PERSONAL LINES INSURANCE STUDY GUIDE QUESTIONS WITH
CORRECT ANSWERS 2025/2026
Insurance - CORRECT ANSWER -transfer of risk from a person or a business to an insurer
Risk. 2 types: speculative and Pure - CORRECT ANSWER -Risk - the uncertainty, possibility of loss
Types of risk:
Speculative risk - chance of loss or gain; not insurable
Ex. gambling, vegas, stocks
Pure risk - chance of loss only; insurance companies will insure
Ex. car crash
Exposure - CORRECT ANSWER -risks for which the insurance company would be liable
Peril - CORRECT ANSWER -- Cause of loss
- House burns down - peril is the fire
Direct loss / Indirect loss - CORRECT ANSWER -Direct - physical loss
Indirect - Consequences of physical loss
Hazard (physical, moral, morale) - CORRECT ANSWER -Hazard - increases the chance of loss
- Physical hazard - the hazard can be seen
ex. wet floor
- Moral hazard - dishonesty
ex. dishonesty
,- Morale hazard - carelessness
ex. leaving the door open
Methods of handing risk (STAAR) - CORRECT ANSWER -Sharing - in risk sharing, two or more
individuals or businesses agree to pay a portion of any loss incurred by any member of the
group. Stockholders in a corp. share the risk
Transfer- Risk transfer is what happens with insurance. The insurer (insurance company) agrees
to pay of an insured (customer) has a loss the insured no longer bears that risk. The individual
has a cost in the form of a premium payments. But, in contrast to the loss which is large and
uncertain.
Avoidance- Risk avoidance means eliminating a particular risk by not engaging in a certain
activity. For example an individual who does not drive avoids the risk of injuring someone in an
automobile collision
Retention- Risk retention means the Individual or business will pay for the loss if it occurs, or a
portion of the loss via a deductible. If you don't have car insurance to pay for the damages you
cause to another person in an accident, you have retained the risk
Reduction- risk reduction refers to lessening the chance that a loss will occur, or lessening the
extent of a loss if it occurs. If a business installs a sprinkler system in its building this will help
reduce or eliminate the damage caused by a fire.
Parties to an insurance contract - CORRECT ANSWER -contract (policy)
InsurED 2 InsurER
ED 2 ER
- an agreement between the insured and the insurer
- 1st party - insured (customer)
,- 2nd party- insurer (insurance company)
Law of Large Numbers - CORRECT ANSWER -The larger the group, the more accurately losses
can be predicted
Elements of Insurable risk (CANHAM) - CORRECT ANSWER -*C*alculable: Premiums must be
calculable based on prior loss statistics for that particular risk.
*A*ffordable: Premium should be affordable for the average consumer.
*N*on-catastrophic: The Risk must be non-catastrophic for the Insurance Company.
*H*omogeneous: Risk must be similar in nature so the same factors affect the chance of loss.
*A*ccidental: Loss must have been caused due to chance (accident).
*M*easurable: A definite (Time and Place) and measurable loss (Numbers and Dollar amounts
not just casual reference).
Adverse Selection - CORRECT ANSWER -- risks that have a greater than average chance of loss
- not wanted by insurers
- tendency for high risk individuals to get and keep insurance
- why insurers go through the underwriting process
- High risk = higher rate to insure of refusal
reinsurance - CORRECT ANSWER -- An insurance company's insurance company
- Helps insurers spread their risk
Stock Insurers - CORRECT ANSWER -- Owned by stockholders
- Dividend is not guaranteed
- Dividend is paid to stockholder
- Dividend is taxable to stockholder
, - Issue non-participating policies
Mutual Insurers - CORRECT ANSWER -- Owned by policyholders
- Dividend is not guaranteed
- Dividend is paid to policyholder
- Dividend is not taxable; considered refund of premium
- Issue participating policies
Fraternal Benefit Societies - CORRECT ANSWER -- Provides insurance and other benefits
- Must be a member to get the benefits
Reciprocal Insurers - CORRECT ANSWER --unincorporated
-members are assessed the amount they have to pay if a loss to any member of the group
occurs
-Managed by an attorney-in-fact
Lloyd's Association - CORRECT ANSWER -insurance provided by individual underwriters not
companies
Insure unusual risks
- hole in one contest
- athletes arm
- celebrity hair
Risk retention groups - CORRECT ANSWER -NOT THE INSURANCE COMPANY
- a group of business from the same industry that join together to buy liability insurance from
