AINS 101

Sports, Inc. is looking to obtain a commercial property policy on its building for $400,000. If their insurer decides to charge them a rate of $0.50 per $100 of building insurance, what premium must Sports, Inc. pay?

$2,000

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

$3,200

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

The financial report for Hometown Insurer contains the following information: Earned premiums$4,000,000Written premiums$5,000,000Net investment income$1,000,000Incurred losses$3,000,000Incurred underwriting expenses$2,000,000 What is Hometown Insurer's loss ratio?

75%

An insurer has decided to take an extremely narrow interpretation of a property insurance policy provision to limit the number of loss payments it will need to make. It realizes that its interpretation is probably wrong, but it knows that individual insured's loss amounts will be small, such that most insureds will not take the trouble to file lawsuits against it. The insurer may be violating the principle that an insurance policy is

A contract of utmost good faith

Alicia works for the Drewman Agency, Sandi at insurer Greenway Insurance, and Rosa at Grossman Brokers, all as customer service representatives. Which one of the following is true regarding their work?

Alicia can process policy endorsements and explain coverage to her customers

Riley Turner is performing a comprehensive evaluation of Hardwick Enterprises to make sure its insurance and risk management efforts are serving the organization appropriately. Which one of the following will be true in regard to this effort?

Besides risk management goals being attainable, they should also pose a challenge.

Which one of the following is a temporary agreement providing insurance coverage until the formal policy is issued?

Binder

Which one of the following is the amount of business an insurer can write based on regulatory guidelines, usually a comparsion of the insurer's written premiums to the policyholders' surplus?

Capacity

Sota's Superstore has recently become an insured of Keithly Insurance Company. Kaito, Keithly's premium auditor, is being sent to conduct an advance audit. Which one of the following tasks will Kaito do to assist underwriting?

Classify the various exposures

The insurance agent suggested that Sally's Snack Shop buy a policy that combines property, crime, and liability coverages into one policy. This is referred to as a(n)

Commercial package policy (CPP)

Waycroft Industries is working with their insurance producer Graydon Murphy. Graydon and the risk managers at Waycroft have already completed the first step of the risk consultation process. The second step of the process is

Comparing an organization's results with established performance standards

Margaret was severely injured and scarred due to a recent accident. Which one of the following is an example of general damages Margaret received?

Compensation for disfigurement

Understanding the steps in the claims handling process is important to new claims reps. Which one of the following steps generally comes after investigating and documenting the claim and before concluding the claim?

Determining cause of loss and loss amount

Jessie is a new customer service representative (CSR) at the Winfield Agency. Jessie usually engages in all the following activities, EXCEPT:

Determining coverage quotes

The processing of almost every claim involves which one of the following activities?

Determining the amount of damages or extent of loss

When preprinted forms do not provide the terms of coverage needed by a particular insured or small group of insureds, the insurer may

Draft a manuscript form to meet the customer's needs

Winston is skimming through his new personal auto policy that just arrived. Winston discovers that every insurance policy is represented through a collection of policy provisions. He discovers all of the following policy provisions, EXCEPT:

Exceptions

The difference between an independent agency and an exclusive agency is that an

Exclusive agency is contracted to sell insurance for one insurer or group of insurers

James works very closely with producers on a daily basis. In addition to evaluating the applicants that the producers submit, James is involved in presenting policy quotations, processing policy endorsements, helping to explain coverages, and making coverage recommendations. James works as a

Field Underwriter

Brian works in the Underwriting department for DGH Insurance. In addition to carefully selecting insureds, he works with producers and premium auditors to ensure accurate classification and pricing. Brian is a

Field underwriter

Insurance deals primarily with loss exposures that are fortuitous. Which one of the following statements best characterizes fortuitous losses?

Fortuitous losses are beyond the insured's control

Damages for disfigurement are a form of

General damages

Damages for pain and suffering are a form of

General damages

Which two of the four quadrants of risk are classified as pure risks?

Hazard risks and operational risks

James West is a claims rep with Hatters Insurance. As he learns how to handle a claim from start to finish, which one of the following best describes the correct order for him to follow during this process?

Identifying the policy, calculating a loss reserve, determining the cause of loss, preparing a loss statement

Which one of the following best explains why producers should be alert to changes in clients' loss exposures?

Implemented risk management techniques may prove to be ineffective or become obsolete

Expense Ratio =

Incurred underwriting expenses ÷ Written premiums

Destructive competition in the insurance industry could result in

Insurance shortages

An insurance policy is considered a contract of adhesion when it is drafted by the

Insurer

Why are insurance regulators concerned about the effects of large catastrophes?

