Chapter 1

QUESTION 1.Within the realm of Risk Management, insurance is a technique that is often used. When insurance is used it isprimarily attempting to a. Isolate the cost of losses. b. Prevent the cost of losses. c. Reduce the cost of losses. d. Transfer the cost of losses. ANSWER D QUESTION 2.When insurance is used to transfer possible losses to the insurer, the vehicle that accomplishes this transfer is the a. Policy. b. Agent. c. Letter of transfer. d. Broker of record letter. ANSWER A QUESTION 3.An insurance policy is a contract that states the rights and duties of a. The insured and insurer and agent. b. The insured and the insurer. c. The insured and the agent. d. The insured and other third parties. ANSWER B QUESTION 4.Transferring the costs of losses to an insurer would be unnecessary, if there were no a. Exposures to loss. b. Civil courts. c. Agents. d. Reinsurance. ANSWER A QUESTION 5.Making a profit for the insurance company is a major objective for which one of the following departments? a. Underwriting department b. Finance department c. Marketing department d. Claims department ANSWER A QUESTION 6.An insurance company pays for covered losses and, in effect, distributes the costs of losses among all a. Insurers in a state. b. Insureds. c. Members of society. d. Claimants. ANSWER B QUESTION 7.All of the following statements regarding loss exposures are true, EXCEPT: a. There would be no need to transfer the costs of losses if there were no exposures to loss. b. For a loss exposureto exist, there must be the possibility of a loss. c. It is necessary for a loss to occur for a loss exposure to exist. d. Every home has a fire loss exposure ANSWER C QUESTION 8.The law of large numbers is a mathematical principle that states that as the number of similar but independent exposure units increases, the relative a. Accuracy of predictions about future outcomes decreases. b. Accuracy of predictions about future outcomes increases. c. Frequency of predictions about future outcomes decreases. d. Frequency of predictions about future outcomes increases. ANSWER B QUESTION 9.In order for the law of large numbers to operate, insurance companies need to insure a. A large number of similar exposure units. b. Exposure units that are widely dispersed. c. Exposure units that have not had losses. d. A large number of unique exposure units. ANSWER A QUESTION

10.What states that as the number of similar but independent units increases, the relative accuracy of predictions about future outcomes based on these exposure units also increases? a. The principle of indemnity b. The principle of reciprocal pricing c. Loss trending and forecasting d. The law of large numbers ANSWER D QUESTION 11.John has worked for Alloto, Inc. for 25 years and is considering retiring within the next two years. John's retirement is an example of a. A personnel loss exposure for Alloto, Inc. b. A human loss exposure for Alloto, Inc. c. A liability loss exposure for Alloto, Inc. d. A loss transfer loss exposure for Alloto, Inc. ANSWER A QUESTION 12.Pam operates a home business that requires her clients to come to her house. The possibility of one of Pam'sclients tripping on a step leading to Pam's house and injuring herself is a a. Property loss exposure. b. Liability loss exposure. c. Personnel loss exposure. d. Human loss exposure. ANSWER B QUESTION 13.The possibility of Chuck's house being damaged by fire is a. A property loss exposure relating to real property. b. A property loss exposure relating to personal property. c. A noninsurable loss exposure. d. A commercial loss exposure. ANSWER A OBJECTIVE 4QUESTION 14.All of the following are characteristics of ideally insurable loss exposures, EXCEPT: a. Losses that are definite and measurable b. Losses that are accidental c. Large number of similar exposure units d. Large concentration of financial capacity ANSWER D QUESTION 15.Which one of the following is most likely to have the characteristics of an ideally insurable loss exposure? a. Explosion of an industrial factory steam boiler b. Sun damage to an exterior paint finish c. Physical damage to a lunar land roverd d. Termite damage to a home ANSWER A QUESTION 16.One of the major reasons why government insurance programs exist is because the insurance may a. Not be available from private insurers. b. Be too complicated for private insurers to write. c. Not be allowed to be written by private insurers. d. Be a significant source of revenue for the government. ANSWER A ( pp. 1.11-1.12)QUESTION 17.All of the following are types of insurance provided by the federal government, EXCEPT: a. Flood insurance b. Crop insurance c. Tenants insurance d. Social Security ANSWER C ( p. 1.11)QUESTION 18.Government insurance programs exist because a. The government has expertise in handling insurance claims. b. The government has the necessary financial resources. c. The government has infrastructure and staff to provide insurance. d. The government has legal representatives in every state of the union. ANSWER B ( p. 1.11)OBJECTIVE QUESTION 19.The department in an insurance company that is primarily concerned with determining customer's needs and then promoting products/services to meet those needs is the a. Customer service department.

