Insurance Terms and Contracts Quiz

What is the purpose of requiring insurable interest in insurance?

• To ensure the insured profits from a loss

• To prevent moral hazard

• To confirm the insured has a legitimate interest in the insured item

• To reduce the cost of premiums

Answer explanation

Requiring insurable interest ensures that the insured has a legitimate stake in the insured item, preventing individuals from taking out policies on items they do not own or have no connection to, which helps maintain the integrity of the insurance system.

What is the main difference between a peril and a hazard?

• A peril is a type of insurance policy, while a hazard is a condition

• A peril is covered by insurance, while a hazard is not

• A peril is the cause of loss, while a hazard increases the likelihood of a loss

• A peril is a physical condition, while a hazard is a moral condition

Answer explanation

A peril refers to the actual cause of a loss, such as fire or theft, while a hazard is a condition that makes the occurrence of a peril more likely, such as a faulty electrical system. Thus, the correct choice highlights this distinction.

What is a peril in insurance terms?

• A condition that increases the likelihood of a loss

• The cause of loss

• A type of insurance policy

• A method of calculating premiums

Answer explanation

In insurance, a peril refers to the cause of loss, such as fire, theft, or natural disasters. Understanding perils is crucial for determining coverage and claims.

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

• Dishonesty leading to fraud

• Icy roads

• Not locking doors due to having insurance

• A tendency to buy insurance when at high risk

Answer explanation

Icy roads are a clear example of a physical hazard, as they pose a direct risk to safety and can lead to accidents. The other options relate to behavioral or financial risks, not physical dangers.

What is the main difference between moral and morale hazards?

• Moral hazard is a type of peril, while morale hazard is a type of exposure

• Moral hazard involves intentional misbehavior, while morale hazard involves carelessness

• Moral hazard is related to physical conditions, while morale hazard is related to mental conditions

• Moral hazard is covered by insurance, while morale hazard is not

Answer explanation

Moral hazard refers to situations where individuals engage in intentional misbehavior due to the safety net of insurance, while morale hazard involves carelessness or lack of concern for risk, often stemming from a sense of security.

What is the significance of competent parties in an insurance contract?

• It ensures the contract is valid for a specific period

• It provides a basis for premium calculation

• It allows minors to purchase insurance

• It ensures both parties are legally able to enter a contract

Answer explanation

The significance of competent parties in an insurance contract is that it ensures both parties are legally able to enter a contract, which is essential for the contract's validity and enforceability.

What is the role of consideration in an insurance contract?

• To provide a bonus for no claims

• To increase the insurer's profits

• To provide value exchanged between parties

• To ensure the insured profits from a loss

Answer explanation

Consideration in an insurance contract refers to the value exchanged between the insurer and the insured, typically the premium paid for coverage in return for the promise of compensation for covered losses.

What is the role of underwriting in insurance?

• To provide legal advice to policyholders

• To increase premiums for all policyholders

• To screen applicants and control adverse selection

• To ensure all claims are paid promptly

Answer explanation

Underwriting plays a crucial role in insurance by screening applicants to assess risk and control adverse selection, ensuring that only qualified individuals receive coverage, which helps maintain the stability of the insurance pool.

What is an example of adverse selection?

• High-risk drivers buying insurance at low rates

• Safe drivers paying higher premiums

• Insurers refusing to cover high-risk individuals

• Policyholders canceling insurance after a claim

Answer explanation

Adverse selection occurs when high-risk individuals, like high-risk drivers, seek insurance at low rates, leading insurers to face greater losses. This choice exemplifies how riskier applicants can distort the insurance market.

What is the main purpose of underwriting in insurance?

• To increase premiums for all policyholders

• To screen applicants and control adverse selection

• To ensure all claims are paid promptly

• To provide legal advice to policyholders

Answer explanation

The main purpose of underwriting in insurance is to screen applicants and control adverse selection, ensuring that the insurer only accepts risks that are manageable and appropriate for coverage.