RMI Exam
49) "Actual cash value" means "historical cost less depreciation."
Answer: FALSE
47) Ambiguities in the wording of an insurance contract are always construed against the writer
Answer: TRUE
47) The exposures in an insurance pool must be similar to reduce subsidization.
Answer: TRUE
17) IBNR reserves are an estimate of: A) losses that have been incurred but not reported to the insurer B) losses that have been incurred and reported to the insurer, but not yet settled C) unearned premiums the insurer owes policyholders D) agent commissions owed
Answer: A
1) The homeowners policy agrees to cover the peril of collapse in the "Additional Coverage" section and not as a specified peril because: A) of concurrent causation B) of moral hazard C) all perils are not defined in the contract D) collapse of buildings should not be covered
Answer: A
10) Which of the following is not likely to be found on a declarations page? A) Duties following a loss B) Identity of the named insured C) List of coverages provided by the contract D) Name of the insurer
Answer: A
18) Mr. Xavier has an HO-3 contract with $100,000 dwelling coverage, $50,000 personal property coverage, and a $500 deductible. The dwelling is 50% depreciated. Sewage backs up into the basement and destroys the furnace, which will cost $8,000 to replace. The policy will pay: A) nothing because of the water damage exclusion B) nothing because the property is not covered C) $7,500 because of replacement cost coverage D) $3,500 because of actual cash value and the deductible
Answer: A
20) If Paul causes a car accident, and the car he hits is driven by an insured motorist, Paul's PAP will pay for the other driver's damages: A) under coverage A, Liability B) under coverage C, Uninsured Motorist C) under both coverages A and C D) nothing since an uninsured motorist was injured
Answer: A
29) Alberto has an HO-3 contract with $100,000 of Liability Coverage. He is ordered by a judge to pay his neighbor $162,000 because of bodily injuries the neighbor suffered while he and Alberto were fishing in Alberto's old, undeclared 35 horse-power outboard motor boat. How will the contract respond? A) Nothing is paid because liability arising out of this boat is excluded. B) $61,500 is paid because of the deductible. C) $62,000 is paid to the injured party. D) $100,000 is paid to the neighbor.
Answer: A
30) Under the PAP Liability Coverage, the "insured" is: A) the person who causes the accident and/or damages B) the person or persons who is/are injured in the accident C) both the at-fault driver and those persons injured D) the police officer who arrives at the scene and beats up the at-fault driver
Answer: A
31) Britney and Kevin were painting their backyard fence with a spray gun. A strong gust of wind blew paint on the neighbor's house. The neighbor sued them for all the clean-up costs. Which of the following is true about Britney and Kevin's HO policy? A) This liability is covered by their HO policy. B) This liability is not covered by their HO policy because the damage occurred off their premises. C) This liability is not covered by their HO policy because the damages are not bodily injuries. D) This type of incident is specifically excluded by the HO policy.
Answer: A
6) Which of the following are not a part of the conditions at the end of the HO-3 policy typically cover? A) Additional coverages B) Activities that the insured must perform to assist the insurer C) Set limits on the insurer's total liability D) Issues surrounding cancellation and nonrenewal of the policy
Answer: A
61) What is the difference between a single limit and a split limit in expressing liability limits in the PAP?
Answer: A single limit (e.g. $100,000) identifies the maximum amount paid for one occurrence regardless of the number of people involved for bodily injury or the amount of property damage. Once the limit is spent, no more coverage exists. The split limit (e.g. 10/20/5) provides $10,000 per person, $20,000 per occurrence for bodily injury and $5,000 for property damage. The maximum paid in this circumstance is $25,000 (excluding defense).
10) The Liability coverage in the HO policy does all the following except: A) defends a suit against the insured even if the allegations of the suit are groundless, false or fraudulent B) covers the insured's own property destroyed by another's negligence C) pays for immediate medical and surgical expenses incurred by other(s) D) reimburses the insured for all reasonable expenses incurred at the request of the company
Answer: B
15) Which of the following coverages is provided by the PAP? A) Rental car reimbursement coverage for any car rental, regardless of why the car is needed B) Liability insurance C) Medical expense for disease D) Personal property coverage
Answer: B
17) Which of the following is true regarding your PAP contract? A) Your personal property is covered while in your automobile. B) Your Medical Payments will pay for your friend's injuries suffered while s/he is occupying your car. C) If you drive a car that you do not own, you will have no coverage for anything. D) All rental cars must be declared to be insured in order to have coverage on them.
Answer: B
23) Which of the following is not covered by the HO-3 Form? A) Additional living expense and rental value B) Death (loss) of domestic animals C) Personal liability defense costs D) Loss of trees, shrubs and other plants
Answer: B
25) Uninsured Motorist coverage: A) provides first-dollar coverage for damage to the insured's own autos B) protects the insured against financially irresponsible drivers who have no auto liability insurance C) doubles the premium for liability coverage D) is available only to drivers with excellent driving records
Answer: B
26) Underinsured Motorist coverage: A) is the same as Uninsured Motorist coverage B) potentially pays the difference between the negligent driver's liability coverage amount and the injured party's UM limits C) pays for property damage you cause when your victims have no coverage D) pays for an insured's negligence when insufficient liability limits exist
Answer: B
22) Which of the following is excluded by the HO-3 Form? A) Additional living expense and rental value B) Debris removal C) Loss of trees, shrubs and other plants D) Loss caused by ordinance or law
Answer: D
30) Which of the following perils is not covered by the HO-3 form? A) Aircraft & vehicles B) Flood C) Theft D) Falling objects
Answer: B
33) You drink 19 beers to celebrate the end of your risk management and insurance class, and then have an accident while driving home from the bar. The police charge you with drunk driving, and with hitting another automobile from behind. What will your automobile insurer do when you file a claim for the damage to your car, and what will it do when the injured people in the other car file claims to have their bodily injuries paid for? A) Nothing. The insurer does not have to pay any of these claims. B) The insurer will pay all the claims. C) The insurer will pay the liability claims, but not the damages to your car, because of the fact that you were drunk. D) The insurer will say, "Who are you? Nobody here remembers selling you a policy."
