Accredited Adviser in Insurance (AAI) Exam
Practice Questions And Correct Answers
(Verified Answers) Plus Rationale 2026
Q&A| Instant Download Pdf
1. What is the primary purpose of insurance in risk management?
A) To eliminate all possible risks
B) To transfer financial loss from an individual to a pool
C) To increase the probability of loss
D) To guarantee profit to the insurer
Correct answer: B
Insurance primarily functions by transferring the financial
consequences of risk from an individual or entity to a larger risk pool,
thereby reducing the burden of unexpected losses.
2. Which principle requires that an insured must have a financial stake in
the subject matter of insurance?
A) Utmost good faith
B) Indemnity
C) Insurable interest
D) Contribution
Correct answer: C
Insurable interest ensures that the policyholder would suffer a
financial loss if the insured event occurs, preventing wagering
contracts.
,3. What does the principle of indemnity aim to achieve?
A) Profit from insurance claims
B) Restore the insured to the same financial position after loss
C) Increase the value of the insured asset
D) Provide coverage beyond actual loss
Correct answer: B
Indemnity ensures that the insured is compensated only to the extent
of the actual loss, preventing unjust enrichment.
4. Which insurance contract characteristic makes it legally enforceable?
A) It is a wagering agreement
B) It is based on speculation
C) It is a legal contract with consideration
D) It guarantees returns
Correct answer: C
Insurance contracts are legally enforceable agreements supported by
consideration, usually premium and promise of indemnity.
5. What is a premium in insurance terms?
A) The amount paid by insurer to insured
B) The fee paid by insured to insurer for coverage
C) The claim amount paid after loss
D) The penalty for policy violation
Correct answer: B
A premium is the payment made by the insured to the insurer in
exchange for risk coverage.
6. Which principle requires full disclosure of material facts?
A) Subrogation
B) Contribution
C) Utmost good faith
D) Insurable interest
, Correct answer: C
Utmost good faith requires both parties to disclose all material facts
that could influence the insurance contract.
7. What is subrogation in insurance?
A) Transfer of policy ownership
B) Insurer’s right to recover loss from third party
C) Payment of premium in installments
D) Cancellation of policy
Correct answer: B
Subrogation allows the insurer to step into the shoes of the insured
to recover costs from a responsible third party.
8. Which type of risk is typically insurable?
A) Speculative risk
B) Pure risk
C) Financial market risk
D) Business expansion risk
Correct answer: B
Pure risks involve only the possibility of loss or no loss, making them
suitable for insurance coverage.
9. What is moral hazard in insurance?
A) Physical damage risk
B) Increased risk due to dishonesty or behavior change after insurance
C) Natural disaster risk
D) Statistical loss prediction
Correct answer: B
Moral hazard occurs when insured individuals behave more riskily
because they are protected by insurance.
10. What is the function of underwriting?
A) Paying claims
Practice Questions And Correct Answers
(Verified Answers) Plus Rationale 2026
Q&A| Instant Download Pdf
1. What is the primary purpose of insurance in risk management?
A) To eliminate all possible risks
B) To transfer financial loss from an individual to a pool
C) To increase the probability of loss
D) To guarantee profit to the insurer
Correct answer: B
Insurance primarily functions by transferring the financial
consequences of risk from an individual or entity to a larger risk pool,
thereby reducing the burden of unexpected losses.
2. Which principle requires that an insured must have a financial stake in
the subject matter of insurance?
A) Utmost good faith
B) Indemnity
C) Insurable interest
D) Contribution
Correct answer: C
Insurable interest ensures that the policyholder would suffer a
financial loss if the insured event occurs, preventing wagering
contracts.
,3. What does the principle of indemnity aim to achieve?
A) Profit from insurance claims
B) Restore the insured to the same financial position after loss
C) Increase the value of the insured asset
D) Provide coverage beyond actual loss
Correct answer: B
Indemnity ensures that the insured is compensated only to the extent
of the actual loss, preventing unjust enrichment.
4. Which insurance contract characteristic makes it legally enforceable?
A) It is a wagering agreement
B) It is based on speculation
C) It is a legal contract with consideration
D) It guarantees returns
Correct answer: C
Insurance contracts are legally enforceable agreements supported by
consideration, usually premium and promise of indemnity.
5. What is a premium in insurance terms?
A) The amount paid by insurer to insured
B) The fee paid by insured to insurer for coverage
C) The claim amount paid after loss
D) The penalty for policy violation
Correct answer: B
A premium is the payment made by the insured to the insurer in
exchange for risk coverage.
6. Which principle requires full disclosure of material facts?
A) Subrogation
B) Contribution
C) Utmost good faith
D) Insurable interest
, Correct answer: C
Utmost good faith requires both parties to disclose all material facts
that could influence the insurance contract.
7. What is subrogation in insurance?
A) Transfer of policy ownership
B) Insurer’s right to recover loss from third party
C) Payment of premium in installments
D) Cancellation of policy
Correct answer: B
Subrogation allows the insurer to step into the shoes of the insured
to recover costs from a responsible third party.
8. Which type of risk is typically insurable?
A) Speculative risk
B) Pure risk
C) Financial market risk
D) Business expansion risk
Correct answer: B
Pure risks involve only the possibility of loss or no loss, making them
suitable for insurance coverage.
9. What is moral hazard in insurance?
A) Physical damage risk
B) Increased risk due to dishonesty or behavior change after insurance
C) Natural disaster risk
D) Statistical loss prediction
Correct answer: B
Moral hazard occurs when insured individuals behave more riskily
because they are protected by insurance.
10. What is the function of underwriting?
A) Paying claims
