Principles of Insurance

Question 1

What are two definitions of insurance?

Answer 1

Financial arrangement that redistributes costs of unexpected losses and contractual arrangement where one party agrees to compensate another for loss

Question 2

What are types of loss?

Answer 2

Undersired, unplanned reduction of economic value from chance, categorized as direct or indirect losses

Question 3

On what basis can risk be defined?

Answer 3

Variability concept emphasizes statistical aspects, and uncertainty concept emphasizes behavioral aspect of people exposed to risk

Question 4

What are types of risk responses?

Answer 4

Risk avoidance, reduction, retention and diversification

Question 5

Each of the following statements about insurance is correct EXCEPT:

Insurance is a financial arrangement that redistributes the costs of unexpected losses.
Insurance is a contractual arrangement whereby one party agrees to compensate another party for losses, in exchange for consideration paid.
Insurance law is a branch of contract law.
Under an insurance policy, a right created for one party creates a corresponding right to the other party.

Answer 5

In analyzing an insurance contract, a right created for one party represents a duty (obligation) for the other party.