HS 311 Fundamentals of Insurance Planning Study Guide (394
Study Questions with 100% Correct Answers)
What is the definition of "risk"? Correct Answer: the possibility of loss.
Types of hazards? Correct Answer: Physical, attitudinal (carelessness), and moral.
How do insurance companies measure probabilities? Correct Answer: By observing large
numbers (mass) of similar (homogeneous) exposures in the statistical group from which they
make their estimate.
What is the definition of "particular risk"? Correct Answer: Loss possibilities that affect only
individuals or small groups of individuals at the same time
What is the definition of "fundamental risk"? Correct Answer: Loss possibilities that can affect
large segments of society at the same time.
What is the definition of "pure risk"? Correct Answer: Loss or no loss
What is the definition of "speculative risk"? Correct Answer: Possibility of loss, no loss, or gain
Pure risk categories include? Correct Answer: Risks involving the person, risks involving loss of
or damage to property, and risks involving liability for injury or damage to persons or the
property of others.
5 requirements that a risk must meet? Correct Answer: Important, accidental nature, calculable,
definite, and cannot be excessively catastrophic.
What is an indirect loss? Correct Answer: Lost profits following a direct loss.
3 factors that add to the costs of risks? Correct Answer: Fear and worry, inadequate preparation,
and expenses of managing risks.
Insurance can be defined from the following viewpoints? Correct Answer: Economic, legal,
business, social, and actuarial.
Economic viewpoint of insurance? Correct Answer: Insurance reduces risk by transferring risks
to an insurer, who combines policy owners' potential losses
Legal viewpoint of insurance? Correct Answer: Insurance transfers risk by the terms of a
contract
Business viewpoint of insurance? Correct Answer: Insurance is a financial institution
specializing in the treatment of risk
,Social viewpoint of insurance? Correct Answer: Insurance pools losses by using group
members' contributions to pay losses suffered by some group members.
Actuarial viewpoint of insurance? Correct Answer: Insurance predicts and distributes losses
using actuarial estimates based on principles of probability.
Common elements of insurance? Correct Answer: Risk transfer, Risk spreading,
indemnification, ability to make reasonable estimates of future losses, ability to express losses in
definite amounts, and possibility of adverse, random events occurring outside insured's control.
The cost of insurance include? Correct Answer: Operating costs, insurer profits, opportunity
costs, possible increased losses, and adverse selection.
Individual insurance underwriting typically requires the individual to show ...? Correct Answer:
Evidence of insurability.
What is a peril? Correct Answer: Cause of loss.
What is a hazard? Correct Answer: Acts or conditions that increase the chance or amount of loss
caused by a peril.
Moral hazards are...? Correct Answer: Dishonest tendencies.
To use a probability to measure risk, what is needed? Correct Answer: A large number of
similar exposures would be needed.
Can pure loss be effectively hedged against? Correct Answer: No
What is adverse selection? Correct Answer: 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.
Employees covered under group insurance receive what as evidence of their coverage? Correct
Answer: Certificate of insurance.
Risk management goals include? Correct Answer: Survival, peace of mind, lower costs (or
higher net income), stable earnings, minimal interruption of business operations or personal life,
continued growth, and satisfaction of social responsibility with a good public image.
A risk manager has full responsibility in the property and liability area for...? Correct Answer:
identifying and evaluating risks, selecting insurers, approving insurance renewals and amounts,
negotiating insurance rates, seeking competitive insurance bids, keeping insurance records,
choosing deductibles, and handling insurance claims
,A risk manager shares responsibility for...? Correct Answer: Deciding whether or not to insure
or retain (including self-insuring) financial risks, selecting insurance agents and brokers,
instituting safety programs, and reviewing contracts other than insurance.
Deductibles lower insurance premiums by eliminating ...? Correct Answer: The relatively high
claims costs associated with small losses.
Family or business retained risks are commonly financed by...? Correct Answer: Absorption in
current operating expenses or family budgets, and emergency funding and reserves. Business'
also employ self-insurance through a formal program of risk retentions and captive
insurers(separate subsidiary insurance companies established to write the parent company's
insurance).
An insurer receives income from...? Correct Answer: Premiums (or insurance payments from
policy owners), investment earnings, and other income.
The uses for income (that an insurer receives)? Correct Answer: Covered losses, the cost of
doing business, or expenses, and profits (which may be used to pay dividends or held as retained
earnings)
The probability of loss is expressed algebraically in a fraction whose numerator is ...? Correct
Answer: The total number of all possible outcomes
Three building blocks of an insurance program? Correct Answer: social insurance, employer-
sponsored insurance, and individual insurance.
What is the social insurance? Correct Answer: a floor of protection against certain perils.
Example is social security.
What is employer-sponsored insurance? Correct Answer: various insurance programs made
available at work.
What is individual insurance? Correct Answer: fill in coverage gaps left by social insurance and
employer-sponsored insurance and increase total coverage amounts to the necessary levels.
