State Farm Property & Casualty Insurance Exam
| Comprehensive Exam Review & Practice
Questions with Correct Answers
Grade A+
(2026-2027)
,Risk chance of loss
Loss unplanned reduction in economic value
Direct loss Immediate result of an event caused by peril
Indirect loss side effect of the direct loss
exposure the state of being subject to possible loss
peril cause of loss. the event that insurance protects against
examples of perils fire, explosion, windstorm, flood, theft, collision
hazard a condition that increases the number of or the severity of losses
Moral hazards traits of an individual that increases loss: alcoholism, smoking, bad credit
Morale hazards individual tendencies from a state of mind or attitude or indifference to loss.
example: not locking a car door or driving recklessly
Physical hazards physical conditions that increase chance of loss. example: diseases, slippery floors,
congested traffic, unsanitary conditions
Risk Management (5 techniques) 1. avoiding risk
2. controlling (reducing) the risk
3.sharing the risk
4.retaining the risk
5.transferring the risk
Risk Avoidance not always practical. example if you dont own a car you avoid the risk of having a
car be stolen or damaged
Risk Control can be controllable through risk prevention or risk reduction measures.
, risk prevention reduce likleyhood that a loss will occur
risk reduction reduce the severity of any loss. for example a fire extinguishers (does not keep fires
from starting but when used they can limit fire damage)
Risk Sharing sharing the burden of a loss with others. (pooling tips)
Risk retention "doing nothing" choosing to use existing assets to pay for any losses
Risk Transfer transferring the risk of loss to a third party
"Only pure risks ... are insurable"
To be covered by insurance, a risk must meet these rules: The loss must be clear—when, where, and how it happened.
The item's value must be measurable so the company knows how much to charge
and pay.
The loss must be accidental, not something the insured caused on purpose.
Huge disasters like wars or massive earthquakes usually aren't covered.
The risk must be common enough that the insurance company can predict future
losses.
Only pure risks (like a house fire) are covered— risky investments or gambling
losses are not.
Adverse selection means to select against.
underwriting a process that determines whether a particular risk(individual, property etc) can be
insured and at what rate
law of large numbers the larger the number of individuals that are randomly drawn from a population, the
more representative the resulting group will be of the entire population (the
probability)
speculative risks (stock investments, gambling)... are not insurable
the use of deductibles in property insurance is a risk retention device
insurers Insurance companies
| Comprehensive Exam Review & Practice
Questions with Correct Answers
Grade A+
(2026-2027)
,Risk chance of loss
Loss unplanned reduction in economic value
Direct loss Immediate result of an event caused by peril
Indirect loss side effect of the direct loss
exposure the state of being subject to possible loss
peril cause of loss. the event that insurance protects against
examples of perils fire, explosion, windstorm, flood, theft, collision
hazard a condition that increases the number of or the severity of losses
Moral hazards traits of an individual that increases loss: alcoholism, smoking, bad credit
Morale hazards individual tendencies from a state of mind or attitude or indifference to loss.
example: not locking a car door or driving recklessly
Physical hazards physical conditions that increase chance of loss. example: diseases, slippery floors,
congested traffic, unsanitary conditions
Risk Management (5 techniques) 1. avoiding risk
2. controlling (reducing) the risk
3.sharing the risk
4.retaining the risk
5.transferring the risk
Risk Avoidance not always practical. example if you dont own a car you avoid the risk of having a
car be stolen or damaged
Risk Control can be controllable through risk prevention or risk reduction measures.
, risk prevention reduce likleyhood that a loss will occur
risk reduction reduce the severity of any loss. for example a fire extinguishers (does not keep fires
from starting but when used they can limit fire damage)
Risk Sharing sharing the burden of a loss with others. (pooling tips)
Risk retention "doing nothing" choosing to use existing assets to pay for any losses
Risk Transfer transferring the risk of loss to a third party
"Only pure risks ... are insurable"
To be covered by insurance, a risk must meet these rules: The loss must be clear—when, where, and how it happened.
The item's value must be measurable so the company knows how much to charge
and pay.
The loss must be accidental, not something the insured caused on purpose.
Huge disasters like wars or massive earthquakes usually aren't covered.
The risk must be common enough that the insurance company can predict future
losses.
Only pure risks (like a house fire) are covered— risky investments or gambling
losses are not.
Adverse selection means to select against.
underwriting a process that determines whether a particular risk(individual, property etc) can be
insured and at what rate
law of large numbers the larger the number of individuals that are randomly drawn from a population, the
more representative the resulting group will be of the entire population (the
probability)
speculative risks (stock investments, gambling)... are not insurable
the use of deductibles in property insurance is a risk retention device
insurers Insurance companies
