AINS 21 EXAM
Brown Insurance Company has the following expenses: Dividends $70,000 Claim staff salaries $100,000 Agents' commissions $200,000 Advertising $50,000 Rent and utilities $60,000 What is the amount of Brown Insurance Company's acquisition expenses? Select one: A. $250,000 B. $300,000 C. $350,000 D. $450,000
A. $250,000 Acquisition expenses = Sales salaries, commissions, and bonuses + advertising. $200,000 + $50,000 = $250,000. Rent and utilities are part of general expenses.
If a manufacturer has $1 million in annual sales, its liability insurance is priced per 1,000 of sales, and the per-unit rate is $0.50, what is the manufacturer's liability insurance premium? Select one: A. $500 B. $1,000 C. $5,000 D. $10,000
A. $500 Calculated at 1,000 units ($1 million sales ÷ price per $1,000) × $0.50 rate = $500.
Which one of the following describes the characteristics of a mutual insurance company? Select one: A. A corporation owned by policyholders that provides insurance to its policyholders. Correct. A mutual insurer is owned by its policyholders and formed as a corporation for the purpose of providing insurance to them. B. A corporation owned by stockholders that earns profits for the stockholders. C. An unincorporated association that earns profits for its individual investors. D. An unincorporated association that provides reciprocal coverage to subscribers.
A. A corporation owned by policyholders that provides insurance to its policyholders.
Perils are an important aspect of property insurance. Which one of the following statements is correct with respect to perils? Select one: A. A peril is the actual means by which property is damaged or destroyed such as fire, lightning, windstorm, hail, or theft. B. A peril is anything that increases the frequency or the severity of a loss. C. Property insurance policies can cover specific perils and cannot exclude other perils. D. In order to be covered by an insurance policy, a peril must be defined and described in that policy.
A. A peril is the actual means by which property is damaged or destroyed such as fire, lightning, windstorm, hail, or theft.
Self-contained policies Select one: A. Address complete coverage needs. B. Do not address all of an insured's coverage needs. C. Require more than one form to address coverage needs. D. Address unique coverage needs.
A. Address complete coverage needs
Principals often authorize another party to act on their behalf. This relationship is called Select one: A. Agency. B. Broker. C. Fiduciary. D. Attorney in fact.
A. Agency.
An auto dealer's showroom is destroyed by fire, and the dealer has to temporarily rent an adjacent building to use as a showroom. This is an example of Select one: A. An extra expense. B. A reduction in value. C. Lost income. D. An altered condition.
A. An extra expense.
Jerry is an experienced claim adjuster who handles claims for Jackson Insurance Company during hurricane season when Jackson's staff adjusters need assistance. Jerry is Select one: A. An independent adjuster. B. A third-party adjuster. C. A hurricane adjuster. D. A public adjuster.
A. An independent adjuster.
Which one of the following statements is correct regarding considerations involved in the selection of insurance marketing systems and distribution channels? Select one: A. An insurer can exercise the greatest control over producers in the direct writer system. B. Small-business customers have not shown an interest in exploring various distribution channels. C. Personal insurance customers require the most direct involvement from the producer. D. The direct writer system dominates the medium-to large-sized commercial insurance business.
A. An insurer can exercise the greatest control over producers in the direct writer system.
In terms of the elements of a contract, an insurance application is Select one: A. An offer. B. A consideration. C. An agreement. D. An acceptance.
A. An offer.
Estimating how large the losses may be and how often they may occur is required under which one of the steps of the risk management process? Select one: A. Analyzing loss exposures B. Monitoring results C. Identifying loss exposures D. Examining the feasibility of risk management techniques
A. Analyzing loss exposures
A commercial building may contain furniture, machinery and equipment, raw materials, and finished products. Which one of the following is the term generally used in property insurance policies to refer to all these types of property? Select one: A. Business personal property B. Inventory C. Commercial property D. Stock
A. Business personal property
How do underwriting guidelines help an insurer achieve its goals? Select one: A. By providing rules that guide underwriters toward consistent decisions B. By creating a channel for communication for the insurer's vision, mission, and objectives C. By establishing the criteria required for treaty reinsurance to apply D. By maintaining a consistently applied set of behavioral measurements against which an individual's performance will be measured
A. By providing rules that guide underwriters toward consistent decisions
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. Reciprocal insurance exchanges D. Mutual insurers
A. Captive insurers
Insurers and their representatives are called upon to handle claims with utmost good faith. However, allegations of bad faith in insurance claims remain one of the most troublesome and controversial issues for insurers and claim representatives. Which one of the following statements related to bad-faith in the insurance arena is true? Select one: A. Claim representatives must be familiar with the bad-faith laws in jurisdictions in which they handle claims. B. Bad-faith allegations can only be brought by second-party or third-party claimants. C. The single widely-accepted definition of bad faith used by insurers is from the Black's Law Dictionary. D. Third-party bad-faith claims generally arise in property insurance.
A. Claim representatives must be familiar with the bad-faith laws in jurisdictions in which they handle claims.
Anyone who submits a claim to an insurer may be called a Select one: A. Claimant. B. Third-party claimant. C. First-party claimant. D. Claim producer.
A. Claimant
Many property insurance policies contain a provision that reduces the amount of recovery for loss if the property is underinsured. This provision is known as Select one: A. Coinsurance. B. The deductible. C. The other insurance clause. D. Reinsurance.
A. Coinsurance.
The premium charged for an insurance policy should be Select one: A. Commensurate with the loss exposure. B. Equivalent to the loss exposure. C. Concurrent with the loss exposure. D. Equal to the loss exposure.
A. Commensurate with the loss exposure.
The principal method of determining a prospect's insurance needs is through Select one: A. Completing a risk management review for the prospect. B. Reviewing the prospect's current insurance policies. C. Determining how much the prospect is willing to pay for insurance coverage. D. Asking the prospect what coverage they would like to purchase.
A. Completing a risk management review for the prospect.
An insurer will make a loss payment if an insured loss occurs and if the insured performs certain duties. This illustrates that an insurance policy is a Select one: A. Conditional contract. B. Contract of adhesion. C. Personal contract. D. Contract of indemnity.
A. Conditional contract.
For a contract to be enforceable, something of value must be exchanged. The thing of value exchanged is called Select one: A. Consideration. B. Adhesion. C. Indemnity. D. Mutual assent.
A. Consideration.
Individuals and families benefit from effective risk management in which one of the following ways? Select one: A. Continuing activities following an accident or other loss, and thus reducing inconvenience. B. Stimulating economic growth because fewer losses mean that more funds are available for other uses C. Increasing their personal cash flows by retaining rather than insuring their property exposures D. Creating a positive effect on an insurer's underwriting results
A. Continuing activities following an accident or other loss, and thus reducing inconvenience.
When a business suffers loss of income following a liability suit that causes customers to lose confidence in the business' products, what type of loss has the business suffered? Select one: A. Damage to reputation B. Confidence loss C. Punitive damage D. Special damage
A. Damage to reputation
Rating agencies such as Dun & Bradstreet (D&B) provide Select one: A. Data on credit ratings of businesses.Correct. Rating agencies provide data on credit ratings of businesses. B. Data on motor vehicle reports. C. Information about business operations' safety records. D. Aggregate loss experience data.
A. Data on credit ratings of businesses.
T. Roy Insurance Company is selecting a distribution system and channel for its products. Which one of the following best describes the type of consideration that T. Roy should give to its operations? Select one: A. Does it have the necessary financial resources? B. What are customer's expectations regarding accessibility? C. Can customers navigate easily within the channel? D. Will customers be willing to pay a premium for services?
A. Does it have the necessary financial resources?
The formula for determining an insurer's net underwriting gain or loss is Select one: A. Earned premiums - (losses + underwriting expenses). B. Earned premiums ÷ (losses + underwriting expenses). C. Written premiums ÷ (losses + underwriting expenses). D. Written premiums - (losses + underwriting expenses).
A. Earned premiums - (losses + underwriting expenses).
Which one of the following is the fundamental measure of loss exposure used in insurance rating? Select one: A. Exposure unit B. Rate C. Premium D. Risk
A. Exposure unit
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. Various state insurance programs provide crop insurance for perils such as drought, disease, excessive rain and hail. C. Businesses seeking flood insurance under the National Flood Insurance Program (NFIP) must purchase it at local federal government offices. D. The federal government provides workers compensation insurance to employers who cannot get it from private insurers.
A. Fair Access to Insurance Requirements (FAIR) plans make basic property insurance available to property owners who can't get it otherwise.
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. Federal and state government are involved in insurance to facilitate compulsory insurance purchases.
Which one of the following describes an occurrence-based coverage trigger applicable to Part Two—Employers Liability Insurance? Select one: A. For bodily injury by accident, the policy that is in effect when the injury occurs is the policy that applies. B. For bodily injury by accident, the policy that is in effect when the employer receives notice of the employee's lawsuit is the policy that applies. C. For bodily injury by disease, the policy in effect on the employee's first initial exposure to the conditions causing the disease is the policy that applies. D. For bodily injury by disease, the policy that is in effect on the first day that the employee exhibits symptoms of occupational disease is the policy that applies.
A. For bodily injury by accident, the policy that is in effect when the injury occurs is the policy that applies.
Insurance deals primarily with loss exposures that are fortuitous. Which one of the following statements best characterizes fortuitous losses? Select one: A. Fortuitous losses are beyond the insured's control. B. Fortuitous losses are intentional. C. Fortuitous loss exposures are generally predictable. D. Fortuitous loss exposures are expected.
A. Fortuitous losses are beyond the insured's control.
As part of the risk management process, determining how to allocate the costs of the risk management program is important. All of the following are risk management costs that should be allocated, EXCEPT: Select one: A. General overhead expenses B. Losses retained C. Insurance premiums D. Costs of risk control
A. General overhead expenses
Larger organizations often have a written risk management statement outlining procedures and authority for Select one: A. Implementing risk management techniques. B. Eliminating risk management techniques. C. Identifying risk management techniques. D. Analyzing risk management techniques.
A. Implementing risk management techniques.
Which one of the following statements is correct? Select one: A. In the exclusive agent and direct writer marketing systems, insurers might assist producers with prospecting. B. Cold calling, or cold canvas, is generally not used by insurance producers because it is an ineffective method of prospecting. C. All insurance producers perform the same functions, which are specified in state insurance regulations. D. Insurance producers are prohibited from accepting referrals from strategic partners, such as banks or real estate brokers.
A. In the exclusive agent and direct writer marketing systems, insurers might assist producers with prospecting.
Sound risk management benefits society in each of the following ways, EXCEPT: Select one: A. Increasing opportunity costs B. Reducing the number of people dependent on society for support D. Causing fewer disruptions in the economic and social environment
A. Increasing opportunity costs
The process of restoring an individual or organization to a pre-loss financial condition is the process of Select one: A. Indemnification. B. Subrogation. C. Loss mitigation. D. Premium rebating.
