Insurance and Licensing Chapters 5-6

An insurance contract is designed to be all of the following in the event of a claim, EXCEPT:

A means to provide a profit to the insured

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

A situation that occurs because people with the greatest probability of loss are the ones likely to purchase insurance is known as

Adverse selection.

Most insurers give some producers the authority to pay claims up to a certain amount. In this role, producers function much like

An inside claim representative.

A person or entity that would suffer a financial loss if property were damaged has

An insurable interest

Damages for disfigurement are a form of

General damages

The value of an insurance contract in the event of a claim

Includes peace of mind.

An insurance company must have adequate policyholders' surplus if it wishes to

Increase its written premium volume.

In handling catastrophe claims, insurers should do all of the following, EXCEPT:

Increase record keeping requirements

For the law of large numbers to function properly, exposure units must be

Independent.

Facultative reinsurance is arranged by underwriting management for

Individual policies.

Which one of the following is a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss?

Moral hazard

All of the following are true statements about restrictions on cancellation or nonrenewal of insurance, EXCEPT:

Most states require that insureds wait until the end of the policy period to cancel their policies.

In order to expedite claim handling during a catastrophe, an insurer will consider all of the following modifications to procedures, EXCEPT:

Suspending the use of independent adjusting firms

A liability loss has the following damages: Medical expenses: $ 10,000 Damages for disfigurement: $50,000 Damages for pain and suffering: $ 100,000 What is the amount of special damages?

$ 10,000

Bob is shopping for auto insurance. Insurance Company A's rating system determines that Bob should be charge $800 per auto. If Bob is looking to insure four autos, what premium will he be charged by Insurance Company A?

$3,200

John had an unendorsed homeowners policy. John's two-year-old bicycle was stolen. The bicycle's purchase price was $700, its current replacement cost is $800, and depreciation was estimated at $450. What was the bicycle's actual cash value?

$350

Which one of the following would likely be an unacceptable practice under most states' unfair claims practices act?

A claim representative is asked by an insured if a claim is covered by the policy's liability coverage and the claim representative responds "no" even though he knows it is covered elsewhere in the insured's policy.

Worthley Insurance Company uses claim audits to ensure compliance with best practices. These audits evaluate both quantitative and qualitative factors. Which one of the following factors that Worthley evaluates is a qualitative factor?

Accurate evaluation of insured's liability

The adequacy of the case reserve for a complicated claim should be evaluated

As new information is obtained.

Judgment rates are used

Because there is no established premium-determination system.

Which one of the following concerning claim status reports is true?

Claim status reports are vital to an insurer because the reports advise the insurer how the claim is progressing on periodic basis.

Insurers handling catastrophe claims should be prepared for

Claimants who are aggressive in their pursuit of settlement.

Claim representative Beth adjusted a property damage claim in which the insured's loss totaled $2,500. She knew that the insured had suffered some financial hardships and was eager to receive some cash as soon as possible. Optimistic that the insured could be persuaded to take less than the full value of the claim if a draft was delivered right away, she offered $1,500 to settle the claim. The insured surprised Beth by filing a small claims suit against the insurer in which he recovered the full $2,500 value of the claim. This is not the first time this tactic has backfired on Beth. Beth may be in violation of which one of the following unfair claim practices regulations?

Compelling an insured to sue to recover amounts due under an insurance policy

If a claim representative's investigation determines that no coverage applies for a liability claim, the insurer will

Deny the claim.

Besides using the law of large numbers to predict the amount of future losses, insurers also rely on it to

Determine average loss costs.

An underwriter receives a renewal application for a property quote from his producer. The applicant has had a series of small losses in the recent past. The underwriter is debating whether to reject the submission or quote it with a property deductible of $5,000. During which one of the following steps in the underwriting process is the underwriter involved?

Developing underwriting alternatives

Tania receives an application for homeowner's insurance for a home valued at $500,000 from Patrick, the producer for Keithly Insurance Company. Since Tania's underwriting authority is $350,000 on property risks, she must refer it to Lachlan, her underwriting supervisor. Which one of the following additional functions for underwriting profitability does this case illustrate?

Enforcing underwriting guidelines

Julio, a producer for Argot's Insurance Company, submits an application for a 50-year-old residence to Mathilde, the underwriter. Julio wants to know why the homeowners rate is higher for his 50-year-old residence. Mathilde explains that the homeowners rate for the 50-year-old residence is not the same for a five-year-old residence because the exposures are different. Which one of the following underwriting profitability functions of Argot is Mathilde's explanation supporting?