Answer: B
12) A PAP is issued with both Collision and Other than Collision coverages. Two valuable cameras are stolen from the car. The cameras would be paid for by: A) Other than Collision coverage B) Collision coverage C) a homeowner's policy, if one is in force D) the PAP, but ONLY if there are visible signs of forcible entry on the auto
Answer: C
15) The named insured leaves a suitcase filled with clothing on the seat of his unattended, unlocked automobile. The loss is valued at $900 replacement cost and a depreciated value of $700. The HO-3 contract has a $200 deductible on Section I. How much will the HO-3 contract pay for this loss? A) $0 (because the clothing was in an automobile) B) $700 C) $500 D) $0 (because the automobile was unlocked)
Answer: C
19) What is the rationale for having a special limit of liability on for example a stamp collection? A) There is no limit on the liability for a stamp collection. B) To prevent moral hazard C) It is difficult to determine the amount of loss. D) Both B and C
Answer: C
25) The issue of who is a resident of the household, and thus an "insured" under the HO policy, has been litigated many times. Which of the following is a key factor that most courts consider when determining residence? A) The educational status of the resident in question B) Occupation of the resident in question C) The intent of the individual D) None of the above
Answer: C
28) Beverly has an HO-3 contract with a $100,000 per occurrence limit on the Liability coverage. She rents out her basement to a college student, and the student's personal property is damaged by Beverly's negligence. The student sues her for $3,000. How much will the HO policy pay for this loss? A) $0 is paid because this liability is excluded. B) $0 is paid due to the care, custody and control exclusion. C) $3,000 is paid because the loss is not excluded. D) $3,000 is paid under the property section and not the legal liability section
Answer: C
35) When you have an auto accident that is your fault, your PAP's Liability coverage will pay for all of the following except: A) bodily injuries of passengers in other cars that you hit in the accident B) bodily injuries of non-family members who are passengers in your car at the time of the accident C) bodily injuries of your spouse who is a passenger in your car at the time of the accident D) None of the above; in other words, ALL of the above are items your PAP's Liability coverage would pay for.
Answer: C
45) Mandy's car is stolen and she files a claim with her PAP insurer. Which of the following items will not be paid for by her Other than Collision coverage? A) the actual cash value of the car B) the car's factory-installed GPS navigational system, worth $999 C) her cell phone that had a built-in GPS navigational system D) None of the above; all these items would be covered by her policy.
Answer: C
7) Medical Payments coverage in the HO-3 policy covers all of the following except: A) a guest slips and falls in the shower B) during a delivery, a milkman stumbles over a child's wagon and breaks his leg C) the insured stumbles down the porch while entering his own home and breaks his arm D) the insured accidentally hits someone with a golf ball on the golf course; the person needs medical treatment
Answer: C
52) Explain why there is a coinsurance clause applied to the building structures. How does it work?
Answer: Coinsurance encourages insureds to insure to replacement value. If the insured at the time of loss has 80% or more of replacement cost, the replacement cost of the loss is paid up to the face amount. If there is less than 80% of full replacement cost coverage, the ACV of the loss is calculated. In addition, the replacement cost loss is multiplied by the amount of coverage divided by the amount required. The larger amount is paid, but never more than the face value of the policy.
54) Explain the concept of concurrent causation as it applies to collapse.
Answer: Collapse currently is not an insured peril. It can be the result of any number of causes of loss. If there are causes of a collapse that are covered and other causes that are not covered, courts have used "concurrent causation" theories to force insurers to pay the loss. Collapse now is in the additional coverage section and not the peril section and ALL of the causes for the collapse must be listed or else the resulting collapse will not be paid.
10) Compulsory Auto Liability Insurance laws are designed to: A) reduce automobile insurance rates B) decrease the number of people who carry automobile insurance C) reduce the number of automobile accidents D) force individuals to purchase auto liability insurance
Answer: D
11) All of the following losses are covered in an HO-3 policy except: A) damage done to the house by neighborhood vandals B) damage done to shrubbery during a fire C) loss of use of the property following a fire D) damage done to the building and contents caused by a flash flood
Answer: D
11) All of the following persons are covered under Larry's PAP except: A) Larry's wife, who borrows a neighbor's car B) Larry's son, who borrows a friend's car to get to work C) Larry, while driving a car he borrowed from his employer to run an errand D) Larry, while driving a borrowed commercial wrecker truck to tow his car to a repair garage
Answer: D
13) All of the following are available under one of the HO forms except: A) personal liability insurance B) theft insurance C) medical payments coverage for others D) automobile physical damage coverage
Answer: D
18) Which of the following is false? A) A pedestrian who has a PAP and is injured by an automobile can collect under his own Medical Payments coverage. B) The PAP covers theft of the automobile. C) The subrogation provision of the PAP does not apply to Medical Payments coverage. D) There is no coverage for the insured while driving a rented automobile.
