AINS 101 Exam Prep | Questions and
Answers | 2026 Update | 100% Correct
1. What is the primary purpose of insurance?
A) To eliminate all risk
B) To transfer the financial consequence of risk to an insurer
C) To guarantee that no losses will occur
D) To serve as an investment vehicle
Correct answer: B) To transfer the financial consequence of risk to an insurer
Explanation: Insurance is a risk transfer mechanism. The insured pays a premium
to the insurer, who then assumes the financial responsibility for potential covered
losses.
2. In insurance, what is the term for the person or entity who owns the policy?
A) Beneficiary
B) Insured
C) Policyowner
D) Third-party
Correct answer: C) Policyowner
Explanation: The policyowner is the individual or entity that has entered into the
contract with the insurance company. The policyowner and insured are often the
same person, but they can be different (e.g., a parent owns a policy on a child).
3. Which of the following is considered a fundamental element of an insurance
contract?
,A) Gratuitous Promise
B) Conditional Contract
C) Unilateral Contract
D) Aleatory Contract
Correct answer: D) Aleatory Contract
Explanation: An aleatory contract is one where the exchange of value is unequal
and depends on an uncertain event. Insurance contracts are aleatory because the
insured may pay premiums and never receive a claim payout, or may receive a
large payout after paying only a few premiums.
4. What does the principle of indemnity state?
A) The insured should be restored to approximately the same financial position after a
loss as before it.
B) The insured can profit from a covered loss.
C) The insurer must replace any damaged property with new property.
D) The insured is always paid the policy's face amount.
Correct answer: A) The insured should be restored to approximately the same
financial position after a loss as before it.
Explanation: The principle of indemnity prevents the insured from gaining
financially from a loss. It aims to place the insured in the same, but not better,
position than prior to the loss.
5. Which insurance principle is violated if an insured can collect from multiple policies
for the same loss and make a profit?
A) Indemnity
B) Insurable Interest
C) Subrogation
D) Utmost Good Faith
Correct answer: A) Indemnity
Explanation: Collecting more than the actual loss constitutes a violation of
,indemnity. Other mechanisms like "Other Insurance" clauses or the principle of
Contribution are designed to prevent this.
6. What is the term for the cause of a loss?
A) Hazard
B) Peril
C) Risk
D) Loss
Correct answer: B) Peril
Explanation: A peril is the specific cause of a loss, such as fire, windstorm, theft, or
collision.
7. Which of the following best describes a "hazard"?
A) The uncertainty of a loss
B) The actual cause of a loss
C) A condition that increases the likelihood or severity of a loss
D) The financial loss itself
Correct answer: C) A condition that increases the likelihood or severity of a loss
Explanation: A hazard is a factor that increases risk. Examples include icy roads
(physical hazard), dishonesty (moral hazard), or carelessness (morale hazard).
8. The requirement that an insured must have a financial stake in the insured item to
purchase insurance is called what?
A) Indemnity
B) Insurable Interest
C) Waiver and Estoppel
D) Consideration
Correct answer: B) Insurable Interest
Explanation: Insurable interest means the policyowner would suffer a financial loss
, if the insured property or person is damaged or lost. It must exist at the time of
loss for property insurance and at the time of policy inception for life insurance.
9. What type of risk involves only the possibility of loss, with no chance of gain?
A) Speculative Risk
B) Pure Risk
C) Fundamental Risk
D) Particular Risk
Correct answer: B) Pure Risk
Explanation: Pure risk presents the chance of loss only (e.g., fire, illness, death).
Insurance typically covers only pure risks, not speculative risks (like gambling)
which involve a chance of loss or gain.
10. What is the process called when an insurance company transfers a portion of its risk
to another insurer?
A) Underwriting
B) Reinsurance
C) Cession
D) Subrogation
Correct answer: B) Reinsurance
Explanation: Reinsurance is "insurance for insurance companies." It allows a
primary insurer (the ceding company) to transfer part of its risk exposure to a
reinsurer to protect against catastrophic losses.
11. An insurance applicant intentionally lies on the application about a material fact.
What is this called?
