NORTH CAROLINA PERSONAL LINES
INSURANCE EXAM TERMS |
COMPREHENSIVE DEFINITIONS, KEY
CONCEPTS AND STUDY GUIDE
| GRADED A+ | GUARANTEED SUCCESS
Updated 2026 Questions and Answers
100% Verified Exam Prep
,Pure risk chance of loss only; we attempt to buy insurance based on pure risk
insurable risk one that an insurance company is willing to accept
Characteristics of insurable risk 1. low probability of loss occurring
2. less than catastrophic results (earthquake, flood, wind)
3. the loss must be measurable ($)
4. the loss must be significant
5. the loss must be accidental and unintended
Probability measures the chance of an event occurring; measure of risk; predicting the future based
on the past
Law of Large Numbers (Law of Averages) Mathematical principle that makes it possible to predict future losses based upon prior
experience; insurance uses both probability and law of numbers in determining rates
geographic dispersion (spread of risk) spreading the company's policies over a broad geographical area in order to avoid large
losses in the event of a catastrophic event
adverse selection occurs when insureds with a high risk of loss attempt to purchase insurance and are
successful in obtaining insurance; insurers attempt to prevent adverse selection by
carefully underwriting each and every applicant for insurance.
with higher risk customers you can 1. refulse to write the policy
2. charge more
3. check underwriting guidelines with companies; some use credit history; shop around
do not deductibles ____ prevent bad business from getting on the books
methods of handling risk 1. retention
2. transfer
3. control or reduction
retention when liability for a loss is maintained by an individual by not purchasing insurance
transfer shift the responsibility for a loss to an insurance company through the purchase of
insurance
, control or reduction Attempt to prevent a loss or to reduce the amount of the loss.
perils actual cause of a loss such as a fire, theft, wind, hail, etc.
hazard increase the probability of a peril occurring; ex: bald tires faulty wires
restore The purpose of insurance is to ____ the insured to the original financial position that was
enjoyed before a loos, but without gain. This is also known as the principle of indemnity.
property insurance indemnifies (repays) a person or business with an interest in the physical integrity of
tangible property for its loss and the loss of income produced by that property
casualty insurance provides protection to meet the unexpected costs imposed by law due to acts that have
cause bodily injury or property damage to another individual
direct loss actual damage to property (house, detached garage, furniture)
Indirect Loss/Consequential Loss occurs as a consequence of the direct loss; fire would be a direct loss; loss of rental
dollars due to fire would be the indirect loss
fields of property and casualty insurance 1. Private or Voluntary-not required nor made by any government.
2. Social Insurance-Either required or made available by government.
3. Reinsurance-insurers sell portions of their individual contracts of insurance to other
companies. This spreads the risk and/or improves cash positions
Types of insurers 1. Capital Stock companies
2. mutual companies-owned by policyholders
reciprocal (assessment)companies
capital stock companies - in business to make a profit for stockholders
- owned by stockholders; elect a board of directors
- profit is fully taxable to stockholder
-dividends are taxable
mutual companies -owned by policyholders
-policyholders elect a board of directors who appoint officers to be in charge of
companies daily operations
-dividend is nontaxable
INSURANCE EXAM TERMS |
COMPREHENSIVE DEFINITIONS, KEY
CONCEPTS AND STUDY GUIDE
| GRADED A+ | GUARANTEED SUCCESS
Updated 2026 Questions and Answers
100% Verified Exam Prep
,Pure risk chance of loss only; we attempt to buy insurance based on pure risk
insurable risk one that an insurance company is willing to accept
Characteristics of insurable risk 1. low probability of loss occurring
2. less than catastrophic results (earthquake, flood, wind)
3. the loss must be measurable ($)
4. the loss must be significant
5. the loss must be accidental and unintended
Probability measures the chance of an event occurring; measure of risk; predicting the future based
on the past
Law of Large Numbers (Law of Averages) Mathematical principle that makes it possible to predict future losses based upon prior
experience; insurance uses both probability and law of numbers in determining rates
geographic dispersion (spread of risk) spreading the company's policies over a broad geographical area in order to avoid large
losses in the event of a catastrophic event
adverse selection occurs when insureds with a high risk of loss attempt to purchase insurance and are
successful in obtaining insurance; insurers attempt to prevent adverse selection by
carefully underwriting each and every applicant for insurance.
with higher risk customers you can 1. refulse to write the policy
2. charge more
3. check underwriting guidelines with companies; some use credit history; shop around
do not deductibles ____ prevent bad business from getting on the books
methods of handling risk 1. retention
2. transfer
3. control or reduction
retention when liability for a loss is maintained by an individual by not purchasing insurance
transfer shift the responsibility for a loss to an insurance company through the purchase of
insurance
, control or reduction Attempt to prevent a loss or to reduce the amount of the loss.
perils actual cause of a loss such as a fire, theft, wind, hail, etc.
hazard increase the probability of a peril occurring; ex: bald tires faulty wires
restore The purpose of insurance is to ____ the insured to the original financial position that was
enjoyed before a loos, but without gain. This is also known as the principle of indemnity.
property insurance indemnifies (repays) a person or business with an interest in the physical integrity of
tangible property for its loss and the loss of income produced by that property
casualty insurance provides protection to meet the unexpected costs imposed by law due to acts that have
cause bodily injury or property damage to another individual
direct loss actual damage to property (house, detached garage, furniture)
Indirect Loss/Consequential Loss occurs as a consequence of the direct loss; fire would be a direct loss; loss of rental
dollars due to fire would be the indirect loss
fields of property and casualty insurance 1. Private or Voluntary-not required nor made by any government.
2. Social Insurance-Either required or made available by government.
3. Reinsurance-insurers sell portions of their individual contracts of insurance to other
companies. This spreads the risk and/or improves cash positions
Types of insurers 1. Capital Stock companies
2. mutual companies-owned by policyholders
reciprocal (assessment)companies
capital stock companies - in business to make a profit for stockholders
- owned by stockholders; elect a board of directors
- profit is fully taxable to stockholder
-dividends are taxable
mutual companies -owned by policyholders
-policyholders elect a board of directors who appoint officers to be in charge of
companies daily operations
-dividend is nontaxable
