Assignment 6 - Functional View of Insurance, Fundamentals of Insurance A3, Chapter 4, Assignment 2 Quiz Questions revised, Assignment 3 Questions, Assignment 8 - The Underwriting Function
Which one of the following is a supporting function of an insurance company? Select one: A. Claims B. Marketing and distribution C. Underwriting D. Reinsurance
D. Reinsurance
Which one of the following departments provides information to the underwriting department to assist in selecting and rating risks? Select one: A. Actuarial B. Marketing C. Claims D. Risk control
D. Risk control
Which one of the following statements is true regarding the agency contract? A. The agent is the principal in the agency contract relationship. B. An agency contract is also known as an agency endowment. C. Insurance agency contracts usually have a fixed expiration date, at which time the parties negotiate the renewal. D. The agency contract states the scope of the agency's authority to conduct business for the insurer.
D. The agency contract states the scope of the agency's authority to conduct business for the insurer.
Which one of the following best describes a factor in determining the types of investments that an insurer acquires? Select one: A. The level of operating expenses it incurs B. The number of claims it pays C. The volume of insurance it writes D. The nature of the risks that it assumes
D. The nature of the risks that it assumes
Leah decides to purchase her personal automobile insurance through a program offered by her employer. Leah's employer offers her a discounted premium which is deducted from her paycheck. Leah's employer is using which type of distribution channel? A. Affinity marketing B. Direct response marketing C. Mass marketing D. Worksite marketing
D. Worksite marketing
How does a flex rating law work? A. Insurers may adjust rates within a range without prior approval. B. Insurers may change rates without prior approval, but they are subject to regulatory review. C. Insurers may adjust rates within a range with prior approval. D. Insurers may adjust rates at will, but are required to file a rate schedule.
a
Prompt and professional loss adjustment services are a responsibility of what part of an insurer's organization? A. The claims function B. The loss control function C. The premium audit function D. The underwriting function
a
Some communities in the US celebrate holidays with firecrackers. Firecracker vendors put stands in the parking lots of shopping centers before the holidays. One shopping center owner want to sponsor a firecracker vendor's booth found that his insurance did not cover the exposure. He found that none of the insurers licensed to do business in the state sold insurance coverage for the exposures. How can the shopping center owner obtain appropriate coverage for the exposure from the firecracker vendor's booth? A. By obtaining coverage through the excess and surplus lines market B. By pooling the risk with other shopping center owners with similar exposures C. Through a proportionate sharing arrangement with multiple insurers D. From alien insurers in countries that also celebrate holidays with firecrackers
a
Which one of the following best describes what is determined by the insurer's staff review of applications from prospective insureds? A. Whether the characteristics of the customer match the insurer's eligibility and selection guidelines B. Whether the account should be written as a personal insurance policy or a commercial insurance policy C. Whether any loss control recommendations will be made D. Whether claims will be paid or denied
a
Which one of the following is generally exempt from state insurance regulations pertaining to policy forms and rates? A. Surplus line insurers B. Workers compensation insurers C. Commercial property insurers D. Health insurers
a
Which one of the following statements concerning government insurance programs is true? A. Businesses seeking flood insurance under the National Flood Insurance Program (NFIP) must purchase it at local federal government offices. B. Various state insurance programs provide crop insurance for perils such as drought, disease, excessive rain and hail. C. Fair Access to Insurance Requirements (FAIR) plans make basic property insurance available to property owners who can't get it otherwise. D. The federal government provides workers compensation insurance to employers who cannot get it from private insurers.
c
The laws of agency impose all of the following specific duties on all agents, EXCEPT: A. Apparent authority B. Accounting C. Loyalty D. Relaying information
A. Apparent authority
Among other things, a binder provides A. Applicable coverages and limits. B. Operations of the insured. C. Policy conditions and exclusions. D. Insured's financial profile.
A. Applicable coverages and limits.
All of the following are similarities between agents and brokers, EXCEPT: A. Both are legal representatives of insurers. B. Both collect premiums from insureds and remit to insurers. C. Both are intermediaries between insurers and insurance buyers. D. Both sell insurance appropriate to customers' insurance needs.
A. Both are legal representatives of insurers
Which one of the following distribution channels is also an efficient way to handle claim reporting and billing inquiries? A. Call centers B. Financial institutions C. Direct response D. Affinity marketing
A. Call centers
Which one of the following statements is true concerning the use of the Internet to market insurance products? A. Consumers assume that insurance purchased over the Internet will be less expensive than the same product purchased from a producer. B. Consumers who use the Internet for insurance focus chiefly on service rather than price. C. Consumers' ability to access competitor information is reduced when insurers market products over the Internet. D. Insurers' costs for underwriting and claim processing services are increased by having an Internet presence.
A. Consumers assume that insurance purchased over the Internet will be less expensive than the same product purchased from a producer.
Which one of the following is the responsibility of the underwriting department of an insurer? Select one: A. Helping the insurer avoid the problem of adverse selection B. Reviewing commercial insureds' records to obtain accurate information on rating variables C. Calculating insurance rates and developing rating plans D. Working with insureds to help prevent losses and reduce the effects of those losses that cannot be prevented
A. Helping the insurer avoid the problem of adverse selection
Which one of the following functions is performed by virtually all insurance producers? A. Prospecting B. Policy issuance C. Underwriting D. Fee basis consulting
A. Prospecting
Offering a cash payment or something of value to an applicant as an inducement to buy or maintain insurance is called A. Rebating. B. Misrepresentation. C. Tie-in. D. Twisting.
A. Rebating.
Jancy Insurance Company's CEO Adam is researching Jancy's supporting functional areas for sources of additional income. He believes that certain services his company performs could be marketed as a stand-alone product to businesses which are not policyholders. Which one of the following functional areas provides services that insurers often market as a stand-alone product? Select one: A. Risk control B. Actuarial C. Special investigation unit D. Customer service
A. Risk control
For insurance agents, the method of premium collection determines how sales commissions are received. If the insurer direct bills, Choose one answer. A. The agency periodically mails a commission check to the insurer. B. The agency subtracts its commission on each policy and remits the premium balance to the insurer. C. The insurer periodically mails a commission check to the agency. D. The insured sends a separate commission payment directly to the agency.
A. The agency periodically mails a commission check to the insurer. If the insurer direct bills, the insurer periodically mails a commission check to the agency.
When an agency relationship is created between a principal and the agent, it requires a high degree of A. Trust. B. Patience. C. Oversight. D. Creativity.
A. Trust
Which one of the following insurer functions has the responsibility of determining whether and under what conditions the insurer is willing to provide insurance products and services to potential customers? Select one: A. Underwriting B. Investments C. Acturarial D. Marketing and distribution
A. Underwriting
Worthley Insurance Company's board of directors wants information about Worthley's current financial position. Which one or the following individuals can best assist the board with evaluating Worthley's financial position? Select one: A. Yusuf, manager of accounting and finance B. Laura, manager of actuarial services C. Patrick, manager of information technology D. Kenta, manager of investments
A. Yusuf, manager of accounting and finance
Insurance Company D (ICD) has traditionally used regional brokers to market and produce its insurance products. The management team at ICD has decided it wants to launch a new specialized product. The marketing plan includes ICD's desire to control the targeted number of monthly applications as well as the methods that will be used to advertise and campaign to achieve the desired results. Which one of the following distribution systems will best allow ICD the desired control? Choose one answer. A. Regional brokerage B. Direct writer C. Exclusive agency D. Independent agency
B. Direct writer The direct writer system will best allow ICD the desired control because an insurer can exercise the greatest control over producers in the direct writer system.
