely approach expected results.

• The insurerʹs profitability should become more variable.

Insurance transfers a speculative risk, while hedging involves the transfer of a pure risk.

• True

• False