1. Insurance is designed to cover:

Pure risk involving only the chance of loss or no loss

Only pure risk (loss or no loss, no chance of gain) is insurable; speculative risk involves a chance of gain.

2. A physical hazard is:

A tangible condition that increases the chance of loss, such as faulty wiring

A physical hazard is a tangible condition (e.g., faulty wiring) that increases the likelihood or severity of loss.

3. A moral hazard is best described as:

Dishonesty or character flaws that increase the chance of loss

A moral hazard arises from dishonesty (such as arson for profit) that increases the chance of a loss.

4. The law of large numbers helps insurers because, as the number of similar exposures increases:

Predicted losses become more accurate

The law of large numbers makes loss predictions more accurate as the pool of similar exposures grows.