[PSI INSURANCE EXAM, MOST TESTED QUESTIONS 2026 !!]
COMPLETE EXAM QUESTIONS AND VERIFIED ANSWERS |
2026–2027 LATEST UPDATE | GUARANTEED PASS | DETAILED
RATIONALES | FULL STUDY GUIDE | EXAM PREP | PRACTICE
TEST | CERTIFICATION PREPARATION
1. An applicant submits an insurance application with incomplete medical history
information. What is the most appropriate action for the producer?
A. Submit the application immediately to avoid delay
B. Complete the missing information on behalf of the applicant
C. Return the application to the applicant for completion
D. Estimate the missing details based on similar applicants
Correct Answer: C. Return the application to the applicant for completion
Rationale: Producers must ensure applications are complete and accurate as submitted by
the applicant. Completing or estimating information may constitute misrepresentation.
Returning the application maintains compliance and reduces underwriting risk.
2. Which of the following is the primary purpose of insurance?
A. To eliminate all financial risks
B. To transfer risk from an individual to an insurer
C. To guarantee profit for policyholders
D. To avoid any future losses entirely
Correct Answer: B. To transfer risk from an individual to an insurer
Rationale: Insurance does not eliminate risk but transfers it from the insured to the insurer in
exchange for premiums. The other options incorrectly describe insurance as risk elimination
or profit generation.
3. What best describes a "hazard" in insurance terminology?
A. The cause of a loss
B. A condition that increases the likelihood of loss
C. The financial value of the loss
D. A type of insurance policy exclusion
Correct Answer: B. A condition that increases the likelihood of loss
Rationale: A hazard increases the chance or severity of a loss, such as unsafe conditions. The
cause of loss is a peril, not a hazard.
4. An insured fails to disclose a material fact on an application. What is the potential
consequence?
A. Automatic policy renewal
B. Policy denial or rescission
C. Reduced premium rates
D. Guaranteed claim approval
Correct Answer: B. Policy denial or rescission
Rationale: Material misrepresentation can allow the insurer to void or rescind the policy.
Insurers rely on accurate disclosure for underwriting decisions.
,5. Which principle requires that both parties to an insurance contract act in good faith?
A. Indemnity
B. Utmost good faith
C. Subrogation
D. Contribution
Correct Answer: B. Utmost good faith
Rationale: Insurance contracts require honesty from both insurer and insured. The other
principles relate to claims recovery and loss compensation.
6. What is the function of an insurance premium?
A. To represent the insured’s tax liability
B. To serve as the insurer’s profit guarantee
C. To fund potential claim payments and insurer expenses
D. To eliminate underwriting requirements
Correct Answer: C. To fund potential claim payments and insurer expenses
Rationale: Premiums pool risk funds used for claims and operational costs. They are not
guaranteed profit or unrelated to underwriting.
7. Which of the following is an example of a moral hazard?
A. Poor road conditions increasing accidents
B. A driver installing safety features in a car
C. An insured intentionally causing a loss for gain
D. A storm damaging multiple homes
Correct Answer: C. An insured intentionally causing a loss for gain
Rationale: Moral hazard involves intentional behavior that increases risk due to insurance
coverage. The other options relate to physical hazards or risk reduction.
8. What does the principle of indemnity aim to prevent?
A. Policy cancellations
B. Insurer profitability
C. Insured profit from a loss
D. Claims processing delays
Correct Answer: C. Insured profit from a loss
Rationale: Indemnity ensures the insured is restored to their financial position before the loss,
not placed in a better position.
9. Which document provides evidence of insurance coverage prior to policy issuance?
A. Binder
B. Certificate of origin
C. Claim form
D. Endorsement
Correct Answer: A. Binder
Rationale: A binder temporarily provides coverage until the formal policy is issued. Other
documents serve different administrative purposes.
