Minnesota Accident & Health Insurance License Unit Test
Questions and Answers 2023 with complete solution
The law of large numbers
A) states that there must be an adequate spread of risk for insurance to be effective.
B) states that large risks should be transferred to an insurance company.
C) prohibits insurance with extremely high premiums.
D) states that the more examples used to develop a statistic, the more reliable the
statistic will be.
D) states that the more examples used to develop a statistic, the more reliable the
statistic will be.
The law of large numbers says that the more examples used to develop a statistic, the
more reliable the statistic will be. Insurers use the law of large numbers to predict the
number of losses that will occur so they can charge the correct premium.
A risk that involves both the possibility of loss and the possibility of gain is a/an
A) pure risk.
B) a morale risk.
C) speculative risk.
D) insurable risk.
C) speculative risk.
A speculative risk involves both the possibility of loss and the possibility of gain.
Speculative risks are not insurable. A pure risk involves only the possibility of loss.
LaTonya purchases a house from John. She borrows $75,000 from First City Bank
which, along with her $25,000 down payment, equals the $100,000 purchase price of
the home. Who has an insurable interest in this home?
A) John
B) LaTonya
C) Both LaTonya and First City Bank
D) First City Bank
C) Both LaTonya and First City Bank
To have an insurable interest, an individual or business must have a chance of financial
loss or a financial interest in the property. Both LaTonya, who owns the home, and First
City Bank, which provided the mortgage, have insurable interests. John does not have
an insurable interest because he no longer owns the home.
Highpoint Industries has an automatic sprinkler system installed in its office building.
This is an example of which risk management method?
A) Transfer
B) Reduction
,C) Avoidance
D) Control
B) Reduction
A sprinkler system can reduce the severity of fires, but it does not prevent them
altogether or reduce the number that occur.
Benson Pharmaceutical Company decides not to manufacture a new drug after
determining that it has serious potential side effects. This is an example of which risk
management method?
A) Avoidance
B) Control
C) Retention
D) Transfer
A) Avoidance
By not producing the drug, Benson avoids the risk of being sued by consumers who are
injured by the drug.
Since she has always been in good health, Donna decides to cancel her health
insurance policy. This is an example of which risk management method?
A) Transfer
B) Control
C) Avoidance
D) Retention
D) Retention
By not carrying health insurance, Donna is retaining the risk of financial loss from
unexpected medical expenses.
Myron, who is 16, signs a contract to lease a car. This would probably not be
considered a valid contract under the law because
A) Myron is not a competent party.
B) it does not involve offer and acceptance.
C) there is no consideration involved in a leasing contract.
D) the contract does not have a legal purpose.
A) Myron is not a competent party.
Myron would probably be considered incompetent because of his age.
Ben bought an automobile four years ago for $15,000. Today it is worth $6,000.
According to the principle of indemnity, how much should Ben receive if the car is totally
demolished?
A) $9,000
B) $15,000
,C) $6,000
D) Nothing
C) $6,000
According to the principle of indemnity, an individual should be restored to the
approximate financial condition he or she was in before the loss, no more and no less.
Harry Arne and his cousin each own 50% of a $160,000 duplex. Suppose Harry
purchases $160,000 of insurance on the home. If it burns to the ground, how much
would Harry collect?
A) $160,000
B) $240,000
C) $40,000
D) $80,000
D) $80,000
An insured may only be indemnified to the extent of his or her insurable interest. Harry
has an $80,000 insurable interest in the duplex.
Under a unilateral contract, which parties are legally bound to perform under the
contract?
A) Insured only
B) Neither the insured nor the insurer
C) Insurer only
D) Both the insured and the insurer
C) Insurer only
An insurance policy is one-sided because only the insurance company is legally bound
to perform its part of the agreement. If an insured stops paying premiums, the insurer
can cancel coverage, but it can't take the insured to court for breaking the contract.
Which part of an insurance policy describes the responsibilities and obligations of both
the insurance company and the insured under the policy?
A) Insuring agreements
B) Definitions
C) Declarations
D) Conditions
D) Conditions
The conditions describe the responsibilities and obligations of both the insurance
company and the insured under the policy.
What type of insurance company pays dividends to its policyholders?
A) Mutual
B) Stock
, C) Reciprocal
D) Lloyd's
A) Mutual
Mutual insurance companies are owned by their policyholders. Any divisible surplus is
paid to policyholders in the form of dividends.
Liability coverage is classified as what line of insurance?
A) Life
B) Property
C) Casualty
D) Health
C) Casualty
The risk that an individual will become liable for damage caused to others is classified
as casualty insurance.
Nonexclusive agents are part of what insurance marketing system?
A) Captive agent
B) Direct writer
C) Direct response
D) Independent agent
D) Independent agent
An independent agent represents more than 1 company and is, therefore, not exclusive
to that company.
Alinda is an employee working as an agent for an insurance company. What type of
insurance marketing system does Alinda's company use?
A) Direct response
B) Captive agency
C) Independent agency
D) Direct writer
D) Direct writer
Agents of insurance companies that use the direct writer marketing system are
employees of the company.
Which insurance company department is responsible for analyzing data in order to
properly set the rates to be charged for insurance?
