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Exclusions are found in insurance policies for all of the following reasons EXCEPT to add coverage for certain perils moral hazard problems would develop without certain exclusions. coverage may be provided under another insurance contract. some perils are not insurable.

to add coverage for certain perils

All of the following are objectives in claim settlement EXCEPT to delay payment to increase insurer profitability. to pay claims fairly and promptly. to verify that the loss is covered by insurance. to provide assistance to the insured.

to delay payment to increase insurer profitability

Deductibles are used for all of the following reasons EXCEPT to reduce premiums. to reduce loss control efforts. to reduce moral and attitudinal hazard. to eliminate small claims.

to reduce loss control efforts

All of the following are reasons for an insurance company to use reinsurance EXCEPT to protect against catastrophic losses. to stabilize profits. to reduce underwriting capacity. to reduce the unearned premium reserve.

to reduce underwriting capacity

For a legally binding property insurance contract to be in force, all of the following elements are necessary EXCEPT written document. legal purpose. competent parties. exchange of consideration.

written document

April is employed by an insurance company. Her job is to calculate the premium that policyowners must pay for life insurance. April majored in mathematics and minored in statistics in college. April is a(n) producer. actuary. claims adjuster. underwriter.

actuary

There is a tendency for individuals who have a higher-than-average probability of loss to seek insurance at standard (average) rates. If not controlled by careful underwriting, higher-than-anticipated losses will occur. This problem is called adverse selection. reinsurance. moral hazard. class underwriting.

adverse selection

All of the following are methods used to pay retained losses EXCEPT insurance. credit line. current net income. funded reserve.

Insurance

Dale and his wife Jenny are legally separated. The couple owns a vacation cabin. Dale purchased a $25,000 property insurance policy on the cabin. Unaware that Dale had purchased this coverage, Jenny purchased a $50,000 property insurance policy on the cabin. While both policies were in force, a $12,000 covered property loss occurred. The insurers agreed to settle the claim on a pro rata basis. What is each insurer's liability? Dale's insurer pays $4,000 and Jenny's insurer pays $8,000. Dale's insurer pays $3,000 and Jenny's insurer pays $9,000. Dale's insurer pays $12,000 and Jenny's insurer pays nothing. Dale's insurer pays nothing and Jenny's insurer pays $12,000.

Dale pays 4,000 and Jenny pays 8,000

Which of the following statements about law and the insurance agent is (are) true? I. An insurer is responsible for the acts of its agents when the agents are acting within the scope of the agency agreement. II. Consumers should not assume that an agency relationship exists just because someone claims to represent an insurance company. both I and II neither I nor II I only II only

I and II

Which of the following statements is (are) true with respect to endorsements and riders? I. Endorsements and riders are used to amend provisions of insurance contracts. II. If the endorsement or rider conflicts with terms in the underlying contract, the endorsement or rider takes precedence unless it conflicts with the law. II only I only neither I nor II both I and II

I and II

Which of the following statements is (are) true with respect to the objectives of risk management? I. A pre-loss objective of risk management is the reduction of anxiety. II. A post-loss objective of risk management is the stabilization of earnings. I only both I and II II only neither I nor I

I and II

Which of the following statements regarding insurance company investments is (are) true? I. Investment income helps to reduce the premium charged for insurance. II. Life insurance companies tend to invest in longer-term investments than do property and liability insurance companies. both I and II neither I nor II II only I only

I and II

Which of the following statements about insurance companies is (are) true? I. Mutual insurance companies are owned by their policyowners. II. Stock insurance companies can issue assessable policies. I only II only both I and II neither I nor II

I only

Which of the following statements is (are) true with respect to identifying potential loss exposures? I. A physical inspection of company plants and operations can help to identify major loss exposures. II. Historical claims data can help to identify major loss exposures. neither I nor II I only both I and II II only

II and II

Which of the following statements about the independent agency system is (are) true? I. Independent agents are paid a higher commission rate on new business than on renewal business. II. Independent agents, rather than the insurers they represent, own the expiration rights to insurance business they write. II only neither I nor II both I and II I only

II only

Which of the following statements about the principle of insurable interest is (are) true? I. In life insurance, the insurable interest requirement must be met only at the time of the loss to receive life insurance proceeds after the insured has died. II. The insurable interest requirement helps to reduce the problem of moral hazard. both I and II neither I nor II II only I only

