Insurance Risk Assessment & Management 4 — Questions and Answers
Question 1: A company sets aside funds each year to pay for anticipated future losses rather than purchasing insurance. This is known as:
- Captive insurance
- Self-insurance (Correct answer)
- Risk transfer
- Loss prevention
Correct answer: Self-insurance
Self-insurance involves an organization formally retaining risk by accumulating funds to cover expected losses instead of buying commercial insurance.
Question 2: Which principle holds that an insured should be restored to approximately the same financial position after a loss as before it?
- Subrogation
- Indemnity (Correct answer)
- Insurable interest
- Utmost good faith
Correct answer: Indemnity
The principle of indemnity prevents the insured from profiting from a loss by limiting recovery to the actual financial loss sustained.
Question 3: What type of risk involves the possibility of both financial gain and financial loss?
- Pure risk
- Speculative risk (Correct answer)
- Fundamental risk
- Particular risk
Correct answer: Speculative risk
Speculative risk involves three possible outcomes: gain, loss, or no change — such as investing in stocks or gambling.
Question 4: A company creates a subsidiary specifically to insure the risks of its parent company. This arrangement is called:
- Reinsurance
- Self-insurance
- A captive insurer (Correct answer)
- A risk retention group
Correct answer: A captive insurer
A captive insurer is a subsidiary company established to insure the risks of its parent organization, combining elements of risk retention and formal insurance structure.
Question 5: Which of the following factors does an underwriter consider when evaluating the risk of insuring a property?
- The insured's political affiliation
- Construction type, occupancy, protection, and exposure (COPE) (Correct answer)
- The insured's social media history
- The number of employees the business has
Correct answer: Construction type, occupancy, protection, and exposure (COPE)
Underwriters use the COPE framework — Construction, Occupancy, Protection, and Exposure — to assess property risk.
Question 6: What is the purpose of a hold-harmless agreement in risk management?
- To transfer responsibility for losses from one party to another contractually (Correct answer)
- To prevent an insurer from canceling a policy mid-term
- To ensure that premiums remain fixed for a policy period
- To require both parties to share losses equally
Correct answer: To transfer responsibility for losses from one party to another contractually
A hold-harmless (or indemnity) agreement is a contractual clause in which one party agrees to assume liability and protect another party from specified claims or losses.
Question 7: Which of the following best describes 'exposure' in property and casualty insurance risk assessment?
- The insured's vulnerability to neighboring properties' hazards (Correct answer)
- The amount of premium the insurer charges
- The total insured value subject to loss
- The deductible amount chosen by the insured
Correct answer: The insured's vulnerability to neighboring properties' hazards
Exposure in the COPE framework refers to the susceptibility of insured property to loss from neighboring properties or external environmental hazards.
Insurance Risk Assessment & Management 4
A company sets aside funds each year to pay for anticipated future losses rather than purchasing insurance.
This is known as: