Award in London Market Insurance (ALMI) Practice Exam
Question 1: What is the primary purpose of insurance?
A. To generate profit
B. To transfer risk
C. To avoid regulation
D. To increase liquidity
Correct Answer: B
Explanation: Insurance is primarily designed to transfer the financial risk of loss from an individual or
business to an insurer.
Question 2: Which principle ensures that an insured party is compensated only for the actual loss
incurred?
A. Principle of Subrogation
B. Principle of Contribution
C. Principle of Indemnity
D. Principle of Pooling
Correct Answer: C
Explanation: The principle of indemnity guarantees that the insured is reimbursed only up to the
amount of the actual loss, preventing overcompensation.
Question 3: How is 'risk' best defined in insurance terminology?
A. An opportunity for profit
B. The possibility of loss or damage
C. A measure of safety
D. A regulatory requirement
Correct Answer: B
Explanation: In insurance, risk refers to the possibility of loss or damage, which the insurance contract
seeks to address.
Question 4: What distinguishes a pure risk from a speculative risk?
A. Pure risks involve chance of loss only, while speculative risks offer a chance of gain
B. Pure risks offer both gain and loss potential
C. Speculative risks are always insurable
D. Pure risks always lead to profit
Correct Answer: A
Explanation: Pure risks involve only the possibility of loss (or no loss), whereas speculative risks include
the possibility of both loss and gain.
Question 5: Which of the following is considered a non-insurable risk?
A. Fire damage to property
B. Loss due to theft
C. Investment loss
D. Natural disaster damage
Correct Answer: C
,Explanation: Investment losses are generally non-insurable because they involve speculative risk, not a
pure risk.
Question 6: In insurance, what is meant by 'insurable interest'?
A. A financial interest in earning profits
B. A legal requirement that the insured suffers a loss if the insured event occurs
C. The ability to cancel a policy anytime
D. The insurer's interest in making a profit
Correct Answer: B
Explanation: Insurable interest means the policyholder must have a stake in the insured subject matter
such that they would suffer a genuine loss if the insured event occurs.
Question 7: Which term refers to the additional condition that increases the likelihood of a loss?
A. Hazard
B. Peril
C. Risk pooling
D. Subrogation
Correct Answer: A
Explanation: A hazard is a condition that increases the chance or severity of a loss occurring.
Question 8: What does the term 'peril' denote in insurance?
A. A risk management strategy
B. A cause of loss covered under a policy
C. A financial gain mechanism
D. An insurer’s profit margin
Correct Answer: B
Explanation: A peril is a specific cause of loss or damage, such as fire, theft, or windstorm, that is
covered under an insurance policy.
Question 9: How does risk pooling benefit policyholders?
A. By eliminating all losses
B. By spreading individual risks across many policyholders
C. By guaranteeing profit for the insurer
D. By reducing the premium for high-risk individuals only
Correct Answer: B
Explanation: Risk pooling spreads individual risks across a large group, reducing the financial impact on
any one member.
Question 10: Which concept allows insurers to recover funds from a third party responsible for a loss?
A. Contribution
B. Indemnity
C. Subrogation
D. Proximate cause
Correct Answer: C
Explanation: Subrogation allows the insurer to pursue recovery from the party that caused the loss after
compensating the insured.
,Question 11: What does the doctrine of proximate cause help determine in an insurance claim?
A. The premium amount
B. The chain of events leading to a loss
C. The underwriting authority
D. The correct regulatory body
Correct Answer: B
Explanation: The doctrine of proximate cause helps in determining the primary cause in a series of
events that leads to a loss, which is critical in claim settlement.
Question 12: What is the effect of compulsory insurance requirements?
A. They reduce the availability of insurance products
B. They mandate that certain risks must be insured by law
C. They allow insurers to charge arbitrary rates
D. They limit consumer rights in claims
Correct Answer: B
Explanation: Compulsory insurance requires individuals or businesses to purchase coverage for certain
risks, ensuring protection and reducing public losses.
Question 13: Which of the following is a primary function of insurance?
A. Generating surplus funds for investment
B. Providing risk transfer and financial security
C. Increasing governmental regulation
D. Maximizing underwriting profits
Correct Answer: B
Explanation: The primary function of insurance is to provide risk transfer, offering financial security in
the event of loss.
Question 14: Which legal principle requires all parties to act honestly and disclose relevant
information in an insurance contract?
