Retention Questions (Chapter 1)

11. Which principle of insurance restores the insured to the same economic condition that existed before the loss? a. Indemnity b. Insurability c. Adhesion d. Underwriting

a. Indemnity * An insured should not profit from an insurance loss.

5. Which of the following individuals represents the insurance company when selling an insurance policy? a. Producer b. Broker c. Adjuster d. Insurer

a. Producer * The producer or agent is licensed to represent the insurance company when transacting insurance business.

14. Each of the following is a factor considered by an underwriter, except: a. Hazards b. Marital status c. Claims history d. Outside factors

b. Marital status * Marital status is not an underwriting factor, but the nature of the risk is also considered.

9. Dishonest tendencies that increase the probability of loss are what types of hazard? a. Physical b. Moral c. Emotional d. Legal

b. Moral * A hazard increases the chance of loss and the three types are moral, morale, which is indifference or carelessness, and physical, which is a physical condition.

15. Which of the following calculations equals a company's loss ratio? a. All losses + expenses b. Paid losses + loss reserves / total earned premium c. Losses + total operating expenses / total written premium d. Paid losses + paid expenses / total earned premium

b. Paid losses + loss reserves / total earned premium * The loss ratio is calculated by paid losses and reserves divided by the total earned premium and under to determine the expected losses for a line of business.

2. If an insurance company wants to transfer all or part of the risk it has accepted, it would buy which of the following types of insurance? a. Residual b. Reinsurance c. Reciprocal d. Insurer

b. Reinsurance * An insurance company that accepts all the risk for an insurance company sells reinsurance and is called a reinsurance company.

13. A warranty is defined as which of the following? a. Intentional misrepresentation on the application b. Statement in the application that is guaranteed to be true c. A false statement in the application d. What a reasonable and prudent buyer can expect

b. Statement in the application that is guaranteed to be true * A warranty is a statement guaranteed true in all respects and if later discovered to be false, the contract may be voided.

3. Which of the following is an insurance company that is organized under the laws of another state within the United States? a. Domestic b. Alien c. Foreign d. Authorized

c. Foreign * A foreign insurer is not organized under the laws of the state in which it is writing insurance, whereas a domestic insurer is organized under the laws of the state in which it is writing insurance.

6. Which of the following types of authority does the public assume an agent has when quoting insurance? a. Authorized b. Express c. Implied d. Apparent

c. Implied * Implied authority is that which the public assumes the agent has if it is not written into the agent's agency contract.

10. Each of the following must be included in an insurable risk, except: a. Calculable chance of loss b. Excluded catastrophic perils c. Large group with dissimilar members d. Accidental losses

c. Large group with dissimilar members * An insurable risk must also include a large number of groups with the same perils, affordable premiums, and the loss must be measurable.

7. A producer has each of the following responsibilities to the Insurer, except: a. A fiduciary duty b. Forwarding premiums to the insurer on a timely basis c. Reporting material facts that may affect underwriting d. A duty to recommend only high rate policies

d. A duty to recommend only high rate policies * The producer is responsible to the insurance applicant to promptly forward premiums to the insurer, recommend the best protection, gain knowledge of the applicant's insurance needs and current insurance coverage, and serve the applicant's best interests.

8. A federal regulation called the __________ protects consumer privacy. a. Consolidated Omnibus Budget Reconciliation Act b. Fraudulent Insurance Act c. Privacy Protection Act d. Fair Credit Reporting Act

d. Fair Credit Reporting Act * The Fair Credit Reporting Act protects consumer privacy by ensuring that data collected by companies on a person is confidential, accurate, relevant, and used for a proper purpose.

12. Each of the following is an element of a legal contract, except: a. Consideration b. Legal Purpose c. Agreement d. Indemnity

d. Indemnity * The fourth element of a legal contract is a competent party or someone that has the legal capacity to enter into a legal contract.

1. A __________ insurance company is owned by its policy holders. a. Stock b. Reciprocal c. Fraternal Benefits Society d. Mutual

d. Mutual * Its members also called policyholders, own a mutual insurance company.

4. Which insurance company department accepts the insurance risk? a. Executive b. Actuarial c. Claims d. Underwriting

d. Underwriting * The underwriting Department is responsible for evaluating the acceptability of a risk and, once accepted, determines the actual rate to be charged.