Principles of Risk and Insurance Test Preparation
Course Introduction
Principles of Risk and Insurance introduces students to the fundamental concepts and frameworks for understanding risk management and the role of insurance in mitigating financial losses. The course explores the nature and sources of various risks faced by individuals and organizations, examines methods for identifying, evaluating, and controlling these risks, and covers the structure, functioning, and regulation of insurance markets. Topics include risk assessment, insurance contracts, policy provisions, premium calculation, and the social and economic significance of insurance. Through case studies and real-world examples, students develop the analytical skills necessary to make informed decisions regarding risk and insurance solutions in both personal and business contexts.
Recommended Textbook
Introduction to Risk Management and Insurance 10th Edition by Mark S. Dorfman
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23 Chapters
1358 Verified Questions
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Chapter 1: Introduction to Enterprise Risk Management and Insurance
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Sample Questions
Q1) Which of the following is an accurate definition of "insurance"?
A) A savings account designed to protect you in the event of a rainy day
B) A financial arrangement that redistributes the costs of unexpected losses among a pool of insureds
C) A communist plot to destroy capitalist enterprise
D) A contractual agreement in which the insurer agrees to pay the insured only if the insured requests the money
Answer: B
Q2) Which of the following is a true statement?
A) Liability risks are risks associated with building calamities.
B) Theft is a diversifiable risk.
C) Most individuals in the industrialized countries carry no insurance.
D) The Law of Large Numbers is used in Risk Pooling.
Answer: D
Q3) Employee benefits have been strengthened in the last few years.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Risk Identification
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Sample Questions
Q1) The damage caused by an indirect loss can be greater in amount than the damage caused by direct loss in the same occurrence.
A)True
B)False
Answer: True
Q2) If assumption of the risk is established, it means the defendant usually must pay for damages.
A)True
B)False
Answer: False
Q3) In a negligence lawsuit, the jury's primary function is to:
A) assist the judge in interpreting the law
B) determine the facts
C) decide guilt or innocence
D) make sure neither plaintiff nor defendant cheats in presenting their case
Answer: B
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Chapter 3: Risk Assessment and Pooling
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Sample Questions
Q1) Which of the following is not a characteristic of a Probability Distribution?
A) The probability of occurrence of a variable is assigned randomly.
B) The maximum probability for any one outcome will be less than 1.
C) The minimum probability for any one outcome will be greater than 0.
D) The sum of all probabilities must be equal to 1.
Answer: A
Q2) Risk Assessment:
A) is the first step in the Risk Management Process
B) is the process of identifying the broad range of risk exposures
C) is the process of estimating the financial impact of each risk
D) deals with risk identification
Answer: C
Q3) The confidence interval increases with a larger pool size.
A)True
B)False
Answer: False
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5
Chapter 4: Risk-Handling Techniques: Loss Control, Risk
Transfer, and Loss Financing
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61 Verified Questions
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Sample Questions
Q1) There are no clear rules for choosing an appropriate risk-handling technique.
A)True
B)False
Q2) All of the following are true about captive insurers, <u>except</u>:
A) that they are located in locations like Bermuda
B) that claims-settlement often take longer
C) that the parent company or companies save on overhead and profits that they would otherwise pay to third insurance companies
D) that the parent company or companies are in some cases allowed to deduct their premiums from their tax liability
Q3) Which of the following is not a federal regulation or agency?
A) EUREX
B) OSHA
C) CPSC
D) EPA
Q4) Loss prevention activities, if successful, may increase risk.
A)True
B)False
Q5) Discuss the concept of funded risk assumption.
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Chapter 5: Risk-Handling Techniques: Diversification and Hedging
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Sample Questions
Q1) A financial instrument whose value is based on an underlying security or commodity is called a/an:
A) insurance contract
B) employment contract
C) enterprise contract
D) derivative security
Q2) As long as their correlation coefficient is less than 1, risk is being reduced by adding investments to the pool.
