Insurance Exam Prep: Contracts, Risk Principles,
Hazards, and Reinsurance
1. An insurer enters into a contract with a third party to insure itself against losses from insurance
policies it issues. What is this agreement called? - ✔✔Reinsurance
An insurer owned by its policyholders is called a - ✔✔Mutual insurer
AAA insurance company has transferred a portion of it's loss exposure to BBB insurance company. In this
reinsurance transaction, what is AAA insurance called - ✔✔Primary insurers
Which of the following contracts is defined as "one that restores an injured party to the condition that
was present before the loss? - ✔✔Indemnity
When handling premiums for an insured, an agent is acting in which capacity? - ✔✔Fiduciary
The importance of a representation is demonstrated in what rule? - ✔✔Materiality of concealment
Which principal is accurately described with the statement "Insureds are entitled to recover an amount
NOT greater than the amount of their loss"? - ✔✔Indemnity
A unilateral contract is one in which - ✔✔Only one party makes (the insurer) makes any kind of legally
enforceable promise
Which of the following is NOT required in the content of a policy? - ✔✔Probability of loss
10. Which statement is correct when describing a contract of adhesion? - ✔✔Contract may be accepted
or rejected by the insured
,Express power given to an agent in an agency agreement is - ✔✔The authority to represent the insurer
What does the term indemnity refer to? - ✔✔Make whole
Which of the following statements correctly describes a contract of indemnity? - ✔✔Restore to the
position the party was in before the loss occurred
Which of the following statements about aleatory contracts is NOT true? - ✔✔The insured and the
insurer contribute equally to the contract
If a material warranty violation on the part of the insured is found, what recourse does an insurer have?
- ✔✔Rescind the policy
Restoring an insured to the same condition as before a loss is an example of the principal of -
✔✔Indemnity
Which of the following is NOT a requirement of a contract? - ✔✔Equal consideration is required
between the involved parties
Which course of action is the insurer entitled to when deliberate concealment is committed by the
insured? - ✔✔Rescinding the contract
Which of the following in NOT a characteristic of reinsurance? - ✔✔Increases the unearned premium
reserve
20. One important function of an insurance company is to identify and sell to potential customers.
Which of these BEST describes this function? - ✔✔Marketing
Which of the following is a contract that involves one party which indemnifies another when a loss
arises from an unknown event? - ✔✔Insurance policy
,John owned an insurance policy that gives him the right to share in the insurer's surplus. What kind of
policy is this? - ✔✔Participating
Which of the following is an insurer established by a parent company for the purpose of insuring the
parent company's loss exposure? - ✔✔Captive insurer
Which of the following is a type of insurance where an insurer transfers loss exposure from policies
written for its insureds? - ✔✔Reinsurance
25. When a mutual insurer becomes a stock company, the process is called - ✔✔Demutualization
Which of the following would not be accomplished with the purchases of an insurance policy - ✔✔Risk is
eliminated
Which of the following is considered to be any situation that has the potential for loss? - ✔✔Loss
exposure
Which of the following refers to a condition that may increase the chance of a loss? - ✔✔Hazard
All of the following circumstances must be met for loss retention not be an effective risk management
technique, EXCEPT - ✔✔Probability of loss is unknown
30. Which of the following is NOT considered to be a definition of the term loss? - ✔✔the probability
that an event will occur
An insurer having a large number of similar exposure units is considered important because - ✔✔The
greater the number insured, the more accurately the insurer can predict losses and set appropriate
premiums
Moral hazard is described as the - ✔✔increased chance of a loss because of an insured's dishonest
tendencies
, Which of the following is NOT considered a definition of risk? - ✔✔The cause of the loss
Which of the following describes the increase in the probability of a loss due to an insured's dishonest
tendencies? - ✔✔Moral hazard
A hazard can be best described as - ✔✔a condition that may increase the likelihood of a loss occuring
Which type of risk is gambling - ✔✔Speculative risk
Which of the following is NOT an element of an insurance risk? - ✔✔Loss must be catastrophic
Which of the following is a situation where there is a possibility of either a loss or gain - ✔✔Speculative
risk
A situation in which there is ONLY a chance of loss or no loss is a - ✔✔pure risk
40. Which of these statements correctly describes risks? - ✔✔Pure risk is the only insurable
Which of the following statements do NOT apply to child coverage in a family policy? - ✔✔Only children
born prior to policy's issue date may be included
Which of the following is NOT a true description of non-medical life insurance? - ✔✔Applicants are not
required to answer medical questions on the application
A life insurance policy where the insured can choose where the cash value can be invested is called -
✔✔Variable life
What is the proper order of initial life insurance premiums, from lowest to highest? - ✔✔Modified
