I85PREP
⌘ K
General Insurance Applications (GIA) study materials
General Insurance Applications (GIA) study resources

General Insurance Applications (GIA) practice questions

One question at a time. Build your General Insurance Applications (GIA) understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Insurance Principles and Risk Management Fundamentals

Which term describes the possibility of financial loss arising from an uncertain future event?

  1. Indemnity
  2. Premium
  3. Warranty
  4. Risk Correct answer.

Explanation

Risk refers to uncertainty about outcomes that may produce financial loss, and insurance exists to transfer that uncertainty to an insurer for a price. The other terms describe pricing, claim restoration, or contract promises rather than the underlying chance of loss.

Question 2Insurance Principles and Risk Management Fundamentals

A homeowner faces the chance of fire damage but cannot know whether or when it will occur. Which characteristic of insurable risk does this illustrate?

  1. The loss must be measurable
  2. The loss must be accidental
  3. The loss must be catastrophic
  4. The loss must be uncertain Correct answer.

Explanation

Insurable risks must be uncertain as to whether, when, and how much loss will occur; if loss were certain, the insurer could not pool it meaningfully. Measurability and accidentality are separate requirements, and catastrophic exposure is generally a reason a risk is hard to insure.

Question 3Insurance Principles and Risk Management Fundamentals

Which type of risk can be reduced or avoided through an individual's own choices and behavior?

  1. Fundamental risk
  2. Speculative risk
  3. Particular risk Correct answer.
  4. Pure risk

Explanation

Particular risk affects individuals and is within their control, such as driving carefully or maintaining a home. Pure risk involves only loss or no loss, speculative risk involves gain or loss, and fundamental risk is society-wide and largely beyond individual control.

Question 4Insurance Principles and Risk Management Fundamentals

Which method of handling risk involves accepting the possibility of loss and making no arrangement to transfer or reduce it?

  1. Transfer
  2. Retention Correct answer.
  3. Avoidance
  4. Reduction

Explanation

Retention means the individual or organization keeps the risk and bears any resulting loss itself, whether deliberately or by default. Avoidance eliminates the exposure, transfer shifts it to another party such as an insurer, and reduction lessens frequency or severity.

Question 5Insurance Principles and Risk Management Fundamentals

An insured installs a sprinkler system to lessen the extent of damage if a fire occurs. Which risk management technique is being used?

  1. Risk transfer
  2. Risk avoidance
  3. Loss prevention
  4. Loss reduction Correct answer.

Explanation

Loss reduction measures limit the severity of damage after an event occurs, and sprinklers suppress fire once it starts. Loss prevention instead aims to stop the event from happening at all, while avoidance eliminates the exposure and transfer shifts the cost to an insurer.

Question 6Insurance Principles and Risk Management Fundamentals

Which concept describes the tendency of people with greater-than-average exposure to seek insurance more eagerly?

  1. Law of large numbers
  2. Adverse selection Correct answer.
  3. Risk pooling
  4. Moral hazard

Explanation

Adverse selection occurs because applicants know more about their own risk than the insurer does, so higher-risk individuals are more likely to buy coverage. Insurers counter it through underwriting, and it differs from moral hazard, which concerns behavior after coverage begins.

Question 7Insurance Principles and Risk Management Fundamentals

After obtaining theft insurance, a shop owner stops locking the rear door at night. This behavior is best described as which of the following?

  1. Adverse selection
  2. Speculative risk
  3. Subrogation
  4. Moral hazard Correct answer.

Explanation

Moral hazard is the increased carelessness or dishonesty that can follow once insurance removes the full financial consequence of a loss. The owner's reduced precaution after buying coverage fits this concept rather than selection at application or a legal recovery right.

Question 8Insurance Principles and Risk Management Fundamentals

Which principle holds that the larger the number of similar independent exposures, the more closely actual results approach expected results?

  1. Law of large numbers Correct answer.
  2. Principle of utmost good faith
  3. Principle of indemnity
  4. Doctrine of proximate cause

Explanation

The law of large numbers supports insurance pricing by showing that predictions become more reliable as the number of similar independent units increases. Indemnity, proximate cause, and utmost good faith are separate doctrines governing claim payment and contract conduct.

