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Michigan- General Insurance Exam Questions and Answers
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Michigan- General Insurance Exam Questions and Answers
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Michigan- General Insurance ExamQuestions and Answers
Insurance Defined - Answer -A contract whereby one party (insurer) agrees to indemnify
or guarantee another party (insured) against a loss by a specified future contingency or
peril in return for payment of a premium.
Insurance Concept - Answer -Insurance transfers the risk of loss from an individual or
business entity to an insurance company, which in turn spreads the costs of unexpected
losses to many individuals. It is protection.
Risk Management - Answer -Insurance is the transfer of financial responsibility
associated with a potential of a loss (risk) to an insurance company, which in turn
spreads the costs of unexpected losses to many individuals. Insurance redistributes the
financial consequences of individual losses to all persons injured. With insurance, the
cost of the loss up to the amount of the policy face amount will be covered by the
insurance provider. Yet, the cost of the loss may exceed the limit of insurance.
Risk - Answer -is the uncertainty or chance of a loss occurring. There are two types of
risk, pure and speculative, pure risk is the only insurable risk.
Pure Risk - Answer -refers to situations that can only result in a loss or no change.
There is no opportunity for financial gain. It is the only type of risk that insurance
companies are willing to accept.
Speculative Risk - Answer -involves the opportunity for either loss or gain. An example
is gambling, and these types of risks are not insurable.
Hazards - Answer -are conditions or situations that increase risk or probability of loss.
Classified as physical, moral, or morale. Conditions such as lifestyle and existing health,
or activities such as scuba diving, are hazards and may increase the chance of a loss
occurring.
Peril - Answer -are the causes of loss, insured against in an insurance policy.
-Life insurance: insures against the financial loss caused by the premature death of the
insured;
-Health insurance: insures against the medical expenses and/or loss of income caused
by the insured's sickness or accidental injury;
, -Property insurance: insures against the loss of physical property or the loss of its
income-producing abilities;
Causality insurance: insures against the loss and/or damage of property and resulting
liabilities.
Loss - Answer -the reduction of value, decrease or disappearance of value of the
person or property insured in a policy, cause by a named peril. Insurance provides a
means to transfer loss. Basis for a claim.
Avoidance - Answer -method of handling risk, which means eliminating exposure to a
loss. For example, if a person wanted to avoid the risk of being killed in an airplane
crash, he might choose never to fly in an airplane. Risk avoidance is effective, but
seldom practical.
Retention - Answer -method of handing risk. Is the planned assumption of risk by an
insured through the use of deductibles, co-payments, or self-insurance. It is also known
as self-insurance when the insured accepts the responsibility for the loss before the
insurance company pays.
The purpose is to:
1. Reduce expenses and improve cash flow;
2. Increase control of claim reserving and claims settlements;
3. Fund for losses that cannot be insured.
Sharing - Answer -a method of dealing with risk for a group of individual persons or
businesses with the same or similar exposure to loss to share the losses that occur
within that group. A reciprocal insurance exchange is a formal risk-sharing arrangement.
Reduction - Answer -We cannot avoid risk entirely, we often attempt to lessen the
possibility or severity of a loss. So, taking actions such as installing smoke detectors in
our homes, having an annual physical, or making a change in our lifestyles.
Transfer - Answer -The most effective way to handle risk, so that the loss is borne by
another party. Insurance is the most common method of transferring risk from an
individual or group to an insurance company. Though the purchasing of insurance will
not eliminate risk of death or illness, it relieves the insured of the financial losses these
risks bring.
Ways to Transfer Risk - Answer -Some ways to transfer are holding harmless
agreements and other contractual agreements, but the safest and most common
method is to purchase insurance coverage.
Due to Chance - Answer -a loss that is outside the insured's control.
Definite and Measurable - Answer -a loss that is specific as to the cause, time, place
and amount. An insurer must be able to determine how much the benefit will be and
when it becomes payable.
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