Quiz - Chapter 1 INS200

What is the definition of risk in insurance terms?

• A condition with no possible deviation from expected outcomes
• A variation of outcomes in a given situation
• Certainty about a positive outcome
• An assurance of financial gain

Answer explanation

Risk in insurance implies uncertainty about an outcome, indicating variation between expected and actual outcomes.

The three major types of hazards are physical hazard, moral hazard, and __________ hazard.

Answer explanation

Morale hazard refers to an individual's indifference towards loss because of existing insurance coverage.

Which type of hazard is associated with a physical condition that increases the chance of loss?

• Moral hazard
• Physical hazard
• Morale hazard
• Legal hazard

Answer explanation

A physical hazard involves tangible conditions that increase the possibility of a loss.

What is a moral hazard in insurance terms?

• A physical condition increasing loss chance
• Indifference due to insurance coverage
• Character defect increasing loss chance
• Intentional damage to property

Answer explanation

Moral hazard arises from character defects that increase the risk of loss, such as dishonesty or unethical behavior.

Which of the following best describes 'Fundamental Risk'?

• A risk that affects a single individual
• A risk that affects the entire economy or a large number of people
• A risk that involves speculative gains
• A risk that cannot be insured

Answer explanation

Fundamental risks affect a large number of people or the whole economy, such as natural disasters or inflation.

Which type of probability theory uses historical data to estimate loss?

• A Priori Probability
• Judgmental Probability
• Empirical Probability
• Speculative Probability

Answer explanation

Empirical probability is determined based on past data and historical occurrences.

What type of risk can result in both profit and loss?

• Pure Risk
• Speculative Risk
• Fundamental Risk
• Particular Risk

Answer explanation

Speculative risk involves the possibility of profit, loss, or no loss, unlike pure risks that involve only loss or no loss.

A __________ hazard is caused by carelessness or indifference to loss because of having insurance coverage.

Answer explanation

Morale hazard arises from a relaxed attitude due to being insured.

The probability theory that relies on human judgment in the absence of sufficient data is known as __________ probability.

Answer explanation

Judgmental probability is used when there is insufficient historical data to make statistical predictions.

A __________ risk affects the entire economy or large groups of people rather than an individual.

Answer explanation

Fundamental risks impact a vast population or economic system.