FIN 360 Final Exam
27) Millie is risk manager of JKL Company. She is considering an investment in a loss control project. The project will cost $40,000. Assuming a 10 percent discount rate, the present value of the future net cash flows that this project will generate is $60,000. What is the net present value (NPV) of this project? A) $20,000 B) $26,000 C) $60,000 D) $100,000
A) $20,000
1) Which of the following is a basic characteristic of insurance? A) pooling of losses B) avoidance of risk C) payment of intentional losses D) certainty about specific losses that will occur
A) pooling of losses
29) Under the terms of Jenny's auto insurance policy, she must pay the first $500 of any physical damage loss to her vehicle before her insurer will pay anything. What type of deductible is included in Jenny's auto insurance policy? A) calendar-year deductible B) waiting period C) straight deductible D) aggregate deductible
C) straight deductible
52) Fundamental purposes of the principle of indemnity include which of the following? I. To reduce physical hazards II. To prevent the insured from profiting from insurance A) I only B) II only C) both I and II D) neither I nor II
II only
23) All of the following are programs to insure fundamental risks EXCEPT A) federally subsidized flood insurance. B) auto physical damage insurance. C) Social Security. D) unemployment insurance.
B) auto physical damage insurance.
31) Loss control includes which of the following? I. Loss reduction II. Loss prevention A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
28) The extra expense incurred by a business to stay in operation following a fire is an example of a(n) A) fundamental risk. B) speculative risk. C) direct loss. D) indirect loss.
D) indirect loss.
35) Betty's personal property is insured for $100,000 under her Homeowners 3 policy. If she usually keeps some personal property at a mountain cabin that she owns, how much coverage for this property is available under her homeowners policy? A) $10,000 B) $20,000 C) $40,000 D) $50,000
A) $10,000
47) ABC Insurance Company's investment income ratio last year was 4.2 percent. The company's combined ratio last year was 102.6 percent. What was ABC's overall operating ratio? A) 96.8 percent B) 98.4 percent C) 103.2 percent D) 106.8 percent
B) 98.4 percent
22) An automobile that is a total loss as a result of a collision is an example of which of the following types of risk? I. Speculative risk II. Diversifiable risk A) I only B) II only C) both I and II D) neither I nor II
B) II only
24) Calculating the present value of a future amount is called A) interpolating. B) discounting. C) compounding. D) regression analysis.
B) discounting.
9) An earthquake is an example of a(n) A) moral hazard. B) peril. C) physical hazard. D) objective risk.
B) peril.
32) Cal is renting an apartment. Which homeowners policy is specially designed to insure renters? A) HO-2 B) HO-3 C) HO-4 D) HO-6
C) HO-4
22) A table showing losses that could occur and the corresponding chance that each loss could occur is called a(n) A) underwriting cycle. B) capital budget. C) loss distribution. D) risk map.
C) loss distribution.
21) A method of characterizing the relationship between two or more variables and then using the characterization to make a prediction is called A) loss analysis. B) time value of money analysis. C) regression analysis. D) capital budgeting analysis.
C) regression analysis.
39) The process of transferring risk to the capital markets through the use of financial instruments such as bonds, futures contracts, and options is known as A) consolidation of risk. B) avoidance of risk. C) securitization of risk. D) compartmentalization of risk.
C) securitization of risk.
58) Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis? A) Losses are settled without the applicable deductible. B) Losses are settled without a deduction for depreciation. C) The insurer must replace the damaged or destroyed property in lieu of a cash settlement. D) The policy is converted to a valued policy.
Losses are settled without a deduction for depreciation.
79) Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions? A) because insurance contracts are aleatory B) because insurance contracts are unilateral C) because insurance contracts are conditional D) because insurance contracts are contracts of adhesion
because insurance contracts are conditional
100) Powers specifically conferred on an agent to act on behalf of a principal are A) incidental authority. B) apparent authority. C) implied authority. D) express authority.
express authority.
49) The risk-based capital requirements for life insurers are based on a formula that considers four types of risk. One risk reflects whether the insurer will have enough surplus if claims are higher than expected. This risk is called A) asset risk. B) insurance risk. C) interest rate risk. D) business risk.
insurance risk.
94) Which distinct legal characteristic of insurance contracts states that only the insurer's promise to perform is legally enforceable? A) contracts of adhesion B) unilateral contracts C) aleatory contracts D) personal contracts
unilateral contracts
42) The purpose of the Financial Analysis Solvency Tracking (FAST) system employed by the NAIC is to A) prioritize insurance companies for additional regulatory action. B) quicken the approval of rates in prior approval states. C) speed-up the claims settlement process for insurers charged with delaying claims payments. D) quickly address market conduct complaints by consumers.
prioritize insurance companies for additional regulatory action.
88) Melody's car was damaged when another driver ran a stop sign and hit her car. Melody decided to collect from her own insurer and to let her insurer recoup the loss payment from the negligent driver who hit her. What fundamental legal principle is illustrated in this scenario? A) the principle of utmost good faith B) the principle of insurable interest C) the principle of subrogation D) the principle of reasonable expectations
the principle of subrogation
107) Kim purchased a one-year property insurance policy. She agreed to pay half the premium when she bought the coverage, and the other half six months later. If Kim fails to pay the second premium, the insurer cannot sue her for the premium because insurance contracts are A) unilateral contracts. B) contracts of adhesion. C) personal contracts. D) aleatory contracts.
unilateral contracts.
16) Which of the following statements about self-insurance is (are) true? I. It is a form of planned retention. II. State law usually prohibits its use for workers compensation. A) I only B) II only C) both I and II D) neither I nor II
A) I only
45) Which of the following statements is (are) true regarding how the Homeowners 3 policy handles the peril of collapse? I. Collapse is specifically excluded, and there are no exceptions to the exclusion. II. Collapse that is caused by a Coverage C peril is covered. A) I only B) II only C) both I and II D) neither I nor II
B) II only
2) Insurers obtain data that can be used to determine rates from A) pricing pools. B) insurance advisory organizations. C) banks. D) reciprocal exchanges.
B) insurance advisory organizations.
19) Which of the following is a characteristic of a typical mass merchandising plan? A) higher commission scales for agents and higher administrative expenses B) payment of premiums through payroll deduction C) group rather than individual underwriting D) contributions by the employer to the cost of coverage
B) payment of premiums through payroll deduction
33) The transfer of insurable risk to the capital markets through the creation of a financial instrument is called A) coefficient of risk. B) securitization of risk. C) financial risk management. D) enterprise risk management.
B) securitization of risk.
52) A special form of planned retention by which part or all of a give loss exposure is retained by the firm is called A) hedging. B) self-insurance. C) passive retention. D) noninsurance transfer.
B) self-insurance.
39) In reviewing his company's operations, a risk manager noticed that all of the company's finished goods were stored in a single warehouse. The risk manager recommended that the finished goods be divided among three warehouses to prevent all of the finished goods from being destroyed by the same peril. Dividing the finished goods among three warehouses illustrates A) duplication. B) separation. C) insurance. D) noninsurance transfer.
B) separation.
5) A risk manager is concerned with which of the following? I. Identifying potential losses II. Selecting the appropriate techniques for treating loss exposures A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
21) The unit of measurement used in property and casualty insurance pricing is called the A) unit rate. B) premium. C) exposure unit. D) experience unit.
C) exposure unit.
7) An individual's personal estimate of the chance of loss is a(n) A) objective probability. B) objective risk. C) subjective probability. D) a priori probability.
C) subjective probability.
8) Why is a large number of exposure units generally required before a pure risk is insurable? A) It prevents the insurer from losing money. B) It eliminates intentional losses. C) It minimizes moral hazard. D) It enables the insurer to predict losses more accurately.
D) It enables the insurer to predict losses more accurately.
23) All of the following statements about life insurance company investments are true EXCEPT A) Funds for these investments are derived primarily from premium income, investment earnings, and maturing investments that must be reinvested. B) Income from these investments reduces the cost of insurance. C) A primary objective in making these investments is safety of principal. D) The majority of these investments are short-term investments.
D) The majority of these investments are short-term investments.
12) Carelessness or indifference to a loss is an example of A) physical hazard. B) objective probability. C) moral hazard. D) attitudinal hazard.
D) attitudinal hazard.
51) Each accounting period, Harris Company Department Store charges a bookkeeping account for its estimated shoplifting losses. The method that Harris Company Department Store uses to fund its retained shoplifting losses is a(n) A) private insurance policy. B) captive insurer. C) credit line. D) unfunded reserve.
D) unfunded reserve.
38) Darla purchased an unendorsed Homeowners 3 policy. While the policy was in force, a fire occurred that destroyed a living room set. The living room set cost $4,000 new, but was 25 percent depreciated when the loss occurred. Replacement furniture will cost $4,400. Assuming no deductible, how much will Darla receive from her insurer? A) $3,000 B) $3,300 C) $3,400 D) $4,400
B) $3,300
31) ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies? A) $33,333 B) $35,000 C) $36,000 D) $40,000
B) $35,000
11) Which of the following statements about life insurance marketing systems is true? A) Insurance brokers are not permitted to sell life insurance. B) Some exclusive agents who market property and liability insurance also sell life insurance. C) Independent insurance agents are not permitted to market life insurance. D) Financial institutions such as banks are not permitted to market life insurance.
B) Some exclusive agents who market property and liability insurance also sell life insurance.
5) Which of the following statements is true about fraternal insurers? A) They are legally organized as stock insurers. B) They specialize in writing life and health insurance. C) They are taxed more heavily than other types of insurers because of discriminatory marketing practices. D) They account for the majority of life insurance in force in the United States.
B) They specialize in writing life and health insurance.
44) A useful measure for an organization to monitor is the total expenditures for treating loss exposures including retained losses, loss control expenses, insurance premiums, and other related expenses. This measure is called the organization's A) cost of capital. B) cost of goods sold. C) cost of risk. D) cost of equity.
C) cost of risk.
59) Melanie was just hired as the risk manager of JKL Company. The company president asked her to make a thorough review of all of the company's loss exposures. Melanie noted that many employees were too heavily invested in stock issued by the company in their 401-k plan. Melanie suggested that the employees change some of their investment holdings to mutual funds that invest in stock issued by different companies. The risk control method that Melanie suggested is A) risk avoidance. B) duplication. C) diversification. D) separation.
C) diversification.
14) A provision in a disability income insurance policy that requires a person to be disabled for 60 days before receiving benefits is an example of a(n) A) calendar year deductible. B) grace period. C) elimination period. D) probationary period.
C) elimination period.
27) Mark has been an underwriter for 20 years. An application he recently reviewed looked odd to him. The building value in the application seemed far too high, and Mark suspected the applicant might be planning to destroy the property after it is insured. Mark hired an outside firm to investigate the applicant and to prepare a report about the applicant. This report is called a(n) A) agent's report. B) binder. C) physical inspection. D) inspection report.
D) inspection report.
23) Scott works in property and liability insurance marketing. He legally represents insurance purchasers, rather than insurance companies. Scott is paid a commission on the insurance placed with insurers. Scott is a(n) A) exclusive agent. B) direct writer. C) branch manager. D) insurance broker.
D) insurance broker.
29) A grid charting the potential frequency and severity of losses is called a A) risk management information system. B) risk management Intranet. C) risk management web site. D) risk map.
D) risk map.
59) Which of the following statements about the principle of insurable interest is (are) true? I. It makes it difficult to measure the amount of an insured's loss. II. It reduces moral hazard. A) I only B) II only C) both I and II D) neither I nor II
II only
61) Which of the following statements about an insurable interest in life insurance is (are) true? I. It is required of any person named as beneficiary. II. It may result from a pecuniary (financial) interest. A) I only B) II only C) both I and II D) neither I nor II
II only
39) All of the following are arguments in favor of using an applicant's credit record in personal lines underwriting EXCEPT A) Most consumers have good credit records and benefit when credit history is used as a rating factor. B) Use of credit data in underwriting and rating eliminates price discrimination against minority groups when they purchase insurance. C) Underwriting and rating may be more consistent if applicants' credit histories are considered. D) There is high correlation between an applicant's credit record and future claims experience.
Use of credit data in underwriting and rating eliminates price discrimination against minority groups when they purchase insurance.
2) Objective risk is defined as A) the probability of loss. B) the relative variation of actual loss from expected loss. C) uncertainty based on a person's mental condition or state of mind. D) the cause of loss.
B) the relative variation of actual loss from expected loss.
87) Jacob sold his house to Shelia for $140,000 in cash. Jacob "threw in" insurance on the house as part of the deal and did not bother telling the insurer that there was a new owner. Four months after Shelia purchased the home, a windstorm damaged the roof. Which of the following legal characteristics of insurance contracts could the insurer use to legally deny payment for the damage to the roof? A) Insurance contracts are unilateral contracts. B) Insurance contacts are contracts of adhesion. C) Insurance contracts are aleatory contracts. D) Insurance contracts are personal contracts.
Insurance contracts are personal contracts.
82) What is the practical effect of an insurance contract being a contract of adhesion? A) The insurer can refuse to pay claims if the insured has not complied with all policy provisions. B) The insured can assign the policy only with the insurer's consent. C) The insurer can sue the insured for failure to pay any premiums. D) The policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties.
The policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties.
10) 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. A) I only B) II only C) both I and II D) neither I nor II
both I and II
12) 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. A) I only B) II only C) both I and II D) neither I nor II
both I and II
15) 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? A) flex-rating law B) prior-approval law C) file-and-use law D) use-and-file law
flex-rating law
6) 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) A) nonadmitted insurer. B) foreign insurer. C) alien insurer. D) reciprocal insurer.
foreign insurer
60) All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT A) former ownership of property. B) potential legal liability. C) secured creditors. D) contractual right.
former ownership of property.
28) 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? A) guaranty fund B) premium rebates C) risk-based capital D) admitted assets
guaranty fund
74) Chris applied for life insurance and paid the first premium on Monday. She was given an insurability premium receipt which specified that coverage was effective on the date of the application or the date of the medical exam, whichever is later. She took the medical exam the following Thursday. She was found to be in perfect health. On which day was her coverage effective? A) on Monday, when she completed the application and paid the first premium B) on Wednesday, two days after completing the application and paying the first premium C) on Thursday when she passed the medical exam D) on Saturday, two days after passing the medical exam
on Thursday when she passed the medical exam
26) XYZ Mutual Insurance Company has total assets of $10 million. The policyholders' surplus is $2 million. What are XYZ Mutual's total liabilities? A) $4.0 million B) $8.0 million C) $10.0 million D) $12.0 million
$8.0 million
96) Some states have a law that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law. These laws are called A) agreed amount laws. B) replacement cost laws. C) homestead laws. D) valued policy laws.
valued policy laws
84) The voluntary relinquishment of a legal right is called A) subrogation. B) adhesion. C) estoppel. D) waiver.
waiver.
11) The relative level of surplus in the insurance industry is called the industry's A) capacity. B) liabilities. C) reserves. D) admitted assets.
A) capacity.
36) R.I.P. Company manufactures herbicide and pesticide. The company had difficulty finding affordable liability insurance. R.I.P. established its own insurance company based in Bermuda for the purpose of insuring R.I.P.'s loss exposures. The company that R.I.P. formed is called a A) captive insurer. B) reciprocal insurer. C) fraternal insurer. D) holding company.
A) captive insurer.
34) Laura Evans is risk manager of LMN Company. Laura decided to retain certain property loss exposures. Which of the following is a method that Laura can use to fund the retained property losses? A) current net income B) private insurance C) noninsurance transfer D) high deductibles
A) current net income
50) A risk that affects only individuals or small groups and not the entire economy is called a A) diversifiable risk. B) pure risk. C) speculative risk. D) nondiversifiable risk.
A) diversifiable risk.
32) Acme Company has three identical manufacturing plants, one on the Texas Gulf Coast, one in southern Alabama, and one in Florida. Each plant is valued at $200 million. Acme's risk manager is concerned about the damage which could be caused by a single hurricane. The risk manager believes there is an extremely low probability that a single hurricane could destroy two or all three plants because they are located so far apart. What is the probable maximum loss associated with a single hurricane? A) $0 million B) $200 million C) $400 million D) $600 million
B) $200 million
21) Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance. Delta has a retention limit of $200,000, and nine lines of insurance are ceded to Eversafe. How much will Eversafe pay if a $1,600,000 building insured by Delta suffers an $800,000 loss? A) $600,000 B) $700,000 C) $720,000 D) $800,000
B) $700,000
1) Reasons for regulation of insurance include which of the following? I. Maintaining insurer solvency II. Ensuring reasonable rates A) I only B) II only C) both I and II D) neither I nor II
Both I and II
43) 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 A) Financial Modernization Act. B) McCarran-Ferguson Act. C) Dodd-Frank Act. D) Biggert-Waters Act.
Dodd-Frank Act.
11) 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. A) I only B) II only C) both I and II D) neither I nor II
I only
77) Why are insurance contracts said to be contracts of adhesion? A) The values exchanged by the parties to the contract are not equal. B) One party writes the contract, and the other party must accept the entire contract as written. C) Only one party makes a legally enforceable promise. D) Conditions are placed on the insurer's promise to perform.
One party writes the contract, and the other party must accept the entire contract as written.
65) Which of the following statements about subrogation is true? A) Subrogation eliminates adverse selection. B) Subrogation helps to hold down the cost of insurance. C) Subrogation results in violation of the principle of indemnity. D) Subrogation permits a party who caused a loss to avoid responsibility for the loss.
Subrogation helps to hold down the cost of insurance.
68) What is the legal significance of a material concealment by an insurance applicant? A) The contract is automatically voided from its inception. B) The contract is voidable at the insurer's option. C) Loss payments are reduced by the degree of the concealment. D) The insurer is immediately entitled to a higher premium.
The contract is voidable at the insurer's option.
99) All of the following statements about subrogation are true EXCEPT A) The general rule allows the insurer to recover up to the amount paid to its insured under the policy. B) Subrogation does not apply in life insurance. C) Interfering with the insurer's subrogation rights can jeopardize indemnification of the insured. D) The insurer reserves the right to subrogate against its own insureds.
The insurer reserves the right to subrogate against its own insureds.
83) All of the following statements about the rules governing agency relationships are true EXCEPT A) An agent must be authorized to act on behalf of a principal. B) An agency agreement may grant certain powers to the agent as well as denying the agent other powers. C) The principal is responsible for the acts of agents only if the acts are criminal. D) Knowledge of the agent is presumed to be knowledge of the principal with respect to matters within the scope of the agency relationship.
The principal is responsible for the acts of agents only if the acts are criminal.
49) ABC Company in considering a loss control investment. The project will cost $100,000. It will generate an after-tax net cash flow of $60,000 one year after investment and an after-tax net cash flow of $60,000 two years after investment. The present value of $1 received one year from today assuming a 6 percent rate is .9434. The present value of $1 received two years from today assuming a 6 percent interest rate is .8900. Assuming a discount rate of 6 percent, what is the net present value (NPV) of this project? A) $10,004 B) $13,195 C) $16,604 D) $20,000
A) $10,004
7) Which of the following statements about Lloyd's of London is true? A) Coverage is actually written by syndicates who belong to Lloyd's of London. B) New individual members or Names who belong to the various syndicates have unlimited legal liability. C) It operates as an admitted insurer throughout the United States. D) It allows underwriters to write coverage without meeting stringent financial requirements.
A) Coverage is actually written by syndicates who belong to Lloyd's of London.
20) Purposes of the coinsurance clause in health insurance contracts include which of the following? I. To reduce premiums. II. To exclude coverage for certain medical procedures. A) I only B) II only C) both I and II D) neither I nor II
A) I only
21) Which of the following statements about the use of deductibles is (are) true? I. They represent risk retention by insurance purchasers. II. They tend to increase the cost of adjusting small claims. A) I only B) II only C) both I and II D) neither I nor II
A) I only
22) Which of the following statements regarding private insurance and government insurance is (are) true? I. Private insurance programs include life and health insurance and property and liability insurance. II. Social insurance programs are government insurance programs that are voluntary and financed entirely by contributions from covered employers. A) I only B) II only C) both I and II D) neither I nor II
A) I only
29) Which of the following statements about experience rating is (are) true? I. The insured's past loss experience is used to determine the premium for the next policy period. II. Its use is generally limited to small firms whose actual experience lacks credibility. A) I only B) II only C) both I and II D) neither I nor II
A) I only
3) Which of the following statements about "open-perils" coverage is (are) true? I. All losses are covered except those losses specifically excluded. II. The burden of proof is on the insured to prove that a loss is covered. A) I only B) II only C) both I and II D) neither I nor II
A) I only
3) An insurance company estimates its objective risk for 10,000 exposures to be 10 percent. Assuming the probability of loss remains the same, what would happen to the objective risk if the number of exposures were to increase to 1 million? A) It would decrease to 1 percent. B) It would decrease to 5 percent. C) It would remain the same. D) It would increase to 20 percent.