Answer: D
2) Which of the following is not a part of the HO-3 policy layout? A) Definitions B) Exclusions C) Conditions D) All of the above are a part of the HO-3 policy layout.
Answer: D
24) Which of the following is not a valid reason to carry Medical Payments coverage? A) Guests injured in an automobile accident might hesitate to sue their hosts. B) A negligent host would probably feel a moral obligation to pay for medical bills for injured guests. C) To facilitate settlement for relatively small amounts of medical expense D) To provide reasonably priced health insurance for the insured and his family
Answer: D
24) Which of the following is not exclusion in a typical HO-3 policy? A) Catastrophic events B) Coverage where another policy is specifically designed to provide coverage C) Failure of power or another utility D) All of the above are a typical exclusion in a HO-3 policy.
Answer: D
26) All of the following are available under the HO-3 contract except: A) personal liability insurance B) theft insurance C) medical payments coverage for others D) automobile comprehensive coverage
Answer: D
27) In homeowner's insurance, coinsurance is: A) an agreement between two or more insurance companies to jointly cover a large risk B) a contractual agreement to make the insured bear a portion (usually small) of every loss C) a contractual agreement to prevent over-insurance D) a contractual agreement that penalizes the insured when under-insured
Answer: D
33) Ira is a homeowner covered by an HO-3 policy. He lives with his wife and three teenage children, plus one teenage foster child. Who in the household is not covered for personal liability by the HO policy? A) Ira's foster child B) Ira's wife C) Any of the Ira's three teenage children D) All of the persons listed above are covered.
Answer: D
37) Mary's house is burglarized and $22,000 in jewelry is stolen. What is the maximum amount her standard HO-3 policy will pay for this loss? A) $12,000 B) $9,600 C) $2,500 D) $1,500
Answer: D
39) Which of the following is true? A) Suing an uninsured motorist for damages they cause you to suffer is not a promising source of recovery. B) If you are struck by an uninsured motorist and want your PAP's Uninsured Motorist coverage to pay for your bodily injuries, you must convince your insurer that the Uninsured Motorist was at-fault in the incident. C) If you cannot clearly establish that an uninsured motorist was at fault in the accident, you may have to enter the arbitration process to get your insurer to pay for your damages under the PAP's Uninsured Motorist coverage. D) All of the above
Answer: D
4) All the following are provisions in the HO-3 contract that can decrease amounts payable by the insurance company except: A) deductibles B) coinsurance/replacement cost provisions C) special limits on certain types of property D) mortgage clause
Answer: D
42) Meghan has a PAP on 3 cars, and, she owns a fourth car on which no coverage has been purchased. Which of the following persons are covered by Meghan's PAP assuming they are driving the uninsured car? A) Meghan, plus any other family member residing in the household B) Any family member that resides in the household, but NOT Meghan C) Only Meghan D) None of the above would be covered.
Answer: D
57) What are some of the reasons exclusions are found in insurance contracts?
Answer: Exclusions are found in insurance contracts to: 1) eliminate catastrophic losses, 2) control the moral and morale hazards, 3) eliminate coverage for events/property where an extra charge is needed, and 4) eliminate coverage in which a specific contract is designed for that need.
40) No consequential or loss of use losses are covered by the standard homeowners' policy.
Answer: FALSE
43) In fire insurance, the purpose of coinsurance clauses is to prevent over-insurance.
Answer: FALSE
47) The HO policy provides professional liability insurance coverage to the insured, provided the work leading to the lawsuit is done at home.
Answer: FALSE
48) PAP coverage A, which includes Property Damage Liability, provides coverage to reimburse you if your automobile is damaged.
Answer: FALSE
50) Uninsured Motorist coverage usually provides property damage coverage to the insured for damages to his auto caused by an insured motorist.
Answer: FALSE
58) When you borrow someone's car and wreck it, you have the option of letting your automobile insurance pay on a primary basis for the accident.
Answer: FALSE
60) Property Damage Liability of the Personal Automobile Policy provides coverage to reimburse you if your automobile is damaged.
Answer: FALSE
55) What is the contractual significance of having high limits of legal liability coverage in the HO contract?
Answer: If the insured has purchased high limits of legal liability coverage the insurance company must pay up to those high limits for a covered loss. In addition, since defense costs are paid in addition to the limit of liability, high limits of liability coverage forces the insurer into defending the insured up to those high limits. The higher the limit of liability, the more interested the insurer will be relative to defense.
51) Why is there a "special limits of liability" section in the personal property section of the HO-3 contract?
Answer: Special limits are imposed on various types of property because it would be unfair to charge all insureds high premiums for target property (such as jewelry and furs) that they do not own. If an insured needs more coverage they can buy it and pay the additional premium.
41) Falling objects is a named peril for coverage of personal property in a HO-3 policy.
Answer: TRUE
42) A coinsurance requirement, if not met, serves to limit the recovery of loss under the policy.
Answer: TRUE
45) The HO policy's Mortgage Clause continues to protect the lender (mortgagee) even if the insured/homeowner has committed fraud against the insurer.
Answer: TRUE
47) You collide with another vehicle and the accident is your fault. You may collect for damages to your vehicle, less the deductible, from your insurance company under Coverage D, Collision, if a premium for Collision has been paid.
Answer: TRUE
48) Adding coverage to the HO contract by endorsement increases the insured's premium.
Answer: TRUE
50) One purpose of exclusions in the HO policy is to eliminate losses due to moral hazard.
