LOMA 281 Module 1 Lesson 1 - Risk and Insurance -questions with answers, Exams of Insurance law

Download LOMA 281 Module 1 Lesson 1 - Risk and Insurance -questions with answers and more Exams Insurance law in PDF only on Docsity! LOMA 281 Module 1 Lesson 1 - Risk and Insurance -questions with answers Risk - ANSWER: ✔✔The Possibility of an unexpected result; could be a loss or gain Speculative Risk - ANSWER: ✔✔3 possible outcomes: Loss, gain, or no change ex. buying stock Pure Risk - ANSWER: ✔✔No possibility of a gain ex. people dying after they buy stock Is speculative or pure risk insured? - ANSWER: ✔✔Only pure risk Steve is too nervous about losing money in the stock market, so he doesnt invest in stocks. This is an example of - ANSWER: ✔✔Avoiding Risk Mark uses a laptop computer in his business. If he loses the laptop or accidentally damages it, Mark will have to purchase another one or pay to replace it. This is an example of - ANSWER: ✔✔Accepting Risk To reduce the likelihood of fire destroying her convenience store, Rebecca installed smoke detectors and a sprinkler system. This is an example of - ANSWER: ✔✔Controlling Risk Conrad purchased a disability income insurance policy to provide for his family in case he becomes sick or injured and cant work. This is an example of - ANSWER: ✔✔Transferring Risk Insurance - ANSWER: ✔✔Method for transferring risk from an individual to an insurance company Policy Benefit - ANSWER: ✔✔A specific amount of money the insurer agrees to pay under an insurance policy when a specific loss occurs. Premium - ANSWER: ✔✔A specific sum of money paid by the insured to the insurance company in exchange for financial protection against loss. Life Insurance - ANSWER: ✔✔insurance that pays out a sum of money either on the death of the insured person or other events such as terminal illness or critical illness can also trigger payment. Life insurance protects against ___ of a deceased person - ANSWER: ✔✔1. Lost Future Income 2. Funeral Expenses 3. Final Medical Expenses 4. Unpaid Debts Risk Pooling - ANSWER: ✔✔Organizing people into a group to collectively absorb the risk faced by each individual Annuity - ANSWER: ✔✔Can be purchased if you outlive your assets. Receiving a promise of periodic payments for a set period or for life. Example of annuity - ANSWER: ✔✔Vlad might purchase an annuity that will provide monthly payments of $1000 to him for 20 years, with the understanding that if he lives another 30 years, he will have to survive 10 years without that source of income. Or he might purchase an annuity that provides monthly recurring payments of $500 for the rest of his life, regardless of how long he lives Micah wants to provide her family with a source of income that they can use if she dies. This is an example of - ANSWER: ✔✔Life Insurance Micah wants to make sure that he has a monthly income once he retires. This is an example of - ANSWER: ✔✔Annuity Hector applies for an insurance policy for him and his wife. Who is the applicant, policyowner, insured, beneficiary, and is there a third-party policy? - ANSWER: ✔✔For Hectors life: must be able to predict the probably rate of loss that a group of insureds will experience otherwise they wouldnt know how much to charge each person for the coverage. Law of Large Numbers - ANSWER: ✔✔A principle stating that the larger the number of similar exposure units considered, the more closely the losses reported will equal the underlying probability of loss. Probabliity - ANSWER: ✔✔likelihood that a particular event will occur To be insurable, a loss must be either catastrophic or not catastrophic to the insurer? - ANSWER: ✔✔Must NOT be catastrophic to the insurer. Cant have a single event be financially catastrophic to the insurer Reinsurance - ANSWER: ✔✔Insurance that one insurance company, known as the direct writer, purchases from another insurance company, known as the reinsurer, to transfer all or part of the risk on insurance policies that the direct writer has issued. Basically insurance for insurance companies Retention Limit - ANSWER: ✔✔A maximum amount of insurance that an insurer is willing to carry at its own risk without transferring some of the risk to a reinsurer. The direct writer cedes anything above that limit to a reinsurer in a reinsurance transaction or through other risk transfer mechanisms Direct Writer - ANSWER: ✔✔In a reinsurance transaction, the insurance company that purchases reinsurance to transfer all or part of the risks on insurance policies the company issued. Contrast with reinsurer. Also known as ceding company. Reinsurer - ANSWER: ✔✔Insurance company that accepts risks transferred from another insurer in a reinsurance transaction Retrocessionaire - ANSWER: ✔✔Insurance company that accepts risk transferred from another reinsurer in a reinsurance transaction Robert owns a life insurance policy that will pay his named beneficiary $250,000 when robert dies. Is his insurance policy an example of a valued contract or a contract of indemnity? - ANSWER: ✔✔Valued Contract because it states at the time of policy issue