Quiz on the Nature of Insurance

What is the primary function of insurance?

• To stimulate business competition

• To act as a risk transfer mechanism

• To provide investment opportunities

• To generate profit for insurers

What does the concept of a common pool in insurance refer to?

• A fund for government insurance

• A method of calculating interest

• A collection of premiums from many insured

• A group of unrelated risks

Which of the following is NOT a characteristic of insurable risks?

• Fortuitous

• Homogeneous exposures

• Guaranteed outcomes

• Pure risks

What is the Law of Large Numbers in insurance?

• It limits the number of insured individuals

• It guarantees profits for insurers

• It states that larger groups will have more predictable losses

• It defines the maximum premium rates

Which of the following is a secondary function of insurance?

• To provide peace of mind

• To pay for losses

• To act as a risk transfer mechanism

• To stimulate business enterprise

What is meant by 'insurable interest'?

• The ability to predict losses

• The interest rates on premiums

• The requirement for insurance policies

• A financial stake in the insured item

Which of the following is a benefit of insurance?

• Limited coverage

• Higher taxes

• Peace of mind

• Increased risk exposure

What type of risks does insurance primarily cover?

• Market risks

• Investment risks

• Pure risks

• Speculative risks

What is the role of premiums in insurance?

• To pay for administrative costs

• To fund the common pool for losses

• To cover marketing expenses

• To provide dividends to shareholders

Which of the following is an indirect function of insurance?

• Social benefits

• Loss reduction

• Investment of funds

• Risk transfer