insurance Final exam

he 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 was the Hometown Insurer's combined ratio?

115%

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 expense $2,000,000 What is Hometown Insurer's investment income ratio?

25%

Which one of the following statements about policy sections is true?

A condition clarifies an insurer's promise or an insured's duty.

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

Perils are an important aspect of property insurance. Which one of the following statements is correct with respect to perils?

A peril is the actual means by which property is damaged or destroyed such as fire, lightning, windstorm, hail, or theft.

One of the benefits to a business of retaining a loss exposure instead of insuring it is

A reduction in expenses

All of the following are factors in determining the replacement cost of real property, EXCEPT:

Actual cash value of the property

Sofie and the members of her homeowner's association have homeowner's policies on their coastal dwellings. They have heard that there are 11 named hurricane storms predicted for their coastal area this year. Sofie and the homeowner association members plan to increase their homeowner's property coverage limits to handle their concern about the possible hurricane damage. Their action is known as

Adverse selection.

The possibility that a retailer might be sued because it used a customer's photo in a sales brochure without the customer's permission is what kind of liability exposure for the retailer?

Advertising

When an insurer appoints an agent to act its behalf, the agent's scope of authority is spelled out in the

Agency contract.

The Declarations page of an insurance policy includes all of the following, EXCEPT:

Agreement and definitions

The requirements of a valid offer include

Agreement, capacity to contract, consideration, and legal purpose.

Which one of the following is an example of material misrepresentation by Albert, a businessman applying for property insurance on a building he owns?

Albert tells the insurance agent the building is used to store steel, but it is actually used to store steel drums containing flammable liquids.

The Bakery, an applicant for commercial property insurance, has experienced a series of property losses over the past three years. In order to find this applicant viable, the underwriter agrees to increase the property deductible. This type of underwriting modification is known as

Amending policy terms and conditions.

Small United States unincorporated insurance associations, domiciled mainly in Texas, are known as

American Lloyds.

The most typical third-party bad-faith claim alleges

An improper failure to settle a third party's liability claim within policy limits followed by a verdict that exceeds the policy limits.

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

An insurable interest.

Which one of the following is an opportunity cost of insurance?

An insured's funds that could be invested elsewhere if purchasing insurance were not necessary

Angela is having a dispute with her insurance company regarding a claim and the definition of an insured loss. The definition is subject to two reasonable interpretations, one that favors Angela and one that favors the insurer. A court of law is likely to find in favor of

Angela, because an insurance contract is a contract of adhesion

Insurers generally have the option to repair, replace, or pay the value of lost or damaged property. These options

Are settlement options

The risk management technique that eliminates a loss exposure and reduces the chance of loss to zero is

Avoidance

Though premiums are an obvious cost of insurance, many insureds believe they are too high because

Benefits are intangible until a loss occurs.

The possibility that a plumbing contractor might start a fire at a customer's house while soldering a pipe is what type of liability loss exposure for the plumber?

Business operations

Sofie, a property underwriter for Cintriell Insurance Company is reviewing a new homeowners application for Yu. 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

While driving to work, John loses control of his automobile, which jumps a curb and strikes a tree. Which one of the following coverages must John have purchased in order for the damage to his vehicle to be covered?

Collision

Liability coverage for loss exposures arising from a business organization's premises and operations, its products, or its completed work is typically provided by

Commercial general liability insurance.

The principal method of determining a prospect's insurance needs is through

Completing a risk management review for the prospect.

Insurance policies are written in such a way that the parties have to perform only under certain conditions, because an insurance contract is a

Conditional contract.

For a contract to be enforceable, something of value must be exchanged. The thing of value exchanged is called

Consideration

For contract purposes, an offer is valid if it includes the capacity to contract, an agreement, a legal purpose, and

Consideration from both parties.

Risk management activities under the enterprise-wide risk management approach occur at the

Corporate level.

The principal purpose of underwriting is to

Develop and maintain a profitable book of business for the insurer.

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?

Does it have the necessary financial resources?

Barton Industries keeps copies of key documents stored at a second location. The risk control technique Barton Industries is using is

Duplication

Law Firm asked Insurance Company to provide both a commercial liability policy and a professional liability policy to meet its coverage needs. Insurance Company believes that there could be some types of losses that would be covered under both policies, a situation it wishes to avoid. What type of policy provisions could Insurance Company use to address this problem?

Exclusions

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.

Which one of the following statements is correct with regard to the submission evaluation step in the underwriting process?

Government records that provide underwriting information include motor vehicle reports, criminal records, and civil court records.

A physical inspection is a method used to

Identify loss exposures

The first step in the risk management process is to

Identify loss exposures.

Helen, the risk manager of a supermarket, has decided that the store needs a sprinkler system. She needs to check on the local water supply and building permits and decide what is necessary to comply with local ordinances as well as decide how much the supermarket can afford to spend on the system. Helen is making these decisions as part of

Implementing the selected risk management technique.

Which one of the following describes a benefit to businesses of making insurance part of an overall risk management program instead of relying solely on insurance?

Improved access to affordable insurance

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

Includes peace of mind.

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

Increase record keeping requirements

Sound risk management benefits society in each of the following ways, EXCEPT:

Increasing opportunity costs

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.

Which one of the following statements is correct regarding the benefits provided by insurance?