A) It would decrease to 1 percent.
46) The assets of a property and liability insurance company are primarily A) investments such as stocks and bonds. B) loss reserves. C) plant and equipment. D) premiums paid by policyholders.
A) investments such as stocks and bonds.
54) A risk manager analyzed fleet accident data to help determine which loss control measures would provide the greatest safety incentives for drivers. Examining data to generate information that will help make more informed decisions is called A) predictive analytics. B) catastrophe modeling. C) sensitivity analysis. D) data mining.
A) predictive analytics.
7) Loss severity is defined as the A) probable size of the losses which may occur during some period. B) probable number of losses which may occur during some period. C) probability that any particular piece of property may be totally destroyed. D) probability that a liability judgment may exceed a firm's net worth.
A) probable size of the losses which may occur during some period.
30) Some investors decided to start an insurance company. Each investor contributed $50,000 to raise the capital required to charter a new company. Each investor received an ownership interest in the company. The company will raise additional capital by selling ownership rights to other investors. Under this type of organization, the customer and owner functions are separate. This type of insurer is called a A) stock company. B) reciprocal exchange. C) fraternal company. D) mutual company.
A) stock company.
15) MedProf Insurance markets medical malpractice insurance. The company's combined ratio in 2015 was 95.4. Its expense ratio was 25.4. What was the company's loss ratio? A) 60.4 B) 70.0 C) 88.2 D) 120.8
B) 70.0
37) Which of the following statements is (are) true with respect to catastrophe bonds? I. The bonds are issued by the U.S. Government. II. The bonds have relatively high interest (coupon) rates. A) I only B) II only C) both I and II D) neither I nor II
B) II only
45) A reciprocal exchange is managed by a corporation that is authorized to collect premiums, pay losses, invest funds, seek new members, and perform other functions. This corporate manager is called a(n) A) holding company. B) attorney-in-fact. C) resident agent. D) captive manager.
B) attorney-in-fact.
6) Which of the following is a source of information a risk manager could use to help identify pure loss exposures? A) commodity prices B) physical inspections C) currency exchange rates D) interest rate movements
B) physical inspections
35) XYZ Insurance Company uses class rating to determine the rate to charge for insurance. For one type of insurance, the pure premium XYZ actuaries calculated is $75 per unit. If XYZ's expense ratio is 25 percent, what is the gross rate for this coverage? A) $37.50 B) $55.25 C) $75.00 D) $100.00
D) $100.00
13) 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. A) I only B) II only C) both I and II D) neither I nor II
I only
40) All of the following statements about insurance regulation are true EXCEPT A) Insurance commissioners are appointed in some states and elected in some states. B) Insurers are subject to regulation by certain federal agencies and laws. C) The National Association of Insurance Commissioners (NAIC) can force states to adopt the model laws that it drafts. D) An insurance commissioner can revoke or suspend an insurer's license to do business in his or her state.
The National Association of Insurance Commissioners (NAIC) can force states to adopt the model laws that it drafts.
104) Bob purchased insurance on his home with an insurer that was not licensed to do business in the state. In this case, which requirement to form a binding insurance contract is lacking? A) exchange of consideration B) offer and acceptance C) legal purpose D) competent parties
competent parties
8) Which of the following is considered a nonadmitted asset for an insurer? A) cash B) preferred stocks C) real estate D) office furniture
office furniture
11) Methods by which insurers may minimize or avoid catastrophic losses include which of the following? I. The use of reinsurance II. Concentrating coverage written in one geographic region A) I only B) II only C) both I and II D) neither I nor II
A) I only
13) Advantages of the direct response system for marketing life insurance include which of the following? I. Advertising can be specifically directed to selected markets. II. Complex products can be easily sold. A) I only B) II only C) both I and II D) neither I nor II
A) I only
17) Which of the following statements regarding insurance and gambling is (are) true? I. Insurance is used to handle existing pure risks, while gambling creates a new speculative risk. II. Insurance usually involves risk avoidance, while gambling typically involves only risk reduction. A) I only B) II only C) both I and II D) neither I nor II
A) I only
42) Which statement is (are) true concerning catastrophe models? I. Businesses other than insurance companies use catastrophe models. II. Catastrophe models are able to precisely predict disaster occurrences and loss values. A) I only B) II only C) both I and II D) neither I nor II
A) I only
43) If insurers were to provide indemnification for losses that were deliberately caused, which characteristic of ideally insurable risks would not be met? A) The loss must be accidental and unintentional. B) The loss must be determinable and measurable. C) The loss should not be catastrophic. D) There must be a large number of similar exposure units.
A) The loss must be accidental and unintentional.
20) ABC Insurance retains the first $1 million of each property damage loss and purchases reinsurance for that part of any property loss that exceeds $1 million. The insurance for property losses above $1 million is called A) excess insurance. B) liability insurance. C) coinsurance. D) primary insurance.
A) excess insurance.
50) One additional coverage under the homeowners policy makes available up to 10 percent of the Coverage A limit to cover increased repair costs after a loss in order to comply with a stricter building code. This additional coverage is called A) ordinance or law. B) reasonable repairs. C) concurrent causation. D) debris removal.
A) ordinance or law.
20) Which of the following is classified as casualty insurance? A) workers compensation insurance B) fire insurance C) marine insurance D) life insurance
A) workers compensation insurance
16) David owns a commercial building with a replacement cost of $4 million. The building is insured on a replacement cost basis for $2.4 million under a fire insurance policy that has an 80 percent coinsurance clause. How much will David collect if the building sustains a covered fire loss with a replacement cost of $80,000? A) $50,000 B) $60,000 C) $66,667 D) $80,000
B) $60,000
38) Mark owns a building that he insured for $90,000. The replacement cost of the building is $100,000. Mark's property insurance policy has an 80 percent coinsurance clause. Ignoring any deductible, if Mark's building is destroyed by a covered peril, how much will Mark receive from his insurer? A) $80,000 B) $90,000 C) $101,250 D) $112,500
B) $90,000
18) Two buildings are located close together at a production facility. The probability that either of these buildings will experience a fire loss is 4 percent. However, if one building has a fire, the probability that the second building will have a fire is 60 percent. What is the probability that both buildings will have a fire? A) 1.6 percent B) 2.4 percent C) 8.0 percent D) 64.0 percent
B) 2.4 percent
10) JKL Insurance Company reported the following information on its accounting statements last year: Premiums Written $90,000,000 Loss Adjustment Expenses $5,000,000 Underwriting Expenses $30,000,000 Premiums Earned $100,000,000 Incurred Losses $70,000,000 What was JKL's loss ratio last year? A) 70.0 percent B) 75.0 percent C) 83.3 percent D) 90.0 percent
B) 75.0 percent
4) Which homeowners policy is designed for the tenants of a rented premises? A) Homeowners 2 B) Homeowners 4 C) Homeowners 6 D) Homeowners 8
B) Homeowners 4
39) Which of the following statements concerning social insurance benefits is (are) correct? I. Social insurance benefits are heavily weighted in favor of upper-income groups because of their higher earnings. II. Social insurance benefits are financed entirely or in part by mandatory contributions by covered employers and employees, and not by general revenues of the government. A) I only B) II only C) both I and II D) neither I nor II
B) II only
40) Which of the following statements about a personal risk management program is (are) true? I. Insurance and retention are the only techniques used to handle potential losses. II. The steps in a personal risk management process are the same steps used by businesses. A) I only B) II only C) both I and II D) neither I nor II
B) II only
38) Ashley opened an all-you-can-eat buffet restaurant. The price per-person was based on what Ashley believed an average restaurant patron would consume. The restaurant began to lose money. Ashley concluded that her patrons had "above average" appetites, and were attracted to her restaurant because they could eat as much as they wanted while being charged an average price. A similar phenomenon exists in insurance markets. This problem is called A) legal hazard. B) adverse selection. C) attitudinal hazard. D) nondiversifiable risk.
B) adverse selection.
42) Most insurance companies require their marketing representatives to submit an evaluation of the prospective insured. This important source of underwriting information is called the A) application. B) agent's report. C) inspection report. D) physical inspection.
B) agent's report.
40) Ellen believes the value of the loss to her home is $30,000. The insurer has offered $18,000 to settle the loss. If Ellen and the insurer cannot agree on the value of the loss, which homeowners policy provision specifies how this dispute will be settled? A) insurer's option B) appraisal clause C) loss payment clause D) mortgage clause
B) appraisal clause
41) Bev lives in the suburbs and works downtown. She drives to work, and her most direct route to work would require her to pass through an area where carjackings and drive-by-shootings are common. Bev does not drive through this area. Instead, she uses a route which adds 10 minutes to her commute. Which risk management technique is Bev using with respect to the risk of injury while driving through the dangerous area? A) noninsurance transfer B) avoidance C) passive retention D) loss reduction
B) avoidance
55) West Coast Insurance writes property and liability insurance in California, Oregon, and Washington. These states are all susceptible to earthquakes. To help determine how much reinsurance to purchase, West Coast Insurance hired an organization to use a computer algorithm to estimate what its insured losses would be if a severe earthquake occurred. West Coast Insurance based its purchase of reinsurance on the loss estimates. This scenario illustrates using A) value-at-risk analysis. B) catastrophe modeling. C) risk mapping. D) a risk management information system.
B) catastrophe modeling.
7) The policy provision requiring the filing of proof of loss with the insurer is an example of a(n) A) declaration. B) condition. C) insuring agreement. D) miscellaneous provision.
B) condition.
41) An elimination (waiting) period is an example of a(n) A) exclusion. B) deductible. C) other-insurance provision. D) coinsurance provision.
B) deductible.
1) The primary function of an actuary is to A) adjust claims. B) determine premium rates. C) negotiate reinsurance treaties. D) invest insurance company assets.
B) determine premium rates.
31) RST Insurance Company does not have any agents. Instead, the company sells insurance through radio ads, telemarketers, and newspaper and magazine inserts. This distribution method is called A) reciprocal exchange. B) direct response system. C) mass merchandising. D) multiple distribution system.
B) direct response system.
56) Five years ago, Shannon decided to start investing monthly in the common stock of ABC Telecom Company. Her financial well-being will be harmed if the price of ABC Telecom stock drops significantly. The risk of investment loss can be reduced if she invests in other companies and other types of financial assets. The risk Shannon faces with regard to her investments is a(n) A) enterprise risk. B) diversifiable risk. C) pure risk. D) nondiversifiable risk.
B) diversifiable risk.
5) Regional Airline (RA) spends millions of dollars each year on jet fuel. The company also has significant liability exposures. RA can retain a large portion of its liability exposure if fuel costs are low. The company can pay high fuel costs if retained liability losses are low. RA cannot, however, absorb both high fuel costs and high retained liability claims. RA's insurer designed an insurance program where the insurer pays only if both contingencies (high fuel costs and high retained liability claims) occur. The contract the insurer designed is called a(n) A) double indemnity rider. B) double trigger option. C) multiple protection policy. D) other insurance provision.
B) double trigger option.
56) The U.S. government is concerned that terrorists might try to crash a vehicle loaded with explosives into a U.S. embassy in a foreign country. Inside the gate to the embassy, they installed steel and cement posts in the road. These posts can be raised up from the ground to form a barrier against suicide bombers. The posts can be lowered back into the ground to allow safe vehicles to pass. This physical barrier system illustrates which risk management technique? A) risk avoidance B) insurance transfer C) loss prevention D) noninsurance transfer
B) insurance transfer
48) Last year, XYZ Insurance Company had a combined ratio of 102.4 and lost $10.2 million on the insurance that it sold. The company, however, was required to pay income taxes. The best explanation for this apparent contradiction is that XYZ offset its underwriting loss with A) increased loss reserves. B) investment income. C) increased loss adjustment expenses. D) unearned premiums.
B) investment income.
42) A property and liability insurance company's loss reserve and unearned premium reserve are A) assets. B) liabilities. C) income. D) expenses.
B) liabilities.
10) The worst loss that is likely to happen is referred to as the A) maximum possible loss. B) probable maximum loss. C) frequency of loss. D) severity of loss.
B) probable maximum loss.
59) Some members of Congress are concerned that if one or two large U.S. banks fail, it could lead to the collapse of the entire U.S. financial sector. This risk is called A) objective risk. B) systemic risk. C) enterprise risk. D) subjective risk.
B) systemic risk.
19) Connie has an individual medical expense policy with a $1,000 deductible. She is required to pay 20 percent of covered expenses in excess of the deductible. The insurer will pay 80 percent of expenses in excess of the deductible. If Connie has eligible medical expenses of $26,000, how much will be paid by her insurer? A) $10,000 B) $11,000 C) $20,000 D) $21,000
C) $20,000
32) XYZ Company insured its building on a replacement cost basis for $450,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $500,000 when it sustained a $50,000 loss. How much will XYZ Company receive from its insurer, assuming no deductible applies? A) $42,500 B) $45,000 C) $50,000 D) $56,250
C) $50,000
33) Laura's medical insurance policy includes a $500 deductible. Laura is required to pay 20 percent of covered expenses in excess of the deductible, and her insurer will pay 80 percent of covered expenses in excess of the deductible. Laura was hospitalized and her covered medical expenses were $10,500. How much of the $10,500 will be paid by the insurer? A) $7,500 B) $7,900 C) $8,000 D) $10,000
C) $8,000
15) All of the following statements about the independent agency system are true EXCEPT A) Agents are often authorized to adjust small claims. B) Agents are compensated on the basis of commissions. C) The insurer rather than the agent owns the renewal rights to the business. D) The agent is an independent business person who represents several insurers.
C) The insurer rather than the agent owns the renewal rights to the business.
8) Persons insured under Section I of the Homeowners 3 policy include which of the following? I. A spouse of the named insured if living in the same household II. The named insured's children who are under age 24 and who are full-time college students A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
9) Factors that may result in more restrictive underwriting decisions include which of the following? I. Inadequate rates. II. The unavailability of reinsurance at favorable terms. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
9) The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following? I. Decrease in moral hazard II. More accurate prediction of future losses A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
46) The terrorism risk in the United States A) is of no concern to private companies. B) is limited to attacks by foreign nationals. C) can be addressed through risk control and insurance. D) is an uninsurable risk.
C) can be addressed through risk control and insurance.
38) Pac-Coast Insurance (PCI) concentrates its underwriting activities in California. The company is concerned that if a catastrophic earthquake occurs, it might threaten the solvency of the company. To address this risk, PCI issued some debt securities. If a catastrophic earthquake occurs, PCI does not have to repay the full amount borrowed or pay interest. The securities PCI issued are called A) catastrophe futures contracts. B) interest rate swaps. C) catastrophe bonds. D) contingent options contracts.
C) catastrophe bonds.
3) Mid-States Beef is a commercial feedlot business. Currently, the company has over 10,000 cattle in feedlots. Mid-States is concerned that the price of corn, the grain fed to the cattle, will increase significantly. The risk that the price of corn may increase and harm the profitability of Mid-States Beef's operations is a(n) A) currency exchange rate risk. B) property risk. C) commodity price risk. D) interest rate risk.
C) commodity price risk.
22) Huge Insurance Company is a property insurer that is interested in protecting itself against cumulative losses that exceed $200 million during the year. This protection can best be obtained using a(n) A) quota-share reinsurance treaty. B) surplus-share reinsurance treaty. C) excess-of-loss reinsurance treaty. D) reinsurance pool.
C) excess-of-loss reinsurance treaty.
33) ABC Insurance Company calculated the amount that it expected to pay in claims for each policy sold. Rather than selling the insurance for the amount it expected to pay in claims, ABC added an allowance to cover the cost of doing business, including commissions, taxes, and acquisition expenses. This allowance is called a(n) A) policyowner dividend. B) premium. C) expense loading. D) rate credit.
C) expense loading.
53) If the insurer broadens coverage during the policy period without an increase in premium, and the broadened coverage is not part of a general program revision, the insured is entitled to the broadened coverage under which policy provision? A) waiver of policy provisions B) subrogation C) liberalization clause D) pair or set clause
C) liberalization clause
42) Which of the following is an example of private insurance? A) unemployment insurance B) Social Security C) life insurance D) federal deposit insurance
C) life insurance
11) Faking an accident to collect insurance proceeds is an example of A) physical hazard. B) objective risk. C) moral hazard. D) attitudinal hazard.
C) moral hazard.
24) ABC Insurance has always used the exclusive agency system to market coverages. ABC, however, cannot afford full-time agents in sparsely-populated areas. To reach customers in these areas, ABC enters into agreements with local independent agents. Using more than one marketing system is called employing a A) direct response system. B) general agency system. C) multiple distribution system. D) branch office system.
C) multiple distribution system.
35) Apex Insurance Company wrote a large number of property insurance policies in an area where earthquake losses could occur. When the president of Apex was asked if she feared that a severe earthquake might put the company out of business, she responded, "Not a chance. We transferred most of that risk to other insurance companies." An arrangement by which an insurer that initially writes insurance transfers to another insurer part or all of the potential losses associated with such insurance is called A) hedging. B) speculating. C) reinsurance. D) loss avoidance.
C) reinsurance.
19) Which of the following is a covered peril under the personal property coverage (Coverage C) of an unendorsed Homeowners 3 policy? A) earthquake B) nuclear radiation C) windstorm D) flood
C) windstorm
26) Eric's property was damaged in an accident. He phoned his agent to see if the loss was covered under his property insurance policy. The agent said, "As long as the cause of loss is not specifically excluded in the policy, the loss is covered." Based on the agent's answer, what type of insuring agreement appears in the policy? A) unconditional coverage B) named-perils coverage C) extended-perils coverage D) "open-perils" coverage
D) "open-perils" coverage
34) XYZ Insurance Company expects $500,000 in claims and loss adjustment expenses for each 1,000 properties that it insures in a certain category of business insurance. What pure premium should XYZ charge for each property insured? A) $69.99 B) $166.67 C) $350.00 D) $500.00
D) $500.00
33) Acme Company has three identical manufacturing plants, one on the Texas Gulf Coast, one in southern Alabama, and one in Florida. Each plant is valued at $200 million. Acme's risk manager is concerned about the damage which could be caused by a single hurricane. The risk manager believes there is an extremely low probability that a single hurricane could destroy two or all three plants because they are located so far apart. What is the maximum possible loss associated with a single hurricane? A) $0 million B) $200 million C) $400 million D) $600 million
D) $600 million
12) JKL Insurance Company reported the following information on its accounting statements last year: Premiums Written $90,000,000 Loss Adjustment Expenses $5,000,000 Underwriting Expenses 30,000,000 Premiums Earned $100,000,000 Incurred Losses $70,000,000 What was JKL's combined ratio last year? A) 100.0 B) 103.3 C) 105.0 D) 108.3
D) 108.3
32) Which of the following was a consequence of passage of the Financial Modernization Act (Gramm-Leach-Bliley)? A) Formation of insurers was made easier because capital requirements were reduced. B) It became easier for insurers to conduct business as they were no longer required to be licensed in each state where they operate, but only in the state where they are domiciled. C) Insurers were required to prepare financial statements using generally accepted accounting principles (GAAP) instead of using statutory accounting. D) Depression-era barriers between underwriting risk, depository functions, and securities underwriting were eliminated.
D) Depression-era barriers between underwriting risk, depository functions, and securities underwriting were eliminated.
33) Shauna purchased a condominium unit. Which homeowners policy is specially designed for condominium unit owners? A) HO-2 B) HO-3 C) HO-4 D) HO-6
D) HO-6
43) Jose and Maria would like "open-perils" coverage on their home and their personal property. Which unendorsed homeowners form provides this coverage? A) Homeowners 2 B) Homeowners 3 C) Homeowners 4 D) Homeowners 5
D) Homeowners 5
46) When a fraternal insurer began operations, it asked each member, regardless of age, to pay $20 per month to the fraternal's group life insurance plan. In exchange, each member received the same amount of life insurance. Soon younger members of the group began to drop out when they realized their premiums were subsidizing a group with a higher chance of loss. Which important underwriting principle was violated in this case? A) An underwriting profit should be attained. B) Moral hazard should be avoided. C) Insureds should be selected according to underwriting standards. D) There should be equity among policyholders.
D) There should be equity among policyholders.
40) The section of the insurance policy that includes provisions that qualify or limit the insurer's promise to perform is the A) definitions. B) insuring agreement. C) exclusions. D) conditions.
D) conditions.