A) Misrepresentation
B) Concealment
C) Warranty
D) Waiver
Answers | 2026 Update | 100% Correct
1. What is the primary purpose of insurance?
A) To eliminate all risk
B) To transfer the financial consequence of risk to an insurer
C) To guarantee that no losses will occur
D) To serve as an investment vehicle
Correct answer: B) To transfer the financial consequence of risk to an insurer
Explanation: Insurance is a risk transfer mechanism. The insured pays a premium
to the insurer, who then assumes the financial responsibility for potential covered
losses.
2. In insurance, what is the term for the person or entity who owns the policy?
A) Beneficiary
B) Insured
C) Policyowner
D) Third-party
Correct answer: C) Policyowner
Explanation: The policyowner is the individual or entity that has entered into the
contract with the insurance company. The policyowner and insured are often the
same person, but they can be different (e.g., a parent owns a policy on a child).
3. Which of the following is considered a fundamental element of an insurance
contract?
,A) Gratuitous Promise
B) Conditional Contract
C) Unilateral Contract
D) Aleatory Contract
Correct answer: D) Aleatory Contract
Explanation: An aleatory contract is one where the exchange of value is unequal
and depends on an uncertain event. Insurance contracts are aleatory because the
insured may pay premiums and never receive a claim payout, or may receive a
large payout after paying only a few premiums.
4. What does the principle of indemnity state?
A) The insured should be restored to approximately the same financial position after a
loss as before it.
B) The insured can profit from a covered loss.
C) The insurer must replace any damaged property with new property.
D) The insured is always paid the policy's face amount.
Correct answer: A) The insured should be restored to approximately the same
financial position after a loss as before it.
Explanation: The principle of indemnity prevents the insured from gaining
financially from a loss. It aims to place the insured in the same, but not better,
position than prior to the loss.
5. Which insurance principle is violated if an insured can collect from multiple policies
for the same loss and make a profit?
A) Indemnity
B) Insurable Interest
C) Subrogation
D) Utmost Good Faith
Correct answer: A) Indemnity
Explanation: Collecting more than the actual loss constitutes a violation of
,indemnity. Other mechanisms like "Other Insurance" clauses or the principle of
Contribution are designed to prevent this.
6. What is the term for the cause of a loss?
A) Hazard
B) Peril
C) Risk
D) Loss
Correct answer: B) Peril
Explanation: A peril is the specific cause of a loss, such as fire, windstorm, theft, or
collision.
7. Which of the following best describes a "hazard"?
A) The uncertainty of a loss
B) The actual cause of a loss
C) A condition that increases the likelihood or severity of a loss
D) The financial loss itself
Correct answer: C) A condition that increases the likelihood or severity of a loss
Explanation: A hazard is a factor that increases risk. Examples include icy roads
(physical hazard), dishonesty (moral hazard), or carelessness (morale hazard).
8. The requirement that an insured must have a financial stake in the insured item to
purchase insurance is called what?
A) Indemnity
B) Insurable Interest
C) Waiver and Estoppel
D) Consideration
Correct answer: B) Insurable Interest
Explanation: Insurable interest means the policyowner would suffer a financial loss
, if the insured property or person is damaged or lost. It must exist at the time of
loss for property insurance and at the time of policy inception for life insurance.
9. What type of risk involves only the possibility of loss, with no chance of gain?
A) Speculative Risk
B) Pure Risk
C) Fundamental Risk
D) Particular Risk
Correct answer: B) Pure Risk
Explanation: Pure risk presents the chance of loss only (e.g., fire, illness, death).
Insurance typically covers only pure risks, not speculative risks (like gambling)
which involve a chance of loss or gain.
10. What is the process called when an insurance company transfers a portion of its risk
to another insurer?
A) Underwriting
B) Reinsurance
C) Cession
D) Subrogation
Correct answer: B) Reinsurance
Explanation: Reinsurance is "insurance for insurance companies." It allows a
primary insurer (the ceding company) to transfer part of its risk exposure to a
reinsurer to protect against catastrophic losses.
11. An insurance applicant intentionally lies on the application about a material fact.
What is this called?
A) Misrepresentation
B) Concealment
C) Warranty
D) Waiver
