Life & Health Insurance Practice Test
Insurance General Insurance Concepts Practice Questions
General Insurance Concepts makes up 5 of every 50 questions on a Tigertest Insurance practice test. Here are 10 of the 20 questions on it, each with the answer and the reason.
Updated by the Tigertest team. General portion only, on the NAIC model and standard prelicensing texts. Your state portion is separate.
1. Jake buys shares of a startup company, hoping for a large gain but knowing he could lose his entire investment. This type of risk is:
- A.Moral hazard
- B.Speculative risk
- C.Physical hazard
- D.Pure risk
Answer: B. Speculative risk involves the chance of loss, gain or no change, as with investing or gambling, and is not insurable. Pure risk offers only the chance of loss or no loss, and only pure risk can be insured.
2. Since buying insurance, Tom has stopped locking his car because he figures any theft will be covered. This attitude is an example of:
- A.A moral hazard
- B.A physical hazard
- C.A peril
- D.A morale hazard
Answer: D. Morale hazard is indifference or carelessness toward loss because insurance exists. Moral hazard is dishonesty or bad character, such as faking a claim, and a peril is the cause of loss itself, such as theft.
3. An insurer can predict expected losses more accurately as the number of similar exposure units it insures grows larger. This principle is called:
- A.The law of large numbers
- B.Adverse selection
- C.Risk retention
- D.The principle of indemnity
Answer: A. The law of large numbers holds that the larger the group of similar exposure units, the more closely actual losses will match predicted losses. Adverse selection is the tendency of poorer risks to seek coverage, which works against predictability rather than describing it.
4. An insurer notices that people in poor health are more likely to apply for life insurance than healthy people. This tendency is called:
- A.Risk reduction
- B.Law of large numbers
- C.Adverse selection
- D.Moral hazard
Answer: C. Adverse selection is the tendency of poorer-than-average risks to seek insurance more often, which insurers control through underwriting. Moral hazard refers to an applicant's dishonesty, not the tendency of high-risk people to buy coverage.
5. Which of the following is NOT one of the elements of an insurable risk?
- A.The loss must be due to chance
- B.The loss must be definite and measurable
- C.The loss must be catastrophic
- D.Exposure units must be numerous and similar
Answer: C. An insurable loss must NOT be catastrophic, because a loss striking many insureds at once, such as war, would make losses unpredictable. Chance, definite and measurable losses, and a large group of similar units are all required elements.
6. A business installs a sprinkler system and holds regular fire safety training to lower the chance and severity of a fire. This risk management method is:
- A.Reduction
- B.Avoidance
- C.Transfer
- D.Retention
Answer: A. Reduction lowers the likelihood or severity of a loss without eliminating the exposure. Avoidance would mean eliminating the exposure entirely, retention means accepting the loss yourself, and buying insurance is the classic example of transfer, while sharing spreads losses among a group.
7. Sandra receives a dividend check from the insurer that issued her participating whole life policy, and she can vote for its board. The insurer is most likely a:
- A.Reinsurer
- B.Risk retention group
- C.Stock insurer
- D.Mutual insurer
Answer: D. A mutual insurer is owned by its policyholders, issues participating policies, and returns surplus as dividends that are treated as a return of premium. A stock insurer is owned by shareholders and generally issues nonparticipating policies, paying dividends to stockholders rather than policyholders.
8. Several companies in the same industry form a member-owned liability insurer under a federal law to cover their common exposures. This is a:
- A.Fraternal benefit society
- B.Risk retention group
- C.Reinsurer
- D.Lloyd's association
Answer: B. A risk retention group is a member-owned liability insurer formed by businesses with similar exposures under the federal Liability Risk Retention Act. A fraternal benefit society is a nonprofit social organization with a lodge system that insures its members, and a reinsurer accepts risk ceded by other insurers.
9. Before buying an annuity, a consumer wants to check the insurer's financial strength and claims-paying ability. The best source for this is:
- A.The NAIC's list of model laws
- B.A rating service like A.M. Best
- C.The insurer's own sales brochures
- D.The state guaranty association
Answer: B. Independent rating services such as A.M. Best, Standard & Poor's and Moody's grade insurers' financial strength. The state guaranty association protects policyholders after an insurer fails but does not rate insurers, and its limits vary by state.
10. A person who has been declared legally insane by a court signs an application for life insurance. Which element of a valid contract is missing?
- A.Consideration
- B.Legal purpose
- C.Offer and acceptance
- D.Competent parties
Answer: D. A contract requires competent parties, meaning people of legal age and sound mind who are not under the influence of drugs or alcohol. Consideration is the premium and application statements exchanged for the insurer's promise, which is not the problem here.
Practice all 20 general insurance concepts questions, and the rest of the 200-question bank, in the free Insurance training sets. Questions you miss come back until you have mastered them.
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