A. Caveat emptor
B. Utmost good faith
C. Stare decisis
D. Res ipsa loquitur
Correct Answer: B
Explanation: Utmost good faith (uberrimae fidei) requires both the insurer and the insured to disclose all
relevant information to avoid misrepresentation.
Question 15: In contract law, what does 'consideration' refer to in the context of insurance?
A. The benefit an insurer receives by issuing a policy
B. The process of evaluating claims
C. The profit made from premiums
D. The regulatory oversight provided
Correct Answer: A
Explanation: Consideration in insurance refers to what each party stands to gain; the insurer receives
premium payments while providing the risk coverage.
, Question 16: What is the consequence of failing to disclose a material fact under the principle of
utmost good faith?
A. Enhanced coverage
B. Policy cancellation or voidance
C. Premium reduction
D. Immediate claim approval
Correct Answer: B
Explanation: Non-disclosure of material facts can lead to cancellation or voidance of the insurance
policy, as it breaches the principle of utmost good faith.
Question 17: Which type of insurance covers loss or damage to a vessel and its cargo?
A. Aviation insurance
B. Marine insurance
C. Property insurance
D. Liability insurance
Correct Answer: B
Explanation: Marine insurance specifically covers risks related to ships, cargo, and other maritime
operations.
Question 18: What distinguishes non-marine insurance from marine insurance?
A. It only covers property damage
B. It encompasses all insurable risks outside of maritime activities
C. It is exclusively for liability coverage
D. It only applies to reinsurance markets
Correct Answer: B
Explanation: Non-marine insurance covers a wide range of risks that do not involve maritime operations,
such as property, casualty, and liability risks.
Question 19: What unique risk does aviation insurance primarily cover?
A. Damage from natural disasters
B. Risks related to aircraft operation and liability
C. Theft of personal belongings
D. General business interruption
Correct Answer: B
Explanation: Aviation insurance focuses on the risks associated with aircraft operations, including
liability and physical damage to aircraft.
Question 20: What is the main purpose of reinsurance in the insurance industry?
A. To increase the insurer’s profit margin
B. To spread risk and protect insurers from large losses
C. To decrease the regulatory burden
D. To create new insurance policies
Correct Answer: B
Explanation: Reinsurance allows primary insurers to transfer portions of risk to other insurers, thereby
mitigating the impact of large claims.
Question 1: What is the primary purpose of insurance?
A. To generate profit
B. To transfer risk
C. To avoid regulation
D. To increase liquidity
Correct Answer: B
Explanation: Insurance is primarily designed to transfer the financial risk of loss from an individual or
business to an insurer.
Question 2: Which principle ensures that an insured party is compensated only for the actual loss
incurred?
A. Principle of Subrogation
B. Principle of Contribution
C. Principle of Indemnity
D. Principle of Pooling
Correct Answer: C
Explanation: The principle of indemnity guarantees that the insured is reimbursed only up to the
amount of the actual loss, preventing overcompensation.
Question 3: How is 'risk' best defined in insurance terminology?
A. An opportunity for profit
B. The possibility of loss or damage
C. A measure of safety
D. A regulatory requirement
Correct Answer: B
Explanation: In insurance, risk refers to the possibility of loss or damage, which the insurance contract
seeks to address.
Question 4: What distinguishes a pure risk from a speculative risk?
A. Pure risks involve chance of loss only, while speculative risks offer a chance of gain
B. Pure risks offer both gain and loss potential
C. Speculative risks are always insurable
D. Pure risks always lead to profit
Correct Answer: A
Explanation: Pure risks involve only the possibility of loss (or no loss), whereas speculative risks include
the possibility of both loss and gain.
Question 5: Which of the following is considered a non-insurable risk?
A. Fire damage to property
B. Loss due to theft
C. Investment loss
D. Natural disaster damage
Correct Answer: C
,Explanation: Investment losses are generally non-insurable because they involve speculative risk, not a
pure risk.
Question 6: In insurance, what is meant by 'insurable interest'?
A. A financial interest in earning profits
B. A legal requirement that the insured suffers a loss if the insured event occurs
C. The ability to cancel a policy anytime
D. The insurer's interest in making a profit
Correct Answer: B
Explanation: Insurable interest means the policyholder must have a stake in the insured subject matter
such that they would suffer a genuine loss if the insured event occurs.
Question 7: Which term refers to the additional condition that increases the likelihood of a loss?
A. Hazard
B. Peril
C. Risk pooling
D. Subrogation
Correct Answer: A
Explanation: A hazard is a condition that increases the chance or severity of a loss occurring.
