CFP 512 TESTING QUESTIONS AND ANSWERS WITH
COMPLETE SOLUTIONS VERIFIED GRADED A++
Which of the following statements regarding the principles of risk and insurance
are CORRECT?
1. Risk is a condition in which there is a possibility of an adverse result from the
expected desired outcome.
2. A hazard is the cause of a financial loss and is the actual event for which the
individual purchases insurance.
3. A peril is a condition that increases the probability that a financial loss will
occur.
4. Pure risk involves only the chance of loss or no loss.
1 and 4
Risk is the condition in which there is a possibility of an adverse result from the
expected desired outcome. A peril is the cause of a financial loss, and a hazard is a
condition that increases the chance of financial loss. Pure risk is the risk that only
involves the chance of loss or no loss.
Which of the following statements best describes a morale hazard?
A)
An unintentional tort in the form of an action or omission that leads to the injury
,of another party
B)
A condition of carelessness or indifference on the part of an individual as to
whether a loss occurs and/or the size of a loss if one does occur
C)
A false and material statement made by an applicant for insurance, providing a
basis for the insurer to void the contract
D)
An act or condition that increases the likelihood of the occurrence of a peril
and/or increases the severity of a loss if a peril does occur
B
A morale hazard is a condition of carelessness or indifference as to whether a loss
occurs and/or the size of a loss if one does occur. A homeowner's failure to lock the
house doors at night is considered a morale hazard because it increases the probability
of theft or loss.
Which of the following are methods of managing risk?
Avoidance
Retention
Reduction
Transfer
All of the above
All of these are risk management techniques. Avoidance and reduction are methods of
risk control. Retention and transfer are methods of risk financing.
,Which of the following statements regarding self-insurance by a business is
CORRECT?
The organization should have enough homogeneous exposure units to make
losses unpredictable.
B)
The self-insurer must be able to competently manage the investment of the self-
insurance fund.
C)
Self-insurance is a method of risk transfer.
D)
Most firms are good candidates for self-insurance.
The self-insurer must be able to competently manage the investment of the self-
insurance fund. Relatively few firms are good candidates for self-insurance, which is a
method of risk retention. The organization that self-insures should have enough
homogeneous exposure units to make losses somewhat predictable.
Which of the following is the role of the legislative branch in regulating the
insurance industry within a state?
A)
Passing laws relative to the insurance industry
B)
Creating model legislation relative to the insurance industry
, C)
Interpreting and applying the laws in place relative to the insurance industry
D)
Enforcing the laws in place relative to the insurance industry
The answer is passing laws relative to the insurance industry. The legislative branch
votes on and passes laws relative to the insurance industry. These laws are enforced by
the executive branch, and disputes concerning the interpretation or application of the
law is handled by the judicial branch. The National Association of Insurance
Commissioners provides model legislation that may or may not be enacted by the
several states.
An insurance contract requires an exchange of value to be considered a legally
binding document. What is the term used to describe this requirement?
A)
Legal form
B)
Legal object
C)
Legal capacity
D)
Consideration
The answer is consideration. Consideration occurs when there is an exchange of value.
The insurance contract requires an exchange of value to be legally binding. For most
insurance, the promise to pay the premium is usually sufficient consideration to make
COMPLETE SOLUTIONS VERIFIED GRADED A++
Which of the following statements regarding the principles of risk and insurance
are CORRECT?
1. Risk is a condition in which there is a possibility of an adverse result from the
expected desired outcome.
2. A hazard is the cause of a financial loss and is the actual event for which the
individual purchases insurance.
3. A peril is a condition that increases the probability that a financial loss will
occur.
4. Pure risk involves only the chance of loss or no loss.
1 and 4
Risk is the condition in which there is a possibility of an adverse result from the
expected desired outcome. A peril is the cause of a financial loss, and a hazard is a
condition that increases the chance of financial loss. Pure risk is the risk that only
involves the chance of loss or no loss.
Which of the following statements best describes a morale hazard?
A)
An unintentional tort in the form of an action or omission that leads to the injury
,of another party
B)
A condition of carelessness or indifference on the part of an individual as to
whether a loss occurs and/or the size of a loss if one does occur
C)
A false and material statement made by an applicant for insurance, providing a
basis for the insurer to void the contract
D)
An act or condition that increases the likelihood of the occurrence of a peril
and/or increases the severity of a loss if a peril does occur
B
A morale hazard is a condition of carelessness or indifference as to whether a loss
occurs and/or the size of a loss if one does occur. A homeowner's failure to lock the
house doors at night is considered a morale hazard because it increases the probability
of theft or loss.
Which of the following are methods of managing risk?
Avoidance
Retention
Reduction
Transfer
All of the above
All of these are risk management techniques. Avoidance and reduction are methods of
risk control. Retention and transfer are methods of risk financing.
,Which of the following statements regarding self-insurance by a business is
CORRECT?
The organization should have enough homogeneous exposure units to make
losses unpredictable.
B)
The self-insurer must be able to competently manage the investment of the self-
insurance fund.
C)
Self-insurance is a method of risk transfer.
D)
Most firms are good candidates for self-insurance.
The self-insurer must be able to competently manage the investment of the self-
insurance fund. Relatively few firms are good candidates for self-insurance, which is a
method of risk retention. The organization that self-insures should have enough
homogeneous exposure units to make losses somewhat predictable.
Which of the following is the role of the legislative branch in regulating the
insurance industry within a state?
A)
Passing laws relative to the insurance industry
B)
Creating model legislation relative to the insurance industry
, C)
Interpreting and applying the laws in place relative to the insurance industry
D)
Enforcing the laws in place relative to the insurance industry
The answer is passing laws relative to the insurance industry. The legislative branch
votes on and passes laws relative to the insurance industry. These laws are enforced by
the executive branch, and disputes concerning the interpretation or application of the
law is handled by the judicial branch. The National Association of Insurance
Commissioners provides model legislation that may or may not be enacted by the
several states.
An insurance contract requires an exchange of value to be considered a legally
binding document. What is the term used to describe this requirement?
A)
Legal form
B)
Legal object
C)
Legal capacity
D)
Consideration
The answer is consideration. Consideration occurs when there is an exchange of value.
The insurance contract requires an exchange of value to be legally binding. For most
insurance, the promise to pay the premium is usually sufficient consideration to make
