INSURANCE EXAM (2026/2027) | WITH CORRECT VERIFIED QUESTIONS AND
ANSWERS
Introduction
This comprehensive examination prepares candidates for the state licensing process to become licensed
insurance producers. It covers foundational principles common to all lines of insurance, including policy
types, policy provisions and contract law, state regulations, ethical selling practices, and the core concepts
of risk, underwriting, and claims. The exam emphasizes practical application of insurance doctrines,
consumer protection standards, and producer responsibilities to ensure competent and lawful practice.
Exam Structure
● 150 multiple-choice questions
● Proportional coverage across 8 core domains
● State-specific insurance regulations and comprehensive licensing focus
Answer Format
All correct answers and insurance principles are presented in bold and green, followed by detailed
rationales that define key insurance terms (e.g., deductible, peril, binder), explain policy structures and
standard provisions, differentiate between major lines of coverage, apply state regulatory requirements,
and outline ethical guidelines for producers.
Domain 1: Insurance Principles & Concepts (25 Questions)
Question 1
Which concept best explains how insurers can predict losses more accurately across a large group of
similar risks?
A) Indemnity
B) Law of Large Numbers
C) Subrogation
D) Utmost good faith
Rationale: The Law of Large Numbers states that as the number of exposure units increases, actual
results more closely approximate expected results, enabling more accurate rate-making. Indemnity
restores the insured to the financial condition before loss. Subrogation allows the insurer to pursue
recovery from a negligent third party. Utmost good faith refers to the duty of full and honest disclosure in
insurance contracts.
Question 2
,A bet on a sports event is an example of which type of risk?
A) Pure risk
B) Speculative risk
C) Fundamental risk
D) Particular risk
Rationale: Speculative risk involves the possibility of gain or loss (e.g., gambling or investing) and is
generally uninsurable. Pure risk only involves loss or no loss and is insurable (e.g., fire, accident).
Fundamental risk affects large groups (e.g., inflation), while particular risk affects individuals (e.g., theft).
Question 3
Which term describes the financial interest an insured must have in property at the time of loss?
A) Adhesion
B) Insurable interest
C) Aleatory
D) Warranty
Rationale: Insurable interest is a legal requirement that the insured suffer a financial loss if the
property is damaged, preventing wagering. Adhesion means the insurer drafts the contract. Aleatory
means unequal value exchange contingent on uncertain events. Warranties are strict statements or
promises that must be true.
Question 4
Which principle ensures an insured does not profit from a covered loss?
A) Subrogation
B) Indemnity
C) Coinsurance
D) Estoppel
Rationale: Indemnity restores the insured to the pre-loss financial condition, preventing gain from
insurance. Subrogation allows the insurer to collect from responsible third parties. Coinsurance is a
property insurance clause sharing loss costs if underinsured. Estoppel prevents denial of coverage based
on prior actions/representations.
Question 5
Transferring risk from an individual to an insurer is achieved primarily by:
A) Risk avoidance
B) Risk retention
C) Risk reduction
D) Risk transfer
Rationale: Risk transfer occurs when a policyholder pays a premium to shift financial consequences of
loss to the insurer. Avoidance eliminates exposure. Retention accepts exposure through deductibles or
self-insurance. Reduction mitigates severity/frequency via safety measures.
Question 6
,A hazard best described as a tendency to be careless because insurance exists is:
A) Physical hazard
B) Moral hazard
C) Morale hazard
D) Legal hazard
Rationale: Morale hazard arises from carelessness or indifference due to having insurance (e.g., not
locking doors). Moral hazard involves dishonesty (e.g., arson for profit). Physical hazards are tangible
conditions (e.g., frayed wiring). Legal hazard stems from legal or regulatory environments increasing
claim likelihood.
Question 7
Pooling of many homogeneous exposures primarily functions to:
A) Increase adverse selection
B) Spread risk and stabilize losses
C) Guarantee profit
D) Eliminate catastrophic risk
Rationale: Pooling spreads risk, stabilizing losses and enabling predictable premiums. It does not
guarantee profit and cannot eliminate catastrophic risk (managed via reinsurance, diversification).
Adverse selection increases when higher-risk individuals disproportionately seek coverage without proper
underwriting.
