1. Pure risk defines situations where there is only a chance of loss or no loss. Which of the following would be an example of pure risk?
A. The purchase of a lottery ticket.
B. The purchase of stock certificates.
C. The possibility of dying prematurely. Correct
D. The purchase of a rare antique.
Explanation
Pure risk involves only the possibility of loss or no loss, without any opportunity for gain, making premature death a classic example as it can lead to financial hardship for dependents without any upside. Lottery tickets, stocks, and antiques involve speculative risk where gain is possible alongside loss. Insurance is designed specifically to address pure risks, providing protection against unavoidable adverse events. Creatively, pure risk looms as a shadow of potential loss alone, devoid of gambling's thrill of profit.
2. What is the purpose of insurance?
A. Reduction of risk
B. Transfer of risk Correct
C. Avoidance of risk
D. Retention of risk
Explanation
Insurance serves to transfer the financial burden of pure risks from the insured to the insurer in exchange for premiums, allowing individuals and businesses to manage uncertainty through risk pooling. While reduction (mitigation), avoidance (elimination), and retention (self-insuring) are risk management strategies, transfer is insurance's core function. This mechanism stabilizes economies by spreading losses. Creatively, insurance acts as a bridge, shifting risk's weight to collective shoulders.
3. Mortality figures are usually developed by the analysis of statistics
A. Obtained by examining policyowners' records.
B. Relating to the deaths of millions of individuals over extended periods of time. Correct
C. From decennial small group samples of surviving individuals.
D. Resulting from sophisticated sampling techniques.
Explanation
Mortality tables are constructed from comprehensive population death data collected over long periods involving millions, ensuring statistical reliability for predicting life expectancies and setting premiums accurately. Policyowner records are biased and limited, small or decennial samples insufficient for precision, and sampling is a tool within larger datasets. These tables form the foundation of actuarial science. Creatively, vast death records weave mortality's intricate tapestry, guiding premium equity.
4. Why are policy dividends not taxable as income?
A. Because to the policyowner the dividends are additional income.
B. Because the dividends reflect a type of interest earnings.
C. Because the dividends are never reported by the company to the federal government.
D. Because the federal government considers policy dividends a return to the policyowner of an overcharge of premium. Correct
Explanation
In mutual companies, dividends represent returns of excess premiums when experience is favorable, treated as nontaxable refunds of overcharges rather than earned income. Interest or additional income would be taxable, and reporting occurs but classification matters. This tax treatment benefits participating policyholders. Creatively, dividends echo premium surpluses, returning nontaxable overpayments graciously.
5. A mutual company is owned by whom?
A. Stock holders
B. Policyholders Correct
C. The Insurance Commissioner
D. Lloyd's of London
Explanation
Mutual insurers are owned by policyholders who receive dividends from profits, aligning interests directly with insureds rather than external shareholders. Stock companies are investor-owned, commissioners regulate, and Lloyd's is a marketplace. This structure emphasizes long-term stability. Creatively, policyholders democratically own mutual enterprises.