Page 1 of 44
PRINCIPLES OF RISK MANAGEMENT AND INSURANCE ACTUAL EXAM
QUESTIONS LATEST EDITION 2026 – 2027 VERSION SOLVED QUESTIONS &
ANSWERS
Principles of Risk Management and Insurance:
Questions with Rationales
1. Traditionally, risk has been defined as which of the following?
A) Any situation in which the probability of loss is one
B) Any situation in which the probability of loss is zero
C) Uncertainty concerning the occurrence of loss
D) The probability of a loss occurring
Correct Answer: C
Rationale: Risk is traditionally defined as uncertainty concerning the occurrence of
loss. This definition is foundational to the study of risk management and insurance.
2. What is objective risk?
A) The probability of loss
B) The relative variation of actual loss from expected loss
C) Uncertainty based on a person's mental condition or state of mind
D) The cause of loss
Correct Answer: B
Rationale: Objective risk is defined as the relative variation of actual loss from
expected loss. It is measurable and decreases as the number of exposure units
increases.
, Page 2 of 44
3. Uncertainty based on a person's mental condition or state of mind is known as
which of the following?
A) Objective risk
B) Subjective risk
C) Objective probability
D) Subjective probability
Correct Answer: B
Rationale: Subjective risk refers to uncertainty based on a person's mental condition or
state of mind. It can vary significantly among individuals for the same situation.
4. The long-run relative frequency of an event based on the assumption of an
infinite number of observations with no change in underlying conditions is called
which of the following?
A) Objective probability
B) Objective risk
C) Subjective probability
D) Subjective risk
Correct Answer: A
Rationale: Objective probability refers to the long-run relative frequency of an event
based on the assumption of an infinite number of observations and no change in
underlying conditions.
5. Which of the following statements about a priori probabilities is correct?
A) They are subjective probabilities based on ambiguity in the way probability is
perceived
B) They are subjective probabilities that may vary among individuals
C) They are objective probabilities that can be determined by deductive reasoning
D) They are objective probabilities determined by subjective reasoning
Correct Answer: C
Rationale: A priori probabilities are objective probabilities that can be determined by
deductive reasoning, such as the probability of flipping a coin and getting heads.
6. Hazards are usually classified into which of the following categories?
A) Perils, risks, and uncertainties
, Page 3 of 44
B) Physical, mental, and moral
C) Moral, morale, and physical
D) Personal, property, and liability
Correct Answer: C
Rationale: Hazards are commonly classified into three categories: moral hazard,
morale hazard, and physical hazard. These conditions increase the chance of loss or
severity of loss.
7. A homeowner who fails to shovel snow from their sidewalk, increasing the
chance of someone slipping, represents which type of hazard?
A) Moral hazard
B) Morale hazard
C) Physical hazard
D) Legal hazard
Correct Answer: B
Rationale: Morale hazard refers to indifference to loss because of the existence of
insurance. The homeowner's carelessness due to having insurance represents a morale
hazard.
8. Dishonest tendencies that increase the probability of loss, such as intentionally
causing a fire to collect insurance, represent which type of hazard?
A) Physical hazard
B) Moral hazard
C) Morale hazard
D) Legal hazard
Correct Answer: B
Rationale: Moral hazard refers to dishonesty or character defects in an individual that
increase the frequency or severity of loss, such as intentionally causing a loss to collect
insurance.
9. Which of the following is an example of a pure risk?
A) Potential loss of a home by fire
B) Potential loss of $5,000 in the stock market
C) Potential gain from a business venture
, Page 4 of 44
D) Potential profit from gambling
Correct Answer: A
Rationale: Pure risk refers to situations where there are only the possibilities of loss or
no loss. A home fire is a pure risk, whereas stock market losses are speculative risks.
10. Which of the following is NOT an example of a pure risk?
A) Potential loss of a home by fire
B) Potential theft of a car
C) Potential loss of your watch being stolen
D) Loss of the use of your apartment due to smoke damage
Correct Answer: D (Note: All options are pure risks; however, if this were a question
about speculative risk, the answer would differ.)
Rationale: All of the listed options are examples of pure risks. Loss of use due to smoke
damage is a consequential loss arising from a pure risk. This question likely tests
recognition that all are pure risks.
11. Which of the following is a burden of risk on society?
A) Increased anxiety and fear
B) Loss of goods and services
C) Need for larger emergency funds
D) All of the above
Correct Answer: D
Rationale: The burdens of risk on society include the need for larger emergency funds,
loss of goods and services, and increased anxiety and fear. These burdens justify the
existence of insurance and risk management.
12. The process of identifying loss exposures, analyzing them, selecting
appropriate risk management techniques, implementing the techniques, and
monitoring the results is known as which of the following?
