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AZ Property & Casualty practice questions

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Question 1Insurance Regulation

Which body is the state agency that regulates the business of insurance and licenses producers in Arizona?

  1. The federal Department of Insurance Oversight
  2. The National Association of Insurance Commissioners
  3. The Arizona Corporation Commission
  4. The state insurance department, DIFI Correct answer.

Explanation

Arizona's insurance regulator is the Department of Insurance and Financial Institutions, commonly called DIFI, which administers the state's insurance laws and issues producer licenses. The Corporation Commission regulates utilities and securities, not insurance. The NAIC is a voluntary association of state regulators with no licensing authority, and insurance is regulated by the states rather than by a federal insurance department.

Question 2Insurance Regulation

How is Arizona's Director of Insurance selected?

  1. Elected by the state legislature in joint session
  2. Appointed by the Governor Correct answer.
  3. Elected by voters in a statewide general election
  4. Chosen by a vote of licensed insurers

Explanation

The head of the Arizona Department of Insurance and Financial Institutions is a gubernatorial appointee, so the office is not filled by popular election. Insurers and legislators do not select the Director. This structure makes the regulator answerable to the executive branch rather than to the industry it supervises.

Question 3Insurance Regulation

A person who wants to sell property and casualty insurance in Arizona must first satisfy which requirement?

  1. Being appointed by at least three admitted insurers
  2. Holding a valid Arizona producer license for that line Correct answer.
  3. Passing the license exam, even if no license has been issued yet
  4. Joining a state-approved producer trade association

Explanation

Soliciting, negotiating, or selling insurance requires a current producer license in the applicable line of authority; passing the exam alone does not authorize activity. Appointments are filed by insurers after licensing and are not a prerequisite to licensure. Trade association membership is optional and confers no legal authority.

Question 4Insurance Regulation

Before a licensed producer may submit business on an insurer's behalf, that insurer must do which of the following?

  1. Obtain the Director's written consent for each appointment
  2. Appoint the producer with the Department Correct answer.
  3. Require the producer to post a cash deposit with the state
  4. Issue the producer a surety bond equal to premiums written

Explanation

An insurer grants authority to act for it by filing an appointment for the producer with the Department of Insurance and Financial Institutions. No case-by-case approval from the Director, surety bond, or cash deposit is required for a standard producer appointment. Without an appointment, the producer may not submit business for that carrier.

Question 5Insurance Regulation

How much continuing education must an Arizona resident insurance producer complete to keep a license in force?

  1. 40 credit hours every two years, including 8 hours of ethics
  2. No continuing education after ten years of licensure
  3. 24 hours every two years, with 3 hours of ethics Correct answer.
  4. 12 credit hours each year, including 1 hour of ethics

Explanation

Arizona producers satisfy continuing education on a two-year cycle by completing 24 credit hours, at least 3 of which must be in ethics. The requirement applies throughout the producer's career and is not waived by longevity. Hours must be from approved courses and reported to the Department.

Question 6Insurance Regulation

A producer wants to pay a $50 referral fee to an unlicensed friend who sent a client to the office. Under Arizona law this payment is:

  1. Allowed if the fee does not exceed the producer's own commission
  2. Allowed because referrals are not considered solicitation
  3. Prohibited; only licensed producers may share commissions Correct answer.
  4. Allowed if the fee is disclosed to the client in writing

Explanation

Compensation for bringing in insurance business may be paid only to a licensed producer, because paying an unlicensed person for a referral is an illegal inducement. Disclosure to the client does not cure the violation, and the size of the payment is irrelevant. A producer may, however, share commissions with another properly licensed producer.

Question 7Insurance Regulation

To close a sale, a producer offers to pay the applicant's first month of premium out of her own pocket. This offer is:

  1. Permitted when the policy is commercial lines coverage
  2. Permitted if the insurer approves it in writing
  3. Permitted if the insured is a family member
  4. An unlawful rebate, which is prohibited Correct answer.

Explanation

Offering any inducement not stated in the policy, such as paying part of the premium, is rebating and is an unfair trade practice. Insurer consent, the type of policy, and the relationship between the parties do not create an exception. Rebating distorts competition and can result in license discipline.