Insurance Company D (ICD) has traditionally used regional brokers to market and produce its insurance products. The management team at ICD has decided it wants to launch a new specialized product. The marketing plan includes ICD's desire to control the targeted number of monthly applications as well as the methods that will be used to advertise and campaign to achieve the desired results. Which one of the following distribution systems will best allow ICD the desired control? Choose one answer. A. Regional brokerage B. Direct writer C. Exclusive agency D. Independent agency
B. Direct writer The direct writer system will best allow ICD the desired control because an insurer can exercise the greatest control over producers in the direct writer system.
Activities of the legal and compliance function may include Select one: A. Deciding under what conditions the insurer is willing to provide insurance products and services to customers. B. Ensuring that organizational standards are met and the procedures are followed. C. Providing the infrastructure that supports all of an insurer's internal and external communications. D. Collecting evidence of possible fraud.
B. Ensuring that organizational standards are met and the procedures are followed.
Authority that the insurance company specifically grants to an agent is called A. Binding authority. B. Express authority. C. Implied authority. D. Apparent authority.
B. Express authority.
An independent agency A. Generally represents only one insurer. B. Has the right to switch a customer's coverage to another insurer. C. Represents customers rather than insurers and shops insurers to find the best coverage and value for its customers. D. Typically only handles commercial insurance accounts.
B. Has the right to switch a customer's coverage to another insurer
In which one of the following types of insurance marketing systems does the agency or agent usually own the expiration lists? A. Exclusive agency system B. Independent agency system C. Direct writing system D. Alternative distribution system
B. Independent agency system
In an insurance agency relationship, the agent's fundamental responsibility is to act for the benefit of the A. Insured. B. Insurer. C. Broker. D. Policyholder
B. Insurer
In an insurance agency relationship, the agent's fundamental responsibility is to act for the benefit of the Choose one answer. A. Insured. B. Insurer. C. Broker. D. Policyholder.
B. Insurer In an insurance agency relationship, the agent's fundamental responsibility is to act for the benefit of the insurer.
In an insurance agency relationship, the agent's fundamental responsibility is to act for the benefit of the Choose one answer. A. Insured. B. Insurer. C. Broker. D. Policyholder.
B. Insurer.
Producers' licenses are generally issued for a term of Choose one answer. A. Six months. B. One or two years. C. Five years. D. The life of the producer.
B. One or two years.
Producers' licenses are generally issued for a term of A. Six months. B. One or two years. C. Five years. D. The life of the producer.
B. One or two years.
Producers' licenses are generally issued for a term of Choose one answer. A. Six months. B. One or two years. C. Five years. D. The life of the producer.
B. One or two years. Producers' licenses are generally issued for a term of one or two years.
If a third party sues the agent in connection with activities performed on behalf of the principal, the principal must A. Reimburse the agent for any liability incurred, whether or not the agent was at fault. B. Reimburse the agent for any liability incurred, if the agent was not at fault. C. Bring a countersuit against the third party. D. Provide legal defense for the agent.
B. Reimburse the agent for any liability incurred, if the agent was not at fault.
Alex, a premium auditor for Keithly Insurance Company, has received a workers compensation audit form which his insured completed for the prior year. He notes the payroll has been greatly decreased since the last audit. Which one of the following functional areas of Keithly can assist Alex with this audit's irregularity? Select one: A. Accounting and finance B. Special investigation unit C. Human resources D. Risk control
B. Special investigation unit
Alex is involved in investigating the unusual circumstances of a large insurance claim. Alex is seeing indicators that the insured skewed the payroll numbers in order to obtain a lower premium. Alex most likely works in the insurer's Select one: A. Accounting and finance department. B. Special investigation unit. C. Legal and compliance department. D. Actuarial department.
B. Special investigation unit.
Which one of the following statements is correct with respect to selecting a distribution channel? A. Customers are prepared to spend a reasonable amount of time and effort interacting with a distribution channel if that channel saves them money. B. The types of insurance products and services to be delivered by the insurer must fit the marketing channel selected. C. The majority of customers prefer to speak with a producer or service representative rather than access their account information online. D. The primary consideration is what approach will allow the insurer to operate efficiently.
B. The types of insurance products and services to be delivered by the insurer must fit the marketing channel selected.
Once the marketing department has developed a relationship with potential customers, which one of the following departments determines if and under what conditions the insurer is willing to provide insurance products and services to these potential customers? Select one: A. Actuarial B. Underwriting C. Risk control D. Premium auditing
B. Underwriting
Which one of the following statements is true regarding traditional marketing systems for insurance? A. The three traditional marketing systems are the independent agency system, the captive agency system, and the exclusive agency system. B. An insurer operating through a managing general agent can expect higher fixed costs. C. A principal characteristic that distinguishes one traditional marketing system from another is the ownership of policy expirations. D. A single producer cannot operate as both an agent and a broker in a given state.
C. A principal characteristic that distinguishes one traditional marketing system from another is the ownership of policy expirations.
Which one of the following insurer functions includes calculating insurance rates, developing rating plans, estimating loss reserves, and providing predictive modeling services? Select one: A. Accounting and finance B. Underwriting C. Actuarial D. Premium auditing
C. Actuarial
Principals often authorize another party to act on their behalf. This relationship is called A. Broker. B. Fiduciary. C. Agency. D. Attorney in fact.
C. Agency
When an insurer appoints an agent to act its behalf, the agent's scope of authority is spelled out in the A. Broker of record letter. B. Insurance contract. C. Agency contract. D. Letter of intent.
C. Agency contract.
The principal method of determining a prospect's insurance needs is through A. Reviewing the prospect's current insurance policies. B. Determining how much the prospect is willing to pay for insurance coverage. C. Completing a risk management review for the prospect. D. Asking the prospect what coverage they would like to purchase.
C. Completing a risk management review for the prospect
The authority that the principal specifically grants to the agent is contained in the agency contract. This authority is known as A. Implied authority. B. Apparent authority. C. Express authority. D. Contractual authority.
C. Express authority
The primary purpose of the claims function is to Select one: A. Assist in selecting and rating risks. B. Provide legal counsel, support, and services to claimants. C. Fulfill the insurer's promise. D. Support the underwriting function.
C. Fulfill the insurer's promise.
Gulford Insurance Company (Gulford) is a direct writer of commercial insurance in Pennsylvania. The management team is frustrated by the continued lack of success in the more rural western part of the state. It is difficult to penetrate the market without a local presence, but the cost of assigning agents to this territory is not justified by the returns. Which one of the following distribution systems would best allow Gulford the local presence in a cost-effective manner? A. National brokers B. Surplus lines brokers C. Independent agents D. Exclusive agents
C. Independent agents
Because the agent represents the insurer, the law presumes that A. Agents are employees of the insurer. B. Knowledge acquired by the insurer is knowledge acquired by the agent. C. Knowledge acquired by the agent is knowledge acquired by the insurer. D. All communications between the agent and the insurer will be in writing.
C. Knowledge acquired by the agent is knowledge acquired by the insurer.
The most difficult time for an insurer to change distribution systems is when Choose one answer. A. Expanding to a larger territory. B. Entering a new target market. C. Renewing an existing book of business. D. Launching a new insurance product.