A. Indemnification.
For the law of large numbers to function properly, exposure units must be Select one: A. Independent. B. Equal. C. Random. D. Accurate.
A. Independent.
Which one of the following statements is true? Select one: A. Insurance regulators review policies to determine if they benefit consumers. B. Insurance policies are private contracts, the language of which is largely unregulated. C. Insurers must be free to create policies that are in their best interest. D. Regulators set coverage standards, but allow insurers to determine policy language.
A. Insurance regulators review policies to determine if they benefit consumers.
An insurance policy is considered a contract of adhesion when it is drafted by the Select one: A. Insurer. B. Insurance commissioner. C. Insured. D. Third party.
A. Insurer.
Why are insurance regulators concerned about the effects of large catastrophes? Select one: A. Insurers may become insolvent. B. Insurance rates will rise. C. They could lead to destructive competition. D. Licensed insurers will be unable to handle demand.
A. Insurers may become insolvent.
Which one of the following is the correct formula for net investment income? Select one: A. Investment income - investment expenses B. Investment expenses + investment income C. Investment income + change in investment expenses D. Change in investment expenses - investment income
A. Investment income - investment expenses
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. Will often be able to eliminate losses from those loss exposures. D. Is likely to see the same economic benefit as compared to insurance.
A. Is likely to use insurance to treat those loss exposures.
Liability insurance policies generally exclude war because Select one: A. It is catastrophic and not economically feasible to insure B. Third parties do not suffer injury or damage. C. It is included in the insuring agreement. D. It is an illegal activity.
A. It is catastrophic and not economically feasible to insure
Which one of the following identifies a benefit that a business can receive by applying sound risk management? Select one: A. It will have a better opportunity to achieve business goals. B. It will not have to worry about losses. C. It will be able to attract and retain talented employees and managers. D. It will meet state and federal safety regulations.
A. It will have a better opportunity to achieve business goals.
Chuck and Sally discovered they have flaking lead paint on the walls and trim inside their recently purchased house. They researched lead paint hazards and abatement techniques on the Internet and discovered the best action they can take is to remove loose paint chips and dust, replace the windows, and seal the walls with a paint designed for that purpose. Which one of the following risk management techniques does this activity involve? Select one: A. Loss control B. Retention C. Avoidance D. Noninsurance transfer
A. Loss control
Grocers' Warehouse is a newly created business that will open next month. It will include a retail operation as well as 500,000 square feet of warehouse space with loading docks. Which one of the following methods of identifying loss exposures would be least applicable in this situation? Select one: A. Loss histories B. Physical inspection C. Loss exposure survey D. Interviews with management
A. Loss histories
Loss exposure surveys or checklists are comprehensive and apply to almost any organization. The survey's major weakness is that they Select one: A. May omit an important exposure. B. Are expensive. C. Have to be custom designed for each business. D. Take too long to complete.
A. May omit an important exposure.
Which one of the following is true about the participation of the head of the underwriting department in the insurer's management? Select one: A. May participate in selecting the type of marketing system to be used B. Is heavily involved in the day-to-day claims, finance, and actuarial decisions, as well as other decisions C. Is generally restricted to enforcing underwriting guidelines D. Reviews all underwriting decisions for adherence to underwriting guidelines
A. May participate in selecting the type of marketing system to be used
Which one of the following types of insurers is the most likely to include its bylaws as part of its policies? Select one: A. Mutual insurers B. No-fault insurers C. Workers compensation insurers D. Auto insurers
A. Mutual insurers
Exclusions in insurance policies generally serve all of the following basic purposes, EXCEPT: Select one: A. Outline steps the insured needs to take to enforce coverage B. Assist in managing moral and morale hazards C. Assist in keeping premiums reasonable D. Eliminate coverages requiring special treatment
A. Outline steps the insured needs to take to enforce coverage
An analyst in the financial department for an insurer has calculated the loss ratio to be 1.03. This result indicates that the insurer is Select one: A. Paying out approximately $1.03 in claim-related expenses for every $1.00 it collects in premium. B. Paying out approximately $1.03 in claim-related and underwriting expenses for every $1.00 it collects in premium. C. Collecting approximately $1.03 in premium for every $1.00 it pays in claim-related expenses. D. Collecting approximately $1.03 in premium for every $1.00 it pays in claim-related and underwriting expenses.
A. Paying out approximately $1.03 in claim-related expenses for every $1.00 it collects in premium.
Other than for money, for what primary reasons or types of reasons would an internationally based American organization's employees be kidnapped or held for ransom? Select one: A. Political reasons B. Microeconomic reasons C. Cultural reasons D. Psychological reasons
A. Political reasons
The two major sources of an insurer's investment funds are policyholders' surplus and Select one: A. Premiums received but not yet used to pay claims. B. Acquisition expenses. C. Reserves for loss expenses. D. Reserves for unearned premiums.
A. Premiums received but not yet used to pay claims.
Because attorneys, physicians, architects, and engineers are considered to be experts in their fields and are expected to perform accordingly, what liability exposure do they face if a client is injured when such an expert fails to exercise the appropriate standard of care? Select one: A. Professional liability B. Business operations C. Products D. Completed operations
A. Professional liability
Traditionally, the risk management professional's role has been associated with loss exposures related to Select one: A. Pure risk. B. Speculative risk. C. Business risk. D. Operational risk.
A. Pure risk.
Successful underwriting ensures selected applicants Select one: A. Receive coverage that adequately reflect their loss exposure. B. Can use the standard forms developed by insurance advisory organizations. C. Never experience losses that exceed the amount the insurer anticipated when pricing coverage. D. Do not require monitoring for increases in hazards.
A. Receive coverage that adequately reflect their loss exposure.
Which one of the following methods of prospecting is more likely to be used by an experienced producer than a new insurance producer? Select one: A. Referrals from present clients B. Direct mail C. Interactive web sites D. Cold canvass
A. Referrals from present clients
If an insured wants to receive "new for old" in the event of a property loss, he or she would purchase Select one: A. Replacement cost. B. Actual cash value (ACV). C. Market value. D. Agreed value.
A. Replacement cost.
Earned premiums are shown on an insurer's income statement because they are Select one: A. Revenues. B. Equal to net income. C. Expenses. D. Admitted assets.
A. Revenues.
Market conduct regulation focuses on insurers' treatment of applicants for insurance, insureds, and others who present claims for coverage. Market conduct regulation affects all of the following areas of operations of an insurer, EXCEPT: Select one: A. Risk control B. Sales C. Underwriting D. Claims handling
A. Risk control
A producer will generally review a company's loss run report while performing which one of the following functions? Select one: A. Risk management review B. Customer service C. Claims handling D. Sales
A. Risk management review
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. Risk transfer. B. Retention. C. Loss control. D. Avoidance.
A. Risk transfer
Which one of the following is considered to be an acquisition expense for an insurance company? Select one: A. Sales commissions B. Guarantee fund expenses C. Dividends D. Losses
A. Sales commissions
The insurer's rights to recover and sell or otherwise dispose of insured property on which the insurer has paid a total loss are called Select one: A. Salvage rights. B. Catastrophe rights. C. Constructive rights. D. Fiduciary rights.
A. Salvage rights.
Damages awarded to pay surgeon's fees following an auto accident, are referred to as Select one: A. Special damages. B. Punitive damages. C. General damages. D. Surgical damages.
A. Special damages.
Maja's, a professional liability underwriter, primary responsibilities involve formulating underwriting policy and revising underwriting guides for various lines of professional liability insurance that will be used by personnel in the company's field offices. Maja is functioning as a Select one: A. Staff underwriter. B. Field underwriter. C. Chartered underwriter. D. Line underwriter.
A. Staff underwriter.
All of the following are types of private insurers, EXCEPT: Select one: A. State workers compensation funds B. Mutual insurers C. Reciprocal insurance exchanges D. Stock insurers
A. State workers compensation funds
Owners of reciprocal insurance exchanges are also known as Select one: A. Subscribers. B. Names. C. Policyholders. D. Correspondents.
A. Subscribers.
When deciding to approve or disapprove an insurer's request for a rate, a state insurance commissioner must determine if the rates are adequate. Adequate means that the rates should be Select one: A. Sufficient to pay all claims and the expenses related to those claims. B. Able to generate a fair return for the insurer but no to excessive or unrealistic profit. C. Similar to the rates charged by other insurers operating in the state. D. Similar for insureds with similar loss exposures.
A. Sufficient to pay all claims and the expenses related to those claims
Documents that can become part of an insurance policy include all of the following, EXCEPT: Select one: A. Summary of available coverage options B. Relevant statutory terms and provisions C. Completed application D. Insurer's bylaws
A. Summary of available coverage options
All of the following correctly describe reasons for the use of independent adjusters, EXCEPT: Select one: A. The insured may retain an independent adjuster if settlement negotiations with the insurer are not progressing satisfactorily. B. In the case of a catastrophic loss such as a hurricane, an insurer may not have sufficient staff to manage the large number of claims, and may use independent adjusters. C. Insurers may use independent adjusters when special skills and expertise are needed, for example to investigate aircraft accidents. D. In some areas it is not economically feasible to set up claim offices, and insurers may contract with independent adjusters to handle claims in these remote areas.
A. The insured may retain an independent adjuster if settlement negotiations with the insurer are not progressing satisfactorily.
Losses arising from maintenance perils are generally excluded from property insurance policies because Select one: A. They are either certain to occur over time or are avoidable. B. They are unexpected and therefore difficult to insure. C. Maintenance agreements generally cover them. D. Covering them would result in a moral hazard.
A. They are either certain to occur over time or are avoidable.
Underwriting management monitors underwriting results Select one: A. Through a process called an underwriting audit. B. By issuing periodic bulletins to field offices. C. To determine if coverage changes will increase sales. D. To allow the insured to adjust goals if results are not as expected.
A. Through a process called an underwriting audit.
Risk management concepts in one form or another apply Select one: A. To all companies and families. B. Only to international companies. C. To all companies but not families. D. Only to large companies.
A. To all companies and families.
Unity Insurance Company (UIC) has an operating ratio of 0.98, a combined ratio of 1.02, and a loss ratio of 0.77. Considering these ratios, which one of the following statements is true for UIC? Select one: A. UIC's investment income is offsetting losses and expenses from its underwriting operation, allowing an operating profit. B. UIC is collecting enough premium exclusive of investment income to allow an operating profit. C. UIC's favorable financial basis expense ratio is offsetting losses, allowing an underwriting profit. D. UIC is collecting enough premium to allow a profit from its underwriting operations.