Ensuring adequate policyholder's surplus

During which one of the following steps in the underwriting process would an underwriter request a risk control visit to a prospective policyholder's location?

Evaluating the submission

Which one of the following is the fundamental measure of loss exposure used in insurance rating?

Exposure unit

Produce, such as apples or grapes, may be priced by the unit or by the pound. In insurance, these measures are similar to

Exposure units.

While developing goals for its book of business, an insurer's staff 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.

Which one of the following describes the effect underwriting standards can have on premium?

Insurers can lower premiums for better-than-average risks.

All of the following are true, EXCEPT:

Insurers that are merely negligent in their claim handling face no consequences, regardless of jurisdiction.

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. This company is currently in need of a:

Line underwriter.

Which one of the following statements is correct with respect to line underwriters?

Line underwriters offer assistance to producers by inquiring about an insured's risk management program.

Incurred losses (including loss adjustment expenses) divided by earned premium is the formula for

Loss ratio.

The best description of a third-party claim is a claim

Made against the policyholder by someone to whom the policyholder may be liable.

Which one of the following is true about the participation of the head of the underwriting department in the insurer's management?

May participate in selecting the type of marketing system to be used

Which one of the following is a negotiation process in which a neutral outside party helps participants examine the issues and develop a mutually agreeable settlement?

Mediation

Which one of the following statements about claim evaluation is correct?

Prompt evaluation helps to ensure compliance with time limits specified by unfair claims settlement practices acts.

One of the greatest challenges for an insurer dealing with a catastrophe is staffing. All of the following are likely responses to this challenge, EXCEPT:

Purchasing catastrophe reinsurance.

Subrogation is the insurer's right to

Recover its claim payment from the responsible party.

Actual cash value (ACV) is

Replacement cost minus depreciation

An applicant for commercial property insurance is found unacceptable by an underwriter due to the nature of its operations and the construction of the building it occupies. If the applicant installs an automatic fire-extinguishing sprinkler system, the underwriter will approve the application. This type of underwriting modification is known as?

Requiring risk control measures.

Claims vary from one another in various ways, but there are some basic claim handling activities that apply to almost every claim, from the simplest to the most complex. These activities include all of the following, EXCEPT:

Sending a reservation of rights letter

A liability adjuster must be concerned with specific, out-of-pocket expenses when evaluating the damages being claimed. The technical term for such expenses is

Special damages.

Maja's, a professional liability underwriter, primary responsibilities involve formulating underwriting policy and revising underwriting guides for various lines of professional liability insurance that will be used by personnel in the company's field offices. Maja is functioning as a:

Staff underwriter.

According to state insurance laws, unfair discrimination occurs when insurers deny coverage based solely on certain factors. Those factors include all of the following, EXCEPT:

The applicant's ability to pay the premium

All of the following explain when the use of independent adjusters might be advantageous, EXCEPT:

The insured may retain an independent adjuster after becoming dissatisfied with the pace of negotiations with the insurer.

All of the following correctly describe reasons for the use of independent adjusters, EXCEPT:

The insured may retain an independent adjuster if settlement negotiations with the insurer are not progressing satisfactorily.

Tobias, a successful producer with Barnley's Insurance Company (Barnley's) 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

Prospective loss costs indicate

The money the insurer can expect to need to pay for future claims for each exposure unit.

One of the roles of underwriting management is arranging reinsurance. Which one of the following statements explains how treaty reinsurance helps an insurer meet its obligations?

The reinsurer automatically assumes a portion of all of the primary insurer's insurance that is eligible under the treaty.

If an insurance applicant charges that an insurer has rejected the application due to prohibited unfair discrimination, what is a likely valid defense to the charge?

The risk did not meet objective underwriting criteria.

Underwriting management monitors underwriting results

Through a process called an underwriting audit.

Why do states require that insurers notify the insured before a policy is to be canceled or nonrenewed?

To give the policyholder an opportunity to replace the coverage

Lou is a claim manager at a small property-casualty insurance company. Lou takes pride in the fact that because of his leadership, his company has gained a public reputation for resisting legitimate claims. Ultimately, this reputation:

Undermines the effectiveness of his company's advertising.