Intro to Insurance

The difference between canceling a policy and nonrenewing a policy is that

A policy is canceled during the policy period and a policy is nonrenewed at the end of the policy period.

The declarations page of a commercial insurance policy

Contains information about the insured, the coverages to be provided, coverage limits, premiums, and policy period.

The major difference between primary insurers and reinsurers is that

Primary insurers sell to the general public while reinsurers sell to other insurers.

Less than 1 cent of each premium dollar is for

Profit.

Profit is important to insurers because it

Provides a financial cushion and attracts investors.

In the insurance industry, to write premiums means to

Sell insurance policies.

Compared to the personal lines underwriting decision process, the commercial lines underwriting decision process is

Similar, but usually more complex.

The renewal process for a personal insurance policy might include all of the following, EXCEPT:

The insured's agent paying the renewal premium for the insured and then billing the insured for the premium amount

Insurance is

The most common example of risk financing

For the purpose of insurance, all of the following are examples of risk, EXCEPT:

The possibility of losing money in the stock market

A combined ratio of 97 means the insurer

Has an underwriting gain of three cents per premium dollar.

If your dog bites a neighbor, you are protected by your

Liability insurance.

All of the following are organizations that provide services to insurance claimants to assist them, EXCEPT:

Advertising firms

The following are aspects of an insurance company's organization, EXCEPT:

Age of the department

The Gramm-Leach-Bliley Act

Allowed banks to sell insurance and to own insurance-related businesses.

Insurance helps businesses by

Allowing them to pursue activities they might not otherwise do because they are too risky.

An exclusive agent is

An independent business person who sells insurance only for one insurer or one group of affiliated insurers.

The term underwriter originated from

Bankers or investors signing their names "under" the description of the voyage they agreed to guarantee.

The steps in a typical personal insurance transaction include all of the following, EXCEPT:

Establishing underwriting guidelines

A combined ratio of 109 means that the insurer

Has an underwriting loss.

If an underwriter decides to provide the coverage for a commercial applicant, the producer will often prepare a proposal for the prospective insured. Which one of the following best describes that proposal?

It highlights the features of the proposed coverage and services and indicates the premiums to be charged.

If one of your trees falls onto your neighbor's house, you are protected for the expense of the damage by your

Liability insurance.

Firemarks are

Metal plates used to identify buildings covered by a fire insurance company.

What is the effect of fraudulent insurance applications on the insurance industry?

Premiums must be raised for all insureds to pay for losses.

All of the following statements concerning state regulation are true, EXCEPT:

State insurance departments are the only entity responsible for regulating the insurance industry.

What can the insurer use to estimate the amount of losses it expects to pay for all of its insured?

Statistics

A personal policy includes all of the following, EXCEPT:

Statutes

The two most common forms of insurance company ownership are

Stock and mutual.

Which one of the following is true about an independent agent's customer list?

The agent owns the customer list and if the agent ceases representing the insurer, the agent keeps the customers for itself.

If the claim representative and the third party cannot agree on the amount of settlement for a liability claim,

The claim will most likely need resolved through legal action.

Burial societies were early forms of mutual assistance because

The cost of a burial was covered by other members of the society.

The combined ratio is equal to

The expense ratio plus the loss ratio.

Insurance companies are moving to use the Internet because

They want to improve their customer service and increase their sales.

The claim handling process for property losses involves all of the following, EXCEPT:

A claim representative will pay the entire amount of the loss and then seek reimbursement for the deductible from the party responsible for the loss.

An underwriter, upon reviewing an application, can decide to

Accept the application, reject the application, or accept the application with modification.

Insurers can go many years without making a profit on its underwriting operations and yet still have positive operating income. How is this possible?

Because the insurer has likely made a profit from its investment operations.

Within an insurance policy, exclusions

Help to define exactly what is not covered.

In a centralized insurance company

There are relatively few offices or operating units, and decision-making authority is relatively concentrated in a corporate or home office staff.

Which one of the following organizations works with or parallel to the insurance industry and tests a wide range of electronic devices, alarm systems, and other items for safety and accuracy of operation?

Underwriters Laboratories.

When an insurer's earned premiums exceed its losses and expenses, the insurer has an

Underwriting profit.

Suppose an insurer has a pool of five insureds. The insurer calculates that one insured will have a $1,000 loss during the year. So, the insurer charges each insured $200 (plus a little extra for other expenses) for insurance for the year. If two insureds each have a $1,000 loss, the insurer's estimate of the pool's losses is off by

100%

An insurer with $35 million in net income and $500 million in surplus has a return on surplus of

7 percent

All of the following are covered by commercial insurance, EXCEPT:

A woman's purse is stolen while shopping

Insurance in the United States evolved from the insurance practices of the

British.

