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34) JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 2,000 homeowners this year?
A) The total number of claims filed by JKL policyowners should decrease. B) The total dollar value of claims will decrease. C) The average size of loss will decline in value.
D) The actual results will more closely approach the expected results. Answer: D
Question Status: Previous Edition
35) Apex Insurance Company wrote a large number of property insurance policies in an area where earthquake losses could occur. When the president of Apex was asked if she feared that a severe earthquake might put the company out of business, she responded, \to other insurance companies.\writes insurance transfers to another insurer part or all of the potential losses associated with such insurance is called A) hedging. B) speculating. C) reinsurance. D) loss avoidance. Answer: C
Question Status: Previous Edition
36) Bronson Casualty Company sells casualty insurance only. Which of the following coverages could you purchase from Bronson Casualty Company? A) life insurance B) fire insurance C) marine insurance D) liability insurance
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Answer: D
Question Status: New
37) Which of the following statements regarding insurance and hedging is (are) true?
I. Insurance involves the transfer of insurable risk while hedging handles risk that is typically uninsurable.
II. Both insurance and hedging rely on the law of large numbers to reduce risk. A) I only B) II only C) both I and II D) neither I nor II Answer: A
Question Status: Previous Edition
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38) Ashley opened an all-you-can-eat buffet restaurant. The cost per-person was based upon what Ashley believed an average restaurant patron would consume. The restaurant began to lose money. Ashley concluded that her patrons had \could eat as much as they wanted while being charged an average price. A similar phenomenon exists in insurance markets. This problem is called A) moral hazard. B) adverse selection. C) attitudinal hazard. D) fundamental risk. Answer: B
Question Status: Revised
39) Which of the following statements is (are) true concerning private insurance? I. Social insurance programs are private insurance programs. II. Both individuals and businesses purchase private insurance. A) I only B) II only C) both I and II D) neither I nor II Answer: B
Question Status: Previous Edition
40) Adverse selection occurs
A) when an insurance company loses money on its investments.
B) when individuals intentionally bring about a loss in order to collect from an insurer.
C) when catastrophic losses occur as a result of a natural disaster.
D) when applicants with a higher-than-average chance of loss seek insurance at standard rates. Answer: D
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Question Status: New
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