4) The exclusion of flood in a homeowners policy is an example of an A) excluded activity. B) excluded condition. C) excluded property. D) excluded peril.
D) excluded peril.
43) Which of the following is a financial derivative that derives value from specific insurable losses or from an index of values? A) commodity futures contract B) corporate bond C) catastrophe bond D) insurance option
D) insurance option
14) Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award to a smoker harmed by the company's cigarettes. The characteristics of the judicial system that increase the frequency and severity of loss are known as A) moral hazard. B) particular risk. C) speculative risk. D) legal hazard.
D) legal hazard.
45) One liability on a property and liability insurance company's balance sheet is for the costs associated with settling and paying reserved claims. This liability is the A) pre-paid expense reserve. B) loss reserve. C) unearned premium reserve. D) loss adjustment expense reserve.
D) loss adjustment expense reserve.
24) All of the following are examples of personal risks EXCEPT A) poor health. B) unemployment. C) premature death. D) loss of business income.
D) loss of business income.
46) A plan for selling individually underwritten property and liability insurance to members of a group is called A) direct response. B) multiple distribution. C) niche marketing. D) mass merchandising.
D) mass merchandising.
46) Property insurance policies contain declarations, conditions, definitions, exclusions, and an insuring agreement. However, some policy terms, such as subrogation, cancellation, other insurance, and assignment do not fall into these categories. The part of an insurance contract in which these provisions can be found is the A) endorsements. B) binders. C) conditions. D) miscellaneous provisions.
D) miscellaneous provisions.
17) Some events cannot occur together because the occurrence of one event makes the occurrence of the second event impossible. Such events are called A) dependent events. B) independent events. C) conditional events. D) mutually exclusive events.
D) mutually exclusive events.
41) A strip-mall includes eight identical-sized retail units. All of the units were built at the same time and each has an identical sprinkler system. Unit number two is a dry cleaning business. Unit number three is a bar and grill. Unit number four is a dress shop. The owners of these three units are all insured by the same insurance company, but the property insurance premiums vary significantly. Which of the following rating factors best explains the difference in premiums? A) exposure B) protection C) construction D) occupancy
D) occupancy
48) All of the following are characteristics of the liability risk that most people face EXCEPT A) a lien may be placed on your income and assets to satisfy a legal judgment. B) substantial legal expenses may be incurred defending the claim. C) there is no upper limit on the amount of the loss. D) owning liability insurance eliminates the possibility of being held legally liable.
D) owning liability insurance eliminates the possibility of being held legally liable.
14) Which of the following types of risks is normally uninsurable by private insurers? A) personal risks B) property risks C) liability risks D) political risks
D) political risks
3) The basis for current state regulation of insurance is A) the McCarran-Ferguson Act. B) Paul v. Virginia. C) the South-Eastern Underwriters Association case. D) the National Association of Insurance Commissioners.
The McCarran-Ferguson Act
67) The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT A) representations. B) warranty. C) subrogation. D) concealment.
subrogation.
27) Mutual Property Insurance Company has a surplus of $2 million. According to a conservative rule, how much in new net premiums can Mutual Property Insurance Company safely write? A) $2 million B) $8 million C) $10 million D) $20 million
$2 million
54) Sam's furniture was destroyed by a fire. The furniture cost $1200 when it was purchased, but similar new furniture now costs $1800. Assuming the furniture was 50 percent depreciated, what is the actual cash value of Sam's loss? A) $600 B) $900 C) $1200 D) $1800
$900
86) Janice purchased a living room set for $1,000 and insured this furniture on an actual cash value basis. Two years later the living room set was destroyed by a covered peril. At the time of loss, the property had depreciated in value by 25 percent. The replacement cost of the furniture at the time of loss was $1,200. Assuming no deductible, how much will Janice receive from her insurer? A) $900 B) $950 C) $1,000 D) $1,200
$900
91) Dave is an agent for Easy Pay Insurance. Easy Pay insures only high-quality applicants. Dave wanted to earn more commissions, so he sold some policies to applicants he knew were below-average risks. When these policyowners started filing claims, Easy Pay tried to deny the claims stating that Dave had not acted appropriately. Which general rule of agency makes Easy Pay responsible for the claims of the higher-than-average risk policyowners? A) There is no presumption of an agency relationship. B) Agents should be compensated based on the quality of the business they generate. C) A principal is responsible for the acts of its agents who are acting within the scope of their authority. D) An agent must have authority to represent the principal.
A principal is responsible for the acts of its agents who are acting within the scope of their authority.
15) RST Company has production facilities in Salt Lake City and Cleveland. The probability that in any given year a fire will damage the production facility in Salt Lake City is 5 percent. The probability that in any given year a fire will damage the Cleveland production facility is 4 percent. What is the probability that BOTH production facilities will be damaged by fire in any given year? A) 0.20 percent B) 2.00 percent C) 4.50 percent D) 9.00 percent
A) 0.20 percent
13) Which of the following statements about property and casualty insurance company operating results is (are) true? I. An insurance company can have a combined ratio greater than 1 (or 100 percent) and still be required to pay income taxes. II. By all measures, the property and casualty insurance industry is highly profitable when compared to other industries. A) I only B) II only C) both I and II D) neither I nor II
A) I only
23) Which of the following statements is (are) true with respect to the time value of money? I. Money received today is worth more than the same amount of money received in the future. II. The present value of a future amount is greater than the future amount. A) I only B) II only C) both I and II D) neither I nor II
A) I only
24) Which of the following statements about the investments of property and liability insurers is (are) true? I. Income from investments is important in offsetting any unfavorable underwriting experience. II. Because premium income is continually being received, the investment objective of liquidity is of little importance. A) I only B) II only C) both I and II D) neither I nor II
A) I only
29) Which of the following statements about liability risks is (are) true? I. Future income and assets can be attached to pay judgments if inadequate insurance is carried. II. There is an upper limit on the amount of loss. A) I only B) II only C) both I and II D) neither I nor II
A) I only
3) Which of the following statements about underwriting policy is (are) true? I. A company must establish an underwriting policy consistent with company objectives. II. Underwriting policy is usually subjective and allows the underwriter considerable flexibility with respect to lines written and forms used. A) I only B) II only C) both I and II D) neither I nor II
A) I only
41) Which of the following statements is (are) true regarding insurance agents and insurance brokers? I. A property and liability insurance agent has the authority to bind the insurer for certain types of coverage. II. A licensed broker who is not a licensed agent has the legal authority to bind an insurer. A) I only B) II only C) both I and II D) neither I nor II
A) I only
49) Which of the following statements concerning the selection of risk management techniques and insurance market conditions is (are) true? I. It's easier to purchase affordable insurance during a "soft " market than during a "hard" market. II. Retention is used more during a "soft" market than during a "hard" market. A) I only B) II only C) both I and II D) neither I nor II
A) I only
50) Which of the following statements about the risk of terrorism in the United States is (are) true? I. Congress created a federal backstop for terrorism claims. II. Coverage for losses attributable to terrorism is not marketed by private insurers in the U.S. A) I only B) II only C) both I and II D) neither I nor II
A) I only
6) Which statement is (are) true with respect to enterprise risk management programs? I. They address traditional property, liability, and personnel loss exposures. II. They do not address financial risks. A) I only B) II only C) both I and II D) neither I nor II
A) I only
8) Which of the following statements about the definition of the insured is (are) true? I. In some cases, a person who is not specifically named may be classified as an insured. II. Under no circumstances can more than one person be named as an insured. A) I only B) II only C) both I and II D) neither I nor II
A) I only
9) Which of the following statements about insurance brokers is (are) true? I. They legally represent the insured rather than the insurance company. II. They are prohibited from being licensed as agents. A) I only B) II only C) both I and II D) neither I nor II
A) I only
9) Which statement is (are) true regarding property and liability insurance market conditions? I. Premiums are high when the insurance market is "hard." II. Underwriting standards are tight when the insurance market is "soft." A) I only B) II only C) both I and II D) neither I nor II
A) I only
16) Which of the following statements about coverage for loss of use (Coverage D) under the Homeowners 3 policy is true? A) If a covered loss makes the home unfit for living, the insurer pays additional living expenses the insured may incur as a result of the loss. B) The duration of payments for additional living expenses is limited to a maximum of 30 days. C) There is no coverage for loss of rent if an insured peril makes the part of the premises rented to others uninhabitable. D) There is coverage for loss of business income if an insured peril forces a home business to be terminated.
A) If a covered loss makes the home unfit for living, the insurer pays additional living expenses the insured may incur as a result of the loss.
35) Jane purchased a $50,000 liability insurance policy from Insurer A. Fearing that she did not have enough liability insurance, she purchased an additional $100,000 of liability coverage from Insurer B. As a result of a negligent act, Jane was ordered to pay $75,000 in damages. Assuming the coverage from Insurer A is primary and the coverage from Insurer B is excess, how will this claim be settled? A) Insurer A will pay $50,000 and Insurer B will pay $25,000. B) Insurer A will pay $37,500 and Insurer B will pay $37,500. C) Insurer A will pay $25,000 and Insurer B will pay $50,000. D) Insurer A will pay nothing and Insurer B will pay $75,000.
A) Insurer A will pay $50,000 and Insurer B will pay $25,000.
3) Which of the following statements about the Homeowners 6 (unit-owners form) policy is true? A) It includes personal liability coverage. B) It covers personal property on an open-perils basis. C) It covers the dwelling on an open-perils basis. D) It is designed for tenants who rent an apartment or a home.
A) It includes personal liability coverage.
25) Kate is covered under her employer's group health plan. She is also covered as a dependent under her husband's group health plan. Under the usual coordination-of-benefits provision, how will each company respond to a claim filed by Kate? A) Kate's plan is primary, and her husband's plan is excess. B) Her husband's plan is primary, and Kate's plan is excess. C) The plan of the person with the birthday earliest in the year pays first, and the other plan is excess. D) Each plan will pay 50 percent of the claim.
A) Kate's plan is primary, and her husband's plan is excess.
11) Which of the following statements about the coverage for other structures (Coverage B) under the Homeowners 3 policy is true? A) The coverage applies to a detached garage or tool shed on the residence premises. B) Structures attached to the dwelling by a fence or utility line are considered to be part of the dwelling rather than other structures. C) Coverage applies even if the other structure is used for business purposes. D) There is no coverage for a private garage if it is rented to a tenant of the dwelling.
A) The coverage applies to a detached garage or tool shed on the residence premises.
22) Which of the following statements about an excess insurance plan is true? A) The insurer does not participate in a loss until the loss exceeds the amount the firm has decided to retain. B) The insurer pays first up to some specified level; the insured then pays all losses exceeding the insurer's retention level. C) Losses in excess of a specified amount are not covered. D) The insured and insurer share equally in any loss that occurs.
A) The insurer does not participate in a loss until the loss exceeds the amount the firm has decided to retain.
21) Which of the following statements about covered perils under the personal property coverage (Coverage C) of the Homeowners 3 policy is true? A) Theft losses to boats and watercraft are covered only if they occur at the insured's residence. B) Damage from an explosion is covered only if the explosion is the result of fire or lightning. C) Property damage from vehicles is covered only if it is caused by the insured. D) Smoke damage is covered only if it arises from agricultural or industrial operations.
A) Theft losses to boats and watercraft are covered only if they occur at the insured's residence.
17) Which of the following statements about the additional coverages under Section I of the Homeowners 3 policy is true? A) There is coverage for the reasonable cost incurred to protect property from further damage after a covered loss occurs. B) There is unlimited coverage for furnishings of the landlord in an apartment on the premises that is rented to others. C) Property removed from the premises because it is endangered by an insured peril is covered on a named-perils basis while it is outside the insured premises. D) There is no coverage for the increased cost of construction or repair to comply with an ordinance or law.
A) There is coverage for the reasonable cost incurred to protect property from further damage after a covered loss occurs.
53) The production facility for ABC Manufacturing is located in a flood plain. Although the risk of flood is low, ABC's risk manager is concerned that a flood could damage the plant and equipment. He received bids on flood insurance from two insurance agents, but decided the cost of coverage was too high relative to the risk. So he did not purchase flood insurance. Which risk management technique is ABC using with respect to the risk of flood? A) active retention B) noninsurance transfer C) passive retention D) avoidance
A) active retention
34) Sue double-majored in mathematics and statistics in college. She also enrolled in a number of finance courses. After graduation, she was hired by Econodeath Insurance Company. Her job is to calculate premium rates for life insurance coverages. Sue is a(n) A) actuary. B) underwriter. C) claims adjustor. D) producer.
A) actuary.
42) Roger owns some farmland that he rents to a tenant. The tenant lives in an old farmhouse on the property and raises crops on the land. Roger is concerned about possible legal liability if the tenant injures someone. Roger requires the tenant to have liability insurance and to add himself to the liability coverage through an endorsement. Under the tenant's liability insurance, Roger is a(n) A) additional insured. B) first-named insured. C) second-named insured. D) other insured.
A) additional insured.
5) The underwriting process begins with the A) agent. B) desk underwriter. C) inspection report. D) actuary.
A) agent.
14) Life insurance policyholders may borrow the cash value from their life insurance policies. Where are life insurance policy loans shown on a life insurance company's financial statements? A) as an asset B) as a liability C) as income D) as an expense
A) as an asset
12) Abandoning an existing loss exposure is an example of A) avoidance. B) retention. C) noninsurance transfer. D) insurance transfer.
A) avoidance.
8) Temporary evidence of insurance until a policy is actually issued is provided by a(n) A) binder. B) brokerage agreement. C) pre-approval form. D) endorsement.
A) binder.
5) A property and casualty insurer's loss reserve includes estimates for all of the following EXCEPT A) claims anticipated but not yet incurred. B) claims reported and adjusted but not yet paid. C) claims reported and filed but not yet adjusted. D) claims incurred but not yet reported to the company.
A) claims anticipated but not yet incurred.
1) That part of a property and liability insurance contract that contains information about the property or activity to be insured is called the A) declarations. B) insuring agreement. C) exclusions. D) conditions.
A) declarations.
36) The purpose of a coordination-of-benefits provision in group health insurance plans is to A) determine which plan pays first if more than one plan covers a loss. B) determine which health care provider an insured may use for his or her care. C) determine if the calendar-year deductible has been satisfied by the insured. D) determine if the employee is eligible for coverage under the group health plan.
A) determine which plan pays first if more than one plan covers a loss.
11) One of the reasons that deductible are used in insurance policies is to A) eliminate coverage for small claims. B) place restrictions or limits on the insurer's promise to perform. C) provide broader coverage by increasing the number of perils covered. D) exclude perils that are not insurable.
A) eliminate coverage for small claims.
28) Mark reviewed his homeowners policy. He learned that his personal property was insured on an actual cash value basis. He would like replacement cost coverage on his personal property. He contacted his agent who said, "I'll simply add an amendment to your contract that changes the basis of recovery to replacement cost." The written provision the agent was referring to is called a(n) A) endorsement. B) coinsurance clause. C) binder. D) deductible.
A) endorsement.
32) Gina would like to buy a house. She will pay 10 percent of the cost of the house as a down payment and borrow the other 90 percent from a mortgage lender. The home will serve as collateral for the loan. The lender will not make the loan to Gina unless the home is insured. Using insurance to secure the collateral for a loan illustrates which of the following benefits of insurance to society? A) enhancement of credit B) reduction of fear and worry C) source of investment funds D) incentives for loss prevention
A) enhancement of credit
45) The premium that insurance companies charge does not cover the cost of expected losses only. The premium must also cover the cost of compensating agents and other costs of doing business. The amount added to the pure premium to cover these costs is called the A) expense loading. B) deductible. C) dividend. D) loss reserve.
A) expense loading.
46) A discount store chain is concerned that cashiers might steal money from cash registers. To provide protection against theft by the cashiers, the discount store chain can purchase a A) fidelity bond. B) liability insurance policy. C) surety bond. D) business income insurance policy.
A) fidelity bond.
19) Inland marine insurance provides coverage for A) goods being shipped on land. B) premature death of members of the armed forces. C) goods being shipped on ocean-going vessels. D) liability exposures of nonprofit organizations.
A) goods being shipped on land.
37) As an alternative to coinsurance, rate discounts can be given as the amount of insurance to value increases. This alternative is called A) graded rates. B) agreed value coverage. C) retrospective rating. D) manual rating.
A) graded rates.
34) As an alternative to demutualizing, Big Mutual Insurance Company reorganized itself into a corporate form that can directly or indirectly own a stock insurance company. This form of organization is called a(n) A) holding company. B) shell company. C) upstream company. D) downstream company.
A) holding company.
55) The concurrent causation exclusion in the Homeowners 3 policy specifies that: A) if two or more perils jointly cause a loss, there is no coverage if one of the perils is excluded. B) if the insured has two or more policies in force at the time of the loss, the loss is not covered. C) if the insured has two or more policies in force at the time of the loss, the loss is pro-rated between the insurers. D) if two or more perils jointly cause a loss, there is coverage as long as one of the perils is covered.
A) if two or more perils jointly cause a loss, there is no coverage if one of the perils is excluded.
21) Sarah owns a property and liability insurance agency. She is authorized to represent several insurance companies and she is compensated by commissions. Sarah's agency owns the expiration rights to the business she sells. Sarah is a(n) A) independent agent. B) exclusive agent. C) direct writer. D) insurance broker.
A) independent agent.
7) If an underwriter suspects moral hazard, the underwriter may ask an outside firm to investigate the applicant and make a detailed report to the insurer. This report is called a(n) A) inspection report. B) application. C) M.I.B. report. D) agent's report.
A) inspection report.
10) Deductibles are not used in which of the following type of insurance? A) life insurance B) health insurance C) property insurance D) disability income insurance
A) life insurance
33) Nathan was hired as an actuary with ABC Insurance. Nathan was asked to calculate the annual premium for a new product and to explain his calculations to ABC's director of ratemaking. Nathan calculated the pure premium and presented this value as the final premium. After Nathan's presentation, the director of ratemaking said, "You left out something very important. If we sell coverage at the pure premium rate, we'll be out of business soon." What did Nathan overlook in his calculations? A) loading for expenses B) the underwriting cycle C) seasonality of claims D) investment income
A) loading for expenses
22) The portion of an insurance premium allocated to expenses, profit, and a margin for contingencies is called the A) loading. B) pure premium. C) gross premium. D) experience rate.
A) loading.
9) Section I of the Homeowners 3 policy provides coverage for which of the following? A) loss of use B) personal liability C) disability of the homeowner D) medical payments
A) loss of use
32) Following good health habits can be categorized as A) loss prevention. B) risk retention. C) noninsurance transfer. D) personal insurance.
A) loss prevention.
2) Which of the following would not appear in the asset section of an insurance company's balance sheet? A) loss reserves B) bonds C) common stock D) real estate
A) loss reserves
24) An insurance policy specifically written and designed to meet the needs of an insurance purchaser is called a(n) A) manuscript policy. B) bureau policy. C) standard policy. D) excess policy.
A) manuscript policy.
9) The worst loss that could ever happen to a firm is referred to as the A) maximum possible loss. B) probable maximum loss. C) frequency of loss. D) severity of loss.
A) maximum possible loss.
5) The long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called A) objective probability. B) objective risk. C) subjective probability. D) subjective risk.
A) objective probability.
15) At what point in time must an insured meet the coinsurance requirement in a property insurance policy in order to avoid having to pay a portion of the loss? A) only at the time of loss B) only at the time when the policy is issued C) only at the time of policy application D) both at the time when the policy is issued and at the time of loss
A) only at the time of loss
19) A pure risk is defined as a situation in which there is A) only the possibility of loss or no loss. B) only the possibility of profit. C) a possibility of neither profit nor loss. D) a possibility of either profit or loss.
A) only the possibility of loss or no loss.
54) David never stopped to consider the possible consequences of a long-term, permanent, disability. So David did not include disability income insurance in his personal risk management program. David is dealing with the risk of disability through A) passive retention. B) active retention. C) risk control. D) risk avoidance.
A) passive retention.
53) When Derrick became risk manager of Boller Company, he noticed that the company did not have a clear set of risk management objectives and a clearly-stated risk management philosophy. Derrick developed a written document stating the company's risk management objectives and risk management philosophy. This document is called a risk management A) policy statement. B) manuscript policy. C) manual. D) binder.
A) policy statement.