Answer: TRUE
54) If you rent a car while on vacation, you have coverage for any collision damage to the rental car under your own PAP, assuming you have purchased such coverage on your owned automobiles.
Answer: TRUE
57) Your PAP's Medical Payments coverage will pay for your bodily injuries if you get hit by a car as a pedestrian.
Answer: TRUE
59) Robert drove his car from California to New Mexico. He had an accident right after crossing the border into New Mexico. His PAP provided coverage for this incident.
Answer: TRUE
53) What is meant by "Medical Payments to others"? Why does the coverage exist?
Answer: The Medical Payments to others section pays for medical services within 3 years of the date of injury to generally non-insureds on a no-fault basis. The coverage is designed to minimize the probability of a suit under Coverage E (legal liability).
63) Explain the purpose of Uninsured Motorist coverage.
Answer: The purpose of Uninsured Motorist coverage is to protect occupants of the automobile from being injured by a negligent driver who is operating a vehicle which is an "uninsured motor vehicle," as defined by the contract. The Uninsured Motorist coverage allows collection from one's own insurer when entitled to collect from a negligent third party and they are financially irresponsible.
62) If an insured is using his/her own private passenger car under normal circumstances, in what situations can the insured lose legal liability coverage?
Answer: Under normal circumstances the insured will be covered for any legal liability situation using the car. He/she will lose coverage under abnormal situations including intentional injury and using the car for moving people or property for a fee (business use).
22) Explain briefly why increasing or decreasing price artificially can decrease the supply of insurance.
Answer: When insurance prices are decreased, companies will reduce writings to minimize the loss of profits or minimize losses. Since there has to be a level of capital to support premiums, all other factors the same, as prices increase, fewer policies can be written. Therefore, increasing or decreasing prices can both reduce the availability of coverage.
19) Comparison shopping for insurance is generally not worthwhile since very little price variation is found in either life or property insurance.
Answer: FALSE
45) Exclusions are not a basic part of an insurance contract
Answer: FALSE
18) All of the following are perils except: A) heart attack B) theft C) forgery and embezzlement D) incorrect instructions on the label of a pesticide
Answer: D
32) Under a contract of adhesion: A) subrogation is not allowed B) ambiguous features are interpreted against the writer of the contract C) ambiguous features are interpreted always against the insurer D) ambiguous features are decided based upon the intent of the parties when the contract was entered
Answer: B
35) A burglar enters Marcia's home and steals $10,000 worth of appliances. Marcia tells the insurance company that the appliances were worth $20,000. This overstatement of the loss is an example of: A) a morale hazard B) a peril C) insurance fraud D) carelessness
Answer: C
8) Most markets involve two parties. How many does the insurance market have? A) 1 B) 2 C) 3 D) 4
Answer: C
52) When entering into a legally enforceable insurance contract consideration must exist. Explain what consideration is and the form it takes in insurance contracts.
Answer: Consideration is an exchange of tangible property or promise(s) in order to start an enforceable contract. Consideration in property insurance is the money exchanged (or the promise to pay) and abiding by the conditions and stipulations in the contract. In life insurance it is money exchanged and making truthful statements in the application.
21) The insurance commissioner applies the state insurance code to regulate insurance companies and their activities.
Answer: TRUE
55) An insurance broker legally represents the insurance consumer.
Answer: TRUE
41) Which one of the following is false concerning the standardization of insurance policies? A) It reduces the risk for the insurance companies resulting from the principle of adhesion. B) It holds rates below what they would otherwise be. C) It reduces adverse selection. D) It increases flexibility
Answer: D
42) Which one of the following is not a basic part of an insurance contract? A) Deductibles B) Conditions C) Declarations D) All of the above are a basic part of an insurance contract.
Answer: D
6) Participants in the private insurance market include all of the following except: A) insurance buyers B) insurance companies C) insurance regulators D) the FDIC
Answer: D
7) From the viewpoint of an insurer, the prerequisites of an ideally insurable risk include all the following except: A) the loss must be capable of being determined and measured B) there must be a large, homogeneous group of exposure units C) the loss should not be subject to catastrophic hazard D) the peril should be such that the probability of loss is high
Answer: D
51) Standardized insurance policies make it easier to calculate an insurance rate than do non-standardized policies.
Answer: TRUE
35) The principle of insurable interest is important because it: A) makes insurance companies more profitable B) supports the principle of indemnity C) prevents insurers from unfairly denying insurance claims D) prevents an insurer from subrogating against a negligent third party
Answer: B
13) Which of the following is the correct calculation of the insurance premium? A) Insured Loss Claims + Loading Expenses + Fair Rate of Return - Investment Income B) Insured Loss Claims + Loading Expenses + Investment Income - Fair Rate of Return C) Insured Loss Claims - Loading Expenses - Investment Income + Fair Rate of Return D) Insured Loss Claims - Loading Expenses + Fair Rate of Return + Investment Income
Answer: A
17) Which of the following is a true statement? A) Insurers are significant financial intermediaries in the U.S. economy. B) Property insurers are prohibited from insuring commercial real estate. C) The insurance companies in the U.S. are estimated to be very profitable. D) Both A and C above are true statements.
Answer: A
19) Proximate cause means: A) the first insured peril in an unbroken chain of events leading to a loss B) the event nearest the peril in time C) the event nearest the peril in space D) the event nearest the loss in time and space
Answer: A
46) The principle of indemnity says that the insured should profit from insurance
Answer: FALSE
55) What is the doctrine of utmost good faith? What situations arise out of its application? Explain.