C. Renewing an existing book of business.
The most difficult time for an insurer to change distribution systems is when A. Expanding to a larger territory. B. Entering a new target market. C. Renewing an existing book of business. D. Launching a new insurance product.
C. Renewing an existing book of business.
The most difficult time for an insurer to change distribution systems is when Choose one answer. A. Expanding to a larger territory. B. Entering a new target market. C. Renewing an existing book of business. D. Launching a new insurance product.
C. Renewing an existing book of business. The most difficult time for an insurer to change distribution systems is when renewing an existing book of business.
A producer will generally review a company's loss run report while performing which one of the following functions? Choose one answer. A. Claims handling B. Sales C. Risk management review D. Customer service
C. Risk management review
A producer will generally review a company's loss run report while performing which one of the following functions? Choose one answer. A. Claims handling B. Sales C. Risk management review D. Customer service
C. Risk management review A producer will generally review a company's loss run report while performing risk management review.
The selection of a distribution channel for an insurer's products and services depends, partly, on customer preferences. Which one of the following statements is true regarding customer preferences that should be considered when selecting a distribution channel? A. Speed is not an important consideration for customers. B. Customers are always willing to pay more for good service. C. The channel should be consistent with the customer's expectations for service. D. Customers value a challenging experience when conducting business with insurers.
C. The channel should be consistent with the customer's expectations for service.
The Wellborn agency represents only Coastal Insurance. Wellborn is an independent contractor but its contract with Coastal specifies that all insurance it sells will be placed with Coastal. Wellborn is operating under which one of the following marketing systems? A. The independent agency system B. The direct writer system C. The exclusive agency system D. The managing general agency system
C. The exclusive agency system
For insurance agents, the method of premium collection determines how sales commissions are received. If the insurer direct bills, Choose one answer. A. The agency periodically mails a commission check to the insurer. B. The agency subtracts its commission on each policy and remits the premium balance to the insurer. C. The insurer periodically mails a commission check to the agency. D. The insured sends a separate commission payment directly to the agency.
C. The insurer periodically mails a commission check to the agency. If the insurer direct bills, the insurer periodically mails a commission check to the agency.
It is an unfair trade practice for a lender to require that a borrower purchase insurance from the lender or from any insurance producer recommended by the lender. This unfair trade practice is called A. Misrepresentation. B. Twisting. C. Tie-in sale. D. Rebating.
C. Tie-in sale.
When an insurance company appoints an insurance agent to serve as its representative, what specifies the scope of authority given to the agent in this relationship? Choose one answer. A. Implied authority B. Binding authority C. A unilateral contract D. An agency contract
D. An agency contract An agency contract specifies the scope of authority given to the agent in this relationship.
Argot Insurance Company (Argot) writes both property and casualty policies which include general liability. Valteri, the investment manager for Argot, should select which one of the following investments to support Argot's general liability lines of business? Select one: A. Investments with short maturity B. Short-term investments C. Liquid investments D. Corporate bonds with long maturity
D. Corporate bonds with long maturity
Which one of the following statements is true concerning guidelines for insurers combining systems and distribution channels? A. Customers are receptive to receiving different messages across the different distribution channel B. Customers expect a different experience when interacting with an insurer's different distribution channels. C. Internal communication can differ across marketing systems and distribution channels. D. Different marketing systems can be used for different types of insurance based on which is most suitable.
D. Different marketing systems can be used for different types of insurance based on which is most suitable.
Rhonda is a personal lines insurance producer. Under the terms of her agency contracts, the insurers forward policies promptly to Rhonda's customers and send a premium invoice with the policy. Insureds are instructed to remit premium payments to their insurer. The insurers calculate Rhonda's commissions and forward those commission payments to her monthly. Rhonda is operating under which one of the following payment procedures? Choose one answer. A. Item basis B. Statement basis C. Account current basis D. Direct bill basis
D. Direct bill basis
Rhonda is a personal lines insurance producer. Under the terms of her agency contracts, the insurers forward policies promptly to Rhonda's customers and send a premium invoice with the policy. Insureds are instructed to remit premium payments to their insurer. The insurers calculate Rhonda's commissions and forward those commission payments to her monthly. Rhonda is operating under which one of the following payment procedures? A. Item basis B. Statement basis C. Account current basis D. Direct bill basis
D. Direct bill basis
Rhonda is a personal lines insurance producer. Under the terms of her agency contracts, the insurers forward policies promptly to Rhonda's customers and send a premium invoice with the policy. Insureds are instructed to remit premium payments to their insurer. The insurers calculate Rhonda's commissions and forward those commission payments to her monthly. Rhonda is operating under which one of the following payment procedures? Choose one answer. A. Item basis B. Statement basis C. Account current basis D. Direct bill basis
D. Direct bill basis Rhonda is operating under a direct bill basis.
Which one of the following premium collection methods is used in the majority of personal insurance sales? Choose one answer. A. Item basis B. Statement basis C. Account current basis D. Direct bill process
D. Direct bill process In the majority of personal insurance sales, the direct bill process is used for premium collection.
Which one of the following premium collection methods is used in the majority of personal insurance sales? Choose one answer. A. Item basis B. Statement basis C. Account current basis D. Direct bill process
D. Direct bill process In the majority of personal insurance sales, the direct bill process is used for premium collection.
Bill is an insurance producer for ABC Insurance Company (ABC). He represents only ABC when marketing insurance products. ABC compensates Bill primarily through salary, and he has no ownership rights to policy expirations. Bill is a producer in the Choose one answer. A. Independent agency marketing system. B. Exclusive agency marketing system. C. Captive agency marketing system. D. Direct writer marketing system.
D. Direct writer marketing system.
Bill is an insurance producer for ABC Insurance Company (ABC). He represents only ABC when marketing insurance products. ABC compensates Bill primarily through salary, and he has no ownership rights to policy expirations. Bill is a producer in the Choose one answer. A. Independent agency marketing system. B. Exclusive agency marketing system. C. Captive agency marketing system. D. Direct writer marketing system.
D. Direct writer marketing system. Bill is a producer in the direct writer marketing system.
T. Roy Insurance Company is selecting a distribution system and channel for its products. Which one of the following best describes the type of consideration that T. Roy should give to its operations? Choose one answer. A. What are customer's expectations regarding accessibility? B. Will customers be willing to pay a premium for services? C. Can customers navigate easily within the channel? D. Does it have the necessary financial resources?
D. Does it have the necessary financial resources? The initial fixed cost of entering the market through the exclusive agency system or direct writer system is greater than doing so through the independent agency system. Similarly, Internet-based distribution channels have high start-up costs for supporting information system. A direct response campaign cost can be much lower.
An important question for an insurer to ask when examining customers' needs and characteristics to select a distribution channel is Choose one answer. A. Who is the target market? B. Is the expertise of the current staff adequate? C. Does cost outweigh the benefit? D. How quickly can inquiries and transactions be processed?
D. How quickly can inquiries and transactions be processed? An important question for an insurer to ask when examining customers' needs and characteristics to select a distribution channel is "how quickly can inquiries and transactions be processed?"
Which one of the following statements is correct? A. All insurance producers perform the same functions, which are specified in state insurance regulations. B. Cold calling, or cold canvas, is generally not used by insurance producers because it is an ineffective method of prospecting. C. Insurance producers are prohibited from accepting referrals from strategic partners, such as banks or real estate brokers. D. In the exclusive agent and direct writer marketing systems, insurers might assist producers with prospecting.