Question 8Insurance Regulation

A producer falsely tells a client that her current policy is worthless in order to persuade her to surrender it and buy a new one. This practice is:

  1. Defamation
  2. Twisting Correct answer.
  3. Rebating
  4. Coercion

Explanation

Twisting is inducing a policyholder to lapse, surrender, or replace coverage through misrepresentation or incomplete comparison. Coercion involves compulsion rather than persuasion, and rebating involves offering value outside the policy. Defamation is a false statement about an insurer's financial condition, not about the client's own policy.

Question 9Insurance Regulation

An agent tells an applicant that a homeowners policy covers flood damage when it plainly excludes flood. The agent has committed:

  1. A misrepresentation and an unfair trade practice Correct answer.
  2. Nothing wrongful if the applicant never asks for details
  3. No violation, because insurers alone are responsible for policy terms
  4. Acceptable puffery because the policy is mailed later

Explanation

Misrepresenting the terms, benefits, or conditions of a policy is an unfair trade practice under Arizona law. Delivering the policy afterward does not cure the false statement, and the applicant's failure to ask questions is no defense. Producers are personally accountable for the accuracy of the coverage representations they make.

Question 10Insurance Regulation

A producer collects a client's premium, deposits it in a personal checking account, and uses the funds for office expenses. This conduct violates:

  1. Arizona's competitive rating statute
  2. The fiduciary duty to hold premiums in trust Correct answer.
  3. The insurer's certificate of authority filing
  4. The state's continuing education rules

Explanation

Premiums collected on an insurer's behalf are held in a fiduciary capacity and must not be commingled with a producer's personal or business funds. Using collected premium for personal expenses is a breach of that trust and grounds for license discipline. Rate filing rules, certificates of authority, and continuing education have no bearing on handling client funds.

Question 11Insurance Regulation

An insurer receives a valid first-party claim and, without any reasonable explanation, does not respond or pay for many months. This conduct is:

  1. Acceptable, because no deadline applies to first-party claims
  2. Allowed unless the insured retains an attorney
  3. An unfair claim settlement practice Correct answer.
  4. A lawful business decision protected by rate regulation

Explanation

Failing to acknowledge, investigate, or act promptly on a claim without a reasonable basis is an unfair claim settlement practice. The duty applies to first-party claims and does not depend on whether the claimant has counsel. Rate regulation protects pricing decisions, not deliberate delay in claims handling.

Question 12Insurance Regulation

Arizona's motor vehicle financial responsibility law requires a driver to do which of the following?

  1. Post a $100,000 cash bond with the motor vehicle division
  2. Purchase all coverage from a state-run assigned risk pool
  3. Carry only uninsured motorist coverage on the vehicle
  4. Maintain liability insurance or another approved security Correct answer.

Explanation

Arizona requires owners and operators to be able to respond in damages, ordinarily by carrying liability coverage and, when required, filing proof such as an SR-22. A bond, deposit, or assigned risk plan is not the standard requirement for every driver. Uninsured motorist coverage is optional and does not satisfy financial responsibility.

Question 13Insurance Regulation

The Arizona Property and Casualty Insurance Guaranty Fund exists primarily to:

  1. Reimburse producers for unpaid commissions
  2. Pay covered claims of insolvent property and casualty insurers Correct answer.
  3. Guarantee policyholders a profit on their policies
  4. Insure the solvency of every admitted carrier

Explanation

The guaranty fund protects policyholders and claimants when a member property and casualty insurer becomes insolvent and cannot pay covered claims. It is funded by assessments on member insurers and does not regulate solvency in advance. Policyholders are protected against loss, not guaranteed a profit.

Question 14Insurance Regulation

An Arizona resident owns a life insurance policy issued by a carrier that is declared insolvent. Which statement about claim protection is correct?

  1. No guaranty mechanism covers life insurance in Arizona
  2. The Director personally guarantees payment of the benefit
  3. The property and casualty guaranty fund pays the death benefit
  4. A separate life and disability guaranty fund applies Correct answer.

Explanation

Arizona maintains a separate life and disability insurance guaranty fund that responds to covered claims against insolvent life and health insurers. The property and casualty fund covers only P&C lines, so it cannot pay a life insurance death benefit. No state official personally guarantees an insurer's contractual obligations.

Question 15Insurance Regulation

What is the function of a certificate of authority issued in Arizona?

  1. It is issued by the Governor to every domestic producer
  2. It replaces the producer license for company employees
  3. It is required only of surplus lines brokers
  4. It authorizes an insurer to transact insurance in Arizona Correct answer.

