Sample Questions

(Please ignore questions on Employee Health Insurance) Multiple Choices 1. The definition of “risk” suggested in the text views risk as a) a condition of the real world. b) a state of mind. c) Uncertainty in future outcome. d) none of the above. 2. Which of the following is most likely a pure risk? a) Gambling at a casino. b) Investing in the stock market. c) Asking someone out for a date. d) Slipping on the ice while walking to class. e) None of the above is a pure risk. 3. Properly used, the microwave oven is safe and convenient for heating a variety of foods in a short time, but the microwave can cause scald burns if it is used improperly or unsafely. Be careful when removing a wrapper or cover from a hot item. Hot steam escaping from the container as the covering is lifted can cause a burn. Here, we see an example of: a) Avoidance b) Self-insurance c) Loss prevention d) Direct loss e) Loss reduction 4. Given the following loss frequency distribution based on historical losses calculate the expected number of losses that will occur in the coming year. The total number of exposures (N) is 1,000. Outcomes Probability 0/1,000 .70 10/1,000 .25 30/1,000 .05 a) .004 b) .04 c) .40 d) 4 e) 40

5. There are 2,000 students at one school and each year there are 100 losses reported by students due to theft. In categorizing these losses 60% are, on average, $20 losses. The remaining thefts are, on average, $30. Calculate the expected loss per student per year. a)$1.20 b)$24.00 c)$.05 d)$25.00 e) None of Above. For the following questions, assume that you have the State Farm Car Policy handed out in class, including the coverages and limits shown on the Declarations page. For each situation, calculate how much your insurance policy would pay, in total. Unless otherwise indicated, assume the loss occurs during the policy period. Do not assume facts not given in the question. 7. While you are driving your car in Hawaii, you run into a parked car. It costs $800 to repair your car and $1,200 to repair the car you hit. Your policy will pay: a). 0 b). $700 c). $1,200 d) $1,900 e). None of the above.

8. One night someone breaks into your car and steals your radar detector. Although your car is not damaged, it costs $500 to replace the detector. The Actual Cash Value of the detector before it was stolen was $300. Your policy will pay: a). 0 b). $300 c). $500 d). $800 e). None of the above 9. While walking to class, you are hit by a car and seriously injured. You incur $35,000 in medical bills. You are entitled to collect a bodily injury award of $90,000, but the driver only has 20/40/15 liability limits. Your policy will pay: a). 0 b). $25,000 c). $70,000 d). $90,000 e). None of the above

10. A 12 year old girl cannot be held to a contract she signed with a modeling agency because which requirement of a contract would be violated? a). Offer and acceptance b). Consideration c). Competent parties d). Legal purpose e). None of the above 11. By refusing to provide health insurance coverage for a person with a serious heart ailment, the insurer: a). Allows the transfer of risk b). Avoids an ideally insurable loss c). Keeps the person from receiving medical treatment d). Prevent adverse selection e). All of the above 12. The principle of indemnity provides that: a). Insurance premium rates must be neither too high nor too low b). The insured should be paid for the loss he or she suffered and no more nor less c). The insured shall be paid exactly the fact amount of the policy d). People who cause accidents should pay for the loss that results e). Only indemnity companies may issue contracts of indemnity 13. The right of subrogation: a). Prevents the insured from collecting twice for the same loss b). Sometimes conflicts with the principle of indemnity c). Increases the cost of insurance d). Is not applicable in fire insurance e). Applies only to ocean marine insurance 14. Binders are: a). A method of storing insurance policies for safekeeping b). Temporary insurance contracts c). More expensive than regular insurance d). A method of changing the provisions of an insurance contract e). More dependable than other forms of insurance 15. Health maintenance organizations a). Pay providers on a fee-for-service basis b). Require significant cost sharing by employees c). Provide unlimited employee choice of providers d). Act both as providers and insurers e). All of the above

True/False 16. The expected value of a random variable is a weighted average of all possible values for that random variable, and is computed by multiplying each possible value by its respective probability and summing the results. T F

17. If two different probability distributions have the same standard deviations then their means will also be the same. T F

18. The presence of insurance can sometimes present a moral hazard for the insured. T F

19. A person who did not have an insurable interest in a building destroyed by fire could not be indemnified for its loss. T F

20. COBRA qualifying events include when an employee’s child dies or when an employee’s spouse loses a job. T F

Short Question 21. You work for an insurance company and a concert pianist comes to you asking about insurance coverage for his hand. Please briefly discuss whether this is an ideally insurable risk?

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