Introduction to Insurance Questions (Unit 1)

Which of the following is an example of an adverse selection? - A 26-year-old marathon runner applies for health insurance. - A husband and wife buy a new house, and the mortgage company requires homeowner insurance. - An 18-year-old male buys a sports car, and the bank requires automobile insurance. - A contractor hires a worker who is always on time and does an excellent job.

An 18-year-old male buys a sports car, and the bank requires automobile insurance.

Which of the following statements about risk retention groups is NOT true? - Risk retention groups are insurance companies - An RRG is owned by its members - Each group is made up of members who are in the same or very similar industries - An RRG typically writes workers' compensation insurance for its members

An RRG typically writes workers' compensation insurance for its members

A condition or situation that presents a possibility of loss is - A law of large numbers - A proximate cause - An exposure - A peril

An exposure

Who represents the insurance company and is a direct link between the company and the insureds? - The insured - An insurance agent - A policyowner - A policyholder

An insurance agent

An agent in the XYZ Insurance Company, equipped with business cards, sample XYZ policies, and an XYZ rate book, informs a prospect that XYZ has given him unlimited binding authority. The prospect assumes this is true. Given the prospect's assumption, which of the following correctly defines the agent's authority in this case? - Apparent - Express - Implied - Binding

Apparent

Robert and Carolyn live in a busy city and decide that the solution to not getting into a car accident is to avoid riding in or owning a car. Which of the following methods describes this philosophy? - Retention - Loss control - Avoidance - Transfer

Avoidance

ABC State Insurance Company has agents who are under a contract that allows them to sell only ABC State Insurance Company policies. Which distribution system describes ABC State Insurance Company's organization? - Captive - Group - Direct - Independent

Captive

Individuals that represent only one company, are independent contractors, and are not employees of the insurer are known as - Independent Agents - Captive (Exclusive) Agents - General Agents - MGAs

Captive ( Exclusive) Agents

Agents have certain responsibilities when dealing with applicants and insureds. All of the following are agent responsibilities EXCEPT - Field underwriting each risk - Collecting the commission from the applicant - Periodically reviewing the insured's coverage - Explaining coverages

Collecting the commission from the applicant

Which of the following best defines a hazard? - Cause of a loss - Condition that increases the chance of a loss - Uncertainty of a loss - Unexpected loss

Condition that increases the chance of a loss

If an insurance company is organized in Detroit, where it maintains its home office, the company is classified in Michigan as what kind of company? - Foreign - Alien - Domestic - Preferred

Domestic

Which of the following is an example of a peril? - Gasoline stored on premises - Earthquake - Indifference - Illness

Earthquake

What type of authority does an insurer give to its agents by means of the agent's contract? - Fiduciary - General - Implied - Express

Express

The agent has many responsibilities to the applicant. One involves a trust relationship between the agent and the insured regarding the insured's finances and confidentiality. In this case, the agent acts in what capacity? - Attorney-in-fact - Consultant - Special agent - Fiduciary

Fiduciary

An insurance company that sells insurance only to people who meet specific membership requirements is known as what kind of insurance company? - Reciprocal exchange - Fraternal - Stock - Mutual

Fraternal

XYZ Insurance Company gives its agents authority that was not formally expressed or communicated. The authority given to the agents by XYZ can be called - Apparent authority - Implied authority - Traditional authority - Express authority

Implied Authority

Which of the following is an example of control (reduction) as a method of handling risk? - Buying insurance to reduce the risk - Installing a burglar alarm - Increasing a deductible - Reducing coverages

Installing a burglar alarm

In an insurance transaction, who does a licensed agent legally represent? - National Association of Insurance Commissioners - State insurance department - Insurer - Applicant

Insurer

All of the following are characteristics of Lloyd's Association EXCEPT - It is an insurance company - Is insurance provided by individual underwriters, not companies - Its members are individually liable for the contracts in which they enter - It insurers unusual risks like a hole-in-one contest

It is an insurance company

Guides to insurance companies' financial integrity and claims-paying ability are published regularly by rating services. All of the following are rating services EXCEPT - Fitch's - Standard & Poor's - M. Best Inc. -Lloyd's of Lindon

Lloyd's of London

Dishonesty on the part of an insured is an example of: - Physical Hazard - Peril - Morale Hazard - Moral Hazard

Moral Hazard

Which one of the following hazards can be described as a careless attitude or general indifference on the part of the insured towards the occurrence of loss? - legal - Morale - Moral - Physical

Morale

Driving too fast and not wearing a seat belt are examples of - Morale hazard - Risks - Physical hazard - Moral hazards

Morale Hazards

An insurance company owned by its policyholders, who receive a return of unused premiums in the form of policy dividends, is a - Risk retention group - Reciprocal company - Stock company - Mutual company

Mutual Company

John and Gina met with their insurance agent who asked a series of questions that identified what they owned, what coverage they needed, how much money they wanted to spend on this coverage, and all possible sources of paying for this coverage. What analysis is the insurance agent completing? - Needs - Risk transference - Loss - Hazard

Needs

Which of the following statements pertaining to insurance companies is CORRECT? - Both mutual and stock companies have stockholders. - In a mutual company, insureds are not owners of the company. - A stock company is owned by its policyholders. - The primary purpose of a stock company is to earn a profit for its stockholders.

