California Property & Casualty: Property Insurance Basics

Correct

The answer is B: 0.40 or 40%

Loss ratio = incurred losses / earned premiums = $60M / $150M = 0.40, or 40%. Flipping the fraction (premiums over losses) gives 2.5, and subtracting the loss ratio from 100% gives the 60% of premium left after losses; neither is the loss ratio.

Reviewed in our October 2026 California fact-check.

Correct

The answer is C: Risk Retention

Risk retention is the practice of accepting responsibility for a portion or all of the financial consequences of a particular loss. By choosing a higher deductible, the homeowner is retaining a larger portion of the risk themselves. Risk avoidance means not engaging in the activity that could lead to loss. Risk reduction involves taking steps to minimize the likelihood or severity of a loss. Risk transfer involves shifting the financial burden of loss to another party, typically an insurance company.

Reviewed in our October 2026 California fact-check.

Correct

The answer is D: Loss Cost Rating, to promote competition among insurers while sharing industry loss data.

Loss cost rating has an advisory organization (such as ISO) supply insurers with loss costs, the prospective pure loss portion of a rate, without expenses or profit. Each insurer then adds its own expense, tax and profit loading to arrive at its premium. The method promotes competition: insurers differentiate themselves on their own expenses and profit while still relying on shared actuarial data for the loss component. Manual rating applies complete published class rates, judgment rating prices unique risks by the underwriter's evaluation, and experience rating adjusts one insured's premium for its own past losses.

Reviewed in our October 2026 California fact-check.

Correct

The answer is D: The unearned premium will be returned on a short rate basis, which includes a penalty.

When the insured cancels a fire policy mid-term, the California standard form (Ins. Code §2071) refunds the premium in excess of the customary short rate for the expired time. Short rate lets the insurer keep somewhat more than the pro rata earned share, which acts as a penalty for the insured's early termination. When the insurer cancels, the refund is pro rata. The insurer does not keep all of the premium paid, and it does not apply the unearned premium to a new policy on its own.

Reviewed in our October 2026 California fact-check.

Correct

The answer is C: Common Carrier Liability Insurance

Insurance Code §110 defines common carrier liability insurance as insurance against loss from a common carrier's liability for accident or injury, fatal or nonfatal, to any person. A bus company's liability to its passengers is the core example. Automobile insurance (§116) covers the hazards of owning and using automobiles but leaves out injury to natural persons. The liability class (§108) expressly leaves out common carrier liability. Workers' compensation (§109) covers employees' injuries, not passengers'.

Reviewed in our October 2026 California fact-check.