A)True
B)False
Q3) Which of the following statements about correlation is incorrect?
A) If two variables are statistically independent of each other, their correlation coefficient is zero.
B) Negatively correlated investments offer the best opportunities for diversification.
C) If two investments are perfectly correlated, their correlation coefficient is +1.
D) The risk of fire is positively correlated with the risk of traffic accidents.
Q4) Explain when and why a call option has value.
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Chapter 6: Fundamentals of Insurance
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Sample Questions
Q1) A burglar enters Marcia's home and steals $10,000 worth of appliances. Marcia tells the insurance company that the appliances were worth $20,000. This overstatement of the loss is an example of:
A) a morale hazard
B) a peril
C) insurance fraud
D) carelessness
Q2) The Financial Definition of insurance:
A) is that insurance is a contract in which one party agrees to compensate another party for losses covered by the contract
B) is that insurance is a financial agreement that transfers the risk of insured losses to a risk pool by an insurer
C) differs from state to state
D) is that it is any pool for which the insurance mechanism works
Q3) Life insurance provides protection from the peril of death.
A)True B)False
Q4) What are considered the benefits and the costs to society of operating an insurance mechanism?
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Chapter 7: Insurable Perils and Insuring Organizations
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Sample Questions
Q1) Both stock and mutual insurance companies are incorporated.
A)True
B)False
Q2) All the following statements are true concerning mutual insurance companies <u>except</u>:
A) they may pay dividends
B) they are owned by their policyholders
C) they are legally organized as perpetual partnerships
D) they are nonprofit
Q3) The term "demutualization" refers to:
A) the process of a stock insurer converting its organizational structure to mutual B) the board of directors' action in declaring dividends for the policy owners
C) the process of a mutual insurer converting its organizational structure to the stock form
D) the process of liquidating an insolvent mutual insurance company
Q4) What are the basic differences between a stock and a mutual insurance company?
Q5) Reciprocal exchanges are unincorporated.
A)True
B)False
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Chapter 8: Insurance Functions
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Sample Questions
Q1) Insurance brokers are:
A) compensated by a flat salary
B) legally, agents of the insurance company
C) only used in life insurance
D) legally, agents of the insurance consumer
Q2) The independent agency system:
A) is doomed because agent's commissions are too high relative to direct writers
B) means the agent rather than the insurance company "owns" the business
C) is not a good career path for most college graduates because the system is doomed to extinction
D) is growing rapidly to the point of eliminating the direct writers
Q3) In reinsurance, the reinsurer is also known as the "ceding" company.
A)True
B)False
Q4) Professional reinsurance companies:
A) engage only in reinsurance transactions
B) make up only a small part of the reinsurance market
C) are located only in the United States
D) also act as primary insurers
Q5) What are the steps in the loss adjustment process?
Page 10
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Chapter 9: Insurance Markets: Economics and Issues
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Sample Questions
Q1) Which of the following is a primary reason that insurance consumers are <u>not</u> well-informed?
A) Insurers have not made much effort to inform consumers.
B) The rewards of making informed decisions are not worth the cost of obtaining the needed information.
C) State insurance regulators do not provide the needed information.
D) Insurance prices are so low that most consumers do not care to be informed.
Q2) Which of the following statements about the courts is correct?
A) Courts mostly deal with insurance companies denying coverage.
B) Courts mostly deal with insurance companies not paying on legitimate claims.
C) Courts mostly deal with insurance companies not providing sufficient coverage.
D) Courts mostly deal with insurance companies not paying on fraudulent claims.
Q3) When the consumer purchases insurance, several key decisions are made. What are these key decisions?
Q4) What is the purpose of an automobile insurance plan? How does an auto plan generally work?
Q5) Briefly explain the role of the courts and the law in providing consumer protection relative to insurance products.
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Chapter 10: Insurance Regulation
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Sample Questions
Q1) Which one of the following is an argument for federal regulation of the insurance transaction?
A) If there were federal regulation, state regulation would still be required for intrastate transactions.
