Insurance Companies: An Introduction to Financial Risk Management

Question 1

What is the main purpose of an insurance company?

Accepted Answer

To protect against financial risks

Answer

To invest premiums for profit

Answer

To collect and pool premiums

Question 2

What is the fundamental purpose of an insurance company?

Accepted Answer

To provide financial protection against potential risks and uncertainties

Answer

To maximize profits for its shareholders

Answer

To collect premiums from policyholders

Answer

To assist policyholders in understanding financial risks

Question 3

Which of the following is NOT a key principle of insurance?

Accepted Answer

Negligence

Answer

Utmost good faith

Answer

Indemnity

Answer

Subrogation

Question 4

What is the term used to describe the process where an insurance company transfers a portion of its risk to another insurance company?

Accepted Answer

Reinsurance

Answer

Co-insurance

Answer

Contribution

Answer

Subrogation

Question 5

Which type of insurance policy covers businesses against property damage, business interruption, and other associated risks?

Accepted Answer

Commercial property insurance

Answer

Homeowners insurance

Answer

Auto insurance

Answer

Travel insurance

Question 6

What is the process through which an insurance company evaluates the validity and extent of coverage for a submitted claim?

Accepted Answer

Claims handling

Answer

Underwriting

Answer

Risk assessment

Answer

Premium calculation

Question 7

In the United Kingdom, which regulatory body is responsible for overseeing the insurance industry?

Accepted Answer

Financial Conduct Authority (FCA)

Answer

Bank of England

Answer

Her Majesty's Revenue and Customs (HMRC)

Answer

Office of Fair Trading (OFT)

Question 8

What is the term used to refer to the periodic payment made by the policyholder to the insurance company for coverage?

Accepted Answer

Premium

Answer

Deductible

Answer

Co-payment

Answer

Indemnity

Question 9

Distinguish the coverage provided by life insurance, property insurance, and liability insurance.

Accepted Answer

Life insurance: death and disability; property insurance: physical assets; liability insurance: legal liabilities.

Answer

Life insurance: death only; property insurance: physical and digital assets; liability insurance: all legal claims.

Answer

Life insurance: financial loss after death; property insurance: physical asset damage/loss; liability insurance: bodily injury claims.

Answer

Life insurance: death and retirement; property insurance: income loss; liability insurance: property damage claims.

Question 10

Why are regulations important in the insurance industry?

Accepted Answer

To protect customers and keep the market fair.

Answer

To help insurance companies make more money.

Answer

To limit competition between insurance companies.

Answer

To give insurance companies special tax breaks.

Question 11

Which of the following is NOT a fundamental principle of insurance?

Accepted Answer

Profit-making

Answer

Risk sharing

Answer

Indemnity

Answer

Subrogation

Question 12

In insurance terminology, what is the term used to describe the amount of money an insured person must pay out of pocket before insurance coverage begins?

Accepted Answer

Deductible

Answer

Premium

Answer

Co-insurance

Answer

Co-payment

Question 13

Which of the following organizations is the primary regulatory body for insurance companies in the United Kingdom?

Accepted Answer

Financial Conduct Authority (FCA)

Answer

Prudential Regulation Authority (PRA)

Answer

Financial Ombudsman Service (FOS)

Answer

Bank of England

Question 14

What is the main purpose of a reinsurance contract?

Accepted Answer

To transfer risk from one insurance company to another

Answer

To provide additional coverage to policyholders

Answer

To reduce the cost of premiums for policyholders

Answer

To eliminate the need for insurance companies to hold reserves

Question 15

What is the process by which an insurance company evaluates a claim and makes a decision on whether to approve or deny it?

Accepted Answer

Claims handling

Answer

Underwriting

Answer

Reinsurance

Answer

Risk assessment

Question 16

What is the primary role of an insurance broker?

Accepted Answer

To represent policyholders

Answer

To represent insurance companies

Answer

To provide financial advice

Answer

To investigate claims

Question 17

Which of the following is a characteristic of a mutual insurance company?

Accepted Answer

Owned by its policyholders

Answer

Profits distributed to shareholders

Answer

Premiums set by external regulators

Answer

Guaranteed return on investment

Question 18

How do insurance companies use diversification to manage financial risks?