26) A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that each farmer sustained. Which characteristic of insurance is embodied in this agreement? A) pooling of losses B) fortuitous losses C) risk avoidance D) indemnification
A) pooling of losses
50) Gwen is in charge of accounting at Integrity Insurance Company. Integrity is a publicly-traded insurer. In describing her job, Gwen said, "There aren't too many businesses where you are required to keep two sets of books." Gwen's comment most likely refers to her company A) preparing accounting statements using statutory and GAAP accounting. B) preparing one set of records for the insurer's managers and another set for the policyholders. C) preparing one set of books using dishonest values and another set using current market values. D) preparing one set of accounting statements considering investment income and another set of accounting statements not considering investment income.
A) preparing accounting statements using statutory and GAAP accounting.
4) An integrated risk management program is a risk management program which combines A) pure and speculative risks. B) property and liability risks. C) personnel-related risk and property risk. D) direct and indirect loss risk.
A) pure and speculative risks.
20) The premature death of an individual is an example of a A) pure risk. B) speculative risk. C) nondiversifiable risk. D) physical hazard.
A) pure risk.
36) A manufacturing company just hired a new risk manager, and she has instituted several employee safety programs. She has persuaded the insurer writing the company's workers compensation insurance to base the premium on the company's actual loss experience during the current coverage period rather than on the company's historical performance. This type of plan is called a(n) A) retrospectively rated plan. B) class rated plan. C) experience rated plan. D) judgment rated plan.
A) retrospectively rated plan.
46) MLX Drug Company would like to market a new hypertension drug. While the Food and Drug Administration (FDA) was testing the drug, it discovered that the drug produced a harmful side effect. When MLX learned of the FDA's test result, MLX abandoned its plan to produce and distribute the drug. MLX's reaction illustrates A) risk avoidance. B) hedging. C) risk transfer. D) risk retention.
A) risk avoidance.
41) Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new manufacturing facility. These devices are all examples of A) risk control. B) noninsurance transfer. C) risk avoidance. D) risk retention.
A) risk control.
28) A computerized data base that permits risk managers to store and analyze risk management data is called a A) risk management information system. B) risk management Intranet. C) risk management web site. D) risk map.
A) risk management information system.
60) A U.S. athletic equipment company has production plants in several Pacific Rim countries. Each plant is divided into separate production areas using six-foot thick concrete walls. The construction method is designed to prevent fire from spreading from one production area to another. Using thick concrete walls so that fire does not spread to another production area illustrates which risk control method? A) separation B) duplication C) risk avoidance D) diversification
A) separation
2) Which of the following is implied by the pooling of losses? A) sharing of losses by an entire group B) inability to predict losses with any degree of accuracy C) substitution of actual loss for average loss D) increase of objective risk
A) sharing of losses by an entire group
47) ABC Insurance Company entered into a reinsurance agreement with XYZ Reinsurance. Under the contract, XYZ Re has no liability unless ABC's loss ratio exceeds 85 percent for the year. XYZ Re agreed to pay all losses in excess of the 85 percent loss ratio. ABC Insurance Company is using reinsurance to A) stabilize profits. B) reduce the unearned premium reserve. C) provide large risk capacity. D) retire from a line or territory.
A) stabilize profits.
10) Neil needs insurance that is unavailable in the state where he lives. To obtain insurance from a nonadmitted insurer, Neil should contact a A) surplus lines broker. B) nonadmitted agent. C) general agency broker. D) direct writer.
A) surplus lines broker.
7) The major difference between the dwelling coverage (Part A) of the Homeowners 2 (Broad From) policy and the Homeowners 3 (Special Form) policy is that A) the HO-3 provides open perils ("all risks") coverage and the HO-2 provides named-perils coverage. B) the HO-3 provides actual cash value coverage, the HO-2 provides replacement cost coverage. C) the HO-3 is always written without a deductible, the HO-2 always written with a deductible. D) the HO-3 can be used for any type of construction, the HO-2 is limited to wood frame homes.
A) the HO-3 provides open perils ("all risks") coverage and the HO-2 provides named-perils coverage.
1) Risk management is concerned with A) the identification and treatment of loss exposures. B) the management of speculative risks only. C) the management of pure risks that are uninsurable. D) the purchase of insurance only.
A) the identification and treatment of loss exposures.
36) Reasons to adopt an enterprise risk management plan include all of the following EXCEPT A) to increase earnings volatility. B) to treat risks facing the business in a more holistic way. C) to increase net income. D) to gain an advantage over competitors.
A) to increase earnings volatility.
16) All of the following are reasons for a primary insurer to use reinsurance EXCEPT A) to increase the unearned premium reserve. B) to increase underwriting capacity. C) to protect against catastrophic losses. D) to stabilize profits.
A) to increase the unearned premium reserve.
29) All of the following are duties of the mortgagee under the standard mortgage clause EXCEPT A) to reimburse the insurer for any loss payments. B) to notify the insurer of any change in ownership of the property of which the mortgagee is aware. C) to provide a proof of loss form if the insured fails to do so. D) to pay the premium if the insured fails to do so.
A) to reimburse the insurer for any loss payments.
26) Jan is employed by an insurance company. She reviews applications to determine whether her company should insure the applicant. If insurable, Jan assigns the applicant to a rating category based on the applicant's degree of risk. Jan is a(n) A) underwriter. B) actuary. C) loss control engineer. D) claims adjustor.
A) underwriter.
26) Ratemakers at ABC Insurance Company calculated the pure premium to be $280 for a risk they were considering insuring. What is the gross rate for this risk, assuming a 30 percent expense ratio? A) $364 B) $400 C) $430 D) $520
B) $400
39) Which of the following statements about the combined ratio is true? A) It is equal to the loss ratio minus the expense ratio. B) A combined ratio greater than 1 (or 100 percent) means an underwriting loss has occurred. C) The combined ratio considers the company's investment income. D) A combined ratio less than 1 (or 100 percent) indicates an underwriting loss has occurred.
B) A combined ratio greater than 1 (or 100 percent) means an underwriting loss has occurred.
3) According to the law of large numbers, what happens as the number of exposure units increases? A) Actual results will increasingly differ from probable results. B) Actual results will more closely approach probable results. C) Nondiversifiable risk will decrease. D) Objective risk will increase.
B) Actual results will more closely approach probable results.
47) Ann Parks and Robert Evans jointly own a grocery store. Ann and Robert are both named insureds on the property insurance covering the store, but Ann is the first named insured. Which of the following statements is true with regard to Ann's status as the first named insured? A) Any loss settlement is paid to Ann only. B) Ann is responsible for making sure that the premium has been paid. C) Ann can assign the policy without the consent of the insurer. D) Ann can waive policy conditions.
B) Ann is responsible for making sure that the premium has been paid.
30) All of the following statements about the cancellation of a Homeowners 3 policy are true EXCEPT A) The insurer may cancel a new policy for any reason if it has been in force for less than 60 days and is not a renewal policy. B) At least 100 days' notice of cancellation must be given if an insurer cancels a policy for nonpayment of premium. C) A policy written for longer than 1 year can be cancelled for any reason on the anniversary date by giving the insured at least 30 days' notice of cancellation. D) After a policy has been in force for at least 60 days, it can be cancelled by the insurer if the risk has increased substantially since the policy was issued.
B) At least 100 days' notice of cancellation must be given if an insurer cancels a policy for nonpayment of premium.
52) Which of the following statements concerning the coverage of collapse of the dwelling under an unendorsed Homeowners 3 policy is true? A) There is no coverage for collapse, regardless of the cause of the collapse. B) Collapse is covered if it is caused by one of the Coverage C perils. C) If collapse is caused by an earthquake, the loss is covered. D) There is no coverage for collapse unless the proper endorsement is added to the policy.
B) Collapse is covered if it is caused by one of the Coverage C perils.
25) Which of the following statements about the replacement cost provision of the Homeowners 3 policy is true? A) It applies to personal property losses only. B) Except for small losses, the insured must repair or replace the damaged property in order to receive full replacement cost. C) The insured is required to carry an amount of insurance equal to 100 percent of the replacement value of the insured property. D) Loss settlements are equal to 50 percent of the value of the loss if the insured is carrying less than the required amount of insurance.
B) Except for small losses, the insured must repair or replace the damaged property in order to receive full replacement cost.
12) Which of the following statements is (are) true regarding investment returns and the underwriting cycle? I. Investment returns have no impact upon the underwriting cycle. II. Investment returns can lengthen the duration of a soft market by offsetting underwriting losses. A) I only B) II only C) both I and II D) neither I nor II
B) II only
13) Which of the following conditions is (are) appropriate for using retention? I. Losses are difficult to predict. II. The worst possible loss is not serious. A) I only B) II only C) both I and II D) neither I nor II
B) II only
14) Which of the following statements regarding the use of retention is (are) true? I. Retention is best used for loss exposures that have a low frequency and a high severity. II. A financially strong firm can have a higher retention level than a firm whose financial position is weak. A) I only B) II only C) both I and II D) neither I nor II
B) II only
2) Which of the following statements about eligibility requirements for homeowners insurance is (are) true? I. A contract can be written on a twenty-unit apartment complex as long as the tenants are families. II. Separate forms are available for renters and condominium owners. A) I only B) II only C) both I and II D) neither I nor II
B) II only
2) Which of the following statements about the scope of risk management is (are) true? I. Traditionally, risk management was limited in scope to speculative loss exposures. II. In the 1990s, some businesses began to expand the scope of risk management to include financial risks. A) I only B) II only C) both I and II D) neither I nor II
B) II only
26) Which of the following statements is (are) true regarding the net present value of a capital investment? I. Net present value does not consider time value of money. II. A positive net present value represents an increase in value to the firm. A) I only B) II only C) both I and II D) neither I nor II
B) II only
26) Which of the following types of loss exposures may be appropriately handled through the purchase of insurance? I. High-frequency, low-severity loss exposures II. Low-frequency, high-severity loss exposures A) I only B) II only C) both I and II D) neither I nor II
B) II only
27) Which of the following statements about the appraisal clause in the Homeowners 3 policy is (are) true? I. It is used to determine a value for personal property when the policy is issued. II. It is used to help settle disputes over the amount of a loss after a loss has occurred. A) I only B) II only C) both I and II D) neither I nor II
B) II only
27) Which of the following statements is (are) true about the loss ratio method of class rating? I. The pure premium is calculated, and it is loaded to cover expenses, profit, and contingencies. II. The actual loss ratio is compared to the expected loss ratio, and the rate is adjusted accordingly. A) I only B) II only C) both I and II D) neither I nor II
B) II only
33) Which of the following statements about Lloyds of London (are) true? I. The majority of the business underwritten by Lloyds of London is for unusual risks, such as valuable race horses and professional athletes. II. Lloyds of London is a group of underwriters who underwrite insurance, not an insurance company. A) I only B) II only C) both I and II D) neither I nor II
B) II only
37) Which of the following statements is (are) true about savings bank life insurance (SBLI)? I. Each depositor at the savings bank receives life insurance equal to his or her savings account balance. II. The goal of SBLI is to provide low-cost life insurance to consumers. A) I only B) II only C) both I and II D) neither I nor II
B) II only
47) Which of the following statements about captive insurance companies is (are) true? I. A captive insurance company established by a U.S. company must be domiciled in the United States. II. A captive insurance company may be owned by several parents. A) I only B) II only C) both I and II D) neither I nor II
B) II only
49) Which of the following statements about chance of loss and risk is (are) true? I. If the chance of loss is identical for two groups, the objective risk must be the same. II. Two individuals may perceive differently the risk inherent in a given activity. A) I only B) II only C) both I and II D) neither I nor II
B) II only
5) Characteristics of a fortuitous loss include which of the following? I. The loss is certain to occur. II. The loss occurs as a result of chance. A) I only B) II only C) both I and II D) neither I nor II
B) II only
6) Which of the following statements about methods for estimating loss reserves for property and casualty insurers is (are) true? I. The judgment method involves the use of a statutory formula to estimate the loss reserve. II. The average value method is used when the number of claims is large and the claims are settled quickly. A) I only B) II only C) both I and II D) neither I nor II
B) II only
6) Which of the following statements about reciprocal exchanges is (are) true? I. Reciprocal exchanges usually specialize in health insurance. II. Reciprocal exchanges are unincorporated mutual insurance companies. A) I only B) II only C) both I and II D) neither I nor II
B) II only
57) Which of the following statements concerning coverage under the Homeowners 3 policy is true? A) If a power failure away from the insured dwelling causes a loss, the loss is covered. B) If a Coverage C peril causes a collapse, the resulting damage is covered. C) If an insured peril damages a portion of a pair or set (e.g. matching lamps or end tables), the insurer must pay the full value of the entire pair or set. D) If a discharge from a home appliance causes the home to flood, the loss is excluded. .
B) If a Coverage C peril causes a collapse, the resulting damage is covered.
12) Which of the following statements about claims settlement is true? A) Agents are never authorized to settle claims. B) Independent adjustors may be used in a geographic area where the volume of business is too low for an insurer to have its own adjustors. C) A public adjustor is a salaried employee who works for one insurer. D) A staff claims representative is hired by a policyholder to represent him or her if the policyholder does not agree with the claim settlement offered by the insurer.
B) Independent adjustors may be used in a geographic area where the volume of business is too low for an insurer to have its own adjustors.
41) Which of the following statements regarding insurance and hedging is true? A) Both insurance and hedging deal only with pure risks. B) Insurance reduces objective risk while hedging involves only risk transfer and not risk reduction. C) Hedging reduces objective risk while insurance involves only risk reduction and not risk transfer. D) Both insurance and hedging reduce objective risk but do not involve the transfer of risk.
B) Insurance reduces objective risk while hedging involves only risk transfer and not risk reduction.
23) Which of the following statements about judgment rating is true? A) It involves the manual rating of exposures. B) It is used when the loss exposures are so diverse that a class rate cannot be calculated. C) It is a form of experience rating. D) It is only used when credible loss statistics are available.
B) It is used when the loss exposures are so diverse that a class rate cannot be calculated.
23) Which of the following is a general exclusion under Section I of the Homeowners 3 policy? A) Water damage caused by accidental discharge from a household appliance. B) Losses due to the failure of the insured to use all reasonable means to save and preserve property after the time of a loss. C) Losses resulting from a power failure caused by an insured peril at the residence premises. D) Losses due to a windstorm.
B) Losses due to the failure of the insured to use all reasonable means to save and preserve property after the time of a loss.
8) One source of life and health insurance underwriting information is an organization that life and health insurance companies can join. As a member, life and health insurance companies report health impairments of applicants, and this information is shared with member companies. Although the information is shared, the underwriting decision of the member company is not disclosed. What is this organization called? A) Fair Isaac Corporation (FICO) B) Medical Information Bureau (MIB) C) National Association of Insurance Commissioners (NAIC) D) National Association of Mutual Insurance Companies (NAMIC)
B) Medical Information Bureau (MIB)
44) Which of the following statements about covered perils and loss settlement under an unendorsed Homeowners 3 policy is true? A) The dwelling is covered on a named-perils basis. B) Personal property losses are settled on an actual cash value basis. C) Losses to the dwelling are always settled on an actual cash value basis. D) Personal property is covered on an open-perils basis.
B) Personal property losses are settled on an actual cash value basis.
15) Which of the following is a result of adverse selection? A) The insurer's financial results will be substantially improved. B) Persons most likely to have losses are also most likely to seek insurance at standard rates. C) It is unnecessary for the insurance company to use underwriting. D) Insurance can be written only by the federal government.
B) Persons most likely to have losses are also most likely to seek insurance at standard rates.
30) All of the following are burdens to society because of the presence of risk EXCEPT A) The size of an emergency fund must be increased. B) Risk provides an incentive for people to engage in loss control. C) Society is deprived of certain goods and services. D) Mental fear and worry are present.
B) Risk provides an incentive for people to engage in loss control.
47) Which of the following is a demographic factor that has increased losses from climate change in the United States? A) The increasing life expectancy in the United States. B) The increasing population in Southern states such as Florida, Texas, and South Carolina. C) The declining fertility rate (live births per women of child-bearing age) in the United States. D) The growth in the number of families living below the poverty line in the United States.
B) The increasing population in Southern states such as Florida, Texas, and South Carolina.
34) Michelle had four matching end tables in her home. A fire damaged the home, destroying two of the end tables. Michelle's home was covered by an unendorsed Homeowners 3 policy. Which of the following is true with regard to the settlement for the end tables in this case? A) Loss to a pair or set is excluded under the policy. B) The insurer will pay the difference in actual cash value of the property before and after the loss. C) The insurer will pay the replacement cost of the loss. D) If a partial loss to a pair or set occurs, the insurer is liable for replacement of the entire pair or set.
B) The insurer will pay the difference in actual cash value of the property before and after the loss.
6) From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT A) The loss must be accidental. B) The loss should be catastrophic. C) The premium must be economically feasible. D) There must be a large number of exposure units.
B) The loss should be catastrophic.
27) XYZ Insurance Company writes coverage for most perils which can damage property. XYZ, however, does not write flood insurance on property located in flood plains. Which requirement of an ideally insurable risk might be violated if XYZ wrote flood insurance on property located in flood plains? A) There must be a large number of similar exposure units. B) The loss should not be catastrophic. C) The chance of loss must be calculable. D) The losses must be determinable and measurable.
B) The loss should not be catastrophic.
30) Which of the following statements about retrospective rating is true? A) The premium for the current period is determined by the loss experience in prior periods. B) The premium for the current period is determined by the loss experience during the current period. C) The premium for the current period is determined by predicted future loss experience. D) The premium for future periods is determined by the loss experience for the current period.
B) The premium for the current period is determined by the loss experience during the current period.
19) All of the following statements about business objectives in designing a rating system are true EXCEPT A) The rating system should encourage loss control activities. B) The rating system should be independent of long-run changes in economic conditions. C) The rating system should be simple to understand. D) The rating system should be stable over short periods so that consumer satisfaction can be maintained.
B) The rating system should be independent of long-run changes in economic conditions.
19) Which of the following statements about treaty reinsurance is true? A) The reinsurer is required to underwrite each individual applicant that is reinsured. B) The reinsurer must accept all business that falls within the scope of the treaty. C) The ceding insurer can choose which business falling within the scope of the treaty it wishes to reinsure. D) It protects the reinsurer by requiring the ceding insurer to charge adequate premiums.
B) The reinsurer must accept all business that falls within the scope of the treaty.
15) Which of the following property is covered under the personal property coverage (Coverage C) of the Homeowners 3 policy? A) a pet dog owned by the named insured B) a bicycle owned by a foster child living with the named insured C) a motor vehicle owned by the named insured D) a stamp collection insured under a separate policy
B) a bicycle owned by a foster child living with the named insured
17) The unearned premium reserve of an insurer is A) an asset representing the investments made with premium income. B) a liability representing the unearned portion of gross premiums on outstanding policies. C) a liability representing claims that have been filed, but not yet paid. D) the portion of the insurer's net worth belonging to policyowners.
B) a liability representing the unearned portion of gross premiums on outstanding policies.
2) What information is contained in the insuring agreement of an insurance policy? A) a description of the property or life to be insured B) a summary of the major promises of the insurer C) a summary of the obligations of the insured D) a list of the property, losses, and perils that are not covered
B) a summary of the major promises of the insurer
17) The primary purpose of coinsurance in property insurance is to A) reduce moral hazard. B) achieve equity in rating. C) minimize problems in settling claims. D) eliminate small losses.
B) achieve equity in rating.
47) BBB Auto Club provides emergency road service and other services to its members. BBB Auto Club charges a higher membership fee to new members than it charges to members who are renewing their membership. When asked to explain this pricing policy, the auto club president noted, "New members often sign-up prior to taking a long road trip, so we have to charge more as first-year members have higher service utilization rates." A similar phenomenon observed in insurance markets is called A) attitudinal hazard. B) adverse selection. C) risk aversion. D) moral hazard.
B) adverse selection.
31) Terrorists attacked the World Trade Center on September 11, 2001. The attack simultaneously created large losses for life insurers, property insurers, workers compensation insurers, health insurers, and liability insurers. What name is given to an event that simultaneously creates large losses in several lines of insurance? A) speculative loss B) clash loss C) retroactive loss D) consequential loss
B) clash loss
3) Which of the following is a post-loss risk management objective? A) treating loss exposures in the most economical way B) continuing operations C) reduction of anxiety D) meeting externally imposed legal obligations
B) continuing operations
13) A large property and liability insurance company merged with a bank and then acquired a stock brokerage company. This type of merger and acquisition activity is categorized as A) insurance company consolidation. B) cross-industry consolidation. C) financial risk management. D) insurance brokerage consolidation.
B) cross-industry consolidation.