Question 9Insurance Principles and Risk Management Fundamentals

Which element of an insurable risk requires that the loss be outside the insured's control and unintentional?

  1. Determinable loss
  2. Catastrophic loss
  3. Definite loss
  4. Fortuitous loss Correct answer.

Explanation

A fortuitous loss is accidental and unexpected from the insured's standpoint, which is essential because insurance cannot cover intentionally caused loss. Determinable and definite losses concern measurement and timing, while catastrophic losses are generally avoided rather than required.

Question 10Insurance Principles and Risk Management Fundamentals

An individual faces the risk of becoming disabled and unable to earn income. Which type of insurance is designed primarily for this exposure?

  1. Disability income insurance Correct answer.
  2. Marine insurance
  3. Property insurance
  4. Liability insurance

Explanation

Disability income insurance replaces a portion of earned income when illness or injury prevents the insured from working. Property insurance covers damage to belongings, liability insurance covers legal obligations to others, and marine insurance covers transit exposures.

Question 11Insurance Principles and Risk Management Fundamentals

Which of the following best describes a pure risk?

  1. A risk that is always uninsurable
  2. A chance of gain or loss from a business venture
  3. A situation offering only the possibility of loss or no loss Correct answer.
  4. A risk affecting an entire economy simultaneously

Explanation

Pure risk involves only loss or no loss and no possibility of profit, which is why it is generally insurable. Speculative risk offers the chance of gain, fundamental risk affects society broadly, and insurability depends on several criteria rather than being automatic.

Question 12Insurance Principles and Risk Management Fundamentals

A retailer deliberately sets aside funds each year to cover small glass breakage losses rather than buying coverage. This is an example of which risk treatment?

  1. Planned retention Correct answer.
  2. Risk avoidance
  3. Risk transfer
  4. Loss prevention

Explanation

Planned retention is a deliberate decision to absorb losses internally, often for small, predictable exposures where insurance cost exceeds the benefit. Avoidance would eliminate the activity, transfer would shift the exposure to an insurer, and prevention would reduce how often losses occur.

Question 13Insurance Principles and Risk Management Fundamentals

Which measure of loss frequency and severity helps an insurer estimate the average number of losses expected in a given period?

  1. Exposure base
  2. Loss ratio
  3. Loss severity
  4. Loss frequency Correct answer.

Explanation

Loss frequency is the number of losses expected within a period relative to the exposure units, and it is a key input to pricing. Severity measures the size of each loss, the loss ratio compares losses to premiums, and the exposure base is the unit used to measure risk.

Question 14Insurance Principles and Risk Management Fundamentals

Which characteristic of ideally insurable risk is satisfied when a large number of similar exposure units exist?

  1. Accidental loss
  2. Measurable loss
  3. Calculable chance of loss
  4. Large number of homogeneous units Correct answer.

Explanation

A large number of similar exposure units allows losses to be pooled and predicted reliably under the law of large numbers. Calculability, accidentality, and measurability are separate criteria that address prediction, intent, and valuation respectively.

Question 15Insurance Principles and Risk Management Fundamentals

Which of the following exposures is generally considered uninsurable by private insurers?

  1. Fire damage to a commercial warehouse
  2. Loss from a gradual, certain deterioration of a building Correct answer.
  3. Theft of personal jewelry
  4. Windstorm damage to a residence

Explanation

Insurance requires uncertainty, and predictable deterioration that is certain to occur over time lacks that element, so maintenance-related wear is excluded. Fire, theft, and windstorm are accidental, measurable events that insurers commonly cover.

Question 16Insurance Principles and Risk Management Fundamentals

The chance of loss from a specific peril, expressed as a probability, is known as which of the following?

  1. Risk Correct answer.
  2. Hazard
  3. Exposure
  4. Peril

Explanation

In insurance usage, risk is often used to mean the measurable probability of loss from a given peril. Peril is the cause of loss, hazard is a condition increasing the chance or severity of loss, and exposure is the state of being subject to a loss.

