AINS Practice Exam

A producer is usually paid a fee for performing which one of the following functions?

A. Prospecting B. Policy issuance C. Premium collection D. Consulting Correct. A producer is usually paid a fee for performing consulting.

An insured under a personal auto policy with liability limits of $100,000/$300,000/$25,000 is responsible for an auto accident that resulted in $90,000 in damages for bodily injury. The costs incurred by the insurer to defend the insured were $20,000. Which one of the following amounts did the insurer pay as a result of the accident? Select one: A. $20,000Incorrect. The insurer paid $110,000. 90K damages + 20K defense costs. B. $90,000 C. $100,000 D. $110,000

$110,000

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 net income loss? Select one: A. $ 40,000 B. $ 50,000 C. $ 90,000Correct. 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. D. $120,000

$ 90,000

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. $150,000Correct. The amount of general damages is $150,000. General damages are for losses that do not have a specific economic value. D. $160,000

$150,000

Sports, Inc. is looking to obtain a commercial property policy on its building for $400,000. If their insurer decides to charge them a rate of $0.50 per $100 of building insurance, what premium must Sports, Inc. pay? Select one: A. $1,000 B. $2,000Correct. [$400,000 (insured value) ÷ $100 (exposure unit size)] x $0.50 (rate per unit) = $2,000. C. $4,000 D. $8,000

$2,000

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. $450Incorrect. ACV=Replacement cost - Depreciation. The bicycle's actual cash value is $350: $800 − $450 = $350. D. $800

$350

Bill's three-year-old stereo was completely destroyed in a covered loss. Its expected useful life was ten years. Its replacement cost is $600. Its actual cash value (ACV) is Select one: A. $ 60. B. $180. C. $420.Correct. The stereo's Depreciation is 3/10 x $600 = $180. The ACV is $600 - $180 = $420. D. $600.

$420

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. $90,000Correct. Business income insurance pays for the reduction in net income, which considers both the net income that would have occurred and the net loss that does occur. 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. D. $120,000

$90,000

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%Correct. SBC's loss ratio is 83%. LR = (IL + LAE)/ EP x 100. C. 96% D. 104%

83%

Which one of the following is an element of a loss exposure? Select one: A. The verification of risk B. The probability of a loss C. A cause of lossCorrect. A cause of loss is an element of a loss exposure. D. The occurrence of a loss

A cause of loss

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

A corporation owned by policyholders that provides insurance to its policyholders

Which one of the following insurance customers is most likely to obtain coverage through a surplus lines broker? Select one: A. A contractor seeking workers compensation insurance B. A homeowner seeking flood insurance C. An 18-year-old seeking personal auto insurance D. A drug manufacturer seeking umbrella liability insuranceCorrect. A drug manufacturer seeking umbrella liability insurance is most likely to obtain coverage through a surplus lines broker.

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. A general agreement stating the insurer's duty to pay damages and defense costs subject to the terms of the policy. B. A general agreement stating that the insurer is providing the coverage subject to payment of premium and to the terms of the policy.Correct. An agreement includes a general agreement stating that the insurer is providing the coverage subject to payment of premium and to the terms of the policy. C. The name of the insurer issuing the policy. D. The name and mailing address of the insured.

A general agreement stating that the insurer is providing the coverage subject to payment of premium and to the terms of the policy.

Underwriting management arranges treaty reinsurance to reinsure Select one: A. Insureds that do not meet underwriting guidelines. B. A group or group of insureds. C. All insurance of the primary insurer.Incorrect. Treaty reinsurance is arranged for a portion of all eligible insurance of the primary insurer. D. Individual accounts.

A group or group of insureds

From the insurer's perspective, occurrence basis liability coverage entails the possibility that the insurer will have to pay liability claims that surface long after Select one: A. A claim is made. B. An insured has died. C. A loss was reported.Incorrect. From the insurer's perspective, occurrence basis liability coverage entails the possibility that the insurer will have to pay liability claims that surface long after a policy has expired. D. A policy has expired.

A policy has expired.

Which one of the following statements is true regarding traditional marketing systems for insurance? Select one: A. An insurer operating through a managing general agent can expect higher fixed costs. B. The three traditional marketing systems are the independent agency system, the captive agency system, and the exclusive agency system. C. A principal characteristic that distinguishes one traditional marketing system from another is the ownership of policy expirations.Correct. A principal characteristic that distinguishes one traditional marketing system from another is the ownership of policy expirations. D. A single producer cannot operate as both an agent and a broker in a given state.

A principal characteristic that distinguishes one traditional marketing system from another is the ownership of policy expirations.

An employee of an insurance company who performs some or all of the insurer's claim-handling activities is called Select one: A. A field claim adjuster. B. An inside claim representative. C. A public adjuster. D. A staff claim representative.Correct. An employee of an insurance company who performs some or all of the insurer's claim-handling activities is called a staff claim representative.

A staff claim representative

A policy provides coverage starting on April 1 with an annual premium of $800. How much premium is earned as of June 30?

A. $100 B. $200 Correct. The earned premium is $200 because three months of coverage have been provided. 3/12 X $800 = $200 C. $600 D. $800

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?

A. $500 Correct. Calculated at 1,000 units ($1 million sales ÷ price per $1,000) × $0.50 rate = $500. B. $1,000 C. $5,000 D. $10,000

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?

