PERSONAL LINES LATEST 2026 EXAM STUDY GUIDE
QUESTIONS AND SOLUTIONS GUARANTEE A+
✔✔Law of Large Numbers - ✔✔The greater the number of exposure units (cars/homes),
the more predictable the loss. Used to establish appropriate rates that benefits the
insured.
✔✔exposure unit - ✔✔Measure used to establish rates. In property it's the number of
cars
✔✔Elements of insurability - ✔✔Insurance is not an appropriate mechanism for
protection against all risks. There are certain rules that establish a practical basis
regarding who can be insured and for what exposure. These rules determine a risks
insurability (the ability of an individual to obtain an insurance policy to cover the risk)
✔✔Insurable Events - ✔✔Is any contingent (may or may not happen) or unknown
event, whether past or future, which may damnify a person having an insurable interest
or create a liability against him may be insured against, except gambling and lotteries.
✔✔Insurable interest - ✔✔Policyholder has a legitimate financial interest in preserving
the property or life insured. It requires a person to face personal risk of loss; has a
legitimate finance interest; no potential for gain due to the insurance.
✔✔Underwriting - ✔✔Process of reviewing application and additional information to
decide whether the risk will be accepted or denied (rejected). This is known is risk
selection.
✔✔Combined Ratio - ✔✔Loss ration plus expense ration divided by premium. loss ratio
equals losses divided by premium. Expense Ratio equals expenses divided by premium
(cost of operations). If combined ratio is less than 100, the insurer is profitable. If it is at
100, the insurer is breaking even. If it is greater than 100, the insurer is losing money.
✔✔Premium vs Claim - ✔✔Small loss= premium
Large loss = claim
✔✔6 steps of Risk Management - ✔✔Identify, analyze, examine, select, implement,
monitor and revise
✔✔Idemnity - ✔✔Restore/whole
✔✔Adverse - ✔✔Someone who waits last minute to get insurance
✔✔Expectant interests are - ✔✔Not Insurable
, ✔✔Person seeking recovery - ✔✔Claimant
✔✔Reckless driving or malingering are what type of hazards? - ✔✔Morale
✔✔Material, structural, age, location, operations arise from what type of Hazard -
✔✔Physical
✔✔Measure in the law of large numbers used to establish rates? - ✔✔Exposure units
✔✔Possibility of just Loss is: - ✔✔Loss exposure
✔✔Three dimensions that make up Loss Exposure - ✔✔Type of value exposed to loss,
peril causing the loss, and financial consequence of loss
✔✔Loss due to resignation, retirement, or death of a key employee is what type of loss
exposure - ✔✔Personnel
✔✔Not a benefit of Insurance is: - ✔✔Risk retention
✔✔Other words for Homogenous units - ✔✔Like or similar
✔✔Formula for loss ratio - ✔✔Loss divided by premiums
✔✔Principle of indemnity - ✔✔The basic principle behind Insurance. To restore
someone to the same financial condition the occupied prior to the loss with no intent of
loss or gain (to make while). The intent is to cover the amount of the actual loss only. An
insured cannot collect more than 100% of actual loss. An insured can only be
indemnified to the extent of their insurable interest (ownership) in property.
✔✔Purpose of indemnity - ✔✔To prevent insured from profit from a loss and reduce
moral hazard
✔✔Indemnification - ✔✔Cannot collect more than your actual loss under this definition.
✔✔Deductibles - ✔✔Portion of covered expenses the insured must pay/satisfy before
the insurer pays. Lowering deductible would cause a increase in claims and premiums.
Raising deductible would cause a decrease in claims and premiums. Purpose is to
eliminate nuisance claims; to keep premiums affordable; to make the insured more
careful about loss control
✔✔Reinsurance - ✔✔The process of the insurer ceding (transferring) all or part of the
risk to another insurer so that they share the risk. The insurer transferring the risk is
known as the ceding or primary insurer and the party agreeing to accept all or a portion
of the risk is known as the reinsurer
QUESTIONS AND SOLUTIONS GUARANTEE A+
✔✔Law of Large Numbers - ✔✔The greater the number of exposure units (cars/homes),
the more predictable the loss. Used to establish appropriate rates that benefits the
insured.
