AINS 21 Chapter 1

A company interested in improving cash flow should consider meeting its insurance needs through which one of the following types of insurance organizations? Select one: A. Captive insurers B. Stock insurers C. Mutual insurers D. Reciprocal insurance exchanges

A

A small business owner concerned about something happening and not being able to work or earn a living for an extended period of time due to an accident should purchase Select one: A. Disability insurance. B. Universal life insurance. C. Medical insurance. D. Personal liability insurance.

A

Insurance Company wrote a commercial liability policy for a manufacturer of off-road motorcycles. The potential costs of the insured's loss exposure exceed Insurance Company's capacity. Insurance Company could consider which one of the following types of contractual transferring agreement to meet its needs? Select one: A. Reinsurance B. Interinsurance C. Reciprocal insurance D. Mutual insurance

A

Risk control is intended to prevent or reduce losses. When practicing sound risk control, an organization Select one: A. Is likely to use insurance to treat those loss exposures. B. Is likely to see the same economic benefit as compared to insurance. C. Will often be able to eliminate losses from those loss exposures. D. Will not be required to expend economic resources to insure those loss exposures

A

Risk control is intended to prevent or reduce losses. When practicing sound risk control, an organization Select one: A. Is likely to use insurance to treat those loss exposures. B. Will not be required to expend economic resources to insure those loss exposures. C. Is likely to see the same economic benefit as compared to insurance. D. Will often be able to eliminate losses from those loss exposures.

A

Successful underwriting ensures selected applicants Select one: A. Receive coverage that adequately reflect their loss exposure. B. Never experience losses that exceed the amount the insurer anticipated when pricing coverage. C. Do not require monitoring for increases in hazards. D. Can use the standard forms developed by insurance advisory organizations.

A

The premium charged for an insurance policy should be Select one: A. Commensurate with the loss exposure. B. Equal to the loss exposure. C. Equivalent to the loss exposure. D. Concurrent with the loss exposure.

A

The size of an employer's loss exposure for workers compensation insurance is based on Select one: A. The amount of its payroll. B. The extent of its operations. C. The final premium audit. D. The number of its employees.

A

The state of Maryland operates a residual auto plan (the Maryland Auto Insurance Fund—MAIF) that provides coverage for drivers who are unable to obtain coverage from private insurers. Which one of the following is the best rationale for the MAIF program? Select one: A. Auto insurance is compulsory, and the program makes it possible for all drivers to have reasonably priced insurance. B. Private insurers overcharge for auto insurance, and the state provides a low-cost alternative. C. Private insurers face limited competition, and the state increases competitive pressures by operating this type of plan. D. Auto insurance for high-risk drivers is profitable, and the program enables the state to share in the profits.

A

The type of insurance that provides periodic income payments to an insured who is unable to work because of sickness or injury is Select one: A. Disability income insurance. B. Medical insurance. C. Long-term care insurance. D. Term life insurance

A

Which one of the following best describes what is determined by the insurer's staff review of applications from prospective insureds? Select one: A. Whether the characteristics of the customer match the insurer's underwriting criteria. B. Whether any loss control recommendations will be made C. Whether the account should be written as a personal insurance policy or a commercial insurance policy D. Whether claims will be paid or denied

A

Which one of the following is the most common reason premium audits are conducted? Select one: A. The amount of the loss exposure is unknown at the start of the policy period. B. Loss control activities during the policy period may reduce the risk of loss. C. Claim examiners have discovered unacceptable operations during the policy period. D. The amount of actual losses are not known at the start of the policy period.

A

Which one of the following is the most common reason premium audits are conducted? Select one: A. The amount of the loss exposure is unknown at the start of the policy period. B. The amount of actual losses are not known at the start of the policy period. C. Loss control activities during the policy period may reduce the risk of loss. D. Claim examiners have discovered unacceptable operations during the policy period.

A

Which one of the following statements concerning government insurance programs is true? Select one: A. Fair Access to Insurance Requirements (FAIR) plans make basic property insurance available to property owners who can't get it otherwise. B. Businesses seeking flood insurance under the National Flood Insurance Program (NFIP) must purchase it at local federal government offices. C. Various state insurance programs provide crop insurance for perils such as drought, disease, excessive rain and hail. D. The federal government provides workers compensation insurance to employers who cannot get it from private insurers.

