P&C General Insurance Principles 3

Question 1

Which of the following best describes 'adverse selection' in insurance?

Accepted Answer

The tendency for higher-risk individuals to seek insurance more than lower-risk individuals

Answer

Adverse selection occurs when people with higher-than-average risk are more likely to purchase insurance, potentially skewing the insured pool toward worse risks than the insurer anticipated.

Question 2

The principle of 'utmost good faith' (uberrimae fidei) in insurance requires that:

Accepted Answer

Both the insured and the insurer must disclose all material facts relevant to the policy

Answer

Utmost good faith obligates both parties to disclose all material facts relevant to the insurance contract — concealment or misrepresentation by either party can void the policy.

Question 3

Which of the following statements about insurance policy 'conditions' is correct?

Accepted Answer

Conditions are the obligations the insured must fulfill to maintain coverage and collect claims

Answer

Conditions are the duties and requirements imposed on the insured (and insurer) — such as timely notice of loss, cooperation, and proof of loss — that must be met for coverage to apply.

Question 4

What is the difference between a 'stock' insurance company and a 'mutual' insurance company?

Accepted Answer

Mutual companies are owned by policyholders; stock companies are owned by shareholders

Answer

A mutual insurance company is owned by its policyholders, who may receive dividends if experience is favorable; a stock company is owned by shareholders who receive dividends.

Question 5

A 'warranty' in an insurance policy is a statement by the insured that is:

Accepted Answer

Absolutely true; if false, it may void the policy even if not material to the loss

Answer

A warranty is a statement that is guaranteed to be strictly true; breach of a warranty — even on an immaterial point — has traditionally been grounds to void the policy, unlike a mere representation.

Property & Casualty Insurance License Test Practice Test

Property & Casualty Insurance License Test Practice Test

P&C General Insurance Principles 3