LOMA 280 common mistakes
LOMA 280 · Understand the traps and how to avoid them.
Treating 'insurance' as synonymous with 'risk transfer' and answering questions about risk pooling, risk avoidance, and risk retention as if all were forms of insurance.
Candidates memorise one definition and then apply it to every risk-management question, missing that insurance is one specific technique (transfer to an insurer) among several, and that the insurer itself pools risks rather than avoiding them.
What to do instead
Before answering, classify the scenario on two axes: who bears the financial consequence (individual, insurer, or nobody because loss was prevented) and whether risk was avoided, retained, reduced, or transferred. Write the classification in the margin, then match it to the answer choice that names the same technique.
Confusing the concepts of 'peril' and 'hazard' when a question describes a cause of loss versus a condition that increases the chance or severity of loss.
The two words appear together in study material and sound interchangeable in ordinary speech, so candidates select the answer naming the fire or the storm when the question is actually asking about the oily rags or the careless driving.
What to do instead
Use a fixed test sentence: the peril is the 'what happened' (fire, flood, theft, collision); the hazard is the 'what made it more likely or worse' (physical, moral, morale). Practise by labelling each noun in the stem as peril or hazard before reading the options.
Mixing up pure risk and speculative risk, and then misapplying the insurable-risk criteria to a business venture scenario.
Candidates remember that insurance handles 'risk' without anchoring on the requirement that the loss be accidental and outside the insured's control, so they treat investment loss or normal business competition as insurable.
What to do instead
Apply a checklist to every 'is this insurable' item: pure (loss only, no gain possible), accidental, measurable and definite, large number of similar exposure units, not catastrophic to the insurer, and legally insurable. If any element fails, identify which one, because the answer choice usually names that failing element.
Reversing the roles of adverse selection and moral hazard when the stem describes either a high-risk applicant seeking coverage or an insured behaving more carelessly after buying coverage.
Both are described as 'problems caused by information asymmetry', and candidates memorise the label without the timing distinction, so they pick the wrong term under time pressure.
What to do instead
Anchor on timing: before the contract, a person's private knowledge about their own risk is adverse selection (solved by underwriting, medical questions, exclusions); after the contract, changed behaviour is moral hazard (addressed by deductibles, coinsurance, policy conditions). Read the stem for 'before purchase' versus 'after purchase' cues.
Describing reinsurance as a policy sold to the original insured, or confusing the reinsurer's relationship with the policyholder in a claim scenario.
Candidates learn that reinsurance 'spreads risk' and assume it works like ordinary insurance, missing that it is insurance for insurers and that the original insured generally has no direct contractual claim against the reinsurer.
What to do instead
Draw the two-party chain: policyholder to primary insurer (the original contract), primary insurer to reinsurer (a separate contract). Then answer questions about who the policyholder sues (the primary insurer) and what reinsurance does for the ceding company (capacity, surplus relief, catastrophe protection).
Treating stock insurers and mutual insurers as differing only in name, and failing to connect ownership, policyholder dividends, and the direction of the customer relationship.
The organisational forms are taught in a short list, so candidates skim them and cannot answer items about who owns the company, who elects the board, or whether 'dividends' to policyholders are guaranteed.
What to do instead
Build a three-column comparison (owner, who receives surplus distributions, governance) for stock, mutual, fraternal, and reciprocal/LLC insurers. Note explicitly that policyholder dividends in a mutual are non-guaranteed distributions of surplus, not a contractual return of premium.
Confusing the roles of the producer/agent, the underwriter, and the claims adjuster when a question asks who performs a given function in the insurance mechanism.
All three touch the customer, so candidates default to 'agent' for anything involving the applicant, even when the task is risk classification, issuing the policy, or settling a loss.
What to do instead
Map functions to stages: solicitation and needs analysis (producer), selection and classification of risk and policy issuance (underwriter), investigation, evaluation, negotiation and payment of the claim (adjuster). Answer by locating the stage described in the stem, not by who speaks to the customer.
Assuming insurance eliminates risk rather than transferring and pooling it, and therefore choosing answers that say the insured 'no longer faces any risk' or that the insurer 'avoids' the risk.
Everyday language ('buy insurance to be safe') reinforces a false absolute, and the exam's distractors are written to match that intuition.
What to do instead
Restate the mechanism in one sentence before answering: many exposure units pay premiums into a pool, the insurer bears the transferred financial consequence, and uncertainty is reduced for the individual but not removed (deductibles, limits, exclusions remain). Reject any option containing absolute words such as 'eliminates all risk'.
Misreading 'law of large numbers' questions as being about the size of an individual policy or claim, rather than about the number of similar independent exposure units.
The phrase contains 'large', so candidates associate it with large losses, large premiums, or large companies, and then choose an option about a single catastrophic claim.
What to do instead
Memorise the precise statement: as the number of similar, independent exposure units increases, actual loss experience converges toward expected loss experience, improving predictability. Check whether each option talks about the count of units (correct) or the size of one loss (incorrect).
Answering characteristics-of-insurance items with a feature that belongs to a different characteristic, for example describing 'risk transfer' when the stem is testing 'indemnity' or 'utmost good faith'.
The characteristics are learned as a memorised list without operational meaning, so under exam pressure the candidate matches a familiar phrase rather than the concept the stem describes.
What to do instead
Attach one concrete example to each characteristic (indemnity: restoring the insured to approximately the pre-loss financial position, no profit from loss; insurable interest: you must stand to lose; utmost good faith: material facts disclosed; subrogation: insurer steps into the insured's legal position). Match the stem's example to the characteristic, not the label to a remembered phrase.