SAMPLE EXAM 1a

SAMPLE EXAM 1 1. Insurance authors have traditionally defined risk as a. Any situation in which the probability of loss is zero. b. Any situation in which the probability of loss is one. c. Uncertainty concerning the occurrence of loss. d. The probability of a loss occurring. Answer: c 2. Uncertainty based on a person’s mental condition or state of mind is known as a. Objective risk. b. Objective probability. c. Subjective probability. d. Subjective risk. Answer: d 3. A peril is a. The cause of a loss b. A condition that increases the chance of a loss c. The probability that a loss will occur d. A moral hazard Answer: a 4. Dense fog that increases the chance of an automobile accident is an example of a a. Physical hazard b. Moral hazard c. Peril d. Speculative risk Answer: a 5. Indifference to loss because of the existence of insurance is an example of a a. Physical hazard b. Morale hazard c. Objective probability d. Moral hazard Answer: b

6. All of the following are programs to insure fundamental risks EXCEPT a. Automobile physical damage insurance b. Federally subsidized flood insurance c. Unemployment compensation d. Social Security Answer: a 7. All of the following are examples of personal risks EXCEPT a. Inflation b. Unemployment c. Poor health d. Premature death Answer: a 8. All of the following are examples of direct property losses EXCEPT a. The expense to rent a substitute vehicle while a collision-damaged car is repaired b. The destruction of a firm’s manufacturing plant by an earthquake c. The theft of a person’s jewelry d. The vandalism of a person’s automobile Answer: a 9. For the insured, the use of deductibles in insurance contracts is an example of a. Loss control b. Risk retention c. Risk avoidance d. Risk transfer Answer: b 10. Curt borrowed money to purchase a fishing boat. He purchased property insurance on the boat. Curt had difficulty making loan payments because he did not catch many fish, and fish prices were low. Curt intentionally sunk the boat, collected from his insurer, and paid off the loan. This scenario illustrates the problem of a. Adverse selection b. Moral hazard c. Morale hazard d. Fundamental risk Answer: b

11. All of the following are characteristics of insurance EXCEPT a. Risk avoidance b. Indemnification c. Pooling of losses d. Payment of fortuitous losses Answer: a 12. 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. b. c. d.

I only II only Both I and II Neither I nor II Answer: b

13. From the standpoint of the insurer, all of the following are characteristics of an insurable risk EXCEPT a. The loss must be unintentional b. The loss must be measurable c. The loss must be indeterminable d. The chance of loss must be calculable Answer: c 14. Which of the following types of risks is normally uninsurable by private insurers? a. Liability risks b. Personal risks c. Property risks d. Market risks Answer: d 15. The tendency for unhealthy people to seek life or health insurance at standard rates is an example of a. Morale hazard b. Adverse selection c. Moral hazard d. Fundamental risk Answer: b

16. All of the following are benefits to society that result from insurance EXCEPT a. Elimination of moral hazard b. Indemnification for loss c. Less worry and fear d. Loss prevention Answer: a 17. A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that the farmer sustained. Which characteristic of insurance is embodied in this agreement? a. Expense loading b. Risk avoidance c. Pooling of losses d. Underwriting Answer: c 18. LMN Insurance markets homeowners insurance. The LMN homeowners policy combines property and casualty insurance in the same contract. Insurance policies combining property and casualty coverage in the same contract are called a. Manuscript policies b. Multiple-line policies c. Mono-line policies d. Multi-year policies Answer: b 19. JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 20,000 homeowners this year? a. The average size of loss should decline in value b. The total number of claims filed by JKL policyowners should decrease c. The actual results will more closely approach the expected results d. The total dollar value of claims settled should decrease Answer: c

20. Apex Insurance Company wrote a large number of property insurance policies in an area where earthquake losses could occur. When the president of Apex was asked if she feared that a catastrophic earthquake might put the company out of business, she responded, “Not a chance. We transferred most of that risk to other insurance companies.” The shifting of part or all of the insurance originally written by one insurance company to another insurance company is called a. Speculating b. Reinsurance c. Hedging d. Loss avoidance Answer: b 21. Which of the following types of loss exposures may be appropriately handled through the purchase of insurance? I. High-frequency, low-severity II. Low-frequency, high-severity a. b. c. d.

