Texas Property and Casualty Insurance Exam
Questions with 100% Correct Answers
Insurance
The transfer of the possibility of a loss (risk) from an individual or business to an insurance company,
which in turn spreads the costs of unexpected losses to many individuals
Law of Large Numbers
The larger the number of people with a similar exposure to loss, the more predictable actual losses
will be
Law of Large Numbers Example
When issuing a policy on a 35 year old male, the insurance company has no way of knowing or
accurately predicting when he will die. Instead, they will look at a large group of similar risks - 35 year
old males of similar lifestyles/health - and make some conclusions based on statistics of past losses to
create a general idea of the predicted time of death and set premiums accordingly
Insurable Interest
When the insured would incur a financial or other type of benefit loss if the insured object was
damaged/lost
3 Elements of Insurable Risk
1. Financial (monetary interest)
2. Blood (relative)
3. Business (a business partner)
Risk
The uncertainty or chance of a loss occurring
Two Types of Risk
1. Pure risk
2. Speculative risk
Pure Risk
Situations that can only result in a loss or no change, there is no opportunity for financial gain
Speculative Risk
Situations that have the opportunity for either loss or gain
Which type of risk are insurance companies willing to accept?
Pure risk situations
Peril
The causes of loss insured against in an insurance policy
Perils of Life Insurance
, The financial loss caused by the premature death of the insured
Perils of Health Insurance
The medical expenses and/or loss of income caused by the insured's sickness or accidental injury
Perils of Property Insurance
The loss of physical property or the loss of its income-producing abilities
Perils of Casualty Insurance
The loss and/or damage of property and resulting liabilities
Hazard
Conditions or situations that increase the probability of an insured loss occurring
3 Classifications of Hazards
1. Physical hazards
2. Moral hazards
3. Morale hazards
Physical Hazards
Hazards arising from the material, structural, or operational features of the risk, apart from the
persons owning or managing it
Moral Hazards
Applicants that may lie on an application for insurance, or in the past have submitted fraudulent
claims against an insurer
Morale Hazards
Increase in the hazard presented by a risk, arising from the insured's indifference to loss because of
the existence of insurance
Conditions
The section of an insurance policy that indicates the general rules that the insurer and insured agree
to follow under the terms of the policy
Loss
The reduction, decrease, or disappearance of value of the person or property insured in a policy,
caused by a named peril
Hazards lead to...
Perils
Perils lead to...
Loss
Questions with 100% Correct Answers
Insurance
The transfer of the possibility of a loss (risk) from an individual or business to an insurance company,
which in turn spreads the costs of unexpected losses to many individuals
Law of Large Numbers
The larger the number of people with a similar exposure to loss, the more predictable actual losses
will be
Law of Large Numbers Example
When issuing a policy on a 35 year old male, the insurance company has no way of knowing or
accurately predicting when he will die. Instead, they will look at a large group of similar risks - 35 year
old males of similar lifestyles/health - and make some conclusions based on statistics of past losses to
create a general idea of the predicted time of death and set premiums accordingly
Insurable Interest
When the insured would incur a financial or other type of benefit loss if the insured object was
damaged/lost
3 Elements of Insurable Risk
1. Financial (monetary interest)
2. Blood (relative)
3. Business (a business partner)
Risk
The uncertainty or chance of a loss occurring
Two Types of Risk
1. Pure risk
2. Speculative risk
Pure Risk
Situations that can only result in a loss or no change, there is no opportunity for financial gain
Speculative Risk
Situations that have the opportunity for either loss or gain
Which type of risk are insurance companies willing to accept?
Pure risk situations
Peril
The causes of loss insured against in an insurance policy
Perils of Life Insurance
, The financial loss caused by the premature death of the insured
Perils of Health Insurance
The medical expenses and/or loss of income caused by the insured's sickness or accidental injury
Perils of Property Insurance
The loss of physical property or the loss of its income-producing abilities
Perils of Casualty Insurance
The loss and/or damage of property and resulting liabilities
Hazard
Conditions or situations that increase the probability of an insured loss occurring
3 Classifications of Hazards
1. Physical hazards
2. Moral hazards
3. Morale hazards
Physical Hazards
Hazards arising from the material, structural, or operational features of the risk, apart from the
persons owning or managing it
Moral Hazards
Applicants that may lie on an application for insurance, or in the past have submitted fraudulent
claims against an insurer
Morale Hazards
Increase in the hazard presented by a risk, arising from the insured's indifference to loss because of
the existence of insurance
Conditions
The section of an insurance policy that indicates the general rules that the insurer and insured agree
to follow under the terms of the policy
Loss
The reduction, decrease, or disappearance of value of the person or property insured in a policy,
caused by a named peril
Hazards lead to...
Perils
Perils lead to...
Loss