The four steps in the risk management process are...? Correct Answer: Identification,
measurement, choice and use of methods to treat each identifiable risk, and administration
The four methods of risk identification are...? Correct Answer: survey forms, financial statement
analysis, personal inspections, and contract analysis.
Survey forms are...? Correct Answer: focuses on risk detection, identification, and classification.
A review of insurance priorities assumes ...? Correct Answer: for each of the pure risks that have
been identified and measured in the risk management process, insurance will be used if it is
available.
, Insurance coverages are group into these priority categories...? Correct Answer: essential,
desirable, available, and each insurance coverage is compared with the other available techniques
for treating the particular risk.
Risk management process? Correct Answer: risk identification, measure the risks associated
with the various loss exposures they identify, evaluate both the suitability and the cost of various
methods of treating their pure risks, and (finally) purchase insurance.
Self-insurance is generally appropriate only for....? Correct Answer: large business' that can act
like an insurance company for their own risk
For an insurance company to operate in the long-run...? Correct Answer: premiums plus
investment earnings plus other income must equal losses, expenses, and profits.
The law of large numbers...? Correct Answer: As the number of independent events increase,
there is a greater chance that the actual results will be close to the expected results.
Each risk can be measured in terms of...? Correct Answer: frequency, severity, and variation
Both stock and mutual insurance companies are what type of company? Correct Answer:
corporations
The most important reason for demutualization? Correct Answer: Raise capital quickly
The second most important reason for demutualization? Correct Answer: enables the insurance
company to diversify its activities by acquiring other insurers or other types of financial
institutions through the issuance or exchange of stock.
The last important reason for demutualization? Correct Answer: facilitates payment of certain
types of non cash compensation to the insurance company's key executives and board members
What are the disadvantages to demutualization? Correct Answer: time, cost, complexity due to
regulatory, tax, legal, and accounting problems to overcome. Policyowners must be compensated
adequately for loss of their ownership rights. As a stock company, the insurer might become
vulnerable to a hostile takeover. Demutualization requires the company to admit an explicit
profit motive.
What is a life insurance agent's authority? Correct Answer: Limited ability to accept business or
bind the coverage, cannot cover the policy owner immediately, and cannot make contract
modifications without the insurance company's approval.
What can an agent appointed to represent property and liability insurers do? Correct Answer:
Granted authority set forth in the agency agreement. May bind their companies for a client's
coverage. Can be done orally or contractually.
Study Questions with 100% Correct Answers)
What is the definition of "risk"? Correct Answer: the possibility of loss.
Types of hazards? Correct Answer: Physical, attitudinal (carelessness), and moral.
How do insurance companies measure probabilities? Correct Answer: By observing large
numbers (mass) of similar (homogeneous) exposures in the statistical group from which they
make their estimate.
What is the definition of "particular risk"? Correct Answer: Loss possibilities that affect only
individuals or small groups of individuals at the same time
What is the definition of "fundamental risk"? Correct Answer: Loss possibilities that can affect
large segments of society at the same time.
What is the definition of "pure risk"? Correct Answer: Loss or no loss
What is the definition of "speculative risk"? Correct Answer: Possibility of loss, no loss, or gain
Pure risk categories include? Correct Answer: Risks involving the person, risks involving loss of
or damage to property, and risks involving liability for injury or damage to persons or the
property of others.
5 requirements that a risk must meet? Correct Answer: Important, accidental nature, calculable,
definite, and cannot be excessively catastrophic.
What is an indirect loss? Correct Answer: Lost profits following a direct loss.
3 factors that add to the costs of risks? Correct Answer: Fear and worry, inadequate preparation,
and expenses of managing risks.
Insurance can be defined from the following viewpoints? Correct Answer: Economic, legal,
business, social, and actuarial.
Economic viewpoint of insurance? Correct Answer: Insurance reduces risk by transferring risks
to an insurer, who combines policy owners' potential losses
Legal viewpoint of insurance? Correct Answer: Insurance transfers risk by the terms of a
contract
Business viewpoint of insurance? Correct Answer: Insurance is a financial institution
specializing in the treatment of risk
,Social viewpoint of insurance? Correct Answer: Insurance pools losses by using group
members' contributions to pay losses suffered by some group members.
Actuarial viewpoint of insurance? Correct Answer: Insurance predicts and distributes losses
using actuarial estimates based on principles of probability.
Common elements of insurance? Correct Answer: Risk transfer, Risk spreading,
indemnification, ability to make reasonable estimates of future losses, ability to express losses in
definite amounts, and possibility of adverse, random events occurring outside insured's control.
The cost of insurance include? Correct Answer: Operating costs, insurer profits, opportunity
costs, possible increased losses, and adverse selection.
Individual insurance underwriting typically requires the individual to show ...? Correct Answer:
Evidence of insurability.
