Principles of Risk Management and Insurance, 11e (Rejda) Chapter 2 Insurance and Risk
1) All of the following are characteristics of insurance EXCEPT A) risk avoidance. B) pooling of losses.
C) payment of fortuitous losses. D) indemnification. Answer: A
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2) Which of the following is implied by the pooling of losses? A) sharing of losses by an entire group
B) inability to predict losses with any degree of accuracy C) substitution of actual loss for average loss D) increase of objective risk Answer: A
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3) According to the law of large numbers, what happens as the number of exposure units increases?
A) Actual results will increasingly differ from probable results. B) Actual results will more closely approach probable results. C) Nondiversifiable risk will decrease. D) Objective risk will increase. Answer: B
Question Status: Revised
4) According to the law of large numbers, what should happen as an insurer increases the number of units insured?
A) The amount the insurer expects to pay in claims should decrease.
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B) Underwriting expenses should decrease.
C) Actual results will more closely approach expected results. D) The insurer's profitability should become more variable. Answer: C
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5) Characteristics of a fortuitous loss include which of the following? I. The loss is certain to occur.
II. The loss occurs as a result of chance. A) I only B) II only C) both I and II D) neither I nor II Answer: B
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6) From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT A) The loss must be accidental. B) The loss should be catastrophic.
C) The premium must be economically feasible. D) There must be a large number of exposure units. Answer: B
Question Status: Revised
7) From the standpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT A) The loss must be unintentional. B) The chance of loss must be calculable. C) The loss must be indeterminable. D) The loss must be measurable. Answer: C
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Question Status: Revised
8) Why is a large number of exposure units generally required before a pure risk is insurable?
A) It prevents the insurer from losing money. B) It eliminates intentional losses. C) It minimizes moral hazard.
D) It enables the insurer to predict losses more accurately. Answer: D
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9) The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following? I. Decrease in moral hazard
II. More accurate prediction of future losses A) I only B) II only C) both I and II D) neither I nor II Answer: C
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10) Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable? I. The loss must be definite as to place. II. The loss must be definite as to amount. A) I only B) II only C) both I and II D) neither I nor II Answer: C
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11) Methods by which insurers may minimize or avoid catastrophic losses include which of the following? I. The use of reinsurance
II. Concentrating coverage written in one geographic region A) I only B) II only C) both I and II D) neither I nor II Answer: A
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12) Which of the following types of risks best meets the requirements for being insurable by private insurers? A) market risks B) property risks C) financial risks D) political risks Answer: B
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13) Reasons why market, financial, and production risks are often uninsurable include which of the following?
I. The potential to produce a catastrophic loss is great. II. The chance of loss cannot be accurately estimated. A) I only B) II only C) both I and II D) neither I nor II Answer: C
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