The primary purpose of a stock company is to earn a profit for its stockholders.

The purpose of insurance is to - Transfer Risk - Eliminate Risk - Reduce adverse selection - Eliminate Hazards

Transfer Risk

Which of the following is considered a hazard? - Fire - Explosion - Lightning - Trash

Trash

With regard to insurance, risk can be defined as - Uncertainty of financial loss - Certainty of financial loss - Certainty of financial gain - Uncertainty of financial gain

Uncertainty of financial loss

At the national level, the federal government provides all of the following types of insurance EXCEPT - Flood insurance - War risk insurance - Unemployment insurance - Federal crop insurance

Unemployment insurance

What is the definition of a fiduciary? - A person in a position of trust and confidence who handles the affairs and funds of others - An institution that handles trust accounts for the wealthy - An insurance agent who sells policies worth more than $1 million in death benefits - A person who determines policy rates at an insurance company

A person in a position of trust and confidence who handles the affairs and funds of others

Which one of the following statements pertaining to risk is NOT correct? - A stock market venture is an example of a pure risk. - Uncertainty regarding financial loss is the definition of risk; therefore, it is characteristic of both pure and speculative risks. - Pure risk involves only the chance of loss; there is never a possibility of gain or profit. - Only pure risks are insurable.

A stock market venture is an example of a pure risk

Agency is a relationship in which one person is authorized to represent and act for another person, or for a corporation. The person authorized to act on behalf of the other is called an - Principal - Agent - Corporation - Insured

Agent

In the insurance business, the insurance company is also known as the - Policyowner - Principal - Agent - Insured

Agent

Transferring is a method of handling risk. Which of the following best describes the concept of transfer? - Buying a car with a friend to share the risk - Avoiding situations where there is a high risk for loss - Purchasing insurance - Having a cosigner sign off on the risk and take all financial responsibility

Purchasing Insurance

Which of the following risks is insurable? - Pure - Whole - Speculative - Partial

Pure

A group of individuals who agree to share each other's losses is known as a - Reinsurer - Reciprocal Company - Service Organization - Mixed Group

Reciprocal Company

A contract in which one insurer cedes all or part of a risk to another insurers is known as - A participating policy - Retro Insurance - Assuming Insurance - Reinsurance

Reinsurance

Which department within an insurance company organization is typically responsible for helping to cover the insurer's exposure to loss? - Actuarial department - Loss control department - Accounting department - Reinsurance department

Reinsurance Department

The insurer of an insurance company is known as a - Reinsurer - Reciprocal - Mixed Group - Service Organization

Reinsurer

Self-insurance is an example of what type of risk management? - Avoidance - Transference - Reduction - Retention

Retention

A chance, possibility, or uncertainty of loss is known as a - Risk - Peril - Proximate cause - Hazard

Risk

Uncertainty regarding financial loss is also known as - Risk - Peril - Insurance - Hazard

Risk

The risk that involves the chances of both loss and gain is - Impure Risk - Speculative Risk - Whole Risk - Pure Risk

Speculative Risk

Faulty wiring causes a fire that destroys a building. The faulty wiring is considered to be - An indirect cause - A peril - A proximate cause - A hazard

A hazard

A person who stands in a specific relationship of trust with another person is - An obligee - A fiduciary - A bailee - A surety

A fiduciary

Fire would be an example of a - Peril - Hazard - Risk - Loss

Peril

What is the actual cause of a loss? - Proximate cause - Hazard - Risk - Peril

Peril

Which one of the following is NOT an agent responsibility? - Explaining the coverage - Collecting the initial premium - Prepaying the initial premium - Delivering the policy

Prepaying the initial premium

Which of the following is NOT an element of insurable risk? - The loss must be accidental from the insured's perspective - The loss must be catastrophic - The loss must have determinable value - The loss must be due to chance

The loss must be catastrophic

The law of large numbers states that the - smaller the number of risks combined into one group, the larger the loss will be to any one individual in that group - larger the number of risks combined into one group, the smaller the loss will be to any one individual in that group - smaller the number of risks combined into one group, the less uncertainty there will be as to the amount of loss that will be incurred - larger the number of risks combined into one group, the less uncertainty there will be as to the amount of loss that will be incurred

larger the number of risks combined into one group, the less uncertainty there will be as to the amount of loss that will be incurred