Ch 8

All of the following are arguments in favor of using an applicant's credit record in personal lines underwriting EXCEPT

Use of credit data in underwriting and rating eliminates price discrimination against minority groups when they purchase insurance from insurers.

An insurance company incorporated in another state has been licensed to operate in your state. In your state, the insurer would be considered a(n)

foreign insurer

The regulation of insurers in areas that affect consumers, which include claims handling, underwriting, complaints, advertising, sales practices, and other trade practices is called

market conduct regulation

Which of the following is an advantage of federal regulation of insurance over state regulation of insurance?

more effective treatment of systemic risk

The major argument in favor of an optional federal charter for insurers is that

national insurers are at a competitive disadvantage under the present system.

Which of the following statements about premium taxes is (are) true? I. They are levied by the federal government as a result of the McCarran-Ferguson Act. II. Their primary purpose is to provide funds for insurance regulation.

neither I nor II

Which of the following statements is (are) true regarding the quality of insurance regulation? I. The quality of insurance regulation is uniform from state to state. II. All evidence suggests federal regulation of insurance would improve the quality of regulation.

neither I nor II

In which of the following did the Court decide that insurance was interstate commerce when conducted across state lines, and therefore was subject to federal regulation?

South-Eastern Underwriters Association case

Mutual Property Insurance Company has a surplus of $2 million. According to a conservative rule, how much new net premiums can Mutual Property Insurance Company safely

$2 million

XYZ Mutual Insurance Company has total assets of $10 million. The policyholders' surplus is $2 million. What are XYZ Mutual's total liabilities?

$8.0 million

A life insurance company based in Canada was licensed to operate in Massachusetts. When operating in Massachusetts, the Canadian insurer would be considered a(n)

alien insurer

To correct abuses in the financial services industry, Congress passed an Act in 2010 that included numerous provisions to reform the financial services industry. This Act was the

Dodd-Frank Act.

The Dodd-Frank Act created a federal body with some limited regulatory authority. For example, the organization can represent the federal government in international negotiations regarding insurance and it can preempt state law where it conflicts with negotiated international agreements. This body is called the

Federal Office of Insurance

An insurance company chartered in another country has been licensed to operate in your state. In your state, the insurer would be considered a(n)

alien insurer

Which of the following statements about state insurance guaranty funds is (are) true? I. They limit the amount that policyholders can collect if an insurer becomes insolvent. II. They are usually funded by general revenues of the states.

I only

Which of the following statements about the licensing of insurance companies is (are) true? I. A new capital stock insurer must meet minimum capital and surplus requirements, which vary by state and line of insurance. II. The licensing requirements for insurance companies are less stringent than those imposed on most other types of firms.

I only

Which of the following statements about the regulation of insurance company investments is (are) true? I. The purpose of regulating insurance company investments is to prevent insurers from making unsound investments which could threaten their solvency. II. Life insurers can invest an unlimited amount of their assets in common stocks.

I only

Which of the following statements concerning the proposed optional federal charter for life insurers is (are) true? I. Large insurers operating in many states would more likely prefer a state charter while smaller, regional, insurers would more likely choose a federal charter. II. Proponents of the federal charter argue that it would speed the development and approval of new products.

II only

All of the following statements about the methods of regulating insurance are true EXCEPT

Insurers are totally exempt from regulation by federal agencies and laws.

The right of the states to regulate the business of insurance was first established by

Paul v. Virginia.

ABC Insurance Company would like to purchase a bank. For many years, ABC was not permitted under federal law to enter into banking operations. Which of the following legislative acts eliminated the prohibition that prevented banks, insurers, and investment firms from entering into one another's markets?

The Financial Modernization Act (Gramm-Leach-Bliley Act)

All of the following statements about insurance regulation are true EXCEPT

The National Association of Insurance Commissioners (NAIC) can force states to adopt the model laws that it drafts.

The policyholders' surplus of an insurer is defined as the difference between its

assets and its liabilities.

