Chapter 2 Insurance and Risk

Which of the following is a basic characteristic of insurance?

• A) pooling of losses
  

• B) avoidance of risk
  

• C) payment of intentional losses

• D) certainty about specific losses that will occur

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

• A) sharing of losses by an entire group
  
  

• B) inability to predict losses with any degree of accuracy

• C) substitution of actual loss for average loss

• D) increase of objective risk

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

• A) Actual results will increasingly differ from probable results.

• B) Actual results will more closely approach probable results.

• C) Nondiversifiable risk will decrease.

• D) Objective risk will increase.

4) From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT

• A) The loss must be accidental.

• B) The loss should be catastrophic.

• C) The premium must be economically feasible.

• D) There must be a large number of exposure units.

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

• A) It prevents the insurer from losing money.

• B) It eliminates intentional losses.

• C) It minimizes moral hazard.

• D) It enables the insurer to predict losses more accurately.

6) Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable?
I. The loss must be definite as to place.
II. The loss must be definite as to amount.

• A) I only

• B) II only

• C) both I and II

• D) neither I nor II

7) Which of the following types of risks best meets the requirements for being insurable by private insurers?

• A) most market risks

• B) property risks

• C) financial risks

• D) political risks

8) Which of the following types of risks is normally uninsurable by private insurers?

• A) personal risks

• B) property risks

• C) liability risks

• D) political risks

9) The tendency for unhealthy people to seek life or health insurance at standard rates is an example of

• A) moral hazard.

• B) fundamental risk.

• C) attitudinal hazard.

• D) adverse selection.

10) Inland marine insurance provides coverage for

• A) goods being shipped on land.

• B) premature death of members of the armed forces.

• C) goods being shipped on ocean-going vessels.

• D) liability exposures of nonprofit organizations.