B) State regulation allows experimentation and isolation of bad laws.
C) Many states do not have enough trained people to regulate insurance efficiently.
D) All of the above
Q2) Which of the following is the most important goal of insurance regulation?
A) Limiting the number of insurance companies in the state
B) Promoting the solvency of insurance companies
C) Mandating that all citizens purchase auto insurance and health insurance
D) Approving the contractual language of insurance policies sold in the state
Q3) The main outcome of the Gramm-Leach-Bliley Act of 1999 is to allow:
A) banks, insurers and security dealers to openly compete with one another
B) banks, insurers and security dealers to form financial services holding companies
C) insurers to choose between state or federal regulation
D) banks to evade the provisions of the Glass-Steagall Act
Q4) What is the overall regulatory objective for a state's rate regulations?
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Page 12
Chapter 11: Insurance Contracts
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Sample Questions
Q1) The parol evidence rule says:
A) oral statements made prior to the issuance of an insurance policy are not a part of the contract
B) oral statements made after a policy is issued are not a part of the contract
C) after an oral agreement is put into writing, it becomes a contract of adhesion
D) none of the above
Q2) The principle of utmost good faith:
A) holds the insurer to a higher standard of honesty
B) does not apply in life insurance
C) holds the insured to a higher standard of honesty
D) requires the insurer and insured to enter the contract with utmost good faith
Q3) Explain the principle of indemnity. How does one measure indemnity?
Q4) The purpose of the insuring agreement of an insurance policy is to:
A) specify the perils covered
B) list reasons allowing the insurer to cancel the policy
C) present the language giving force to the contract
D) indicate who can collect for a covered loss
Q5) What are some of the reasons exclusions are found in insurance contracts?
Q6) Explain the principle of subrogation. Provide a mathematical example of its use.
Page 13
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Chapter 12: The Personal Auto Policy
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Sample Questions
Q1) You collide with another vehicle and the accident is your fault. You may collect for damages to your vehicle, less the deductible, from your insurance company under Coverage D, Collision, if a premium for Collision has been paid.
A)True
B)False
Q2) Claims paid under the PAP's "Collision Coverage" are usually considered to be the insured's fault.
A)True
B)False
Q3) Which of the following is false?
A) A pedestrian who has a PAP and is injured by an automobile can collect under his own Medical Payments coverage.
B) The PAP covers theft of the automobile.
C) The subrogation provision of the PAP does not apply to Medical Payments coverage.
D) There is no coverage for the insured while driving a rented automobile.
Q4) If an insured is using his/her own private passenger car under normal circumstances, in what situations can the insured lose legal liability coverage?
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Chapter 13: Homeowners Insurance
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Sample Questions
Q1) Falling objects is a named peril for coverage of personal property in a HO-3 policy.
A)True
B)False
Q2) Which of the following is not an exclusion from the HO policy's Liability coverage?
A) Liability assumed under any unwritten contract
B) Property damage to property owned by the insured
C) Damage to property in the care, custody or control of the insured by all perils
D) Liability arising out of the ownership or maintenance of the residence premises
Q3) Joe owns a house on which he carries a $400,000 HO-3 policy. The replacement cost of the house is $600,000. A fire loss occurs that has a replacement cost of $10,000. How much can Joe collect under his HO-3 policy?
A) $15,462
B) $10,000
C) $30,000
D) $8,333
Q4) What is meant by "Medical Payments to others"? Why does the coverage exist?
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Page 15
Chapter 14: Professional Financial Planning
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Sample Questions
Q1) With respect to a trust fund, what is the role of the trustee?
A) Provide the initial funding for the trust
B) Receive the benefits of the trust
C) Provide management of the trust's property
D) Determine the beneficiary of the trust
Q2) The best financial plan for financing a child's college education requires:
A) a savings plan
B) a 401(k) plan
C) premature death protection
D) both A and C
Q3) What is a charitable deduction?
