Question 1

An applicant purchases a homeowners policy on a house he owns and lives in. Which type of risk does this insurance address?

Accepted Answer

Insurance covers only pure risk, which involves the chance of loss or no loss with no possibility of gain. Speculative risk includes the chance of gain (such as gambling or investing) and is not insurable.

Question 2

A homeowner stores oily rags in a pile in a warm closet, increasing the chance a fire will start. In insurance terms, the oily rags are best described as which of the following?

Accepted Answer

A hazard is a condition that increases the likelihood or severity of a loss; a physical hazard arises from the material condition of property. The peril would be the fire itself, which is the actual cause of loss.

Question 3

For an insurance program to operate effectively, an insurer must be able to predict aggregate losses with reasonable accuracy. Which principle allows this predictability to improve as the number of similar insured units increases?

Accepted Answer

The law of large numbers states that as the number of similar exposure units increases, actual loss experience will more closely approximate the expected (predicted) losses. This lets insurers set accurate premiums and reduces uncertainty.

Question 4

Insurers use underwriting, careful risk selection, and provisions such as suicide clauses primarily to control which tendency?

Accepted Answer

Adverse selection is the tendency of those with a greater-than-average likelihood of loss to seek or continue insurance to a greater extent than better risks. Underwriting and provisions like the suicide clause help insurers guard against it.

Question 5

The concept that an insured should be restored to approximately the same financial position held before a loss, without profiting from it, is known as which principle?

Accepted Answer

Indemnity means an insured is restored to their pre-loss financial condition but should not gain from a loss. Consideration refers to the value exchanged to form a contract, not the measure of loss recovery.

Question 6

Which of the following is NOT one of the four essential elements required to form a legally binding insurance contract?

Accepted Answer

The four elements of a valid contract are agreement (offer and acceptance), consideration, competent parties, and legal purpose. A commissioner's countersignature is not required to make a contract legally binding.

Question 7

An insurance contract in which the dollar amounts exchanged by the parties may be unequal is described as which of the following?

Accepted Answer

An aleatory contract is one in which the values exchanged are unequal and depend on an uncertain event; a policyholder may pay small premiums and collect a large claim, or pay premiums and collect nothing. Unilateral refers to only one party making an enforceable promise.

Question 8

Because the insurance company writes the policy and the applicant must accept it as written on a take-it-or-leave-it basis, any ambiguity in the policy is generally interpreted in favor of the insured. This characteristic makes insurance a contract of which type?

Accepted Answer

A contract of adhesion is drafted entirely by one party (the insurer), so any ambiguities are construed against the drafter and in favor of the insured. Aleatory refers to the unequal exchange of value, not who drafts the terms.

Question 9

During the application process, an applicant states that she has never been treated for heart disease, which she believes to be true. This statement is best classified as which of the following?

Accepted Answer

A representation is a statement believed to be true to the best of the applicant's knowledge and is not guaranteed to be absolutely true. A warranty is guaranteed to be true, while concealment is the deliberate withholding of a known material fact.

Question 10

A producer intentionally fails to disclose to the insurer a material fact that the applicant told her, knowing it would affect the underwriting decision. This deliberate withholding of a known material fact is called which of the following?

Accepted Answer

Concealment is the intentional failure to disclose a known material fact, and it can void a policy. Misrepresentation involves making a false statement, whereas concealment involves staying silent about something material.

Question 11

An agent's authority to collect an initial premium and issue a conditional receipt, even though the agency agreement does not expressly grant it, arises because such acts are customary and necessary to carry out expressly granted powers. This is an example of which type of authority?

Accepted Answer

Implied authority is not written in the contract but is assumed to be granted because it is necessary to carry out the agent's express duties. Express authority is that which is specifically written in the agency agreement.

Question 12

Regarding the timing of insurable interest, which of the following statements is correct?

Accepted Answer

For life insurance, insurable interest must exist when the policy is applied for but is not required at the time of the insured's death. For property insurance, insurable interest must exist at the time of the loss to collect.

General Insurance Concepts Practice Questions

Answer a few General Insurance Concepts questions now

More Life & Health Insurance Exam Topics