Explanation

A certificate of authority is the document that admits an insurer to do the business of insurance in Arizona; an insurer without one is unauthorized. It is issued to insurers, not to producers, and surplus lines brokers are licensed differently. Employees of an insurer still need their own producer license to solicit or negotiate coverage.

Question 16Insurance Regulation

No admitted insurer will write coverage for an unusual Arizona risk. After documenting a diligent search, the producer may:

  1. Place the risk with any out-of-state insurer the client selects
  2. Sell the client an admitted policy that excludes coverage actually needed
  3. Place it with an eligible surplus lines insurer after a diligent search Correct answer.
  4. Write the coverage personally and issue a binder to the client

Explanation

Surplus lines placement is available only when coverage cannot be obtained from authorized insurers, and the transaction must involve an eligible, unauthorized insurer through a licensed surplus lines broker. The producer cannot personally assume the risk or place business with an unqualified carrier. Selling a policy that omits the needed coverage is a misrepresentation, not a solution.

Question 17Insurance Regulation

For purposes of Arizona insurance regulation, a domestic insurer is:

  1. An insurer formed under another state's laws
  2. An insurer that holds no certificate of authority
  3. An insurer formed under Arizona law Correct answer.
  4. An insurer formed under the laws of another country

Explanation

Domestic status depends on the jurisdiction of formation, so an insurer organized under Arizona law is domestic. An insurer formed in another state is foreign, and one formed in another country is alien. Holding or lacking a certificate of authority is a separate question of admitted status.

Question 18Insurance Regulation

An insurer charges two applicants with identical risk characteristics different rates because one recently immigrated to the United States. This pricing is:

  1. Permitted during the first policy year only
  2. Lawful if the producer agrees to it in writing
  3. Unfair discrimination Correct answer.
  4. Permitted if the insurer files the rate

Explanation

Charging different rates to insureds in the same class with the same risk characteristics, based on a characteristic unrelated to risk, is unfair discrimination. Filing the rate does not make discriminatory classification lawful, and no first-year exception exists. A producer's agreement cannot validate the practice.

Question 19Insurance Regulation

A lender tells a borrower that the loan will be denied unless the homeowners policy is purchased through the lender's affiliated agency. This conduct is:

  1. Lawful, since lenders may set loan conditions
  2. Coercion, an unfair trade practice Correct answer.
  3. Twisting, because the borrower's coverage changes
  4. Rebating, because the agency earns a commission

Explanation

Requiring a borrower to buy insurance through a particular agency as a condition of credit is coercion, which is an unfair trade practice. Lenders may require that insurance exist, but they may not dictate where the borrower buys it. Rebating involves inducements, and twisting involves misrepresentation that causes replacement.

Question 20Insurance Regulation

Three insurers agree among themselves not to write coverage for any contractor who does business through a particular competing carrier. This arrangement is best described as:

  1. Risk sharing, which is permitted among admitted insurers
  2. Reinsurance, which is exempt from state regulation
  3. A boycott, an unfair trade practice Correct answer.
  4. A lawful exercise of underwriting judgment

Explanation

An agreement among competitors to refuse to deal with certain parties is a boycott, which is prohibited as an unfair trade practice. Underwriting judgment is exercised individually based on risk factors, not through concerted refusals. Reinsurance is an agreement between insurers to share risk, not to exclude customers.

Question 21Insurance Regulation

An applicant knowingly conceals a prior fire loss on a homeowners application in order to obtain a lower premium. Under Arizona law this conduct is:

  1. Permitted, since applications are not sworn statements
  2. Only a civil matter between insurer and applicant
  3. An underwriting issue with no legal consequences
  4. Insurance fraud, which may be prosecuted and penalized Correct answer.

Explanation

Knowingly giving false or incomplete information to obtain insurance is insurance fraud, a criminal offense that also exposes the person to civil remedies and rescission. Insurance applications are relied upon as representations of material fact. A producer who knowingly assists in such a submission faces license discipline as well.

Question 22Insurance Regulation

When an insurer ends a producer's appointment, it must notify the Arizona Department of Insurance and Financial Institutions within:

  1. 30 days Correct answer.
  2. 10 days
  3. 60 days
  4. 180 days

Explanation

Arizona requires the insurer to file notice of termination of a producer appointment with the Department within 30 days of the termination. The notice obligation rests on the insurer, not on the producer, and late filing can itself be a violation. The terminated producer's license remains in effect unless separate action is taken against it.

