UNIT 1 - PERSONAL LINES INSURANCE EXAM PREP – ARIZONA
QUESTIONS WITH CORRECT ANSWERS 2025/2026
Insurance - CORRECT ANSWER -transfer of risk from a person or business to an insurer
Risk - CORRECT ANSWER -is the uncertainty or possibility of a loss
Describe Both Type of Risk - CORRECT ANSWER -Speculative risk has a chance for gain or loss
and pure risk is 100% risk (making it insurable).
Exposure - CORRECT ANSWER -Is the possibility that risk will occur.
List Examples of Exposure - CORRECT ANSWER -Auto Accident, Lost Luggage (on a trip), Pet Bites
Mailman, House Fire, etc.
Peril - CORRECT ANSWER -The cause of loss, for example when a house burns down the peril is
fire.
Direct Loss vs. Indirect Loss - CORRECT ANSWER -Direct loss is a physical loss (a rental home that
burns down) and the indirect loss is a consequence of the direct loss (loss of rent during the
repairs, if loss made the rental uninhabitable).
Hazard - CORRECT ANSWER -something that increases the chances of a loss.
List and Describe the 3 Hazard Types - CORRECT ANSWER -Physical hazards, are visible hazard
like wet floors. A moral hazard is an intentional act of dishonesty that causes a loss, for example
the employee lied to their boss and said they put up the wet floor sign but did not. While a
morale hazard is an act of carelessness that could cause loss, for example someone who decides
to forgo wearing their seatbelt.
, STARR Method for Handling Risk - CORRECT ANSWER -Sharing, Transfer, Avoidance, Retention,
Reduction
Law of Large Numbers - CORRECT ANSWER -The larger the number of people in a group then
the more accurately the company can predict future loss.
Contract (Policy) - CORRECT ANSWER -An agreement between the insured and the insurer.
Property insurance the contact is a 1st party contract where the 1st party is the insured and the
2nd party is the insurer. For Casualty insurance the contract is a 3rd party contract where the
previous two parties are the same and the 3rd party is the "other guy" suing you for their loss.
Elements of Insurable Risk (CANHAM) - CORRECT ANSWER -Calculable, Affordable, Non-
Catastrophic, Homogeneous, Accidental, and Measurable
Adverse Selection - CORRECT ANSWER -Risks that are not wanted by insurers because they have
a greater-than-average chance of loss. This is the why insurers go through the underwriting
process to determine the level of risk and base the decision to accept/refuse risk as well the
amount of money for the premiums.
Reinsurance - CORRECT ANSWER -When an insurance company (the ceding company) pays
another insurance company (reinsurer) to take some of the company's risk to help spread out
the risk.
Facultative - CORRECT ANSWER -The reinsurer evaluated each risk before allowing the transfer.
Treaty - CORRECT ANSWER -The reinsurer accepts the transfer of risk according to the
agreement.
QUESTIONS WITH CORRECT ANSWERS 2025/2026
Insurance - CORRECT ANSWER -transfer of risk from a person or business to an insurer
Risk - CORRECT ANSWER -is the uncertainty or possibility of a loss
Describe Both Type of Risk - CORRECT ANSWER -Speculative risk has a chance for gain or loss
and pure risk is 100% risk (making it insurable).
Exposure - CORRECT ANSWER -Is the possibility that risk will occur.
List Examples of Exposure - CORRECT ANSWER -Auto Accident, Lost Luggage (on a trip), Pet Bites
Mailman, House Fire, etc.
Peril - CORRECT ANSWER -The cause of loss, for example when a house burns down the peril is
fire.
Direct Loss vs. Indirect Loss - CORRECT ANSWER -Direct loss is a physical loss (a rental home that
burns down) and the indirect loss is a consequence of the direct loss (loss of rent during the
repairs, if loss made the rental uninhabitable).
Hazard - CORRECT ANSWER -something that increases the chances of a loss.
List and Describe the 3 Hazard Types - CORRECT ANSWER -Physical hazards, are visible hazard
like wet floors. A moral hazard is an intentional act of dishonesty that causes a loss, for example
the employee lied to their boss and said they put up the wet floor sign but did not. While a
morale hazard is an act of carelessness that could cause loss, for example someone who decides
to forgo wearing their seatbelt.
, STARR Method for Handling Risk - CORRECT ANSWER -Sharing, Transfer, Avoidance, Retention,
Reduction
Law of Large Numbers - CORRECT ANSWER -The larger the number of people in a group then
the more accurately the company can predict future loss.
Contract (Policy) - CORRECT ANSWER -An agreement between the insured and the insurer.
Property insurance the contact is a 1st party contract where the 1st party is the insured and the
2nd party is the insurer. For Casualty insurance the contract is a 3rd party contract where the
previous two parties are the same and the 3rd party is the "other guy" suing you for their loss.
Elements of Insurable Risk (CANHAM) - CORRECT ANSWER -Calculable, Affordable, Non-
Catastrophic, Homogeneous, Accidental, and Measurable
Adverse Selection - CORRECT ANSWER -Risks that are not wanted by insurers because they have
a greater-than-average chance of loss. This is the why insurers go through the underwriting
process to determine the level of risk and base the decision to accept/refuse risk as well the
amount of money for the premiums.
Reinsurance - CORRECT ANSWER -When an insurance company (the ceding company) pays
another insurance company (reinsurer) to take some of the company's risk to help spread out
the risk.
Facultative - CORRECT ANSWER -The reinsurer evaluated each risk before allowing the transfer.
Treaty - CORRECT ANSWER -The reinsurer accepts the transfer of risk according to the
agreement.
