PSI Insurance and Risk Management 3 — Questions and Answers
Question 1: Which component of a fire insurance premium reflects the unique characteristics of a specific building?
- Class rate
- Schedule rate (Correct answer)
- Experience rate
- Judgment rate
Correct answer: Schedule rate
Schedule rating adjusts the base class rate up or down based on specific characteristics of the individual building being insured.
Question 2: What does 'pro rata' cancellation mean in insurance?
- The insurer keeps a penalty portion of the unearned premium
- The unearned premium is returned in exact proportion to the unexpired policy period (Correct answer)
- Coverage continues until the next renewal date
- The insured forfeits all remaining premium
Correct answer: The unearned premium is returned in exact proportion to the unexpired policy period
Pro rata cancellation returns premium exactly proportional to the remaining policy period with no penalty.
Question 3: An umbrella policy provides coverage that is:
- Concurrent with the primary policy only
- Excess over the underlying primary limits and may drop down to fill certain gaps (Correct answer)
- A replacement for all underlying liability policies
- Limited to personal injury claims only
Correct answer: Excess over the underlying primary limits and may drop down to fill certain gaps
An umbrella policy sits above underlying liability limits and can drop down to cover some gaps not covered by the primary policy.
Question 4: What is 'moral hazard' in the context of insurance?
- Physical conditions that increase the likelihood of a loss
- The increased risk arising from an insured's dishonest or fraudulent character (Correct answer)
- A defect in the insured property that causes loss
- The financial instability of an insurance company
Correct answer: The increased risk arising from an insured's dishonest or fraudulent character
Moral hazard refers to the increased chance of loss caused by an insured's dishonest tendencies or intention to defraud the insurer.
Question 5: Which insurance concept requires that an insured have a financial interest in the insured property at the time of loss?
- Subrogation
- Insurable interest (Correct answer)
- Indemnity
- Contribution
Correct answer: Insurable interest
Insurable interest requires the insured to face actual financial loss if the insured property is damaged or destroyed.
Question 6: A 'blanket' insurance policy differs from a 'specific' policy in that a blanket policy:
- Covers only one location for a fixed amount
- Covers multiple locations or items under a single limit of insurance (Correct answer)
- Excludes all catastrophic perils
- Applies only to personal property
Correct answer: Covers multiple locations or items under a single limit of insurance
A blanket policy provides a single limit of insurance that applies collectively to multiple locations or property items.
Question 7: In workers' compensation insurance, the employer's premium is primarily based on:
- The number of employees only
- Payroll amounts by classification code (Correct answer)
- Gross company revenue
- The number of prior claims filed
Correct answer: Payroll amounts by classification code
Workers' compensation premiums are calculated by multiplying the manual rate for each job classification by the employer's payroll per $100.
PSI Insurance and Risk Management 3
Which component of a fire insurance premium reflects the unique characteristics of a specific building?