premium, ordinary life, single premium
Hazards, and Reinsurance
1. An insurer enters into a contract with a third party to insure itself against losses from insurance
policies it issues. What is this agreement called? - ✔✔Reinsurance
An insurer owned by its policyholders is called a - ✔✔Mutual insurer
AAA insurance company has transferred a portion of it's loss exposure to BBB insurance company. In this
reinsurance transaction, what is AAA insurance called - ✔✔Primary insurers
Which of the following contracts is defined as "one that restores an injured party to the condition that
was present before the loss? - ✔✔Indemnity
When handling premiums for an insured, an agent is acting in which capacity? - ✔✔Fiduciary
The importance of a representation is demonstrated in what rule? - ✔✔Materiality of concealment
Which principal is accurately described with the statement "Insureds are entitled to recover an amount
NOT greater than the amount of their loss"? - ✔✔Indemnity
A unilateral contract is one in which - ✔✔Only one party makes (the insurer) makes any kind of legally
enforceable promise
Which of the following is NOT required in the content of a policy? - ✔✔Probability of loss
10. Which statement is correct when describing a contract of adhesion? - ✔✔Contract may be accepted
or rejected by the insured
,Express power given to an agent in an agency agreement is - ✔✔The authority to represent the insurer
What does the term indemnity refer to? - ✔✔Make whole
Which of the following statements correctly describes a contract of indemnity? - ✔✔Restore to the
position the party was in before the loss occurred
Which of the following statements about aleatory contracts is NOT true? - ✔✔The insured and the
insurer contribute equally to the contract
If a material warranty violation on the part of the insured is found, what recourse does an insurer have?
- ✔✔Rescind the policy
Restoring an insured to the same condition as before a loss is an example of the principal of -
✔✔Indemnity
Which of the following is NOT a requirement of a contract? - ✔✔Equal consideration is required
between the involved parties
Which course of action is the insurer entitled to when deliberate concealment is committed by the
insured? - ✔✔Rescinding the contract
Which of the following in NOT a characteristic of reinsurance? - ✔✔Increases the unearned premium
reserve
20. One important function of an insurance company is to identify and sell to potential customers.
Which of these BEST describes this function? - ✔✔Marketing
Which of the following is a contract that involves one party which indemnifies another when a loss
arises from an unknown event? - ✔✔Insurance policy
,John owned an insurance policy that gives him the right to share in the insurer's surplus. What kind of
policy is this? - ✔✔Participating
Which of the following is an insurer established by a parent company for the purpose of insuring the
parent company's loss exposure? - ✔✔Captive insurer
Which of the following is a type of insurance where an insurer transfers loss exposure from policies
written for its insureds? - ✔✔Reinsurance
25. When a mutual insurer becomes a stock company, the process is called - ✔✔Demutualization
Which of the following would not be accomplished with the purchases of an insurance policy - ✔✔Risk is
eliminated
Which of the following is considered to be any situation that has the potential for loss? - ✔✔Loss
exposure
Which of the following refers to a condition that may increase the chance of a loss? - ✔✔Hazard
All of the following circumstances must be met for loss retention not be an effective risk management
technique, EXCEPT - ✔✔Probability of loss is unknown
30. Which of the following is NOT considered to be a definition of the term loss? - ✔✔the probability
that an event will occur
An insurer having a large number of similar exposure units is considered important because - ✔✔The
greater the number insured, the more accurately the insurer can predict losses and set appropriate
premiums
Moral hazard is described as the - ✔✔increased chance of a loss because of an insured's dishonest
tendencies
, Which of the following is NOT considered a definition of risk? - ✔✔The cause of the loss
Which of the following describes the increase in the probability of a loss due to an insured's dishonest
tendencies? - ✔✔Moral hazard
A hazard can be best described as - ✔✔a condition that may increase the likelihood of a loss occuring
Which type of risk is gambling - ✔✔Speculative risk
Which of the following is NOT an element of an insurance risk? - ✔✔Loss must be catastrophic
Which of the following is a situation where there is a possibility of either a loss or gain - ✔✔Speculative
risk
A situation in which there is ONLY a chance of loss or no loss is a - ✔✔pure risk
40. Which of these statements correctly describes risks? - ✔✔Pure risk is the only insurable
Which of the following statements do NOT apply to child coverage in a family policy? - ✔✔Only children
born prior to policy's issue date may be included
Which of the following is NOT a true description of non-medical life insurance? - ✔✔Applicants are not
required to answer medical questions on the application
A life insurance policy where the insured can choose where the cash value can be invested is called -
✔✔Variable life
What is the proper order of initial life insurance premiums, from lowest to highest? - ✔✔Modified
premium, ordinary life, single premium