D. In the exclusive agent and direct writer marketing systems, insurers might assist producers with prospecting.
Given the complexity of commercial insurance, which one of the following is best suited for its distribution? A. Internet B. Direct response C. Group marketing D. Independent agencies
D. Independent agencies
From an insured's point of view, relative to the concept of agency, little distinction exists between the A. Broker and the claimant. B. Insurance agent and the insurance department. C. Insurer and the insurance department. D. Insurance agent and the insurer.
D. Insurance agent and the insurer.
Which one of the following statements is correct regarding the investment function within an insurer? Select one: A. An insurer's decision to use short-term versus long-term investments generally does not vary by type of loss exposure. B. Because liability losses tend to be larger than property losses, liability policies do not support investments. C. An insurer that assumes high underwriting risks must assume greater investment risks than one that assumes only moderate underwriting risks. D. Investment income enables an insurer to reduce the premium that it must charge for the underwriting risks it assumes.
D. Investment income enables an insurer to reduce the premium that it must charge for the underwriting risks it assumes.
With regard to insurer licensing, a foreign insurer is an insurer A. Domiciled outside of the U.S. and operating as a nonadmitted insurer. B. Licensed in the U.S. and transacting business outside the U.S. C. Domiciled outside of the U.S. and licensed to transact business in the U.S. D. Licensed and operating in states other than its state of domicile.
D. Licensed and operating in states other than its state of domicile.
Producer Tina has recently received many requests for cell phone coverage from auto insurance customers. She feels that this type of coverage could be inexpensive for the insurer to develop but could possibly attract youthful policyholders. Tina should discuss her product innovation ideas with the insurer's Select one: A. Investments and financial department. B. Human resources department. C. Customer service. D. Marketing and distribution department.
D. Marketing and distribution department.
Three core functions exist within the structure of a typical insurer. These core functions are Select one: A. Underwriting, investments, and actuarial. B. Claims, investments, and legal and compliance. C. Actuarial, marketing and distribution, and risk control. D. Marketing and distribution, underwriting, and claims.
D. Marketing and distribution, underwriting, and claims.
At year end, Omicron Insurance Company (OIC) posted these results: Premiums written $10,000,000 Premiums earned 9,500,000 Underwriting expenses incurred 4,000,000 Loss and loss adjustment expenses incurred 5,700,000 Based on this information, which one of the following represents OIC's trade basis combined ratio?
100%
Argot Stock Insurance Company's (Argot) net income is $1,000,000 and its average owners' equity is $16,500,000. Argot's average policyholders' surplus is $20,000,000. Using the GAAP approach, which one of the following is Argot's return on equity?
6%
Earned premiums are the portion of written premiums that A. Apply to the part of the policy period that has already occurred. B. Are available to generate investment income. C. Are billed at the beginning of the policy period. D. Apply to the part of the policy period that follows a loss.
A. Earned premiums are the portion of written premiums that apply to the part of the policy period that has already occurred.
The laws of agency impose all of the following specific duties on all agents, EXCEPT: A. Knowledge B. Accounting C. Loyalty D. Relaying information
A. Knowledge
The independent agency and brokerage marketing system uses A. Managing general agents. B. Direct writer producers. C. Exclusive agents. D. Captive agents.
A. Managing general agents
A situation that occurs because people with the greatest probability of loss are the ones likely to purchase insurance is known as
Adverse selection
Which one of the following is the term used to refer to a situation that occurs because people with the greatest probability of loss are the ones most likely to purchase insurance?
Adverse selection
Earned premiums are the portion of written premiums that A. Apply to the part of the policy period that has already occurred. B. Are available to generate investment income. C. Are billed at the beginning of the policy period. D. Apply to the part of the policy period that follows a loss.
Ans. A. Earned premiums are the portion of written premiums that apply to the part of the policy period that has already occurred.
Which one of the following is the best measure of the amount of insurance provided for a given period? A. Earned premium B. Paid premium C. Written premium D. Unearned premium
Ans. A. Earned premiums are the portion of written premiums that apply to the part of the policy period that has already occurred.
Insurers carefully evaluate the interaction between premiums and loss ratio and how changes in each affect profit. Which one of the following statements concerning the relationship between premium and loss ratio is true? A. If premiums increase by a greater percentage than incurred losses increase, the loss ratio will decrease. B. If incurred losses increase at a faster rate than premiums, the loss ratio will improve. C. If premiums decrease at a faster rate than losses increase, the loss ratio will decrease. D. If losses decrease at a faster rate than premiums decrease, the loss ratio will increase.
Ans. A. If premiums increase by a greater percentage than incurred losses increase, the loss ratio will decrease.
Expenses associated with an insurer's underwriting activity include all of the following, EXCEPT: A. Investment expenses B. Payment for losses C. Loss adjustment expenses D. Premium taxes, licenses, and fees
Ans. A. Investment expenses are separate from the expenses associated with underwriting activities.
The financial report for LMN Insurance contains the following information: Earned premiums $8M Written premiums $10M Incurred losses $6M Incurred underwriting expenses $4M What is LMN Insurance's expense ratio? A. 40% B. 50% C. 60% D. 100%
Ans. A. LMN Insurance expense ratio is 40 percent. Incurred Underwriting Expense/Written Premiums
Atwell Insurance Company has the following expenses: Dividends $50,000 Claim staff salaries $90,000 Agents' commissions$180,000 Advertising costs $30,000 Rent and utilities $40,000 What is the amount of Atwell Insurance Company's acquisition expenses? A. $210,000 B. $260,000 C. $310,000 D. $410,000
Ans. A. The amount of Atwell Insurance Company's acquisition expenses is $210,000. Agents + Advertising
Unity Insurance Company (UIC) has an operating ratio of 0.98, a combined ratio of 1.02, and a loss ratio of 0.77. Considering these ratios, which one of the following statements is true for UIC? A. UIC's investment income is offsetting losses and expenses from its underwriting operation, allowing an operating profit. B. UIC is collecting enough premium to allow a profit from its underwriting operations. C. UIC is collecting enough premium exclusive of investment income to allow an operating profit. D. UIC's favorable financial basis expense ratio is offsetting losses, allowing an underwriting profit.
Ans. A. UIC's investment income is offsetting losses and expenses from its underwriting operation, allowing an operating profit.
A combined ratio of 1.05 indicates that an insurer is A. Profitable overall. B. Not profitable on an underwriting basis. C. Not profitable overall. D. Profitable on an underwriting basis.
Ans. B. A combined ratio greater than 1 indicates than insurer is not profitable on an underwriting basis; however, when investment income is subtracted from the combined ratio the resulting overall operating ratio may be less than 1, showing that the insurer is profitable overall.
Which one of the following types of financial statements shows the financial position of an insurance company at any particular point in time? A. Income statement B. Balance sheet C. Sales report D. Cash flow report
Ans. B. The balance sheet shows an insurer's financial position at a particular point in time.
Which one of the following is the correct formula for net investment income? A. Investment income + change in investment expenses B. Investment income - investment expenses C. Change in investment expenses - investment income D. Investment expenses + investment income
Ans. B. The formula for net investment income is investment income minus investment expenses.
A financial analyst determines that the combined ratio for the DEF Insurance Company was 112 percent for the prior year. Which one of the following statements best describes how the analyst can interpret this information for the year? A. The insurer's net profit had to be negative. B. The insurer had a loss ratio that was over 100 percent. C. The insurer had an underwriting loss. D. The insurer's expense ratio exceeded its loss ratio.