18) Which of the following is an expense for a life insurance company? A) loss reserves B) death benefits paid to a beneficiary C) unrealized capital gains D) realized capital gains
B) death benefits paid to a beneficiary
37) Which of the following is an additional coverage provided under Section I of the Homeowners 3 policy? A) medical payments to others B) debris removal C) personal liability D) intentional property damage caused by an insured
B) debris removal
57) A college professor stores class grading records on a spreadsheet on her office computer. Each time she updates a grading file she makes a printout and a backup copy of the grading file. The professor is using which risk management method to address the risk of losing her class grading records? A) risk avoidance B) duplication C) separation D) noninsurance transfer
B) duplication
23) All of the following are benefits to society that result from insurance EXCEPT A) less worry and fear. B) elimination of moral hazard. C) indemnification for loss. D) loss prevention.
B) elimination of moral hazard.
36) Which of the following is an example of a noninsurance risk transfer? A) not engaging in dangerous activities B) entering into a hold-harmless agreement C) installing smoke detectors in your home D) using nonflammable building material when constructing a house
B) entering into a hold-harmless agreement
18) Katelyn was just named Risk Manager of ABC Company. She has decided to create a risk management program which considers all of the risks faced by ABC—pure, speculative, operational, and strategic—in a single risk management program. Such a program is called a(n) A) financial risk management program. B) enterprise risk management program. C) fundamental risk management program. D) consequential risk management program.
B) enterprise risk management program.
52) Morris Company self-insures its workers compensation loss exposure. The risk manager of Morris Company is concerned about the possible impact of a single catastrophic claim. She decided to set a retention limit of $500,000 per-claim, and to purchase insurance that will be begin to pay once Morris Company has paid $500,000 on a single claim. The insurance the risk manager purchased is called A) captive insurance. B) excess insurance. C) primary insurance. D) umbrella insurance.
B) excess insurance.
40) Marcy advises her clients on investments, taxes, wealth management, estate issues, budgeting, and insurance. Marcy is also a licensed life insurance agent. When Marcy sells life insurance to a client, the distribution channel used is a(n) A) stock broker. B) financial planner. C) insurance broker. D) direct writer.
B) financial planner.
17) One of the speculative financial risks considered in an enterprise risk management program is the risk of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money. This risk is called A) property risk. B) financial risk. C) strategic risk. D) operational risk.
B) financial risk.
21) Which of the following is a form of casualty insurance? A) fire insurance B) general liability insurance C) inland marine insurance D) ocean marine insurance
B) general liability insurance
47) ABC Insurance Company sells auto insurance in one state. Recently, the state legislature passed a law that limits the use of an individual's credit history by insurers when selecting applicants to insure. This change in law will increase the possibility of unprofitable results for ABC. This type of hazard is an example of A) physical hazard. B) legal hazard. C) moral hazard. D) attitudinal hazard.
B) legal hazard.
45) Ben is concerned that if he injures someone or damages someone's property he could be held legally responsible and required to pay damages. This type of risk is called a A) speculative risk. B) liability risk. C) nondiversifiable risk. D) property risk.
B) liability risk.
32) Ross studied engineering in college. After graduation, he went to work for an insurance company. Ross visits properties insured by his company. He conducts inspections and makes recommendations about alarm systems, sprinkler systems, and building construction. In what functional area does Ross work? A) underwriting B) loss control C) information systems D) claims adjusting
B) loss control
2) A situation or circumstance in which a loss is possible, regardless of whether a loss occurs, is called a A) deductible. B) loss exposure. C) loss avoidance. D) peril.
B) loss exposure.
35) Parker Department Stores has been hurt in recent months by a large increase in shoplifting losses. Parker's risk manager concluded that while the frequency of shoplifting losses was high, the severity is still relatively low. What is (are) the appropriate risk management technique(s) to apply to this problem? A) retention B) loss prevention C) transfer through insurance D) avoidance
B) loss prevention
7) One item that appears on an insurance company's financial statements is a liability that represents an estimate of the claims reported and adjusted but not yet paid, claims reported and filed but not yet adjusted, and claims incurred but not yet reported to the company. This liability is called the insurer's A) net income. B) loss reserves. C) admitted assets. D) unearned premium reserve.
B) loss reserves.
25) Cathy just started a job with XYZ Manufacturing Company. She attended an orientation and was given a packet providing information about the various employee benefits XYZ offers. One item in the packet was a booklet and application form from an auto insurer. The insurer offers lower premiums to XYZ employees. The insurer's plan for selling individually-underwritten auto insurance to employees of XYZ Manufacturing Company is called A) direct response. B) mass merchandising. C) financial institution distribution. D) multiple marketing.
B) mass merchandising.
37) Curt borrowed money from a bank to purchase a fishing boat. He purchased property insurance on the boat. Curt had difficulty making loan payments because he did not catch many fish, and fish prices were low. Curt intentionally sunk the boat, collected from his insurer, and paid off the loan balance. This scenario illustrates the problem of A) adverse selection. B) moral hazard. C) nondiversifiable risk. D) attitudinal hazard.
B) moral hazard.
39) Brad started a pest control business. To protect his personal assets against liability arising out of the business, Brad incorporated the business. Brad's use of the corporate form of organization to shield against personal liability claims illustrates A) fundamental risk. B) noninsurance transfer. C) risk retention. D) objective risk.
B) noninsurance transfer.
36) Barb, who is self-employed, is the main breadwinner for her family. Barb does not have disability income insurance because she has never stopped to consider the impact of a long-term disability upon her family. Barb's treatment of the risk of disability is best described as A) risk transfer. B) passive retention. C) risk avoidance. D) active retention.
B) passive retention.
44) Peggy is an independent insurance agent who places substantial amounts of business with XYZ Insurance Company. XYZ pays Peggy a bonus when she meets a sales goal. XYZ also allows Peggy to recruit and train sub-agents. She receives additional commissions based on the sales generated by the sub-agents. Based on this description, we can conclude that Peggy is a A) direct writer. B) personal producing general agent. C) multiple line exclusive agent. D) broker.
B) personal producing general agent.
20) David is a successful independent insurance agent. Recently, one of the life insurance companies with whom he places business offered him a special financial arrangement. If David meets sales targets, he will receive large bonuses. He will also be able to recruit and train sub-agents and receive an over-riding commission based on the amount of life insurance the sub-agents sell. Based on this description, David is a(n) A) insurance broker. B) personal-producing general agent. C) direct writer. D) multiple life exclusive agent.
B) personal-producing general agent.
8) Loss frequency is defined as the A) probable size of the losses that may occur during some period. B) probable number of losses that may occur during some period. C) probability that any particular piece of property may be totally destroyed. D) probability that a liability judgment may exceed a firm's net worth.
B) probable number of losses that may occur during some period.
35) Easy Pay Insurance Company may require insureds who suffer a loss to submit a sworn statement to substantiate that a loss occurred and to describe the conditions under which the loss occurred. This sworn statement is called a(n) A) binder. B) proof of loss. C) inspection report. D) notice of loss.
B) proof of loss.
12) Which of the following types of risks best meets the requirements for being insurable by private insurers? A) most market risks B) property risks C) financial risks D) political risks
B) property risks
39) A special coverage policy is a policy that A) has no exclusions. B) provides open-perils coverage. C) provides coverage under special conditions. D) has coverage for multiple lines of insurance.
B) provides open-perils coverage.
29) Insurance companies collect premiums in advance. Since the premiums collected are not needed to pay losses and expenses immediately, the funds can be loaned to business firms. Because of this fact, insurance benefits society by A) enhancing credit. B) providing a source of investment funds. C) indemnifying losses. D) providing an incentive for loss prevention.
B) providing a source of investment funds.
36) All of the following are methods that a property and liability insurance company can use to protect against catastrophic losses EXCEPT A) sale of catastrophe bonds. B) purchase of common stock. C) purchase of excess-of-loss reinsurance. D) quota share reinsurance with a low retention percentage.
B) purchase of common stock.
28) Low-frequency, low-severity loss exposures are best handled by A) avoidance. B) retention. C) insurance. D) noninsurance transfer.
B) retention.
33) Amy heads the legal staff of a large property and liability insurance company. Amy's staff is likely involved in which of the following activities? A) reviewing investment options for the insurer's assets B) reviewing language and policy provisions in insurance contracts C) calculating premiums to be charged for the insurer's products D) reviewing applications to determine if the company should insure the risk
B) reviewing language and policy provisions in insurance contracts
48) Maggie purchased a life insurance policy. She was concerned that if she became disabled, she would no longer be able to pay the premiums. Her agent added an amendment of the policy stating that if she became disabled, future premium payments would be waived. Such an amendment to a life insurance policy is called a(n) A) binder. B) rider. C) warranty. D) schedule.
B) rider.
34) The use of fire-resistive materials when constructing a building is an example of A) risk transfer. B) risk control. C) risk avoidance. D) risk retention.
B) risk control.
46) Purchasing health insurance illustrates the use of which personal risk management technique? A) avoidance B) risk transfer C) risk control D) risk retention
B) risk transfer
36) Linda wants to purchase a homeowners policy. She has some valuable personal property to which internal policy limits apply. Her agent said that she could obtain coverage under her homeowners policy by attaching a list of this valuable property with specific amounts of insurance. Such a listing is called a(n) A) binder. B) schedule. C) application. D) warranty.
B) schedule.
4) The corporate structure of mutual insurers has changed in recent years. All of the following are examples of significant changes EXCEPT A) demutualization of some insurers. B) sharp increase in the number of mutual insurance companies. C) increase in company mergers. D) formation of mutual holding companies.
B) sharp increase in the number of mutual insurance companies.
31) One branch of government insurance programs has a number of distinguishing characteristics. These programs are compulsory, they are financed by mandatory contributions rather than general tax revenues, and benefits are weighted in favor of low-income groups. These government insurance programs are called A) welfare programs. B) social insurance programs. C) casualty insurance programs. D) private insurance programs.
B) social insurance programs.
13) Morgan was hired by an insurance company after she graduated from college. Upon completion of a training program, Morgan was assigned to a territory where she adjusts claims of the insurer's policyowners. Morgan is a(n) A) public adjustor. B) staff claims representative. C) agent. D) independent adjustor.
B) staff claims representative.
26) Brian buys and sells investment securities for his clients. Brian also decided to become a licensed life insurance agent to better serve his customers. While Brian's primary focus is buying and selling financial securities for his clients in exchange for commissions, he also earns commissions on his life insurance sales. Brian is a(n) A) direct writer. B) stock broker. C) insurance broker. D) personal-producing general agent.
B) stock broker.
39) Uncertainty pertaining to the organization's goals and objectives and the organization's strengths, weaknesses, opportunities, and threats is called A) operational risk. B) strategic risk. C) subjective risk. D) pure risk.
B) strategic risk.
4) Uncertainty based on a person's mental condition or state of mind is known as A) objective risk. B) subjective risk. C) objective probability. D) subjective probability.
B) subjective risk.
48) Granite Insurance Company entered into a treaty reinsurance agreement with Rock Solid Reinsurance (RSR). Granite's retention limit is $400,000 and RSR agreed to provide reinsurance for up to $2.0 million. If Granite writes an $800,000 policy, RSR is responsible for 50 percent of the losses. If Granite insures a $1.6 million risk, RSR is responsible for 25 percent of any losses. What type of reinsurance arrangement did Granite enter into with RSR? A) facultative reinsurance B) surplus share reinsurance C) quota share reinsurance D) excess of loss reinsurance
B) surplus share reinsurance
3) Under one method of estimating a loss reserve, the reserve is based on life expectancy, duration of disability, and similar factors. This method of estimating loss reserves is called the A) judgment method. B) tabular value method. C) loss ratio method. D) average value method.
B) tabular value method.
8) A peril is A) a moral hazard. B) the cause of a loss. C) a condition that increases the chance of a loss. D) the probability that a loss will occur.
B) the cause of a loss.
43) Maria's home was damaged by an earthquake. As Maria has open-perils coverage on her home, she was surprised to learn that her loss was not covered. Which section of a property insurance policy specifies which perils, property, and types of losses are not covered? A) the declarations B) the exclusions C) the conditions D) the insuring agreement
B) the exclusions
10) All of the following are covered under the dwelling coverage (Coverage A) of the Homeowners 3 policy EXCEPT A) any structure attached to the dwelling. B) the land on which the insured dwelling is located. C) materials and supplies intended for alteration or repair of the dwelling. D) materials and supplies intended for construction of a detached garage.
B) the land on which the insured dwelling is located.
51) Which of the following is an example of a commercial risk? A) the risk of insufficient retirement income B) the loss of business income C) the risk of premature death D) the risk of being unemployed
B) the loss of business income
51) In a reinsurance transaction, the ceding commission is paid by A) the insured to the ceding company. B) the reinsurer to the ceding company. C) the ceding company to the insured. D) the ceding company to the reinsurer.
B) the reinsurer to the ceding company.
47) If there is a conflict between state law and a provision in a homeowners policy, A) the policy wording takes precedence. B) the state law takes precedence. C) the policyholder is entitled to whichever provides broader coverage. D) the policy is null and void.
B) the state law takes precedence.
55) The property and liability insurance industry fluctuates between periods of increasing insurance rates and tight underwriting standards, and decreasing insurance rates and loose underwriting standards. Profitability in the industry follows these cyclical movements. What is this pattern of fluctuations called? A) the claims cycle B) the underwriting cycle C) the business cycle D) the accounting cycle
B) the underwriting cycle
30) New Liability Insurance Company began operations last year and has been very successful. The company's ability to grow is being restricted by an accounting rule that requires insurers to realize acquisition expenses immediately, while not realizing premiums received as income until some time has passed. Reinsurance is often used in such cases for which of the following purposes? A) to stabilize profitability B) to reduce the unearned premium reserve C) to provide protection against catastrophic losses D) to withdraw from a line of business or territory
B) to reduce the unearned premium reserve
5) Exclusions are used in insurance policies for all of the following reasons EXCEPT A) to reduce moral hazard. B) to waive policy conditions. C) to eliminate coverage for uninsurable perils. D) to eliminate coverage not needed by typical insureds.
B) to waive policy conditions.
35) Hedge Fund Company offers a mutual fund to investors. Fund managers are concerned about fund volatility. They analyzed the fund to determine the worst loss likely to occur in a calendar quarter, assuming a 90 percent level of confidence. The worst probable loss is known as the fund's A) unrealized capital gain. B) value at risk. C) beta coefficient. D) surrender value.
B) value at risk.
41) Five Below Zero is a new ski resort in Colorado. Five Below Zero is concerned that an abnormally warm winter will prevent the accumulation of snow needed to have a profitable ski season. Five Below Zero purchased a contract that will pay a lump sum if the daily high temperature exceeds 30 degrees for more than 12 days between January 1st and March 31st. The contract Five Below Zero purchased is called a(n) A) catastrophe bond. B) weather option. C) interest rate swap. D) convertible bond.
B) weather option.
18) Under one life insurance marketing system, agents conduct sales interviews at the workplace with the approval of the management of the business. There are few direct costs to the employer, and this marketing system is especially appropriate for low-income and middle-income workers. This life insurance marketing system is called the A) direct response system. B) worksite marketing system. C) independent agency system. D) personal producing general agency system.
B) worksite marketing system.
49) The homeowners policy excludes a loss brought about by two or more perils where one peril is covered under the policy and the other perils are excluded. This situation is called A) ordinance or law. B) proximate cause. C) concurrent causation. D) nullification.
C) concurrent causation.
39) A dwelling with a replacement cost of $150,000 was insured under a Homeowners 3 policy for $100,000 at the time the roof was destroyed by a windstorm. The actual cash value of the loss was $9,000, but it will cost $12,000 to replace the roof. Ignoring any deductible, what will the insurer pay to settle this loss? A) $8,000 B) $9,000 C) $10,000 D) $12,000
C) $10,000
26) David has a Homeowners 3 policy that provides $280,000 of insurance on his dwelling, which has a current replacement value of $400,000. Ignoring any deductible, how much will David collect if a roof with a replacement value of $16,000 but an actual cash value of $10,000 is destroyed in a fire? A) $10,000 B) $12,000 C) $14,000 D) $16,000
C) $14,000
1) LMN Mutual Insurance Company has total liabilities of $300 million. The company has total assets of $380 million. What is LMN's policyholders' surplus? A) $680 million B) $340 million C) $80 million D) -$80 million
C) $80 million
14) A company has a fleet of 200 vehicles. On average, 50 vehicles per year experience property damage. What is the probability that any vehicle will be damaged in any given year? A) 10 percent B) 20 percent C) 25 percent D) 50 percent
C) 25 percent
11) JKL Insurance Company reported the following information on its accounting statements last year: Premiums Written $90,000,000 Loss Adjustment Expenses $5,000,000 Underwriting Expenses $30,000,000 Premiums Earned $100,000,000 Incurred Losses $70,000,000 What was JKL's expense ratio last year? A) 5.0 percent B) 30.0 percent C) 33.3 percent D) 50.0 percent
C) 33.3 percent
16) RST Company has production facilities in Salt Lake City and Cleveland. The probability that in any given year a fire will damage the production facility in Salt Lake City is 5 percent. The probability that in any given year a fire will damage the Cleveland production facility is 4 percent. What is the probability that AT LEAST ONE of the production facilities will be damaged by fire in any given year? A) 0.20 percent B) 2.00 percent C) 8.80 percent D) 9.00 percent
C) 8.80 percent
4) According to the law of large numbers, what should happen as an insurer increases the number of units insured? A) The amount the insurer expects to pay in claims should decrease. B) Underwriting expenses should decrease. C) Actual results will more closely approach expected results. D) The insurer's profitability should become more variable.
C) Actual results will more closely approach expected results.
24) Helen and John both own automobiles on which they carry liability insurance. If Helen is negligent and has an accident while driving John's car with his permission, how will each insurer respond to any liability judgment against Helen? A) The insurers will pay the judgment on a pro rata basis. B) John's insurer will pay on an excess basis if Helen's insurance is insufficient to cover the judgment. C) Helen's insurance will pay on an excess basis if John's insurance is insufficient to cover the judgment. D) The policies will pay the judgment on the basis of contribution by equal shares.
C) Helen's insurance will pay on an excess basis if John's insurance is insufficient to cover the judgment.
29) All of the following statements about the administration of a risk management program are true EXCEPT A) The risk manager is an important part of a firm's management team. B) A risk management policy statement can be used to educate top executives about the risk management process. C) If a risk management program is properly designed, periodic review of the program is unnecessary. D) In order to properly identify loss exposures, the risk manager needs the cooperation of other departments.
C) If a risk management program is properly designed, periodic review of the program is unnecessary.
39) Which of the following statements is true regarding independent insurance agents in property and liability insurance? A) The insurer owns the expiration rights, not the independent agent. B) Independent agents are only permitted to represent one insurance company. C) Independent agents are paid the same commission rate on new and renewal business. D) Independent agents are not permitted to sell life and health insurance.
C) Independent agents are paid the same commission rate on new and renewal business.
10) Which of the following statements is true regarding insurance market conditions and underwriting results? A) A combined ratio greater than one (or 100 percent) indicates profitable underwriting. B) In a "soft" insurance market, more retention is used than in a "hard" insurance market. C) Insurance rates are high and underwriting standards are tight when the insurance market is "hard." D) Property and liability insurance premiums and underwriting standards do not fluctuate over time.
C) Insurance rates are high and underwriting standards are tight when the insurance market is "hard."
34) James purchased liability insurance with a $100,000 limit from Insurer A. When Insurer A denied a claim that James thought should be covered, he bought a second liability insurance policy with a $150,000 limit from Insurer B. Before he cancelled the policy with Insurer A, a $60,000 loss occurred. If this loss is settled on a pro rata basis, how much must each insurer pay? A) Insurer A will pay $10,000 and Insurer B will pay $50,000. B) Insurer A will pay $20,000 and Insurer B will pay $40,000. C) Insurer A will pay $24,000 and Insurer B will pay $36,000. D) Insurer A will pay $40,000 and Insurer B will pay $20,000.
C) Insurer A will pay $24,000 and Insurer B will pay $36,000.
20) All of the following statements about regulatory objectives of insurance rate making are true EXCEPT A) One purpose of rate adequacy is to maintain the solvency of insurers. B) Rates unfairly discriminate if loss exposures that are similar with respect to losses and expenses are charged substantially different rates. C) Insurers know in advance if the coverages marketed will be profitable, so rate regulation is not needed. D) Rates are excessive if policyholders are paying substantially more than the actual value of their protection.
C) Insurers know in advance if the coverages marketed will be profitable, so rate regulation is not needed.
25) All of the following are disadvantages of using insurance in a commercial risk management program EXCEPT A) There is an opportunity cost because premiums must be paid in advance. B) Considerable time and effort must be spent selecting and negotiating coverages. C) It results in considerable fluctuations in earnings after losses occur. D) Attitudes toward loss control may become lax when losses are insured.
