Ch. 5 Questions

personal-producing general agent.

) David is a successful independent insurance agent. Recently, one of the life insurance companies with whom he places business offered him a special financial arrangement. If David meets sales targets, he will receive large bonuses. He will also be able to recruit and train sub-agents and receive an over-riding commission based on the amount of life insurance the sub-agents sell. Based on this description, David is a(n)

convergence

A personal lines insurance company initiating banking and investment services for its policyowners demonstrates which financial services industry trend?

direct writer

A property and casualty insurer in which the salesperson is an employee of the insurer, not an independent contractor, is called a

multiple distribution system

ABC Insurance has always used the exclusive agency system to market coverages. ABC, however, cannot afford full-time agents in sparsely-populated areas. To reach customers in these areas, ABC enters into agreements with local independent agents. Using more than one marketing system is called employing a

C) Stock companies are exempt from state insurance regulation

All of the following are reasons why mutual insurance companies convert to stock insurance companies EXCEPT A) Stock companies can offer stock options to attract and retain key personnel. B) Stock companies can raise new capital more easily. C) Stock companies are exempt from state insurance regulation. D) Stock companies offer greater flexibility to expand through acquisitions.

captive insurer.

R.I.P. Company manufactures herbicide and pesticide. The company had difficulty finding affordable liability insurance. R.I.P. established its own insurance company based in Bermuda for the purpose of insuring R.I.P.'s loss exposures. The company that R.I.P. formed is called a

consolidation

In 2008, Liberty Mutual Insurance Company acquired Safeco Insurance Company. This acquisition demonstrates which financial services industry trend?

surplus lines broker

Jim would like to start a business raising thoroughbred racehorses. The business would be the first of its kind in the state where he lives. Obtaining insurance on the horses is a key concern, and he was dismayed to learn that none of the insurers authorized to operate in his state offer this specialty insurance. What is the name of the intermediary which Jim can use to place this coverage with an insurer not admitted to his state?

C) The insurer rather than the agent owns the renewal rights to the business

All of the following statements about the independent agency system are true EXCEPT A) Agents are often authorized to adjust small claims. B) Agents are compensated on the basis of commissions. C) The insurer rather than the agent owns the renewal rights to the business. D) The agent is an independent business person who represents several insurers.

financial institution distribution system

Big Life Insurance Company purchased Regional Bank. Regional Bank has 27 branches in four states. Big Life Insurance Company required one employee at each bank branch to become a licensed life insurance agent and to sell Big Life Insurance Company annuities and life insurance products. This distribution channel is an example of the

demutualization.

Big Mutual Insurance Company would like to take advantage of financial services deregulation by acquiring a bank and a stock brokerage firm. Big Mutual, however, would have trouble raising the funds needed to make these acquisitions under the mutual form of organization. Big Mutual is planning to switch from the mutual form of organization to the stock form, and to issue shares of common stock to raise capital. This change in organizational

stock broker.

Brian buys and sells investment securities for his clients. Brian also decided to become a licensed life insurance agent to better serve his customers. While Brian's primary focus is buying and selling financial securities for his clients in exchange for commissions, he also earns commissions on his life insurance sales. Brian is a(n)

independent agent.

Sarah owns a property and liability insurance agency. She is authorized to represent several insurance companies and she is compensated by commissions. Sarah's agency owns the expiration rights to the business she sells. Sarah is a(n)

insurance broker

Scott works in property and liability insurance marketing. He legally represents insurance purchasers, rather than insurance companies. Scott is paid a commission on the insurance placed with insurers. Scott is a(n)

stock company

Some investors decided to start an insurance company. Each investor contributed $50,000 to raise the capital required to charter a new company. Each investor received an ownership interest in the company. The company will raise additional capital by selling ownership rights to other investors. Under this type of organization, the customer and owner functions are separate. This type of insurer is called a

surplus line.

The bar at the local franchise of a national chain continued to serve a drunk customer. The customer left the bar and tried to drive home. The drunk driver hit and killed three people who were riding bicycles. The legal representatives of those who were killed filed a multi-million dollar lawsuit against the national chain. As jury awards in the city where the incident occurred tend to be high, insurers marketing liquor liability insurance refused to issue new coverage until the case was resolved. Because no admitted insurers were willing to offer the coverage, liquor liability in this case is considered a(n)

B) sharp increase in the number of mutual insurance companies.

The corporate structure of mutual insurers is changing rapidly. All of the following are current trends EXCEPT A) demutualization of some insurers. B) sharp increase in the number of mutual insurance companies. C) increase in company mergers. D) formation of mutual holding companies.

fewer financial institutions offering a wider range of financial services products.

The financial services field is currently experiencing consolidation and convergence. If both of these trends continue, in the future we should observe

B) payment of premiums through payroll deduction

Which of the following is characteristic of a typical mass merchandising plan? A) higher commission scales for agents and higher administrative expenses B) payment of premiums through payroll deduction C) group rather than individual underwriting D) contributions by the employer to the cost of coverage

both I and II

Which of the following statements about Blue Cross and Blue Shield plans is (are) true? I. Blue Cross and Blue Shield plans can be organized on a nonprofit basis or on a for-profit basis. II. Blue Cross provides coverage for hospital services; Blue Shield provides coverage for physicians' and surgeons' fees.

A) Coverage is actually written by syndicates who belong to Lloyd's of London.

Which of the following statements about Lloyd's of London is true? A) Coverage is actually written by syndicates who belong to Lloyd's of London. B) New individual members or Names who belong to the various syndicates have unlimited legal liability. C) It operates as an admitted insurer throughout the United States. D) It allows underwriters to write coverage without meeting stringent financial requirements.

II only

Which of the following statements about a reciprocal exchange is (are) true? I. It usually specializes in health insurance. II. It is an unincorporated mutual insurance company.

I only

Which of the following statements about brokers is (are) true? I. They legally represent the insured rather than the insurance company. II. They are prohibited from being licensed as agents.

B) Some exclusive agents who market property and liability insurance also sell life insurance.

Which of the following statements about life insurance marketing systems is true? A) Insurance brokers are not permitted to sell live insurance. B) Some exclusive agents who market property and liability insurance also sell life insurance. C) Independent insurance agents are not permitted to market life insurance. D) Financial institutions such as banks are not permitted to market life insurance.

They may pay dividends to their policyholders

Which of the following statements about mutual insurers is true?

both I and II

Which of the following statements about personal producing general agents is (are) true? I. They often have the option of recruiting and training sub-agents. II. They are independent agents who produce substantial amounts of life insurance with one insurer.

D) New exclusive agents may start as employees and after a training period become independent

Which of the following statements about the exclusive agency system for marketing property and liability insurance is true? A) Exclusive agents typically have complete ownership of policy expirations. B) A higher commission rate is usually paid on exclusive agents' renewal business than on new business. C) Exclusive agents represent several different insurance companies. D) New exclusive agents may start as employees and after a training period become independent

I only

Which of the following statements is (are) true regarding insurance agents and insurance brokers? I. A property and liability insurance agent has the authority to bind the insurer for certain types of coverage. II. A licensed broker who is not a licensed agent has the legal authority to bind an insurer.

II only

Which of the following statements is (are) true with respect to the financial services industry? I. The number of life insurers operating in the industry continues to increase at a rapid rate. II. The Financial Modernization Act of 1999 permits financial institutions to compete in other financial markets outside their core business area.

They can assess policyholders if premiums are insufficient to pay losses and expenses

Why are some mutual insurers referred to as "assessment mutuals"?