A

Which one of the following statements is correct regarding government involvement in insurance? Select one: A. Federal and state government are involved in insurance to facilitate compulsory insurance purchases. B. Most organizations obtain workers compensation insurance through federal or state insurance programs. C. Government insurance plans typically incur significant costs in marketing and sales commissions. D. Legislators find it more straightforward to invite and analyze bids from private insurers than to establish government plans.

A

Harry has a new sports car that is insured with an Insurance Services Office, Inc. (ISO) Personal Auto Policy sold through his neighborhood agent. Because this is the first new car he's ever owned, Harry is interested in making sure he is fully covered and knowledgeable about his insurance policy. Which one of the following is true for Harry? Select one: A. An insurance contract, like the ISO policy Harry purchased, has certain additional characteristics other than those of typical valid contracts. B. Harry understands his policy is modular one, combining various coverage forms and other documents especially tailored to his needs. C. Harry can rest assured that if his new car is a total loss, he can expect to make a profit while being restored to his pre-loss financial position. D. As the policy is a contract of utmost good faith, both his insurer and his agent are the parties expected to be ethical in their dealings with one another.

A.

Which one of the following is an operating cost of insurers? Select one: A. Producers' commissions B. Increased liability loss payments because people have insurance C. Increased property losses because people have insurance D. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary

A.

Which one of the following statements is correct regarding the benefits of insurance? Select one: A. Contractors must usually provide evidence of liability insurance before a construction contract is granted. B. One disadvantage of insurance is that it promotes inefficient use of policyholders' funds. C. Insurance policies typically cannot be used to provide evidence of financial resources. D. Insurers generally do not provide incentives to organizations to implement risk control measures.

A.

Which one of the following statements is correct regarding the benefits provided by insurance? Select one: A. Insurance helps reduce the financial burden to society by compensating accident victims. B. Insurance reduces the financial consequences of loss exposures but not the related uncertainty. C. The reduction in losses paid by insurers due to risk control measures benefits individual insureds but not society as a whole. D. The primary role of insurance is to meet mandatory insurance requirements.

A.

A reciprocal insurance exchange Select one: A. Is a stock corporation providing insurance for its policyholders. B. Is an unincorporated association providing insurance coverage to its subscribers. C. Transfers potential costs of insured loss exposures from one insurer to another insurer. D. Is a subsidiary that provides all or part of the insurance for a parent company.

B

A reinsurance company Select one: A. Provides primary insurance for loss exposures that private insurers are unwilling to provide. B. Assumes loss exposures from a primary insurer. C. Is formed to write all or part of the insurance for a parent company. D. Transfers losses to a primary insurer.

B

All of the following are types of private insurers, EXCEPT: Select one: A. Mutual insurers B. State workers compensation funds C. Stock insurers D. Reciprocal insurance exchanges

B

Successful underwriting ensures selected applicants Select one: A. Can use the standard forms developed by insurance advisory organizations. B. Receive coverage that adequately reflect their loss exposure. C. Do not require monitoring for increases in hazards. D. Never experience losses that exceed the amount the insurer anticipated when pricing coverage.

B

The premium charged for an insurance policy should be Select one: A. Concurrent with the loss exposure. B. Commensurate with the loss exposure. C. Equivalent to the loss exposure. D. Equal to the loss exposure.

B

The two primary types of health insurance coverage are Select one: A. Accident and Medical. B. Medical and Disability Income. C. Sickness and Accident. D. Disability Income and Sickness.

B

Which one of the following correctly describes a reason for government involvement in property-casualty insurance? Select one: A. Selling insurance provides the government with a non-tax source of revenues and profits. B. Government programs can meet legitimate public demands unmet by private insurers. C. Competition from government plans keeps private insurer's premiums competitive. D. Preventing high-risk individuals or activities from being insured is in the public interest.

B

Which one of the following is a typical adjuster activity during the claim handling process? Select one: A. Determining policy terms and conditions B. Contacting the insured. C. Notify underwriters of larger loss exposures than were originally contemplated. D. Controlling the loss.

B

From a risk management viewpoint, insurance is used to Select one: A. Prevent the cost of losses. B. Transfer the cost of losses. C. Reduce the cost of losses. D. Isolate the cost of losses.

B.