Insurers may become insolvent

The big differences between property and liability policies are found in their

Insuring Agreements

Oscar's custom-built vehicle looks like a sausage sandwich on wheels. He plans to drive it to special events at schools around the country where it will serve as a mobile billboard to promote his product. Oscar is surprised to learn that insurers are reluctant to insure his vehicle because it fails to meet one of the ideal characteristics of an insurable risk. Which characteristic is Oscar's vehicle least likely to meet?

Large number of similar exposure units

Which one of these is most directly associated with a satisfied customer?

Leads and referrals that can be used to generate new business

The Insurance Services Office, Inc. (ISO) commercial package policy is an example of a

Modular policy

Joe and Helene are married with two teenage children and two dogs. They own three cars and a large house with a swimming pool in the back yard. Their insurance agent advised them that the pool, teenage drivers, and dogs put them at risk for large liability losses. Which one of the following personal property-casualty insurance policies would provide them with protection for their high potential for large liability losses?

Personal umbrella

All of the following are categories of liabilities found on an insurer's balance sheet, EXCEPT:

Policyholders' surplus

Which one of the following accurately describes activities related to customer service representatives?

Profitability in the insurance business is directly linked to customer retention

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 activity

Earned premiums are shown on an insurer's income statement because they are

Revenues

Tony now works at the corporate level for Newtown Insurance. He is considered a staff underwriter. Which one of the following is primarily a responsibility of staff underwriters?

Revise underwriting guidelines

Which one of the following represents uncertainty about outcomes that can be negative or positive?

Risk

Donna is an insurance producer. She makes an appointment with potential policyholder Sandie to review her loss exposures. She asks Sandie to complete a questionnaire to assist her in this effort. Donna is conducting a

Risk management review

What term refers to the ability of an insurer to meet its obligations as they become due?

Solvency

An insurer that was formed for the purpose of earning a profit for its stockholders is a

Stock insurer

A stock insurer differs from a reciprocal insurance exchange in which one of the following ways?

Stockholders own a stock insurer. Members own a reciprocal insurance exchange.

Which one of the following most accurately describes one of the policy provisions in an insurance policy?

The exclusions are in place to reduce duplicate coverage

Adhering to the characteristics of an ideally insurable loss exposure in selling insurance help assure that

The insurer is able to charge a premium that the insured can afford to pay

The key to the direct writer marketing system is that

The insurer is using its own employees as producers

Leadon Transportation is using the expertise of its producer Carmen to help the organization understand how to correct substandard performance as well as evaluate exceeded standards. One measurement she will use is the cost of risk which is best described as

The total cost of all aspects of the organization that relate to managing risk

For a loss exposure to be ideally insurable it must be definite in

Time, cause, and location.

Tony is a producer working with several different insurers. Which one of the following most accurately describes Tony's activities for reaching and serving customers?

Tony will generally need to spend less time insuring a family's activities than a business' services and liabilities

Interinsurance

another name for a reciprocal

policy provisions

conditions, definitions, and declarations. The other two main provisions in a policy are the insuring agreement, and the exclusions.

Moral hazards

include questionable business practices or a failing business.

Loss Ratio

incurred losses divided by its earned premiums

The major categories of liabilities found on an insurer's financial statements are

loss and loss expense reserves, unearned premium reserves, and other liabilities.

Mutual insurer

owned by its policyholders and formed as a corporation for the purpose of providing insurance to them. To share profits, mutual insurers may pay dividends to policyholders as a return of a portion of premiums paid.

Mutual insurance

provide insurance for their own policyholders

Reciprocal insurance

provide insurance for their subscribers

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.

Field Underwriter

sometimes referred to as line underwriters, perform duties that include: selecting insureds, presenting policy quotations, processing policy endorsements, helping to explain coverages and making coverage recommendations.

Special damages

specific, identifiable expenses

direct response distribution channel

using social media, email blasts, website ads, and direct mail would be the best

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

$ 10,000

Because the insurance company usually determines policy wording and the insured has little choice but to "take it or leave it," an insurance contract is a

Contract of adhesion

Which one of the following statements is correct regarding the interaction between risk control and other insurer functions?

A risk control evaluation can make the difference between the applicant's being rejected or accepted by the underwriter.

Clare is a commercial lines underwriter. She always tries to follow underwriting guidelines, effectively evaluate loss exposures, and charge adequate premiums. By doing these things, Clare's goal is to ensure

Adequate policyholders' surplus

Insuring individuals with a high probability of loss at a cost lower than the insurer would normally charge for that risk because it wasn't aware of the actual risk involved is known as

Adverse selection

Allian Insurance Company is a growing regional insurer selling policies in three states, specializing in personal auto and homeowners policies. Which one of the following is most likely true regarding Allian and the policies it sells?