10. What is subrogation in insurance?
A. The insurer’s right to cancel a policy
B. The insured’s right to choose coverage limits
C. The insurer’s right to recover losses from a third party
D. The insured’s right to increase premiums
, Correct Answer: C. The insurer’s right to recover losses from a third party
Rationale: Subrogation allows insurers to recover claim costs from responsible third parties
after indemnifying the insured.
11. Which factor is most likely to influence underwriting decisions?
A. Social media activity
B. Risk exposure and applicant history
C. Color preference of applicant
D. Policy delivery method
Correct Answer: B. Risk exposure and applicant history
Rationale: Underwriters evaluate risk factors such as history, exposure, and probability of
loss. Irrelevant personal preferences are not considered.
12. What is the purpose of a deductible in an insurance policy?
A. To increase insurer liability
B. To reduce small claims and share risk with insured
C. To eliminate premium payments
D. To guarantee full claim payment
Correct Answer: B. To reduce small claims and share risk with insured
Rationale: Deductibles ensure policyholders share in losses and discourage minor claims,
helping stabilize premiums.
13. Which of the following is a peril?
A. Poor maintenance
B. Fire
C. Negligence
D. Wear and tear
Correct Answer: B. Fire
Rationale: A peril is a direct cause of loss such as fire, theft, or storm. Hazards increase risk
but are not perils.
14. What is the primary role of an insurance underwriter?
A. Adjust claims after losses
B. Market insurance products to clients
C. Evaluate and accept or reject risk
D. Collect premiums from policyholders
Correct Answer: C. Evaluate and accept or reject risk
Rationale: Underwriters assess applications and determine insurability based on risk analysis.
15. Which term describes insurance that covers losses only up to the actual cash value?
A. Replacement cost coverage
B. Valued policy
C. Indemnity coverage
D. Excess coverage
Correct Answer: C. Indemnity coverage
Rationale: Indemnity ensures compensation reflects actual loss value, factoring depreciation.
16. What is the function of reinsurance?
A. Increase policyholder premiums
B. Transfer risk from insurer to another insurer
COMPLETE EXAM QUESTIONS AND VERIFIED ANSWERS |
2026–2027 LATEST UPDATE | GUARANTEED PASS | DETAILED
RATIONALES | FULL STUDY GUIDE | EXAM PREP | PRACTICE
TEST | CERTIFICATION PREPARATION
1. An applicant submits an insurance application with incomplete medical history
information. What is the most appropriate action for the producer?
A. Submit the application immediately to avoid delay
B. Complete the missing information on behalf of the applicant
C. Return the application to the applicant for completion
D. Estimate the missing details based on similar applicants
Correct Answer: C. Return the application to the applicant for completion
Rationale: Producers must ensure applications are complete and accurate as submitted by
the applicant. Completing or estimating information may constitute misrepresentation.
Returning the application maintains compliance and reduces underwriting risk.
2. Which of the following is the primary purpose of insurance?
A. To eliminate all financial risks
B. To transfer risk from an individual to an insurer
C. To guarantee profit for policyholders
D. To avoid any future losses entirely
Correct Answer: B. To transfer risk from an individual to an insurer
Rationale: Insurance does not eliminate risk but transfers it from the insured to the insurer in
exchange for premiums. The other options incorrectly describe insurance as risk elimination
or profit generation.
3. What best describes a "hazard" in insurance terminology?
A. The cause of a loss
B. A condition that increases the likelihood of loss
C. The financial value of the loss
D. A type of insurance policy exclusion
Correct Answer: B. A condition that increases the likelihood of loss
Rationale: A hazard increases the chance or severity of a loss, such as unsafe conditions. The
cause of loss is a peril, not a hazard.
4. An insured fails to disclose a material fact on an application. What is the potential
consequence?
A. Automatic policy renewal
B. Policy denial or rescission
C. Reduced premium rates
D. Guaranteed claim approval
Correct Answer: B. Policy denial or rescission
Rationale: Material misrepresentation can allow the insurer to void or rescind the policy.
