Risk Management & Insurance Fundamentals Flashcards

Which risk management technique involves transferring financial loss to an insurance company in exchange for a premium?

Answer: Risk transfer

Risk transfer shifts the financial burden of a potential loss to a third party, typically an insurer, via a premium payment.

In the context of GAP insurance, 'negative equity' refers to a situation where:

Answer: The loan balance exceeds the vehicle's actual cash value

Negative equity (being 'upside down') occurs when the outstanding loan balance is greater than what the vehicle is currently worth.

Which of the following best describes 'actual cash value' (ACV) as used in auto insurance?

Answer: The replacement cost minus depreciation

ACV is calculated as the replacement cost of the vehicle less accumulated depreciation at the time of loss.

A dealership sells a vehicle for $35,000 with a down payment of $500. Six months later the vehicle is totaled and its ACV is $28,000 while the loan balance is $33,500. Approximately how much would GAP cover?

Answer: $5,500

GAP covers the difference between the ACV ($28,000) and the loan balance ($33,500), which is $5,500.

The principle of indemnity in insurance means that:

Answer: The insured is restored to roughly the same financial position as before the loss

Indemnity prevents the insured from profiting from a loss; it restores them to their pre-loss financial position.

Which factor is LEAST likely to influence the GAP insurance premium charged to a borrower?

Answer: The borrower's favorite color

Personal preferences such as favorite color have no actuarial relevance to GAP pricing, unlike LTV, vehicle type, or loan term.

Under a standard GAP addendum, which of the following is typically EXCLUDED from coverage?

Answer: Overdue loan payments and late fees

GAP policies typically exclude past-due payments, late charges, and other fees from the covered deficiency balance.