Insurance and Licensing Chapters 3-4
On January 1, 2005, the XYZ Insurance Company issued a policy with a one-year policy period. The premium for this policy was $1,200. What was the unearned premium for this policy as of May 1, 2005?
$ 800
On November 1, Mammoth Insurance Company issued a one-year business auto policy to Mid-State Painting Company with a premium of $24,000. What was the unearned premium for this policy as of December 31?
$20,000
A policy provides coverage starting on April 1 with an annual premium of $800. How much premium is earned as of June 30?
$200
Atwell Insurance Company has the following expenses: Dividends $ 50,000 Claim staff salaries $90,000 Agents' commissions $180,000 Advertising costs $30,000 Rent and utilities $40,000 What is the amount of Atwell Insurance Company's acquisition expenses?
$210,000
The financial report for Hometown Insurer contains the following information: Earned premiums$4,000,000 Written premiums $5,000,000 Net investment income $1,000,000 Incurred losses $3,000,000 Incurred underwriting expenses $2,000,000 What was the Hometown Insurer's combined ratio?
115%
The financial report for Hometown Insurer contains the following information: Earned premiums $4,000,000 Written premiums $5,000,000 Net investment income $1,000,000 Incurred losses $3,000,000 Incurred underwriting expenses $2,000,000 What is Hometown Insurer's loss ratio?
75%
Sometimes an agent may be eligible for a commission based on its premium volume and profitability. This type of compensation is called
A contingent commission.
ABC Insurance Company's combined ratio is 102. Its operating ratio is 98. These ratios indicate that
ABC's return on investments is offsetting the unprofitable underwriting performance
Which one of the following is shown on an insurer's income statement?
Acquisition expenses
Which one of the following is considered to be an acquisition expense for an insurance company?
Advertising expenses
When an insurer appoints an agent to act its behalf, the agent's scope of authority is spelled out in the
Agency contract.
An independent business owner or firm that sells insurance by representing customers rather than insurers is
An insurance broker.
An agent may at times act on behalf of the principal in ways that the principal did not intend, and a third party reasonably believes that the agent has sufficient authority. This authority is known as
Apparent authority.
The balance sheet shows an insurer's financial position
At a particular point in time.
Rachel is considering investing in the stock of an insurance company. Which one of the following is likely to provide the best indication of the insurer's financial position at this point in time?
Balance sheet
Which one of the following types of financial statements shows the financial position of an insurance company at any particular point in time?
Balance sheet
Managing general agencies
Commonly represent several insurers.
The investment income ratio indicates the
Degree of success achieved by the insurer in its investment activities.
Bill is an insurance producer for ABC Insurance Company (ABC). He represents only ABC when marketing insurance products. ABC compensates Bill primarily through salary, and he has no ownership rights to policy expirations. Bill is a producer in the
Direct writer marketing system.
When a firm is selecting a distribution channel, which one of the following is an important consideration with regard to its operations?
Does the selected channel capitalize on its core capabilities?
Which one of the following is the best measure of the amount of insurance provided for a given period?
Earned premium
An increase in earned premiums with no change in written premiums or any other financial figures will generally cause a decrease in all of the following, EXCEPT:
Expense ratio
When an independent agency is bought or sold, the agency's most valuable asset is its
Expiration lists.
Authority that the insurance company specifically grants to an agent is called
Express authority.
The terms of the agency contract define the agent's
Express authority.
Gulford Insurance Company is licensed in the state where it is incorporated. Gulford is also licensed in several other states. In these other states, Gulford is a(n)
Foreign insurer.
An independent agency
Has the right to switch a customer's coverage to another insurer.
An important question for an insurer to ask when examining customers' needs and characteristics to select a distribution channel is
How quickly can inquiries and transactions be processed?
The scope of an agent's authority can go beyond the terms of the agency contract and may include authority to perform other tasks customary to the agency relationship. This authority is referred to as
Implied authority.
Which one of the following statements is correct?
In the exclusive agent and direct writer marketing systems, insurers might assist producers with prospecting
Which one of the following is the correct formula for net investment income?
