1) Which of the following is a characteristic of insurance?
A) pooling of losses
B) avoidance of risk
C) payment of intentional losses
D) certainty about specific losses that will occur
2) Which of the following is implied by the pooling of losses?
A) sharing of losses by an entire group
B) inability to predict losses with any degree of accuracy
C) substitution of actual loss for average loss
D) increase of objective risk
3) According to the law of large numbers, what happens as the number of exposure units increases?
A) Actual results will increasingly differ from probable results.
B) Actual results will more closely approach probable results.
C) Nondiversifiable risk will decrease.
D) Objective risk will increase.
4) According to the law of large numbers, what should happen as an insurer increases the number of units insured?
A) The amount the insurer expects to pay in claims should decrease.
B) Underwriting expenses should decrease.
C) Actual results will more closely approach expected results.
D) The insurer’s profitability should become more variable.
5) 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) I only
B) II only
C) both I and II
D) neither I nor II
6) From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT
A) The loss must be accidental.
B) The loss should be catastrophic.
C) The premium must be economically feasible.
D) There must be a large number of exposure units.
7) From the standpoint of the insurer, which of the following is a characteristic of an ideally insurable risk?
A) The loss must be intentional.
B) There must be a small number of unique loss exposures.
C) The chance of loss must be calculable.
D) The loss must be indeterminable.
8) Why is a large number of exposure units generally required before a pure risk is insurable?
A) It prevents the insurer from losing money.
B) It eliminates intentional losses.
C) It minimizes moral hazard.
D) It enables the insurer to predict losses more accurately.