A) Risk transfer
B) Risk management process
C) Insurance underwriting
D) Claims settlement
Correct Answer: B
PRINCIPLES OF RISK MANAGEMENT AND INSURANCE ACTUAL EXAM
QUESTIONS LATEST EDITION 2026 – 2027 VERSION SOLVED QUESTIONS &
ANSWERS
Principles of Risk Management and Insurance:
Questions with Rationales
1. Traditionally, risk has been defined as which of the following?
A) Any situation in which the probability of loss is one
B) Any situation in which the probability of loss is zero
C) Uncertainty concerning the occurrence of loss
D) The probability of a loss occurring
Correct Answer: C
Rationale: Risk is traditionally defined as uncertainty concerning the occurrence of
loss. This definition is foundational to the study of risk management and insurance.
2. What is objective risk?
A) The probability of loss
B) The relative variation of actual loss from expected loss
C) Uncertainty based on a person's mental condition or state of mind
D) The cause of loss
Correct Answer: B
Rationale: Objective risk is defined as the relative variation of actual loss from
expected loss. It is measurable and decreases as the number of exposure units
increases.
, Page 2 of 44
3. Uncertainty based on a person's mental condition or state of mind is known as
which of the following?
A) Objective risk
B) Subjective risk
C) Objective probability
D) Subjective probability
Correct Answer: B
Rationale: Subjective risk refers to uncertainty based on a person's mental condition or
state of mind. It can vary significantly among individuals for the same situation.
4. The long-run relative frequency of an event based on the assumption of an
infinite number of observations with no change in underlying conditions is called
which of the following?
A) Objective probability
B) Objective risk
C) Subjective probability
D) Subjective risk
Correct Answer: A
Rationale: Objective probability refers to the long-run relative frequency of an event
based on the assumption of an infinite number of observations and no change in
underlying conditions.
5. Which of the following statements about a priori probabilities is correct?
A) They are subjective probabilities based on ambiguity in the way probability is
perceived
B) They are subjective probabilities that may vary among individuals
C) They are objective probabilities that can be determined by deductive reasoning
D) They are objective probabilities determined by subjective reasoning
Correct Answer: C
Rationale: A priori probabilities are objective probabilities that can be determined by
deductive reasoning, such as the probability of flipping a coin and getting heads.
6. Hazards are usually classified into which of the following categories?
A) Perils, risks, and uncertainties
, Page 3 of 44
B) Physical, mental, and moral
C) Moral, morale, and physical
D) Personal, property, and liability
Correct Answer: C
Rationale: Hazards are commonly classified into three categories: moral hazard,
morale hazard, and physical hazard. These conditions increase the chance of loss or
severity of loss.
7. A homeowner who fails to shovel snow from their sidewalk, increasing the
chance of someone slipping, represents which type of hazard?
A) Moral hazard
B) Morale hazard
C) Physical hazard
D) Legal hazard
Correct Answer: B
Rationale: Morale hazard refers to indifference to loss because of the existence of
insurance. The homeowner's carelessness due to having insurance represents a morale
hazard.
8. Dishonest tendencies that increase the probability of loss, such as intentionally
causing a fire to collect insurance, represent which type of hazard?
A) Physical hazard
B) Moral hazard
C) Morale hazard
D) Legal hazard
Correct Answer: B
Rationale: Moral hazard refers to dishonesty or character defects in an individual that
increase the frequency or severity of loss, such as intentionally causing a loss to collect
insurance.
9. Which of the following is an example of a pure risk?
A) Potential loss of a home by fire
B) Potential loss of $5,000 in the stock market
C) Potential gain from a business venture
, Page 4 of 44
D) Potential profit from gambling
Correct Answer: A
Rationale: Pure risk refers to situations where there are only the possibilities of loss or
no loss. A home fire is a pure risk, whereas stock market losses are speculative risks.
10. Which of the following is NOT an example of a pure risk?
A) Potential loss of a home by fire
B) Potential theft of a car
C) Potential loss of your watch being stolen
D) Loss of the use of your apartment due to smoke damage
Correct Answer: D (Note: All options are pure risks; however, if this were a question
about speculative risk, the answer would differ.)
Rationale: All of the listed options are examples of pure risks. Loss of use due to smoke
damage is a consequential loss arising from a pure risk. This question likely tests
recognition that all are pure risks.
11. Which of the following is a burden of risk on society?
A) Increased anxiety and fear
B) Loss of goods and services
C) Need for larger emergency funds
D) All of the above
Correct Answer: D
Rationale: The burdens of risk on society include the need for larger emergency funds,
loss of goods and services, and increased anxiety and fear. These burdens justify the
existence of insurance and risk management.
12. The process of identifying loss exposures, analyzing them, selecting
appropriate risk management techniques, implementing the techniques, and
monitoring the results is known as which of the following?
A) Risk transfer
B) Risk management process
C) Insurance underwriting
D) Claims settlement
Correct Answer: B