Insurers rely on accurate disclosure for underwriting decisions.
,5. Which principle requires that both parties to an insurance contract act in good faith?
A. Indemnity
B. Utmost good faith
C. Subrogation
D. Contribution
Correct Answer: B. Utmost good faith
Rationale: Insurance contracts require honesty from both insurer and insured. The other
principles relate to claims recovery and loss compensation.
6. What is the function of an insurance premium?
A. To represent the insured’s tax liability
B. To serve as the insurer’s profit guarantee
C. To fund potential claim payments and insurer expenses
D. To eliminate underwriting requirements
Correct Answer: C. To fund potential claim payments and insurer expenses
Rationale: Premiums pool risk funds used for claims and operational costs. They are not
guaranteed profit or unrelated to underwriting.
7. Which of the following is an example of a moral hazard?
A. Poor road conditions increasing accidents
B. A driver installing safety features in a car
C. An insured intentionally causing a loss for gain
D. A storm damaging multiple homes
Correct Answer: C. An insured intentionally causing a loss for gain
Rationale: Moral hazard involves intentional behavior that increases risk due to insurance
coverage. The other options relate to physical hazards or risk reduction.
8. What does the principle of indemnity aim to prevent?
A. Policy cancellations
B. Insurer profitability
C. Insured profit from a loss
D. Claims processing delays
Correct Answer: C. Insured profit from a loss
Rationale: Indemnity ensures the insured is restored to their financial position before the loss,
not placed in a better position.
9. Which document provides evidence of insurance coverage prior to policy issuance?
A. Binder
B. Certificate of origin
C. Claim form
D. Endorsement
Correct Answer: A. Binder
Rationale: A binder temporarily provides coverage until the formal policy is issued. Other
documents serve different administrative purposes.
10. What is subrogation in insurance?
A. The insurer’s right to cancel a policy
B. The insured’s right to choose coverage limits
C. The insurer’s right to recover losses from a third party
D. The insured’s right to increase premiums
, Correct Answer: C. The insurer’s right to recover losses from a third party
Rationale: Subrogation allows insurers to recover claim costs from responsible third parties
after indemnifying the insured.
11. Which factor is most likely to influence underwriting decisions?
A. Social media activity
B. Risk exposure and applicant history
C. Color preference of applicant
D. Policy delivery method
Correct Answer: B. Risk exposure and applicant history
Rationale: Underwriters evaluate risk factors such as history, exposure, and probability of
loss. Irrelevant personal preferences are not considered.
12. What is the purpose of a deductible in an insurance policy?
A. To increase insurer liability
B. To reduce small claims and share risk with insured
C. To eliminate premium payments
D. To guarantee full claim payment
Correct Answer: B. To reduce small claims and share risk with insured
Rationale: Deductibles ensure policyholders share in losses and discourage minor claims,
helping stabilize premiums.
13. Which of the following is a peril?
A. Poor maintenance
B. Fire
C. Negligence
D. Wear and tear
Correct Answer: B. Fire
Rationale: A peril is a direct cause of loss such as fire, theft, or storm. Hazards increase risk
but are not perils.
14. What is the primary role of an insurance underwriter?
A. Adjust claims after losses
B. Market insurance products to clients
C. Evaluate and accept or reject risk
D. Collect premiums from policyholders
Correct Answer: C. Evaluate and accept or reject risk
Rationale: Underwriters assess applications and determine insurability based on risk analysis.
15. Which term describes insurance that covers losses only up to the actual cash value?
A. Replacement cost coverage
B. Valued policy
C. Indemnity coverage
D. Excess coverage
Correct Answer: C. Indemnity coverage
Rationale: Indemnity ensures compensation reflects actual loss value, factoring depreciation.
16. What is the function of reinsurance?
A. Increase policyholder premiums
B. Transfer risk from insurer to another insurer