Answer: The doctrine of utmost good faith raises the degree of honesty in insurance contracts above normal business contracts. Representations, concealments, and warranties arise. Representations, when false and material, allow the company to avoid payment. Material concealments do the same as well as breaches of warranties.
55) Discuss the building blocks of an insurance premium.
Answer: The insurance premium consists of the insured loss claims by the insured plus the loading expenses, which are the overhead costs incurred by the insurance company plus a fair rate of return for the insurance company minus the investment income generated by the insurance company.
44) Since the automobile insurance policy is written by the insurer, ambiguities are interpreted in favor of the insurer.
Answer: FALSE
16) Mr. Green's 24-year old son still lives at home while attending college part-time. The son also has an apartment near his college campus. His stereo is stolen from the apartment. The stereo has a $1,400 replacement cost, and an actual cash value of $900. If there is a $100 deductible on Section I, how much will the HO-3 contract pay for the stolen stereo? A) $800 B) $900 C) $0, because the son is not covered by the contract D) $1,400
Answer: A
53) An insurance contract creates duties for the insurer, but only the insured has contractual rights.
Answer: FALSE
35) Which of the following is not an available endorsement to the HO policy? A) Professional Liability Coverage Endorsement B) Home Day Care Coverage Endorsement C) Business Pursuits Endorsement D) Scheduled Personal Property Endorsement
Answer: A
36) Bob loans his car to Norm, and Norm wrecks the car. Both Bob and Norm have PAP's on their owned vehicles, and both men have purchased all four major coverages (A, B, C and D) on their automobiles. Whose policy will pay for this loss on a PRIMARY basis? A) Bob's B) Norm's C) They'll both be primary and will share the loss equally. D) Neither policy will pay on a primary basis because the loss is not covered.
Answer: A
38) Why is there an "ordinance-or-law exclusion" in a typical HO-3 policy? A) Because it is too costly to include B) Because there is a federal insurance policy that covers this aspect C) Because it is better insured under another insurance policy D) There is no such exclusion.
Answer: A
43) All of the following would be paid under the PAP's Other than Collision coverage except: A) the car skids out of control due to ice on the road, and hits a tree B) the driver of the car hits a bunny rabbit, loses control of the car, and runs into a ditch C) the windshield gets broken, and there is no known outside cause for the damage D) the car is damaged by a fire the insured negligently started while shooting off fireworks on the 4th of July
Answer: A
44) When you have an auto accident that is your fault, your PAP's Liability coverage will pay for all of the following except: A) bodily injuries of your family members riding with you B) bodily injuries of non-family members who are passengers in your car at the time of the accident C) bodily injuries of your best friend who is a passenger in your car at the time of the accident D) the cost to repair or replace property belonging to others that you damaged in the accident
Answer: A
5) Replacement cost is most closely synonymous with: A) original purchase price B) actual cash value less depreciation C) accounting book value D) reconstruction cost
Answer: D
64) What is the difference between Collision and Other than Collision coverages? Why does the PAP list certain perils in Other than Collision when they can be caused by collision? What happens if the cause of loss is not listed?
Answer: Collision is hitting an object or the overturn of the vehicle. Other than Collision consists of the ten items listed, plus any other loss not excluded by the contract. The ten items are listed to artificially separate losses that can be construed as either category for rating and clarity purposes (except glass breakage). Other than Collision is an open perils coverage, which means if a cause of loss is not excluded it is covered.
20) Joe owns a house on which he carries a $400,000 HO-3 policy. The replacement cost of the house is $600,000. A fire loss occurs that has a replacement cost of $10,000. How much can Joe collect under his HO-3 policy? A) $15,462 B) $10,000 C) $30,000 D) $8,333
Answer: D
52) Explain briefly why insurance functions as an antimonopoly device.
Answer: Insurance enables smaller companies to exist and compete with bigger companies, hence it increases competitiveness in the economy.
24) Unrestrained price competition does not work in the insurance market because prices have to be determined long before final costs are known.
Answer: TRUE
46) The liability coverage of the HO policy commits the insurer to defend lawsuits brought against the homeowner, even if the lawsuits are frivolous and groundless.
Answer: TRUE
46) Your vehicle is damaged by another vehicle and the accident is the fault of the other driver. You may collect for damages to your vehicle, less the deductible, from your insurance company under Coverage D, Collision, if a premium for Collision has been paid.
Answer: TRUE
18) Insurance companies offer identical and perfectly substitutable products.
Answer: FALSE
2) Which of the following is a primary reason that insurance consumers are not well-informed? A) Insurers have not made much effort to inform consumers. B) The rewards of making informed decisions are not worth the cost of obtaining the needed information. C) State insurance regulators do not provide the needed information. D) Insurance prices are so low that most consumers do not care to be informed.
Answer: A
30) Which of the following pieces of information would be the LEAST useful to a property insurance underwriter? A) Age of the property owner B) Age of the property C) Use of the property D) What the surrounding properties are like
Answer: A
34) The combined ratio is: A) the loss ratio plus the expense ratio B) a measure of underwriting losses C) the loss ratio divided by the expense ratio D) a measure of capital gains and dividend returns
Answer: A
4) Insurer reserve requirements exist to: A) force the insurer to maintain a minimum amount of unencumbered assets B) allow the insurer to earn investment income C) allow the insurer to charge higher premiums D) set money aside for fixed asset acquisition
Answer: A
4) The Legal Definition of insurance: A) is that insurance is a contract in which one party agrees to compensate another party for losses covered by the contract B) is that insurance is a financial agreement that transfers the risk of insured losses to a risk pool by an insurer C) differs from state to state D) originally comes from tort law
Answer: A
5) Legally, insurance is a branch of: A) contract law B) tort law C) Neither A nor B is correct. D) Both A and B are correct.