the amount of the benefit payable when the insured dies Colonnade insurance company issued a $1 million life insurance policy to Albert. Colonnade transferred $500,000 of the risk to the Fairness Insurance Company. Fairness accepted the $500,000 and then transferred $300,000 of the risk to the Journey Financial Services Company. Who is the direct writer, the reinsurer, and the retrocessionaire? - ANSWER: ✔✔Direct writer: Cololnnade Reinsurer: Fairness Retrocessionaire: Journey Underwriting - ANSWER: ✔✔The process of identifying and classifying the degree of risk represented by a proposed insured Underwriter - ANSWER: ✔✔An insurance company employee who is responsible for evaluating proposed risks. They look for anything that may increase the amount of risk. Things that make them say, "Uh oh" If you were an underwriter, what would you think if you learned that a family history showed a high incidence of heart disease that led to an early death.. Uh oh or no problem - ANSWER: ✔✔Uh-Oh - medical risk factor If you were an underwriter, would would you think if you learned a person was once a convicted felon? Uh-Oh or no problem? - ANSWER: ✔✔Uh-Oh - moral hazard Antiselection - ANSWER: ✔✔The tendency of individuals who believe they have greater-than-average likelihood of loss to seek insurance protection to a greater extent than do other individuals. Ideally insurers want to accept applicants who are low or average risk Harold insurance application indicates that he works on a commercial fishing boat, which is generally regarded as a more dangerous profession than average. Do you think an underwriter would consider Harolds occupation as a risk factor that is likely to increase his likelihood of loss? - ANSWER: ✔✔Yes Risk Class - ANSWER: ✔✔A grouping of insureds who represent a similar level of risk to an insurer. They use this to determine how much to charge each person for coverage What is the purpose of assigning proposed insureds to risk classes - ANSWER: ✔✔To make sure everyone pays a fair amount for their life insurance Standard Risks - ANSWER: ✔✔Proposed insured who has a likelihood of loss that is not significantly greater than average Standard Premium Rates - ANSWER: ✔✔A premium rate charged insureds who are classified as standard risks. Most life insurance policies are issued at this Preferred Risks - ANSWER: ✔✔A proposed insured who represents a significantly lower-than-average likelihood of loss Preferred Premium Rates - ANSWER: ✔✔A lower-than-standard premium rate charged insureds who are classified as preferred risks. Charges are lower than standard premium rates Substandard Risks - ANSWER: ✔✔A proposed insured who has a significantly greater-than-average likelihood of loss but is still found to be insurable Substandard Premium Rates - ANSWER: ✔✔A higher-than-standard premium rate charged insureds who are classified as substandard risks. Charges higher than standard premium rates Declined Risks - ANSWER: ✔✔A proposed insured who is considered to present a risk that is too great for the insurer to cover Non-Insurable Risks - ANSWER: ✔✔Risks faced by a business for which insurance is not available. an ex. someone on death row in prison Jason is in good health and is a test pilot for the military. Some of his maneuvers include flying inverted, rolling the aircraft, and putting the aircraft in a dive. Is this preferred risk, standard risk, substandard risk, or declined risk - ANSWER: ✔✔Declined risk - too risky of an activity have a rate of loss that is unpredictable - ANSWER: ✔✔Be significant (insignificant losses are normally not insurable) Carly Pavin, an underwriter for the Keen Insurance Company, has gathered the following information about Van Gregg, a proposed insured: Fact A: Mr. Gregg is overweight and has high blood pressure Fact B: Mr. Gregg was convicted of tax evasion five years ago From the answer choices below, select the response that correctly indicates whether Ms. Pavin correctly classify as Facts A and B as morla hazards or medical Risk factors Moral hazard / medical risk factor Moral hazard / moral hazard Medical risk factor / moral hazard Medical risk factor / medical risk factor - ANSWER: ✔✔Medical risk factor / moral hazard In assessing the degree of risk represented by a proposed insured, an underwriter must consider the tendency of individuals who have a greater-than-average likelihood of loss to seek insurance protection to a greater extent than do other individuals. This tendency is know, by definition, as reinsurance the law of large numbers antiselection risk pooling - ANSWER: ✔✔Antiselection The Nimble Life Insurance Comapny places proposed insureds into one of four risk classes: preferred, standard, substandard, and declined. An underwriter for Nimble determined that Hai Zhang, a proposed insured, presented a likelihood of loss that was nit significantly greater than average. This information indicates that Nimble places Mr. Zhang in the risk class known as the preferred risk class standard risk class substandard risk class declined risk class - ANSWER: ✔✔Standard risk class