II only

Which of the following statements is (are) true about the insuring agreement? I. The insuring agreement provides a description of the property or activity to be insured. II. The insuring agreement can be written on an "open-perils" basis or on a "named-perils" basis. neither I nor II I only both I and II II only

II only

Which of the following statements regarding reinsurance is (are) true? I. Under treaty reinsurance, the primary insurer must shop for a reinsurer each time the primary company needs reinsurance. II. Reinsurance can help a primary insurer to stabilize its profitability. I only neither I nor II both I and II II only

II only

Bill borrowed Linda's car with her permission. Both Bill and Linda have automobile liability insurance with a $100,000 bodily injury liability limit. While driving Linda's car, Bill negligently caused an accident. The accident victim was awarded $80,000 in damages. How will this claim be settled, assuming that the policy written by Linda's insurer is primary and Bill's insurance coverage is excess?

Lindas insurer will pay the 80,000 claim

All of the following statements about Lloyd's of London are true EXCEPT Lloyd's of London operates as a nonadmitted insurer in most states in the United States. Members of Lloyd's of London write coverage on many diverse loss exposures. Lloyd's of London syndicates are not permitted to write reinsurance. Lloyd's of London does not write insurance; insurance is written by syndicates that are members of Lloyd's of London.

Lloyds of london syndicates are not permitted to write insurance

Claire is a salaried employee who works for LMN Insurance Company. It is Claire's job to verify that covered losses have occurred, to assist insureds who have experienced losses, and to help arrange for payments to insureds after covered losses have occurred. Claire is a(n) underwriter. insurance agent. independent adjustor. staff claims representative.

Staff claims representative

Harris Petroleum, a fuel storage and delivery business, occasionally has difficulty in obtaining affordable pollution liability insurance. Jane Elmore, Risk Manager of Harris Petroleum, decided to form an insurance subsidiary for the purpose of writing pollution liability insurance for Harris Petroleum, as well as other insurance coverages. The insurance subsidiary will be based in Bermuda for regulatory reasons. What is such a subsidiary called? a captive insurance company a risk retention group a fraternal insurer a social insurance company

captive insurance company

In which section of an insurance contract will you find provisions that qualify or place limitations on the insurer's promise to perform? insuring agreement exclusions definitions conditions

conditions

An insurance contract must be accepted in its entirety and any ambiguity in the contract is construed against the insurer. Because of these characteristics, we can describe insurance contracts as valued contracts. contracts of adhesion. aleatory contracts. bilateral contracts.

contract of adhesion

In which part of an insurance contract would you find information about the property or activity to be insured? insuring agreement declarations exclusions conditions

declarations

One marketing system for life and health insurance and property and liability insurance does not use agents or brokers. Instead, potential customers are solicited by television, radio, print ads, and other media. This marketing system is called the exclusive agency system. personal selling distribution system. the direct response system. the direct writer system.

direct response system

Hal sells property and liability insurance. He is an employee of XYZ Insurance Company and is paid a salary plus a bonus based on the amount of insurance he sells. Hal is a(n) insurance broker. direct writer. exclusive agent. independent agent.

direct writer

Disability income insurance uses a special type of deductible. No benefits are paid during the initial period of disability (e.g. two weeks, a month, five months, etc.). What is this type of deductible, which is expressed in time rather than in dollars, called? corridor deductible aggregate deductible elimination (waiting) period calendar year deductible

elimination (waiting) period

When someone reasonably relies upon a representation of fact, what legal doctrine prevents the representation of fact from being retracted if the individual who relied upon the representation of fact would be harmed? estoppel agency waiver warranty

estoppel

All of the following are property and liability insurance marketing systems EXCEPT independent agency system. exclusive agency system. direct writer system. financial institution distribution system.

financial institution distribution system

Brenda works for an insurance company that is owned by its policyowners. The company provides life and health insurance to members of a certain religious faith. The type of company that Brenda works for is called a(n) fraternal insurer. stock insurer. assessment mutual. reciprocal exchange.

fraternal insurer

The first step in the risk management process is to identify loss exposures. analyze potential losses. select the appropriate techniques for handling losses. implement and administer the program.

