TX General Lines- Life, Accident, and Health Risk
Management and Insurance Principles
Examination: Assessment of Knowledge on Risk
Types, Loss Exposure, Perils and Hazards, Risk
Management Techniques, Insurable Risk Criteria,
Underwriting Processes, Law of Large Numbers,
Adverse Selection, and Insurance Providers
Including Private, Mutual, Managed Care,
Fraternal, Home Service, Self-Insurers, and Risk
Retention Groups Exam Questions Verified and
Provided with Complete A+ Graded Rationales
Latest Updated 2026
Risk and Loss
through insurance, an individual/group can transfer the financial risk associated with potential
loss to an insurance company ("insurer")
the insurer promises to pay a stated amount if a specified loss occurs
risk
chance of loss
pure risk: only the possibility of loss
- no chance of gain with a pure risk
- only pure risks are inusrable
- ex) untimely death & serious illness/disability
speculative risk: result in either loss or gain
- ex) gambling and investing in the stock market
- because they include a chance of gain, speculative risks are not insurable
loss
unplanned reduction in economic value
,direct loss: immediate result of an event involving an insured peril
indirect loss: loss that results from direct loss
loss exposure and exposure units
loss exposure: being subject to a possible loss
the amount of loss exposure facing an insurer has a direct bearing on the premium it charges
for a policy
loss exposure measured by the number of exposure units assigned to the insured by the insurer
during the underwriting process
- risk (and premium) associated with any insurance policy based on number of exposure units
assigned (exposure units are the basis for each applicant's premium)
ex)
During their working years, coal miners are generally exposed to a greater risk of death,
accidents, and serious illness than insurance agents and brokers. Thus, life and health insurers
assign more exposure units to coal miners than they do to insurance producers. All other factors
being equal, this translates into a higher premium for coal miners than insurance producers
peril and hazard
peril: direct cause of a loss and the event that insurance protects against
- life and health insurance covered perils include: death, disability, and sickness
hazard: condition that increases the chance of loss due to a peril or increases the severity of a
loss
- ex) smoking, poor diet, and excessive alcohol consumption are health hazards that increase
the likelihood of illness or early death
- 3 categories:
(1) moral hazards: character weaknesses, habits, and risky activities that increase possibility of
loss
- underwriters look for clues that suggest the applicants lifestyle could result in a loss (DUI
convictions for drinking and driving, excessive alcohol consumption, smoking, and reckless drug
use)
-conscious willingness to defraud insurers [lying on an application or claim form and adverse
,selection (tendency of someone at a high risk of loss to try to buy insurance) are considered
moral hazard]
(2) morale hazards: state of mind or attitudes that create an indifference to loss
- ex) disregarding one's health (being overweight or inactive), driving recklessly, and less careful
(3) physical hazards: physical conditions that increase chance of loss
- ex) working in dangerous conditions (coal mining or heavy construction) and engaging in
dangerous activities (rock climbing)
- ex) chronic diseases (diabetes and emphysema) that increases chance of death
- as a means of identifying physical hazards, insurers require life and health insurance applicants
to answer the questions about their work and personal activities (and undergo medical exams
as part of the application process)
risk management techniques
risk avoidance
- ex) refusing to operate a vehicle after drinking alcoholic beverages is a practical way to avoid
the peril of injury or death that may result from driving while under the influence
risk reduction:
- if avoiding a risk is impractical, it may be possible to reduce exposure to its related hazards
- ex) exercising regularly, avoiding poor health habits, and eating a balanced diet can reduce the
risk of illness and premature death from heart disease, cancer, and diabetes
risk retention
- acceptance of risk and dealing with a loss using personal funds
- works well for small financial losses
- going without insurance is example of risk retention
- use of deductibles in health insurance is a risk retention device (deductibles shift small losses
to the policyowner, leaving insurance to cover more serious losses)
risk sharing
- people who shared a common risk banded together and chipped in to compensate a member
of group who suffered a covered loss
risk transfer
- transfer the loss to a 3rd party
- basis for most insurance
, - in exchange for paying a premium, an individual or business can transfer the risk of loss to a
insurance company
- should a covered loss occur, the insurer will compensate the insured for the value of loss up to
policy limits
elements of insurable risk
before issuing an insurance policy to an applicant, the company determines whether the
applicant represents an insurable risk
to be insurable, a risk (and the potential loss it represents) must be:
(1) definable
(time, cause, and location)
(2) measurable
(insurance policies include a provision clearly stating the amount they will pay in the event of a
covered loss)
(3) insured peril must be outside of the insured's control
(death is insurable peril because of the uncertainty as to when it will occur; self-inflicted injuries
are not covered under most health policies; suicide excluded for first 2 years of a life insurance
policy)
(4) risk must be part of a large group of similar (or homogenous) risks that the insurance
company can use to predict future losses
(5) potential loss must not be financially catastrophic (war)
(6) risk must not be one of the policy's stated exclusions
underwriting
insurance company underwriters determine if the proposed risk should be accepted or rejected
using the application and related information they determine if the applicant represents an
insurable risk
law of large numbers
predicting future insurance losses relies heavily on statistics, probabilities, and averages