If a customer slips and falls in an insured's store, which one of the following provides protection in the event of a lawsuit? Select one: A. Workers compensation insurance B. Commercial general liability (CGL) insurance C. Commercial property insurance D. Commercial crime insurance

B.

One of the costs of insurance is said to be opportunity costs. This means that if capital and labor were not being used in the insurance business, they could be used elsewhere and making other productive contributions to Select one: A. The insurance industry. B. Society. C. The agency system. D. Government.

B.

The primary role of insurance is to Select one: A. Sell insurance policies to individuals and organizations. B. Indemnify individuals and organizations for covered losses. C. Make a profit for the insurance company's shareholders. D. Educate individuals and organizations about loss prevention.

B.

Which one of the following statements is correct regarding the benefits of insurance? Select one: A. Insurers generally do not provide incentives to organizations to implement risk control measures. B. Contractors must usually provide evidence of liability insurance before a construction contract is granted. C. One disadvantage of insurance is that it promotes inefficient use of policyholders' funds. D. Insurance policies typically cannot be used to provide evidence of financial resources.

B. Contractors must usually provide evidence of liability insurance before a construction contract is granted

Sometimes the existence of insurance encourages losses. The result of this phenomenon is that it Select one: A. Increases competition in the industry. B. Increases the total cost of insurance. C. Reduces the term of many policies. D. Reduces agents' commissions.

B. Sometimes the existence of insurance encourages losses. The result of this phenomenon is that it increases the total cost of insurance.

A mutual insurance company is owned by Select one: A. Independent investors. B. State insurance departments. C. Policyholders. D. Mutual funds.

C

A policy that combines property, crime, and liability coverages into one policy is referred to as a(n) Select one: A. Workers compensation policy. B. Commercial umbrella policy. C. Commercial package policy (CPP). D. Employee dishonesty policy.

C

A stock insurer differs from a reciprocal insurance exchange in which one of the following ways? Select one: A. Both are owned by stockholders. However, the reciprocal insurance exchange provides coverage to investors. B. A stock insurer provides insurance to its policyholder-owners. A reciprocal insurance exchange provides insurance to investors. C. Stockholders own a stock insurer. Subscribers own a reciprocal insurance exchange. D. Both are formed to provide profit to investors. However, the stock insurer is managed through a board of directors.

C

A type of insurer that has a board of directors elected by policyholders and that may pay dividends to policyholders as a return of a portion of premiums paid is a Select one: A. Reciprocal insurance exchange. B. Stock insurer. C. Mutual insurer. D. Captive insurer.

C

Insurance customers' loss exposures arise out of their activities, as well as Select one: A. Insurers' requirements. B. Insureds' goals. C. Insureds' property. D. Insurers' coverages.

C

Liability coverage to individuals and families for bodily injury and property damage arising from the insured's personal premises or activities is typically provided by Select one: A. Commercial general liability insurance. B. Professional liability insurance. C. Personal liability insurance. D. Auto liability insurance.

C

Prompt and professional loss adjustment services are a responsibility of which one of the following parts of an insurer's organization? Select one: A. The loss control function B. The underwriting function C. The claims function D. The premium audit function

C

Properties of Insurtech Companies include all of the following, EXCEPT: Select one: A. Capable of assisting traditional insurers with new products and services. B. Takes advantage of the current digital world by using web-enabled platforms and mobile devices. C. Elimination for the need of underwriters given the technological advances in this space. D. They were born out of emerging technologies.

C

State government involvement in Workers Compensation Insurance involves all of the following, EXCEPT: Select one: A. Operating as a residual market. B. Competing with private insurers. C. Providing coverage through insurance pools. D. Functioning as an exclusive insurer.

C

State governments can be involved in insurance at various levels. Some states provide which one of the following types of insurance in competition with private insurers? Select one: A. Crop B. Flood C. Workers compensation D. General liability

C

When an employee is injured on the job, coverage for his or her medical care and lost wages will be provided by the insured's Select one: A. Commercial package policy. B. Commercial general liability (CGL) policy. C. Workers compensation policy. D. Commercial umbrella policy.

C

Which one of the following is a typical adjuster activity during the claim handling process? Select one: A. Determining policy terms and conditions B. Notify underwriters of larger loss exposures than were originally contemplated. C. Contacting the insured. D. Controlling the loss.