I only II only Both I and II Neither I nor II Answer: b

22. Which of the following types of loss exposures are best met by the use of avoidance? a. High-frequency, low-severity b. High-frequency, high-severity c. Low-frequency, high-severity d. Low-frequency, low-severity Answer: b 23. Anne, who is self-employed, is the main breadwinner for her family. Anne does not have disability income insurance because she has never stopped to consider the impact of a long-term disability upon her family. Anne’s treatment of the risk of disability is best described as a. Risk avoidance b. Active retention c. Risk transfer d. Passive retention Answer: d

24. Ryan decided to review his personal risk management program. His car is ten years old and he would receive little from his insurer if the car were damaged or stolen. Ryan decided to drop the physical damage insurance on the car. From a risk management perspective, dropping physical damage insurance on the car is best described as a. Increasing the use of noninsurance transfer in the risk management program b. Increasing the use of retention in the risk management program c. Increasing the use of risk control in the risk management program d. Increasing the use of avoidance in the risk management program. Answer: b 25. Brenda listed all the pure-loss exposures her family faces. Then she analyzed these loss exposures and developed a plan to treat these risks. The process Brenda engaged in is called a. Personal estate planning b. Personal financial planning c. Personal insurance programming d. Personal risk management Answer: d 26. All of the following are exceptions to the principle of indemnity EXCEPT a. Replacement cost property insurance b. Actual cash value property insurance c. Valued policies d. Life insurance Answer: b 27. Under which of the following rules is actual cash value determined by taking into consideration all relevant factors an expert would use to determine the value of the property? a. The broad evidence rule b. The property indemnity rule c. The objective value rule d. The circumstantial evidence rule Answer: a

28. All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT a. Ownership of illegal drugs b. A contract right c. A creditor-debtor relationship d. Potential legal liability Answer: a 29. Sue’s office building was damaged by a fire caused by a careless tenant. After paying Sue for her loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of a. Subrogation b. Insurable interest c. Utmost good faith d. Indemnity Answer: a 30. What is the legal significance of a material concealment by an insurance applicant? a. Loss payments are reduced by the degree of the concealment b. The contract is voidable at the insurer’s option c. The contract is automatically voided from its inception d. The insurer is immediately entitled to a higher premium Answer: b 31. David, who lives in an apartment in a high-crime area, purchased an expensive car. In order to obtain physical damage insurance, David promised to park the car in a garage that had a 24-hour security guard. This agreement, which was incorporated into the insurance contract, is an example of a a. Warranty b. Contract of adhesion c. Representation d. Unilateral contract Answer: a

32. A contract in which the values exchanged are not equal because chance is involved is called a(n) a. Conditional contract b. Contract of adhesion c. Aleatory contract d. Unilateral contract Answer: c 33. Why are insurance contracts described as “contracts of adhesion”? a. One party writes the contract, and the other party must accept the contract as written b. Only one party makes a legally enforceable promise c. The values exchanged are not equal d. Conditions are placed on the insurer’s promise to perform Answer: a 34. Janice purchased a living room set for $1,000 and insured this furniture on an actual cash value basis. Two years later the living room set was destroyed by a covered peril. At the time of loss, the property had depreciated in value by 25 percent. The replacement cost of the furniture at the time of loss was $1,200. Assuming no deductible, how much will Janice receive from her insurer? a. $900 b. $1,200 c. $1,000 d. $950 Answer: a 35. Mark owns a bar. The bar has a back room in which mark has some slot machines and video poker games. Mark lets some of his patrons play these games, and Mark keeps any profits. This type of gambling is illegal where Mark lives. Mark wanted to purchase insurance on this equipment in case it was confiscated by the police. Such an insurance contract would not be enforceable. Which requirement necessary to form an enforceable insurance contract would be missing? a. Consideration b. Competent parties c. Legal purpose d. Offer and acceptance Answer: c