Question 17Insurance Principles and Risk Management Fundamentals

An oily rag stored in a garage increases the chance of a fire starting. In insurance terms, the oily rag is best described as which of the following?

  1. A claim
  2. A loss
  3. A hazard Correct answer.
  4. A peril

Explanation

A hazard is a condition that raises the probability or severity of a loss, and the stored oily rag does exactly that by making ignition more likely. The fire itself would be the peril, while loss and claim refer to the resulting damage and the request for payment.

Question 18Insurance Principles and Risk Management Fundamentals

Which type of hazard arises from carelessness, indifference, or dishonest behavior by an individual?

  1. Legal hazard
  2. Moral hazard
  3. Morale hazard Correct answer.
  4. Physical hazard

Explanation

Morale hazard is indifference to loss because insurance will pay, such as leaving keys in a car. Moral hazard involves dishonest intent, physical hazard is a tangible condition, and legal hazard arises from laws or court decisions affecting loss outcomes.

Question 19Insurance Principles and Risk Management Fundamentals

Which of the following best explains why insurance allows individuals to substitute a small certain cost for a large uncertain loss?

  1. It removes the need for underwriting
  2. It guarantees that no loss will occur
  3. It eliminates the underlying peril
  4. It pools premiums to fund the losses of the few Correct answer.

Explanation

Insurance collects premiums from many exposed parties and uses those funds to pay the losses suffered by the relatively few, converting an uncertain large loss into a certain small cost. It does not eliminate perils, prevent losses, or remove the need to assess risk.

Question 20Insurance Principles and Risk Management Fundamentals

Which of the following describes a speculative risk?

  1. A worker suffering a workplace injury
  2. A company investing in a new product line Correct answer.
  3. A driver being found liable for an accident
  4. A house being damaged by hail

Explanation

Speculative risk involves a chance of gain as well as loss, as with a business investment that may succeed or fail. Hail damage, liability for negligence, and workplace injury offer only loss or no loss and are therefore pure risks.

Question 21Insurance Principles and Risk Management Fundamentals

An insurer's underwriting department reviews an applicant's claim history to decide whether to issue a policy. Which risk management step does this represent for the insurer?

  1. Risk evaluation and selection Correct answer.
  2. Reinsurance cession
  3. Risk avoidance by the insurer
  4. Loss adjustment

Explanation

Underwriting evaluates the applicant's exposure and selects which risks the insurer will accept and on what terms. Loss adjustment handles claims after a loss, reinsurance cedes part of the risk to another insurer, and avoidance would mean declining all exposures.

Question 22Insurance Principles and Risk Management Fundamentals

Which of the following is an example of a fundamental risk?

  1. A single homeowner's roof leaking
  2. A widespread unemployment crisis affecting the nation Correct answer.
  3. A store's inventory being stolen
  4. A driver's collision with a parked car

Explanation

Fundamental risks are impersonal, affect large segments of society, and are generally beyond individual control, such as mass unemployment or natural catastrophe. The other examples are particular risks tied to specific individuals or businesses.

Question 23Insurance Principles and Risk Management Fundamentals

Which of the following best describes the relationship between hazards and perils?

  1. Hazards increase the chance or severity of loss while perils are the causes of loss Correct answer.
  2. Perils increase loss frequency while hazards determine coverage limits
  3. Hazards and perils are identical concepts in insurance
  4. Hazards are causes of loss and perils are conditions increasing loss

Explanation

A peril is the event that causes loss, such as fire or windstorm, while a hazard is a condition that makes that peril more likely or more damaging. Keeping the two distinct helps underwriters assess and price exposures accurately.

Question 24Insurance Principles and Risk Management Fundamentals

A business decides to stop manufacturing a hazardous chemical altogether. Which risk management technique has it chosen?

  1. Risk avoidance Correct answer.
  2. Risk retention
  3. Risk transfer
  4. Risk reduction

Explanation

Avoidance eliminates the exposure by discontinuing the activity that creates it, so no loss from that source can occur. Reduction would continue the activity with safeguards, retention would absorb losses, and transfer would shift them to an insurer.