A. UIC's investment income is offsetting losses and expenses from its underwriting operation, allowing an operating profit.
Some insurance rating laws allow rates to be put into use immediately but require insurers to files the rates with the state within a specific period of time. These types of laws are known as Select one: A. Use-and-file laws. B. File-and-use laws. C. Prior-approval laws. D. Flex rating laws.
A. Use-and-file laws.
Jose asked his neighbor, Martina, to go to the store in Jose's car and pick up some bread. While on the way to the grocery store, Martina had an accident causing bodily injury and property damage to another party. Martina had acted as Jose's agent. This scenario can best be described as an example of Select one: A. Vicarious liability. B. Strict liability. C. The family purpose doctrine. D. Contributory negligence.
A. Vicarious liability
For an insurer to be considered solvent, states require it to have financial reserves Select one: A. Well in excess of its ordinary expenses. B. Equal to its ordinary expenses. C. As a fraction of its ordinary expenses. D. Double its ordinary expenses.
A. Well in excess of its ordinary expenses.
Extra expenses are a common financial consequence of property losses. Which one of the following is an example of an extra expense? Select one: A. When a family's house is damaged, the family must pay rent to live in a hotel temporarily. B. Even though fire has made a building untenantable, the landlord must continue making mortgage and tax payments. C. A fence worth $7,000 was damaged by a car, and the fence owner has to pay $2,000 to have the damage repaired. D. When a grocery store in a mall burns, other nearby stores have to close and lose revenue until the grocery store is repaired.
A. When a family's house is damaged, the family must pay rent to live in a hotel temporarily.
Earned premium for ABC Insurance (ABC) for the year was $400 million and incurred losses were $500 million. Incurred underwriting expenses were $60 million. ABC had a net investment gain of $40 million for the year. Which one of the following is ABC's overall gain or loss from operations? Select one: A. $120 million gainfor a $120 million loss. B. $120 million loss C. $200 million gain D. $200 million loss
B. $120 million loss ABC's overall gain or loss from operations is $400 million earned premium minus $500 million incurred losses minus $60 million underwriting expenses plus $40 million net investment gain, for a $120 million loss.
The financial report for Apex Insurance contains the following information (all figures in '000s): Admitted assets $500,000 Nonadmitted assets $400,000 Liabilities $300,000 What is the amount of Apex Insurance's policyholders' surplus? Select one: A. $100,000 B. $200,000 C. $400,000 D. $600,000
B. $200,000 Policyholders' surplus equals total admitted assets minus total liabilities: $500,000 - $300,000 = $200,000
Bob is shopping for auto insurance. Insurance Company A's rating system determines that Bob should be charge $800 per auto. If Bob is looking to insure four autos, what premium will he be charged by Insurance Company A? Select one: A. $2,400 B. $3,200Correct. $800 per auto x 4 autos = $3,200. C. $800 D. $200
B. $3,200 $800 per auto x 4 autos = $3,200
John had an unendorsed homeowners policy. John's two-year-old bicycle was stolen. The bicycle's purchase price was $700, its current replacement cost is $800, and depreciation was estimated at $450. What was the bicycle's actual cash value? Select one: A. $225 B. $350 C. $450 D. $800
B. $350 ACV=Replacement cost - Depreciation. The bicycle's actual cash value is $350: $800 − $450 = $350.
At year-end, SBC Insurance Company posted the following results: Incurred losses - $18 million Loss adjustment expenses - $2 million Underwriting expenses - $5 million Written premiums - $26 million Earned premiums - $24 million Based upon the company's year-end results, which one of the following represents SBC's loss ratio? Select one: A. 75% B. 83% C. 96% D. 104%
B. 83% SBC's loss ratio is 83%. LR = (IL + LAE)/ EP x 100.
An Ohio insurer that is licensed to sell insurance in Michigan is known as what in Michigan? Select one: A. A domestic insurer B. A foreign insurer C. A captive insurer D. An alien insurer
B. A foreign insurer
When an insurance company appoints an insurance agent to serve as its representative, what specifies the scope of authority given to the agent in this relationship? Select one: A. Implied authority B. An agency contract C. A unilateral contract D. Binding authority
B. An agency contract
Generally, how often must a foreign insurer's license be renewed? Select one: A. Every five years B. Annually C. Semi-annually D. Every two years
B. Annually
A commercial general liability policy typically provides insured status to Select one: A. Persons filing liability claims against the named insured. B. Any organization newly acquired by the named insured for up to a certain number of days. C. Resident relatives of the named insured. D. Independent contractors working on behalf of the named insured.
B. Any organization newly acquired by the named insured for up to a certain number of days.
Waking up on a cold February morning, Amy discovers the roads are icy and snow covered. Concerned about driving to work and possibly having an accident, she decides to take the day off. Amy's decision is an example of which one of the following risk management techniques? Select one: A. Loss prevention B. Avoidance C. Separation D. Loss reduction
B. Avoidance
An animal damaged the interior of an insured's automobile while it was parked with the windows down. Which one of the following types of physical damage coverage under the Business Auto Coverage Form (BACF) would cover this loss? Select one: A. Towing and labor B. Comprehensive C. Specified perils D. Collision
B. Comprehensive
A producer is usually paid a fee for performing which one of the following functions? Select one: A. Prospecting B. Consulting C. Premium collection D. Policy issuance
B. Consulting
Which one of the following is a typical adjuster activity during the claim handling process? Select one: A. Notify underwriters of larger loss exposures than were originally contemplated. B. Contacting the insured. C. Determining policy terms and conditions D. Controlling the loss.
B. Contacting the insured.
A neighbor has sued Andy for property damage that is potentially covered under Andy's homeowners liability coverage. Even if this lawsuit is found to be groundless, Andy's insurer will still probably be obligated to pay Select one: A. Special damages. B. Defense costs. C. Compensatory damages. D. General damages.
B. Defense costs.
The two objectives of insurance policy form regulation are to ensure that policies are clear and readable and to Select one: A. Ensure policies are negotiable between an insurer and insured. B. Detect and address any policy provisions that are unfair. C. Limit policies' length and complexity. D. Ensure that the insurers rights are protected.
B. Detect and address any policy provisions that are unfair.
Which one of the following insurance distribution channels usually cuts compensation costs greatly but has higher advertising costs? Select one: A. Exclusive agency B. Direct response C. Independent agency D. Direct writing
B. Direct response
Which one of the following is the correct term for documents that are used to modify commercial property coverage to meet the specialized needs of particular insureds? Select one: A. Commercial Property Conditions B. Endorsements C. Supplemental declarations D. Optional exclusion forms
B. Endorsements
The focus of a line underwriter is Select one: A. Managing the risk selection process. B. Evaluating new submissions and renewal underwriting. C. Securing and maintaining treaty reinsurance. D. Conducting education and training.
B. Evaluating new submissions and renewal underwriting.
A decrease in incurred losses will generally cause a decrease in all of the following, EXCEPT: Select one: A. Loss ratio B. Expense ratio C. Overall ratio D. Combined ratio
B. Expense ratio
A net income loss exposure is a condition that presents the possibility of loss caused by a reduction in net income. In a given time period, net income equals revenue minus Select one: A. Accounts payable and income taxes. B. Expenses and income taxes. C. Costs of goods sold. D. Continuing expenses and outstanding liabilities.
B. Expenses and income taxes.
Produce, such as apples or grapes, may be priced by the unit or by the pound. In insurance, these measures are similar to Select one: A. Construction cost index. B. Exposure units. C. Premiums. D. Rates.
B. Exposure units.
Damages for the loss of the ability to bear children are a form of Select one: A. Special damages. B. General damages. C. Out-of-pocket damages. D. Punitive damages.
B. General damages
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. Government programs can meet legitimate public demands unmet by private insurers.
Sho Ching is risk manager for Market Sales Company. Market Sales owns a large fleet of autos used by the sales employees. The fleet is insured with $1,000 physical damage deductibles. Sho Ching is concerned about an increasing frequency of auto accidents in recent years. Which one of the following is the best risk management option for addressing the increased frequency of accidents from the fleet of autos? Select one: A. Implement loss reduction programs B. Implement loss prevention programs C. Decrease the deductible to $500 D. Increase the deductible to $2,000
B. Implement loss prevention programs
Businesses, individuals, and families that practice sound risk management can benefit society in all of the following ways, EXCEPT: Select one: A. Controlling medical expenses through reduced injuries B. Increasing interest in leisure activities C. Reducing the overall number of losses D. Stimulating economic growth
B. Increasing interest in leisure activities
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. Business income insurance. B. Inland marine insurance. C. Auto physical damage insurance. D. Crime insurance.
B. Inland marine insurance
Which one of the following statements is correct regarding the benefits that insurance provides? Select one: A. Insurance provides a source of investment funds for insurers but not for insureds. B. Investment income helps keep insurance premiums at a reasonable level. Correct. Investment income helps keep insurance premiums at a reasonable level. C. Insurers are prohibited from investing in such things as research or technological advancements. D. The premiums collected by insurers must be held in cash to be available to pay claims.
B. Investment income helps keep insurance premiums at a reasonable level.
Incurred losses (including loss adjustment expenses) divided by earned premium is the formula for Select one: A. Combined ratio. B. Loss ratio. C. Underwriting profit ratio. D. Expense ratio.
B. Loss ratio.
The use of a seatbelt while driving a car is an example of Select one: A. Separation. B. Loss reduction. C. Avoidance. D. Loss prevention.
B. Loss reduction
Which one of the following is a financial consequence of personnel losses to an organization? Select one: A. Expenses of paying replacement employees more than departing employees B. Losses to an organization's value caused by negative publicity C. Costs of hiring new management personnel to manage a younger workforce D. Cost allocations relating to departing employees' benefit plans
B. Losses to an organization's value caused by negative publicity
The best description of a first-party claim is a claim Select one: A. Made by the insurer against the policyholder. B. Made by the policyholder against the insurer. C. Made by the policyholder against someone to whom the policyholder may be liable. D. Made by the liable party against the policyholder.
B. Made by the policyholder against the insurer.
Which one of the following best explains why underwriting expenses are divided by written premiums rather than earned premiums in order to calculate an insurer's expense ratio? Select one: A. Loss adjustment expenses are incurred evenly throughout the policy period. B. Many underwriting expenses are incurred at the beginning of the policy period. C. Insurance coverage is provided evenly throughout the policy period. D. The expense ratio does not take into account an insurer's investment income.
B. Many underwriting expenses are incurred at the beginning of the policy period
Which one of the following is the goal of enterprise-wide risk management (ERM)? Select one: A. Decentralize control of business decisions B. Maximize the organization's value C. Coordinate loss reduction efforts D. Reduce risk management costs
B. Maximize the organization's value
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. Medical and Disability Income
n insurance terminology, equipment such as tractors, bulldozers, road graders, front-end loaders, and forklifts designed primarily for off-road use are considered to be Select one: A. Heavy vehicles. B. Mobile equipment. C. Recreational vehicles. D. Autos.