A. 10% B. 20% C. 25% Correct. Hometown's investment income ratio equals its net investment income ($1,000,000) divided by its earned premiums ($4,000,000), or 25 percent. D. 50%

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 expense ratio?

A. 20% B. 40% C. 50% D. 75% Incorrect. Hometown Insurer's expense ratio is its incurred underwriting expenses ($2,000,000) divided by its written premiums ($5,000,000), or 40 percent.

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 is Hometown Insurer's loss ratio?

A. 20% Incorrect. Hometown Insurer's loss ratio is its incurred losses ($3,000,000) divided by its earned premiums ($4,000,000), or 75 percent. B. 30% C. 50% D. 75%

Class rating relies on

A. A highly refined classification. B. Insureds with similar characteristics. Correct. Class rating relies on grouping insureds with similar characteristics. C. All insureds being charged the same rate. D. Similar frequency and severity of loss.

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

A. Able to generate a fair return for the insurer but no to excessive or unrealistic profit. B. Sufficient to pay all claims and the expenses related to those claims. Correct. Adequate means that the rates should be sufficient to pay all claims and the expenses related to those claims. C. Similar to the rates charged by other insurers operating in the state. D. Similar for insureds with similar loss exposures.

Which one of the following statements is correct regarding considerations involved in the selection of insurance marketing systems and distribution channels?

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. Incorrect. An insurer can exercise the greatest control over producers in the direct writer system.

An independent business owner or firm that sells insurance by representing customers rather than insurers is which one of the following?

A. An underwriter B. An independent agent C. An independent adjuster D. An insurance broker Correct. An independent business owner or firm that sells insurance by representing customers rather than insurers is an insurance broker.

Which one of the following methods of prospecting is more likely to be used by an experienced producer than a new insurance producer?

A. Cold canvass B. Referrals from present clients Correct. Referrals from present clients are more likely to be used by an experienced producer than a new insurance producer. C. Interactive web sites D. Direct mail

Produce, such as apples or grapes, may be priced by the unit or by the pound. In insurance, these measures are similar to

A. Construction cost index. B. Exposure units. Correct. Units, pounds, and exposure units are all multiplied by the rate to arrive at the cost (premium). C. Premiums. D. Rates.

Underwriting guidelines help an insurer achieve its goals by

A. Creating a channel for communication for the insurer's vision, mission, and objectives B. Providing rules that guide underwriters toward consistent decisions Correct. Underwriting guidelines help an insurer achieve its goals by providing rules that guide underwriters toward consistent decisions. C. Maintaining a consistently applied set of behavioral measurements against which an individual's performance will be measured D. Establishing the criteria required for treaty reinsurance to apply

If a line of insurance is class rated, with all insureds possessing similar characteristics and paying the same rate, which one of the following determines the difference in premiums insureds pay?

A. Data from insurance advisory organizations B. Considerations for profits and expenses C. Number of exposure units Correct. For individuals in the same class, all members are charged the same rate, although their premiums will be different if they have different numbers of exposure units. D. Credits and debits for changes in exposures

The type of insurance that provides periodic income payments to an insured who is unable to work because of sickness or injury is:

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

If an insurer's admitted assets stayed the same but its liabilities decreased significantly, its policyholders' surplus would

A. Either stay the same or increase. B. Decrease. Incorrect. Policyholders' surplus is admitted assets minus liabilities. Any decrease in a liability without a change in admitted assets increases policyholders' surplus. C. Either stay the same or decrease. D. Increase.

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. Evaluating the submission Correct. An underwriter would request a risk control visit to a prospective policyholder's location while evaluating the submission. B. Monitoring the loss exposures C. Determining underwriting alternatives D. Implementing the underwriting decision

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?

A. Flood B. General liability C. Crop D. Workers compensation Correct. State government can provide workers compensation insurance as a competitor to private insurers or as a residual market.

Which one of the following is considered to be an acquisition expense for an insurance company?

A. Guarantee fund expenses B. Dividends C. Advertising expenses Correct. Advertising expenses may also be a significant component of insurer acquisition expenses. D. Losses

When a firm is selecting a distribution channel, which one of the following is an important consideration with regard to its operations?

A. How quickly can inquiries and transactions be processed in the channel? B. Does the selected channel capitalize on its core capabilities? Correct. When a firm is selecting a distribution channel, an important consideration with regard to its operations is whether the selected channel capitalizes on its core capabilities. C. What are customers' expectations regarding accessibility to the channel? D. Are customers willing to pay a premium for personalized products and services through the channel?

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?

A. Implied authority B. Binding authority C. A unilateral contract D. An agency contract Correct. An agency contract specifies the scope of authority given to the agent in this relationship.

Most insurers give some producers the authority to pay claims up to a certain amount. In this role, producers function much like an

A. Inside claim representative. Correct. In this role, producers function much like an inside claim representative. B. Insurance appraiser. C. Outside claim representative. D. Independent adjuster.

Which one of the following statements is true?

A. Insurance policies are private contracts, the language of which is largely unregulated. B. Insurers must be free to create policies that are in their best interest. C. Insurance regulators review policies to determine if they benefit consumers. Correct. Insurance regulators review policies to determine if they benefit consumers. D. Regulators set coverage standards, but allow insurers to determine policy language.