C) It results in considerable fluctuations in earnings after losses occur.
35) All of the following statements about risk retention are true EXCEPT A) It may be used intentionally if commercial insurance is unavailable. B) It may be used passively because of ignorance. C) Its use is most appropriate for low-frequency, high-severity types of risks. D) Its use results in cost savings if losses are less than the cost of insurance.
C) Its use is most appropriate for low-frequency, high-severity types of risks.
31) Monopoly Insurance is the only company marketing a certain line of insurance in a state. After complaints from several consumers, the State Insurance Department investigated Monopoly's rates. The regulators determined that Monopoly was taking advantage of being the only insurer offering the line by charging more than double the actuarial cost of the coverage. Which regulatory rating objective was Monopoly violating? A) Rates must be adequate. B) Rates should encourage loss control. C) Rates must not be excessive. D) Rates must not unfairly discriminate.
C) Rates must not be excessive.
35) All of the following are reasons why mutual insurance companies convert to stock insurance companies EXCEPT A) Stock companies can offer stock options to attract and retain key personnel. B) Stock companies can raise new capital more easily. C) Stock companies are exempt from state insurance regulation. D) Stock companies offer greater flexibility to expand through acquisitions.
C) Stock companies are exempt from state insurance regulation.
1) Which of the following statements about stock insurers is true? A) They issue assessable policies. B) They are not permitted to write property and liability insurance. C) Stockholders bear any losses and share in any profits. D) They are owned by their policyholders.
C) Stockholders bear any losses and share in any profits.
14) All of the following statements about the settlement of a claim are true EXCEPT A) The insurance policy usually has a provision specifying how a notice of loss is to be made to the insurance company. B) One step in the investigation of a claim is to determine whether the policy was in force when the loss occurred. C) The adjustor must file the proof of loss, which is a sworn statement supporting his or her decision regarding a claim. D) A policy provision may determine how disputes over claim settlements are resolved.
C) The adjustor must file the proof of loss, which is a sworn statement supporting his or her decision regarding a claim.
15) Which of the following statements about the use of a captive insurance company by a parent firm is true? A) The captive may not write outside, non-parent company, business. B) Captives are not permitted to use reinsurance, so any business insured by the captive stays with the captive. C) The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers. D) Business placed with the captive is always considered retained risk and is never considered transferred risk.
C) The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers.
7) From the standpoint of the insurer, which of the following is a characteristic of an ideally insurable risk? A) The loss must be intentional. B) There must be a small number of unique loss exposures. C) The chance of loss must be calculable. D) The loss must be indeterminable.
C) The chance of loss must be calculable.
25) All of the following statements about class rating are true EXCEPT A) Exposures with similar characteristics are placed in the same underwriting class. B) The rate charged for each class reflects the average loss experience for that class. C) The complexity of class rating makes it inappropriate for personal lines coverages. D) It is based on the assumption that future losses to insureds will be determined by the same classification factors currently in use.
C) The complexity of class rating makes it inappropriate for personal lines coverages.
19) Which of the following statements is (are) true with regard to probability analysis? I. If two events are independent, the occurrence of one event does not affect the occurrence of the second event. II. If two events are dependent, the occurrence of one event affects the occurrence of the second event. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
51) Brian purchased an unendorsed Homeowners 3 policy. Under the policy, Brian's detached garage is also covered. Which of the following statements regarding coverage on the garage is true? A) The garage is covered on a named-perils basis. B) Any losses to the garage are settled on an actual cash value basis. C) The cost of removing debris is included in the policy limit on the garage, but if the damage and cost of removing debris exceed the limit, an additional five percent of the policy limit is available. D) The garage is covered under the dwelling coverage, Part A.
C) The cost of removing debris is included in the policy limit on the garage, but if the damage and cost of removing debris exceed the limit, an additional five percent of the policy limit is available.
48) A fire destroyed the home next door to Brad's home. The fire department chief was concerned that the damaged home would collapse on to Brad's home, so he ordered Brad to evacuate his home. Which of the following statements is true concerning the cost of Brad's hotel room while he is complying with the fire chief's order? A) The cost of the hotel room is not covered, as Brad's home was not directly damaged. B) The cost of the hotel room is covered under the "fair rental value" coverage of Part D. C) The cost of the hotel room is covered under the "prohibited use" coverage of Part D. D) The cost of the hotel room is covered under the dwelling coverage of Part A.
C) The cost of the hotel room is covered under the "prohibited use" coverage of Part D.
44) A property and liability insurance company's loss ratio and expense ratio, respectively, for 2013 - 2015 were: 2013: 74% 31% 2014: 68% 33% 2015: 66% 30% Which of the following statements is true about the company's underwriting results for this time period? A) The insurer made money from its underwriting activities each year. B) The insurer's profitability from underwriting has been deteriorating each year. C) The insurer's profitability from underwriting has been improving each year. D) The insurer lost money from its underwriting activities each year.
C) The insurer's profitability from underwriting has been improving each year.
19) All of the following are disadvantages of noninsurance transfers EXCEPT A) The party to whom the potential loss is transferred may be unable to pay. B) The transfer may fail because the contract language is ambiguous. C) The only potential losses that can be transferred are those that are not commercially insurable. D) The noninsurance transfer may be costly.
C) The only potential losses that can be transferred are those that are not commercially insurable.
6) Which of the following statements about a priori probabilities is correct? A) They are subjective probabilities based on ambiguity in the way probability is perceived. B) They are subjective probabilities that may vary among individuals because of factors such as age, gender, education, and the use of alcohol. C) They are objective probabilities that can be determined by deductive reasoning. D) They are objective probabilities that can be determined by subjective reasoning.
C) They are objective probabilities that can be determined by deductive reasoning.
21) Which of the following statements about speculative risks is true? A) They are almost always insurable by private insurers. B) They are more easily predictable than pure risks. C) They may benefit society even though a loss occurs. D) They involve only a chance of loss.
C) They may benefit society even though a loss occurs.
14) The Homeowners 3 policy limits the amount of coverage provided on certain personal property (e.g. coin collections and silverware). This personal property can be adequately insured by A) lowering the deductible which applies to personal property losses. B) storing the property away from the home at another location. C) adding a schedule to the policy listing the property with specific amounts of insurance. D) adding an appraisal clause to the policy.
C) adding a schedule to the policy listing the property with specific amounts of insurance.
10) Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable? I. The loss must be definite as to place. II. The loss must be definite as to amount. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
12) Which of the following statements about personal producing general agents is (are) true? I. They often have the option of recruiting and training sub-agents. II. They are independent agents who produce substantial amounts of life insurance with one insurer. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
13) Reasons why market, financial, and production risks are often uninsurable include which of the following? I. The potential to produce a catastrophic loss is great. II. The chance of loss cannot be accurately estimated. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
13) Which of the following statements about the personal property coverage (Coverage C) of the Homeowners 3 policy is (are) true? I. There are special limits of liability that apply to certain types of personal property. II. The full amount of coverage applies only if the property is permanently located at any residence of the insured. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
17) Which of the following statements is (are) true concerning investments of property and casualty insurers and life insurers? I. Property and casualty insurance companies place greater emphasis on liquidity than do life insurers. II. Life insurance company investments are, on average, of longer duration than property and casualty insurance company investments. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
18) In addition to marketing life insurance, life insurers typically sell which of the following products? I. Retirement annuities II. Disability income insurance A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
18) Which of the following statements about problems arising from the use of a coinsurance clause is (are) true? I. The amount of insurance should be periodically evaluated to avoid a coinsurance penalty because of inflation. II. An agreed value coverage option is one method used to solve the problem of values that fluctuate throughout the policy term. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
23) Factors a risk manager must consider in selecting an insurer include which of the following? I. The availability of risk management services II. The financial strength of the insurer A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
24) Which of the following is (are) included among the duties of an insured following a loss covered under the Homeowners 3 policy? I. To file a proof of loss within a specified time period after the insurer's request II. To prepare an inventory of damaged personal property A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
24) Which of the following statements about the insurance industry as a source of investment funds is (are) true? I. These funds result in a lower cost of capital than would exist in the absence of insurance. II. These funds tend to promote economic growth and full employment. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
25) Functions of an insurance company's legal department include which of the following? I. Lobbying for legislation favorable to the insurance industry. II. Drafting policy provisions. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
25) Which of the following is a reason why premature death may result in economic insecurity? I. Additional expenses associated with death may be incurred. II. The income of the deceased person's family may be inadequate to meet its basic needs. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
26) Which of the following is (are) often consequences of long-term disability? I. Continuing medical expenses II. Loss or reduction of employee benefits A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
28) Which of the following statements about schedule rating is (are) true? I. It involves the determination of a basis rate for each exposure, which is then modified by credits or debits. II. It is based on the assumption that certain physical characteristics of the insured's operations will influence the insured's future loss experience. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
30) Which of the following statements is (are) true with regard to the use of technology in risk management programs? I. Risk management Intranets are networks intended for an internal audience. II. Risk management information systems can be used to store and track workers compensation claims data. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
32) Which of the following statements about Blue Cross and Blue Shield plans is (are) true? I. Blue Cross and Blue Shield plans can be organized on a nonprofit basis or on a for-profit basis. II. Blue Cross provides coverage for hospital services; Blue Shield provides coverage for physicians' and surgeons' fees. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
37) Which of the following statements concerning the securitization of risk is (are) true? I. Securitization increases the capacity of the insurance industry. II. Securitization can be used to protect against catastrophic loss. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
37) Which of the following statements regarding insurance and hedging is (are) true? I. Insurance involves the transfer of an insurable risk while hedging handles risk that is typically uninsurable. II. Insurance transactions can reduce objective risk, while hedging typically involves only risk transfer and not risk reduction. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
38) Which of the following statements concerning regulatory objectives of rate making is (are) true? I. Rates must not be unfairly discriminatory. II. Rates must be adequate. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
4) Preloss objectives of risk management include which of the following? I. Preparing for potential losses in the most economical way II. Reduction of anxiety A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
4) Reasons for the unearned premium reserve include which of the following? I. To pay losses that occur during the policy period. II. To pay premium refunds to policyholders in the event of cancellation. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
4) Which of the following statements about underwriting standards is (are) true? I. One purpose of underwriting standards is to reduce adverse selection against the insurer. II. Equitable rates should be charged so that each group of policyowners pays its own way in terms of losses and expenses. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
40) Which of the following statements is (are) true about life insurance company investments? I. The majority of life insurance company general account assets are invested in bonds. II. The majority of life insurance company separate account assets are invested in stocks. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
42) Which of the following statements about hedging is (are) true? I. Hedging is a form of risk transfer. II. Hedging is used to address the risk of unfavorable price fluctuations. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
43) Which statement about a company's cost of risk is (are) true? I. Cost of risk includes insurance premiums and retained losses. II. Reducing the cost of risk increases profitability. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
44) Which of the following statements is true regarding the information systems functional area of an insurance company? I. Computers and information systems are able to perform some tasks that previously were performed directly by employees. II. Information systems can speed the processing of policies by insurers. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
45) Which of the following statements regarding terrorism insurance is (are) true? I. There is a federal backstop if terrorism claims are catastrophic. II. Private insurers market terrorism insurance. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
6) Reasons why a peril may be considered uninsurable and therefore excluded from insurance contracts include which of the following? I. The losses from the occurrence of the peril may be due to a predictable decline in value. II. The losses from the occurrence of the peril may be incalculable and catastrophic. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
20) Which of the following losses to a dwelling would be covered under an unendorsed Homeowners 3 policy? A) smoke damage resulting from agricultural operations of a neighboring farmer B) damage to the structure caused by a flash flood C) damage to the structure caused by the weight of heavy snow on the roof D) damage to a floor caused by water backing up through a sewer pipe
C) damage to the structure caused by the weight of heavy snow on the roof
18) All of the following are additional coverages under Section I of the Homeowners 3 policy EXCEPT A) the reasonable expenses of removing debris after an insured loss. B) fire department service charges for which the insured is liable by contract or agreement. C) damage to trees and shrubs caused by a windstorm. D) losses incurred from the unauthorized use of a stolen credit card.
C) damage to trees and shrubs caused by a windstorm.
27) ABC Term Life Insurance Company uses an interesting marketing system—it has no agents. Instead, the company markets its coverages through television and radio ads, newspaper inserts, and the Internet. The type of marketing system that ABC Term Life Insurance Company uses is called the A) mass merchandising system. B) mixed marketing system. C) direct response system. D) worksite marketing system.
C) direct response system.
16) A property and casualty insurer in which the salesperson is an employee of the insurer, not an independent contractor, is called a A) fraternal insurance company. B) risk retention group. C) direct writer. D) captive insurance company.
C) direct writer.
15) A name that encompasses all of the major risks faced by a business firm is A) financial risk. B) speculative risk. C) enterprise risk. D) pure risk.
C) enterprise risk.
24) Under one type of merit rating, the class or manual rate is adjusted upward or downward based on past loss history. This type of merit rating is called A) schedule rating. B) judgment rating. C) experience rating. D) retrospective rating.
C) experience rating.
42) Mike and Susan built their "dream home." They insured their home for its full replacement cost. They also added an endorsement that will pay up to an additional 20 percent of the policy limit in case the cost of rebuilding the home after a loss is greater than the policy limit. The basis under which Mike and Susan insured their home is called A) actual cash value. B) valued policy coverage. C) extended replacement cost. D) guaranteed replacement cost.
C) extended replacement cost.
42) Big Life Insurance Company purchased Regional Bank. Regional Bank has 27 branches in four states. Big Life Insurance Company required one employee at each bank branch to become a licensed life insurance agent and to sell Big Life Insurance Company annuities and life insurance products. This distribution channel is an example of the A) career agent distribution system. B) direct response distribution system. C) financial institution distribution system. D) worksite marketing distribution system.
C) financial institution distribution system.
38) To better understand her company's operations, a risk manager asked a production manager to draw a diagram tracing the steps in the production and distribution of the company's products. Such a diagram, which is useful in risk identification, is called a A) financial statement. B) risk management matrix. C) flowchart. D) risk management audit.
C) flowchart.
51) When announcing that an enterprise risk management program would be implemented at XYZ Company, the president of the company observed, "We must overcome the silo mentality for the program to be successful." The "silo mentality" refers to A) over-emphasis on pure risks and ignoring speculative risks. B) using too much of one risk treatment measure and ignoring other risk treatment methods. C) focusing narrowly on one area and not viewing risk holistically. D) everyone assuming someone else is responsible for managing a risk and no one taking leadership.
C) focusing narrowly on one area and not viewing risk holistically.
22) The leaders of a religious group decided to start a life insurance organization to insure members of the religious group. The insurer will operate as a nonprofit organization, thus receiving favorable tax treatment. The insurer formed will be a A) health maintenance organization. B) stock insurer. C) fraternal insurer. D) reciprocal exchange.
C) fraternal insurer.
48) Which of the following is least likely to occur during a "hard" insurance market period? A) difficulty in obtaining insurance B) tightening underwriting standards C) higher insurer profits D) increasing premiums
C) higher insurer profits
30) Cal was just hired as XYZ Company's first risk manager. Cal would like to employ the risk management process. The first step in the process Cal should follow is to A) evaluate potential losses faced by XYZ Company. B) formulate a treatment plan for XYZ Company's loss exposures. C) identify potential losses faced by XYZ Company. D) implement and administer a risk management plan for XYZ Company.
C) identify potential losses faced by XYZ Company.
37) Ryan decided to review his personal risk management program. His car is 10 years old, and he would receive little money from his insurer if the car was damaged or destroyed. Ryan decided to drop the physical damage insurance on the car. From a risk management perspective, dropping the physical damage insurance on the car is best described as A) increasing the use of avoidance in the risk management program. B) increasing the use of noninsurance transfer in the risk management program. C) increasing the use of retention in the risk management program. D) increasing the use of risk control in the risk management program.
C) increasing the use of retention in the risk management program.
29) Beverly lives in a sparsely populated area in northern Idaho. Some insurance companies marketing coverage in northern Idaho cannot afford to have full-time adjustors there. Several insurers hire Beverly to adjust claims for their insureds. Beverly charges the insurers a fee for each claim that she settles. Beverly is a(n) A) public adjustor. B) adjustment bureau. C) independent adjustor. D) company adjustor.
C) independent adjustor.
44) In determining insurance limits and deductibles, an important concept is that insurance should be used to pay big losses rather than small losses. The objective is to insure big losses that could cause financial ruin and to exclude small losses that can be budgeted out of current income. This concept is called the A) law of large numbers. B) efficient loss-cost concept. C) large-loss principle. D) retention-transfer tradeoff.
C) large-loss principle.
30) LMN Insurance sells homeowners insurance. The LMN homeowners policy combines property and casualty insurance in the same contract. Insurance policies combining property and casualty coverage in the same contract are called A) mono-line policies. B) multi-year policies. C) multiple-line policies. D) manuscript policies.
C) multiple-line policies.
37) An Econodeath Insurance Company actuary calculated the present value of the expected death claim the company will pay if it sells whole life insurance to a 30-year-old woman. This value is called the A) net level premium. B) gross premium. C) net single premium. D) life insurance policy reserve.
C) net single premium.
55) Rapid inflation, cyclical unemployment, war, hurricanes, and floods are all examples of A) diversifiable risks. B) physical hazards. C) nondiversifiable risks. D) speculative risks.
C) nondiversifiable risks.
40) ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects that 8 homeowners out of every 100, on average, will report claims each year. The variation between the rate of loss that ABC expects to occur and the rate of loss that actually occurs is called A) objective probability. B) subjective probability. C) objective risk. D) subjective risk.
C) objective risk.
45) An insurance policy provision that specifies how a property loss will be settled if more than one property insurance policy covers the loss is the A) insuring agreement provision. B) loss settlement provision. C) other insurance provision. D) coinsurance provision.
C) other insurance provision.
49) Homeowners insurance policies usually cover resident relatives of the named insured who are under age 24 and who are full-time students away from home. Under the homeowners policy, these full-time students are considered A) first named insureds. B) second named insureds. C) other insureds. D) additional insureds.
C) other insureds.
10) Dense fog that increases the chance of an automobile accident is an example of a A) speculative risk. B) peril. C) physical hazard. D) moral hazard.
C) physical hazard.
43) Cathy's car hit a patch of ice on the road. The car skidded off the road and hit a tree. The presence of ice on the road is best described as a(n) A) peril. B) subjective risk. C) physical hazard. D) indirect loss.
C) physical hazard.
22) Lisa has three fire insurance policies on her office building. The policy from company A is for $400,000, and the policies from companies B and C are for $100,000 each. If Lisa has a $360,000 loss, how much of the loss will be covered by each policy if the loss is settled on a pro rata basis by the insurers? A) each policy: $120,000 B) policy A: $160,000; policies B and C: $100,000 each C) policy A: $240,000; policies B and C: $60,000 each D) policy A: $360,000; policies B and C: nothing
C) policy A: $240,000; policies B and C: $60,000 each
43) In schedule rating, each building is individually rated on several factors. One factor refers to the quality of the city's water supply and fire department, and the risk control devices installed in the building. This factor is called A) exposure. B) occupancy. C) protection. D) housekeeping.
C) protection.
31) Liability Insurance Company (LIC) was approached by a regional airline to see if LIC would write the airline's liability coverage. LIC agreed to write the coverage and entered into an agreement with a reinsurer. Under the agreement, LIC retains 25 percent of the premium and pays 25 percent of the losses, and the reinsurer receives 75 percent of the premium and pays 75 percent of the losses. This reinsurance arrangement is best described as A) excess-of-loss reinsurance. B) surplus-share reinsurance. C) quota-share reinsurance. D) pool reinsurance.
C) quota-share reinsurance.
45) The price per unit of insurance is called the A) premium. B) loss adjustment expense. C) rate. D) loss reserve.
C) rate.
32) Small Town used to be just that—a small town 6 miles from Large City. Over the years, the area between Small Town and Large City has developed, and now Small Town is part of the suburbs surrounding Large City. An auto insurer that operated in the area had a large increase in auto claims from Small Town insureds. The insurer did not adjust its rates, and this year will lose money because of claims attributable to higher population density. Which business rating objective did this insurer fail to meet? A) simplicity B) stability C) responsiveness D) encouragement of loss control
C) responsiveness
52) The first step in the enterprise risk management process is A) risk analysis. B) implementing and monitoring the program. C) risk identification. D) selection of risk treatment measures.
C) risk identification.