Accepted Answer

Investing in stocks and bonds of companies in different industries and sectors

Answer

Accumulating large reserves of cash

Answer

Purchasing insurance policies from other insurance companies

Answer

Retaining all financial risks within the company

Question 19

What factor primarily defines the scope and terms of insurance coverage?

Accepted Answer

Policy terms and conditions

Answer

Premium payments

Answer

Deductibles and out-of-pocket expenses

Question 20

How do insurance policies contribute to economic growth?

Accepted Answer

They reduce uncertainty for businesses.

Answer

They increase government borrowing.

Answer

They decrease consumer spending.

Question 21

In the context of risk management for insurance companies, define reinsurance and elaborate on its significance.

Accepted Answer

Reinsurance is a risk management tool that enables insurance companies to transfer a portion of their liabilities to other insurance companies, reducing their potential exposure to losses.

Answer

Reinsurance is an insurance policy that protects insurance companies against claims made by their policyholders.

Answer

Reinsurance is a legal obligation for all insurance companies operating in the United Kingdom.

Answer

Reinsurance does not affect the premiums paid by policyholders to insurance companies.

Question 22

Which term describes an event that initiates an insurance claim?

Accepted Answer

Claim

Answer

Premium

Answer

Policy

Answer

Annuity

Question 23

Which option is NOT a fundamental principle of insurance?

Accepted Answer

Personal liability

Answer

Indemnity

Answer

Subrogation

Answer

Good faith

Question 24

How do life insurance policies differ from general insurance policies?

Accepted Answer

Life insurance covers death and disability, while general insurance covers property and liability.

Answer

General insurance covers death and disability, while life insurance covers property and liability.

Answer

There is no difference between the two types of insurance policies.

Answer

Life insurance is for businesses, while general insurance is for individuals.

Question 25

What is the purpose of a reinsurance policy?

Accepted Answer

To transfer risk from an insurance company to another

Answer

To cover risks not covered by primary insurance

Answer

To increase the overall premium income of insurance companies

Answer

To reduce the number of claims for policyholders

Question 26

What is the distinction between an insurance deductible and an excess?

Accepted Answer

A deductible is paid by the policyholder before coverage begins, while an excess is paid after.

Answer

An excess is paid by the policyholder before coverage begins, while a deductible is paid after.

Answer

There is no difference between a deductible and an excess.

Answer

A deductible is only applicable to health insurance, while an excess applies to all types of insurance.

Question 27

What is the primary objective of insurance underwriting?

Accepted Answer

To assess and evaluate the risk associated with an insurance policy

Answer

To determine the monthly premium for an insurance policy

Answer

To finalize the terms and conditions of an insurance policy

Answer

To investigate claims made under an insurance policy

Question 28

Explain the ethical concern known as 'moral hazard' in insurance.

Accepted Answer

The tendency for policyholders to take greater risks when they have insurance coverage

Answer

The tendency for insurance companies to deny legitimate claims

Answer

The tendency for insurance companies to overcharge for premiums

Answer

The tendency for policyholders to understate their risk exposure

Question 29

What is the term for the sum of money received by a policyholder from an insurance company after a valid claim?

Accepted Answer

Claim

Answer

Premium

Answer

Deductible

Answer

Co-payment

Question 30

Which type of insurance policy provides coverage for financial losses resulting from damage to or loss of property?

Accepted Answer

Property insurance

Answer

Life insurance

Answer

Health insurance

Answer

Liability insurance

Question 31

What is the purpose of a deductible in an insurance contract?

Accepted Answer

To protect the insurance company from small claims

Answer

To reduce the premium cost

Answer

To increase the coverage amount

Answer

To provide a tax advantage

Question 32

Which regulatory body is responsible for overseeing the insurance industry in the United Kingdom?

Accepted Answer

Financial Conduct Authority (FCA)

Answer

Bank of England

Answer

Department for Work and Pensions

Answer

HM Revenue and Customs

Question 33

What is the main objective of reinsurance?

Accepted Answer

To spread risk across multiple insurance companies

Answer

To increase the coverage amount

Answer

To reduce the premium cost

Answer

To provide investment opportunities

Question 34

What is the key distinction between an insurance policy and an insurance contract?

Accepted Answer

An insurance contract is a legal document, while an insurance policy is not

Answer

There is no distinction

Answer

An insurance policy is a legal document, while an insurance contract is not

Answer

An insurance policy covers personal risks, while an insurance contract covers business risks

Question 35

What is the primary responsibility of a claims adjuster?

