PSI Insurance and Risk Management 2 — Questions and Answers
Question 1: Which type of risk involves the possibility of loss but no chance of gain?
- Speculative risk
- Pure risk (Correct answer)
- Dynamic risk
- Particular risk
Correct answer: Pure risk
Pure risk involves only the possibility of loss or no loss, with no opportunity for financial gain.
Question 2: An insured suffers a $50,000 loss. The policy has a $5,000 deductible and an 80% coinsurance clause. If the insured carried adequate insurance, how much does the insurer pay?
- $36,000
- $40,000
- $45,000 (Correct answer)
- $50,000
Correct answer: $45,000
After the $5,000 deductible, the remaining $45,000 is paid 100% by the insurer since coinsurance was met.
Question 3: What does the principle of indemnity prevent?
- Insureds from filing fraudulent claims
- Insureds from profiting from a loss (Correct answer)
- Insurers from denying valid claims
- Policies from lapsing due to nonpayment
Correct answer: Insureds from profiting from a loss
The principle of indemnity states that insurance should restore the insured to their pre-loss financial position, not allow them to profit.
Question 4: Which of the following best describes 'adverse selection'?
- Insurers cherry-picking only low-risk applicants
- High-risk individuals seeking insurance more than low-risk individuals (Correct answer)
- The selection of a deductible that is too high
- A random sample of risks that results in poor loss ratios
Correct answer: High-risk individuals seeking insurance more than low-risk individuals
Adverse selection occurs when those with higher-than-average risk are more likely to seek and purchase insurance.
Question 5: A business owner's policy (BOP) is designed primarily for which type of insured?
- Large industrial manufacturers
- Small to mid-sized commercial businesses (Correct answer)
- Personal auto policyholders
- High-net-worth homeowners
Correct answer: Small to mid-sized commercial businesses
A BOP bundles property and liability coverages at a discounted rate specifically for small to mid-sized businesses.
Question 6: Under a claims-made liability policy, what triggers coverage?
- When the loss-causing event occurs
- When the claim is first reported to the insurer during the policy period (Correct answer)
- When the injured party files suit
- When the insured pays the deductible
Correct answer: When the claim is first reported to the insurer during the policy period
Claims-made policies are triggered when the claim is reported to the insurer, regardless of when the event occurred.
Question 7: What is the purpose of a 'hold harmless' agreement in risk management?
- To transfer financial responsibility for certain losses from one party to another (Correct answer)
- To prevent insurers from subrogating against third parties
- To guarantee premium rates will not increase
- To waive the insured's right to file future claims
Correct answer: To transfer financial responsibility for certain losses from one party to another
A hold harmless agreement contractually transfers liability for specified losses from one party (transferor) to another (transferee).
PSI Insurance and Risk Management 2
Which type of risk involves the possibility of loss but no chance of gain?