C

Coverage for miscellaneous types of property such as movable property, goods in domestic transit, and property used in transportation and communication, typically is provided by Select one: A. Crime insurance. B. Auto physical damage insurance. C. Inland marine insurance. D. Business income insurance.

C.

Insurance is not the only risk management transfer technique. When circumstances are appropriate, transfer can be accomplished through Select one: A. Avoidance. B. Loss prevention. C. Noninsurance transfer techniques. D. Retention.

C.

Life insurance that provides coverage for a specified period with no cash value is called Select one: A. Whole life. B. Long-term care insurance. C. Term life insurance. D. Universal life.

C.

Though premiums are an obvious cost of insurance, many insureds believe they are too high because Select one: A. Insurers only use eighty cents from every premium dollar to pay losses. B. Insureds do not deliberately cause losses. C. Benefits are intangible until a loss occurs. D. Premiums are not a regular cost of living.

C.

Which one of the following is an opportunity cost of insurance? Select one: A. The cost of claims payments that would not have been necessary if insureds' carelessness had not caused losses B. An insurer's loss on invested premiums C. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary D. The payment of commissions to agents

C.

Which one of the following statements is correct regarding the benefits that insurance provides? Select one: A. The premiums collected by insurers must be held in cash to be available to pay claims. B. Insurers are prohibited from investing in such things as research or technological advancements. C. Investment income helps keep insurance premiums at a reasonable level. D. Insurance provides a source of investment funds for insurers but not for insureds.

C.

Though premiums are an obvious cost of insurance, many insureds believe they are too high because Select one: A. Premiums are not a regular cost of living. B. Insureds do not deliberately cause losses. C. Benefits are intangible until a loss occurs. D. Insurers only use eighty cents from every premium dollar to pay losses.

C. Many insureds believe premiums are too high because benefits are intangible until a loss occurs

Pravalt Construction Company pays less than its competitors for workers compensation insurance because Pravalt has had substantially fewer employee injuries than other firms in its class. This illustrates which one of the following benefits of insurance? Select one: A. Meet legal requirements B. Enable efficient use of resources C. Promote risk control D. Reduce social burden

C. Premium savings as a result of substantially fewer employee injuries provide an incentive for an insured to control losses.

A company interested in improving cash flow should consider meeting its insurance needs through which one of the following types of insurance organizations? Select one: A. Mutual insurers B. Reciprocal insurance exchanges C. Stock insurers D. Captive insurers

D

A homeowners insurance policy typically includes Select one: A. Umbrella coverage. B. Only property coverage. C. Only liability coverage. D. Both property and liability coverage.

D

All of the following describe Lloyd's, EXCEPT: Select one: A. Insurance underwritten by a Name B. Operated by syndicates C. An insurance and reinsurance marketplace D. Primarily insurers unusual exposures

D

An insurer that was formed for the purpose of earning a profit for its stockholders is a Select one: A. Mutual insurer. B. Captive insurer. C. Reciprocal insurance exchange. D. Stock insurer.

D

Coverage for money, securities, and other property from various causes of loss such as burglary, robbery, theft, and employee dishonesty typically is provided by Select one: A. Professional liability insurance. B. Inland marine insurance. C. Ocean marine insurance. D. Commercial crime insurance.

D

Liability coverage for loss exposures arising from a business organization's premises and operations, its products, or its completed work is typically provided by Select one: A. Personal liability insurance. B. Auto liability insurance. C. Professional liability insurance. D. Commercial general liability insurance.

D

Prompt and professional loss adjustment services are a responsibility of which one of the following parts of an insurer's organization? Select one: A. The loss control function B. The premium audit function C. The underwriting function D. The claims function

D

Risk control is intended to prevent or reduce losses. When practicing sound risk control, an organization Select one: A. Is likely to see the same economic benefit as compared to insurance. B. Will often be able to eliminate losses from those loss exposures. C. Will not be required to expend economic resources to insure those loss exposures. D. Is likely to use insurance to treat those loss exposures

D

Small U.S. unincorporated insurance associations, domiciled mainly in Texas, are known as Select one: A. American reciprocals. B. American mutuals. C. American captives. D. American Lloyds.

D

Term life insurance Select one: A. Allows the policyholder to borrow against policy savings. B. Accrues a cash value. C. Provides lifetime protection. D. Provides protection for a specified period with no cash value.

