GAP Risk Management & Insurance Fundamentals 3 — Questions and Answers
Question 1: Which insurance concept ensures that the insured has a financial stake in the property being insured?
- Subrogation
- Insurable interest (Correct answer)
- Adhesion
- Coinsurance
Correct answer: Insurable interest
Insurable interest requires that the policyholder would suffer a genuine financial loss if the insured property is damaged or destroyed.
Question 2: In risk management, 'frequency' of loss refers to:
- The total dollar amount of potential losses
- How often a particular loss event is expected to occur (Correct answer)
- The speed at which claims are paid
- The number of policy exclusions
Correct answer: How often a particular loss event is expected to occur
Loss frequency measures how often a specific type of loss is likely to occur within a given period.
Question 3: A consumer finances a new vehicle with a 84-month loan and no down payment. This scenario creates elevated GAP exposure primarily because:
- Longer loan terms mean slower principal payoff relative to rapid early depreciation (Correct answer)
- Short loan terms are more risky than long terms
- The insurer is required to pay more on 84-month loans by law
- New vehicles do not depreciate in the first year
Correct answer: Longer loan terms mean slower principal payoff relative to rapid early depreciation
With 84-month loans, early payments are heavily interest-laden, so loan balances drop slowly while vehicle value depreciates rapidly, widening the gap.
Question 4: Which term describes the process by which an insurer, after paying a claim, acquires the insured's legal right to pursue recovery from a responsible third party?
- Indemnity
- Subrogation (Correct answer)
- Salvage
- Assignment
Correct answer: Subrogation
Subrogation allows the insurer to 'step into the shoes' of the insured and recover loss amounts from the at-fault party.
Question 5: When a primary insurer pays a total loss settlement and the lienholder receives the ACV payout, the remaining loan deficiency is typically the responsibility of:
- The primary insurer
- The state DMV
- The borrower, unless GAP coverage is in place (Correct answer)
- The vehicle manufacturer
Correct answer: The borrower, unless GAP coverage is in place
Without GAP, the borrower remains personally liable for any deficiency balance after the primary insurer's ACV payment satisfies the lienholder.
Question 6: Which of the following is an example of risk reduction (loss control) rather than risk transfer?
- Purchasing a GAP addendum
- Installing anti-theft devices on a vehicle (Correct answer)
- Buying comprehensive auto insurance
- Adding a co-signer to a loan
Correct answer: Installing anti-theft devices on a vehicle
Anti-theft devices reduce the probability of vehicle theft, which is a loss-control (risk reduction) strategy, not a transfer strategy.
Question 7: The 'law of large numbers' is important to insurance pricing because it:
- Guarantees every insured will file a claim
- Allows insurers to predict losses more accurately across a large group (Correct answer)
- Requires insurers to charge higher premiums to all policyholders
- Limits the number of policies any single insurer can issue
Correct answer: Allows insurers to predict losses more accurately across a large group
As the number of insured units grows, actual loss experience converges toward statistically expected values, improving pricing accuracy.
GAP Risk Management & Insurance Fundamentals 3
Which insurance concept ensures that the insured has a financial stake in the property being insured?