A) A deduction from the cash value to a qualified charitable organization
B) A deduction from the taxable estate to a church
C) A deduction from the taxable estate to a qualified charitable organization
D) A deduction from the gross estate to a qualified charitable organization
Q4) Which of the following statements is false?
A) People with a small amount of assets do not typically need a will.
B) A parent can use a will to appoint a guardian for his/her children.
C) A valid will can minimize probate problems.
D) A legally enforceable will must be made when a person is of sound mind.
Page 16
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Chapter 15: Life Insurance Policies
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Sample Questions
Q1) After taking an introductory course in insurance, your parents ask you what type of life insurance policy they should purchase to get permanent death protection with the option to pay more premiums some years, and less in other years. They also want a minimum guaranteed rate of return on their cash value. Which type of life insurance will you recommend?
A) Term life
B) Whole life
C) Universal life
D) Variable life
Q2) In group life insurance, an insurer might accept an exposure who could not meet the insurer's standards for individual life insurance.
A)True
B)False
Q3) In a limited payment policy, only a portion of the face amount is paid if death occurs in the early years.
A)True
B)False
Q4) Why does the death benefit increase under certain conditions in the universal life Plan A (fixed face amount)?
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Chapter 16: Standard Life Insurance Contract Provisions and Options
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Sample Questions
Q1) A tontine is:
A) a form of endowment insurance
B) used frequently to provide retirement income
C) a life insurance contract paying a death claim on the second person to die
D) one reason for the divisible surplus provision
Q2) Cheryl buys a life insurance policy with a two-year incontestable clause, and dies three years later. When she dies, her insurer discovers that she lied on application for coverage about her diabetes. What will happen?
A) The insurer will pay the claim.
B) The insurer will void the policy and not pay the claim because Cheryl made a material misrepresentation on her application.
C) The insurer will void the policy and not pay the claim based on the principle of indemnity.
D) Both B and C above
Q3) Which of the following is <u>not</u> a life insurance nonforfeiture option?
A) Cash
B) Reduced face paid up term insurance
C) Extended term insurance
D) Reduced face paid up whole life insurance
Page 18
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Chapter 17: Annuities
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Sample Questions
Q1) A life annuity that pays nothing after the annuitant's death is a ________ annuity.
A) period certain
B) straight life
C) refund
D) single premium deferred
Q2) A joint-and-one-half survivor annuity covers two people, but the annuity payments are cut in half at the death of the first annuitant.
A)True
B)False
Q3) An annuity, five years certain, makes payments to the annuitant:
A) for 5 years or until the annuitant's death, whichever event happens last
B) for only the first 5 years of the liquidation period
C) only if the insured dies within the first five years
D) for 5 years or until the annuitant's death, whichever event happens first
Q4) How do insurers classify annuities to describe their benefits?
Q5) A variable annuity is usually paid for on a deferred basis.
A)True
B)False
Q6) Explain how an annuity 10 years certain would work.
Page 19
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Chapter 18: Health Insurance and Disability Income
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Sample Questions
Q1) Which of the following is not a type of health insurance coverage?
A) Basic medical expense insurance
B) Medicare supplemental coverage insurance
C) Double indemnity insurance
D) Major medical insurance
Q2) How does Blue Cross health insurance cover hospitalization?
A) By covering a specific number of days in the hospital
B) It pays up to 80% of all usual and customary charges in a semi-private room
C) It pays a flat dollar amount per day of hospitalization, regardless of the actual charges incurred
D) Hospitalization coverage is not provided by Blue Cross policies
Q3) When a hospital performs preadmission testing, in which it determines the most optimal treatment before the patient actually enters the hospital, it is considered to be performing:
A) utilization review
B) cost containment
C) catastrophe prevention
D) adverse selection
Q4) Explain how a typical major medical contract works.
Q5) What is the difference between an HMO and a PPO in providing health care?
