Hs 311 Insurance, Ch 1--T/f

Front 1

T/F
As defined in this course, risk is the probability or chance of loss.

Back 1

False. Risk is the possibility, not the probability or chance, of loss.

Front 2

T/F
Loss is the undesirable result of risk.

Back 2

True

Front 3

T/F
Actual losses are much more common than loss exposures.

Back 3

False. Many loss exposures present a possibility of loss but never result in an actual loss. Therefore, loss exposures are more numerous than actual losses.

Front 4

T/F
The extra expense a client incurs by living in a hotel after a fire has damaged his home is an example of a direct loss.

Back 4

False. This is an indirect loss.

Front 5

T/F
Because uncertainty is a state of mind, two clients facing the same risk situation can have varying degrees of uncertainty.

Back 5

True

Front 6

T/F
Hazards are causes of loss, such as death, fire, or legal liability

Back 6

False. Perils are causes of loss. Hazards are acts or conditions that increase the chance or amount of loss caused by a peril.

Front 7

T/F
Moral hazards are evidenced by carelessness or indifference.

Back 7

False. Attitudinal hazards are evidenced by carelessness or indifference. Moral hazards are evidenced by dishonest tendencies.

Front 8

T/F
Hazards are important in underwriting and rating applicants for insurance.

Back 8

True

Front 9

T/F
A client can use the probability of a loss to measure the risk he or she faces.

Back 9

False. An individual cannot effectively use the probability of a loss to measure the risk he or she faces-the individual either will or will not suffer a loss. Statistical probabilities have no relevance in this case. To use a probability to measure risk, a large number of similar exposures would be needed.

Front 10

T/F
If an insurer observes a large number of similar exposures in estimating the probability of loss, it is very likely that the actual loss experience for its own insureds will closely approximate the expected loss experience from its observations even though the number of its own insureds is very small.

Back 10

False. This is most likely if the number of insureds is also large.

Front 11

T/F
Because pure risks involve a possibility of gain as well as loss, they can be handled effectively with hedging

Back 11

False. Because pure risks involve only loss or no loss, they cannot be handled effectively with hedging. Because speculative risks involve gain as well as loss, they can be handled effectively with hedging.

Front 12

T/F
There are a variety of benefits as well as costs associated with insurance as a technique for handling risk.

Back 12

True

Front 13

T/F
Insurance is essentially a form of gambling risk because the policyowner pays a relatively small premium to protect against a relatively large loss.

Back 13

False. The fact that risk is an existing condition is what removes insurance from the category of a gambling risk. Insurance does not create risk-gambling does.

Front 14

T/F
To be insurable, a risk must substantially meet the requirements of importance, accidental nature, calculability, definiteness of loss, and no excessively catastrophic loss

Back 14

True

Front 15

T/F
The only cost associated with pure risk is the actual loss that takes place.

Back 15

False. In addition to the actual loss that takes place, the costs associated with pure risk include fear and worry, less-than-optimal use of resources, and the expenses of treating risks.

Front 16

T/F
One of the several ways in which insurance can be defined is as an economic system that reduces financial risk through a transfer and combination of losses.

Back 16

True

Front 17

T/F
Adverse selection refers to some people's attempt to take unfair advantage of insurance.

Back 17

False. Adverse selection is the natural tendency for those who know they are highly vulnerable to loss from a specific risk to be most inclined to acquire and retain insurance to cover that loss. Adverse selection by applicants and policyowners is counterbalanced by the care insurers exercise in underwriting, a matter discussed further in chapter 4

Front 18

T/F
Depending on their characteristics, government insurance programs may or may not be social insurance.

Back 18

True

Front 19

T/F
Unlike welfare programs, social insurance emphasizes individual equity rather than social adequacy.

Back 19

False. Social insurance emphasizes social adequacy rather than individual equity.

Front 20

T/F
Employees covered under group insurance receive a certificate of insurance as evidence of their coverage.

Back 20

True