Insurance Terms and Concepts Quiz

What does indemnity aim to achieve for the insured?

• To ensure a higher payout than the loss

• To increase the insured's wealth

• To restore the insured to the same financial position as before the loss

• To provide profit from a claim

Answer explanation

Indemnity aims to restore the insured to the same financial position as before the loss, ensuring they do not profit from a claim or receive more than their actual loss.

What is the difference between pure and speculative risk?

• Pure risk involves only the possibility of loss or no loss, while speculative risk involves loss, no change, or gain

• Pure risk involves only gain, while speculative risk involves loss or no change

• Pure risk is uninsurable, while speculative risk is insurable

• Pure risk involves only financial gain, while speculative risk involves financial loss

Answer explanation

The correct choice highlights that pure risk only involves the chance of loss or no loss, while speculative risk can result in loss, no change, or gain, making it a broader category of risk.

What is the purpose of a deposit premium in insurance?

• To provide temporary coverage

• To alter the terms of the policy

• To serve as the final premium amount

• To serve as an initial estimated premium paid at policy issuance, with adjustments after an audit

Answer explanation

The deposit premium serves as an initial estimated premium at policy issuance, allowing for adjustments after an audit to reflect the actual risk and coverage needed.

Which of the following is an example of a moral hazard?

• Leaving car windows down in a high-crime area

• Frayed electrical wiring in a home

• Deliberately damaging property to collect insurance

• Stacking flammable solvents next to a furnace

Answer explanation

Deliberately damaging property to collect insurance is a clear example of moral hazard, as it involves taking advantage of insurance coverage due to reduced personal risk, unlike the other options which do not involve intentional harm.

Which of the following is an example of negligence?

• Leaving car windows down in a high-crime area

• An insured deliberately damages property to collect insurance

• A store owner fails to clean a known slippery spot, resulting in a customer injury

• Stacking flammable solvents next to a furnace

Answer explanation

The correct choice is the store owner failing to clean a known slippery spot, as this demonstrates negligence by not taking reasonable care to prevent harm to customers, leading to an injury.

What is the significance of an occurrence in an insurance policy?

• An occurrence is a summary of the insurance policy

• An occurrence is a temporary coverage agreement

• An occurrence is an event or continuous exposure that results in a loss under an occurrence-based policy

• An occurrence is a promise within the policy that certain facts or conditions are true

Answer explanation

An occurrence refers to an event or continuous exposure that leads to a loss under an occurrence-based policy, making it crucial for determining coverage and claims.

What is the role of representations in an insurance application?

• Representations are temporary coverage agreements

• Representations are statements believed true by the applicant at the time of application

• Representations are promises within the policy that certain facts or conditions are true

• Representations are methods of loss valuation

Answer explanation

Representations in an insurance application refer to statements made by the applicant that they believe to be true at the time of application. This is crucial as it affects the insurer's decision to provide coverage.

What is the law of large numbers in insurance?

• A principle that states the larger the number of insured units, the more the actual loss experience will approach the expected loss probability

• A principle that states the larger the number of insured units, the more the actual loss experience will deviate from the expected loss probability

• A principle that states the larger the number of insured units, the less reliable the loss predictions

• A principle that states the larger the number of insured units, the more unpredictable the loss experience

Answer explanation

The law of large numbers states that as the number of insured units increases, the actual loss experience will more closely align with the expected loss probability, making the correct choice A.

Which of the following is an example of concealment?

• Not disclosing a history of sink-hole claims when applying for homeowner’s insurance

• Stacking flammable solvents next to a furnace

• Claiming no prior water damage on a home application when one occurred

• Leaving car windows down in a high-crime area

Answer explanation

The correct choice, 'Not disclosing a history of sink-hole claims when applying for homeowner’s insurance', is an example of concealment as it involves intentionally hiding relevant information that could affect the insurance decision.

What is the role of negligence in liability claims?

• Negligence guarantees a higher payout in liability claims

• Negligence is a promise within the policy that certain facts or conditions are true

• Negligence is irrelevant in liability claims

• Negligence is the failure to exercise reasonable care, resulting in harm or damage

Answer explanation

Negligence is crucial in liability claims as it refers to the failure to exercise reasonable care, leading to harm or damage. This definition establishes the basis for proving liability in such claims.