Question 23Insurance Regulation

A producer without actual authority quotes a rate the insurer never approved; the applicant relies on the quote, and the insurer later denies coverage at that price. The insurer may be bound because the producer had:

  1. Apparent authority Correct answer.
  2. Implied authority
  3. Express authority
  4. No authority, so the insurer is never bound

Explanation

Apparent authority arises when the insurer's own conduct leads a reasonable applicant to believe the producer may act for it, allowing the insurer to be bound despite the lack of actual authority. Express authority is granted in writing, and implied authority consists of acts incidental to express powers. A principal that creates the appearance of authority cannot always disclaim the resulting obligation.

Question 24Insurance Regulation

Under Arizona's competitive rating framework, property and casualty rates must not be:

  1. Excessive, inadequate, or unfairly discriminatory Correct answer.
  2. Established by an insurer's own actuarial staff
  3. Reviewed in advance by an independent actuary
  4. Changed more than one time during a policy year

Explanation

The statutory standard for rates is that they be neither too high, too low to maintain solvency, nor unfairly discriminatory among similar risks. Insurers may use their own actuaries and may adjust rates as experience develops. There is no rule limiting how often rates may be revised.

Question 25Insurance Regulation

After a hearing, the Director finds that a producer willfully violated an Arizona insurance statute. The Director may:

  1. Confiscate the producer's personal residence
  2. Suspend or revoke the license and impose penalties Correct answer.
  3. Refer the matter to a federal court for criminal trial
  4. Jail the producer without any court proceeding

Explanation

The Director's administrative authority includes suspending or revoking a license and imposing civil penalties after proper notice and hearing. Incarceration and property forfeiture are criminal or judicial remedies that an administrative agency cannot impose on its own. Federal prosecution is a matter for federal authorities, not something the Director directs.

Question 26Insurance Regulation

Under Arizona law, a person who sells, solicits, or negotiates insurance for compensation must:

  1. join a state insurance trade association
  2. register only with the insurer being represented
  3. hold a valid insurance producer license Correct answer.
  4. post a surety bond with the state treasury

Explanation

Arizona requires a person to be licensed as an insurance producer before transacting insurance for compensation. An insurer appointment is a separate step and does not replace the state license.

Question 27Insurance Regulation

An insurer organized under the laws of another state and authorized to transact insurance in Arizona is classified as:

  1. a domestic insurer
  2. a reciprocal insurer
  3. an alien insurer
  4. a foreign insurer Correct answer.

Explanation

Arizona classifies insurers by place of organization. An insurer formed under the laws of another state is a foreign insurer, while an insurer formed under Arizona law is domestic and one formed under another country's laws is alien.

Question 28Insurance Regulation

The Arizona Director of Insurance and Financial Institutions may examine an insurer's books and records in order to:

  1. approve individual producer compensation
  2. guarantee the insurer a minimum profit
  3. set the insurer's commission schedule
  4. determine whether the insurer is complying with insurance laws Correct answer.

Explanation

The Director has examination authority to monitor insurer solvency and compliance with Arizona insurance law. Examinations are a regulatory tool, not a way to set commissions or guarantee profits.

Question 29Insurance Regulation

A policyholder knowingly submits a claim for damage that never occurred. Under Arizona law, this conduct is:

  1. insurance fraud and subject to criminal penalties Correct answer.
  2. a civil matter only, with no criminal exposure
  3. acceptable if the policyholder has paid premiums for years
  4. permitted if the claim is later withdrawn

Explanation

Knowingly presenting a false or fraudulent claim is insurance fraud. Arizona law treats insurance fraud as criminal conduct, and withdrawing the claim later does not erase the offense.

Question 30Insurance Regulation

An Arizona producer completes none of the required continuing education before the end of the license period. The most likely result is that:

  1. the producer is automatically appointed by every insurer
  2. the license cannot be renewed until CE is satisfied Correct answer.
  3. the license remains valid because CE is voluntary
  4. the producer may continue selling but cannot collect commissions

Explanation

Arizona conditions license renewal on completion of required continuing education. If the requirement is unmet, the license cannot be renewed until the producer satisfies it.