B. Mobile equipment.
Households and organizations should review their current insurance programs with their agent or broker each year. This is done as part of which one of the following steps in the risk management process? Select one: A. Analyzing loss exposures B. Monitoring results and revising the risk management program C. Selecting the appropriate risk management techniques D. Identifying loss exposures
B. Monitoring results and revising the risk management program
Which one of the following would have an insurable interest in real property? Select one: A. Someone expressing interest in purchasing the property B. Mortgagee that has provided a mortgage loan on the property C. Bank that has provided a personal credit card to the owner of the property D. Former owner of the property
B. Mortgagee that has provided a mortgage loan on the property
When John was driving his car, he was inattentive and was unable to stop in time to avoid hitting a car stopped at a traffic light. The collision damaged the stopped car. What is the basis for John's liability? Select one: A. Absolute liability B. Negligence C. Statutory liability D. No-fault statutes
B. Negligence
Insurers using direct response marketing Select one: A. Use personal contact rather than the Internet for sales. B. Often advertise heavily, which can be costly. C. Use a select group of agents. D. Do not target market.
B. Often advertise heavily, which can be costly.
In individual rating, Select one: A. The law of large numbers allows accurate premium determination. B. Points are added or subtracted to arrive at a rate. C. Individual insureds are assigned to a specific class. D. Underwriters are often forced to make an arbitrary judgment.
B. Points are added or subtracted to arrive at a rate.
A mutual insurance company is owned by Select one: A. Mutual funds. B. Policyholders. C. Independent investors. D. State insurance departments.
B. Policyholders.
An insurer's balance sheet can best be described as a Select one: A. Relationship between revenue and liabilities. B. Snapshot of its financial position. C. Summary of premiums written. D. Relationship between assets and expenses.
B. Snapshot of its financial position
An insuring agreement may state the insurer's promise to do all of the following in the event of a covered loss, EXCEPT: Select one: A. Defend against the claim B. Surcharge the insured C. Pay the claim D. Indemnify the insured
B. Surcharge the insured
Which one of the following is the most common reason premium audits are conducted? Select one: A. The amount of actual losses are not known at the start of the policy period. B. The amount of the loss exposure is unknown at the start of the policy period. C. Claim examiners have discovered unacceptable operations during the policy period. D. Loss control activities during the policy period may reduce the risk of loss.
B. The amount of the loss exposure is unknown at the start of the policy period.
When selecting a distribution channel, which one of the following is an important consideration with regard to customers' needs and characteristics? Select one: A. The compatibility of the channel with established channels B. The ease of accessibility within the channel C. The target market D. The expertise of current staff
B. The ease of accessibility within the channel
Anyone who is not a party to an insurance contract who submits a claim against an insured is known as the Select one: A. Claimant party. B. Third party. C. First party. D. Second party.
B. Third party.
From a risk management viewpoint, insurance is used to Select one: A. Isolate the cost of losses. B. Transfer the cost of losses. C. Prevent the cost of losses. D. Reduce the cost of losses.
B. Transfer the cost of losses.
It is easier to gauge the potential severity of property losses than of liability losses because property loss exposures Select one: A. Can be determined as an average according to the type of business. B. Typically have a finite value. C. Are confined to the building and contents. D. Have a calculable frequency.
B. Typically have a finite value.
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. Flood B. Workers compensation C. General liability D. Crop
B. Workers compensation
To analyze the possible financial consequences of an income loss to his business, Joe estimates his normal revenue and expenses and compares them to his estimated revenue and expenses should a loss occur. Normal Operations Post-Loss Revenue $120,000 $0 Expenses $70,000 $40,000 Net Income $50,000 ($40,000) Based on Joe's estimates, which one of the following represents his projected net income loss? Select one: A. $ 40,000 B. $ 50,000 C. $ 90,000 D. $120,000
C. $ 90,000 Joe's projected net income loss is $90,000: $50,000 he would have realized in normal operations + $40,000 lost in continuing expenses that are not offset by revenue, equals $90,000.
Some liability policies place defense costs within the overall policy limit. If such a policy has a limit of $100,000 and the insured has a covered claim involving damage of $85,000 and defense costs of $25,000, what is the total amount that the insurer would pay for damages and defense costs? Select one: A. $25,000 B. $85,000 C. $100,000 D. $110,000
C. $100,000
A liability loss has the following damages: Medical expenses: $10,000 Damages for disfigurement: $50,000 Damages for pain and suffering: $100,000 What is the amount of general damages? Select one: A. $ 60,000 B. $110,000 C. $150,000 D. $160,000
C. $150,000 The amount of general damages is $150,000. General damages are for losses that do not have a specific economic value.
XYZ Manufacturing (XYZ) has a Commercial General Liability (CGL) Coverage Form with a $2,000,000 each occurrence limit, a $3,000,000 general aggregate limit, and a $3,000,000 aggregate limit for products and completed operations. If XYZ has products liability losses of $1,500,000, $1,200,000, and $500,000 during the policy period, how much would the CGL policy pay for the losses? Select one: A. $1,500,000 B. $2,000,000 C. $3,000,000 D. $3,200,000
C. $3,000,000
To analyze the possible financial consequences of an income loss to his business, Joe estimates his normal revenue and expenses and compares them to his estimated revenue and expenses should a loss occur. Normal Operations Post-Loss Revenue $120,000 $0 Expenses $70,000 $40,000 Net Income $50,000 ($40,000) Based on Joe's estimates, which one of the following represents his projected reduction in net income that could be covered by business income insurance? Select one: A. $40,000 B. $50,000 C. $90,000 D. $120,000
C. $90,000 Joe's projected net income loss is $90,000: $50,000 he would have realized in normal operations + $40,000 lost in continuing expenses that are not offset by revenue, equals $90,000.
The financial report for Hometown Insurer contains the following information: Earned premiums $4,000,000 Written premiums $5,000,000 Net investment income $1,000,000 Incurred losses $3,000,000 Incurred underwriting expense $2,000,000 What is Hometown Insurer's investment income ratio? Select one: A. 10% B. 20% C. 25% D. 50%
C. 25% Hometown's investment income ratio equals its net investment income ($1,000,000) divided by its earned premiums ($4,000,000), or 25 percent.
Underwriting management arranges treaty reinsurance to reinsure Select one: A. Insureds that do not meet underwriting guidelines. B. All insurance of the primary insurer. C. A group or group of insureds. D. Individual accounts.
C. A group or group of insureds.
Which one of the following types of insurance policies is least likely to be considered a contract of adhesion? Select one: A. An automobile policy B. A personal articles floater C. A manuscript policy D. A commercial crime policy
C. A manuscript policy
An insurance contract is designed to be all of the following in the event of a claim, EXCEPT: Select one: A. A financial mechanism that can benefit policyholders and other claimants B. A way to restore a claimant to pre-loss condition C. A means to provide a profit to the insured D. A means to afford peace of mind to the insured
C. A means to provide a profit to the insured
A reservation of rights letter Select one: A. Lists all of the rights that an insured has under an insurance policy. B. Advises the insurer that the insured has made a claim, but retains the right to withdraw the claim later. C. Advises the insured that the insurer is investigating the claim but retains the right to deny coverage later. D. Lists all of the rights that an insurer has under an insurance policy.
C. Advises the insured that the insurer is investigating the claim but retains the right to deny coverage later.
An agency in New Jersey has decided to market personal insurance to accountants. It is offering a 10 percent discount to all Certified Public Accountants in the state. This is an example of which one of the following types of group marketing? Select one: A. Franchise marketing B. Worksite marketing C. Affinity marketing D. Sponsorship marketing
C. Affinity marketing
The Bakery, an applicant for commercial property insurance, has experienced a series of property losses over the past three years. In order to find this applicant viable, the underwriter agrees to increase the property deductible. This type of underwriting modification is known as Select one: A. Using schedule rating modifications. B. Requiring loss control measures. C. Amending policy terms and conditions. D. Using facultative reinsurance.
C. Amending policy terms and conditions.
A person or entity that would suffer a financial loss if property were damaged has Select one: A. A renewable interest. B. A contractual interest. C. An insurable interest. D. A discretionary interest.
C. An insurable interest.
In terms of their legal relationships, which one of the following statements accurately describes insurance agents and insurance brokers? Select one: A. An insurance agent represents the customer while a broker represents the insurer. B. Both insurance agents and insurance brokers represent the insurer. C. An insurance agent represents the insurer while a broker represents the customer. D. Both insurance agents and insurance brokers represent the customer.
C. An insurance agent represents the insurer while a broker represents the customer.
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. 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. B. Harry understands his policy is modular one, combining various coverage forms and other documents especially tailored to his needs. C. An insurance contract, like the ISO policy Harry purchased, has certain additional characteristics other than those of typical valid contracts. 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.
C. An insurance contract, like the ISO policy Harry purchased, has certain additional characteristics other than those of typical valid contracts.
Northtown Agency has an agency contract with Withers Insurance Company for personal lines coverages only. Anita, one of Northtown's existing personal lines customers is starting a floral delivery business that will require commercial insurance. Horace, one of the agents, accepted Anita's application, bound coverage and said he would pass the paperwork on to Withers, as Withers had handled all her other needs. As soon as he remembered the agency contract with Withers, he planned to send the request to a different insurance company that could accept the new business. Before he could do this, Anita submitted a claim. The claim would be covered because the coverage is bound based on the concept of Select one: A. Express agency. B. Independent agency. D. Implied authority.
C. Apparent authority
An agent may at times act on behalf of the principal in ways that the principal did not intend, and a third party reasonably believes that the agent has sufficient authority. This authority is known as Select one: A. Implied authority. B. Express authority C. Apparent authority. D. Contractual authority.
C. Apparent authority.
Earned premiums are the portion of written premiums that Select one: A. Apply to the part of the policy period that follows a loss. B. Are billed at the beginning of the policy period. C. Apply to the part of the policy period that has already occurred. D. Are available to generate investment income.
C. Apply to the part of the policy period that has already occurred.
Which one of the following is a common alternative dispute resolution (ADR) technique. Select one: A. Motion for summary judgment B. Interrogatories C. Arbitration D. Pleadings
C. Arbitration
Martha works in the city and drives to work each day. She is concerned about her auto exposures due to driving in the city. If Martha sells her vehicle and begins using public transportation, which one of the following risk management techniques will she be applying to her situation? Select one: A. Loss control B. Noninsurance transfer C. Avoidance D. Retention
C. Avoidance
Many businesses have refrigeration equipment, production equipment, steam boilers, and air conditioning systems. These are all examples of Select one: A. Property in transit. B. Personal property. C. Boilers and machinery. D. Mobile equipment.
