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

   A policy with a $900,000 agreed value limit insures a building whose replacement cost has climbed to $1,050,000 by the time a $300,000 covered loss occurs. The deductible is $10,000. The insurer pays:

   • a.$257,143
   • b.$290,000
   • c.$300,000
   • d.$247,143

   Answer: b

   Explanation: Because the agreed value provision suspends coinsurance, the climb in replacement cost creates no penalty: the insurer pays the $300,000 loss less the $10,000 deductible, or $290,000. Running a coinsurance ratio of $900,000 against the $1,050,000 value would produce about $257,143 before the deductible, and that penalty is exactly what the agreed value provision was bought to remove. Paying $300,000 forgets the deductible.

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)

   Wind-driven waves and rising tidal water push seawater through a home's ground floor. A standard homeowners form treats this as:

   • a.sudden discharge of water, so it is paid
   • b.windstorm, since wind drove the water
   • c.water damage, covered after the deductible
   • d.flood, which the form excludes

   Answer: d

   Explanation: Surface water, waves, tidal water and overflow of a body of water fall inside the water damage exclusion whatever pushed them ashore, so the flooding is not a homeowners loss; cover comes from a separate flood policy, such as one written through the federal program. Calling it windstorm because wind drove the waves is the error the exclusion is worded to defeat. The accidental discharge peril reaches plumbing inside the home, not the sea.

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

   A named non-owner policy differs from an ordinary personal auto policy because it:

   • a.Covers a car furnished for regular use
   • b.Follows the person, not a listed vehicle
   • c.Provides physical damage on rented cars too
   • d.Covers a listed auto that the applicant leases

   Answer: b

   Explanation: A named non-owner policy is written for an individual who owns no vehicle and covers that person's liability while using borrowed or rented autos, so it attaches to the driver rather than to a described auto. It does not reach a vehicle furnished for the insured's regular use, which is what extended non-owned coverage is for, and physical damage on a rental is not part of the basic form.

8. 8. Casualty & Liability Insurance

   A claims-made policy in force now shows a retroactive date of three years ago. A claim made today alleges an error committed five years ago. The policy:

   • a.covers it once the basic reporting tail expires
   • b.covers it under the extended reporting period
   • c.covers it because the claim arrives in term
   • d.excludes it, as the act predates that date

   Answer: d

   Explanation: A retroactive date is the earliest date of wrongful act, injury, or damage a claims-made policy will reach; anything happening before it is outside coverage even when the claim itself is made during the policy period. Here the act is five years old and the retroactive date is three years old, so the claim is not covered. An extended reporting period lengthens the window for reporting claims and does not move the retroactive date backwards.

9. 9. Commercial Lines

   Why is equipment breakdown coverage bought separately from the commercial property policy?

   • a.Boilers are excluded as property
   • b.Property forms exclude mechanical breakdown
   • c.Fire following a boiler burst is excluded
   • d.Breakdown is an inland marine peril

   Answer: b

   Explanation: Commercial property forms exclude loss caused by mechanical breakdown and by artificially generated electrical current, so a boiler, chiller, transformer or motor that wrecks itself is not a property claim. Equipment breakdown coverage fills that gap and pays for the damaged equipment, resulting damage to other property, and the business income loss that follows. A boiler is still covered property for perils such as fire, and an ensuing fire after an explosion is covered, so those answers are wrong.

10. 10. Policy Structure & Provisions

    The part of an insurance policy that identifies the insured, the property or risk, the policy period, and the coverage limits is the:

    • a.Declarations
    • b.Conditions
    • c.Insuring agreement
    • d.Exclusions

    Answer: a

    Explanation: The declarations page (the 'dec page') states the specific facts of the policy: the named insured, description of the covered property or risk, policy period, limits of insurance, premium, and any forms attached. The insuring agreement states what the insurer promises to cover, the exclusions state what is not covered, and the conditions set the rules and duties both parties must follow.