Answer: A
7) Which of the following is not provided on the private insurance market? A) Bank deposit insurance B) Life insurance C) Health insurance D) Commercial lines insurance
Answer: A
9) Which of the following items is not a benefit of standard insurance policies? A) Smaller insurers can offer cheaper insurance than larger companies if standard policies are used. B) Litigation should be reduced as policy meaning becomes understood. C) Consumers are more likely to learn the meaning of standard policies. D) Data collection and loss rate computation are easier and more accurate.
Answer: A
10) Which of the following statements is not correct about the insurance premium? A) The forecast of policyholders' losses is the starting point for the calculation of the risk premium for an insurance policy. B) The fair rate of return, which is a part of the insurance premium, is governed by law. C) Loading expenses increase the insurance premium. D) Most investment income of insurance companies comes from low risk investments, which reduces the insurance premium.
Answer: B
12) Consumers that have done some research to gather insurance information: A) make the insurance market less efficient B) probably will get better subsequent information from insurance companies C) probably will just get "razzle-dazzle" from insurance companies D) probably wasted their time
Answer: B
16) The primary difference between an insurance agent and an insurance broker is: A) their compensation scheme B) the parties they each legally represent C) the fringe benefits their employers provide D) there is no practical or legal difference between them, other than their titles.
Answer: B
18) What is the principle of indemnity? A) A court precedent that gives insureds the right to sue their insurers if they get bad claims service B) The rule that a person may not collect more than his actual loss in the event of damage caused by an insured peril C) The rule that a person will not be reimbursed for a loss unless he can show proof of loss D) A way of requiring a person to pay a premium
Answer: B
2) Adverse selection results FROM which of the following? A) No underwriting is necessary. B) Applicants for insurance have a higher probability of loss than the average group of insureds. C) The federal government must write the insurance. D) Better insureds are attracted to the group.
Answer: B
25) Bodacious D, a famous singer, is performing at a concert. He does not have his body guards and security team present for the concert. A crazed fan runs up on stage, declares her love for Bodacious D, and throws herself at him. Bodacious D lands on the floor, and breaks his back. Which of these is the HAZARD(S), and which is the PERIL? A) The peril is not having a body guard present; the hazard is the crazed fan. B) The peril is being attacked by the fan, and the hazard is not having a body guard present. C) The peril is not having a body guard present, and the hazard is being pushed to the floor. D) The peril is both the crazed fan and the lack of security; there is no hazard in this case.
Answer: B
3) The Financial Definition of insurance: A) is that insurance is a contract in which one party agrees to compensate another party for losses covered by the contract B) is that insurance is a financial agreement that transfers the risk of insured losses to an insurer C) differs from state to state D) is that it is any pool for which the insurance mechanism works
Answer: B
3) Which of the following is the most important goal of insurance regulation? A) Limiting the number of insurance companies in the state B) Promoting the solvency of insurance companies C) Mandating that all citizens purchase auto insurance and health insurance D) Approving the contractual language of insurance policies sold in the state
Answer: B
30) Which term below describes a contract in which there is an unequal dollar consideration? A) Commutative B) Aleatory C) Adhesion D) Unilateral
Answer: B
31) The doctrine of proximate cause: A) forces the insurer to pay for all claims arising out of an unbroken sequence of events if any one of the subsequent perils following the original excluded peril was covered B) forces the insurer to pay for all claims arising out of an unbroken sequence of events if the original insured peril was covered C) forces the insurer to pay for the loss when the proximate cause of the event is the insured's fault D) divides any loss payment among parties proximately affected by the loss
Answer: B
32) Rusty is the president of The Huge Insurance Company. His Vice-President in charge of Finance comes to him one day and says "Rusty, our combined ratio for the year is 95%." Rusty replies, "Wooo hooo, profit sharing bonuses for everyone!" Why isn't Rusty upset about this combined ratio? A) The company probably made enough money on its investments to make up for the underwriting losses. B) The company has actually made a profit on its insurance business. C) Rusty is not very bright and doesn't understand what the combined ratio really means. D) The combined ratio is not an important indicator of underwriting results.
Answer: B
40) Which of the following is not a valid reason to reinsure an exposure? A) To make insured exposures similar in dollar size B) To provide the insured access to Lloyd's of London C) To buy services from the reinsurer D) To allow agents to be more competitive
Answer: B
5) On average, women live longer than men. If an applicant's gender is ignored in determining life insurance prices: A) men will subsidize women B) women will subsidize men C) no subsidization will occur because only group longevity results are valid D) morale hazard will increase significantly
Answer: B
8) To determine if a loss is covered by a property insurance contract, you should look at all of the following except: A) all applicable exclusions B) the subrogation clause C) what property is covered D) the dollar limitations for recovery
Answer: B
68) What is the difference between an agent and a broker?
Answer: Both agents and brokers are controlled by the principle agency legal relationship. However, the principle agent relationship exists between the insurer and the agent in the agent relationship. It exists between the client and the broker in the brokerage relationship. Therefore, any knowledge told to an agent is automatic knowledge of the insurance company. Anything told to the broker is not automatic knowledge of the company.