C. Boilers and machinery.
What type of law is specifically designed to protect personal and property rights, as well as contract rights? Select one: A. Constitutional law B. Criminal law C. Civil law D. Local ordinances
C. Civil law
All of the following are correct with respect to fair evaluation of a claim, EXCEPT: Select one: A. Information about settlements or trial results from similar cases can help claim representatives knowledgably evaluate a claim. B. Legislation often specifies a time limit within which evaluations of coverage and damages must be completed. C. Claim representatives are prohibited from discussing the evaluation of a claim with anyone not directly connected with that claim. D. A fair approach to evaluating liability claims is to evaluate them as if no coverage limit existed.
C. Claim representatives are prohibited from discussing the evaluation of a claim with anyone not directly connected with that claim.
Which one of the following statements about good faith negotiations is correct? Select one: A. Claim representatives are expected to make unrealistic offers when confronted with outrageous demands. B. Settlement negotiations should begin before the claim is evaluated. C. Claim representatives can use arbitration clauses to resolve disputes over the settlement amount. D. Claim representatives should always wait for a demand before presenting an offer to settle.
C. Claim representatives can use arbitration clauses to resolve disputes over the settlement amount.
A description of the property insured, a list of mortgagees, and the applicable coinsurance percentage(s) are shown on which one of the following documents? Select one: A. Commercial Property Conditions B. Causes of loss forms C. Commercial property declarations D. Commercial property coverage forms
C. Commercial property declarations
In the event of a serious auto accident, what type of law would determine who was at fault? Select one: A. Constitutional law B. Statutory law C. Common law D. Criminal law
C. Common law
Individuals and families benefit from effective risk management in which one of the following ways? Select one: A. Stimulating economic growth because fewer losses mean that more funds are available for other uses B. Increasing their personal cash flows by retaining rather than insuring their property exposures C. Continuing activities following an accident or other loss, and thus reducing inconvenience. D. Creating a positive effect on an insurer's underwriting results
C. Continuing activities following an accident or other loss, and thus reducing inconvenience.
uan received a phone call from an angry policyholder. The insured received a bill as a result of a workers compensation premium audit. The individual does not understand why premium has increased when his total payroll is lower than originally projected. Juan advises the insured that he will contact the auditor, review the audit, and call back with an explanation. Which one of the following producer functions is Juan performing? Select one: A. Risk management review B. Consulting C. Customer service D. Premium collection
C. Customer service
Which one of the following categories of insurance policy provisions outlines what is covered and where and when coverage applies? Select one: A. Conditions B. Insuring agreements C. Declarations D. Miscellaneous provisions
C. Declarations
Commercial general liability insurance policies written on an occurrence basis apply to bodily injury and property damage that occurs during the policy period. This provision supports the principle that insurable loss exposures must ideally be Select one: A. Independent. B. Pure risks. C. Definite. D. Fortuitous.
C. Definite.
Besides using the law of large numbers to predict the amount of future losses, insurers also rely on it to Select one: A. Select insureds. B. Plan for catestrophic events. C. Determine average loss costs. D. Select exposure units.
C. Determine average loss costs.
Rhonda is a personal lines insurance producer. Under the terms of her agency contracts, the insurers forward policies promptly to Rhonda's customers and send a premium invoice with the policy. Insureds are instructed to remit premium payments to their insurer. The insurers calculate Rhonda's commissions and forward those commission payments to her monthly. Rhonda is operating under which one of the following payment procedures? Select one: A. Item basis B. Statement basis C. Direct bill basis D. Account current basis
C. Direct bill basis
he state advisory organization has developed a new homeowners form, which increases the personal property limits for guns, silverware, jewelry, and boats. Jancy Insurance Company is considering modifying this form for its own use. Which one of the following of Jancy's staff would be involved in this research and development of this new form? Select one: A. Clara, the underwriting manager B. Merve, the claims manager C. Emma, the staff underwriter D. Antonia, the accounting manager
C. Emma, the staff underwriter
When a newspaper's printing press is damaged, the company may spend extra money to have the newspaper printed on another company's press. The additional cost of printing the newspaper is an example of which one of the following? Select one: A. Altered condition B. Reduction in value C. Extra expenses D. Lost income
C. Extra expenses
Which one of the following correctly describes a property insurance policy covering property of others? Select one: A. Floaters typically extend coverage to include the personal property of others while it is in the care, custody, or control of the insured. B. Commercial property policies generally extend coverage to the dwellings and personal property of company owners, officers, and partners. C. Homeowners policies provide coverage for the personal property of others, such as guests or employees, while the property is in the insured's home. D. The personal auto policy extends physical damage coverage to any automobile leased by the insured but not listed on the policy.
C. Homeowners policies provide coverage for the personal property of others, such as guests or employees, while the property is in the insured's home.
Loss exposure surveys, or checklists, are methods used to Select one: A. Examine the feasibility of techniques. B. Analyze loss exposures. C. Identify loss exposures. D. Monitor results.
C. Identify loss exposures.
Under certain circumstances, an insurer may authorize the adjustment of claims by producers. One of the benefits of providing producers with draft authority is that Select one: A. It gives agents the option of providing coverage for smaller claims that staff adjusters might deny. B. Claim handling by producers is immune to regulatory scrutiny. C. If an agent can issue a draft directly to the insured, it reduces the time an insured waits for payment. D. Claim payments by producers are not included in loss ratio calculations.
C. If an agent can issue a draft directly to the insured, it reduces the time an insured waits for payment.
Which one of the following statements is correct with respect to characteristics of insurable loss exposures? Select one: A. If the insured has control over whether or when a loss will occur, the risk is attractive to insure. B. If a loss is fortuitous, the chance of loss could increase as soon as a policy is issued. C. If losses are not fortuitous, premiums could increase for all policyholders. D. Private insurance is suitable for risks where the probability and timing of loss is known.
C. If losses are not fortuitous, premiums could increase for all policyholders.
Which one of the following statements is correct with respect to the condition Duties in the Event of Loss or Damage of the Building and Personal Property Coverage Form (BPP)? Select one: A. The insured is required to give the insurer notice of the loss, including a description of the property damaged, within 24 hours. B. To prevent insurance fraud, the insurer is obliged to notify the police of all losses reported. C. If the insured fails to perform any of them, the insurer may not have to pay for the loss. D. The claims adjuster is required to take all reasonable steps to protect the property from further loss, prepare an inventory and set the damaged property aside.
C. If the insured fails to perform any of them, the insurer may not have to pay for the loss.
In the selection of appropriate risk management techniques, financial management decisions are often made with the objective of Select one: A. Decreasing the worry factor. B. Decreasing expenses. C. Increasing operating efficiency. D. Increasing the cost of risk.
C. Increasing operating efficiency
Which one of the following types of agent is usually paid the same commission rate for new business and renewals? Select one: A. Direct writer sales agent B. Managing agent C. Independent agent D. Exclusive agent
C. Independent agent
Which one of the following statements is correct regarding the benefits provided by insurance? Select one: A. The reduction in losses paid by insurers due to risk control measures benefits individual insureds but not society as a whole. B. The primary role of insurance is to meet mandatory insurance requirements. C. Insurance helps reduce the financial burden to society by compensating accident victims. D. Insurance reduces the financial consequences of loss exposures but not the related uncertainty.
C. Insurance helps reduce the financial burden to society by compensating accident victims
Destructive competition in the insurance industry could result in Select one: A. Inadequate regulation. B. Excess regulation. C. Insurance shortages. D. Oversupply of insurance.
C. Insurance shortages.
Which one of the following describes the effect underwriting standards can have on premium? Select one: A. The more services provided, the more premiums will increase. B. If more causes of loss are covered, premiums will increase. C. Insurers can lower premiums for better-than-average risks. D. Reduced cash flow drives up premium interest charges.
C. Insurers can lower premiums for better-than-average risks.
The next step in the rate development process, after insurance advisory organizations and/or insurers gather historical loss costs, is Select one: A. Insurers adjust for expenses, profits, and contingencies. B. Insurers determine the final rate. C. Insurers establish prospective loss costs. D. Insurers enter loss cost data into a rating system.
C. Insurers establish prospective loss costs.
Which one of the following is the correct formula for net investment income? Select one: A. Change in investment expenses - investment income B. Investment income + change in investment expenses C. Investment income - investment expenses. D. Investment expenses + investment income
C. Investment income - investment expenses
Insurance Services Office, Inc. Select one: A. Calculates expense allowances to determine rates. B. Manages workers compensation information. C. Is an insurance advisory organization. D. Is responsible for rate determination in the property-casualty industry.
C. Is an insurance advisory organization.
An insurance company needs to hire an employee with knowledge of insurance policy forms and the ability to relate policy provisions to the loss exposures of individual policyholders. The person will also prepare premium quotes and process cancellations. This company is currently in need of a Select one: A. Staff underwriter. B. Producer. C. Line underwriter. D. Premium auditor.
C. Line underwriter
A business installs bars on windows and door deadbolts to prevent burglaries. This is an example of Select one: A. Avoidance. B. Separation. C. Loss prevention. D. Loss reduction.
C. Loss prevention.
Jane's son, Joe, is 15-years-old and he will obtain his driver's license this summer when he becomes 16. Joe has expressed an interest in driving Jane's car once he has his license. Jane owns a compact car and is concerned that Joe might be hurt if he is involved in an accident while driving her car. Jane has read reports indicating that people occupying sport utility vehicles suffer less severe injuries when involved in accidents. If Jane trades her compact car in for a sport utility vehicle, which one of the following risk management techniques will she be applying? Select one: A. Noninsurance transfer B. Loss prevention C. Loss reduction D. Avoidance
C. Loss reduction
Under Section II—Liability Coverage of a homeowners policy all of the following are the insured's duties after an occurrence, EXCEPT: Select one: A. Report losses promptly B. Cooperate with insurer in legal proceedings C. Make voluntary payments to the claimant D. Pay specified premiums
C. Make voluntary payments to the claimant
Standard forms Select one: A. Allow insurers to modify terms and conditions to accommodate differences in applicants' needs. B. Prevent insurers from offering significantly different coverage. C. May result in different insurers issuing identical policies. D. Are commonly used in professional liability insurance.
C. May result in different insurers issuing identical policies.
Which one of the following is a negotiation process in which a neutral outside party helps participants examine the issues and develop a mutually agreeable settlement? Select one: A. Arbitration B. Appraisal C. Mediation D. Mini-trial
C. Mediation
Property insurance policies not only protect the property owner but also generally protect a secured lender's interest in the financed property by Select one: A. Issuing a mortgagee interest-only policy. B. Issuing a separate policy. C. Naming the lender on the owner's policy. D. Sending the lender a letter of intent.
