GAP Risk Management & Insurance Fundamentals 2 — Questions and Answers
Question 1: Which risk management technique involves transferring financial loss to an insurance company in exchange for a premium?
- Risk retention
- Risk avoidance
- Risk transfer (Correct answer)
- Risk reduction
Correct answer: Risk transfer
Risk transfer shifts the financial burden of a potential loss to a third party, typically an insurer, via a premium payment.
Question 2: In the context of GAP insurance, 'negative equity' refers to a situation where:
- The vehicle has a positive resale value
- The loan balance exceeds the vehicle's actual cash value (Correct answer)
- The borrower has paid off more than 50% of the loan
- The insurer denies the GAP claim
Correct 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.
Question 3: Which of the following best describes 'actual cash value' (ACV) as used in auto insurance?
- The original purchase price of the vehicle
- The cost to replace the vehicle with a new model
- The replacement cost minus depreciation (Correct answer)
- The outstanding loan balance at time of loss
Correct answer: The replacement cost minus depreciation
ACV is calculated as the replacement cost of the vehicle less accumulated depreciation at the time of loss.
Question 4: 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?
- $28,000
- $5,500 (Correct answer)
- $33,500
- $6,500
Correct answer: $5,500
GAP covers the difference between the ACV ($28,000) and the loan balance ($33,500), which is $5,500.
Question 5: The principle of indemnity in insurance means that:
- The insured may profit from an insurance claim
- The insured is restored to roughly the same financial position as before the loss (Correct answer)
- Premiums are refunded if no claim is filed
- The insurer pays the full retail value regardless of depreciation
Correct 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.
Question 6: Which factor is LEAST likely to influence the GAP insurance premium charged to a borrower?
- Loan-to-value ratio at origination
- Vehicle make and model
- The borrower's favorite color (Correct answer)
- Loan term length
Correct 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.
Question 7: Under a standard GAP addendum, which of the following is typically EXCLUDED from coverage?
- Theft of the covered vehicle
- Total loss due to collision
- Overdue loan payments and late fees (Correct answer)
- Natural disaster total loss
Correct answer: Overdue loan payments and late fees
GAP policies typically exclude past-due payments, late charges, and other fees from the covered deficiency balance.
GAP Risk Management & Insurance Fundamentals 2
Which risk management technique involves transferring financial loss to an insurance company in exchange for a premium?