14) The principle of utmost good faith: A) holds the insurer to a higher standard of honesty B) does not apply in life insurance C) holds the insured to a higher standard of honesty D) requires the insurer and insured to enter the contract with utmost good faith
Answer: C
2) The regulator's objective with respect to insurance rates is to ensure that rates are: A) understood by consumers and affordable for most consumers B) equal for all applicants, adequate, and minimally discriminatory C) fair, adequate and not unfairly discriminatory D) fair, not excessive, and affordable
Answer: C
30) Billy is driving to the beach for spring break. Before leaving on his trip, he takes some cold medicine that makes him sleepy. He falls asleep at the wheel and collides with another car on the highway and breaks his leg. In this context, which of the following is the hazard? A) Spring break B) Knowing how to drive C) Taking the medicine D) Broken leg
Answer: C
37) Joe has a dispute with his insurance company regarding how much he is entitled to recover on a claim. Joe believes he is entitled to get $8,000 based upon his interpretation of the policy wording. The insurer says the claim is not covered by the policy. Joe sues and a court of law decides that the policy wording is vague and ambiguous, and rules that the loss IS covered. What legal characteristic of insurance resulted in the court's decision? A) Insurance is aleatory. B) Insurance is a contract of indemnity. C) Insurance is a contract of adhesion. D) Insurance is personal.
Answer: C
4) All the following are true about underwriting except: A) a major purpose of underwriting is to reduce adverse selection against the insurance company B) fair rates should be charged so that each group of insureds is not subsidized by other groups C) the underwriter should select only those insureds that are expected to have no losses D) the underwriter makes decisions based on criteria established by the company management
Answer: C
5) Deductibles serve three major purposes, and two of those are: A) reduce moral hazards; save on claims handling expenses B) reveal moral hazards; eliminate morale hazards C) reduce morale hazards; save on claims handling expenses D) reveal morale hazards, eliminate moral hazards
Answer: C
5) One of the reasons why there is not sufficient supply for high-risk insurance applicants is: A) consumers will not buy insurance if prices are increased B) the existence of joint underwriters associations C) regulators have limited the premiums that insurers can charge for such customers D) the number of insurance contracts written by an insurer is totally regulated
Answer: C
6) Which one of the following is an argument for federal regulation of the insurance transaction? A) If there were federal regulation, state regulation would still be required for intrastate transactions. B) State regulation allows experimentation and isolation of bad laws. C) Many states do not have enough trained people to regulate insurance efficiently. D) All of the above
Answer: C
7) Insurance regulations require legal reserves and surplus because: A) assets have to equal liabilities plus owners' equity B) reserves are long-term obligations and must be met with long-term assets C) they provide a cushion against bad underwriting and investment results D) insurers must pre-fund all agent's commissions and underwriting expenses
Answer: C
7) Which part of the insurance contract personalizes the coverage to the individual's exposure? A) Exclusions B) Insuring agreements C) Declaration page D) Conditions
Answer: C
56) What is cash flow underwriting? Why is it a concern for insurance companies?
Answer: Cash flow underwriting is the practice of selling insurance coverage at below actuarial costs and making up the difference with investment income. For example, if an exposure was sold at an expected combined ratio of 0.92, .08 would have to be made in investment earnings to break even. Cash flow underwriting is a concern because underwriting is risky enough without having to rely on an uncertain investment return to produce adequate dollars.
1) Insurance brokers are: A) compensated by a flat salary B) legally, agents of the insurance company C) only used in life insurance D) legally, agents of the insurance consumer
Answer: D
1) The A.M. Best Company can help you to determine which of the following about your insurer? A) Its reputation for settling claims B) Its customer service rating C) How many complaints have been filed against it D) Its financial strength rating
Answer: D
10) Which of the following is the best driver to maintain an adequate supply of insurance at affordable prices? A) Regulations B) Excluding high-risk applicants C) Excluding low-risk applicants D) Competition among insurers
Answer: D
11) Why do regulators care whether high-risk drivers have insurance? A) Regulators are silly and have nothing better to do. B) Otherwise insurance companies would lose too much money. C) Excluding high-risk drivers is a violation of the Constitution. D) The societal costs associated with the accidents caused by high-risk drivers is at least somewhat reduced by having them pay an insurance premium, even if it is too low for the associate risk
Answer: D
12) All the following features are unique to insurance contracts (versus other business contracts) except: A) insurable interest B) subrogation C) utmost good faith D) consideration
Answer: D
12) Which of the following is not a duty of an actuary? A) Calculate rates B) Calculate dividends C) Calculate loss reserves D) Identify individual exposures that are going to have a loss
Answer: D
13) Which of the following was not listed in the text as a duty of an agent? A) Loyalty to the principal B) Carefully handling all money and keeping proper records C) Carefully conveying all relevant information D) Duty to select profitable business for carriers
Answer: D
14) The efficient insurance market requires all of the following conditions except: A) numerous sellers and buyers B) well-informed consumers C) numerous purchase substitutes (homogeneity) D) a government subsidy for lower-income citizens
Answer: D
15) The ________ clause in an insurance policy says that when the insurer indemnifies the insured for a loss, it takes over the insured's right to collect payment from any negligent third party that may have caused the loss. A) indemnity B) proof of loss C) adhesion D) subrogation
Answer: D
20) All of the following are costs to society arising from an insurance system's operation except: A) payments for losses caused by fraudulent claims B) payments for losses caused by exaggerated claims C) use of land, labor and capital to operate the insurance companies D) payments for losses caused by windstorms such as tornadoes
Answer: D
22) Which of the following is not a direct social benefit of the insurance mechanism? A) Increased business and social stability B) Better allocation of society's resources C) Better choice of optimum size of business operations D) Lower federal and state income taxes
Answer: D
23) In which case is there no insurable interest? A) Barb's 25% ownership in an oil well B) A dry cleaner in its customers' clothes C) A bank (creditor) in property used to secure a loan D) A school principal in the lives of the students attending his school
Answer: D
26) Under an "open perils" insurance policy: A) covered perils are spelled out, usually using a numbered list B) any piece of property not excluded is covered C) absolutely all risks of losses are covered, those having an illegal purpose D) all perils not excluded are covered
Answer: D
27) If insurance did not exist in the United States, which of the following might reasonably be expected to happen? A) Banks would lower their interest rates on home mortgages and auto loans. B) Moral hazards would decrease. C) The occurrence of perils would decrease. D) In general, only large businesses would be able to survive.