56) Palmer Polymers is changing from a traditional risk management program to an enterprise risk management program. As a first step, the risk manager determined all the risks that the organization faces. Next, she created a grid with loss frequency on the x-axis and loss severity on the y-axis. Then she plotted all of the loss exposures based on frequency and severity. The grid and the plotted loss exposures are called a A) probability distribution. B) catastrophe model. C) risk map. D) risk management information system.
C) risk map.
16) To protect policyholders, state laws place limitations on a life insurance company's investments. The assets backing interest-sensitive products, such as variable life insurance and variable annuities, are not subject to these restrictions. Assets backing interest-sensitive products are placed in a special account called the life insurer's A) policy reserve account. B) policy loan account. C) separate account. D) policyholders surplus.
C) separate account.
50) Discount Department Stores is a national retail chain. The company had one large, central warehouse. At the suggestion of the risk manager, the company decided to build four smaller regional warehouses so that a loss at the central warehouse would not be a catastrophic blow to the company's distribution system. Splitting the inventory between four regional warehouses illustrates which risk management technique? A) duplication B) risk transfer C) separation D) risk avoidance
C) separation
58) Rather than storing all of its finished goods in a single location, Davis Company divides the finished goods between two warehouses. This simple risk control technique which is designed to limit losses should a warehouse fire occur is called A) duplication. B) risk transfer. C) separation. D) loss prevention.
C) separation.
56) The purpose of the appraisal clause in the Homeowners 3 policy is to A) determine the appropriate amount of homeowners insurance to purchase. B) set a value on the home for estate purposes if the homeowner dies. C) settle valuation disputes between the insurer and insured after a loss has occurred. D) determine a mortgage lender's insurable interest after a loss has occurred.
C) settle valuation disputes between the insurer and insured after a loss has occurred.
12) The deductible used for automobile collision losses is an example of a(n) A) calendar year deductible. B) elimination period. C) straight deductible. D) aggregate deductible.
C) straight deductible.
29) Jim would like to start a business raising thoroughbred racehorses. Obtaining insurance on the horses is a key concern, and he was dismayed to learn that none of the insurers authorized to operate in his state offer this specialty insurance. What is the name of the intermediary that Jim can use to place this coverage with an insurer not admitted to his state? A) alien insurer B) general agent C) surplus lines broker D) direct writer
C) surplus lines broker
27) Which of the following is an example of consequential (indirect) loss? A) the theft of a person's jewelry B) the destruction of a firm's manufacturing plant by an earthquake C) the cost of renting a substitute vehicle while a collision-damaged car is being repaired D) the vandalism of a person's automobile
C) the cost of renting a substitute vehicle while a collision-damaged car is being repaired
20) Jane is risk manager of ABC Manufacturing Company. She is trying to decide whether to self-insure her company's workers compensation exposure or to purchase insurance. Jane would like to use regression analysis to predict the number of workers compensation claims that will occur next year. The number of claims will be the dependent variable in the regression. All of the following would be reasonable independent variables to use EXCEPT A) number of employees. B) number of hours worked. C) total assets. D) payroll.
C) total assets.
1) Traditionally, risk has been defined as A) any situation in which the probability of loss is one. B) any situation in which the probability of loss is zero. C) uncertainty concerning the occurrence of loss. D) the probability of a loss occurring.
C) uncertainty concerning the occurrence of loss.
8) The property and liability insurance industry is characterized by a repetitive pattern of loose underwriting standards with low premiums followed by tight underwriting standards with high premiums. This repetitive pattern is called the A) underwriting by exception method. B) business cycle. C) underwriting cycle. D) account underwriting method.
C) underwriting cycle.
28) Antonio is a claims adjustor for LMN Insurance Company. After the insurer is notified that there has been a loss, Antonio meets with the insured. The first step in the claims process that Antonio should follow is to A) determine the amount of the loss. B) attempt to deny the claim regardless of whether he believes the claim is covered. C) verify that a covered loss has occurred. D) delay paying the claim if the claim is covered.
C) verify that a covered loss has occurred.
31) All of the following statements about conditions under a Homeowners 3 policy are true EXCEPT A) If an insurer broadens coverage without an additional premium during the policy period, the broadened coverage applies immediately to the present policy. B) A waiver or change in any policy provision must be approved in writing by the insurer to be valid. C) The insurer must give written consent for an assignment of the policy to be valid. D) If the named insured dies, coverage automatically ceases with respect to any property of the deceased.
D) If the named insured dies, coverage automatically ceases with respect to any property of the deceased.
11) All of the following statements about avoidance are true EXCEPT A) Certain loss exposures are never acquired. B) Certain loss exposures may be abandoned. C) The chance of loss for certain loss exposures may be reduced to zero. D) It can be used for any loss exposure facing a firm.
D) It can be used for any loss exposure facing a firm.
56) Glenda insured her home for its full replacement cost under an unendorsed Homeowners 3 policy. Which of the following statements is true? A) The dwelling and other structures are covered on a named-perils basis. B) Losses to personal property are settled on a replacement cost basis. C) The personal property is covered on an open-perils basis. D) Losses to the dwelling and other structures are settled on a replacement cost basis.
D) Losses to the dwelling and other structures are settled on a replacement cost basis.
14) Which of the following statements about the exclusive agency system for marketing property and liability insurance is true? A) Exclusive agents typically have complete ownership of policy expirations. B) A higher commission rate is usually paid on exclusive agents' renewal business than on new business. C) Exclusive agents represent several different insurance companies. D) New exclusive agents may start as employees and after a training period become independent contractors.
D) New exclusive agents may start as employees and after a training period become independent contractors.
23) Kevin has three liability policies which provide for contribution by equal shares if other insurance applies to a loss. How much will each policy pay for a $3,000,000 liability judgment if policy A provides $500,000 of coverage, policy B provides $1,000,000 of coverage, and policy C provides $3,000,000 of coverage? A) Each policy will pay $500,000, and Kevin must pay the remaining $1,500,000. B) Policy A will pay $500,000, policies B and C will each pay $1,000,000, and Kevin must pay the remaining $500,000. C) Policy A will pay nothing, policy B will pay $1,000,000, and policy C will pay $2,000,000. D) Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay $1,500,000.
D) Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay $1,500,000.
34) JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 2,000 homeowners this year? A) The total number of claims filed by JKL policyowners should decrease. B) The total dollar value of claims will decrease. C) The average size of loss will decline in value. D) The actual results will more closely approach the expected results.
D) The actual results will more closely approach the expected results.
36) According to the law of large numbers, what should happen as an insurance company increases the number of loss exposures that it insures? A) Fewer losses should be expected to occur. B) The amount of premiums needed to cover losses should decrease. C) The volatility of the insurance company's underwriting results should increase. D) The difference between actual and expected results should decrease.
D) The difference between actual and expected results should decrease.
38) Which of the following statements is true with regard to career life insurance agents? A) They represent several different life insurance companies. B) They are compensated largely through a salary and not through commissions. C) They are paid the same commission rate on new and renewal business. D) The insurer provides financing, training, supervision, and office facilities for career agents.
D) The insurer provides financing, training, supervision, and office facilities for career agents.
15) Which of the following statements about reinsurance is true? A) A reinsurer may not purchase reinsurance. B) The reinsurer is the first insurer that provides claims services to the insured after a loss occurs. C) The amount of insurance transferred to a reinsurer is called the net retention. D) The insurer transferring business to a reinsurer is called the ceding company.
D) The insurer transferring business to a reinsurer is called the ceding company.
41) Ted borrowed $140,000 from ABC Bank to purchase a home and pledged the home as collateral for the loan. Shortly after purchasing the home, Ted lost his job. He could not find another job and could not pay the monthly mortgage. Ted set fire to the home. The claims adjuster suspected arson, and an investigation proved that Ted intentionally caused the loss. Under the mortgage clause of the Homeowners 3 policy, how will this loss be settled? A) The insurer has no liability because the loss was intentional. B) The insurer will pay Ted the actual cash value of the loss as intentional loss is not excluded. C) The insurer will pay ABC the value of its insurable interest and pay Ted the value of his insurable interest. D) The insurer will pay ABC the value of its insurable interest and then attempt to recoup the loss payment from Ted.
D) The insurer will pay ABC the value of its insurable interest and then attempt to recoup the loss payment from Ted.
9) All of the following statements about endorsements and riders are true EXCEPT A) They are usually written. B) They can be used to add or delete policy provisions. C) They normally take precedence over other conflicting policy provisions. D) They are primarily used to circumvent legislation requiring specific policy provisions.
D) They are primarily used to circumvent legislation requiring specific policy provisions.
5) Which of the following statements about the Homeowners 8 policy is (are) true? I. Losses to the dwelling are settled on a replacement cost basis if the dwelling is insured for its full market value. II. It is designed primarily for expensive, newer, dwellings. A) I only B) II only C) both I and II D) neither I nor II
D) neither I nor II
3) Why are some mutual insurers referred to as "assessment mutuals"? A) They charge low premiums because the loss exposures of their insureds are thoroughly assessed before a policy is written. B) They are noted for being very thorough in their assessment of investment opportunities. C) They are assessed for state premium taxes only if they make a profit. D) They can assess policyholders if premiums are insufficient to pay losses and expenses.
D) They can assess policyholders if premiums are insufficient to pay losses and expenses.
2) Which of the following statements about mutual insurers is true? A) They are legally organized as partnerships. B) They have a board of directors which is selected by state insurance departments. C) They are owned by their stockholders. D) They may pay dividends to their policyholders.
D) They may pay dividends to their policyholders.
20) Which of the following statements about treaty reinsurance is true? A) Under a surplus-share treaty, 100 percent of the ceding insurer's liability must be transferred to the reinsurer. B) Using a quota-share treaty increases the ceding insurer's unearned premium reserve. C) Under an excess-of-loss treaty, the reinsurer pays losses in full only if they are less than the ceding insurer's retention limit. D) Using a reinsurance pool provides financial capacity to write large amounts of insurance.
D) Using a reinsurance pool provides financial capacity to write large amounts of insurance.
45) Mark owns a 2006 sedan. The last time Mark renewed his auto insurance, he decided to drop the physical damage insurance on this vehicle. How is Mark dealing with the auto physical damage exposure in his personal risk management program? A) risk transfer B) passive retention C) avoidance D) active retention
D) active retention
28) ABC Appliance offers a warranty requiring an annual fee. The warranty may be purchased at the time of sale or at any time within the first year after the appliance was purchased. The warranty fee after the date of purchase is twice the time-of-purchase fee. When asked why the fee was higher after the date of purchase, ABC's president said, "Buying a warranty is voluntary. We've noted that those who buy the warranty after the purchase date have a greater need for service." Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers? A) excessive premiums B) reduced claims C) bad investments D) adverse selection
D) adverse selection
16) The tendency for unhealthy people to seek life or health insurance at standard rates is an example of A) moral hazard. B) fundamental risk. C) attitudinal hazard. D) adverse selection.
D) adverse selection.
47) One life insurance company reserve is designed to smooth the company's reported surplus over time by absorbing fluctuations in security prices that are not attributable to changing interest rates. This reserve is called the A) asset write-off reserve. B) reserve for amounts held on deposit. C) unearned premium reserve. D) asset valuation reserve.
D) asset valuation reserve.
25) The process of determining which set of investments in plant and equipment to undertake is called A) regression analysis. B) loss forecasting. C) time value of money analysis D) capital budgeting.
D) capital budgeting.
8) A loss reserve established for each individual claim when it is reported to a property and casualty insurance company is call a(n) A) admitted asset. B) incurred-but-not-reported (IBNR) reserve. C) unearned premium reserve. D) case reserve.
D) case reserve.
34) LMN Insurance Company is concerned about its exposure to hurricane losses for property risks it insured on the Gulf Coast. LMN borrowed money from investors by issuing financial securities. LMN promised to repay the money it borrowed with interest if hurricane losses do not exceed a specified level. If hurricane losses exceed the specified level, LMN will repay less than it borrowed and use the extra money to fund hurricane losses. The securities that LMN issued are A) call options. B) futures contracts. C) weather options. D) catastrophe bonds.
D) catastrophe bonds.
38) Insurance Brokerage Company uses a computer-based method of estimating the losses its clients will suffer if a severe storm or earthquake occurs. This method of estimating losses is called A) capital budgeting. B) securitization of risk. C) risk mapping. D) catastrophe modeling.
D) catastrophe modeling.
44) An emerging concern for risk managers is the greater volatility that has been observed in weather patterns—higher high temperatures, lower low temperatures, record rainfall, drought, etc. Collectively, this risk is called A) seismic risk. B) hurricane risk. C) speculative risk. D) climate change risk.
D) climate change risk.
27) Janet hit a wall causing a large dent in the fender of her car. She was busy at work and delayed reporting the damage to her insurer for 9 months. When she finally reported the claim, her insurer denied payment, stating, "Although such a loss is usually covered, you are required under the terms of the contract to provide prompt notification in case of loss." The prompt notification requirement is an example of a(n) A) declaration. B) definition. C) insuring agreement. D) condition.
D) condition.
1) Which of the following is a financial risk that may be faced by a business organization? A) injuries suffered by employees at the workplace B) lost income after a fire loss C) product liability risk D) currency exchange rate risk
D) currency exchange rate risk
53) A bank stores depositor data electronically. The data include financial account values, social security numbers, and other information. An outside party was able to gain access to the bank's customer data through unauthorized access to the bank's computer system. The outside party was able to steal money from the accounts and to sell customer data, including social security numbers, to others. This scenario illustrates A) terrorism risk. B) climate change risk. C) speculative financial risk. D) cyber-liability risk.
D) cyber-liability risk.
22) Which of the following types of water damage is covered under an unendorsed Homeowners 3 policy? A) damage from a flood caused by torrential rain B) damage from water backing up through a drain C) damage from water below the surface of the ground that seeps into a basement D) damage from water that overflows from a malfunctioning washing machine
D) damage from water that overflows from a malfunctioning washing machine
28) Big Mutual Insurance Company would like to take advantage of financial services deregulation by acquiring a bank and a stock brokerage firm. Big Mutual, however, would have trouble raising the funds needed to make these acquisitions under the mutual form of organization. Big Mutual is planning to switch from the mutual form of organization to the stock form, and to issue shares of common stock to raise capital. This change in organizational structure is called A) mutualization. B) retrocession. C) reinsurance. D) demutualization.
D) demutualization.
58) A risk manager was asked to review all the loss exposures his company faces. The risk manager noted that the company obtained over 90 percent of its raw materials from one supplier. He voiced concern about business interruption if that supplier was closed for some reason. Acting on his recommendation, the company began to purchase raw materials from two other suppliers. Using multiple suppliers illustrates which risk control technique? A) risk avoidance B) duplication C) separation D) diversification
D) diversification
57) Frazier Electric keeps a paper copy of business records at the company's headquarters. The company also has two back-up copies of business records stored in electronic files. The electronic files are kept in the event the paper records are damaged or destroyed. The back-up files illustrate which of the following risk control techniques? A) loss prevention B) loss reduction C) diversification D) duplication
D) duplication
30) Shauna hurt her back and was unable to work. She filed a claim under her disability income insurance policy. Under terms of the policy, a period of time must pass between when the injury occurred and when the insurer begins to replace lost earnings. This time period is called a(n) A) grace period. B) enrollment period. C) probationary period. D) elimination (waiting) period.
D) elimination (waiting) period.
7) A comprehensive risk management program that addresses an organization's pure risks, speculative risks, strategic risks, and operational risks is called a(n) A) risk management information system. B) financial risk management plan. C) speculative risk management plan. D) enterprise risk management plan.
D) enterprise risk management plan.
40) In schedule rating, each building is individually evaluated based on several rating factors. One factor refers to the possibility that the building will be damaged or destroyed by a fire that starts at an adjacent property and spreads to the building. This rating factor is known as A) occupancy. B) protection. C) maintenance. D) exposure.
D) exposure.
18) A reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer is called A) a reinsurance pool. B) automatic treaty reinsurance. C) retrocession. D) facultative reinsurance.
D) facultative reinsurance.
12) All of the following losses are subject to special limits of liability under the Homeowners 3 policy EXCEPT A) theft of firearms. B) destruction by fire of property used for business purposes. C) storm damage to a boat at a marina. D) furniture destroyed by a fire.
D) furniture destroyed by a fire.
27) Which of the following types of loss exposures are best handled by the use of avoidance? A) low-frequency, low-severity loss exposures B) low-frequency, high-severity loss exposures C) high-frequency, low-severity loss exposures D) high-frequency, high-severity loss exposures
D) high-frequency, high-severity loss exposures
25) All of the following are social costs associated with insurance EXCEPT A) insurance company operating expenses. B) fraudulent claims. C) inflated claims. D) increased cost of capital.
D) increased cost of capital.
38) Jenna opened a successful restaurant. One night, after the restaurant had closed, a fire started when the electrical system malfunctioned. In addition to the physical damage to the restaurant, Jenna lost profits that could have been earned while the restaurant was closed for repairs. The lost profits are an example of A) direct loss. B) nondiversifiable risk. C) speculative risk. D) indirect loss.
D) indirect loss.
40) Consolidation in the insurance industry is a continuing trend. One area where mergers and acquisitions frequently occur is between marketing intermediaries who represent insurance purchasers. These intermediaries are called A) insurance adjusters. B) insurance agents. C) insurance underwriters. D) insurance brokers.
D) insurance brokers.
13) Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called A) moral hazard. B) physical hazard. C) attitudinal hazard. D) legal hazard.
D) legal hazard.
1) Which of the following statements is (are) true regarding renters insurance? I. Renters insurance is needed if you rent a house, but is not needed if you rent an apartment. II. The ISO renter's policy provides open perils ("all-risks") coverage on the insured's personal property. A) I only B) II only C) both I and II D) neither I nor II
D) neither I nor II
11) Which of the following statements about claim settlement is (are) true? I. The fair payment of claims requires an insurer to adopt a very liberal claims policy. II. To prevent lawsuits, an insurer should provide no personal assistance to a claimant other than that which is required by contractual obligations. A) I only B) II only C) both I and II D) neither I nor II
D) neither I nor II
13) Which of the following statements about a calendar-year deductible is (are) true? I. It requires the insured to pay a specified amount of each claim regardless of when the claim occurs during the year and regardless of any previous claims during the year. II. It is used only in policies which cover direct property losses. A) I only B) II only C) both I and II D) neither I nor II
D) neither I nor II
16) Which of the following statements about financial risk is (are) true? I. Enterprise risk does not include financial risk. II. Financial risk is easily addressed through the purchase of insurance. A) I only B) II only C) both I and II D) neither I nor II
D) neither I nor II
17) Which of the following statements about the sale of property and liability insurance through the direct response system is (are) true? I. Selling expenses are higher because market segmentation tends to be less precise than with other marketing methods. II. It is the most appropriate system for selling complex products. A) I only B) II only C) both I and II D) neither I nor II
D) neither I nor II
6) Which of the following statements about the Homeowners 3 policy is (are) true? I. Losses to the dwelling are always settled on an actual cash value basis. II. Coverage on personal property is limited to $5,000. A) I only B) II only C) both I and II D) neither I nor II
D) neither I nor II
18) A restaurant owner leased a meeting room at the restaurant to a second party. The lease specified that the second party, not the restaurant owner, would be responsible for any liability arising out of the use of the meeting room, and that the restaurant owner would be "held harmless" for any damages. The restaurant owner's use of the hold-harmless agreement in the lease is an example of A) retention. B) self-insurance. C) insurance. D) noninsurance transfer.
D) noninsurance transfer.
28) Under the Homeowners 3 policy, all of the following are options of the insurer for settling claims EXCEPT A) paying the claim in cash. B) replacing the property. C) repairing the property. D) paying the claim with insurance company stock.
D) paying the claim with insurance company stock.
46) Following catastrophic hurricane losses, South Coast Insurance Company changed its deductible provision. Rather than using a specified dollar value, $250 for example; the dollar value of the deductible increases with the size of the loss. The type of deductible that South Coast changed to is called a(n) A) calendar-year deductible. B) aggregate deductible. C) straight deductible. D) percentage deductible.
D) percentage deductible.
42) Brenda identified all of the pure loss exposures her family faces. Then she analyzed these loss exposures, developed a plan to treat these risks, and implemented the plan. The process Brenda conducted is called A) personal insurance programming. B) personal estate planning. C) personal financial planning. D) personal risk management.
D) personal risk management.
9) Which of the following items would appear in the income section of an insurance company's income and expense statement? A) underwriting expense B) bonds C) loss reserves D) premiums
D) premiums
21) The purpose of other-insurance provisions is to A) eliminate the need for deductibles. B) penalize those insureds who carry inadequate amounts of insurance. C) specify who will pay losses if the insurer is bankrupt. D) preserve the principle of indemnity.