C. Naming the lender on the owner's policy.
If an insurer mistakenly writes an insurance policy in a state in which it is not licensed, the insured might later successfully argue on what grounds that the contract is not valid? Select one: A. No agreement B. The lack of consideration C. No legal capacity to contract D. No legal purpose
C. No legal capacity to contract
A northeastern state in the US has a mandatory rate law in effect. A southeastern state has established a file-and-use law. A Pacific coast state requires insurers to follow a prior-approval law, and a midwest state has enacted a flex rating law. Which one of the states and its regulators asserts the greatest extent of control over insurer rates? Select one: A. Southeastern B. Pacific coast C. Northeastern D. Midwest
C. Northeastern
Joe owns a building covered by a property insurance policy. Joe intentionally sets fire to and destroys this building. He then files a claim with his insurance company. Which one of the following statements best describes why Joe would be precluded from recovering under his policy for this loss? Select one: A. Joe acted irrationally B. Payment of the claim would violate the principle of indemnity C. Payment of the claim would be a violation of public policy D. Joe acted under emotional duress
C. Payment of the claim would be a violation of public policy
Other than for money, for what primary reasons or types of reasons would an internationally based American organization's employees be kidnapped or held for ransom? Select one: A. Microeconomic reasons B. Cultural reasons C. Political reasons D. Psychological reasons
C. Political reasons
Most property and liability insurance policies contain other insurance provision clauses in order to Select one: A. Ensure losses are fortuitous. B. Encourage utmost good faith. C. Prevent overindemnification. D. Eliminate the collateral source rule.
C. Prevent overindemnification.
Which one of the following statements about claim evaluation is correct? Select one: A. Evaluation of a liability claim should be made after the claimant makes his or her first settlement demand. B. The limit of liability should be considered when determining the value of a liability claim. C. Prompt evaluation helps to ensure compliance with time limits specified by unfair claims settlement practices acts. D. The claim representative's opinion of the value of a claim is the most important evaluation factor.
C. Prompt evaluation helps to ensure compliance with time limits specified by unfair claims settlement practices acts.
State government involvement in Workers Compensation Insurance involves all of the following, EXCEPT: Select one: A. Functioning as an exclusive insurer. B. Competing with private insurers. C. Providing coverage through insurance pools. D. Operating as a residual market.
C. Providing coverage through insurance pools.
Todd is a producer selling commercial insurance to small to medium sized businesses. Because some of them are struggling to pay the premiums, and because Todd gets more commissions the more policies he sells, he has started giving a portion of the policy premium back to his customers that place multiple coverages with him. In doing so, Todd is specifically engaging in the unfair trade practice of Select one: A. Tie-in sales. B. Misrepresentation. C. Rebating. D. False advertising.
C. Rebating.
An applicant for commercial property insurance is found unacceptable by an underwriter due to the nature of its operations and the construction of the building it occupies. If the applicant installs an automatic fire-extinguishing sprinkler system, the underwriter will approve the application. This type of underwriting modification is known as Select one: A. Using facultative reinsurance. B. Amending the policy terms and conditions. C. Requiring risk control measures. D. Changing insurance rates, rating plans, or policy limits.
C. Requiring risk control measures.
The capital of a stock insurance company comes primarily from Select one: A. Sale of insurance policies. B. Leveraging the difference from when a premium is paid in and when a claim is paid out. C. Sale of company stock. D. Return on invested premium reserves.
C. Sale of company stock.
Outdoor Designs Company (ODC) makes cedar patio furniture. ODC's lumber supplier, L&L Wood Products, is the largest and most competitive supplier of lumber in the area. ODC's risk manager is concerned that a disruption in the supply of lumber from L&L due to a large fire loss would adversely affect its production. Which one of the following would best minimize the adverse effect to ODC of a large loss experienced by L&L? Select one: A. Loss prevention B. Duplication C. Separation D. Avoidance
C. Separation
The dollar amount of damage that results from a loss is the loss Select one: A. Reduction. B. Prevention. C. Severity. D. Frequency.
C. Severity.
What term refers to the ability of an insurer to meet its obligations as they become due? Select one: A. Capital B. Capacity C. Solvency D. Reserves
C. Solvency
A liability adjuster must be concerned with specific, out-of-pocket expenses when evaluating the damages being claimed. The technical term for such expenses is Select one: A. General damages. B. Punitive damages. C. Special damages. D. Measurable damages.
C. Special damages.
Underwriting management develops underwriting guidelines, which Select one: A. Ensure that unprofitable business will be offset by profitable business. B. Vary from one underwriter to another. C. Specify the insurer's attitude toward applicants exhibiting certain characteristics. D. Set firm standards that rarely, if ever, are modified.
C. Specify the insurer's attitude toward applicants exhibiting certain characteristics.
Insurers are required to submit annual financial statements to Select one: A. The state guaranty fund. B. The Insurance Regulatory Information System (IRIS). C. State insurance departments. D. The National Association of Insurance Commissioners (NAIC).
C. State insurance departments.
Legal liability imposed by a specific statute or law is called Select one: A. No-fault liability. B. Legislative liability. C. Statutory liability. D. Liability under law.
C. Statutory liability.
In contrast to a claims-made policy, a liability policy that provides occurrence basis coverage will pay for a covered accident that occurs during the policy period, regardless of when the claim is Select one: A. Closed. B. Paid. C. Submitted. D. Settled.
C. Submitted.
All of the following are underwriting activities typically performed by staff underwriters, EXCEPT: Select one: A. Conduct underwriting audits B. Formulate underwriting policy C. Support producers and insureds D. Research the market
C. Support producers and insureds
Which one of the following is generally exempt from state insurance regulations pertaining to policy forms and rates? Select one: A. Workers compensation insurers B. Commercial property insurers C. Surplus line insurers D. Health insurers
C. Surplus line insurers
Life insurance that provides coverage for a specified period with no cash value is called Select one: A. Long-term care insurance. B. Universal life. C. Term life insurance. D. Whole life.
C. Term life insurance.
What is solvency? Select one: A. Transparency of policy language B. The process of a state taking over the assets and obligations of a failing insurer C. The ability of an insurer to meet its obligations as they become due D. Destructive competition
C. The ability of an insurer to meet its obligations as they become due
Joan has a business auto policy written as specified causes of loss coverage. Which one of the following losses would be covered as auto physical damage? Select one: A. Damage to an engine that froze during the winter B. Collision damage while drag racing at the local raceway C. The cost to repaint a vehicle after it has been vandalized D. The cost to repair a tire after a blowout on the road
C. The cost to repaint a vehicle after it has been vandalized
Adhering to the characteristics of an ideally insurable loss exposure in selling insurance help assure that Select one: A. The losses associated with it typically involve small amounts. B. The insurer is able to predict the amount and timing of each future loss. C. The insurer is able to charge a premium that the insured can afford to pay. D. The insurer can charge a high premium for the coverage.
C. The insurer is able to charge a premium that the insured can afford to pay.
Alfred has an unendorsed HO-3 policy. After a severe fire loss to Alfred's house, an investigation proved that Alfred intentionally set the fire. Alfred was jailed for arson, and his property claim was denied. Which one of the following describes the rights granted by Alfred's HO-3 to the mortgagee? Select one: A. The mortgagee will collect the full amount of the claim if it joins with the insurer in prosecuting Alfred. B. The mortgagee will not collect any amount of the claim because the loss was a fraudulent act. C. The mortgagee will collect the amount of its insurable interest in the property. D. The mortgagee will collect the full amount of the claim.
C. The mortgagee will collect the amount of its insurable interest in the property.
All of the following are true about the insurance agency relationship, EXCEPT: Select one: A. The agency agreement is a written agreement between the insurer and an agent. B. The agency agreement gives the agent the right to represent the insurer and sell insurance on the insurer's behalf. C. The principal is the party the agent authorizes to bind coverage D. The agent is the party authorized by the principal to act on the principal's behalf.
C. The principal is the party the agent authorizes to bind coverage
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. Transfer D. Reinsurance
C. Transfer
To avoid bad faith allegations, claim representatives must understand the law of bad faith claims, who can make such claims, the bases of bad faith claims, and the Select one: A. Amount of reserves established by the insurer for bad faith claims. B. Impact of bad faith claims upon the insurer's goodwill and reputation. C. Types of damages that courts can award. D. Extent of injuries or harm to the claimant.
C. Types of damages that courts can award.
Unfair trade practices acts involve which one of the following insurance company operations? Select one: A. Coverage form design B. Financial reporting C. Underwriting D. Rate filings
C. Underwriting
Which one of the following measures the amount an insurer would owe its policyholders in premium refunds if it were to immediately cease operations? Select one: A. Policyholders' surplus B. "All other" liabilities C. Unearned premium reserve D. Nonadmitted assets
C. Unearned premium reserve
Wanlett Enterprises has a risk manager who is charged with making sure the organization has the necessary property and liability insurance policies in place to respond to hazard risks that were identified over twenty years ago. Wanlett still creates and manufactures the same products it did decades ago. Which one of the following is true given this scenario? Select one: A. Wanlett's risk management efforts are intended to maximize the organization's value. B. Wanlett shows it wants the risk management process to occur at the enterprise level. C. Wanlett is mostly concerned with pure, as opposed to speculative risks. D. Wanlett is managing all its loss exposures that arise from speculative risk.
C. Wanlett is mostly concerned with pure, as opposed to speculative risks.
On November 1, Peafowl Insurance Company issued a one-year business auto policy to Tri-State Painting Company with a premium of $24,000. What was the written premium for this policy as of December 31? Select one: A. $ 4,000 B. $ 6,000 C. $20,000 D. $24,000
D. $24,000
The financial report for Hometown Insurer contains the following information: Earned premiums $4,000,000 Written premiums $5,000,000 Net investment income $1,000,000 Incurred losses $3,000,000 Incurred underwriting expenses $2,000,000 What was the Hometown Insurer's combined ratio? Select one: A. 75% B. 95% C. 105% D. 115%
D. 115% Hometown's combined ratio equals its loss ratio ($3,000,000/$4,000,000) or 75 percent, plus its expense ratio ($2,000,000/$5,000,000) or 40 percent, for a total of 115 percent.
Which one of the following would likely be an unacceptable practice under most states' unfair claims practices act? Select one: A. A claim representative reviewing a claim is unsure of the coverage and waits until the following day to respond to the insured so that he has time to check the coverage with his supervisor. B. A claim representative receives two estimates on the damage to an insured's vehicle and pays the higher of the two estimates because he believes the lower estimate might not be correct. C. A claim representative realizes that a homeowners property claim will be large and also that the insured needs funds immediately to buy necessities, so he gives the insured a partial advance payment on the claim. D. A claim representative is asked by an insured if a claim is covered by the policy's liability coverage and the claim representative responds "no" even though he knows it is covered elsewhere in the insured's policy.