Question 25Insurance Principles and Risk Management Fundamentals

Which statement accurately describes the role of insurance in society?

  1. It sets the price of all goods and services in an economy
  2. It spreads the cost of losses across a pool of exposed parties Correct answer.
  3. It removes the need for individuals to manage their own risks
  4. It guarantees that insureds will never experience a loss

Explanation

Insurance spreads the financial cost of losses among many policyholders who face similar exposures, stabilizing finances for individuals and businesses. It does not prevent losses, replace personal risk management, or determine market prices generally.

Question 26Insurance Principles and Risk Management Fundamentals

Which term describes the possibility that a loss may or may not occur, with no chance of gain?

  1. Speculative risk
  2. Business risk
  3. Pure risk Correct answer.
  4. Investment risk

Explanation

Pure risk involves only the chance of loss or no loss, with no possibility of profit, which is why insurers focus on it. Speculative risk, by contrast, involves the chance of gain as well as loss and is generally not insured.

Question 27Insurance Principles and Risk Management Fundamentals

A homeowner installs a monitored alarm system and replaces old wiring. These actions reduce which of the following?

  1. The moral hazard
  2. The physical hazard Correct answer.
  3. The number of exposure units
  4. The insured's premium volume

Explanation

Physical hazards are tangible conditions such as faulty wiring or unprotected premises that increase the chance or severity of loss. Removing or reducing those conditions reduces physical hazard.

Question 28Insurance Principles and Risk Management Fundamentals

Which risk management technique is used when a company buys a commercial property policy to cover fire damage to its warehouse?

  1. Transfer Correct answer.
  2. Loss control
  3. Retention
  4. Avoidance

Explanation

Purchasing insurance transfers the financial consequences of a loss to the insurer in exchange for a premium. The company keeps the physical risk but shifts the economic burden.

Question 29Insurance Principles and Risk Management Fundamentals

Which of the following is a peril rather than a hazard?

  1. A slippery warehouse floor
  2. A careless smoker
  3. An earthquake Correct answer.
  4. Frayed electrical cords

Explanation

A peril is the actual cause of a loss, such as an earthquake, fire, or theft. Hazards are conditions that increase the chance or severity of a loss caused by a peril.

Question 30Insurance Principles and Risk Management Fundamentals

Which term describes the amount of loss an insurer can absorb while still meeting its obligations, often measured by surplus and reserves?

  1. Coinsurance
  2. Reinsurance
  3. Retention
  4. Capacity Correct answer.

Explanation

Capacity refers to the financial ability of an insurer to accept and keep risk, supported by surplus and reserves. When capacity is limited, insurers may decline business or buy reinsurance.

Question 31Insurance Principles and Risk Management Fundamentals

Which method of handling risk involves a business accepting the financial consequences of small, frequent losses and budgeting for them?

  1. Avoidance
  2. Reduction
  3. Retention Correct answer.
  4. Transfer

Explanation

Retention means the organization keeps the risk and pays losses from its own funds, often through a planned budget or deductible. It is sensible for losses that are predictable and affordable.

Question 32Insurance Principles and Risk Management Fundamentals

Which of the following best describes the law of large numbers in insurance?

  1. It helps predict group losses more accurately as the number of similar units increases Correct answer.
  2. It allows insurers to set premiums without any loss data
  3. It requires every policyholder to pay the same premium
  4. It guarantees that no insurer will ever become insolvent

Explanation

The law of large numbers holds that as the number of similar independent exposure units grows, actual loss experience tends to approach the expected or predicted result. This makes group results more stable and predictable even though individual outcomes remain uncertain.

Question 33Insurance Principles and Risk Management Fundamentals

Which term refers to the uncertainty about whether a loss will occur and how large it will be?

  1. Indemnity
  2. Risk Correct answer.
  3. Premium
  4. Claim

Explanation

Risk is the uncertainty surrounding a potential loss, including whether it will happen and how severe it may be. Insurance exists to manage that uncertainty by pooling exposures.

Question 34Insurance Principles and Risk Management Fundamentals

A manufacturer decides to stop producing a volatile chemical because the liability exposure is too great. Which risk management technique has it applied?