D

The size of an employer's loss exposure for workers compensation insurance is based on Select one: A. The number of its employees. B. The final premium audit. C. The extent of its operations. D. The amount of its payroll.

D

Which one of the following best describes what is determined by the insurer's staff review of applications from prospective insureds? Select one: A. Whether any loss control recommendations will be made B. Whether the account should be written as a personal insurance policy or a commercial insurance policy C. Whether claims will be paid or denied D. Whether the characteristics of the customer match the insurer's underwriting criteria.

D

Which one of the following is the most common reason premium audits are conducted? Select one: A. Claim examiners have discovered unacceptable operations during the policy period. B. The amount of actual losses are not known at the start of the policy period. C. Loss control activities during the policy period may reduce the risk of loss. D. The amount of the loss exposure is unknown at the start of the policy period

D

Which one of the following is true regarding a homeowners policy? Select one: A. It only provides property coverage. B. It only provides liability coverage. C. It excludes losses caused by wind and lightning. D. Most include coverage for theft of contents within the home.

D

Excella Insurance is a private insurer operating in the state of Arkansas. It primarily sells personal auto and homeowners policies and complies with all the necessary licensing and regulations required. Which one of the following is true for Excella in regard to this? Select one: A. Paying expenses and making a reasonable profit is the ultimate measure of the insurer's success. B. Excella must fully comply with insurance regulations so that the federal government does not revoke its license. C. Excella strives to make sure its revenue is equal to or less than its expenses and claim payments to remain financially viable. D. State insurance regulators are only one of many stakeholders that are interested in an insurer's financial health.

D.

Retention is often used in combination with insurance as a way of treating loss exposures. One of the major downsides of individuals using retention alone is Select one: A. The unavailability of insurer loss control services. B. The record keeping associated with retained losses. C. Availability of insurer loss settlement services. D. The potential for financial ruin.

D.

Sally is a recent college graduate who lives in the suburbs and drives to work daily in the city. She recognizes that owning a car creates both property damage and liability exposures for her and at the same time she has the burden of student loans. For someone in Sally's circumstances the most practical risk management technique for dealing with her auto-related loss exposures is Select one: A. Retention. B. Avoidance. C. Loss control. D. Risk transfer.

D.

Some loss exposures are not easy to retain, avoid, or control. Which one of the following risk management techniques is frequently used to treat such exposures? Select one: A. Reunderwriting B. Prevention C. Reinsurance D. Transfer

D.

Which one of the following describes the characteristics of a mutual insurance company? Select one: A. A corporation owned by stockholders that earns profits for the stockholders. B. An unincorporated association that earns profits for its individual investors. C. An unincorporated association that provides reciprocal coverage to subscribers. D. A corporation owned by policyholders that provides insurance to its policyholders

D.

Which one of the following is an operating cost of insurers? Select one: A. Increased property losses because people have insurance B. Increased liability loss payments because people have insurance C. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary D. Producers' commissions

D.

Which one of the following is an opportunity cost of insurance? Select one: A. An insurer's loss on invested premiums B. The cost of claims payments that would not have been necessary if insureds' carelessness had not caused losses C. The payment of commissions to agents D. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary

D.

Which one of the following statements is correct regarding insurance as a source of investment funds? Select one: A. Insurers are prohibited from investing in social projects. B. Insurers cannot invest premium income because it must be available to pay claims. C. Insurance provides a source of investment funds for insurers but not for policyholders. D. Insurers' investment income helps keep premiums at a reasonable level.

D.

As a single mother on a very tight budget, Ciara is tempted to skimp on her insurance. However, her friend Mehmet tells her not to skimp on insurance, because it will help manage her cash flows. Which one of the following examples best illustrates Mehmet's point? Select one: A. When her car's transmission goes out a month after the warranty expires, Ciara is faced with a $1,100 repair bill. B. Ciara needs her car to get to her job, and she needs her job to make car payments and pay for her car insurance. C. Ciara finds it difficult to come up with a $787 auto insurance premium every six months. D. When her car's windshield breaks, Ciara has to pay only $100 of the $600 cost of replacing it.

D. Since the windshield loss is covered, the financial effect on Ciara's cash flow is reduced to the amount of her deductible