All of the following are true with regard to policyholders' surplus, EXCEPT:

A. It provides a financial cushion for the insurer if losses turn out to be higher than expected. B. It provides resources for expansion. C. It measures the difference between what an insurer owns and what it owes. D. It equals nonadmitted assets. Correct. Policyholders' surplus measures the difference between what an insurer owns and owes, provides a financial cushion, and provides resources for expansion. It does not equal nonadmitted assets.

Which one of the following is the primary duty that a principal legally owes to an agent?

A. Loyalty to the agent B. Paying the agent for services performed Correct. The primary duty that a principal legally owes to an agent is paying the agent for services performed. C. Reasonable care in action on behalf of the agent D. Accounting of the agent's money

An underwriter receives a renewal application for a property quote from his producer. The applicant has had a series of small losses in the recent past. The underwriter is debating whether to reject the submission or quote it with a property deductible of $5,000. During which one of the following steps in the underwriting process is the underwriter involved?

A. Monitoring underwriting decisions B. Implementing the underwriting decision C. Developing underwriting alternatives Correct. The underwriter is involved in developing underwriting alternatives. D. Evaluating the submission

Which one of the following statements is correct regarding the benefits of insurance?

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

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?

A. Paying expenses and making a reasonable profit is the ultimate measure of the insurer's success. B. Excella strives to make sure its revenue is equal to or less than its expenses and claim payments to remain financially viable. C. Excella must fully comply with insurance regulations so that the federal government does not revoke its license. D. State insurance regulators are only one of many stakeholders that are interested in an insurer's financial health. Correct. State insurance regulators are only one of many stakeholders that are interested in an insurer's financial health.

Owners of reciprocal insurance exchanges are also known as

A. Policyholders. B. Names. C. Correspondents. D. Subscribers. Correct. Owners of reciprocal insurance exchanges are also known as subscribers.

The two major sources of an insurer's investment funds are policyholders' surplus and

A. Premiums received but not yet used to pay claims. Correct. The two major sources of an insurer's investment funds are policyholders' surplus and premiums received but not yet used to pay claims. B. Reserves for loss expenses. C. Acquisition expenses. D. Reserves for unearned premiums.

All of the following describe Lloyd's, EXCEPT:

A. Primarily insurers unusual exposures Correct. Lloyd's is a insurance and reinsurance marketplace operated by Lloyd's syndicates where insurance is written by a Name (member/investor). Lloyd's underwriters act on behalf of syndicates to analyze risk; they are not liable to pay claims. Each Lloyd's Name is liable for the insurance he or she agrees to write. B. Operated by syndicates C. An insurance and reinsurance marketplace D. Insurance underwritten by a Name

Which one of the following is an operating cost of insurers?

A. Producers' commissions Correct. Producers' commissions are among the operating costs of insurers. B. Increased property losses because people have insurance C. Increased liability loss payments because people have insurance D. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary

An independent agency

A. Represents customers rather than insurers and shops insurers to find the best coverage and value for its customers. B. Typically only handles commercial insurance accounts. C. Has the right to switch a customer's coverage to another insurer. Correct. An independent agency has the right to switch a customer's coverage to another insurer. D. Generally represents only one insurer.

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

A. Retention. B. Loss control. C. Avoidance. D. Risk transfer. Correct. For someone in Sally's situation, risk transfer is the most practical technique.

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:

A. Sales Incorrect. Market conduct regulation usually involves three areas of insurance company operations: sales, underwriting, and claim handling. B. Claims handling C. Risk control D. Underwriting

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)

A. Schedule rating plan. Correct. A rating plan available to commercial insurance applicants that awards debits and credits to a submission based on specific categories is known as a schedule rating plan. B. Experience rating plan. C. Retrospective rating plan. D. Financial rating plan.

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?

A. Speed is not an important consideration for customers. B. Customers are always willing to pay more for good service. C. Customers value a challenging experience when conducting business with insurers. D. The channel should be consistent with the customer's expectations for service. Correct. The channel should be consistent with the customer's expectations for service.

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

A. Staff underwriter. Correct. Maja is functioning as a staff underwriter. B. Chartered underwriter. C. Field underwriter. D. Line underwriter.

Which one of the following is generally exempt from state insurance regulations pertaining to policy forms and rates?

A. Surplus line insurers Correct. Surplus line insurers are generally exempt from state insurance regulations pertaining to policy forms and rates. B. Commercial property insurers C. Health insurers D. Workers compensation insurers

Prompt and professional loss adjustment services are a responsibility of which one of the following parts of an insurer's organization?

A. The premium audit function B. The claims function Correct. Prompt and professional loss adjustment services are a responsibility of the claims function. C. The underwriting function D. The loss control function

Anyone who submits a claim to an insurer may be called a

A. Third-party claimant. B. Claimant. Correct. A claimant is anyone who submits a claim to an insurer. C. First-party claimant. D. Claim producer.

Managing general agencies

A. Typically use the direct response system. B. Do not represent more than one insurer. C. Commonly represent several insurers. Correct. Managing general agencies commonly represent several insurers. D. Typically use the exclusive agency system.

Unfair trade practices acts involve which one of the following insurance company operations?