Ans. C. A combined ratio over 100 percent indicates that the insurer had an underwriting loss.
Amounts designated by insurers to pay claims for losses that have already occurred are called A. Acquisition expenses. B. Loss adjustment expenses. C. Loss reserves. D. Unearned premium reserves.
Ans. C. Amounts designated by insurers to pay claims for losses that have already occurred are called loss reserves.
Which one of the following best explains why underwriting expenses are divided by written premiums rather than earned premiums in order to calculate an insurer's expense ratio? A. Loss adjustment expenses are incurred evenly throughout the policy period. B. The expense ratio does not take into account an insurer's investment income. C. Many underwriting expenses are incurred at the beginning of the policy period. D. Insurance coverage is provided evenly throughout the policy period.
Ans. C. Many underwriting expenses, such as producers' commissions, are incurred at the beginning of the policy period. Therefore, using written premiums rather than earned premiums for the denominator provides a better match for comparing revenues to expenses when calculating the expense ratio.
All of the following appear on an insurer's balance sheet, EXCEPT: A. Assets B. Liabilities C. Net income D. Policyholders' surplus
Ans. C. Net income does not appear on an insurer's balance sheet.
Which one of the following is the correct formula for calculating an insurer's combined ratio? A. Investment income ratio + overall operating ratio B. Investment income ratio + premium income ratio C. Loss ratio + expense ratio D. Loss ratio + underwriting ratio
Ans. C. The combined ratio formula is the sum of the loss ratio and expense ratio.
An increase in earned premiums with no change in written premiums or any other financial figures will generally cause a decrease in all of the following, EXCEPT: A. Dividend ratio B. Combined ratio C. Expense ratio D. Investment income ratio
Ans. C. The expense ratio uses written premiums rather than earned premiums as the denominator; therefore, the expense ratio won't change. All the other ratios would decrease because they use earned premiums as all or part of the denominator.
The two major sources of an insurer's investment funds are policyholders' surplus and A. Reserves for loss expenses. B. Acquisition expenses. C. Premiums received but not yet used to pay claims. D. Reserves for unearned premiums.
Ans. C. The two major sources of an insurer's investment funds are policyholders' surplus and premiums received but not yet used to pay claims.
All of the following are shown on an insurer's income statement, EXCEPT: A. Net underwriting gain (loss) B. Net investment income C. Unearned premium reserve D. Net income
Ans. C. The unearned premium reserve is shown on an insurer's balance sheet. Net underwriting gain (loss), net investment income, and net income are shown on an insurer's income statement.
On November 1, Mammoth Insurance Company issued a one-year business auto policy to Mid-State Painting Company with a premium of $24,000. What was the unearned premium for this policy as of December 31? A. $4,000 B. $6,000 C. $20,000 D. $24,000
Ans. C. The unearned premium was $20,000 because ten months of coverage remained. 10/12 X $24,000 = $20,000
ABC Insurance Company's combined ratio is 102. Its operating ratio is 98. These ratios indicate that A. ABC's underwriting performance is offsetting the lack of investment earnings. B. ABC's earned premium is greater than the sum of losses and expenses from its underwriting operations. C. ABC's return on investments is offsetting the unprofitable underwriting performance. D. ABC is not generating a profit from its core operations.
Ans. C. These ratios indicate that ABC's return on investments is offsetting the unprofitable underwriting performance.
Which one of the following is considered to be an acquisition expense for an insurance company? A. Losses B. Guarantee fund expenses C. Dividends D. Advertising expenses
Ans. D. Advertising expenses may also be a significant component of insurer acquisition expenses.
An insurer's balance sheet can best be described as a A. Relationship between revenue and liabilities. B. Relationship between assets and expenses. C. Summary of premiums written. D. Snapshot of its financial position.
Ans. D. An insurer's balance sheet can best be described as a snapshot of its financial position.
The financial report for Hometown Insurer contains the following information: Earned premiums $4,000,000 Written premiums $5,000,000 Net investment income $1,000,000 Incurred losses $3,000,000 Incurred underwriting expenses $2,000,000 What is Hometown Insurer's loss ratio? A. 20% B. 30% C. 50% D. 75%
Ans. D. Hometown Insurer's loss ratio is its incurred losses ($3,000,000) divided by its earned premiums ($4,000,000), or 75 percent.
The financial report for Hometown Insurer contains the following information: Earned premiums $4M Written premiums $5M Net investment income $1M Incurred losses $3M Incurred underwriting expenses $2M What was the Hometown Insurer's combined ratio? A. 75% B. 95% C. 105% D. 115%
Ans. D. Hometown's combined ratio equals its loss ratio ($3,000,000/$4,000,000) or 75 percent, plus its expense ratio ($2,000,000/$5,000,000) or 40 percent, for a total of 115 percent.
Loss reserves are amounts designated by insurers to pay claims for losses that have A. Not yet occurred but are likely to occur in the future. B. Already occurred and the amount to be paid has been agreed. C. Not yet occurred but are likely to be reported in the future. D. Already occurred but are not yet settled.
Ans. D. Loss reserves are amounts designated by insures to pay claims for losses that have already occurred but are not yet settled.
Which one of the following is an admitted asset? A. Premium balances due in more than ninety days B. Furniture C. Supplies D. Real estate
Ans. D. Real estate is an admitted asset because, in general, it could easily be liquidated at or near its market value.
All of the following are categories of liabilities found on an insurer's balance sheet, EXCEPT: A. Loss and loss expense reserves B. Unearned premium reserves C. "All other" liabilities D. Policyholders' surplus
Ans. D. The major categories of liabilities found on an insurer's financial statements are loss and loss expense reserves, unearned premium reserves, and "all other" liabilities. Policyholders' surplus is not a liability category.
On November 1, Peafowl Insurance Company issued a one-year business auto policy to Tri-State Painting Company with a premium of $24,000. What was the written premium for this policy as of December 31? A. $ 4,000 B. $ 6,000 C. $20,000 D. $24,000
Ans. D. The written premium was $24,000, the amount the insured was billed at the beginning of the policy period.
Most of the income an insurer receives is either from underwriting or A. Nonadmitted assets. B. Losses. C. Policyholders' surplus. D. Investments.
Ans. D. Two major sources of insurer income are (1) the sale of insurance (underwriting) and (2) the investment of funds (investment income).
A management control tool used to determine whether line underwriters are properly implementing underwriting policy is known as an underwriting
Audit
Earned premium for ABC Insurance (ABC) for the year was $400 million and incurred losses were $500 million. Incurred underwriting expenses were $60 million. ABC had a net investment gain of $40 million for the year. Which one of the following is ABC's overall gain or loss from operations? A. $120 million gain B. $120 million loss C. $200 million gain D. $200 million loss
B. ABC's overall gain or loss from operations is $400 million earned premium minus $500 million incurred losses minus $60 million underwriting expenses plus $40 million net investment gain, for a $120 million loss.
Independent agent networks are known as A. Direct writers. B. Agent clusters. C. Exclusive agents. D. Agent forces.
B. Agent clusters
The salaries of investment professionals who are employed by an insurance company are categorized as A. General expenses. B. Investment expenses. C. Acquisition expenses. D. Other underwriting expenses.