Reasons for regulation of insurance include which of the following? I. Maintaining insurer solvency II. Ensuring reasonable rates

both I and II

The major reasons for insurer insolvency include which of the following? I. Inadequate pricing and loss reserves II. Rapid growth and inadequate surplus

both I and II

Which of the following statements about the regulation of life insurance companies is (are) true? I. The percentage of assets a life insurance company may invest in a specific type of asset (e.g., stocks or bonds) is generally limited by law. II. The purpose of limiting the accumulation of surplus is to prevent an insurer from increasing its surplus at the expense of policyowner dividends.

both I and II

Which of the following statements about the use of risk-based capital requirements is (are) true? I. Insurers must have a certain amount of capital depending on the riskiness of their investments and insurance operations. II. Insurers may be required to take certain actions depending on how much capital they have relative to their risk-based capital requirements.

both I and II

A systemic risk is a risk that

can be the cause of the collapse of an entire system

The number of title insurance companies operating in State Z is relatively low. Recently, the largest of these companies (50 percent market share) acquired the second largest company (30 percent market share). Immediately after the acquisition, the insurer raised premiums by 75 percent. This scenario demonstrates which of the following rationales for the regulation of insurance?

ensure reasonable rates

One method of ensuring the solvency of insurers is a periodic review, every three to five years, of insurers that operate on a multistate basis. This review is coordinated by the NAIC. This review is called a(n)

field examination.

Under what type of rate regulation are insurers required to obtain approval of rates before using them if the rate change exceeds a specified predetermined range?

flex-rating law

Fly-By-Night Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If Fly-By-Night becomes insolvent, which of the following will help pay the unpaid claims of the insurer?

guaranty fund

A score derived from an individual's credit history and other factors that is used by many auto and homeowners insurers for underwriting and rating purposes is called a(n)

insurance score.

During the financial crisis, the U.S. federal government stepped-in to prevent the financial failure of the world's largest insurer, the American International Group (AIG). AIG's near insolvency was caused by

losses on derivative loan guarantees issued by the company.

Under one type of rate regulation, insurers do not have to register their rates with state regulatory authorities. However, insurers may be required to furnish rate schedules and supporting data to state officials. A fundamental assumption underlying this type of rating law is that market forces will determine the price and availability of insurance, rather than discretionary acts of regulators. This type of rate regulation is called

no filing required.

Which of the following is considered a nonadmitted asset for an insurer?

office furniture

A shortcoming of state regulation of insurance found by Congressional committees and the General Accounting Office is that state regulation

provides inadequate consumer protection

Which of the following is an advantage of state regulation of insurance over federal regulation of insurance?

quicker response to local insurance problems

Grace is a life insurance agent. She is attempting to sell a large life insurance policy, but the prospective purchaser is having second thoughts. To persuade the prospective purchaser, Grace said, "I will earn a $1,000 commission if you buy this policy. I'll give you $500 of my commission if you buy the policy." In most states, what illegal sales practice will Grace be guilty of if she splits her commission with the purchaser?

rebating

Which of the following is a principal method of ensuring the solvency of insurers

requiring submission of annual financial statements to state regulators

State X's premium tax rate is 2 percent. State Y's premium tax rate is 3 percent. State X insurers are required to pay the 3 percent rate on business written in State Y. State X requires insurers from State Y to pay a 3 percent premium tax on business written in State X, even though the premium tax rate is only 2 percent in State X. This practice is known as a

retaliatory tax law

Which of the following is a method used to help ensure the solvency of insurers?

risk-based capital standards

One provision of the Dodd-Frank Act was creation of the Financial Stability Oversight Council. This council is charged with identifying nonbank financial companies that could increase the risk of collapse of the entire financial system. This risk is called

systemic risk

The National Association of Insurance Commissioners (NAIC) administers an "early warning system" to help ensure insurance company solvency. This system uses data provided in the annual statement to identify companies that may pose a solvency risk. This early warning system is called

the Insurance Regulatory Information System (IRIS).

The basis for current state regulation of insurance is

the McCarran-Ferguson Act.

Which of the following is authority given to the Federal Insurance Office created by the Dodd-Frank Act?

to represent the federal government in international discussions of insurance regulation

By misrepresenting the true facts, Gretchen was able to convince a client to drop a life insurance policy with another company and to purchase a policy from the company that Gretchen represents. Gretchen has engaged in an illegal sales practice called

twisting

Under one type of rating law, insurers are free to change rates and to use modified rates immediately. However, the new rate must be filed with regulators within a specified period, such as 60 days after the modified rate is employed. This type of rating law is called

use-and-file