Exam 2: Insurance and Risk

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 2,000 homeowners this year?

According to the law of large numbers,what should happen as an insurance company increases the number of loss exposures that it insures?

One branch of government insurance programs has a number of distinguishing characteristics.These programs are compulsory,they are financed by mandatory contributions rather than general tax revenues,and benefits are weighted in favor of low-income groups.These government insurance programs are called

Which of the following statements regarding insurance and hedging is true?

ABC Appliance offers a warranty requiring an annual fee.The warranty may be purchased at the time of sale or at any time within the first year after the appliance was purchased.The warranty fee after the date of purchase is twice the time-of-purchase fee.When asked why the fee was higher after the date of purchase,ABC's president said,"Buying a warranty is voluntary.We've noted that those who buy the warranty after the purchase date have a greater need for service." Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers?

Which of the following statements concerning social insurance benefits is (are)correct? I.Social insurance benefits are heavily weighted in favor of upper-income groups because of their higher earnings. II.Social insurance benefits are financed entirely or in part by mandatory contributions by covered employers and employees,and not by general revenues of the government.

All of the following are benefits to society that result from insurance EXCEPT

Gina would like to buy a house.She will pay 10 percent of the cost of the house as a down payment and borrow the other 90 percent from a mortgage lender.The home will serve as collateral for the loan.The lender will not make the loan to Gina unless the home is insured.Using insurance to secure the collateral for a loan illustrates which of the following benefits of insurance to society?

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

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.

ABC Insurance Company calculated the amount that it expected to pay in claims for each policy sold.Rather than selling the insurance for the amount it expected to pay in claims,ABC added an allowance to cover the cost of doing business,including commissions,taxes,and acquisition expenses.This allowance is called a(n)

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.

From the viewpoint of the insurer,all of the following are characteristics of an ideally insurable risk EXCEPT

Which of the following statements about the insurance industry as a source of investment funds is (are)true? I.These funds result in a lower cost of capital than would exist in the absence of insurance. II.These funds tend to promote economic growth and full employment.

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 each farmer sustained.Which characteristic of insurance is embodied in this agreement?

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 severe earthquake might put the company out of business,she responded,"Not a chance.We transferred most of that risk to other insurance companies." An arrangement by which an insurer that initially writes insurance transfers to another insurer part or all of the potential losses associated with such insurance is called

Why is a large number of exposure units generally required before a pure risk is insurable?

According to the law of large numbers,what happens as the number of exposure units increases?

Which of the following is classified as casualty insurance?

In addition to marketing life insurance,life insurers typically sell which of the following products? I.Retirement annuities II.Disability income insurance