InsTX-PCRM92 Property and Casualty Risk Manager (English) Exam
100 Multiple Choice Questions with Answer Key and Explanations
**1.** In property and casualty insurance, what does "indemnity" mean?
A) To punish the wrongdoer
B) To restore the insured to the same financial position as before the loss
C) To provide a profit from the loss
D) To punish the insurance company
**Answer:** B
**Explanation:** Indemnity is the fundamental principle of P&C insurance - to compensate
the insured for actual loss suffered, no more, no less.
**2.** What is the purpose of a deductible in an insurance policy?
A) To increase the insurer's profit margin
B) To eliminate small claims and reduce moral hazard
C) To make policies more expensive
D) To complicate the claims process
**Answer:** B
**Explanation:** Deductibles help eliminate small, frequent claims (reducing
administrative costs) and encourage loss prevention by making the insured share in losses.
**3.** Which of the following is NOT a standard element of an insurance contract?
A) Offer and acceptance
B) Consideration
C) Legal purpose
D) Verbal agreement only
**Answer:** D
,**Explanation:** Insurance contracts must be in writing to be enforceable and include all
standard contract elements plus insurable interest, utmost good faith, etc.
**4.** What does "subrogation" allow an insurer to do after paying a claim?
A) Cancel the policy
B) Pursue recovery from the responsible third party
C) Increase future premiums
D) Deny similar future claims
**Answer:** B
**Explanation:** Subrogation gives the insurer the right to seek recovery from a third party
who caused the loss, preventing the insured from collecting twice.
**5.** The principle of "utmost good faith" requires:
A) Only the insured to be honest
B) Only the insurer to be honest
C) Both parties to disclose all material facts
D) Only material facts requested in writing
**Answer:** C
**Explanation:** Both parties must voluntarily disclose all material facts that could
influence the other party's decision to enter the contract.
**6.** What is "moral hazard" in insurance?
A) The risk that an insured will intentionally cause a loss
B) The risk of natural disasters
C) The risk of inaccurate underwriting data
D) The risk of market fluctuations
**Answer:** A
,**Explanation:** Moral hazard refers to the increased likelihood of loss when an insured
may intentionally cause or fail to prevent a loss due to having insurance.
**7.** A "valued policy" is one that:
A) Pays the actual cash value of a loss
B) Pays a predetermined amount regardless of actual loss
C) Has no maximum limit
D) Is only for valuable items
**Answer:** B
**Explanation:** Valued policies pay a pre-agreed amount for total loss (common for fine
arts, antiques) rather than actual cash value.
**8.** Which organization establishes statutory accounting principles for insurers?
A) FASB (Financial Accounting Standards Board)
B) SEC (Securities and Exchange Commission)
C) NAIC (National Association of Insurance Commissioners)
D) IRS (Internal Revenue Service)
**Answer:** C
**Explanation:** The NAIC establishes SAP (Statutory Accounting Principles) for insurance
company financial reporting to regulators.
**9.** What is the primary purpose of risk retention?
A) To transfer all risk to an insurer
B) To consciously assume and finance losses internally
C) To avoid all risk
D) To hide risk from regulators
**Answer:** B
, **Explanation:** Risk retention means the organization decides to bear the financial
consequences of certain risks itself rather than transferring them.
**10.** In risk management, what is "avoidance"?
A) Eliminating the risk by not engaging in the activity
B) Transferring the risk to another party
C) Reducing the frequency or severity of loss
D) Ignoring the risk
**Answer:** A
**Explanation:** Risk avoidance means deciding not to undertake or continue an activity
that creates the risk.
**11.** What does "ALE" stand for in risk management?
A) Annual Loss Estimate
B) Aggregate Loss Expectation
C) Annualized Loss Expectancy
D) Average Loss Experience
**Answer:** C
**Explanation:** Annualized Loss Expectancy = Single Loss Expectancy × Annual Rate of
Occurrence, used to quantify risk financially.
**12.** Which risk financing technique uses a formal agreement between two parties to
pay for each other's losses?