Allian issues more preprinted policies than manuscript forms.

As it continues to grow, Anchoy Insurance is examining other distribution channels to more effectively market its products. Through this experience, which of one the following will Anchoy most likely learn?

Anchoy can use group marketing to target large numbers of recent local college graduates

Earned premiums are the portion of written premiums that

Apply to the part of the policy period that has already occurred.

In an effort to reduce expenses, increase profitability, and reduce human errors; ABC Insurance Company decided to automate most of its personal lines underwriting function. The company now uses standardized application forms that are submitted electronically to one of the company's regional offices. At each regional office, a computer with a scanner reads the applications. The computer has been programmed with acceptable answers to the questions. If the answers on the application are all acceptable, the policy is automatically issued. Rejected applications are automatically forwarded to a human underwriter who reviews them. The use of this technology has reduced the company's expense ratio by two and a half percent, and reduced the time it takes to issue a policy. ABC Insurance Company's use of computers to evaluate applications electronically is an application of

Artificial intelligence

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?

Balance sheet

Because insurance contracts impose an obligation for ethical practices and behaviors on the parties while dealing with one another, an insurance contract is called a

Contract of utmost good faith.

Erin has recently graduated from college and relocated to Chicago. She has purchased a car and rented an apartment and now needs to purchase insurance. She is comfortable buying from social media recommendations and recently was impressed with an insurer sending her coverage details online with a minimum of forms and salesperson interactions. Which one of the following is likely the best distribution channel to meet Erin's needs?

Direct response

Bill is an insurance producer for and employed by ABC Insurance Company (ABC). He represents only ABC when marketing insurance products, and uses an administrative staff also employed by ABC. Bill is a producer in the

Direct writer marketing system

One of the reasons for insurance regulation is to prevent destructive competition. In which one of the following scenarios would destructive competition be exhibited?

East Insurance comes up with a new rate structure allowing "preferred customers" discounted policies when they continually renew year after year; East eventually loses needed revenue but is rewarded by its competitors leaving the market

Jennie recently purchased a personal auto policy from Westcox Insurers. Three weeks later, Jennie reported her car was stolen from her driveway during the middle of the day. Upon further investigation, claims representative Harry finds out the home address he has on file for Jennie does not match the location where the theft occurred. In light of this scenario, which one of the following would be particularly helpful for Harry to pursue concerning Jenny's claim?

Harry can verify Jennie's address and other possible helpful information by reviewing her policy which has her original application information attached.

Carlos is new to the insurance business and is learning about insurance regulation and what he, now working with Grady Insurance, will need to be aware of regarding the subject of compliance. Which one of the following will Carlos find is accurate as he better understands why insurance is regulated?

Insurance regulation protects customers by guaranteeing insurance is available and accessible to everyone who needs it

Sean was driving and caused an injury to a pedestrian named Wilbur. In the context of the resulting claim made to Sean's insurance company and assigned to Andrea in the claims department, Sean and Wilbur and Andrea are, respectively,

Insured and claimant and claims representative

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

Investments

Spencer Insurance Associates is an independent agency selling primarily homeowners policies. This agency

Is free to work with as many different insurers as it wants.

Which one of the following is the correct formula for calculating an insurer's combined ratio?

Loss ratio + expense ratio

Windsor Insurance has sold more personal auto policies in the recent quarter than ever before in its history, thanks to new commission incentives for ambitious staff members. Even though Windsor is collecting more money upfront, it is actually making less per policy after remitting the higher commissions. Some claim payments are also now being delayed, resulting in many complaints against the company. Which one of the following objectives of insurance regulation is not being realized through this scenario?

Maintaining insurer solvency

Stephanie works for Waynesgood Insurance. She appreciates the help she receives from Clem in the company's claims department who provides her with recent statistics and comments on Waynesgood's customer satisfaction levels. Stephanie works in which one of the following departments?

Marketing

Which one of the following lists provides the optimum order of responsibilities that a producer may engage with any customer on a continual basis?

Meeting a prospective customer, doing a needs and activities analysis, preparing a coverage proposal, closing the sale

As an experienced underwriter, Rick has learned to make every effort to avoid a mistake that can produce insufficient premium to cover losses, or pricing that isn't competitive. Which one of the following underwriting mistakes can often cause these issues?

Misclassifying exposures

Michael is a commercial lines underwriter. He received a risk control report on a new business that he had recently written with Laura, one of his producers. After reviewing the report, Michael contacted Laura to let her know that they needed to process a policy change request adding a new classification and some exposures to the general liability policy. These activities are occurring during which one of the following steps of the underwriting process?