✔✔exposure unit - ✔✔Measure used to establish rates. In property it's the number of
cars
✔✔Elements of insurability - ✔✔Insurance is not an appropriate mechanism for
protection against all risks. There are certain rules that establish a practical basis
regarding who can be insured and for what exposure. These rules determine a risks
insurability (the ability of an individual to obtain an insurance policy to cover the risk)
✔✔Insurable Events - ✔✔Is any contingent (may or may not happen) or unknown
event, whether past or future, which may damnify a person having an insurable interest
or create a liability against him may be insured against, except gambling and lotteries.
✔✔Insurable interest - ✔✔Policyholder has a legitimate financial interest in preserving
the property or life insured. It requires a person to face personal risk of loss; has a
legitimate finance interest; no potential for gain due to the insurance.
✔✔Underwriting - ✔✔Process of reviewing application and additional information to
decide whether the risk will be accepted or denied (rejected). This is known is risk
selection.
✔✔Combined Ratio - ✔✔Loss ration plus expense ration divided by premium. loss ratio
equals losses divided by premium. Expense Ratio equals expenses divided by premium
(cost of operations). If combined ratio is less than 100, the insurer is profitable. If it is at
100, the insurer is breaking even. If it is greater than 100, the insurer is losing money.
✔✔Premium vs Claim - ✔✔Small loss= premium
Large loss = claim
✔✔6 steps of Risk Management - ✔✔Identify, analyze, examine, select, implement,
monitor and revise
✔✔Idemnity - ✔✔Restore/whole
✔✔Adverse - ✔✔Someone who waits last minute to get insurance
✔✔Expectant interests are - ✔✔Not Insurable
, ✔✔Person seeking recovery - ✔✔Claimant
✔✔Reckless driving or malingering are what type of hazards? - ✔✔Morale
✔✔Material, structural, age, location, operations arise from what type of Hazard -
✔✔Physical
✔✔Measure in the law of large numbers used to establish rates? - ✔✔Exposure units
✔✔Possibility of just Loss is: - ✔✔Loss exposure
✔✔Three dimensions that make up Loss Exposure - ✔✔Type of value exposed to loss,
peril causing the loss, and financial consequence of loss
✔✔Loss due to resignation, retirement, or death of a key employee is what type of loss
exposure - ✔✔Personnel
✔✔Not a benefit of Insurance is: - ✔✔Risk retention
✔✔Other words for Homogenous units - ✔✔Like or similar
✔✔Formula for loss ratio - ✔✔Loss divided by premiums
✔✔Principle of indemnity - ✔✔The basic principle behind Insurance. To restore
someone to the same financial condition the occupied prior to the loss with no intent of
loss or gain (to make while). The intent is to cover the amount of the actual loss only. An
insured cannot collect more than 100% of actual loss. An insured can only be
indemnified to the extent of their insurable interest (ownership) in property.
✔✔Purpose of indemnity - ✔✔To prevent insured from profit from a loss and reduce
moral hazard
✔✔Indemnification - ✔✔Cannot collect more than your actual loss under this definition.
✔✔Deductibles - ✔✔Portion of covered expenses the insured must pay/satisfy before
the insurer pays. Lowering deductible would cause a increase in claims and premiums.
Raising deductible would cause a decrease in claims and premiums. Purpose is to
eliminate nuisance claims; to keep premiums affordable; to make the insured more
careful about loss control
✔✔Reinsurance - ✔✔The process of the insurer ceding (transferring) all or part of the
risk to another insurer so that they share the risk. The insurer transferring the risk is
known as the ceding or primary insurer and the party agreeing to accept all or a portion
of the risk is known as the reinsurer