A) Insurance
B) Captive insurer
C) Risk retention group
D) Pooling
100 Multiple Choice Questions with Answer Key and Explanations
**1.** In property and casualty insurance, what does "indemnity" mean?
A) To punish the wrongdoer
B) To restore the insured to the same financial position as before the loss
C) To provide a profit from the loss
D) To punish the insurance company
**Answer:** B
**Explanation:** Indemnity is the fundamental principle of P&C insurance - to compensate
the insured for actual loss suffered, no more, no less.
**2.** What is the purpose of a deductible in an insurance policy?
A) To increase the insurer's profit margin
B) To eliminate small claims and reduce moral hazard
C) To make policies more expensive
D) To complicate the claims process
**Answer:** B
**Explanation:** Deductibles help eliminate small, frequent claims (reducing
administrative costs) and encourage loss prevention by making the insured share in losses.
**3.** Which of the following is NOT a standard element of an insurance contract?
A) Offer and acceptance
B) Consideration
C) Legal purpose
D) Verbal agreement only
**Answer:** D
,**Explanation:** Insurance contracts must be in writing to be enforceable and include all
standard contract elements plus insurable interest, utmost good faith, etc.
**4.** What does "subrogation" allow an insurer to do after paying a claim?
A) Cancel the policy
B) Pursue recovery from the responsible third party
C) Increase future premiums
D) Deny similar future claims
**Answer:** B
**Explanation:** Subrogation gives the insurer the right to seek recovery from a third party
who caused the loss, preventing the insured from collecting twice.
**5.** The principle of "utmost good faith" requires:
A) Only the insured to be honest
B) Only the insurer to be honest
C) Both parties to disclose all material facts
D) Only material facts requested in writing
**Answer:** C
**Explanation:** Both parties must voluntarily disclose all material facts that could
influence the other party's decision to enter the contract.
**6.** What is "moral hazard" in insurance?
A) The risk that an insured will intentionally cause a loss
B) The risk of natural disasters
C) The risk of inaccurate underwriting data
D) The risk of market fluctuations
**Answer:** A
,**Explanation:** Moral hazard refers to the increased likelihood of loss when an insured
may intentionally cause or fail to prevent a loss due to having insurance.
**7.** A "valued policy" is one that:
A) Pays the actual cash value of a loss
B) Pays a predetermined amount regardless of actual loss
C) Has no maximum limit
D) Is only for valuable items
**Answer:** B
**Explanation:** Valued policies pay a pre-agreed amount for total loss (common for fine
arts, antiques) rather than actual cash value.
**8.** Which organization establishes statutory accounting principles for insurers?
A) FASB (Financial Accounting Standards Board)
B) SEC (Securities and Exchange Commission)
C) NAIC (National Association of Insurance Commissioners)
D) IRS (Internal Revenue Service)
**Answer:** C
**Explanation:** The NAIC establishes SAP (Statutory Accounting Principles) for insurance
company financial reporting to regulators.
**9.** What is the primary purpose of risk retention?
A) To transfer all risk to an insurer
B) To consciously assume and finance losses internally
C) To avoid all risk
D) To hide risk from regulators
**Answer:** B
, **Explanation:** Risk retention means the organization decides to bear the financial
consequences of certain risks itself rather than transferring them.
**10.** In risk management, what is "avoidance"?
A) Eliminating the risk by not engaging in the activity
B) Transferring the risk to another party
C) Reducing the frequency or severity of loss
D) Ignoring the risk
**Answer:** A
**Explanation:** Risk avoidance means deciding not to undertake or continue an activity
that creates the risk.
**11.** What does "ALE" stand for in risk management?
A) Annual Loss Estimate
B) Aggregate Loss Expectation
C) Annualized Loss Expectancy
D) Average Loss Experience
**Answer:** C
**Explanation:** Annualized Loss Expectancy = Single Loss Expectancy × Annual Rate of
Occurrence, used to quantify risk financially.
**12.** Which risk financing technique uses a formal agreement between two parties to
pay for each other's losses?
A) Insurance
B) Captive insurer
C) Risk retention group
D) Pooling
