LOMA 280 PRINCIPLES OF
INSURANCE PRACTICE
TEST 60 QUESTIONS
Question 1: A homeowner worries that a �re could damage her house. The possible outcomes are either a �nancial loss or no �nancial loss; there is no possibility of gain. How should this exposure be classi�ed?
Choices:
1) Speculative risk 2) Pure risk 3) Investment risk 4) Entrepreneurial risk
Correct Answer: Pure risk
Explanation: Pure risk involves only the possibility of loss or no loss. Because the homeowner cannot pro�t from the occurrence of the �re, the exposure is a pure risk and is the type of risk commonly addressed by insurance.Page 1
Question 2: A small business purchases an insurance policy to protect against
covered liability claims. Which risk-management method is the business primarily using?
Choices:
1) Avoiding the risk 2) Controlling the risk 3) Accepting the risk 4) Transferring the risk
Correct Answer: Transferring the risk
Explanation: Buying insurance transfers a signi�cant portion of the �nancial consequences of a covered loss to the insurer in exchange for a premium. The business still may retain deductibles or exclusions, but the primary method is risk transfer.Question 3: Which characteristic most directly helps an insurer use the law of large numbers to estimate future losses?
Choices:
1) The insurer covers a su�ciently large number of similar exposure units 2) Every insured exposure is certain to produce a loss 3) Each potential loss is intentionally caused 4) All losses occur at the same time Correct Answer: The insurer covers a su�ciently large number of similar exposure units Explanation: The law of large numbers becomes more useful as the number of similar exposure units increases. A large pool allows actual loss experience to be more likely to approach the expected loss rate, improving predictability.Page 2
Question 4: An insurer notices that applicants who believe they are unusually likely to su�er a loss are purchasing more coverage than average applicants. What insurance concept does this situation illustrate?
Choices:
1) Risk retention 2) Loss prevention 3) Antiselection 4) Subrogation
Correct Answer: Antiselection
Explanation: Antiselection, also called adverse selection, is the tendency of people with a greater-than-average likelihood of loss to seek insurance more actively or in larger amounts.Underwriting helps insurers identify and manage this tendency.
Question 5: Which statement correctly describes ownership of a mutual insurance
company?
Choices:
1) It is owned by bondholders 2) It is owned by its policyowners 3) It is owned only by its employees 4) It is owned by a government insurance department
Correct Answer: It is owned by its policyowners
Explanation: A mutual insurance company is owned by its policyowners. By contrast, a stock insurance company is owned by shareholders who hold shares of the company's stock.Page 3