D) preserve the principle of indemnity.
17) All of the following are potential advantages of retention EXCEPT A) lower expenses. B) increased cash flow. C) encouragement of loss prevention. D) protection from catastrophic losses.
D) protection from catastrophic losses.
41) One method through which reinsurance is provided is through an organization of insurers that underwrites insurance on a joint basis. Through the organization, financial capacity is available for large commercial risks. This reinsurance arrangement is a(n) A) quota-share treaty. B) surplus-share treaty. C) excess-of-loss treaty. D) reinsurance pool.
D) reinsurance pool.
44) An insurance company that sells earthquake insurance in an area where earthquakes are possible has subjected itself to the risk of insolvency if a severe earthquake occurs. An insurer can safely sell earthquake insurance in this area if it shifts the risk of catastrophic loss to another insurer. The shifting of insured risk from one insurer to another insurer is called A) underwriting. B) casualty insurance. C) coinsurance. D) reinsurance.
D) reinsurance.
31) Members of Mid-South Petroleum Distributors, a trade group, had trouble obtaining affordable pollution liability insurance. The members formed a group captive that is exempt from many state laws that apply to other insurers. This group captive is called a(n) A) reinsurance pool. B) Lloyd's association. C) alien insurer. D) risk retention group.
D) risk retention group.
33) From the insured's perspective, the use of deductibles in insurance contracts is an example of A) risk transfer. B) risk control. C) risk avoidance. D) risk retention.
D) risk retention.
52) A highly specialized technician who provides local agents in the field with technical help and assistance with marketing problems is called a(n) A) general agent. B) actuary. C) Certified Financial Planner. D) special agent.
D) special agent.
43) Catastrophe bonds are made available to institutional investors in the capital markets through an entity that is specially created for that purpose. This is entity is called a A) risk retention group. B) fraternal insurance company. C) captive insurance company. D) special purpose reinsurance vehicle.
D) special purpose reinsurance vehicle.
44) Jim and Paula Franklin started a dry cleaning business. The business may be successful or it may fail. The type of risk that is present when either a profit or loss could occur is called A) pure risk. B) subjective risk. C) nondiversifiable risk. D) speculative risk.
D) speculative risk.
54) A student who has skipped many classes and not studied the course material was surprised to learn there was a test when he showed-up for class. The student's mental uncertainty about whether or not he will pass the test is called A) objective risk. B) objective probability. C) subjective probability. D) subjective risk.
D) subjective risk.
43) The local franchise of a national bar and grill chain continued to serve a drunk customer. The drunk customer tried to drive home. He hit and killed two people who were riding bicycles. The representatives of those who were killed filed a lawsuit against the national chain. As jury awards in the area where the incident occurred are high, insurers selling liquor liability insurance refused to issue new coverage until the case was resolved. Because no admitted insurers sell the coverage, liquor liability insurance in this case is considered a(n) A) residual line. B) mandatory coverage. C) orphan policy. D) surplus line.
D) surplus line.
6) Common sources of underwriting information for life and health insurance include all of the following EXCEPT A) the application. B) a physical examination. C) the Medical Information Bureau. D) the applicant's income tax return.
D) the applicant's income tax return.
54) Several different values can be considered when determining how much insurance should be carried on a dwelling (the Coverage A limit of the Homeowners 3 policy). The appropriate value that should be used is: A) the home's market value. B) the home's actual cash value. C) the home's appraised value for property tax purposes. D) the home's replacement cost.
D) the home's replacement cost.
10) Which of the following is a function of the marketing department of an insurance company? A) to settle claims after a loss has been reported B) to determine the cost of products the insurer sells C) to make final underwriting decisions D) to identify production goals
D) to identify production goals
49) State insurance regulators require LMN Life Insurance Company to maintain a separate account. The assets in the separate account would support the liabilities for which of the following products? A) term life insurance B) whole life insurance C) fixed annuity D) variable life insurance
D) variable life insurance
40) Adverse selection occurs A) when an insurance company loses money on its investments. B) when insurance purchasers buy insurance but do not have a loss. C) when catastrophic losses occur as a result of a natural disaster. D) when applicants with a higher-than-average chance of loss seek insurance at standard rates.
D) when applicants with a higher-than-average chance of loss seek insurance at standard rates.
45) 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 A) National Insurance Bureau. B) Federal Office of Insurance. C) Department of International Insurance. D) International Insurance Bureau.
Federal Office of Insurance.
5) 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. A) I only B) II only C) both I and II D) neither I nor II
I only
71) Which of the following statements about a warranty in an insurance contract is (are) true? I. It is part of the insurance contract. II. Statements made by an insurance applicant are considered warranties rather than representations. A) I only B) II only C) both I and II D) neither I nor II
I only
80) Which of the following types of insurance policies can usually be assigned without the insurer's consent? I. Life insurance II. Property insurance A) I only B) II only C) both I and II D) neither I nor II
I only
36) 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. A) I only B) II only C) both I and II D) neither I nor II
II only
75) Which of the following statements about consideration in an insurance contract is (are) true? I. The insured's total consideration is submission of a completed application. II. The insurer's consideration is the promise to do those things specified in the policy. A) I only B) II only C) both I and II D) neither I nor II
II only
73) Which of the following statements about offer and acceptance for insurance contracts is true? A) In property and liability insurance, agents typically do not have the authority to bind coverage. B) In life insurance, the agent can usually accept an offer by immediately binding coverage. C) In property insurance, the offer and acceptance are usually in writing but may be oral. D) In life insurance, completing the application and paying the first premium constitute acceptance of the offer from the insurer.
In property insurance, the offer and acceptance are usually in writing but may be oral.
4) All of the following statements about the methods of regulating insurance are true EXCEPT A) All states have insurance laws that regulate the operations of insurers. B) Insurers are totally exempt from regulation by federal agencies and laws. C) The courts regulate insurance in many ways, including the interpretation of policy clauses and provisions. D) State insurance commissioners, through administrative rulings, have considerable power over insurers doing business in their states.
Insurers are totally exempt from regulation by federal agencies and laws
24) 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? A) Paul v. Virginia B) South-Eastern Underwriters Association case C) McCarran-Ferguson Act D) Financial Modernization Act
South-Eastern Underwriters Association case
31) 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? A) The McCarran-Ferguson Act B) The Tax Reform Act C) The Consolidated Omnibus Budget Reconciliation Act D) The Financial Modernization Act (Gramm-Leach-Bliley Act)
The Financial Modernization Act (Gramm-Leach-Bliley Act)
69) What is the legal significance of a material misrepresentation in an insurance application? A) The contract is automatically voided from its inception. B) The contract is voidable at the insurer's option. C) Loss payments are reduced by the degree of the misrepresentation. D) The insurer is immediately entitled to a higher premium.
The contract is voidable at the insurer's option.
66) Which of the following statements about subrogation is true? A) It is used primarily for losses paid under life insurance policies. B) It allows the insurer to sue its own insured who is negligent. C) The insured's right to collect benefits may be forfeited if the insured interferes with the insurer's subrogation rights after a loss occurs. D) The insurer is required to exercise its subrogation rights.
The insured's right to collect benefits may be forfeited if the insured interferes with the insurer's subrogation rights after a loss occurs.
81) What is the practical effect of an insurance policy being a conditional contract? A) The insurer can refuse to a pay claim if the insured has not complied with all policy provisions. B) The insured can assign the policy only with the insurer's consent. C) The insurer can sue the insured for failure to pay any premiums. D) The insured gets the benefit of the doubt if a policy contains any ambiguities or uncertainties.
The insurer can refuse to a pay claim if the insured has not complied with all policy provisions.
55) The loss settlement under which of the following supports the principle of indemnity? A) life insurance B) valued policies C) replacement cost property insurance D) actual cash value property insurance
actual cash value property insurance
76) A contract in which the values exchanged are not equal because chance is involved is called a(n) A) contract of adhesion. B) unilateral contract. C) conditional contract. D) aleatory contract.
aleatory contract.
7) 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) A) nonadmitted insurer. B) foreign insurer. C) alien insurer. D) reciprocal insurer.
alien insurer
25) 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) A) domestic insurer. B) captive insurer. C) foreign insurer. D) alien insurer.
alien insurer.
57) A total loss under a valued policy is settled on the basis of the A) market value of the loss. B) actual cash value of the loss. C) replacement value of the loss. D) amount of insurance covering the loss.
amount of insurance covering the loss.
101) If a third party is led to reasonably believe that an agent is acting within the scope of his/her authority, even though the agent is exceeding his/her authority, the principal may still be bound by the agent's actions. In this case, the agent has bound the principal by A) implied authority. B) apparent authority. C) incidental authority. D) express authority.
apparent authority.
9) The policyholders' surplus of an insurer is defined as the difference between its A) assets and its liabilities. B) premium income and its expenses. C) reserves and its liabilities. D) assets and its nonadmitted assets
assets and its liabilities
78) Why does the insured get the benefit of the doubt if an insurance policy contains any ambiguities or uncertainties? A) because insurance contracts are aleatory B) because insurance contracts are unilateral C) because insurance contracts are conditional D) because insurance contracts are contracts of adhesion
because insurance contracts are contracts of adhesion
98) Dave and Meagan Philips borrowed $150,000 from Fifth National Bank to help fund the purchase of a new home. The home serves as collateral for the loan. Fifth National has an insurable interest in the home based on A) potential responsibility for legal liability. B) being a secured creditor. C) expectation of ownership. D) having a contractual right.
being a secured creditor.
21) The major reasons for insurer insolvency include which of the following? I. Inadequate pricing and loss reserves II. Rapid growth and inadequate surplus A) I only B) II only C) both I and II D) neither I nor II
both I and II
50) The risk-based capital requirements for life insurers are based on a formula that considers four types of risk. One risk reflects a range of uncertainties that life insurers face including such things as bad management decisions and guaranty fund assessments. This risk is called A) asset risk. B) insurance risk. C) interest rate risk. D) business risk.
business risk.
41) A systemic risk is a risk that A) can be eliminated through diversification. B) can be the cause of the collapse of an entire system. C) can be insured privately. D) can be easily contained so that it does not spread.
can be the cause of the collapse of an entire system.
106) Hank bought a farm that had an old barn. He noticed one day that the roof of the barn was swaying in the wind. Hank went to see his insurance agent and he insured the barn for $20,000. The agent didn't ask if the roof might collapse, and Hank didn't say anything about it. One week later there was a strong wind and the roof collapsed. Assuming the insurer can prove it, under what legal grounds could the insurer deny payment of the claim? A) estoppel B) concealment C) warranty D) misrepresentation
concealment
92) Ted's insurance claim was denied by XYZ Insurance Company. When Ted inquired why the claim was denied, he was told to, "Read the exclusion on page 5 of the policy." Ted read the exclusion. In his opinion, the exclusion was poorly worded and vague. If a court of law agrees with Ted's assessment of the exclusion, Ted may still be able to have his claim paid by the insurer because insurance contracts are A) personal contracts. B) unilateral contracts. C) aleatory contracts. D) contracts of adhesion.
contracts of adhesion.
23) 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? A) maintain insurer solvency B) prohibit unfair sales practices by agents C) ensure reasonable rates D) make insurance available
ensure reasonable rates
85) Frank asked his company's employee benefits director if his group health coverage could be converted to individual coverage. The benefits director said, "Yes, you can convert to an individual policy, and the coverage is identical to your group coverage." Frank quit his job and converted to an individual policy. Six months later he filed a claim. He was dismayed to learn the conversion policy was more limited compared to the group coverage, and his claim was denied. What legal doctrine will allow Frank to bring a successful legal action against his former employer because he was financially harmed due to his reasonable reliance upon a representation of fact? A) adhesion B) waiver C) estoppel D) subrogation
estoppel
95) Some courts have ruled that an alternative to "replacement cost less depreciation" should be used to determine the actual cash value of a property loss. Under this alternative, the value of property lost is determined by the price a willing buyer would pay a willing seller for the property in a free market. This method of determining actual cash value is called the A) intrinsic value method. B) valued policy method. C) fair market value method. D) forensic cost method.
fair market value method.
47) 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) A) annual report. B) early warning system. C) field examination. D) inspection report.
field examination.
102) The authority of an agent to perform all incidental acts necessary to fulfill the purposes of the agency agreement is called A) implied authority. B) declared authority. C) apparent authority. D) express authority.
implied authority.
38) 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) A) CLUE score. B) insurance score. C) expense ratio score. D) combined ratio score.
insurance score.
93) Mark owns a bar. The bar has a back room where Mark has some slot machines. Mark lets some of his patrons play the machines, and Mark keeps any profits. This type of gambling is illegal where Mark lives. Mark wanted to purchase insurance in case his slot machines were confiscated by the police. Such an insurance contract would not be enforceable. Which requirement needed to form a valid insurance contract is missing? A) consideration B) offer and acceptance C) legal purpose D) competent parties
legal purpose
33) The regulation of insurers in areas that affect consumers, which include claims handling, underwriting, complaints, advertising, sales practices, and other trade practices is called A) solvency surveillance. B) market conduct regulation. C) combined ratio analysis. D) market share regulation.
market conduct regulation
89) When Ben applied for life insurance, he was asked on the application if he smoked or used tobacco products. Ben answered "No." In reality, Ben smokes two packs of cigarettes a day. The policy was issued at the "preferred, nonsmoker rate." If Ben dies 6 months after the policy is issued, upon what grounds will the insurer be able to legally deny the claim? A) warranty B) misrepresentation C) waiver D) concealment
misrepresentation
70) A false material statement made by an applicant for insurance is an example of A) concealment. B) breach of warranty. C) lack of offer and acceptance. D) misrepresentation.
misrepresentation.
18) Which of the following is an advantage of federal regulation of insurance over state regulation of insurance? A) greater opportunity for innovation B) more effective treatment of systemic risk C) greater responsiveness to local needs D) more competent regulators
more effective treatment of systemic risk
48) The major argument in favor of an optional federal charter for insurers is that A) small insurers need a national charter to be competitive with large insurers. B) a federal charter will prevent insurer insolvencies. C) a federal charter will provide greater oversight of insurer market practices. D) national insurers are at a competitive disadvantage under the present system.
national insurers are at a competitive disadvantage under the present system.
17) 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. A) I only B) II only C) both I and II D) neither I nor II
neither I nor II
35) 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. A) I only B) II only C) both I and II D) neither I nor II
neither I nor II
14) 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 A) a flex-rating law. B) a prior-approval law. C) a file-and-use law. D) no filing required.
no filing required.
62) When must an insurable interest legally exist in life insurance? A) only at the time of the insured's death B) only at the inception of the policy C) only at the time the beneficiary is paid D) both at the time of the insured's death and at the inception of the policy
only at the inception of the policy
63) When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer? A) only at the time of the loss B) only at the inception of the policy C) only at the time the loss settlement takes place D) both at the time of the loss and at the inception of the policy
only at the time of the loss
105) A pharmaceutical company employs a young chemist who is responsible for three new patents last year and for the development of the company's two best-selling drugs. The company purchased a large life insurance policy on the chemist. In this case, the insurable interest requirement was met because of a(n) A) ownership interest. B) close family relationship. C) pecuniary interest. D) economic family relationship.
pecuniary interest.
20) A shortcoming of state regulation of insurance according to Congressional committees and the General Accounting Office is that state regulation A) leads to decentralized governmental power. B) provides opportunities for innovation. C) provides inadequate consumer protection. D) is more responsive to local needs.
provides inadequate consumer protection.
19) Which of the following is an advantage of state regulation of insurance over federal regulation of insurance? A) uniformity of laws B) greater efficiency C) more effective in negotiating international agreements pertaining to insurance D) quicker response to local insurance problems
quicker response to local insurance problems
29) 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? A) rebating B) churning C) twisting D) backdating
rebating
22) Which of the following is a principal method of ensuring the solvency of insurers? A) requiring submission of annual financial statements to state regulators B) tracking and investigating market conduct complaints against insurers C) disciplining agents of the insurer for illegal sales practices D) regulating the forms (applications and policies) employed by the insurer
requiring submission of annual financial statements to state regulators
51) Liability items on an insurer's balance sheet that reflect obligations that must be met in the future are called A) pre-paid expenses. B) reserves. C) surplus. D) nonadmitted assets.
reserves.
30) 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 A) tax tariff. B) guaranty fund assessment. C) risk-based capital requirement. D) retaliatory tax law.
retaliatory tax law.
37) Which of the following is a method used to help ensure the solvency of insurers? A) commercial lines deregulation B) risk-based capital standards C) use of credit-based insurance scores D) use of no filing required rating laws
risk-based capital standards
64) Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of A) warranty. B) insurable interest. C) utmost good faith. D) subrogation.
subrogation.
44) 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 A) market risk. B) systemic risk. C) diversifiable risk. D) enterprise risk.
systemic risk.
34) 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 A) the risk-based capital requirements. B) an insurance guaranty fund. C) the Insurance Regulatory Information System (IRIS). D) the assessment method.
the Insurance Regulatory Information System (IRIS).
56) Under which of the following rules is actual cash value determined by taking into consideration all relevant factors an expert would use to determine the value of the property? A) the circumstantial evidence rule B) the broad evidence rule C) the property indemnity rule D) the objective value rule
the broad evidence rule
2) The right of the states to regulate the business of insurance was first established by A) the South-Eastern Underwriters Association case. B) the case of Paul v. Virginia. C) the Financial Modernization Act. D) the Sherman Act.
the case of Paul v. Virginia.
103) ABC Life Insurance Company insures both smokers and nonsmokers. Beth lied on her life insurance application, checking the box for "no" in response to the question of whether she smokes cigarettes or uses other tobacco products. Even though Beth smokes 10 to 15 cigarettes each day, the policy was issued at the "preferred nonsmoker rate." Beth's lie is materiel in this case because A) it was in writing on the application. B) it was given with the intent to deceive. C) the policy would have been issued on different terms if the insurer knew the true facts. D) the policy would have been issued for a lower face value if the insurer knew the true facts.
the policy would have been issued on different terms if the insurer knew the true facts.
97) The general rule that ambiguity in insurance contracts is construed against the insurer is reinforced by an important legal principle. This principle states the insured is entitled to coverage under a policy that he or she would assume the policy would provide, and exclusions must be conspicuous, plain, and clear. This principle is known as A) the principle of utmost good faith. B) the principle of reasonable expectations. C) the principle of subrogation. D) the principle of indemnity.
the principle of reasonable expectations.
108) Charles Blake told Wendy that he was an agent for Easy Pay Life Insurance Company. He presented no credentials. He asked Wendy some questions about her health and activities, and recorded the answers on scrap paper. He collected a $250 cash premium from Wendy. When Wendy did not receive a policy from Easy Pay, she contacted the company. Easy Pay said they do not have an agent named Charles Blake. Easy Pay is not responsible for Wendy's loss of $250 because A) the principal is never responsible for the acts of its agents. B) there is no presumption of an agency relationship. C) limitations can be placed on the powers of agents. D) knowledge of the agent is assumed to be knowledge of the principal.
there is no presumption of an agency relationship.
53) Which of the following is a fundamental purpose of the principle of indemnity? A) to reduce moral hazard B) to minimize physical hazards C) to settle property insurance losses on a replacement cost basis D) to require deductibles in all property insurance policies
to reduce moral hazard
46) Which of the following is authority given to the Federal Insurance Office created by the Dodd-Frank Act? A) to represent the federal government in international discussions of insurance regulation B) to license and charter new insurance companies that plan to operate nationally C) to be the primary monitor of insurance company solvency D) to be the primary regulator of all aspects of insurance
to represent the federal government in international discussions of insurance regulation
16) By misrepresenting the true facts, Gretchen was able to convince someone to replace an existing life insurance policy with another company and to purchase a new policy from the company that Gretchen represents. Gretchen has engaged in an illegal sales practice called A) bait and switch. B) rebating. C) retaliating. D) twisting.
twisting.
32) 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 A) prior approval. B) file-and-use. C) use-and-file. D) flex rating.
use-and-file.
72) David owns a liquor store in a high-crime area. In order to obtain a reduced insurance premium, David promised to have a burglar alarm operating at the store when the store was closed. This agreement, which was incorporated into the insurance contract, is an example of a A) representation. B) binder. C) rider. D) warranty.
warranty.
90) Robin plans to open a bar in a high-crime area. She had difficulty obtaining insurance for the business. She found an insurer willing to write the coverage, but only if Robin agreed to have a security alarm system in operation at all times when the business is closed. Robin's promise to have a security alarm system operational as a condition of having the insurance coverage in force is a A) binder. B) warranty. C) waiver. D) deductible.
warranty.
