Sample practice questions

A few real questions from this free bank, with full explanations. Use the practice tool above for the whole set.

1. 1. General Insurance Principles

   Which type of risk is insurable by a property and casualty insurer?

   • a.Speculative risk, since it carries a chance of gain
   • b.Market risk, since price movements are predictable
   • c.Pure risk, since it carries only a chance of loss
   • d.Dynamic risk, since it shifts with the economy

   Answer: c

   Explanation: Insurers cover pure risk, which is a situation with only two possible outcomes: a loss or no loss, with no possibility of gain. Speculative risk (such as gambling or investing) includes a chance of gain and is not insurable, because insurance is meant to restore a loss, not create profit. Market and dynamic risks generally involve speculative elements and broad economic change that are not suited to insurance pooling.

2. 2. General Insurance Principles

   An insurer's incurred losses run 68% of premium and its underwriting expenses run 29%. Its combined ratio and what that ratio shows are:

   • a.97%, an underwriting loss that investment income must cover
   • b.97%, an underwriting gain before any investment income
   • c.68%, since expenses sit outside the combined ratio entirely
   • d.39%, the gap between the loss ratio and the expense ratio

   Answer: b

   Explanation: The combined ratio adds the loss ratio to the expense ratio, so 68% plus 29% gives 97%. A figure under 100% means the insurer collected more premium than it paid out in losses and expenses, which is an underwriting profit before investment income is counted; a figure above 100% would be the underwriting loss. Subtracting the two ratios has no meaning, and expenses are very much part of the calculation.

3. 3. Property Insurance Fundamentals

   Property written on a stated amount basis is settled at a covered total loss by paying:

   • a.The stated amount plus the accrued inflation guard
   • b.The stated amount, whatever the property is worth
   • c.The replacement cost with no depreciation taken
   • d.The least of stated amount, value or repair cost

   Answer: d

   Explanation: A stated amount is a ceiling the insured declares for hard-to-value property, and settlement is the smallest of that figure, the property's value at the time of loss, and what it costs to repair or replace the item. That is what separates it from agreed value, where the figure the insurer accepted is binding. Reading a stated amount as a guaranteed payout is the common misunderstanding, and it leaves an insured paying premium on a number no claim will ever produce.

4. 4. Dwelling Policy (DP)

   An unendorsed dwelling policy pays nothing when a burglar carries off the television. The owner can obtain that coverage by:

   • a.raising the Coverage C limit
   • b.moving up to the broad form
   • c.adding a theft endorsement
   • d.buying extended coverage

   Answer: c

   Explanation: Theft of the insured's property is not a peril any dwelling form insures, so it comes only from a theft endorsement written onto the policy. Moving to the broad or special form adds perils such as weight of ice and snow and accidental discharge of water, and extended coverage adds windstorm, riot, aircraft, and the rest. A bigger limit cannot create a peril that is absent.

5. 5. Homeowners Policy (HO)

   A homeowner deliberately smashes the windows of his own house to collect on the policy. Section I:

   • a.pays the loss but cancels the policy
   • b.denies it as an intentional loss
   • c.pays, since vandalism is a named peril
   • d.pays the depreciated value of the glass

   Answer: b

   Explanation: Insurance answers fortuitous loss, and Section I excludes loss arising out of an act an insured commits with the intent to cause that loss, so self-inflicted damage produces no payment. The vandalism answer fails because that named peril contemplates damage done by others, not by the insured himself. Paying and then cancelling would still hand over the money the exclusion is written to withhold.

6. 6. Personal Auto Policy

   The insured's listed car is in a body shop for a week, so he drives a spare car titled to his resident son. Under the personal auto policy that spare car is:

   • a.A temporary substitute for as long as repairs last
   • b.Not a temporary substitute, since the son owns it
   • c.A non-owned auto used with the son's permission
   • d.A newly acquired auto once the repairs are finished

   Answer: b

   Explanation: A temporary substitute has to be a vehicle the insured and his family members do not own, used because a covered auto is out of service for repair, servicing, breakdown, loss or destruction. The son is a family member, so his car fails the definition and has to be insured in its own right. Calling it a non-owned auto fails for the same ownership reason.

7. 7. Personal Auto Policy

   On a business auto policy, the numeric symbols entered beside each coverage on the declarations:

   • a.Define which autos a given coverage applies to
   • b.Indicate where each auto is garaged
   • c.Set the deductible that applies to that coverage
   • d.Show the rating class for each listed vehicle

   Answer: a

   Explanation: Covered auto designation symbols tell you which group of autos a particular coverage reaches, such as any auto, owned autos, specifically described autos, hired autos or non-owned autos, and each line of coverage can carry a different symbol. Deductibles, rating classes and garaging locations all appear elsewhere on the declarations.

8. 8. Casualty & Liability Insurance

   When a claims-made liability policy is cancelled, the supplemental extended reporting period differs from the basic one in that the supplemental period:

   • a.must be requested in writing and paid for
   • b.attaches automatically at no extra cost
   • c.moves the retroactive date to the cancellation
   • d.changes the policy trigger to occurrence basis

   Answer: a

   Explanation: A basic extended reporting period attaches automatically when a claims-made policy ends, at no additional charge, and gives a limited window to report claims for acts before that date. The supplemental period, the purchased tail, must be requested in writing within a stated time and an extra premium paid, and it extends the reporting window far longer. Neither one moves the retroactive date or converts the policy to an occurrence trigger.

9. 9. Commercial Lines

   A builders risk policy on a commercial building under construction is normally written for a limit equal to:

   • a.the land and the building together
   • b.the completed value of the building
   • c.the contractor's fee for the job
   • d.the value in place when work starts

   Answer: b

   Explanation: Builders risk is written on a completed value basis: the limit is set at what the finished structure will be worth, and the exposure builds up as materials, labour and equipment go into the job. Insuring only the value in place on day one would leave the project badly underinsured within weeks. Land is not insurable property, and the contractor's fee measures profit rather than the property at risk. Coverage ends when the building is accepted, occupied or put to its intended use.

10. 10. Policy Structure & Provisions

    Subrogation is best defined as the insurer's right to:

    • a.Deny coverage after it has already paid the claim
    • b.Raise the insured's premium after paying a claim
    • c.Recover a paid claim from the negligent third party
    • d.Cancel the policy at any time for any reason at all

    Answer: c

    Explanation: Subrogation is the insurer's right, after paying a covered claim, to step into the insured's shoes and pursue recovery from the third party who caused the loss. It prevents the insured from collecting twice and helps hold the responsible party accountable, which supports the principle of indemnity. The insured must not do anything after a loss that impairs the insurer's subrogation rights.