RMI 3011 CHAPTER 2 EXAM QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026

RMI 3011 CHAPTER 2 EXAM QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026 Insurance - Answers Pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, provide other pecuniary benefits on their occurrence, or to render services connected with the risk Insurance Plan Includes - Answers - Pooling of losses - Payment of fortuitous losses - Risk transfers - Indemnification Pooling - Answers Spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss Fortuitous Loss - Answers Loss that is unforeseen, unexpected, and occur as a result of chance Risk Transfer - Answers Pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position Pure Risks In Risk Transfer - Answers - Premature death - Excessive longevity - Poor health - Disability - Destruction and theft of personal and commercial property - Personal and professional liability lawsuits Indemnification - Answers Insured is restored to his or her approximate financial position prior to the occurrence of the loss Characteristics of an Ideally Insurable Risk - Answers - Large number of exposure units - Accidental and unintentional loss - Determinable and measurable loss - No catastrophic loss - Calculable chance of loss - Economically feasible premium Large Number of Exposure Units - Answers Enables insurer to predict losses based on the law of large numbers Accidental and Unintentional Loss - Answers To assure random occurrence of events, moral hazard is increased if the insured deliberately intends to cause a loss, and poor public policy to allow insureds to collect for intentional losses Determinable and Measurable Loss - Answers Loss should be determinable as to cause, time, place, and amount - Will enable the insurer to determine whether the loss is covered under the policy, and if it is, how much should be paid No Catastrophic Loss - Answers - To allow the pooling technique to work - Large proportion of exposure units shouldn't incur losses at the same time Reinsurance - Answers Arrangement by which the primary insurer that initially writes the insurance transfers to another insurer (the reinsurer) part or all of the potential losses associated with such insurance Calculable Chance of Loss - Answers To establish a proper premium that is sufficient to pay all claims and expenses and yields a profit during the policy period Economically Feasible Premium - Answers - Premiums paid should be substantially less than the face amount of insurance or policy period - Chance of loss must be relatively low Adverse Selection - Answers Tendency of persons with a higher-than-average chance of loss to seek insurance at standard rates Adversely Selected Against - Answers Applicants for insurance with a higher-than-average chance of loss succeed in obtaining the coverage at standard rates or even preferred rates Adverse Selection Can Be Controlled By - Answers - Underwriting - Policy provisions Underwriting - Answers Process of selecting, classifying, and pricing applicants for insurance Types of Insurance - Answers Private insurance and government insurance Private Insurance - Answers Includes life and health insurance, along with property and liability insurance Health Insurance - Answers Covers medical expenses because of sickness or injury Life Insurance - Answers Pays death benefits to beneficiaries when the insured dies Property Insurance - Answers Indemnifies property owners against the loss or damage of real or personal property Liability Insurance - Answers Covers the insured's legal liability arising out of property damage or bodily injury to others Casualty Insurance - Answers Insurances that covers whatever isn't covered by fire, marine, and life insurance Government Insurance - Answers Includes social insurance programs and other government insurance plans Social Insurance Programs - Answers - Financed entirely or in large part by contributions from employers and/or employees - Benefits are weighed heavily in favor of low-income groups - Eligibility and benefits are prescribed by statute Categories of Private Insurance - Answers Personal lines and commercial lines Personal Lines - Answers Coverages that insure the real estate and personal property of individuals and families or provide protections against legal liability Private Passenger Auto Insurance - Answers - Personal line in property & liability insurance - Protect insured against legal liability from auto accidents that cause property damage or bodily injury to others Homeowners Insurance - Answers - Personal line in property & liability insurance - Multiple-line policy that provides property insurance and personal liability insurance in one policy Multiple-Line Policy - Answers State legislature that allows insurers to write property and casualty lines in one policy Earthquake Insurance - Answers - Personal line in property & liability insurance - Covers damage that results from buildings cracking and shaking, along with damage to personal property amidst an earthquake