36. The portion of a property and liability insurance contract that contains information about the property to be insured is called the a. Insuring agreement b. Conditions c. Declarations d. Exclusions Answer: c 37. Deductibles are used in all of the following types of insurance EXCEPT a. Property insurance b. Health insurance c. Automobile insurance d. Life insurance Answer: d 38. All of the following are purposes of deductibles EXCEPT a. To reduce morale hazard b. To reduce premiums c. To eliminate small claims d. To exclude uninsurable perils Answer: d 39. Kate is covered under her employer’s group health plan. She is also covered as a dependent under her husband’s group health plan. Under the usual coordination-ofbenefits provision, how will each company respond to a claim filed by Kate? a. Each plan will pay 50 percent of the claim b. Kate’s plan is primary, and her husband’s plan is excess c. The plan of the person whose birthday is earliest in the year will pay first, and the other plan is excess d. Her husband’s plan is primary, and Kate’s plan is excess Answer: b

40. Janet hit a wall in a parking garage causing a large dent in the fender of her car. She was busy and delayed reporting the damage to her insurer for nine months. The insurer denied the claim, stating, “although such a loss is usually covered, you are required to provide prompt notification of loss.” The prompt notification requirement is an example of a(n) a. Insuring agreement b. Definition c. Condition d. Declaration Answer: c 41. Mark reviewed his homeowners policy. He learned that his personal property was insured on an actual cash value basis. He would like replacement cost coverage on the property. He contacted his agent who said, “I’ll simply add an amendment to your contract that changes the basis of recovery to replacement cost.” The written provision the agent was referring to is called a(n) a. b. c. d.

Coinsurance clause Endorsement Other insurance provision Deductible Answer: b

42. Under the terms of Jenny’s auto insurance policy, she must pay the first $500 of any physical damage loss to her vehicle before her insurer will pay anything. What type of deductible is included in Jenny’s auto insurance policy? a. Corridor deductible b. Calendar-year deductible c. Aggregate deductible d. Straight deductible Answer: d 43. Shauna hurt her back and could not work. She filed a claim under her disability insurance policy. Under the policy, 60 days must pass between the date of injury and when the insurer begins to replace lost earnings. The 60-day period is called a(n): a. Elimination (waiting) period b. Probationary period c. Grace period d. Enrollment period Answer: a

44. ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies? a. $35,000 b. $40,000 c. $33,333 d. $36,000 Answer: a 45. All of the following statements about the characteristics of social insurance programs are true EXCEPT: a. They are desibned to provide a floor of income with respect to the risks which are covered. b. The method of determining benefits is prescribed by law. c. Participants are required to satisfy a means test to receive benefits. d. With few exceptions, social insurance programs are compulsory. Answer: c 46. As of this year, Brad, age 50, has 40 credits under the Social Security program. These credits were all earned in the last 10 years. What is Brad’s insured status under the program? a. He is currently and fully insured. b. He is currently insured, but not fully insured. c. He is fully insured, but not currently insured. d. He is neither currently insured nor fully insured. Answer: a 47. Objectives of unemployment insurance include which of the following: I. To help unemployed workers find jobs. II. To encourage employers to stabilize employmenet. a. b. c. d.

I only II only Both I and II Neither I nor II Answer: c

48. Prior to the establishment of workers compensation laws, an employer could use all of the following defenses to block an injured worker’s claim for benefits EXCEPT: a. The contributory negligence doctrine b. The fellow-servant doctrine c. The employer liability doctrine d. The assumption-of-risk doctrine Answer: c 49. Frank is doing some life insurance planning. A financial advisor said, “be sure to consider Social Security when examining sources of funds available for family support if you die.” The financial advisor was referring to which Social Security benefit? a. Retirement benefits b. Survivor benefits c. Disability benefits d. Health insurance benefits Answer: b 50. Beth was injured at work and is eligible to receive workers compensation benefits. All of the following benefits are provided under workers compensation EXCEPT a. Disability income b. Retirement benefits c. Rehabilitation d. Medical care Answer: b