New Mexico Life, Health & Accident Insurance Licensing Exam
120 Multiple-Choice Practice Questions with Answers & Rationales
Based on New Mexico State Regulations and National Insurance Principles
Questions 1-20: Insurance Basics & Risk Management
Question 1
A method of spreading the risk of financial loss among a large number of people is
the definition of:
A) Indemnity
B) Insurance
C) Risk
D) Hazard
Answer: B
Rationale: Insurance is the mechanism for transferring and pooling risk to protect
against financial loss. It allows individuals and businesses to transfer potential
financial losses to an insurer, which spreads that risk across many policyholders.
Question 2
Which of the following is a pure risk?
,A) Gambling at a casino
B) Investing in the stock market
C) The chance of a house fire
D) Starting a new business
Answer: C
Rationale: A pure risk only has a chance of loss or no loss; there is no possibility of
gain. Pure risks are insurable. Gambling and stock market investing are
speculative risks (chance of loss or gain).
Question 3
According to the characteristics of an insurable risk, a loss must be due to chance,
measurable, and:
A) Speculative in nature
B) Based on a large enough pool of similar exposure units
C) A small economic loss
D) Certain to occur
,Answer: B
Rationale: A large pool of similar exposure units allows the insurer to use the law
of large numbers to predict future losses accurately. Losses must also be
determinable and measurable, but not certain to occur.
Question 4
Which type of hazard is defined by a careless attitude on the part of the insured
that increases the chance of loss?
A) Physical Hazard
B) Moral Hazard
C) Morale Hazard
D) Legal Hazard
Answer: C
Rationale: Morale hazard is a state of mind leading to carelessness because the
person knows they are insured. This differs from moral hazard, which involves
intentional dishonesty.
Question 5
, The cause of a potential loss, such as a fire, windstorm, or death, is known as a(n):
A) Hazard
B) Peril
C) Risk
D) Exposure
Answer: B
Rationale: A peril is the actual cause of a potential loss (e.g., fire, theft, death). A
hazard is a condition that increases the chance of loss from a peril.
Question 6
The law of large numbers enables insurers to:
A) Predict future losses with greater accuracy as the number of exposure units
increases
B) Guarantee that no losses will occur
C) Charge each insured an identical premium regardless of risk
D) Avoid paying claims in most circumstances
120 Multiple-Choice Practice Questions with Answers & Rationales
Based on New Mexico State Regulations and National Insurance Principles
Questions 1-20: Insurance Basics & Risk Management
Question 1
A method of spreading the risk of financial loss among a large number of people is
the definition of:
A) Indemnity
B) Insurance
C) Risk
D) Hazard
Answer: B
Rationale: Insurance is the mechanism for transferring and pooling risk to protect
against financial loss. It allows individuals and businesses to transfer potential
financial losses to an insurer, which spreads that risk across many policyholders.
Question 2
Which of the following is a pure risk?
,A) Gambling at a casino
B) Investing in the stock market
C) The chance of a house fire
D) Starting a new business
Answer: C
Rationale: A pure risk only has a chance of loss or no loss; there is no possibility of
gain. Pure risks are insurable. Gambling and stock market investing are
speculative risks (chance of loss or gain).
Question 3
According to the characteristics of an insurable risk, a loss must be due to chance,
measurable, and:
A) Speculative in nature
B) Based on a large enough pool of similar exposure units
C) A small economic loss
D) Certain to occur
,Answer: B
Rationale: A large pool of similar exposure units allows the insurer to use the law
of large numbers to predict future losses accurately. Losses must also be
determinable and measurable, but not certain to occur.
Question 4
Which type of hazard is defined by a careless attitude on the part of the insured
that increases the chance of loss?
A) Physical Hazard
B) Moral Hazard
C) Morale Hazard
D) Legal Hazard
Answer: C
Rationale: Morale hazard is a state of mind leading to carelessness because the
person knows they are insured. This differs from moral hazard, which involves
intentional dishonesty.
Question 5
, The cause of a potential loss, such as a fire, windstorm, or death, is known as a(n):
A) Hazard
B) Peril
C) Risk
D) Exposure
Answer: B
Rationale: A peril is the actual cause of a potential loss (e.g., fire, theft, death). A
hazard is a condition that increases the chance of loss from a peril.
Question 6
The law of large numbers enables insurers to:
A) Predict future losses with greater accuracy as the number of exposure units
increases
B) Guarantee that no losses will occur
C) Charge each insured an identical premium regardless of risk
D) Avoid paying claims in most circumstances