an insurance company
CORRECT ANSWERS 2025/2026
Insurance - CORRECT ANSWER -transfer of risk from a person or a business to an insurer
Risk. 2 types: speculative and Pure - CORRECT ANSWER -Risk - the uncertainty, possibility of loss
Types of risk:
Speculative risk - chance of loss or gain; not insurable
Ex. gambling, vegas, stocks
Pure risk - chance of loss only; insurance companies will insure
Ex. car crash
Exposure - CORRECT ANSWER -risks for which the insurance company would be liable
Peril - CORRECT ANSWER -- Cause of loss
- House burns down - peril is the fire
Direct loss / Indirect loss - CORRECT ANSWER -Direct - physical loss
Indirect - Consequences of physical loss
Hazard (physical, moral, morale) - CORRECT ANSWER -Hazard - increases the chance of loss
- Physical hazard - the hazard can be seen
ex. wet floor
- Moral hazard - dishonesty
ex. dishonesty
,- Morale hazard - carelessness
ex. leaving the door open
Methods of handing risk (STAAR) - CORRECT ANSWER -Sharing - in risk sharing, two or more
individuals or businesses agree to pay a portion of any loss incurred by any member of the
group. Stockholders in a corp. share the risk
Transfer- Risk transfer is what happens with insurance. The insurer (insurance company) agrees
to pay of an insured (customer) has a loss the insured no longer bears that risk. The individual
has a cost in the form of a premium payments. But, in contrast to the loss which is large and
uncertain.
Avoidance- Risk avoidance means eliminating a particular risk by not engaging in a certain
activity. For example an individual who does not drive avoids the risk of injuring someone in an
automobile collision
Retention- Risk retention means the Individual or business will pay for the loss if it occurs, or a
portion of the loss via a deductible. If you don't have car insurance to pay for the damages you
cause to another person in an accident, you have retained the risk
Reduction- risk reduction refers to lessening the chance that a loss will occur, or lessening the
extent of a loss if it occurs. If a business installs a sprinkler system in its building this will help
reduce or eliminate the damage caused by a fire.
Parties to an insurance contract - CORRECT ANSWER -contract (policy)
InsurED 2 InsurER
ED 2 ER
- an agreement between the insured and the insurer
- 1st party - insured (customer)
,- 2nd party- insurer (insurance company)
Law of Large Numbers - CORRECT ANSWER -The larger the group, the more accurately losses
can be predicted
Elements of Insurable risk (CANHAM) - CORRECT ANSWER -*C*alculable: Premiums must be
calculable based on prior loss statistics for that particular risk.
*A*ffordable: Premium should be affordable for the average consumer.
*N*on-catastrophic: The Risk must be non-catastrophic for the Insurance Company.
*H*omogeneous: Risk must be similar in nature so the same factors affect the chance of loss.
*A*ccidental: Loss must have been caused due to chance (accident).
*M*easurable: A definite (Time and Place) and measurable loss (Numbers and Dollar amounts
not just casual reference).
Adverse Selection - CORRECT ANSWER -- risks that have a greater than average chance of loss
- not wanted by insurers
- tendency for high risk individuals to get and keep insurance
- why insurers go through the underwriting process
- High risk = higher rate to insure of refusal
reinsurance - CORRECT ANSWER -- An insurance company's insurance company
- Helps insurers spread their risk
Stock Insurers - CORRECT ANSWER -- Owned by stockholders
- Dividend is not guaranteed
- Dividend is paid to stockholder
- Dividend is taxable to stockholder
, - Issue non-participating policies
Mutual Insurers - CORRECT ANSWER -- Owned by policyholders
- Dividend is not guaranteed
- Dividend is paid to policyholder
- Dividend is not taxable; considered refund of premium
- Issue participating policies
Fraternal Benefit Societies - CORRECT ANSWER -- Provides insurance and other benefits
- Must be a member to get the benefits
Reciprocal Insurers - CORRECT ANSWER --unincorporated
-members are assessed the amount they have to pay if a loss to any member of the group
occurs
-Managed by an attorney-in-fact
Lloyd's Association - CORRECT ANSWER -insurance provided by individual underwriters not
companies
Insure unusual risks
- hole in one contest
- athletes arm
- celebrity hair
Risk retention groups - CORRECT ANSWER -NOT THE INSURANCE COMPANY
- a group of business from the same industry that join together to buy liability insurance from
an insurance company