Answer: D
28) Which one of the following is false concerning subrogation? A) It reinforces the principle of indemnity. B) It holds rates below what they would otherwise be. C) It places the burden of loss on one or more responsible parties. D) The insured can never receive any money collected through subrogation.
Answer: D
29) The fact that insured have reasonable expectations has typically resulted in: A) a reduction in the scope of insurance coverage B) an increase in morale hazard C) difficulties preventing adverse selection D) insurers having to cover things they never anticipated covering
Answer: D
36) The expense ratio equals: A) total underwriting expenses divided by insured losses B) net income divided by total expenses C) total expenses divided by net income D) total expenses divided by premiums written
Answer: D
38) All of the following are federally-sponsored insurance activities in the U.S. except: A) Social Security B) Unemployment Trust Fund C) Federal Deposit Insurance Corporation D) Universal Health for Children Organization
Answer: D
4) All the following are necessary for an ideally insurable loss exposure except: A) large number of homogeneous exposures B) losses must be accidental and unintentional from the point of view of the insured C) losses must be measurable D) low probability of loss
Answer: D
4) An efficient insurance market requires all of the following conditions except: A) numerous sellers and buyers B) well-informed consumers C) numerous purchase substitutes (homogeneity) D) a government subsidy for lower-income citizens
Answer: D
8) "Subsidization" in an insurance pool means: A) the bad risks pay more for insurance than good risks B) the premiums collected by the insurers don't adequately cover the losses experienced by the pool C) those who experience losses have their premiums raised D) the good risks pay for the bad risks
Answer: D
54) Explain the principle of subrogation. Provide a mathematical example of its use.
Answer: Subrogation allows a party to collect from a negligent third party to the extent that they have paid for the rights. John's car is damaged $5,000 by a negligent driver and collects $4,500 due to a $500 deductible. The insurer subrogates against the negligent driver for payment. If the insurer collects anything it goes to John to first collect the $500. Any collection in excess goes to the insurer.
45) The insurer's efficiency and underwriting practices are much more important to the consumer than the insurer's legal form of organization.
Answer: TRUE
48) Subsidization in insurance pools occurs if a 40-year-old male is charged the same life insurance premium as a 20-year-old male.
Answer: TRUE
50) Concealment or fraud before, during, or after a loss generally allows an insurer to contest property insurance contracts.
Answer: TRUE
54) If an applicant for insurance informs his broker of all material facts regarding the risk, and the broker does not pass those facts along to the insurer, it's possible that the insurer can legally deny any subsequent claim.
Answer: TRUE
54) Insurance increases the number of intentional losses that occur in society.
Answer: TRUE
56) Mathematicians specializing in insurance statistics are called "actuaries."
Answer: TRUE
57) An agency contract determines the rights and duties of both the agent and the insurer.
Answer: TRUE
57) What are considered the benefits and the costs to society of operating an insurance mechanism?
Answer: The costs of operating the insurance mechanism include all costs except the losses that would have occurred anyway. The benefits include: stability of families, aids in business planning, facilitates credit transactions, is an antimonopoly device, lowers overall cost of capital, contributes to medical and other research, and insurance companies perform a financial intermediary function
56) Explain the purpose of the declaration page found in insurance contracts.
Answer: The declaration page declares many of the variables one would find between insureds. For example, the following pieces of information are declared that would be unique from insured to insured. 1) the named insured, 2) the location of the property, 3) the deductibles, 4) premium charged, 5) policy limits, 6) type of coverage, and, 7) extent of coverage purchased (perils).
26) What is the overall regulatory objectives for a state's rate regulations?
Answer: The overall objective of a state's regulation of insurance rates is to produce rates that are 1)fair, 2) adequate, and 3) not unfairly discriminatory.
53) Explain the principle of indemnity. How does one measure indemnity?
Answer: The principle of indemnity states that a person should be financially put back in the same position after a loss compared to before. The usual definition of indemnity is replacement cost less depreciation. Replacement cost is the amount needed to repair or replace property with like kind of material. Depreciation is a measurement of betterment for receiving new for old once repaired.
71) What is the relationship between the underwriter and the actuary? How do they interact?
Answer: The underwriter uses the classification scheme and rates to select, reject and price exposures to loss. The actuary develops the classification scheme and rates for each classification. If the actuary does his/her job correctly and the underwriter classifies and charges the appropriate price, the insurer should be successful in its underwriting experience.