Question 8
When an insurer seeks reimbursement from a negligent third party after paying a claim, it is exercising:
A) Adhesion
B) Subrogation
C) Utmost good faith
D) Consideration
Rationale: Subrogation permits the insurer to recover amounts paid from responsible parties,
preventing double recovery by the insured. Adhesion refers to take-it-or-leave-it contracts. Utmost good
faith requires full disclosure. Consideration is the exchange of value (premium for promise to pay).
Question 9
Adverse selection is best controlled by:
A) Rebating
B) Underwriting and classification
C) Twisting
D) Waiver
Rationale: Underwriting classifies risks, sets appropriate premiums, and may decline unacceptable
risks to control adverse selection. Rebating and twisting are prohibited sales practices. Waiver is the
intentional relinquishment of a known right and is not an adverse selection control.
Question 10
, A peril is best defined as:
A) A condition that increases chance of loss
B) The actual cause of loss
C) The residual risk retained
D) A policy exclusion
Rationale: A peril is the immediate cause of loss (e.g., fire, windstorm). A condition that increases
chance of loss is a hazard. Residual risk is remaining after controls. Exclusions are policy provisions
removing coverage.
Question 11
Insurance is distinguishable from gambling because insurance:
A) Creates risk
B) Transfers existing pure risk
C) Provides speculative gain
D) Requires no insurable interest
Rationale: Insurance transfers pure risk and requires insurable interest to prevent wagering.
Gambling creates new speculative risk with potential gain. Insurance does not promise profit.
Question 12
Which type of risk is generally insurable?
A) Pure risk
B) Speculative risk
C) Investment risk
D) Credit risk only
Rationale: Pure risk involves loss/no loss and is insurable. Speculative and investment risks have
potential gains and are generally uninsurable under personal/commercial lines. Credit risk may be
insured via specialty products but is not the general category.
Question 13
A binder primarily provides:
A) Policy exclusions
B) Temporary evidence of insurance
C) Premium financing
D) Loss settlement options
Rationale: A binder is temporary coverage pending policy issuance, evidencing terms like limits and
effective date. It does not list all exclusions, finance premiums, or define settlement options beyond
temporary terms.
Question 14
A deductible primarily serves to:
A) Increase frequency of claims
B) Reduce small claims and encourage risk control
ANSWERS
Introduction
This comprehensive examination prepares candidates for the state licensing process to become licensed
insurance producers. It covers foundational principles common to all lines of insurance, including policy
types, policy provisions and contract law, state regulations, ethical selling practices, and the core concepts
of risk, underwriting, and claims. The exam emphasizes practical application of insurance doctrines,
consumer protection standards, and producer responsibilities to ensure competent and lawful practice.
Exam Structure
● 150 multiple-choice questions
● Proportional coverage across 8 core domains
● State-specific insurance regulations and comprehensive licensing focus
Answer Format
All correct answers and insurance principles are presented in bold and green, followed by detailed
rationales that define key insurance terms (e.g., deductible, peril, binder), explain policy structures and
standard provisions, differentiate between major lines of coverage, apply state regulatory requirements,
and outline ethical guidelines for producers.
Domain 1: Insurance Principles & Concepts (25 Questions)
Question 1
Which concept best explains how insurers can predict losses more accurately across a large group of
similar risks?
A) Indemnity
B) Law of Large Numbers
C) Subrogation
D) Utmost good faith
Rationale: The Law of Large Numbers states that as the number of exposure units increases, actual
results more closely approximate expected results, enabling more accurate rate-making. Indemnity
restores the insured to the financial condition before loss. Subrogation allows the insurer to pursue
recovery from a negligent third party. Utmost good faith refers to the duty of full and honest disclosure in
insurance contracts.
Question 2
,A bet on a sports event is an example of which type of risk?
A) Pure risk
B) Speculative risk
C) Fundamental risk
D) Particular risk
Rationale: Speculative risk involves the possibility of gain or loss (e.g., gambling or investing) and is
generally uninsurable. Pure risk only involves loss or no loss and is insurable (e.g., fire, accident).
Fundamental risk affects large groups (e.g., inflation), while particular risk affects individuals (e.g., theft).
Question 3
Which term describes the financial interest an insured must have in property at the time of loss?
