PSI Insurance and Risk Management 5 — Questions and Answers
Question 1: Which of the following is an example of a 'morale hazard'?
- An insured who intentionally sets fire to their building for the insurance proceeds
- An insured who becomes careless about locking doors because they have theft insurance (Correct answer)
- An insured who misrepresents their age on an application
- An insured who files a claim for a pre-existing condition
Correct answer: An insured who becomes careless about locking doors because they have theft insurance
Morale hazard is indifference to loss due to having insurance — the insured becomes less careful because they know a loss will be covered.
Question 2: A 'retroactive date' on a claims-made policy means that:
- Coverage applies to claims reported after the policy expires
- No coverage applies to incidents that occurred before that date (Correct answer)
- The policy automatically renews without a gap in coverage
- Claims from prior policy years are automatically covered
Correct answer: No coverage applies to incidents that occurred before that date
A retroactive date sets the earliest point in time from which a covered incident may have occurred; losses before this date are excluded.
Question 3: Under personal auto insurance, 'uninsured motorist coverage' protects the insured when:
- The insured is at fault in an accident
- The at-fault driver has no liability insurance (Correct answer)
- The insured's vehicle is stolen
- A family member is injured on private property
Correct answer: The at-fault driver has no liability insurance
Uninsured motorist coverage pays for the insured's bodily injury damages caused by a driver who carries no liability insurance.
Question 4: What is the 'law of large numbers' and how does it apply to insurance?
- It states that insurers must maintain large cash reserves for catastrophic events
- It states that the larger the group of similar exposures, the more predictable the actual losses will be (Correct answer)
- It requires insurers to cover all applicants regardless of risk level
- It limits the total amount any single insurer can write in one state
Correct answer: It states that the larger the group of similar exposures, the more predictable the actual losses will be
The law of large numbers allows insurers to predict losses accurately because actual experience approaches the expected (theoretical) probability as the group size grows.
Question 5: A 'valued policy' differs from a standard property policy in that it:
- Pays the actual cash value regardless of the agreed amount
- Pays a pre-agreed amount upon total loss rather than actual cash value (Correct answer)
- Provides replacement cost coverage automatically
- Excludes coverage for partial losses
Correct answer: Pays a pre-agreed amount upon total loss rather than actual cash value
A valued policy pays the stated face amount upon total loss without requiring proof of actual value at the time of loss.
Question 6: Which of the following best describes 'excess and surplus lines' insurance?
- Standard coverage sold through admitted carriers at regulated rates
- Specialty coverage placed with non-admitted carriers for risks that standard markets decline (Correct answer)
- Reinsurance provided by foreign insurers
- Group health insurance for large employers
Correct answer: Specialty coverage placed with non-admitted carriers for risks that standard markets decline
Excess and surplus lines (E&S) insurance covers unusual or high-hazard risks that admitted carriers refuse, placed through licensed surplus lines brokers.
Question 7: What is the significance of the 'insuring agreement' section of an insurance policy?
- It lists all exclusions and limitations that restrict coverage
- It states the insurer's promise to pay for covered losses and defines the scope of coverage (Correct answer)
- It describes the duties of the insured after a loss
- It establishes the premium amount and payment schedule
Correct answer: It states the insurer's promise to pay for covered losses and defines the scope of coverage
The insuring agreement is the insurer's core promise — it describes what is covered, under what circumstances, and the general scope of the coverage provided.
PSI Insurance and Risk Management 5
Which of the following is an example of a 'morale hazard'?