FUNDAMENTALS OF INSURANCE (BC) PRACTICE EXAM
British Columbia Insurance Licensing Preparation130
Questions | Verified Answers with Rationales | Graded A+
Academic Year: 2025/2026
SECTION A: PURPOSE & FUNCTION OF INSURANCE
Questions 1–15
Question 1
Insurance plays an important role in managing financial risk. The main purpose of insurance is
to:
A) Enable the consumer to obtain a loan or mortgage
B) Provide employment and investment capital
C) Allow spread of risk
D) Reduce losses through loss prevention and loss reduction
Correct answer: C
Rationale: The major function of insurance is to allow the spread of risk. This means the losses
of the few are shared among the many. Insurance shifts the financial responsibility for a loss
from one individual to a large group, making it more manageable .
Question 2
Which of the following best describes the primary purpose of insurance in society?
A) To generate profit for insurers
B) To spread risk among many parties
C) To eliminate all financial losses
D) To provide tax benefits
,Correct answer: B
Rationale: Insurance's fundamental role is to spread the financial impact of losses across a
large pool of policyholders, reducing the burden on any single individual .
Question 3
What are the three main types of insurance included in broad insurance (property and
casualty)?
A) Life, Health, Disability
B) Automobile, Property, Liability
C) Fire, Marine, Aviation
D) Home, Travel, Pet
Correct answer: B
Rationale: Auto insurance, property insurance, and liability insurance are the three main types
of property and casualty (general) insurance. These are also known as P&C insurance .
Question 4
Define "Spread of Risk."
A) The elimination of all potential losses
B) The shifting of financial responsibility for a loss from one individual to a large group
C) The process of increasing premiums for high-risk clients
D) The transfer of risk to a government agency
Correct answer: B
Rationale: The definition of "Spread of Risk" is "the losses of the few are shared among the
many." This is the fundamental principle upon which insurance is built .
Question 5
Which of the following is NOT a function of insurance?
, A) Basis of credit system
B) Elimination of worry - encourages entrepreneurship
C) Guarantee of investment returns
D) Source of employment and investment capital
Correct answer: C
Rationale: Insurance serves four additional important functions: it forms the basis of the credit
system, eliminates worry to encourage entrepreneurship, promotes loss prevention and loss
reduction, and serves as a source of employment and investment capital. Guaranteeing
investment returns is not a function of insurance .
Question 6
What is the term for the immediate cause of a loss?
A) Peril
B) Hazard
C) Risk
D) Exposure
Correct answer: A
Rationale: A peril is the specific cause of a loss, such as fire, theft, or windstorm. Hazards
increase the chance of loss, risk is uncertainty, and exposure is the potential for loss .
Question 7
Which type of hazard arises from an insured's dishonest tendencies?
A) Physical hazard
B) Moral hazard
C) Morale hazard
D) Legal hazard
Correct answer: B
Rationale: Moral hazard involves intentional acts or dishonesty by the insured. Morale hazard is
carelessness, physical hazard is tangible conditions, legal hazard stems from the legal
environment .
British Columbia Insurance Licensing Preparation130
Questions | Verified Answers with Rationales | Graded A+
Academic Year: 2025/2026
SECTION A: PURPOSE & FUNCTION OF INSURANCE
Questions 1–15
Question 1
Insurance plays an important role in managing financial risk. The main purpose of insurance is
to:
A) Enable the consumer to obtain a loan or mortgage
B) Provide employment and investment capital
C) Allow spread of risk
D) Reduce losses through loss prevention and loss reduction
Correct answer: C
Rationale: The major function of insurance is to allow the spread of risk. This means the losses
of the few are shared among the many. Insurance shifts the financial responsibility for a loss
from one individual to a large group, making it more manageable .
Question 2
Which of the following best describes the primary purpose of insurance in society?
A) To generate profit for insurers
B) To spread risk among many parties
C) To eliminate all financial losses
D) To provide tax benefits
,Correct answer: B
Rationale: Insurance's fundamental role is to spread the financial impact of losses across a
large pool of policyholders, reducing the burden on any single individual .
Question 3
What are the three main types of insurance included in broad insurance (property and
casualty)?
A) Life, Health, Disability
B) Automobile, Property, Liability
C) Fire, Marine, Aviation
D) Home, Travel, Pet
Correct answer: B
Rationale: Auto insurance, property insurance, and liability insurance are the three main types
of property and casualty (general) insurance. These are also known as P&C insurance .
Question 4
Define "Spread of Risk."
A) The elimination of all potential losses
B) The shifting of financial responsibility for a loss from one individual to a large group
C) The process of increasing premiums for high-risk clients
D) The transfer of risk to a government agency
Correct answer: B
Rationale: The definition of "Spread of Risk" is "the losses of the few are shared among the
many." This is the fundamental principle upon which insurance is built .
Question 5
Which of the following is NOT a function of insurance?
, A) Basis of credit system
B) Elimination of worry - encourages entrepreneurship
C) Guarantee of investment returns
D) Source of employment and investment capital
Correct answer: C
Rationale: Insurance serves four additional important functions: it forms the basis of the credit
system, eliminates worry to encourage entrepreneurship, promotes loss prevention and loss
reduction, and serves as a source of employment and investment capital. Guaranteeing
investment returns is not a function of insurance .
Question 6
What is the term for the immediate cause of a loss?
A) Peril
B) Hazard
C) Risk
D) Exposure
Correct answer: A
Rationale: A peril is the specific cause of a loss, such as fire, theft, or windstorm. Hazards
increase the chance of loss, risk is uncertainty, and exposure is the potential for loss .
Question 7
Which type of hazard arises from an insured's dishonest tendencies?
A) Physical hazard
B) Moral hazard
C) Morale hazard
D) Legal hazard
Correct answer: B
Rationale: Moral hazard involves intentional acts or dishonesty by the insured. Morale hazard is
carelessness, physical hazard is tangible conditions, legal hazard stems from the legal
environment .
