General Insurance PrinciplesQuestion 159 of 474
Insurance is best described as a method of handling risk by:
a.Eliminating the possibility that a loss will occur
b.Retaining every loss and paying for it out of pocket
c.Avoiding every activity that might produce a loss
d.Transferring the risk of loss to an insurer for a premium
Explanation
Insurance is the transfer of risk from an individual to an insurer in exchange for a premium; the insurer agrees to pay for covered losses. Avoidance and retention are other ways to handle risk, but they are not insurance. Insurance cannot eliminate the chance a loss will happen; it shifts the financial consequences of that loss from the insured to the insurer through pooling.
This topic, taught in full in the Personal Lines Insurance Producer guide. Personal Lines Insurance Producer — Complete Study Guide (2026) — PDF + EPUB, $19.99 · 14-day refund →
Practice all 474 questions free — no signup required.
Own the complete Personal Lines Insurance Producer guide — PDF + EPUB, $19.99 →
Related questions on this topic
- Which statement about stock and mutual insurers is CORRECT?
- The principle of indemnity is BEST expressed by which statement?
- An applicant for a homeowners policy fails to mention that her roof is 28 years old and showing daylight through cracked tiles. The insurer later denies a wind claim and rescinds the policy. The insurer's likely legal theory is:
- For a homeowner to collect on a property insurance claim, insurable interest must exist:
- The principle of indemnity means an insured who suffers a covered loss should be:
- A condition that increases the chance or severity of a loss, such as a worn extension cord, is a:
Last reviewed: · editorial process
PrepPass team · Verified against California Personal Lines Insurance License Exam · How we review