Page 20
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Chapter 19: Employee Benefits
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Sample Questions
Q1) Jane is offered a pension plan through her employer. The plan agrees that if she will deposit 6% of her salary to a retirement account, the employer will deposit a matching amount. When Jane retires, whatever money is in the account will belong to her. What is the proper name for this type of pension plan?
A) A vested pension plan
B) A defined contribution plan
C) A defined benefit plan
D) A tax-deferred savings plan (401(k))
Q2) What does ERISA stand for?
A) Employer Retirement Income Security Act
B) Employee Retirement Income Security Act
C) Employee Restitution and Income Security Act
D) Employer Required Insurance Standards Amendment
Q3) Which of the following statements about IRAs is false?
A) Annual contributions made to the account are tax-deductible up to certain amounts.
B) They earn tax-deferred investment income.
C) Only people in certain income categories can make deductible IRA contributions.
D) The maximum annual deductible contribution is $4,000 per person.
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21
Chapter 20: Social Security
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Sample Questions
Q1) Social security tax applies only until an annual covered maximum wage is reached. What was that wage in 2012?
A) $84,600
B) $90,400
C) $110,100
D) $119,000
Q2) The "retirement test" reduces Social Security benefits if there is non-wage (for example, dividend or interest) income in excess of about $6,000.
A)True
B)False
Q3) The 2011 report from the trustees of Social Security indicates that:
A) Social Security will be bankrupt by the year 2024
B) with no changes to the program, the Medicare Hospital Insurance trust fund will be exhausted in 2024
C) Baby Boomers are specifically responsible for bankrupting the system
D) with no changes to the program, all benefits will be fully-funded through the year 2018
Q4) What are the requirements for receiving Social Security disability benefits?
Q5) Describe the characteristics of a government insurance program.
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Chapter 21: Unemployment and Workers Compensation Insurance
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Sample Questions
Q1) Explain the economic significance for the existence of unemployment insurance.
Q2) Which of the following does not influence a worker's eligibility for, and amount of, unemployment benefits?
A) Waiting period
B) Earnings record
C) Continuing interest in employment
D) Type of work performed
Q3) What are the general types of benefits provided under workers' compensation?
Q4) Experience rating of the unemployment program has which of the following effects?
A) Penalizes good employers that never fire employees
B) Encourages short-term layoffs and causes an unstable workforce
C) Charges employers more when the economy is weak, thus charging for poor experience when companies can least afford it
D) Provides funds to continue employment instead of dismissing employees
Q5) The states can finance deficits in their unemployment compensation programs with interest-free loans from the federal government.
A)True
B)False
23
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Chapter 22: Commercial Property Insurance
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Sample Questions
Q1) Which of the following is <u>not</u> a type of property covered by the CPP's Building and Personal Property form?
A) Automobiles
B) Business personal property
C) Personal property of others
D) Building
Q2) All the following are true about schedule rating <u>except</u>:
A) used in rating some commercial buildings
B) analyzes each property individually
C) starts with a rate for a standard building in the same city as the building being rated D) the rate is looked up based upon a few rating factors such as construction type and territory
Q3) Ocean marine policies are typically "specified perils" contracts.
A)True
B)False
Q4) The term "aircraft" is restricted to "fixed-wing aircraft" capable of speeds in excess of 150 mph.
A)True
B)False
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Chapter 23: Commercial Liability Insurance
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Sample Questions
Q1) One of the suggested solutions to the professional liability problem is a redefinition of the term "negligence."
A)True
B)False
Q2) Why are insurance pools used to insure nuclear energy liability, rather than private insurance mechanisms?
A) There is unlimited liability when a nuclear event occurs.
B) It is impossible to measure the loss.
C) Individual insurers cannot replace lost electricity when a nuclear plant shuts down.
D) The loss could be greater than even the largest insurance company could handle.
Q3) If the EEOC does not find an employer guilty of discrimination, the employee must accept its decision without further action against the employer.
A)True
B)False
Q4) Explain the need for a claims-made form. Explain how a liability insurance contract written on a claims-made form works.
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