b. Underwriting department. c. Public relations department. d. Marketing department. ANSWER D

( pp. 1.12-1.13) QUESTION 20.What is the process by which insurers decide which potential customers to insure and what coverage to offer them? a. Reinsuring b. Marketing c. Prospecting d. Underwriting ANSWER D ( p. 1.13)OBJECTIVE QUESTION 21.The primary reason why insurance regulators monitor the financial condition of insurers is to prevent a. Poor customer service. b. Unfair competition. c. Increased Premiums. d. Insolvency. ANSWER D ( p. 1.14) QUESTION 22.All of the following are ways that state insurance departments regulate and protect consumers, EXCEPT: a. Insurers must maintain a certain ratio of agents to residents in an area b. Insurers must be licensed to write insurance policies in a given state c. Insurers must meet certain tests of financial strength d. Insurers must comply with laws on marketing, underwriting, and claims practices ANSWER A ( p. 1.14)OBJECTIVE QUESTION 23.In insurance, the term that means restoring a party who has had a covered loss to the same financial position that the party held before the loss occurred is a. Subrogate. b. Recoup. c. Indemnify. d. Rectify. ANSWER C ( p. 1.15)QUESTION 24.Joan Appleton has purchased a new car, and when registering her vehicle, she is told that she must provide proof of liability insurance. Which one of the following benefits of insurance applies to Joan's situation? a. Support for credit b. Satisfaction of legal requirements c. Efficient use of resources d. Reduction of social burdens ANSWER B ( p. 1.17)OBJECTIVE QUESTION 25.One of the costs of insurance is said to be opportunity costs. This means that if capital and labor were not being used in the insurance business, they could be used elsewhere and making other productive contributions to a. Society. b. The insurance industry. c. The agency system. d. Government. ANSWER A ( p. 1.18)QUESTION 26.Sometimes the existence of insurance encourages losses. The result of this phenomenon is that it a. Increases competition in the industry. b. Reduces agents' commissions. c. Increases the total cost of insurance. d. Reduces the term of many policies. ANSWER C ( pp. 1.18-1.19) QUESTION 27.The direct and indirect costs of insurance include which of the following? a. Premiums paid by insureds b. Increased lawsuits c. Operating costs of insurers d. All of the above

ANSWER D ( p. 1.18)OBJECTIVE QUESTION 28.Another name for liability insurance is a. First party insurance. b. Second party insurance. c. Third party insurance. d. Multiple party insurance. ANSWER C ( pp. 1.21-1.22) QUESTION 29.All of the following are types of property insurance, EXCEPT: a. Fire and allied lines b. Crime c. Business income d. Directors and officers ANSWER D ( p. 1.20)QUESTION 30.Willie's floral shop was damaged by fire and the business was closed for six months. Willie had property insurance to cover the fire damage, but which one of the following types of coverage did he need to cover his loss of net income during the six-month restoration period? a. Crime insurance b. Fire and allied line insurance c. Business income insurance d. Leasehold insurance ANSWER C ( p. 1.21)OBJECTIVE QUESTION 31.A small business owner concerned about something happening and not being able to work or earn a living for an extended period of time should purchase a. Personal liability insurance. b. Medical insurance. c. Disability insurance. d. Universal life insurance. ANSWER C ( pp. 1.23-1.24) QUESTION 32.Term life insurance a. Provides lifetime protection. b. Accrues a cash value. c. Provides maximum protection for the lowest cost. d. Allows the policyholder to borrow against policy savings. ANSWER C ( p. 1.23) QUESTION 33.Whole life insurance a. Provides coverage for a specified period such as 5 or 10 years. b. Lapses when the policyholder reaches age 65. c. Is primarily an investment vehicle. d. Accrues a cash value. ANSWER D ( p. 1.23)OBJECTIVE QUESTION 34.Any condition or situation that presents the possibility of a financial loss to an individual or a family by such causes as death, sickness, or injury is referred to as a a. Personal loss exposure. b. Personnel loss exposure. c. Liability loss exposure. d. Medical loss exposure. ANSWER A ( pp. 1.7) QUESTION 35.To restore a party who has sustained a loss to the same financial position that party held before the loss occurredis called a. Reciprocity. b. Reimbursement. c. Insurance. d. Indemnification. ANSWER D ( p. 1.15) QUESTION

36.Life insurance that provides coverage for a specified period with no cash value is called a. Universal life. b. Term insurance. c. Whole life. d. Long-term care insurance. ANSWER B