A. Underwriting Correct. Unfair trade practices acts involve the insurance company operations of sales, underwriting, and claim handling. B. Financial reporting C. Coverage form design D. Rate filings

Personal auto insurance is most likely rated using

A. Unit rates. B. Judgment rates. C. Individual rates. Incorrect. Personal auto insurance is most likely rated using class rates. D. Class rates.

Underwriting management develops underwriting guidelines, which

A. Vary from one underwriter to another. B. Set firm standards that rarely, if ever, are modified. C. Specify the insurer's attitude toward applicants exhibiting certain characteristics. Correct. Underwriting guidelines list the insurer's attitude toward applicants exhibiting certain characteristics. D. Ensure that unprofitable business will be offset by profitable business.

Life insurance that provides coverage for a specified period with no cash value is called

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

ABC Insurance Company's combined ratio is 102. Its operating ratio is 98. These ratios indicate that Select one: A. ABC's return on investments is offsetting the unprofitable underwriting performance.Correct. These ratios indicate that ABC's return on investments is offsetting the unprofitable underwriting performance. B. ABC is not generating a profit from its core operations. C. ABC's earned premium is greater than the sum of losses and expenses from its underwriting operations. D. ABC's underwriting performance is offsetting the lack of investment earnings.

ABC's return on investments is offsetting the unprofitable underwriting performance

Compensatory damages represent Select one: A. Non-economic loss.Incorrect. Compensatory damages represent actual harm suffered. B. Damages to deter others from committing wrongful acts. C. Actual harm suffered. D. Out-of-pocket expenses.

Actual harm suffered.

Principals often authorize another party to act on their behalf. This relationship is called Select one: A. Fiduciary. B. Broker. C. Agency. D. Attorney in fact.Incorrect. This relationship is called agency.

Agency

Which one of the following is an example of material misrepresentation by Albert, a businessman applying for property insurance on a building he owns? Select one: A. Albert tells the insurance agent he has owned the building for 17 years, but he has actually owned it for 18 years.Incorrect. Albert tells the insurance agent the building is used to store steel, but it is actually used to store steel drums containing flammable liquids. B. Albert tells the insurance agent the building is used to store steel, but it is actually used to store steel drums containing flammable liquids. C. Albert does not tell the insurance agent he is about to file for bankruptcy. D. Albert does not tell the insurance agent his building has a defective heating system that could explode at any time.

Albert tells the insurance agent the building is used to store steel, but it is actually used to store steel drums containing flammable liquids.

How does the law of large numbers assist insurers? Select one: A. Allows reliable estimates of future loss amountsCorrect. The law of large numbers allows reliable estimates of future loss amounts. B. Assures a profit, given sufficient number of policies C. Prevents catastrophic losses from any single event D. Predicts who will likely suffer losses

Allows reliable estimates of future loss amounts

Loss reserves are amounts designated by insurers to pay claims for losses that have Select one: A. Already occurred but are not yet settled.Correct: Loss reserves are amounts designated by insures to pay claims for losses that have already occurred but are not yet settled. B. Already occurred and the amount to be paid has been agreed. C. Not yet occurred but are likely to be reported in the future. D. Not yet occurred but are likely to occur in the future.

Already occurred but are not yet settled

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. Requiring loss control measures. B. Using schedule rating modifications. C. Amending policy terms and conditions.Correct. This type of underwriting modification is known as amending policy limits and conditions. D. Using facultative reinsurance.

Amending policy terms and conditions

The most typical third-party bad-faith claim alleges Select one: A. Failure of a claim representative to divulge details of a loss investigation that would lead to an increased claim payment to the insured. B. An improper failure to settle a third party's liability claim within policy limits followed by a verdict that exceeds the policy limits.Correct. The most typical third-party bad-faith claim alleges an improper failure to settle a third party's liability claim within policy limits followed by a verdict that exceeds the policy limits. C. Breach of contract. D. Bad-faith claims made against the first-party policyholder relating to coverage issues.

An improper failure to settle a third party's liability claim within policy limits followed by a verdict that exceeds the policy limits.

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. A discretionary interest. D. An insurable interest.Correct. A person or entity that would suffer a financial loss if property were damaged has an insurable interest.

An insurable interest

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 understands his policy is modular one, combining various coverage forms and other documents especially tailored to his needs. B. 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. C. An insurance contract, like the ISO policy Harry purchased, has certain additional characteristics other than those of typical valid contracts.Correct. 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.

An insurance contract, like the ISO policy Harry purchased, has certain additional characteristics other than those of typical valid contracts.

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

An insured's funds that could be invested elsewhere if purchasing insurance were not necessary

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. Monitoring results B. Analyzing loss exposuresCorrect. This is required under Step 2: Analyzing Loss Exposures C. Examining the feasibility of risk management techniques D. Identifying loss exposures

Analyzing loss exposures

Generally, how often must a foreign insurer's license be renewed? Select one: A. Every five years B. Every two years C. AnnuallyCorrect. Generally, a foreign insurer's license must be renewed annually. D. Semi-annually

Annually

Which one of the following is a common alternative dispute resolution (ADR) technique. Select one: A. Motion for summary judgment B. Interrogatories C. Pleadings D. ArbitrationCorrect. Arbitration is a common ADR technique.