A) Adhesion
B) Insurable interest
C) Aleatory
D) Warranty
Rationale: Insurable interest is a legal requirement that the insured suffer a financial loss if the
property is damaged, preventing wagering. Adhesion means the insurer drafts the contract. Aleatory
means unequal value exchange contingent on uncertain events. Warranties are strict statements or
promises that must be true.
Question 4
Which principle ensures an insured does not profit from a covered loss?
A) Subrogation
B) Indemnity
C) Coinsurance
D) Estoppel
Rationale: Indemnity restores the insured to the pre-loss financial condition, preventing gain from
insurance. Subrogation allows the insurer to collect from responsible third parties. Coinsurance is a
property insurance clause sharing loss costs if underinsured. Estoppel prevents denial of coverage based
on prior actions/representations.
Question 5
Transferring risk from an individual to an insurer is achieved primarily by:
A) Risk avoidance
B) Risk retention
C) Risk reduction
D) Risk transfer
Rationale: Risk transfer occurs when a policyholder pays a premium to shift financial consequences of
loss to the insurer. Avoidance eliminates exposure. Retention accepts exposure through deductibles or
self-insurance. Reduction mitigates severity/frequency via safety measures.
Question 6
,A hazard best described as a tendency to be careless because insurance exists is:
A) Physical hazard
B) Moral hazard
C) Morale hazard
D) Legal hazard
Rationale: Morale hazard arises from carelessness or indifference due to having insurance (e.g., not
locking doors). Moral hazard involves dishonesty (e.g., arson for profit). Physical hazards are tangible
conditions (e.g., frayed wiring). Legal hazard stems from legal or regulatory environments increasing
claim likelihood.
Question 7
Pooling of many homogeneous exposures primarily functions to:
A) Increase adverse selection
B) Spread risk and stabilize losses
C) Guarantee profit
D) Eliminate catastrophic risk
Rationale: Pooling spreads risk, stabilizing losses and enabling predictable premiums. It does not
guarantee profit and cannot eliminate catastrophic risk (managed via reinsurance, diversification).
Adverse selection increases when higher-risk individuals disproportionately seek coverage without proper
underwriting.
Question 8
When an insurer seeks reimbursement from a negligent third party after paying a claim, it is exercising:
A) Adhesion
B) Subrogation
C) Utmost good faith
D) Consideration
Rationale: Subrogation permits the insurer to recover amounts paid from responsible parties,
preventing double recovery by the insured. Adhesion refers to take-it-or-leave-it contracts. Utmost good
faith requires full disclosure. Consideration is the exchange of value (premium for promise to pay).
Question 9
Adverse selection is best controlled by:
A) Rebating
B) Underwriting and classification
C) Twisting
D) Waiver
Rationale: Underwriting classifies risks, sets appropriate premiums, and may decline unacceptable
risks to control adverse selection. Rebating and twisting are prohibited sales practices. Waiver is the
intentional relinquishment of a known right and is not an adverse selection control.
Question 10
, A peril is best defined as:
A) A condition that increases chance of loss
B) The actual cause of loss
C) The residual risk retained
D) A policy exclusion
Rationale: A peril is the immediate cause of loss (e.g., fire, windstorm). A condition that increases
chance of loss is a hazard. Residual risk is remaining after controls. Exclusions are policy provisions
removing coverage.
Question 11
Insurance is distinguishable from gambling because insurance:
A) Creates risk
B) Transfers existing pure risk
C) Provides speculative gain
D) Requires no insurable interest
Rationale: Insurance transfers pure risk and requires insurable interest to prevent wagering.
Gambling creates new speculative risk with potential gain. Insurance does not promise profit.
Question 12
Which type of risk is generally insurable?
A) Pure risk
B) Speculative risk
C) Investment risk
D) Credit risk only
Rationale: Pure risk involves loss/no loss and is insurable. Speculative and investment risks have
potential gains and are generally uninsurable under personal/commercial lines. Credit risk may be
insured via specialty products but is not the general category.
Question 13
A binder primarily provides:
A) Policy exclusions
B) Temporary evidence of insurance
C) Premium financing
D) Loss settlement options
Rationale: A binder is temporary coverage pending policy issuance, evidencing terms like limits and
effective date. It does not list all exclusions, finance premiums, or define settlement options beyond
temporary terms.
Question 14
A deductible primarily serves to:
A) Increase frequency of claims
B) Reduce small claims and encourage risk control