  1. Retention
  2. Avoidance Correct answer.
  3. Loss reduction
  4. Transfer

Explanation

Avoidance means eliminating a risk by abandoning the activity that creates the exposure. By ceasing production of the chemical, the manufacturer removes the liability exposure entirely.

Question 35Insurance Principles and Risk Management Fundamentals

Which statement best distinguishes a hazard from a peril?

  1. A hazard is always a financial loss, while a peril is always a physical event
  2. A hazard is the cause of loss, while a peril is a condition that increases loss
  3. A hazard and a peril are identical concepts used interchangeably
  4. A hazard is a condition that increases the chance of loss, while a peril is the cause of loss Correct answer.

Explanation

A peril is the event that causes a loss, such as fire or windstorm. A hazard is a condition or situation that increases the likelihood or severity of a loss from that peril.

Question 36Insurance Principles and Risk Management Fundamentals

An insurer uses the loss ratio to evaluate performance. Which calculation produces the loss ratio?

  1. Expenses divided by written premiums
  2. Earned premiums divided by incurred losses
  3. Incurred losses divided by earned premiums Correct answer.
  4. Claims paid divided by policyholder surplus

Explanation

The loss ratio compares incurred losses to earned premiums, showing the share of premium dollars consumed by claims. A ratio above 100 percent indicates losses exceed premium income.

Question 37Insurance Principles and Risk Management Fundamentals

Which of the following exposures is most likely to be considered uninsurable by a private insurer?

  1. The intentional decision to launch a risky new product Correct answer.
  2. Fire damage to a commercial building
  3. Wind damage to a residence
  4. Theft of personal jewelry from a home

Explanation

Speculative risks involve the chance of gain as well as loss and are generally not insurable because the loss is not accidental and the incentive to create it exists. Fire, theft, and wind are pure risks that are commonly insured.

Question 38Insurance Principles and Risk Management Fundamentals

Which characteristic of an ideally insurable risk is met when the insurer can determine the probable number and size of losses in advance?

  1. Definite location
  2. Accidental loss
  3. Calculable probability Correct answer.
  4. Catastrophic potential

Explanation

Insurers must be able to estimate the frequency and severity of losses to set adequate premiums. This requires a calculable probability based on sufficient historical data.

Question 39Insurance Principles and Risk Management Fundamentals

A restaurant owner keeps a fire extinguisher and trains staff on its use. Which risk management goal is primarily served?

  1. Reducing loss severity Correct answer.
  2. Avoiding the exposure
  3. Transferring risk
  4. Increasing retention

Explanation

Fire extinguishers and trained staff may not prevent every fire, but they can limit how much damage occurs once a fire starts. That is a loss reduction measure aimed at severity.

Question 40Insurance Principles and Risk Management Fundamentals

Which statement best explains why insurance is described as a mechanism for pooling risk?

  1. It spreads the losses of the few among the many who pay premiums Correct answer.
  2. It sets premiums equally for all policyholders regardless of risk
  3. It guarantees that every insured will eventually collect a claim
  4. It eliminates all uncertainty for each individual insured

Explanation

Insurance collects premiums from many exposure units so that the losses suffered by a few can be paid without ruining any single insured. The uncertainty is reduced for the group even though individual risk remains.

Question 41Insurance Principles and Risk Management Fundamentals

Which of the following is an example of a particular risk rather than a fundamental risk?

  1. A flood affecting an entire region
  2. A fire in one insured's kitchen Correct answer.
  3. A widespread economic depression
  4. A national unemployment crisis

Explanation

Particular risks are personal or local in origin and effect, such as a single building fire, and are generally insurable. Fundamental risks arise from broad economic, social, or natural forces and affect many people at once.

Question 42Insurance Principles and Risk Management Fundamentals

Which risk management approach combines retaining part of a loss and insuring the remainder?

  1. Purchasing a policy with no deductible
  2. Using a deductible with an insurance policy Correct answer.
  3. Avoiding the activity entirely
  4. Self-insuring with no other coverage

Explanation

A deductible means the insured retains the first portion of each loss while the insurer covers amounts above it. This blends retention with transfer in a single arrangement.