B. Investment expenses include staff salaries related to the activities of the investment department.
A policy provides coverage starting on April 1 with an annual premium of $800. How much premium is earned as of June 30? A. $100 B. $200 C. $600 D. $800
B. The earned premium is $200 because three months of coverage have been provided. 3/12 X $800 = $200
An insurer's loss expense reserve is A. An asset designated to pay the cost of settling the claims included in the loss reserve. B. An asset designated to pay claims for losses that have occurred. C. A liability designated to pay the cost of settling the claims included in the loss reserve. D. A liability designated to pay claims for losses that have occurred.
C. A loss expense reserve is a liability designated to pay the cost of settling (handling) claims included in the loss reserve. The loss reserve is a liability designated to pay claims for losses that have already occurred.
Managing general agencies A. Typically use the exclusive agency system. B. Typically use the direct response system. C. Commonly represent several insurers. D. Do not represent more than one insurer.
C. Commonly represent several insurers.
An insurer's net underwriting gain or loss provides a better measure of the insurer's marketing, underwriting, and claims skills than its overall gain or loss from operations. This is true because the overall gain or loss from operations includes investment gains or losses that A. Vary over time. B. Are inversely related to how well the insurer conducts its marketing, underwriting, and claims activities. C. Are not directly related to how well the insurer conducts its marketing, underwriting, and claims activities. D. Are generally not subject to income tax.
C. Investment gains or losses are not directly related to how well an insurer conducts its marketing, underwriting, and claims activities.
On January 1, 2005, the XYZ Insurance Company issued a policy with a one-year policy period. The premium for this policy was $1,200. What was the unearned premium for this policy as of May 1, 2005? A. $ 400 B. $ 600 C. $ 800 D. $1,200
C. May = 5th month so 4 months earned and 9 unearned, 8 X 100/month = $800 of unearned premium.
Rachel is considering investing in the stock of an insurance company. Which one of the following is likely to provide the best indication of the insurer's financial position at this point in time? A. Income statement B. Cash flow report C. Balance sheet D. Sales report
C. Of the items listed, an insurer's balance sheet provides the best indication of its financial position because it shows admitted assets, liabilities, and policyholders' surplus at a particular point in time.
If an insurer's admitted assets stayed the same but its liabilities increased significantly, its policyholders' surplus would A. Either stay the same or decrease. B. Increase. C. Decrease. D. Either stay the same or increase.
C. Policyholders' surplus is admitted assets minus liabilities. Any increase in a liability without an increase in admitted assets decreases policyholders' surplus.
All of the following are true with regard to policyholders' surplus, EXCEPT: A. It measures the difference between what an insurer owns and what it owes. B. It provides a financial cushion for the insurer if losses turn out to be higher than expected. C. It equals nonadmitted assets. D. It provides resources for expansion.
C. Policyholders' surplus measures the difference between what an insurer owns and owes, provides a financial cushion, and provides resources for expansion. It does not equal nonadmitted assets.
A producer will generally review a company's loss run report while performing which one of the following functions? A. Claims handling B. Sales C. Risk management review D. Customer service
C. Risk management review
Unfair trade practices laws are A. Limited to the activities of insurance producers. B. Limited to the activities of claim representatives. C. State laws that specify certain prohibited business practices. D. National laws that do not vary by state.
C. State laws that specify certain prohibited business practices
Which one of the following is the correct formula for calculating an insurer's combined ratio? A. Investment income ratio + overall operating ratio B. Investment income ratio + premium income ratio C. Loss ratio + expense ratio D. Loss ratio + underwriting ratio
C. The combined ratio formula is the sum of the loss ratio and expense ratio.
ABC Insurance Company's combined ratio is 102. Its operating ratio is 98. These ratios indicate that A. ABC's underwriting performance is offsetting the lack of investment earnings. B. ABC's earned premium is greater than the sum of losses and expenses from its underwriting operations. C. ABC's return on investments is offsetting the unprofitable underwriting performance. D. ABC is not generating a profit from its core operations.
C. These ratios indicate that ABC's return on investments is offsetting the unprofitable underwriting performance.
Tania, an underwriting trainee for Keithly Insurance Company, has received a new homeowners application for Nanami. The home is to be insured for $150,000. It is a frame house with a swimming pool and trampoline in the back yard. The grass needs mowing and the shrubbery needs trimming. Nanami has a marginal credit score. What is Tania's first step in underwriting the policy for Nanami?
Check to see if she has the underwriting authority to make the decision
Which one of the following cases illustrates how underwriting guidelines ensure uniformity and consistency?
Chloe and Elin are underwriting identical homeowners risks for Cromley Insurance Company. The applicants have the same protection class, construction, and coverage amount. After checking the underwriting guidelines, they come to the same underwriting decision.
Sofie, a property underwriter for Cintriell Insurance Company is reviewing a new homeowners application. Sofie has changed the protection class to unprotected, as the fire protection class listed by the producer is an eight and is incorrect. Which one of the following line underwriter activities is Sofie performing?
Classifying and pricing accounts
Once an underwriter has evaluated a submission, selected and applied any appropriate modifications, and determined the premium, the next step is to implement the underwriting decision. To implement the decision, the underwriter should first
Communicate the decision to the producer
Which one of the following is determined by a company's underwriting policy?
Composition of the insurer's book of business
Which one of the following cases illustrates how underwriting guidelines ensure that selection decisions provide uniformity and consistency by all the insurer's underwriters?
Cromley is training new underwriters and is using a work sample for a homeowner risk which has a unacceptable roof and an overgrown yard. New underwriters Erin and Filip check the guidelines and make the same underwriting decision to decline the risk.
An important question for an insurer to ask when examining customers' needs and characteristics to select a distribution channel is Choose one answer. A. Who is the target market? B. Is the expertise of the current staff adequate? C. Does cost outweigh the benefit? D. How quickly can inquiries and transactions be processed?
D How quickly can inquiries and transactions be processed? An important question for an insurer to ask when examining customers' needs and characteristics to select a distribution channel is "how quickly can inquiries and transactions be processed?"
An insurer's core functions are marketing and distribution, underwriting, and Select one: A. Actuarial. B. Risk control. C. Information technology. D. Claims.
D. Claims.
An analyst in the financial department for an insurer has calculated the loss ratio to be 1.03. This result indicates that the insurer is A. Collecting approximately $1.03 in premium for every $1.00 it pays in claim-related expenses. B. Collecting approximately $1.03 in premium for every $1.00 it pays in claim-related and underwriting expenses. C. Paying out approximately $1.03 in claim-related and underwriting expenses for every $1.00 it collects in premium. D. Paying out approximately $1.03 in claim-related expenses for every $1.00 it collects in premium.
D. Paying out approximately $1.03 in claim-related expenses for every $1.00 it collects in premium.
Admitted assets are types of property that regulators allow insurers to show as assets on their financial statements because they are A. Very stable in value. B. Never subject to decreases in value. C. Generally increasing in value. D. Easily converted to cash at or near their market value.
D. Regulators allow admitted assets to be shown on insurers' financial statements because these assets could easily be liquidated, or converted to cash, at or near their market value.
Which one of the following statements is true with regard to Internet distribution channels for selling insurance? A. "Franchise marketing" is also known as affinity marketing. B. The objective of group marketing is to sell insurance products and services over the Internet. C. Mass marketing plans offer insurers' policies to a small number of targeted individuals based upon their demographic characteristics D. The objective of insurance portals is to deliver leads to the firms whose products they offer through their sites.
