FIN 434 Chapter 1 & 2 Homework

Which of the following statements regarding risk is incorrect?

A. Subjective risk is the risk that an individual perceives based on their prior experiences

B. Objective risk is the difference between the expected and actual losses

C. Particular risk is a risk that will impact a large group of individuals simultaneously

D. Speculative risk is the chance of loss, no loss, or a profit

ANSWER: Particular risk is a risk that will impact a large group of individuals simultaneously.

WHY? Fundamental risk will impact a large group of individuals simultaneously, whereas a particular risk only impacts one individual

Which of the following is a risk reduction technique?

A. Purchasing life insurance

B. Choosing not to go skydiving

C. Parking your car at the end of the parking lot, away from other cars

D. Buying a warranty on your new TV

ANSWER: Parking your car at the end of the parking lot, away from other cars.

WHY? Parking your car away from other cars is an example of a risk reduction technique because you are reducing the likelihood of car damage. Purchasing a life insurance policy and buying a warranty are risk transfer techniques, and choosing not to go skydiving is an example of risk avoidance

The immediate cause and reason for a loss occurring, such as a hurricane, is referred to as a:

A. Peril

B. Hazard

C. Insurable incident

D. Risk

ANSWER: Peril

WHY? A peril is the immediate cause and reason for a loss occurring. A hazard is a specific condition that increases the likelihood of a loss occurring. Risk is simply the possibility of a loss occurring.

Which type of hazard results from a physical condition that increases the likelihood of a loss occurring?

ANSWER: Physical Hazard

WHY? Physical hazards are physical conditions that increase the likelihood of a loss occurring. Examples of physical hazards include wet floors or icy roads. A moral hazard is the potential for loss caused by the character of the individual. A morale hazard is defined as indifference to risk due to the fact that the insured has insurance.

Which of the following statements is/are correct regarding insurance contracts?

1. The principle of incurable interest is closely aligned with the principle of indemnity, which both limit the insured from experience in a gain using insurance.

2. A subrogation clause in an insurance policy requires the insured relinquish a claim against a negligent third party if the insurer has already indemnified the insured.

ANSWER: Both 1 & 2

Which of the following is not an element of the Principle of Utmost Good Faith?

A. Concealment

B. Representation

C. Warranty

D. Waiver

ANSWER: Waiver

WHY? A waiver is not an element of the Principle of Utmost Good Faith. A waiver occurs when a party to a contract relinquishes a known legal right.

The section of a insurance contract that describes exactly which property or person is being covered is the:

A. Inclusions section

B. Declarations section

C. Definitions section

D. Conditions section

ANSWER: Declaration section

WHY? The declarations section describes exactly which property or person is being covered. An inclusions section is not usually included in an insurance contract. The definitions section defines key words or phrases used throughout the contract. The conditions section list provisions that require an insured to perform certain duties.

All of the following statements regarding insurance policies are correct EXCEPT:

A. Adverse selection is the tendency of those that most need insurance to purchase insurance policies while those with the least perceived risk are less likely to pay the necessary premiums for insurance

B. An endorsement is a modification or change to a life or health insurance policy.

C. Co-payments are loss sharing arrangements whereby the insured pays a flat dollar amount or percentage of the loss in excess of the deductible

D. Deductibles serve as motivation

ANSWER: an endorsement is a modification or change to a life or health insurance policy

Why? An endorsement is a modification or change to an exisiting property insurance policy, whereas a change to a health or life insurance policy is a rider.

Premium rates set by insurance companies are regulated at which level of government?

A. Local

B. Government does not regulate insurance premiums

C. State

D. Federal

ANSWER: State

WHY? Insurance premiums are regulated at the state level

Amanda owns a home with a $400,000 replacement value. This January, a snowstorm causes $75,000 in damages to the home. Amanda has an insurance policy with 80% coinsurance and a $1,000 deductible. How much will the insurer pay if Amanda carries $300,00 of coverage?

A. $69,312.50

B. $60,000.00

C. $75,000.00

D. $70,312.50

ANSWER: $69,312.50

WHY? ($300,000 / (.80 x $400,000)) x $75,000 = $70,312.50 - $1,000 (deductible) = $69,312.50