Arbitration

Insurers generally have the option to repair, replace, or pay the value of lost or damaged property. These options Select one: A. Comply with insurance-to-value provisions so that the insured is not penalized. B. Are settlement options.Correct. The option to repair, replace, or pay the value of lost or damaged property are settlement options. C. Increase the insurer's costs. D. Lead to a higher settlement amount for the insured.

Are settlement options.

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. Separation B. AvoidanceCorrect. Amy's decision is an example of avoidance. C. Loss prevention D. Loss reduction

Avoidance

One of the four elements required for a finding of negligence is that the breach of duty must Select one: A. Be related to the injury or damage. B. Be the proximate cause of the injury or damage.Correct. One of the four elements required for a finding of negligence is that the breach of duty must be the proximate course of the injury or damage. C. Not be intended to cause injury or damage. D. Precede the injury or damage.

Be the proximate cause of the injury or damage

Which one of the following best describes how effective risk management benefits society? Select one: A. Providing more thoughtful consumers of insurance B. Causing fewer disruptions in the economic and social environmentCorrect. Effective risk management benefits society by causing fewer disruption in the economic and social environment. C. Increasing the types of charitable and governmental agencies available to the general public D. Creating a positive effect on an insurer's underwriting results

Causing fewer disruptions in the economic and social environment

What type of law is specifically designed to protect personal and property rights, as well as contract rights? Select one: A. Civil law B. Local ordinances C. Criminal law D. Constitutional lawIncorrect. Civil law is specifically designed to protect personal and property rights, as well as contract rights.

Civil law

Fair evaluation of claims is an element of good-faith claim handling. All of the following are true regarding fair evaluation of a claim, EXCEPT: Select one: A. Claim representatives are prohibited from discussing the evaluation of a claim with anyone not directly connected with that claim. B. Unfair claims settlement practices acts often specify a time limit within which evaluations of coverage and damages must be completed. C. Information about settlements or trial results from similar cases can help claim representatives knowledgably evaluate a claim. D. A fair approach to evaluating liability claims is to evaluate them as if no coverage limit existed.

Claim representatives are prohibited from discussing the evaluation of a claim with anyone not directly connected with that claim.

Which one of the following is the correct formula for an insurer's overall operating ratio? Select one: A. Loss ratio + Dividend ratio B. Combined ratio − Dividend ratio C. Combined ratio − Investment income ratioCorrect. An insurer's overall operating ratio equals its combined ratio minus its investment income ratio. D. Loss ratio + Expense ratio

Combined ratio − Investment income ratio

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 declarationsCorrect. A description of the property insured, a list of mortgagees, and the applicable coinsurance percentage(s) are shown on the commercial property declarations. B. Commercial Property Conditions C. Commercial property coverage forms D. Causes of loss forms

Commercial property declarations

Which one of the following is an example of general damages? Select one: A. Hospital expensesIncorrect. An example of general damages is compensation for disfigurement. B. Lost wages C. Prescription costs D. Compensation for disfigurement

Compensation for disfigurement

County Janitorial Service has contracted with local bars and taverns to clean their restrooms on a daily basis. County's greatest liability exposure is probably Select one: A. Professional liability. B. Completed operations.Correct. County's greatest liability exposure is probably completed operations. C. Liquor liability. D. Advertising liability.

Completed operations

The principal method of determining a prospect's insurance needs is through Select one: A. Determining how much the prospect is willing to pay for insurance coverage. B. Reviewing the prospect's current insurance policies. C. Completing a risk management review for the prospect.Correct. The principal method of determining a prospect's insurance needs is through completing a risk management review for the prospect. D. Asking the prospect what coverage they would like to purchase.

Completing a risk management review for the prospect.

When Joshua purchased his home, he did not tell his insurer that he kept flammable chemicals in his basement for use in a hobby. Joshua is aware that storing the chemicals increases the potential for loss to his home. The fact that the insurer is not aware of this exposure is an example of which one of the following? Select one: A. Consideration B. An exchange of unequal amounts C. A contract of adhesion D. Concealment of a material factCorrect. It is an example of concealment of a material fact. A material fact is one that would affect the insurer's decision to provide or maintain insurance or to settle a claim.

Concealment of a material fact

For contract purposes, an offer is valid if it includes the capacity to contract, an agreement, a legal purpose, and Select one: A. Consideration from both parties. B. A legally enforceable promise from the offeree to the offeror. C. An acceptance from the one party.Incorrect. For contract purposes, an offer is valid if it includes an intent to contract, definite terms, and consideration from both parties. D. An agreement between the parties.

Consideration from both parties.

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.Incorrect. Contacting the insured is a typical adjuster activity during the claim handling process. B. Determining policy terms and conditions C. Contacting the insured. D. Controlling the loss.

Contacting the insured.

Individuals and families benefit from effective risk management in which one of the following ways? Select one: A. Increasing their personal cash flows by retaining rather than insuring their property exposures B. Stimulating economic growth because fewer losses mean that more funds are available for other uses C. Continuing activities following an accident or other loss, and thus reducing inconvenience. D. Creating a positive effect on an insurer's underwriting results

Continuing activities following an accident or other loss, and thus reducing inconvenience.