D. A claim representative is asked by an insured if a claim is covered by the policy's liability coverage and the claim representative responds "no" even though he knows it is covered elsewhere in the insured's policy.
A building contractor uses lower grade materials than called for in the specifications for an office building. A year after the building was completed, a balcony collapses, injuring several employees and customers and causing damage to the building and contents. For the building construction company, this is an example of Select one: A. A products liability exposure. B. An operations liability exposure. C. A premises liability exposure. D. A completed operations liability exposure.
D. A completed operations liability exposure.
Which one of the following statements about policy sections is true? Select one: A. Exclusions define terms to clarify ambiguity. B. Declarations state what an insurer will not cover. C. An insuring agreement establishes procedures for implementing the policy. D. A condition clarifies an insurer's promise or an insured's duty.
D. A condition clarifies an insurer's promise or an insured's duty.
Which one of the following insurance customers is most likely to obtain coverage through a surplus lines broker? Select one: A. An 18-year-old seeking personal auto insurance B. A homeowner seeking flood insurance C. A contractor seeking workers compensation insurance D. A drug manufacturer seeking umbrella liability insurance
D. A drug manufacturer seeking umbrella liability insurance
An essential element of a contract is that the parties to the contract are in agreement, which is Select one: A. The name and mailing address of the insured. B. A general agreement stating the insurer's duty to pay damages and defense costs subject to the terms of the policy. C. The name of the insurer issuing the policy. D. A general agreement stating that the insurer is providing the coverage subject to payment of premium and to the terms of the policy.
D. A general agreement stating that the insurer is providing the coverage subject to payment of premium and to the terms of the policy.
ABC Insurance Company's combined ratio is 102. Its operating ratio is 98. These ratios indicate that Select one: A. ABC is not generating a profit from its core operations. B. ABC's earned premium is greater than the sum of losses and expenses from its underwriting operations. C. ABC's underwriting performance is offsetting the lack of investment earnings. D. ABC's return on investments is offsetting the unprofitable underwriting performance.
D. ABC's return on investments is offsetting the unprofitable underwriting performance.
Worthley Insurance Company uses claim audits to ensure compliance with best practices. These audits evaluate both quantitative and qualitative factors. Which one of the following factors that Worthley evaluates is a qualitative factor? Select one: A. Average claim settlement value by claim type B. Timeliness of reserving C. Accuracy of data entry D. Accurate evaluation of insured's liability
D. Accurate evaluation of insured's liability
Significant windstorm damage to the Chang family's home leaves the dwelling uninhabitable. It takes four months to remove the debris and rebuild the home. During that period, the Changs rent an apartment as temporary accommodation and they incur the cost of moving undamaged property from the home to the apartment. Which one of the following would cover the Changs' moving costs and apartment rental? Select one: A. Extra expense coverage B. Indirect expense coverage C. Fair rental value coverage D. Additional living expense coverage
D. Additional living expense coverage
The possibility that a retailer might be sued because it used a customer's photo in a sales brochure without the customer's permission is what kind of liability exposure for the retailer? Select one: A. Professional activities B. Products C. Business operations D. Advertising
D. Advertising
An independent business owner or firm that sells insurance by representing customers rather than insurers is Select one: A. A managing general agency. B. A direct writer. C. An exclusive agent. D. An insurance broker.
D. An insurance broker.
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. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary
The laws of agency impose all of the following specific duties on all agents, EXCEPT: Select one: A. Relaying information B. Accounting C. Loyalty D. Apparent authority
D. Apparent authority
Which one of the following statements describes the monitoring and revising step in the risk management process? Select one: A. Make sure insurance is not being used as a substitute for loss control. B. Create a new workflow and identify new bottlenecks that have occurred. C. Identify noninsurance transfers through hold-harmless agreements. D. Check to make sure the decisions made are still valid, and make changes as needed.
D. Check to make sure the decisions made are still valid, and make changes as needed.
Assuming the retroactive date is the same as the policy inception date of a claims-made liability policy, which one of the following is a true statement about how coverage will apply? Select one: A. Bodily injury or property damage must occur during the policy period or anytime before policy inception. B. Claims can be first made anytime during or after the policy period C. Coverage will never apply when the retroactive date is the same as the policy inception date. D. Claims must be first made during the policy period.
D. Claims must be first made during the policy period.
Homeowners insurance is rated using Select one: A. Experience rates. B. Individual rates. C. Judgment rates. D. Class rates.
D. Class rates.
Which one of the following is the correct formula for an insurer's overall operating ratio? Select one: A. Combined ratio − Dividend ratio B. Loss ratio + Expense ratio C. Loss ratio + Dividend ratio D. Combined ratio − Investment income ratio
D. Combined ratio − Investment income ratio
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. Employee dishonesty policy. C. Commercial umbrella policy. D. Commercial package policy (CPP).
D. Commercial package policy (CPP).
Which one of the following is an example of general damages? Select one: A. Prescription costs B. Hospital expenses C. Lost wages D. Compensation for disfigurement
D. Compensation for disfigurement
Which one of the following statements is correct regarding the benefits of insurance? Select one: A. One disadvantage of insurance is that it promotes inefficient use of policyholders' funds. B. Insurers generally do not provide incentives to organizations to implement risk control measures. C. Insurance policies typically cannot be used to provide evidence of financial resources. D. Contractors must usually provide evidence of liability insurance before a construction contract is granted
D. Contractors must usually provide evidence of liability insurance before a construction contract is granted
The cause of loss that occurs more frequently than death, causing personnel losses, is Select one: A. Kidnap. B. War/terrorism. C. Retirement. D. Disability.
D. Disability.
Admitted assets are types of property that regulators allow insurers to show as assets on their financial statements because they are Select one: A. Never subject to decreases in value. B. Very stable in value. C. Generally increasing in value. D. Easily converted to cash at or near their market value.
D. Easily converted to cash at or near their market value.
Risk management activities under the enterprise-wide risk management approach occur at the Select one: A. Regional level. B. Business unit level. C. Departmental level. D. Enterprise level.
D. Enterprise level
Analyzing loss exposures requires Select one: A. Understanding how a household or organization operates. B. A physical inspection of all locations, operations, and maintenance routines. C. Interviews and the analysis of a flowchart. D. Estimating how large the losses may be and how often they may occur.
D. Estimating how large the losses may be and how often they may occur.
During which one of the following steps in the underwriting process would an underwriter request a risk control visit to a prospective policyholder's location? Select one: A. Implementing the underwriting decision B. Monitoring the loss exposures C. Determining underwriting alternatives D. Evaluating the submission
D. Evaluating the submission
Damages for pain and suffering are a form of Select one: A. Out-of-pocket damages. B. Special damages. C. Punitive damages. D. General damages.
D. General damages.
Which one of the following statements is correct with regard to the submission evaluation step in the underwriting process? Select one: A. An applicant's financial status as indicated by a financial rating service is an incidental piece of underwriting information for evaluating potential loss exposures. B. When an insurance application form is completed properly, an underwriter normally does not need any additional information. C. Underwriters generally rely more on loss runs and government records than producers, as sources of information. D. Government records that provide underwriting information include motor vehicle reports, criminal records, and civil court records.
D. Government records that provide underwriting information include motor vehicle reports, criminal records, and civil court records.
Which one of the following will individuals gain as a benefit of applying sound risk management to automobile loss exposures? Select one: A. No future increases in insurance premiums B. A loss free future C. Economic growth D. Greater peace of mind
D. Greater peace of mind
Don is an agent trying to find appropriate coverage for his customer, Wayne Industrial Supplies, which has large, unique, and hard-to-place commercial loss exposures. Fortunately, Wayne is in a state that has deregulated some insurance coverages, which will make Don's job a little easier. Based on this information, which one of the following statements is true? Select one: A. There is a standard definition, across states, of the size of business to qualify for exemption from rate and form regulation. B. For workers compensation, Don knows most states will exempt this type of commercial coverage from regulation. C. Surplus lines insurers are generally not exempt from insurance regulations pertaining to policy forms and rates. D. If Wayne's loss exposures can be covered by inland or ocean marine coverages, these may be exempt from regulation.
D. If Wayne's loss exposures can be covered by inland or ocean marine coverages, these may be exempt from regulation.
Insurers carefully evaluate the interaction between premiums and loss ratio and how changes in each affect profit. Which one of the following statements concerning the relationship between premium and loss ratio is true? Select one: A. If premiums decrease at a faster rate than losses increase, the loss ratio will decrease. B. If losses decrease at a faster rate than premiums decrease, the loss ratio will increase. C. If incurred losses increase at a faster rate than premiums, the loss ratio will improve. D. If premiums increase by a greater percentage than incurred losses increase, the loss ratio will decrease.
D. If premiums increase by a greater percentage than incurred losses increase, the loss ratio will decrease.
The value of an insurance contract in the event of a claim Select one: A. Is purely remedial. B. Is purely financial. C. Includes the opportunity to profit. D. Includes peace of mind.
D. Includes peace of mind.
Net income losses can be caused by which one of the following? Select one: A. Increases in revenue B. Decreases in expenses C. Decreases in hazard risks D. Increases in expenses
D. Increases in expenses
n which one of the following types of insurance marketing systems does the agency or agent usually own the expiration lists? Select one: A. Alternative distribution system B. Exclusive agency system C. Direct writing system D. Independent agency system
D. Independent agency system
Private insurers are reluctant to provide windstorm insurance on coastal properties. This is because the loss exposures fail to meet the criterion that ideally insurable exposures must be Select one: A. A large number of similar exposure units. B. Definite and measurable. C. Fortuitous. D. Independent and not catastrophic.
D. Independent and not catastrophic.
Frank and Jan recently married and purchased their first home together. What is an effective way for Frank and Jan to begin identifying the liability loss exposures associated with their new home? Select one: A. Hire a professional risk manager B. Determine the value of the home and contents C. Purchase a homeowners insurance policy D. Inspect the home for loss exposures
D. Inspect the home for loss exposures
Jeff recently started a consulting business. One of his concerns is that he will be sued for giving erroneous advice to a client. Which one of the following would most likely be the best risk management technique for Jeff's use in this situation? Select one: A. Duplication B. Avoidance C. Retention D. Insurance
D. Insurance
Almost all property insurance policies exclude coverage for losses from war and nuclear hazard because Select one: A. There might not be enough claim adjusters available in the event of a loss. B. It is against public policy to cover losses from war and nuclear hazard. C. It is illegal to cover losses from war and nuclear hazard. D. Insurance industry funds might not be adequate to pay all losses caused by war or nuclear hazard.