D. The objective of insurance portals is to deliver leads to the firms whose products they offer through their sites.
The principal purpose of underwriting is to
Develop and maintain a profitable book of business for the insurer
The purpose of underwriting is to
Develop and maintain a profitable book of business for the insurer
The state advisory organization has developed a new homeowner's form which increases the personal property limits for guns, silverware, jewelry, and boats. Jancy Insurance Company is considering modifying the form for its own use. Which one of the following members of Jancy's staff would be involved in the research and development of this new form?
Emma, the staff underwriter
Depending on the type of insurance, insurers use automated underwriting systems to
Encode underwriting guidelines
Underwriting guidelines include acceptable approaches to evaluating applicants and the overall desirability of a particular type of risk or class of business. Which one of the following purposes of underwriting guidelines is best served by inclusion of these acceptable approaches?
Ensure uniformity and consistency in risk selection
The account underwriting approach
Evaluates all of an applicant's supporting business across all lines
The focus of a line underwriter is
Evaluating new submissions and renewal underwriting
Underwriters gain underwriting authority with which one of the following
Experience
An insurer decides to discontinue writing a class of workers compensation insureds because losses on the business have exceeded expectations. Instead, in an effort to maximize its return on equity, the insurer plans to use its resources to increase the volume of accounts in an area that offers more promising returns. This need to redirect the focus for desired business is an example of an underwriting constraint due to
Financial capacity
Which one of the following is a constraint to the development of underwriting policy?
Financial capacity
While developing goals for its book of business, an insurer's staff underwriter decides to increase its market share of workers compensation insurance in the construction industry. This type of underwriting activity is known as
Formulating underwriting policy
The common distinction between line underwriters and staff underwriters is that line underwriters
Implement the steps in the underwriting process. Staff underwriters assist underwriting management with formulating underwriting policy
The retention ratio as an underwriting performance measure is the percentage of
Insurance policies renewed
An insurance company needs to hire an employee with knowledge of insurance policy forms and the ability to relate policy provisions to the loss exposures of individual policyholders. The person will also prepare premium quotes and process cancellations. Which one of the following employees would best suit the company's needs?
Line underwriter
Which one of the following lists the financial components used to calculate a combined ratio?
Loss and loss adjustment expenses incurred, earned and written premiums, and underwriting expenses incurred
Which one of the following describes the method that state regulators use to ensure that insurers adhere to filed classification and rating plans?
Market conduct examinations
Which one of the following financial ratios is key for evaluating insurer solvency?
Premium to surplus ratio
Underwriting guidelines serve all of these purposes, EXCEPT
Provide rating criteria
Which one of the following represents two nonfinancial measures that are used to evaluate underwriting performance by focusing on underwriting actions?
Retention ratio and hit ratio
Which one of the following tasks is the responsibility of a staff underwriter as opposed to a line underwriter?
Review and revise rating plans
All of these are line underwriting activities, EXCEPT
Revise pricing plans
Aaron, a senior producer for Blithe Insurance Company (Blithe) has over 15 years experience in the field. He knows Blithe's underwriting guidelines and is familiar with the type of business Blithe wants. He takes pride in the loss ratio produced by his office and also produced by Blithe as a company. He often trains new agents in his office because of his low rejection ratio of applications he writes. He is known as a front-line underwriter for Blithe. Which one of the following is a benefit of Aaron's field underwriting?
Saves Blithe from having to evaluate accounts that they will ultimately reject
Which one of the following statements regarding underwriter responsibilities is correct?
Staff underwriters typically share responsibility for researching fundamental insurance issues with the actuarial and marketing departments
All of the following are underwriting activities typically performed by staff underwriters, EXCEPT
Support producers and insureds
Which one of the following is an underwriting evaluation tool that uses Global Positioning System (GPS) tracking to collect and analyze data regarding driver behavior and vehicle use?
Telematics
All of the following statements are true regarding the factors affecting the formation of an insurer's underwriting policy, EXCEPT
The higher an insurer's premium-to-surplus ratio, the greater its ability to expand premium writings
Tobias, a successful producer with Barnley's Insurance Company, is struggling with an intricate quote on homeowners coverage for his insured, Hanna. Hanna not only has substantial collections of guns and silverware, but also has a small farm located at her premises. Which one of the following individuals from Barnley Insurance Company could provide assistance and support to Tobias?
The line underwriter
The final, and ongoing, step in the underwriting process is monitoring underwriting decisions. Which one of the following statements is correct with respect to this process?
The underwriter is tasked with monitoring both individual policies and books of business to ensure that satisfactory results are achieved
Underwriting authority requirements are usually communicated to an underwriter through
The underwriting guidelines
The overarching purpose of underwriting is
To develop and maintain a profitable book of business for the insurer
Because underwriting guidelines usually specify the attributes of accounts that insurers are willing to insure, insurers consider them
Trade secrets
The first step in the underwriting process is evaluating the submission. Which one of the following statements is correct with respect to that evaluation?
Underwriters must understand the activities, operations, and character of each applicant
The underwriter must evaluate each underwriting alternative carefully and select the optimal one under the circumstances. Which one of the following is true regarding the selection of an alternative?
Underwriters should ensure that accepting a submission supports the insurer's goals for mix of business
Which one of the following is the insurer's quality control check for uniform application of the underwriting guidelines and for continuous improvement?
Underwriting audits
Underwriting guidelines reflect the levels of
Underwriting authority
Victor, the sales manager for Hallbinger's Insurance Company, wants the company to grow in written premium. He wants his agents to write more auto and homeowners business. In order to do so, the company must have adequate capacity. Which one of the following impacts Victor's agents and the company the most concerning surplus and capacity?
Underwriting practices must generate policy premiums that exceed losses and expenses
Insurer B (IB) notifies one of its independent agents that its agency contract will be terminated unless the agency improves its hit (or success) ratio during the next 90 days. This indicates that IB has
Written too few of the accounts it quoted for the agency
A stock insurer is distinguished from a mutual insurer by the fact that A. Owners are not necessarily insureds. B. It seeks to generate a profit. C. It is governed by a board of directors. D. Owners have voting
a
In developing insurance rates, a state mandatory rate law requires the insurer to A. Use state developed rates. B. Establish and file rates for all admitted lines of insurance. C. Use rates developed by the National Association of Insurance Commissioners (NAIC). D. Maintain rates equal to policyholder surplus. .
a
Riko's insurance agent was caught embezzling several insureds' premiums, which involves what area of insurance company operations and what punishment by state regulators? A. Sales; agent license revoked B. Underwriting; agent license revoked C. Claim handling; operating license suspended D. Claim handling; operating license revoked
a
The premium charged for an insurance policy should be A. Commensurate with the exposure. B. Equal to the exposure. C. Concurrent with the exposure. D. Equivalent to the exposure.
a
What is solvency? A. The ability of an insurer to meet its obligations as they become due B. Transparency of policy language C. The process of a state taking over the assets and obligations of a failing insurer D. Destructive competition
a
Which one of the following is a key focus of states' insurance regulation? A. Insurer licensing. B. Product branding. C. Premium taxation. D. Producer concentration.
a
Which one of the following is true about the functions within an insurance organization? A. Each function contributes or detracts from the overall effectiveness of the insurer. B. Insurers use common terminology to identify these functions. C. These well defined functions operate with a high degree of independence. D. The essential functions are always performed by insurer personnel
a
Which one of the following statements is correct regarding government involvement in insurance? A. Federal and state government are involved in insurance to facilitate compulsory insurance purchases. B. Most organizations obtain workers' compensation insurance through federal or state insurance programs. C. Government insurance plans typically incur significant costs in marketing and sales commissions. D. Legislators find it more straightforward to invite and analyze bids from private insurers than to establish government plans
a
Which one of the following statements is true? A. Mutual insurance companies include some large national insurers. B. Mutual insurers are usually large national insurers. C. Mutual insurers are exclusively regional or local insurers. D. Mutual insurers include few regional insurers.
a
insurersWhich one of the following is generally exempt from state insurance regulations pertaining to policy forms and rates? A. Surplus line insurers B. Workers compensation insurers C. Commercial property insurers D. Health insurers
a
Danny's insurance agent was caught embezzling several insureds' premiums, which involves what area of insurance company operations and what punishment by state regulators? A. Sales; agent license revoked B. Underwriting; agent license revoked C. Claim handling; operating license suspended D. Claim handling; operating license revoked
a .