Question 31Insurance Regulation

An Arizona producer moves to a new office and changes mailing address. The producer must notify the Arizona Department of Insurance and Financial Institutions:

  1. only if the producer also changes insurers
  2. within 30 days of the change Correct answer.
  3. only when the license comes up for renewal
  4. within 6 months of the change

Explanation

Arizona requires producers to keep the Department informed of address changes promptly, generally within 30 days. Waiting for renewal or for an insurer change does not satisfy the reporting duty.

Question 32Insurance Regulation

When an insurer wishes to authorize a licensed producer to act on its behalf, the insurer must:

  1. ask the producer to post a bond
  2. wait until the next calendar year to notify the state
  3. file an appointment with the Director Correct answer.
  4. obtain approval from the producer's trade group

Explanation

An insurer authorizes a producer through an appointment filed with the Arizona insurance regulator. The appointment gives the producer authority to act for that insurer.

Question 33Insurance Regulation

A producer tells clients that a competing insurer is 'going bankrupt next month' even though the producer knows the statement is false. This practice is best described as:

  1. defamation of an insurer Correct answer.
  2. lawful competitive advertising
  3. permissible opinion under Arizona law
  4. rebating

Explanation

Making a false statement about an insurer's financial condition to harm its reputation is defamation of an insurer, an unfair trade practice. Competitive speech is protected only when it is truthful and not misleading.

Question 34Insurance Regulation

Before an Arizona surplus lines broker may place coverage with a nonadmitted insurer, the insurer must generally:

  1. be a domestic insurer
  2. be owned by the State of Arizona
  3. appear on the eligible insurer list Correct answer.
  4. hold an Arizona certificate of authority

Explanation

Surplus lines insurers are not admitted in Arizona, so they do not hold an Arizona certificate of authority. They must instead be eligible surplus lines insurers before the broker may use them.

Question 35Insurance Regulation

An Arizona auto insurer must offer uninsured motorist coverage to a new policyholder. If the policyholder does not want the coverage, the policyholder must:

  1. wait until the first claim is denied
  2. prove financial responsibility separately
  3. reject the coverage in writing Correct answer.
  4. simply tell the producer verbally

Explanation

Arizona requires auto insurers to offer uninsured motorist coverage, and a policyholder who declines it must do so in writing. A verbal statement is not sufficient to document the rejection.

Question 36Insurance Regulation

The Arizona Automobile Insurance Plan was created primarily to:

  1. pay claims of insolvent auto insurers
  2. cover drivers unable to obtain voluntary-market auto insurance Correct answer.
  3. operate the state's driver licensing exams
  4. set maximum rates for all auto insurers

Explanation

The Arizona Automobile Insurance Plan is a residual market mechanism for drivers who cannot obtain auto coverage in the voluntary market. It does not set rates for all insurers or handle insurer insolvencies.

Question 37Insurance Regulation

Under Arizona workers' compensation law, an employer generally must:

  1. carry health insurance for all employees' families
  2. purchase auto liability coverage for company vehicles
  3. provide disability insurance through a private carrier only
  4. secure workers' compensation coverage for employees Correct answer.

Explanation

Arizona employers are generally required to secure workers' compensation coverage for their employees, either through insurance or an approved self-insurance arrangement. This system provides the exclusive remedy for work-related injuries.

Question 38Insurance Regulation

During a market conduct investigation, an Arizona insurer refuses to produce requested records. The Director may:

  1. do nothing because insurers are exempt from document requests
  2. issue a subpoena and seek court enforcement Correct answer.
  3. ask the insurer's competitors to supply the records
  4. immediately revoke the insurer's charter without a hearing

Explanation

The Director has authority to issue subpoenas and compel production of records in an investigation. If the insurer refuses, the Director may seek court enforcement of the subpoena.

Question 39Insurance Regulation

The Director intends to revoke a producer's license based on alleged violations. Before a final revocation order, the producer is entitled to:

  1. automatic reinstatement of the license
  2. a jury trial in federal court
  3. a waiver of all continuing education requirements
  4. notice and an opportunity for a hearing Correct answer.

Explanation

A license revocation must follow due process, which includes notice of the charges and an opportunity to be heard. A federal jury trial is not the administrative remedy for a state license revocation.

Question 40Insurance Regulation

A producer holds an Arizona license only for life insurance but sells a homeowners policy and collects the commission. Which statement is correct?

  1. The sale is valid because homeowners is an incidental line
  2. The sale is valid because the insurer accepted the application
  3. The producer may keep the commission but must avoid future sales
  4. The producer violated licensing law and may be disciplined Correct answer.