One reason professional liability insurance is often provided separately from general liability insurance is that Select one: A. Coverage for these types of claims is better handled by other liability insurance policies. B. These types of losses are generally catastrophic and uninsurable in nature.Incorrect. Coverage for these types of claims is better handled by other liability insurance policies. C. The premiums for such coverages can be kept reasonable with separate policies. D. There is less chance of running into duplicate coverage issues.

Coverage for these types of claims is better handled by other liability insurance policies.

Rating agencies such as Dun & Bradstreet (D&B) provide Select one: A. Data on motor vehicle reports. B. Aggregate loss experience data. C. Data on credit ratings of businesses.Correct. Rating agencies provide data on credit ratings of businesses. D. Information about business operations' safety records.

Data on credit ratings of businesses

Joshua is a claim representative who has been assigned an auto liability claim. To determine whether his company's Personal Auto Policy (PAP) provides coverage for the claim, Joshua should first review the policy's Select one: A. Conditions. B. Exclusions. C. Insuring Agreement. D. Declarations.Correct. The Declarations page outlines who or what is covered and when and where coverage applies.

Declarations

The policy section that usually contains the policyholder's name and mailing address, policy limits, and premium amount is the Select one: A. Declarations.Correct. The policy section that usually contains the policyholder's name and mailing address, policy limits, and premium amount is the declarations. B. Definitions. C. Conditions. D. Miscellaneous provisions.

Declarations

The investment income ratio indicates the Select one: A. Degree of success achieved by the insurer in controlling losses. B. Degree of success achieved by the insurer in its investment activities.Correct. The investment income ratio indicates the degree of success achieved by the insurer in its investment activities. C. Percentage of written premium represented by net investment income. D. Cost of running an insurer's investment department.

Degree of success achieved by the insurer in its investment activities

If a claim representative's investigation determines that no coverage applies for a liability claim, the insurer will Select one: A. Try to quickly settle the claim. B. Settle the claim and then seek reimbursement from the insured. C. Deny the claim.Correct. If a court conclusively determines that no coverage applies for a liability claim, the insurer will deny the claim. D. Pay for the defense but not the settlement of the claim.

Deny the claim.

In implementing risk management techniques, the risk manager usually Select one: A. Relies on consultants outside the organization to implement the techniques. B. Depends on others to implement the techniques based on the risk manager's advice.Correct. In implementing risk management techniques, the risk manager usually depends on others to implement the techniques based on the risk manager's advice. C. Has complete authority to make decisions and implement the techniques. D. Is responsible for communicating guidelines but is otherwise not involved in implementing techniques.

Depends on others to implement the techniques based on the risk manager's advice.

The two objectives of insurance policy form regulation are to ensure that policies are clear and readable and to Select one: A. Ensure that the insurers rights are protected. B. Detect and address any policy provisions that are unfair.Correct. The two objectives of insurance policy form regulation are to ensure that policies are clear and readable and to detect and address any policy provisions that are unfair. C. Limit policies' length and complexity. D. Ensure policies are negotiable between an insurer and insured.

Detect and address any policy provisions that are unfair

If an insured's house burns to the ground due to faulty wiring, the most difficult part of the claim handling process will probably be Select one: A. Determining insurable interest. B. Determining the amount of damages.Correct. If an insured's house burns to the ground due to faulty wiring, the most difficult part of the claim handling process will probably be determining the amount of damages. C. Determining the cause of loss. D. Verifying coverage.

Determining the amount of damages.

The cause of loss that occurs more frequently than death, causing personnel losses, is Select one: A. War/terrorism. B. Disability.Correct. The cause of loss that occurs more frequently than death, causing personnel losses, is disability. C. Kidnap. D. Retirement.

Disability

Barton Industries keeps copies of key documents stored at a second location. The risk control technique Barton Industries is using is Select one: A. Separation. B. Loss prevention. C. Duplication.Correct. The risk control technique Barton Industries is using is duplication. D. Avoidance.

Duplication

Law Firm asked Insurance Company to provide both a commercial liability policy and a professional liability policy to meet its coverage needs. Insurance Company believes that there could be some types of losses that would be covered under both policies, a situation it wishes to avoid. What type of policy provisions could Insurance Company use to address this problem? Select one: A. Additions B. ExclusionsCorrect. Coverage exclusions can serve to reduce the likelihood of coverage duplications. C. Coverage sections D. Extensions

Exclusions

All of the following are examples of insurance distribution channels, EXCEPT: Select one: A. Group marketing B. Exclusive agency C. Call centersIncorrect. All listed are alternative insurance distribution channels, EXCEPT the exclusive agency. D. Direct response

Exclusive agency

An increase in earned premiums with no change in written premiums or any other financial figures will generally cause a decrease in all of the following, EXCEPT: Select one: A. Combined ratio B. Investment income ratio C. Dividend ratio D. Expense ratioCorrect. The expense ratio uses written premiums rather than earned premiums as the denominator; therefore, the expense ratio won't change. All the other ratios would decrease because they use earned premiums as all or part of the denominator.

Expense ratio

Which one of the following is the fundamental measure of loss exposure used in insurance rating? Select one: A. Rate B. Exposure unit C. Premium D. Risk

Exposure unit

Authority that the insurance company specifically grants to an agent is called Select one: A. Express authority.Correct. Authority that the insurance company specifically grants to an agent is called express authority. B. Binding authority. C. Apparent authority. D. Implied authority.

