INSURANCE COMMISSION
PHILIPPINES
TRADITIONAL LIFE
PRACTICE TEST 50
QUESTIONS
Question 1: Which situation is an example of pure risk?
Choices:
1) A homeowner may su�er a loss if a �re damages the house 2) An investor may gain or lose money from buying shares 3) A retailer may earn more or less pro�t after changing prices 4) A trader may pro�t from a change in foreign exchange rates Correct Answer: A homeowner may su�er a loss if a �re damages the house Explanation: Pure risk involves the possibility of loss or no loss, with no opportunity for gain.Fire damage to a home is therefore a pure risk, while investments and trading involve speculative risk because gain is possible.Page 1
Question 2: Why does an insurer bene�t from insuring a large number of similar independent exposure units?
Choices:
1) It eliminates all losses 2) It makes individual losses impossible 3) It improves the predictability of aggregate losses through the law of large numbers 4) It guarantees that premiums will never change Correct Answer: It improves the predictability of aggregate losses through the law of large numbers Explanation: The law of large numbers makes actual aggregate loss experience more predictable as the number of similar independent exposure units increases. It does not eliminate losses or guarantee unchanged premiums.
Question 3: What is the principal purpose of risk pooling in life insurance?
Choices:
1) To transfer every �nancial obligation of the insured to the insurer 2) To combine the loss exposures of many insureds so that the �nancial e�ect of deaths can be shared 3) To ensure that every policyholder receives a claim payment 4) To allow policyholders to choose the insurer's investments Correct Answer: To combine the loss exposures of many insureds so that the �nancial e�ect of deaths can be shared Explanation: Risk pooling combines many similar exposures so that the losses of the few can be funded from premiums contributed by the larger group. It spreads �nancial consequences rather than guaranteeing a claim to every insured.Page 2
Question 4: Under the Philippine Insurance Code, which person clearly has an
insurable interest in his or her own life?
Choices:
1) Only a creditor 2) Only an employer 3) The person himself or herself 4) Only a blood relative
Correct Answer: The person himself or herself
Explanation: Section 10 of the amended Insurance Code recognizes that every person has an insurable interest in his or her own life and health. A person may therefore validly procure life insurance on his or her own life.Question 5: For life insurance, when must insurable interest generally exist for the person procuring the insurance?
Choices:
1) Only when a claim is �led 2) When the insurance takes e�ect 3) At every premium due date 4) Only when the bene�ciary is changed
Correct Answer: When the insurance takes e�ect
Explanation: For life insurance, insurable interest must exist when the insurance takes e�ect.This di�ers from property insurance, where insurable interest must generally exist both when the insurance takes e�ect and when the loss occurs.Page 3