Investment income - investment expenses
Rhonda is a personal lines insurance producer. Under the terms of her agency contracts, the insurers forward policies promptly to Rhonda's customers and send a premium invoice with the policy. Insureds are instructed to remit premium payments to their insurer. The insurers calculate Rhonda's commissions and forward those commission payments to her monthly. Rhonda is operating under which one of the following payment procedures?
Item basis
The laws of agency impose all of the following specific duties on all agents, EXCEPT:
Knowledge
With regard to insurer licensing, a foreign insurer is an insurer
Licensed and operating in states other than its state of domicile.
Which one of the following is the correct formula for calculating an insurer's combined ratio?
Loss ratio + expense ratio
Which one of the following statements is correct?
Many producers offer consulting services for which they are paid on a fee basis.
Which one of the following best explains why underwriting expenses are divided by written premiums rather than earned premiums in order to calculate an insurer's expense ratio?
Many underwriting expenses are incurred at the beginning of the policy period.
Compared to its net underwriting gain or loss, an insurer's overall gain or loss from operations gives a
More complete picture of an insurer's profitability.
A combined ratio of 1.05 indicates that an insurer is
Not profitable on an underwriting basis.
An analyst in the financial department for an insurer has calculated the loss ratio to be 1.03. This result indicates that the insurer is
Paying out approximately $1.03 in claim-related expenses for every $1.00 it collects in premium
All of the following are categories of liabilities found on an insurer's balance sheet, EXCEPT:
Policyholders' surplus
If an insurer's losses and expenses exceed its written premiums and investment income, which one of the following must the insurer use to meet its obligations?
Policyholders' surplus
The two major sources of an insurer's investment funds are policyholders' surplus and
Premiums received but not yet used to pay claims.
The functions that insurance producers perform vary widely from one marketing system to another. Which one of the following functions do all producers perform?
Prospecting
Which one of the following functions is performed by virtually all insurance producers?
Prospecting
Which one of the following is an admitted asset?
Real estate
Producers are prohibited from paying a portion of the premiums for a policy or giving any commission to a policyholder. Actions of this type are called
Rebating.
Which one of the following methods of prospecting is more likely to be used by an experienced producer than a new insurance producer?
Referrals from present clients
Which one of the following is considered to be an acquisition expense for an insurance company?
Sales commissions
An insurer's balance sheet can best be described as a
Snapshot of its financial position.
Which one of the following statements is true?
Surplus lines brokers can place coverage that is not available through standard market insurers.
A nonadmitted insurer is typically a(n)
Surplus lines insurer.
After investing significant resources to develop a Web-based system, a personal lines insurer has decided to expand its territory by assuming the role of a direct writer and using the Internet as a distribution channel. What is the insurer's greatest concern with the existing book which used independent agents as the distribution system?
The agents own the expirations for the existing book
When selecting a distribution channel, which one of the following is an important consideration with regard to customers' needs and characteristics?
The ease of accessibility within the channel
A financial analyst determines that the combined ratio for the DEF Insurance Company was 112 percent for the prior year. Which one of the following statements best describes how the analyst can interpret this information for the year?
The insurer had an underwriting loss
Which one of the following statements is correct with respect to selecting a distribution channel?
The types of insurance products and services to be delivered by the insurer must fit the marketing channel selected.
It is an unfair trade practice for a lender to require that a borrower purchase insurance from the lender or from any insurance producer recommended by the lender. This unfair trade practice is called
Tie-in sale.
Unity Insurance Company (UIC) has an operating ratio of 0.98, a combined ratio of 1.02, and a loss ratio of 0.77. Considering these ratios, which one of the following statements is true for UIC?
UIC's investment income is offsetting losses and expenses from its underwriting operation, allowing an operating profit.
Which one of the following is part of written premiums?
Unearned premiums
T. Roy Insurance Company is selecting a distribution system and channel for its products. Which one of the following best describes the type of consideration that T. Roy should give to its operations?
What are customer's expectations regarding accessibility?