identify loss exposures

Tony has worked as an underwriter for ABC Insurance Company for the past 20 years. Recently, a property insurance application for a factory looked 'funny' to Tony. He suspected that the owner of the factory might be planning to intentionally cause a loss after the insurance was in force. Tony asked an outside firm to investigate the applicant and submit a written summary of the findings. This source of underwriting information is called a(n) application. agent's report. physical inspection. inspection report.

inspection report

All of the following risk treatment techniques are classified as risk control methods EXCEPT avoidance. loss prevention. insurance. separation.

insurance

Paula is involved in insurance marketing. She represents insurance purchasers rather than insurance companies. She solicits insurance applications and then attempts to place the coverage with the appropriate insurer. Paula does not have the authority to bind the insurance coverage. Paula is a(n) independent agent. insurance broker. direct writer. exclusive agent.

insurance broker

The assignment of property insurance by the seller of the property to the purchaser of the property is only valid if the insurer approves the assignment. The reason that the insurer must approve the assignment of a property insurance policy is that insurance contracts are aleatory contracts. insurance contracts are bilateral contracts. insurance contracts are contracts of utmost good faith. insurance contracts are personal contracts.

insurance contracts are personal contracts

XYZ Insurance Company provides advice to its insureds on alarm systems, sprinkler systems, fire prevention, and workplace safety. What functional area at XYZ provides this assistance? data processing underwriting loss control legal function

loss control

Some property and liability insurance companies market coverages to individuals who are members of a group under a single program of insurance at reduced premiums. Individual underwriting is used. This type of marketing system is known as a(n) independent agency system. mixed marketing system. mass merchandising system. direct writing system

mass merchandising system

When Maria applied for a life insurance policy, she answered "No" in response to the question "Have you visited a doctor for any reason during the previous 12 months?" In fact, Maria visited a doctor five weeks ago after experiencing chest pains. She was referred to a specialist who determined that Maria has severe heart disease. If Maria dies shortly after the life insurance policy is issued, on what grounds will the insurer be successful in denying the claim? concealment waiver warranty misrepresentation

misrepresentation

Rather than purchasing computers and software, ABC Company entered into a lease agreement with Computer Solutions Company (CSC). Under terms of the lease, CSC provides computers and software and is responsible for damage to the computers and software. ABC uses the lease to shift responsibility for hardware and software losses to CSC. ABC's use of the lease illustrates which method of dealing with risk? risk retention noninsurance transfer risk avoidance insurance transfer

noninsurance transfer

Risk managers must consider the range of outcomes that could occur. The worst loss that is likely to happen is called the frequency maximum loss. the severity maximum loss. the probable maximum loss. the possible maximum loss.

probable maximum loss

The sales and marketing activities of insurers are known as reinsurance. underwriting. production. claims adjusting.

production

An unincorporated mutual in which insurance is exchanged among the members with each member insuring the other members and, in turn, being insured by the other members, is called a stock insurer. health maintenance organization. reciprocal exchange. fraternal insurer.

reciprocal exchange

Tindall Company manufactures electronic components. Managers of the company are considering several diversification options. One possibility is production of prescription drugs. When Tindall Company managers learned of the potential legal liability that could result from the manufacture and sale of prescription drugs, the managers rejected the idea and decided to consider other diversification options. How did Tindall Company choose to deal with the risk of legal liability arising from the manufacture and sale of prescription drugs? risk avoidance risk retention duplication risk transfer

risk avoidance

A written document that outlines the risk management objectives of a firm, as well as company policy with respect to the treatment of loss exposures, is called a risk management specifications guide. risk management policy statement. risk management information system. manuscript policy.

risk management policy statement

Kyle purchased collision insurance on his new car. While Kyle was driving home from work, another driver failed to stop at a stop sign and hit Kyle's car. Kyle phoned his insurance agent and reported the accident. The agent said, "Don't worry, Kyle, we'll pay to get your car fixed. After we pay for the damage to your car, we will try to collect from the driver who damaged your car." The process the agent described is called subrogation. waiver. estoppel. consideration.

subrogation

Property insurance contracts have all of the following distinct legal characteristics EXCEPT they are aleatory contracts. they are personal contracts. they are bilateral contracts. they are contracts of adhesion.

they are bilateral contracts