,P&C Insurance Exam – Licensing & State Regs –
Q&A (2026/2027) | PSI
1. The law of large numbers allows insurers to:
A) Insure speculative risks
B) Eliminate all risk
C) Predict losses more accurately as the number of exposures increases
D) Reduce premiums to zero
Correct Answer: C) Predict losses more accurately as the number of exposures
increases
Rationale: The law of large numbers states that as the number of similar
exposure units increases, the actual loss experience will approach the expected
loss experience. This is the statistical foundation of insurance.
2. Pure risk is defined as a situation where there is:
A) Only a chance of loss or no loss
B) A chance of loss or gain
C) No possibility of loss
D) Guaranteed financial gain
Correct Answer: A) Only a chance of loss or no loss
Rationale: Pure risk involves only the possibility of loss or no loss, making it
insurable. Speculative risk, involving the chance of gain, is not insurable.
,3. The restoration of an insured to the financial position they were in before a
loss is known as the principle of:
A) Subrogation
B) Insurable interest
C) Indemnity
D) Contribution
Correct Answer: C) Indemnity
Rationale: Indemnity means the insured should not profit from a loss but should
be restored to approximately the same financial position they were in prior to
the loss. This prevents moral hazard.
4. An insurer's right to recover from a responsible third party after paying a
claim is called:
A) Subrogation
B) Indemnity
C) Arbitration
D) Adhesion
Correct Answer: A) Subrogation
Rationale: Subrogation allows the insurer to pursue recovery from the party
that caused the loss, preventing the insured from collecting twice and helping to
control insurance costs.
, 5. In property insurance, insurable interest must exist at:
A) The time of application
B) The time of policy issuance
C) The time of loss
D) Both application and loss
Correct Answer: C) The time of loss
Rationale: For property and casualty insurance, insurable interest must exist at
the time of loss. In life insurance, it must exist at the time of application.
6. A tangible condition that increases the chance of loss, such as an icy sidewalk,
is an example of a:
A) Moral hazard
B) Morale hazard
C) Physical hazard
D) Legal hazard
Correct Answer: C) Physical hazard
Rationale: Physical hazards are tangible conditions that increase the probability
of a loss occurring. Moral hazard involves dishonesty, and morale hazard
involves carelessness due to having insurance.
Q&A (2026/2027) | PSI
1. The law of large numbers allows insurers to:
A) Insure speculative risks
B) Eliminate all risk
C) Predict losses more accurately as the number of exposures increases
D) Reduce premiums to zero
Correct Answer: C) Predict losses more accurately as the number of exposures
increases
Rationale: The law of large numbers states that as the number of similar
exposure units increases, the actual loss experience will approach the expected
loss experience. This is the statistical foundation of insurance.
2. Pure risk is defined as a situation where there is:
A) Only a chance of loss or no loss
B) A chance of loss or gain
C) No possibility of loss
D) Guaranteed financial gain
Correct Answer: A) Only a chance of loss or no loss
Rationale: Pure risk involves only the possibility of loss or no loss, making it
insurable. Speculative risk, involving the chance of gain, is not insurable.
,3. The restoration of an insured to the financial position they were in before a
loss is known as the principle of:
A) Subrogation
B) Insurable interest
C) Indemnity
D) Contribution
Correct Answer: C) Indemnity
Rationale: Indemnity means the insured should not profit from a loss but should
be restored to approximately the same financial position they were in prior to
the loss. This prevents moral hazard.
4. An insurer's right to recover from a responsible third party after paying a
claim is called:
A) Subrogation
B) Indemnity
C) Arbitration
D) Adhesion
Correct Answer: A) Subrogation
Rationale: Subrogation allows the insurer to pursue recovery from the party
that caused the loss, preventing the insured from collecting twice and helping to
control insurance costs.
, 5. In property insurance, insurable interest must exist at:
A) The time of application
B) The time of policy issuance
C) The time of loss
D) Both application and loss
Correct Answer: C) The time of loss
Rationale: For property and casualty insurance, insurable interest must exist at
the time of loss. In life insurance, it must exist at the time of application.
6. A tangible condition that increases the chance of loss, such as an icy sidewalk,
is an example of a:
A) Moral hazard
B) Morale hazard
C) Physical hazard
D) Legal hazard
Correct Answer: C) Physical hazard
Rationale: Physical hazards are tangible conditions that increase the probability
of a loss occurring. Moral hazard involves dishonesty, and morale hazard
involves carelessness due to having insurance.