Express authority.

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.Correct. 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.

Federal and state government are involved in insurance to facilitate compulsory insurance purchases.

While developing goals for its book of business, an insurer's staff underwriter decides to increase its market share of workers compensation insurance in the construction industry. This type of underwriting activity is known as Select one: A. Formulating underwriting policy.Correct. This type of underwriting activity is formulating an underwriting policy. B. Developing underwriting guides. C. Providing assistance to policyholders. D. Reviewing and revising rating plans.

Formulating underwriting policy.

Damages for the loss of the ability to bear children are a form of Select one: A. Out-of-pocket damages. B. Punitive damages. C. General damages.Correct. Damages for the loss of the ability to bear children is a form of general damages. D. Special damages.

General damages

Damages for pain and suffering are a form of Select one: A. Out-of-pocket damages. B. General damages.Correct. General damages include pain and suffering. C. Punitive damages. D. Special damages.

General damages.

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. Costs of loss control B. General overhead expensesCorrect. General overhead expenses are not risk management costs that should be allocated. C. Losses retained D. Insurance premiums

General overhead expenses

Which one of the following statements is correct with regard to the submission evaluation step in the underwriting process? Select one: A. When an insurance application form is completed properly, an underwriter normally does not need any additional information. B. Underwriters generally rely more on loss runs and government records than producers, as sources of information.Incorrect. Government records that provide underwriting information include motor vehicle reports, criminal records, and civil court records. C. Government records that provide underwriting information include motor vehicle reports, criminal records, and civil court records. D. An applicant's financial status as indicated by a financial rating service is an incidental piece of underwriting information for evaluating potential loss exposures.

Government records that provide underwriting information include motor vehicle reports, criminal records, and civil court records.

Which one of the following lists the steps in the risk management process in the correct order? Select one: A. Implement techniques, monitor and revise the program, identify loss exposures, analyze loss exposures, examine techniques, and select techniques B. Select techniques, examine techniques, identify loss exposures, analyze loss exposures, implement techniques, monitor, and revise the program C. Identify loss exposures, analyze loss exposures, select techniques, examine techniques, implement techniques, monitor, and revise the program D. Identify loss exposures, analyze loss exposures, examine techniques, select techniques, implement techniques, monitor, and revise the programCorrect. Identify loss exposures, analyze loss exposures, examine techniques, select techniques, implement techniques, monitor, and revise the program is the correct order.

Identify loss exposures, analyze loss exposures, examine techniques, select techniques, implement techniques, monitor, and revise the program

A physical inspection is a method used to Select one: A. Analyze loss exposures. B. Examine the feasibility of techniques. C. Monitor results. D. Identify loss exposures.Correct. A physical inspection is a method used to identify loss exposures.

Identify loss exposures.

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. Surplus lines insurers are generally not exempt from insurance regulations pertaining to policy forms and rates. B. For workers compensation, Don knows most states will exempt this type of commercial coverage from regulation. C. There is a standard definition, across states, of the size of business to qualify for exemption from rate and form regulation. D. If Wayne's loss exposures can be covered by inland or ocean marine coverages, these may be exempt from regulation.Correct. If Wayne's loss exposures can be covered by inland or ocean marine coverages, these may be exempt from regulation.

If Wayne's loss exposures can be covered by inland or ocean marine coverages, these may be exempt from regulation

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. Claim handling by producers is immune to regulatory scrutiny. B. 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. D. It gives agents the option of providing coverage for smaller claims that staff adjusters might deny.

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 a loss is fortuitous, the chance of loss could increase as soon as a policy is issued. B. If the insured has control over whether or when a loss will occur, the risk is attractive to insure. C. Private insurance is suitable for risks where the probability and timing of loss is known. D. If losses are not fortuitous, premiums could increase for all policyholders.Correct. If losses are not fortuitous, premiums could increase for all policyholders.

If losses are not fortuitous, premiums could increase for all policyholders

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. Increase the deductible to $2,000 B. Implement loss prevention programsCorrect. The best management option for addressing the increased frequency of accidents is to implement a loss prevention program. C. Implement loss reduction programs D. Decrease the deductible to $500

Implement loss prevention programs

Most bad-faith claims arising out of contracts are insurance-related. All of the following explains why this is the case, EXCEPT: Select one: A. Insurers generally control claim investigation, evaluation, negotiation, and settlement. B. Insurers have an implied duty of good faith and fair dealing when settling claims.Incorrect. In comparison to other contracts, insurance contracts require a low standard of conduct. C. In comparison to other contracts, insurance contracts require a low standard of conduct. D. Insurance contracts involve the public interest and unequal bargaining power.

In comparison to other contracts, insurance contracts require a low standard of conduct.

Net income losses can be caused by which one of the following? Select one: A. Decreases in expenses B. Increases in revenue C. Increases in expensesCorrect. Net income losses can be caused by increases in expenses. D. Decreases in hazard risks

Increases in expenses

Which one of the following categories of loss expenses can an insurer use to compare its revenue and expenses? Select one: A. Loss reserves at beginning of period B. Incurred losses C. Change in loss reserves D. Loss reserves at end of periodIncorrect. Incurred losses, which are the sum of paid losses and the change in loss reserves over the period for which premium is earned, represent the most accurate loss expense figure to compare with premium revenue.