Question 8: What does the term 'peril' denote in insurance?
A. A risk management strategy
B. A cause of loss covered under a policy
C. A financial gain mechanism
D. An insurer’s profit margin
Correct Answer: B
Explanation: A peril is a specific cause of loss or damage, such as fire, theft, or windstorm, that is
covered under an insurance policy.
Question 9: How does risk pooling benefit policyholders?
A. By eliminating all losses
B. By spreading individual risks across many policyholders
C. By guaranteeing profit for the insurer
D. By reducing the premium for high-risk individuals only
Correct Answer: B
Explanation: Risk pooling spreads individual risks across a large group, reducing the financial impact on
any one member.
Question 10: Which concept allows insurers to recover funds from a third party responsible for a loss?
A. Contribution
B. Indemnity
C. Subrogation
D. Proximate cause
Correct Answer: C
Explanation: Subrogation allows the insurer to pursue recovery from the party that caused the loss after
compensating the insured.
,Question 11: What does the doctrine of proximate cause help determine in an insurance claim?
A. The premium amount
B. The chain of events leading to a loss
C. The underwriting authority
D. The correct regulatory body
Correct Answer: B
Explanation: The doctrine of proximate cause helps in determining the primary cause in a series of
events that leads to a loss, which is critical in claim settlement.
Question 12: What is the effect of compulsory insurance requirements?
A. They reduce the availability of insurance products
B. They mandate that certain risks must be insured by law
C. They allow insurers to charge arbitrary rates
D. They limit consumer rights in claims
Correct Answer: B
Explanation: Compulsory insurance requires individuals or businesses to purchase coverage for certain
risks, ensuring protection and reducing public losses.
Question 13: Which of the following is a primary function of insurance?
A. Generating surplus funds for investment
B. Providing risk transfer and financial security
C. Increasing governmental regulation
D. Maximizing underwriting profits
Correct Answer: B
Explanation: The primary function of insurance is to provide risk transfer, offering financial security in
the event of loss.
Question 14: Which legal principle requires all parties to act honestly and disclose relevant
information in an insurance contract?
A. Caveat emptor
B. Utmost good faith
C. Stare decisis
D. Res ipsa loquitur
Correct Answer: B
Explanation: Utmost good faith (uberrimae fidei) requires both the insurer and the insured to disclose all
relevant information to avoid misrepresentation.
Question 15: In contract law, what does 'consideration' refer to in the context of insurance?
A. The benefit an insurer receives by issuing a policy
B. The process of evaluating claims
C. The profit made from premiums
D. The regulatory oversight provided
Correct Answer: A
Explanation: Consideration in insurance refers to what each party stands to gain; the insurer receives
premium payments while providing the risk coverage.
, Question 16: What is the consequence of failing to disclose a material fact under the principle of
utmost good faith?
A. Enhanced coverage
B. Policy cancellation or voidance
C. Premium reduction
D. Immediate claim approval
Correct Answer: B
Explanation: Non-disclosure of material facts can lead to cancellation or voidance of the insurance
policy, as it breaches the principle of utmost good faith.
Question 17: Which type of insurance covers loss or damage to a vessel and its cargo?
A. Aviation insurance
B. Marine insurance
C. Property insurance
D. Liability insurance
Correct Answer: B
Explanation: Marine insurance specifically covers risks related to ships, cargo, and other maritime
operations.
Question 18: What distinguishes non-marine insurance from marine insurance?
A. It only covers property damage
B. It encompasses all insurable risks outside of maritime activities
C. It is exclusively for liability coverage
D. It only applies to reinsurance markets
Correct Answer: B
Explanation: Non-marine insurance covers a wide range of risks that do not involve maritime operations,
such as property, casualty, and liability risks.
Question 19: What unique risk does aviation insurance primarily cover?
A. Damage from natural disasters
B. Risks related to aircraft operation and liability
C. Theft of personal belongings
D. General business interruption
Correct Answer: B
Explanation: Aviation insurance focuses on the risks associated with aircraft operations, including
liability and physical damage to aircraft.
Question 20: What is the main purpose of reinsurance in the insurance industry?
A. To increase the insurer’s profit margin
B. To spread risk and protect insurers from large losses
C. To decrease the regulatory burden
D. To create new insurance policies
Correct Answer: B
Explanation: Reinsurance allows primary insurers to transfer portions of risk to other insurers, thereby
mitigating the impact of large claims.