What is a peril? Correct Answer: Cause of loss.
What is a hazard? Correct Answer: Acts or conditions that increase the chance or amount of loss
caused by a peril.
Moral hazards are...? Correct Answer: Dishonest tendencies.
To use a probability to measure risk, what is needed? Correct Answer: A large number of
similar exposures would be needed.
Can pure loss be effectively hedged against? Correct Answer: No
What is adverse selection? Correct Answer: 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.
Employees covered under group insurance receive what as evidence of their coverage? Correct
Answer: Certificate of insurance.
Risk management goals include? Correct Answer: Survival, peace of mind, lower costs (or
higher net income), stable earnings, minimal interruption of business operations or personal life,
continued growth, and satisfaction of social responsibility with a good public image.
A risk manager has full responsibility in the property and liability area for...? Correct Answer:
identifying and evaluating risks, selecting insurers, approving insurance renewals and amounts,
negotiating insurance rates, seeking competitive insurance bids, keeping insurance records,
choosing deductibles, and handling insurance claims
,A risk manager shares responsibility for...? Correct Answer: Deciding whether or not to insure
or retain (including self-insuring) financial risks, selecting insurance agents and brokers,
instituting safety programs, and reviewing contracts other than insurance.
Deductibles lower insurance premiums by eliminating ...? Correct Answer: The relatively high
claims costs associated with small losses.
Family or business retained risks are commonly financed by...? Correct Answer: Absorption in
current operating expenses or family budgets, and emergency funding and reserves. Business'
also employ self-insurance through a formal program of risk retentions and captive
insurers(separate subsidiary insurance companies established to write the parent company's
insurance).
An insurer receives income from...? Correct Answer: Premiums (or insurance payments from
policy owners), investment earnings, and other income.
The uses for income (that an insurer receives)? Correct Answer: Covered losses, the cost of
doing business, or expenses, and profits (which may be used to pay dividends or held as retained
earnings)
The probability of loss is expressed algebraically in a fraction whose numerator is ...? Correct
Answer: The total number of all possible outcomes
Three building blocks of an insurance program? Correct Answer: social insurance, employer-
sponsored insurance, and individual insurance.
What is the social insurance? Correct Answer: a floor of protection against certain perils.
Example is social security.
What is employer-sponsored insurance? Correct Answer: various insurance programs made
available at work.
What is individual insurance? Correct Answer: fill in coverage gaps left by social insurance and
employer-sponsored insurance and increase total coverage amounts to the necessary levels.
The four steps in the risk management process are...? Correct Answer: Identification,
measurement, choice and use of methods to treat each identifiable risk, and administration
The four methods of risk identification are...? Correct Answer: survey forms, financial statement
analysis, personal inspections, and contract analysis.
Survey forms are...? Correct Answer: focuses on risk detection, identification, and classification.
A review of insurance priorities assumes ...? Correct Answer: for each of the pure risks that have
been identified and measured in the risk management process, insurance will be used if it is
available.
, Insurance coverages are group into these priority categories...? Correct Answer: essential,
desirable, available, and each insurance coverage is compared with the other available techniques
for treating the particular risk.
Risk management process? Correct Answer: risk identification, measure the risks associated
with the various loss exposures they identify, evaluate both the suitability and the cost of various
methods of treating their pure risks, and (finally) purchase insurance.
Self-insurance is generally appropriate only for....? Correct Answer: large business' that can act
like an insurance company for their own risk
For an insurance company to operate in the long-run...? Correct Answer: premiums plus
investment earnings plus other income must equal losses, expenses, and profits.
The law of large numbers...? Correct Answer: As the number of independent events increase,
there is a greater chance that the actual results will be close to the expected results.
Each risk can be measured in terms of...? Correct Answer: frequency, severity, and variation
Both stock and mutual insurance companies are what type of company? Correct Answer:
corporations
The most important reason for demutualization? Correct Answer: Raise capital quickly
The second most important reason for demutualization? Correct Answer: enables the insurance
company to diversify its activities by acquiring other insurers or other types of financial
institutions through the issuance or exchange of stock.
The last important reason for demutualization? Correct Answer: facilitates payment of certain
types of non cash compensation to the insurance company's key executives and board members
What are the disadvantages to demutualization? Correct Answer: time, cost, complexity due to
regulatory, tax, legal, and accounting problems to overcome. Policyowners must be compensated
adequately for loss of their ownership rights. As a stock company, the insurer might become
vulnerable to a hostile takeover. Demutualization requires the company to admit an explicit
profit motive.
What is a life insurance agent's authority? Correct Answer: Limited ability to accept business or
bind the coverage, cannot cover the policy owner immediately, and cannot make contract
modifications without the insurance company's approval.
What can an agent appointed to represent property and liability insurers do? Correct Answer:
Granted authority set forth in the agency agreement. May bind their companies for a client's
coverage. Can be done orally or contractually.