Primary insurers buy reinsurance to

Help pay for losses that they cannot pay for by themselves.

An example of a restriction state laws often place on an insurer's ability to cancel or nonrenew a policy is that

Insurers must give notice to insureds at least a certain number of days before the policy is actually canceled or nonrenewed.

Insurance helps people buy houses and cars because

Lenders often will not provide a loan on an uninsured asset.

The conditions of a commercial insurance policy

Modify the insuring agreement by specifying the rights and duties of both the insurer and insured.

Approximately 25 cents of each premium dollar is for

Sales and administrative expenses.

The amount of insurance any insurance company can sell is directly related to

The financial cushion it has accumulated.

The commercial insurance sale is similar to the personal insurance sale in all of the following ways, EXCEPT:

The producer is likely to conduct the sale over the phone.

Which one of the following is true regarding insurance for boilers?

The purpose of boiler insurance is not to pay losses, but to prevent explosions.

The type of producer who is an employee of an insurance agency or brokerage or an insurer using a direct response marketing system is

A customer service representative.

The regulation of the insurance industry

Has shaped the industry's practices over time.

Early merchants practiced risk sharing by

Having several merchants spread their goods among several ships, thereby reducing the chance of any one merchant losing everything.

Insurers pool insureds to

More accurately project what they will have to pay in losses.

An underwriter might suggest all of the following modifications to a commercial insured to make the application more acceptable, EXCEPT:

A lower deductible on the coverage

Special investigation units (SIUs)

Apply investigative techniques to detect fraud committed by insureds and insurance company employees.

Claims representatives

Follow the claims policies and procedures established by the claim department.

Selecting risk management techniques that works best for a given risk depend on the

Frequency and severity of losses.

Renewal of a commercial insurance policy

Generally involves a meeting of the insured and insurer to discuss possible changes.

All of the following are types of commercial insurance, EXCEPT:

Homeowners insurance

For liability claims involving bodily injury, the claim representative will usually

Interview the insured and the claimant.

All of the following are roles of insurance producers, EXCEPT:

Loss control representatives

Endorsements to a commercial insurance policy

Modify the policy to meet the special needs of insureds, state requirements, and so on.

Compared to a personal insurance claim, a loss settlement for a commercial insurance claim is typically

More complicated.

Return on surplus is calculated by dividing the insurer's

Net income by the amount of its surplus.

The investment department of an insurance company

Plans and implements an investment strategy that will generate a favorable return for the insurance company.

All of the following are areas in which the federal government regulates insurance companies, EXCEPT:

Policy language

Insurance helps communities recover from catastrophes by

Providing the funds needed for the communities to rebuild.

Policy acquisition expenses would be considered

Sales and administrative expenses.

The formula for the combined ratio is

The loss ratio plus the expense ratio.

Which one of the following is true regarding the commercial insurance claim-handling process?

To settle a property loss, a claim representative must verify that coverage existed.

Insurers have long used technology for internal purposes. Now, they are extending that use to include the Internet. Today, consumers can fairly easily do all of the following over the Internet, EXCEPT:

Track insurer internal data

For insurance purposes, risk is defined as

Uncertainty about outcomes, some of which can be negative.

Reciprocal exchanges are

Unincorporated associations formed to provide insurance services to their subscribers.

Underwriting policies and guidelines establish

Which premium each insured should pay.

Federal laws to which insurers are subject include all of the following, EXCEPT:

Workers' Compensation Act

Insurance is regulated

Primarily by the states with some federal laws applying.

Which one of the following statements is true regarding the issuance of commercial insurance policies?

Preprinted coverage forms will be assembled and added to the declarations page.

As it relates to insurance, what is the purpose of modifying products and work environments?

Prevent bodily injury and property damage

The law of large numbers is used by insurers primarily to

Price insurance coverage.

Two types of insurance that are designed to cover losses from illness, injury, and premature death are

Life insurance and health insurance.

The cost of an insurer to defend an insured against a liability lawsuit would be considered which one of the following components of the insurance premium?

Loss adjustment expenses

Of the following, traditionally, insurance has been used to pay for

Loss from an auto accident.

Risk control primarily involves

Loss reduction and loss prevention.

Approximately 72 cents of each premium dollar is for

Losses and loss adjustment expenses.

Which one of the following costs receives the majority of an insurer's premium?

Losses sustained by group members

Insurance is one of the best methods for

Low frequency, high severity losses.

When applicants do not reveal their true amount of risk to an insurer, such as not being truthful about their driving record which indicates a history of poor driving, the insurer charges the insured

Lower premiums than they should.

Profit is important to an insurer because it

Makes it worthwhile for an insurers owners to take the risk of investing in the company.

Insurers forecast the amount of losses they will pay by

Pooling insureds and using statistics to develop estimates based on the loss experience of those pools.