A mutual insurance company is owned by A. Independent investors. B. Policyholders. C. State insurance departments. D. Mutual funds.
b
Market conduct regulation focuses on insurers' treatment of applicants for insurance, insureds, and others who present claims for coverage. Market conduct regulation affects which one of the following areas of operation? A. Financial requirements B. Sales C. Field examinations D. Annual statements
b
Some insurance rating laws allow rates to be put into use immediately but require insurers to files the rates with the state within a specific period of time. These types of laws are known as A. File-and-use laws. B. Use-and-file laws. C. Prior-approval laws D. Flex rating laws.
b
Some insurance rating laws allow rates to be put into use immediately but require insurers to files the rates with the state within a specific period of time. These types of laws are known as A. File-and-use laws. B. Use-and-file laws. C. Prior-approval laws. D. Flex rating laws.
b
Which one of the following insurance customers may be compelled to meet its liability insurance needs through the excess and surplus lines market? A. Hair salon in a strip mall B. Hazardous waste facility C. Family restaurant D. Clothing store in a mall
b
Which one of the following insurance customers might be able to meet its liability insurance needs through the excess and surplus lines market? A. Hobby shop in a proprietor-owned building B. Major airline requiring multi-billion dollar limits C. Plumbing outfit with one full-time and two part-time employees D. Landscaping company with two full-time and five seasonal workers
b
Which one of the following is true regarding the administration of the Insurance Regulatory Information System (IRIS)? A. If the insurer has financial ratios that are inside predetermined norms, IRIS identifies the company for regulatory attention. B. If regulators determine that an insurer is insolvent, the state insurance department places it in receivership. C. If an insurer cannot be rehabilitated, the state's guaranty fund may be available to increase the effects of the insurer insolvency. D. Under a special provision in state licensing laws, state regulators are empowered to completely take over an insurer at any time.
b
Which one of the following statements is correct regarding government insurance programs? A. Government insurers cannot function as primary insurers for duties such as collecting premiums, providing coverage, or paying claims. B. Government programs can operate as reinsurers, reinsuring 100 percent of the risk or that part in excess of the private insurer's retention. C. Government partnerships with private insurers usually develop in especially desirable lines of business. D. Government insurance programs cannot operate in direct competition with private insurers.
b
Why are insurance regulators concerned about the effects of large catastrophes? A. They could lead to destructive competition. B. Insurers may become insolvent. C. Insurance rates will rise. D. Licensed insurers will be unable to handle demand.
b
subscribersOwners of reciprocal insurance exchanges are also known as A. Policyholders. B. Subscribers. C. Correspondents. D. Names.
b
A reciprocal insurance exchange A. Is a subsidiary that provides all or part of the insurance for a parent company. B. Transfers potential costs of insured loss exposures from one insurer to another insurer. C. Is an unincorporated association providing insurance coverage to its subscribers. D. Is a stock corporation providing insurance for its policyholders.
c
All of the following are types of private insurers, EXCEPT: A. Stock insurers B. Mutual insurers C. State workers compensation funds D. Reciprocal insurance exchanges
c
Destructive competition in the insurance industry could result in A. Oversupply of insurance. B. Excess regulation. C. Insurance shortages. D. Inadequate regulation.
c
Following the terrorist attacks on the United States, insurers became reluctant to provide property insurance on target properties until the federal Terrorism Risk Insurance Program (TRIP) was introduced. Which one of the following social purposes did this government insurance program serve? A. Incentive to purchase insurance B. Pooling of loss exposures C. Prevent economic disruption D. Reduced risk to society
c
For an insurer to be considered solvent, states require it to have financial reserves A. As a fraction of its ordinary expenses. B. Equal to its ordinary expenses. C. Well in excess of its ordinary expenses. D. Double its ordinary expenses.
c
Insurance Company wrote a commercial liability policy for a manufacturer of off-road motorcycles. The potential costs of the insured's loss exposure exceed Insurance Company's capacity. Insurance Company could consider which type of contractual transferring agreement to meet its needs? A. Mutual insurance B. Reciprocal insurance C. Reinsurance D. Interinsurance
c
Most states regulate the excess and surplus lines market by A. Establishing a monitoring board comprised of all insurers licensed to do business in the state. B. Examining the market conduct practices of the unlicensed insurers. C. Requiring that licensed surplus lines brokers transact business with the unlicensed insurers. D. Approving the policy forms and rates used by the unlicensed insurers.
c
The capital of a stock insurance company comes primarily from A. Sale of insurance policies. B. Return on invested premium reserves. C. Sale of company stock. D. Leveraging the difference from when a premium is paid in and when a claim is paid out.
c
Unfair trade practices acts involve which one of the following insurance company operations? A. Rate filings B. Coverage form design C. Underwriting D. Financial reporting
c
An Ohio insurer that is licensed to sell insurance in Michigan is known as what in Michigan? A. An alien insurer B. A domestic insurer C. A captive insurer D. A foreign insurer
d
Generally, how often must a foreign insurer's license be renewed? A. Every five years B. Every two years C. Semi-annually D. Annually
d
State governments can be involved in insurance at various levels. Some states provide which one of the following types of insurance in competition with private insurers? A. Crop B. Flood C. General liability D. Workers compensation
d
The two objectives of insurance policy form regulation are to ensure that policies are clear and readable and to A. Ensure that the insurers rights are protected. B. Ensure policies are negotiable between an insurer and insured. C. Limit policies' length and complexity. D. Detect and address any policy provisions that are unfair.
d
What term refers to the ability of an insurer to meet its obligations as they become due? A. Capacity B. Reserves C. Capital D. Solvency
d
When an insurance company appoints an insurance agent to serve as its representative, what specifies the scope of authority given to the agent in this relationship? Choose one answer. A. Implied authority B. Binding authority C. A unilateral contract D. An agency contract
D. An agency contract
T. Roy Insurance Company is selecting a distribution system and channel for its products. Which one of the following best describes the type of consideration that T. Roy should give to its operations? Choose one answer. A. What are customer's expectations regarding accessibility? B. Will customers be willing to pay a premium for services? C. Can customers navigate easily within the channel? D. Does it have the necessary financial resources?
D) Does it have the necessary financial resources? The initial fixed cost of entering the market through the exclusive agency system or direct writer system is greater than doing so through the independent agency system. Similarly, Internet-based distribution channels have high start-up costs for supporting information system. A direct response campaign cost can be much lower
A business manufactures a product that is harmful to the public if used improperly. More than three licensed insurance companies have refused to provide commercial general liability coverage for the business. The producer should contact which one of the following to attempt to arrange coverage? A. A direct writer B. An independent agent C. A managing general agent D. A surplus lines broker
D. A surplus lines broker