Question 43Insurance Principles and Risk Management Fundamentals

Which term describes the tendency of insurance to reduce an insured's incentive to prevent losses because coverage is in place?

  1. Physical hazard
  2. Adverse selection
  3. Moral hazard Correct answer.
  4. Speculative risk

Explanation

Moral hazard arises when the existence of insurance changes behavior, making an insured less careful about preventing loss. Insurers counter it with deductibles, exclusions, and claims investigation.

Question 44Insurance Principles and Risk Management Fundamentals

An insurer reviews aggregate claims data for thousands of similar homes to set rates for a new region. Which concept is the insurer applying?

  1. Indemnity
  2. Credibility of loss experience Correct answer.
  3. Utmost good faith
  4. Subrogation

Explanation

Credibility refers to the degree of confidence an insurer can place in loss experience when setting rates. Larger volumes of similar, reliable data produce more credible estimates.

Question 45Insurance Principles and Risk Management Fundamentals

Which of the following best explains why insurers require a large number of similar exposure units?

  1. It eliminates the need for underwriting
  2. It makes individual losses more predictable for each insured
  3. It allows each insured to receive a guaranteed profit
  4. It makes aggregate loss experience more stable and predictable Correct answer.

Explanation

A large pool of similar independent exposures allows actual aggregate losses to approach expected losses, which supports accurate pricing. Individual outcomes remain uncertain even when the group result is stable.

Question 46Insurance Principles and Risk Management Fundamentals

A person with a serious heart condition applies for life insurance without disclosing the condition. Which problem is the insurer most concerned about?

  1. Moral hazard
  2. Loss frequency
  3. Adverse selection Correct answer.
  4. Physical hazard

Explanation

Adverse selection occurs when applicants with higher-than-average risk are more likely to seek coverage and may withhold information. Insurers manage it through underwriting, medical questions, and policy provisions.

Question 47Insurance Principles and Risk Management Fundamentals

An insurer writes a policy covering a peril that is expected to affect nearly all insureds at the same time. Which insurable risk criterion is most directly violated?

  1. The loss must be accidental
  2. The loss must not be catastrophic to the insurer Correct answer.
  3. The exposure must be large in number
  4. The loss must be definite and measurable

Explanation

If a single event can produce losses across most of the insured pool at once, the risk is catastrophic and threatens the insurer's solvency. Such exposures are generally excluded or handled through government programs or reinsurance.

Question 48Insurance Principles and Risk Management Fundamentals

Which statement best describes the relationship between risk and insurance pricing?

  1. Premiums are unrelated to the expected cost of losses
  2. Premiums fall as expected loss frequency rises
  3. Higher expected loss costs generally require higher premiums Correct answer.
  4. Risk classification has no effect on premium levels

Explanation

Premiums must fund expected losses, expenses, and a margin for uncertainty, so higher expected loss costs generally require higher premiums. Risk classification helps match price to expected cost.

Question 49Insurance Principles and Risk Management Fundamentals

An insurer accepts a risk that is predictable in aggregate but highly uncertain for any single insured. Which type of risk does this most closely resemble?

  1. A fundamental risk that affects entire regions
  2. A speculative risk with potential for gain
  3. A risk that is certain to produce a loss
  4. A pure risk that is insurable when pooled Correct answer.

Explanation

Pure risks involve only loss or no loss and can be insured when the group experience is predictable, even though individual outcomes are uncertain. Pooling converts individual uncertainty into a manageable aggregate cost.

Question 50Insurance Principles and Risk Management Fundamentals

Which combination best illustrates the difference between loss frequency and loss severity?

  1. Frequency measures premium volume; severity measures retention
  2. Frequency and severity both measure only the number of claims
  3. Frequency is the average size of each loss; severity is how often losses occur
  4. Frequency is how often losses occur; severity is the average size of each loss Correct answer.

Explanation

Frequency describes how often losses happen within a period, while severity describes the size of those losses. Insurers analyze both together because a peril can be frequent but minor or rare but severe.