Insurance helps reduce the financial burden to society by compensating accident victims.

A goal of the claims function is to support the profit goal of the

Insurer

How does a flex rating law work?

Insurers may adjust rates within a range without prior approval.

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

Insurers may use independent adjusters for specific types of losses, for example, aircraft accidents, in which specialized expertise is required to settle the claim.

Which one of the following statements is correct?

Insurers' investment income helps keep premiums at a reasonable level.

Most of the income an insurer receives is either from underwriting or

Investments.

The last step in the risk management process, monitoring results and revising the risk management program,

Is a return to the first step and begins the risk management process once again.

Mira raised chickens in a coop that she constructed in her backyard. Due to her careless smoking, the coop was destroyed by fire. She submitted a claim to her homeowners insurer, which assigned an adjuster. This is the adjuster's first claim involving a building detached from a dwelling. Assuming the adjuster has established Mira's insurable interest in the property, which one of the following should the adjuster be asking next?

Is the damaged property covered by the policy?

Grocers' Warehouse is a newly created business that will open next month. It will include a retail operation as well as 500,000 square feet of warehouse space with loading docks. Which one of the following methods of identifying loss exposures would be least applicable in this situation?

Loss histories

Which one of the following characteristics regarding kidnap and ransom are important for an international organization to consider in assessing personnel loss exposures?

Low frequency but high severity

Which one of the following insurance customers might be compelled to meet its liability insurance needs through the excess and surplus lines market?

Major airline requiring multi-billion dollar limits

Rachel is an insurance broker. She has received a sales referral from another broker concerning an airport management company, Airport Ltd. The company plans to operate a large, national airport in a major city and has requested a quote for airport liability coverage. Rachel will probably recommend the use of which one of the following types of policy forms?

Manuscript

Which one of the following statements is correct?

Many producers offer consulting services for which they are paid on a fee basis

In insurance terminology, equipment such as tractors, bulldozers, road graders, front-end loaders, and forklifts designed primarily for off-road use are considered to be

Mobile equipment

Risk manager Maria Sanchez is evaluating her employer's current fleet of vehicles to ensure they are roadworthy and determine if any replacements are needed. Maria's activities are part of which one of the following steps in the risk management process?

Monitoring results and revising the risk management program

A type of insurer that has a board of directors elected by policyholders and that may pay dividends to policyholders as a return of a portion of premiums paid is a

Mutual insurer.

The difference between an organization's total revenues and its total expenses is

Net income.

Insurance is not the only risk management transfer technique. When circumstances are appropriate, transfer can be accomplished through

Noninsurance transfer techniques.

Kid Smart manufacturing makes a line of childrens toys. The possibility that a child may be injured because of a defect in a Kid Smart toy is what type of liability loss exposure for this toy manufacturer?

Products

Pravalt Construction Company pays less than its competitors for workers compensation insurance because Pravalt has had substantially fewer employee injuries than other firms in its class. This illustrates which one of the following benefits of insurance?

Promote risk control

Traditionally, the risk management professional's role has been associated with loss exposures related to

Pure risk.

Most states regulate the excess and surplus lines market by

Requiring that licensed surplus lines brokers transact business with the unlicensed insurers.

The date in a claims-made policy on or after injury or damage must occur in order to be covered is known as the

Retroactive date

The capital of a stock insurance company comes primarily from

Sale of company stock.

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?

Sales

The declarations page of a Personal Auto Policy (PAP)

Shows the name of the insured and the insured's mailing address.

One of the costs of insurance is said to be opportunity costs. This means that if capital and labor were not being used in the insurance business, they could be used elsewhere and making other productive contributions to

Society

Insurers are required to submit annual financial statements to

State insurance departments.

If a producer engages in unfair trade practices, the state can

Suspend or revoke the producer's license.

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

Life insurance that provides coverage for a specified period with no cash value is called

Term life insurance.

Paying close attention to hazards is an important consideration when reviewing an underwriting submission. An underwriter should recognize a moral hazard, which is a condition

That increases the likelihood that a person will intentionally cause or exaggerate a loss.

One of the main distinguishing features between independent agency systems and other marketing systems is the ownership of

The agency expiration list.

What is the most common reason premium audits are conducted?

The amount of the loss exposure is unknown at the start of the policy period.

Which one of the following is true regarding the delegation of underwriting authority by underwriting management?

The extent of underwriting authority granted to an agent generally depends on premium volume and loss experience.

Schedule rating plans allow insurers to reflect which one of the following in the final premium charged on a risk?

The factors not reflected in the class rates

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?

The insurer had an underwriting loss.

Retention is often used in combination with insurance as a way of treating loss exposures. One of the major downsides of individuals using retention alone is

The potential for financial ruin.

When property is used to secure a loan, which of the following is exposed to loss?

The property owner and the secured lender

For insurance purposes, money and securities are separate from other types of contents because

They are highly susceptible to loss by theft

An insurer's financial statement shows a loss reserve and an unearned premium reserve. These reserves are part of the insurer's

Total liabilities.

All for-profit organizations are exposed to net income losses. Net income is defined as

Total revenue minus total expenses.

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.

For an insurer to be considered solvent, states require it to have financial reserves

Well in excess of its ordinary expenses.

A wrongful act, other than a crime or breach of contract, committed by one party against another is a

tort