Explanation

Arizona licenses producers by line of authority, and a producer may not transact a line for which the producer is not licensed. Selling outside the licensed line is a violation that can lead to disciplinary action.

Question 41General Insurance Concepts

Which type of risk involves only the chance of loss or no loss, with no possibility of financial gain?

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

Explanation

Pure risk has only two outcomes, loss or no loss, and no possibility of profit. Because pure risks are measurable and can be pooled, they are the type insurers generally agree to cover.

Question 42General Insurance Concepts

A property owner intentionally sets fire to a building in order to collect insurance proceeds. This situation illustrates which type of hazard?

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

Explanation

Moral hazard arises from dishonesty or a deliberate act by an insured that increases the likelihood or severity of a loss. Deliberately causing a loss to collect insurance is the classic moral hazard example.

Question 43General Insurance Concepts

Which principle holds that an insured should be restored to approximately the same financial position held before a loss, no better and no worse?

  1. Insurable interest
  2. Utmost good faith
  3. Indemnity Correct answer.
  4. Subrogation

Explanation

The principle of indemnity limits recovery to the actual financial value of the loss so the insured cannot profit from insurance. It is why actual cash value and repair or replacement cost measures are used to value claims.

Question 44General Insurance Concepts

Insurable interest in property must exist:

  1. Only at each policy renewal
  2. At both the time of application and the time of loss
  3. Only when the application is signed
  4. At the time of the loss Correct answer.

Explanation

For property insurance, the insured must have a financial interest in the property at the moment of loss. Life insurance works differently, requiring insurable interest only when the policy is first purchased.

Question 45General Insurance Concepts

After paying a covered claim, an insurer's right to recover that amount from the negligent third party is known as:

  1. Subrogation Correct answer.
  2. Contribution
  3. Coinsurance
  4. Salvage

Explanation

Subrogation transfers the insured's right of recovery against the responsible party to the insurer once the claim is paid. It helps keep premiums down and prevents the insured from collecting twice for the same loss.

Question 46General Insurance Concepts

Insurance contracts are said to be aleatory because:

  1. Only the insurer is legally bound by the contract
  2. The applicant must disclose every material fact
  3. Both parties exchange promises of exactly equal value
  4. The amounts exchanged depend on chance Correct answer.

Explanation

An aleatory contract is one in which the values exchanged may be unequal and depend on an uncertain event. A policyholder may pay a small premium and receive a large claim payment, or pay premiums and receive nothing.

Question 47General Insurance Concepts

An insurance policy is considered a unilateral contract because:

  1. Both parties exchange legally enforceable promises of equal value
  2. The insured may cancel at any time without penalty
  3. The policy must be countersigned before it becomes valid
  4. Only the insurer makes a legally enforceable promise Correct answer.

Explanation

In a unilateral contract only one party, the insurer, is bound by an enforceable promise to pay covered claims. The insured makes no promise to pay future premiums; payment is a condition of continued coverage.

Question 48General Insurance Concepts

Because an insurance policy is a contract of adhesion, ambiguous policy language is generally interpreted:

  1. In favor of the insurer
  2. In favor of the state insurance department
  3. In favor of the agent who wrote the policy
  4. In favor of the insured Correct answer.

Explanation

A contract of adhesion is drafted by one party, the insurer, and accepted or rejected by the other. Because the insured had no part in drafting the wording, courts resolve genuine ambiguities against the drafter.

Question 49General Insurance Concepts

An insurer's ability to predict losses more accurately as the number of similar exposure units increases is known as:

  1. Reinsurance
  2. The law of large numbers Correct answer.
  3. Adverse selection
  4. The principle of indemnity

Explanation

The law of large numbers holds that actual results approach expected results as the number of similar, independent exposure units grows. This predictability is what allows insurers to set rates and pool risk effectively.

Question 50General Insurance Concepts

An insurer tightens its underwriting guidelines because the applicants most likely to suffer a loss are also the most eager to buy coverage. Which problem does this describe?

  1. Contributory negligence
  2. Moral hazard
  3. Adverse selection Correct answer.
  4. Risk retention

Explanation

Adverse selection is the tendency of poorer-than-average risks to seek insurance while better risks may decline it. Underwriting, pricing, and policy design are used to control this imbalance in the risk pool.