Accepted Answer

To investigate and assess insurance claims

Answer

To sell insurance policies

Answer

To provide legal advice

Answer

To manage insurance investments

Question 36

Which of the following is a legal obligation of insurance companies?

Accepted Answer

To pay claims fairly and promptly

Answer

To cover all types of risks

Answer

To maximize profits

Answer

To avoid conflicts of interest

Question 37

Which of the following is NOT a key role of insurance companies in risk management?

Accepted Answer

Accepting all risks indiscriminately

Answer

Offering financial protection against potential losses

Answer

Pooling risks and distributing costs

Answer

Investing premiums to generate returns

Question 38

Which type of insurance policy provides coverage against sudden and accidental physical damage to property?

Accepted Answer

Property insurance

Answer

Life insurance

Answer

Health insurance

Answer

Liability insurance

Question 39

Which fundamental principle of insurance involves spreading losses over numerous policyholders?

Accepted Answer

Risk pooling

Answer

Indemnity

Answer

Subrogation

Answer

Utmost good faith

Question 40

In insurance agreements, what is the concept known as "Indemnity"?

Accepted Answer

The obligation of an insurance company to restore the insured to their pre-loss financial position

Answer

The right of an insurance company to recover compensation from a third party

Answer

The sharing of claim costs between multiple insurance policies

Answer

The principle that requires policyholders to contribute to the cost of their insurance

Question 41

Which regulatory body is responsible for overseeing the insurance sector in the United Kingdom?

Accepted Answer

Financial Conduct Authority (FCA)

Answer

Bank of England

Answer

Prudential Regulation Authority (PRA)

Answer

Office of Fair Trading (OFT)

Question 42

What is the purpose of a deductible in an insurance policy?

Accepted Answer

To encourage preventive measures and reduce claims

Answer

To reduce the insurance premium paid by the policyholder

Answer

To cover losses that are excluded from the policy's coverage

Answer

To penalize policyholders for submitting claims

Question 43

Which type of insurance offers coverage for legal liability resulting from an insured individual's negligence?

Accepted Answer

Liability insurance

Answer

Property insurance

Answer

Accident insurance

Answer

Health insurance

Question 44

What is the term describing the transfer of an insured's rights to an insurance company after a claim payment?

Accepted Answer

Subrogation

Answer

Contribution

Answer

Co-insurance

Answer

Indemnity

Question 45

Which principle of insurance requires policyholders to disclose all relevant information to insurers?

Accepted Answer

Utmost good faith

Answer

Indemnity

Answer

Risk pooling

Answer

Subrogation

Question 46

Which of the following primary functions is NOT performed by insurance companies?

Accepted Answer

Provide portfolio management services

Answer

Settle claims

Answer

Invest policyholder premiums

Answer

Underwrite insurance policies

Question 47

What is the fundamental purpose of an insurance policy?

Accepted Answer

To transfer financial risk from individuals or entities to an insurance company in exchange for regular premium payments

Answer

To provide tax advantages

Answer

To guarantee a future financial return

Question 48

Which type of insurance policy offers coverage against damage to physical assets?

Accepted Answer

Property insurance

Answer

Health insurance

Answer

Life insurance

Question 49

What is the process known as that involves assessing the appropriate level of coverage for an individual or entity?

Accepted Answer

Underwriting

Answer

Premium calculation

Answer

Claims adjustment

Answer

Loss control

Question 50

Which UK regulatory body is responsible for overseeing the insurance industry?

Accepted Answer

Financial Conduct Authority (FCA)

Answer

National Insurance Commission (NIC)

Answer

Office of Fair Trading (OFT)

Answer

Bank of England

Question 51

What is the primary goal of risk management in the context of insurance companies?

Accepted Answer

To minimize potential financial losses and ensure the company's solvency

Answer

To maximize investment returns

Answer

To meet customer demands and satisfaction

Question 52

Which type of insurance policy provides coverage for medical expenses and healthcare costs?

Accepted Answer

Health insurance

Answer

Liability insurance

Answer

Property insurance

Answer

Life insurance

Question 53

What is the key difference between a traditional insurance company and an insurance cooperative?

Accepted Answer

Insurance cooperatives are owned by their policyholders, while traditional insurance companies are owned by external shareholders

Answer

Insurance cooperatives offer lower premiums, while traditional insurance companies provide broader coverage