Management and Insurance Principles
Examination: Assessment of Knowledge on Risk
Types, Loss Exposure, Perils and Hazards, Risk
Management Techniques, Insurable Risk Criteria,
Underwriting Processes, Law of Large Numbers,
Adverse Selection, and Insurance Providers
Including Private, Mutual, Managed Care,
Fraternal, Home Service, Self-Insurers, and Risk
Retention Groups Exam Questions Verified and
Provided with Complete A+ Graded Rationales
Latest Updated 2026
Risk and Loss
through insurance, an individual/group can transfer the financial risk associated with potential
loss to an insurance company ("insurer")
the insurer promises to pay a stated amount if a specified loss occurs
risk
chance of loss
pure risk: only the possibility of loss
- no chance of gain with a pure risk
- only pure risks are inusrable
- ex) untimely death & serious illness/disability
speculative risk: result in either loss or gain
- ex) gambling and investing in the stock market
- because they include a chance of gain, speculative risks are not insurable
loss
unplanned reduction in economic value
,direct loss: immediate result of an event involving an insured peril
indirect loss: loss that results from direct loss
loss exposure and exposure units
loss exposure: being subject to a possible loss
the amount of loss exposure facing an insurer has a direct bearing on the premium it charges
for a policy
loss exposure measured by the number of exposure units assigned to the insured by the insurer
during the underwriting process
- risk (and premium) associated with any insurance policy based on number of exposure units
assigned (exposure units are the basis for each applicant's premium)
ex)
During their working years, coal miners are generally exposed to a greater risk of death,
accidents, and serious illness than insurance agents and brokers. Thus, life and health insurers
assign more exposure units to coal miners than they do to insurance producers. All other factors
being equal, this translates into a higher premium for coal miners than insurance producers
peril and hazard
peril: direct cause of a loss and the event that insurance protects against
- life and health insurance covered perils include: death, disability, and sickness
hazard: condition that increases the chance of loss due to a peril or increases the severity of a
loss
- ex) smoking, poor diet, and excessive alcohol consumption are health hazards that increase
the likelihood of illness or early death
- 3 categories:
(1) moral hazards: character weaknesses, habits, and risky activities that increase possibility of
loss
- underwriters look for clues that suggest the applicants lifestyle could result in a loss (DUI
convictions for drinking and driving, excessive alcohol consumption, smoking, and reckless drug
use)
-conscious willingness to defraud insurers [lying on an application or claim form and adverse
,selection (tendency of someone at a high risk of loss to try to buy insurance) are considered
moral hazard]
(2) morale hazards: state of mind or attitudes that create an indifference to loss
- ex) disregarding one's health (being overweight or inactive), driving recklessly, and less careful
(3) physical hazards: physical conditions that increase chance of loss
- ex) working in dangerous conditions (coal mining or heavy construction) and engaging in
dangerous activities (rock climbing)
- ex) chronic diseases (diabetes and emphysema) that increases chance of death
- as a means of identifying physical hazards, insurers require life and health insurance applicants
to answer the questions about their work and personal activities (and undergo medical exams
as part of the application process)
risk management techniques
risk avoidance
- ex) refusing to operate a vehicle after drinking alcoholic beverages is a practical way to avoid
the peril of injury or death that may result from driving while under the influence
risk reduction:
- if avoiding a risk is impractical, it may be possible to reduce exposure to its related hazards
- ex) exercising regularly, avoiding poor health habits, and eating a balanced diet can reduce the
risk of illness and premature death from heart disease, cancer, and diabetes
risk retention
- acceptance of risk and dealing with a loss using personal funds
- works well for small financial losses
- going without insurance is example of risk retention
- use of deductibles in health insurance is a risk retention device (deductibles shift small losses
to the policyowner, leaving insurance to cover more serious losses)
risk sharing
- people who shared a common risk banded together and chipped in to compensate a member
of group who suffered a covered loss
risk transfer
- transfer the loss to a 3rd party
- basis for most insurance
, - in exchange for paying a premium, an individual or business can transfer the risk of loss to a
insurance company
- should a covered loss occur, the insurer will compensate the insured for the value of loss up to
policy limits
elements of insurable risk
before issuing an insurance policy to an applicant, the company determines whether the
applicant represents an insurable risk
to be insurable, a risk (and the potential loss it represents) must be:
(1) definable
(time, cause, and location)
(2) measurable
(insurance policies include a provision clearly stating the amount they will pay in the event of a
covered loss)
(3) insured peril must be outside of the insured's control
(death is insurable peril because of the uncertainty as to when it will occur; self-inflicted injuries
are not covered under most health policies; suicide excluded for first 2 years of a life insurance
policy)
(4) risk must be part of a large group of similar (or homogenous) risks that the insurance
company can use to predict future losses
(5) potential loss must not be financially catastrophic (war)
(6) risk must not be one of the policy's stated exclusions
underwriting
insurance company underwriters determine if the proposed risk should be accepted or rejected
using the application and related information they determine if the applicant represents an
insurable risk
law of large numbers
predicting future insurance losses relies heavily on statistics, probabilities, and averages