A) Audit
B) Actuarial
C) Marketing
D) Underwriting
B) Actuarial
Questions and Answers 2023 with complete solution
The law of large numbers
A) states that there must be an adequate spread of risk for insurance to be effective.
B) states that large risks should be transferred to an insurance company.
C) prohibits insurance with extremely high premiums.
D) states that the more examples used to develop a statistic, the more reliable the
statistic will be.
D) states that the more examples used to develop a statistic, the more reliable the
statistic will be.
The law of large numbers says that the more examples used to develop a statistic, the
more reliable the statistic will be. Insurers use the law of large numbers to predict the
number of losses that will occur so they can charge the correct premium.
A risk that involves both the possibility of loss and the possibility of gain is a/an
A) pure risk.
B) a morale risk.
C) speculative risk.
D) insurable risk.
C) speculative risk.
A speculative risk involves both the possibility of loss and the possibility of gain.
Speculative risks are not insurable. A pure risk involves only the possibility of loss.
LaTonya purchases a house from John. She borrows $75,000 from First City Bank
which, along with her $25,000 down payment, equals the $100,000 purchase price of
the home. Who has an insurable interest in this home?
A) John
B) LaTonya
C) Both LaTonya and First City Bank
D) First City Bank
C) Both LaTonya and First City Bank
To have an insurable interest, an individual or business must have a chance of financial
loss or a financial interest in the property. Both LaTonya, who owns the home, and First
City Bank, which provided the mortgage, have insurable interests. John does not have
an insurable interest because he no longer owns the home.
Highpoint Industries has an automatic sprinkler system installed in its office building.
This is an example of which risk management method?
A) Transfer
B) Reduction
,C) Avoidance
D) Control
B) Reduction
A sprinkler system can reduce the severity of fires, but it does not prevent them
altogether or reduce the number that occur.
Benson Pharmaceutical Company decides not to manufacture a new drug after
determining that it has serious potential side effects. This is an example of which risk
management method?
A) Avoidance
B) Control
C) Retention
D) Transfer
A) Avoidance
By not producing the drug, Benson avoids the risk of being sued by consumers who are
injured by the drug.
Since she has always been in good health, Donna decides to cancel her health
insurance policy. This is an example of which risk management method?
A) Transfer
B) Control
C) Avoidance
D) Retention
D) Retention
By not carrying health insurance, Donna is retaining the risk of financial loss from
unexpected medical expenses.
Myron, who is 16, signs a contract to lease a car. This would probably not be
considered a valid contract under the law because
A) Myron is not a competent party.
B) it does not involve offer and acceptance.
C) there is no consideration involved in a leasing contract.
D) the contract does not have a legal purpose.
A) Myron is not a competent party.
Myron would probably be considered incompetent because of his age.
Ben bought an automobile four years ago for $15,000. Today it is worth $6,000.
According to the principle of indemnity, how much should Ben receive if the car is totally
demolished?
A) $9,000
B) $15,000
,C) $6,000
D) Nothing
C) $6,000
According to the principle of indemnity, an individual should be restored to the
approximate financial condition he or she was in before the loss, no more and no less.
Harry Arne and his cousin each own 50% of a $160,000 duplex. Suppose Harry
purchases $160,000 of insurance on the home. If it burns to the ground, how much
would Harry collect?
A) $160,000
B) $240,000
C) $40,000
D) $80,000
D) $80,000
An insured may only be indemnified to the extent of his or her insurable interest. Harry
has an $80,000 insurable interest in the duplex.
Under a unilateral contract, which parties are legally bound to perform under the
contract?
A) Insured only
B) Neither the insured nor the insurer
C) Insurer only
D) Both the insured and the insurer
C) Insurer only
An insurance policy is one-sided because only the insurance company is legally bound
to perform its part of the agreement. If an insured stops paying premiums, the insurer
can cancel coverage, but it can't take the insured to court for breaking the contract.
Which part of an insurance policy describes the responsibilities and obligations of both
the insurance company and the insured under the policy?
A) Insuring agreements
B) Definitions
C) Declarations
D) Conditions
D) Conditions
The conditions describe the responsibilities and obligations of both the insurance
company and the insured under the policy.
What type of insurance company pays dividends to its policyholders?
A) Mutual
B) Stock
, C) Reciprocal
D) Lloyd's
A) Mutual
Mutual insurance companies are owned by their policyholders. Any divisible surplus is
paid to policyholders in the form of dividends.
Liability coverage is classified as what line of insurance?
A) Life
B) Property
C) Casualty
D) Health
C) Casualty
The risk that an individual will become liable for damage caused to others is classified
as casualty insurance.
Nonexclusive agents are part of what insurance marketing system?
A) Captive agent
B) Direct writer
C) Direct response
D) Independent agent
D) Independent agent
An independent agent represents more than 1 company and is, therefore, not exclusive
to that company.
Alinda is an employee working as an agent for an insurance company. What type of
insurance marketing system does Alinda's company use?
A) Direct response
B) Captive agency
C) Independent agency
D) Direct writer
D) Direct writer
Agents of insurance companies that use the direct writer marketing system are
employees of the company.
Which insurance company department is responsible for analyzing data in order to
properly set the rates to be charged for insurance?
A) Audit
B) Actuarial
C) Marketing
D) Underwriting
B) Actuarial