Monitor the underwriting decision

Joel is the underwriter for Stanton Industries. He received a notice from the premium auditor on the account. After a recent visit to the insured's location, the auditor wanted to make Joel aware of a decline in the business and some questionable business practices. Which one of the following types of hazards is the auditor identifying?

Moral hazards

Joe is the owner of JG Auto Repair. He is always frustrated with the amount of commercial insurance premium he pays every year, even though he has not had a single claim in over 10 years. Joe is looking to partner with an insurance company that will share its profits and maybe return a portion of his premium if the results are good. Which one of the following types of insurer is the right fit for Joe?

Mutual insurer

The two main sectors of the insurance industry are

Property-casualty insurance and life-health insurance

Willis, a claims representative, is collaborating with his colleague Suzanna from his insurance company's risk control department. How will Suzanna help Willis?

Provide laboratory analysis when Willis is investigating a claim

Risk control can assist the claims department by

Providing laboratory analyses.

Rachel is a new employee of Westley Insurance, and has been asked to review some existing policies to become familiar with the types of policies she will be working with. Which one of the following will Rachel find is true as she conducts her review?

Rachel finds the policy begins with a coverage overview and then goes into more coverage details.

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 one of the following types of contractual transferring agreement to meet its needs?

Reinsurance

If an insured wants to receive "new for old" in the event of a property loss, he or she would purchase

Replacement cost

Actual cash value (ACV) is

Replacement cost minus depreciation

Many auto manufacturers have automated a portion of their assembly lines by introducing a smart product. The smart product performs repetitive tasks, such as making the same weld on each vehicle frame as it passes the smart product. These smart products, which can be fixed or mobile, reduce repetitive motion injuries. They can also be used to perform dangerous tasks and for heavy-lifting jobs. These smart products, enabled by artificial intelligence, are called

Robots

After Marvin's car was stolen, and he was reimbursed for the loss by Greatson Insurance, the police found and returned the vehicle, which was dented and spray-painted, but still had parts that could be usable. Greatson's rights to recover and sell or otherwise dispose of insured property on which it has paid a total loss are called

Salvage rights

Work on a new claim begins for claim representative Anita upon receipt of a claim notice. Anita gathers initial information and verifies coverage. From the list of activities below, the next step Anita would take in the process is

Set a loss reserve

Can result in loss or gain

Speculative Risk

Jimmy decided to buy a house in his neighborhood that had been foreclosed on by the bank that held the mortgage. He is hoping to do some renovation and repair work on the house, and then sell it for a quick profit. Which one of the following types of risk is this for Jimmy?

Speculative risk

At Greenfield Insurance Company, Bernadette and Rachel are corporate underwriters, and Tomas and Jose are field underwriters. All of the following are underwriting activities typically performed by corporate (or staff) underwriters like Bernadette and Rachel, EXCEPT:

Support producers and insureds

The size of an employer's loss exposure for workers compensation insurance is based on

The amount of its payroll

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

Total liabilities

When the Smiths purchased their first home, they were required to purchase a homeowners insurance policy in order to get a mortgage. Because they did not have a lot of extra money in their budget, they wanted to buy as little insurance coverage as possible. The Smiths' insurance agent advised them that if they purchase an insurance policy that adequately covers damage to their home and personal property, they only have to budget for the insurance premium, rather than the full cost of rebuilding the house and replacing its contents. Which one of the following key components of insurance is the insurance agent explaining to the Smiths?

Transfer

Martina, a premium auditor for Cintriell Insurance Company is conducting a premium audit for Carolina's Cookies. Carolina mentioned to Martina that she is opening a coffee shop at another location. By sharing this information, Martina would provide a contribution to which one of the following insurer functions?

Underwriting

All of the following are sources of underwriting information to evaluate an insurance submission, EXCEPT:

Underwriting authority reports

Maria is a new producer who wears many hats when forming relationships and then serving her established customers. In this capacity, which one of the following scenarios most accurately describes her ongoing work wearing the hat of "claims handler"?

Veronica directly contacts Maria for guidance on how to report a stolen car, Maria provides that, and claims rep Sean takes over after an introduction from Maria.

As a single mother on a very tight budget, Ciara is tempted to skimp on her insurance. However, her friend Mehmet tells her not to skimp on insurance, because it will help manage her cash flows. Which one of the following examples best illustrates Mehmet's point?

When her car's windshield breaks, Ciara has to pay only $100 of the $600 cost of replacing it.

Shelton Industries experienced a fire in its manufacturing plant. Several employees suffered burns and smoke inhalation injuries as they tried to escape the building. Which one of Shelton Industries' commercial property-casualty policies would pay for the employees' injuries and illnesses?

Workers compensation insurance