D. Insurance industry funds might not be adequate to pay all losses caused by war or nuclear hazard.
An insurance policy is considered a contract of adhesion when it is drafted by the Select one: A. Third party. B. Insured. C. Insurance commissioner. D. Insurer.
D. Insurer.
The HO-3—Special Form (HO-3) policy, a nontransferable contract Select one: A. Is fully assignable without the insurer's consent. B. Cannot be assigned to another party. C. May be assigned when the insured makes a written request within 60 days of the assignment. D. Is assignable only with the insurer's written consent.
D. Is assignable only with the insurer's written consent.
Which one of the following is true regarding a homeowners policy? Select one: A. It excludes losses caused by wind and lightning. B. It only provides property coverage. C. It only provides liability coverage. D. Most include coverage for theft of contents within the home.
D. Most include coverage for theft of contents within the home.
Which one of the following statements is true? Select one: A. Mutual insurers include few regional insurers. B. Mutual insurers are usually large national insurers. C. Mutual insurers are exclusively regional or local insurers. D. Mutual insurance companies include some large national insurers.
D. Mutual insurance companies include some large national insurers.
A combined ratio of 1.05 indicates that an insurer is Select one: A. Not profitable overall. B. Profitable on an underwriting basis. C. Profitable overall. D. Not profitable on an underwriting basis.
D. Not profitable on an underwriting basis.
An insurer's income statement shows its revenues, expenses, and net income Select one: A. Focusing primarily on revenues. B. Based upon assets minus expenses. C. At a particular point in time. D. Over a particular period of time.
D. Over a particular period of time.
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. Professional liability insurance. B. Commercial general liability insurance. C. Auto liability insurance. D. Personal liability insurance.
D. Personal liability insurance.
Anyone who owns or occupies property has a Select one: A. Products liability loss exposure. B. Professional liability loss exposure. C. Pollution liability loss exposure. D. Premises liability loss exposure.
D. Premises liability loss exposure.
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. Primarily insurers unusual exposures
Subrogation is the insurer's right to Select one: A. Drop a claim in exchange for an agreed amount of money. B. Transfer coverage to a third party. C. Estimate the value of the damaged property. D. Recover its claim payment from the responsible party.
D. Recover its claim payment from the responsible party.
The most difficult time for an insurer to change distribution systems is when Select one: A. Launching a new insurance product. B. Entering a new target market. C. Expanding to a larger territory. D. Renewing an existing book of business.
D. Renewing an existing book of business.
Recruiting, interviewing, and training a new employee who replaces a worker who has just resigned are examples of which one of the following types of financial consequences flowing from personnel losses? Select one: A. Compensation costs B. Loss of value C. Depreciation costs D. Replacement costs
D. Replacement costs
John Young is a risk manager of a medium-size business with both auto and real property exposures. John is looking for ways to save money on insurance premiums. John should consider Select one: A. Canceling the insurance and implementing noninsurance transfer techniques. B. Retaining the auto liability loss exposures. C. Retaining the property loss exposures. D. Retaining some or all of the auto physical damage exposures.
D. Retaining some or all of the auto physical damage exposures.
For loss exposures with high frequency and low severity, the two best risk management alternatives are retention and Select one: A. Insurance. B. Transfer. C. Avoidance. D. Risk control.
D. Risk control.
A rating plan available to commercial insurance applicants that awards debits and credits to a submission based on specific categories is known as a(n) Select one: A. Retrospective rating plan. B. Financial rating plan. C. Experience rating plan. D. Schedule rating plan.
D. Schedule rating plan.
Some businesses require key executives to fly on different flights. This is an example of which one of the following risk control techniques? Select one: A. Loss prevention B. Duplication C. Avoidance D. Separation
D. Separation
Work on a new claim begins for the claim representative upon receipt of the notice of loss. The representative obtains initial information and verifies coverage. Next, the representative should Select one: A. Assign the claim to defense counsel. B. Retain causation experts. C. Make an offer to settle the claim. D. Set a loss reserve.
D. Set a loss reserve.
Claim representative Jan is reviewing an auto liability claim concerning a two-car collision that has just been assigned to her. She notes that the insured was clearly 100 percent at fault for the accident. No one was injured. The estimate for the costs of the repair to claimant's car and a substitute auto for the week it will take to perform the repairs is $3,000. Which one of the following best describes the approach Jan should take in setting the case reserve? Select one: A. Set it at zero dollars, because the claim is expected to resolve within a week. B. Set it at a predetermined percentage above $3,000, in case the original estimate is lower than the actual costs. C. Set it at a predetermined percentage below $3,000, in the expectation that some money can be saved on the claim. D. Set it at $3,000, representing an estimate of what Jan expects to pay to settle the claim.
D. Set it at $3,000, representing an estimate of what Jan expects to pay to settle the claim.
The declarations page of a Personal Auto Policy (PAP) Select one: A. Lists any exclusions that are attached to the policy. B. Identifies common policy definitions. C. Indicates that the policy period starts at 12:01 PM standard time at the address of the insurer. D. Shows the name of the insured and the insured's mailing address.
D. Shows the name of the insured and the insured's mailing address.
When a wrongdoer commits an illegal act, the wrongdoer is subject to both civil law and criminal law in Select one: A. All cases. B. No cases. C. Most cases. D. Some cases.
D. Some cases.
Property insurance coverage on dwellings and other structures covering all causes of loss not specifically excluded is known as Select one: A. Basic form coverage. B. Named perils coverage. C. Broad form coverage. D. Special form coverage.
D. Special form coverage.
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. Excella must fully comply with insurance regulations so that the federal government does not revoke its license. B. Paying expenses and making a reasonable profit is the ultimate measure of the insurer's success. 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. State insurance regulators are only one of many stakeholders that are interested in an insurer's financial health.
An insurer that was formed for the purpose of earning a profit for its stockholders is a Select one: A. Reciprocal insurance exchange. B. Captive insurer. C. Mutual insurer. D. Stock insurer.
D. Stock insurer.
Which one of the following statements is true regarding the agency contract? Select one: A. Insurance agency contracts usually have a fixed expiration date, at which time the parties negotiate the renewal. B. The agent is the principal in the agency contract relationship. C. An agency contract is also known as an agency endowment. D. The agency contract states the scope of the agency's authority to conduct business for the insurer.
D. The agency contract states the scope of the agency's authority to conduct business for the insurer.
The selection of a distribution channel for an insurer's products and services depends, partly, on customer preferences. Which one of the following statements is true regarding customer preferences that should be considered when selecting a distribution channel? Select one: A. Customers are always willing to pay more for good service. B. Customers value a challenging experience when conducting business with insurers. C. Speed is not an important consideration for customers. D. The channel should be consistent with the customer's expectations for service.
D. The channel should be consistent with the customer's expectations for service.
A financial analyst determines that the combined ratio for the DEF Insurance Company was 112 percent for the prior year. Which one of the following statements best describes how the analyst can interpret this information for the year? Select one: A. The insurer's net profit had to be negative. B. The insurer had a loss ratio that was over 100 percent. C. The insurer's expense ratio exceeded its loss ratio. D. The insurer had an underwriting loss.
D. The insurer had an underwriting loss.
If Katie purchases auto insurance from an out-of-state insurer without a license to sell insurance in Katie's state, the policy may be an invalid contract because Select one: A. The principle of indemnity has been violated. B. Utmost good faith was not practiced by the parties. C. The contract does not have a legal purpose. D. The insurer was not legally competent to make the agreement.
D. The insurer was not legally competent to make the agreement.
obias, a successful producer with Barnley's Insurance Company, is struggling with an intricate quote on homeowners coverage for his insured, Hanna. Hanna not only has substantial collections of guns and silverware, but also has a small farm located at her premises. Which one of the following individuals from Barnley Insurance Company could provide assistance and support to Tobias? Select one: A. The actuary B. The claims representative C. Staff underwriter D. The line underwriter
D. The line underwriter
While involuntary employee separations may expose an organization to additional liability loss exposures, such as wrongful termination accusations, they generally are not considered a personnel loss exposure because Select one: A. Employees leave organizations for non-business related reasons and therefore, are not considered a personnel loss. B. The organization may not have a risk management person measuring personnel exposures. C. The reasons for involuntary employee separations are too numerous and too varied to be measure with high accuracy. D. The organization has determined that it is better off without that employee.
D. The organization has determined that it is better off without that employee.
One of the roles of underwriting management is arranging reinsurance. Which one of the following statements explains how treaty reinsurance helps an insurer meet its obligations? Select one: A. The reinsurer assumes a portion of the losses from all policies that have been specifically listed and insured under the treaty. B. The reinsurer monitors the results of the primary insurer's underwriting guidelines to ensure compliance. C. The reinsurer delegates underwriting authority to the primary insurer, helping the primary insurer achieve consistent results. D. The reinsurer automatically assumes a portion of all of the primary insurer's insurance that is eligible under the treaty.
D. The reinsurer automatically assumes a portion of all of the primary insurer's insurance that is eligible under the treaty.
Which one of the following statements is correct with respect to selecting a distribution channel? Select one: A. Customers are prepared to spend a reasonable amount of time and effort interacting with a distribution channel if that channel saves them money. B. The majority of customers prefer to speak with a producer or service representative rather than access their account information online. C. The primary consideration is what approach will allow the insurer to operate efficiently. D. The types of insurance products and services to be delivered by the insurer must fit the marketing channel selected.
D. The types of insurance products and services to be delivered by the insurer must fit the marketing channel selected.
Adjuster Toni is evaluating damages in a bodily injury liability claim where she has determined that the insured is completely at fault for the accident. The claimant suffered a sprain and strain injury to his neck. His special damages total $1,500. He was out of work for a week, was disabled and prevented from performing some regular activities for a month, and attended physical therapy for six weeks. In assessing general damages, Toni should Select one: A. Multiply $1,500, the amount of special damages, by six, the number of weeks of physical therapy, and pay $9,000. B. Consider what she would want to be paid if she were in claimant's shoes. C. Multiply the amount of special damages of $1,500 by three as a rule of thumb, and pay $4,500. D. Use past cases which are similar as a guide.
D. Use past cases which are similar as a guide.
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. When her car's windshield breaks, Ciara has to pay only $100 of the $600 cost of replacing it.
Under Coverage E—Personal Liability of the HO-3 policy, the insurer's obligation to defend ends Select one: A. When the cost of defense exceeds the personal liability limits. B. When the costs of defense limits are exhausted. C. When policy limits are exhausted by the claim expenses. D. When the liability limit for the occurrence is exhausted by payment of a settlement or judgment.
D. When the liability limit for the occurrence is exhausted by payment of a settlement or judgment.