Incurred losses

The process of restoring an individual or organization to a pre-loss financial condition is the process of Select one: A. Premium rebating. B. Loss mitigation. C. Indemnification.Correct. The process of restoring an individual or organization to a pre-loss financial condition is the process of indemnification. D. Subrogation.

Indemnification

For the law of large numbers to function properly, exposure units must be Select one: A. Equal. B. Accurate. C. Random. D. Independent.Correct. For the law of large numbers to function properly, exposure units must be independent.

Independent

Gulford Insurance Company (Gulford) is a direct writer of commercial insurance in Pennsylvania. The management team is frustrated by the continued lack of success in the more rural western part of the state. It is difficult to penetrate the market without a local presence, but the cost of assigning agents to this territory is not justified by the returns. Which one of the following distribution systems would best allow Gulford the local presence in a cost-effective manner? Select one: A. Independent agents B. Exclusive agents C. Surplus lines brokers D. National brokers

Independent agents

Which one of the following lines of business is most likely to be rated using judgment rates? Select one: A. Inland marine insurance. B. Homeowners insurance. C. Personal auto insurance. D. Workers Compensation insurance.

Inland marine insurance

An insurance policy is considered a contract of adhesion when it is drafted by the Select one: A. Third party. B. Insured. C. Insurer.Correct. Insurance is considered a contract of adhesion when one party, the insured, must adhere to the contract as written by the other party (the insurer). The insurer determines the wording of the policy, and the insured has little choice but to take it or leave it. D. Insurance commissioner.

Insurer

Which one of the following is a key focus of states' insurance regulation? Select one: A. Product branding. B. Producer concentration. C. Insurer licensing.Correct. Insurer licensing is a key focus of states' insurance regulation. D. Premium taxation.

Insurer licensing.

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. Reduced cash flow drives up premium interest charges. C. If more causes of loss are covered, premiums will increase. D. Insurers can lower premiums for better-than-average risks.Correct. Underwriting standards refer to selectivity in choosing who to insure. Insurers can lower premiums for better-than-average risks.

Insurers can lower premiums for better-than-average risks.

As usually defined in liability insurance policies, personal injury includes Select one: A. Medical payments.Incorrect. Personal injury includes invasion of privacy. B. Invasion of privacy. C. Loss of earnings. D. Postjudgment interests.

Invasion of privacy.

Expenses associated with an insurer's underwriting activity include all of the following, EXCEPT: Select one: A. Premium taxes, licenses, and fees B. Investment expensesCorrect. Investment expenses are separate from the expenses associated with underwriting activities. C. Loss adjustment expenses D. Payment for losses

Investment expenses

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

Is an unincorporated association providing insurance coverage to its subscribers.

Mira raised chickens in a coop that she constructed in her backyard. Due to her careless smoking, the coop was destroyed by fire. She submitted a claim to her homeowners insurer, which assigned an adjuster. This is the adjuster's first claim involving a building detached from a dwelling. Assuming the adjuster has established Mira's insurable interest in the property, which one of the following should the adjuster be asking next? Select one: A. How many chickens died in the fire? B. Was the chicken coop constructed within the standards of the local building code? C. Is the damaged property covered by the policy? D. How old is the chicken coop?

Is the damaged property covered by the policy?

All of the following are true with regard to the unearned premium reserve, EXCEPT: Select one: A. It equals the admitted portion of unearned premium minus the nonadmitted portion of unearned premium. B. It represents the total premium refunds the insurer would owe its policyholders if it were to immediately cancel all policies. C. It is the total of an insurer's unearned premiums on all policies at a particular time.Incorrect. The unearned premium reserve represents prepaid premiums, premium refunds due if the insurer were to cease operations, and the total of an insurer's unearned premiums on all policies at a particular time. It does not equal the admitted minus the nonadmitted portion of unearned premiums. D. It represents premiums prepaid by insureds for services that the insurer has not yet rendered.

It equals the admitted portion of unearned premium minus the nonadmitted portion of unearned premium.

Which one of the following statements is correct with respect to the Causes of Loss-Special Form? Select one: A. It specifically excludes all loss or damage caused by or resulting from vehicles owned by the named insured or operated in the course of the named insured's business. B. It covers theft by looting at the time of a riot or civil commotion, but it does not cover theft under any other circumstances.Incorrect. The special form shifts the burden of proof as to whether a loss is covered from the insured to the insurer. C. It shifts the burden of proof as to whether a loss is covered from the insured to the insurer. D. It includes a much longer list of specified perils than either the basic or the broad form.

It shifts the burden of proof as to whether a loss is covered from the insured to the insurer.

Which one of the following can be covered by a floater? Select one: A. Swimming pools B. Jewelry C. CarportsIncorrect. Jewelry can be covered by a floater, which covers personal property that moves from place to place. D. Antenna towers

Jewelry

The laws of agency impose all of the following specific duties on all agents, EXCEPT: Select one: A. Knowledge B. Accounting C. Loyalty D. Relaying information

Knowledge

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 exposure survey B. Loss historiesCorrect. Studying loss histories would be the least applicable method of identifying loss exposures in this situation. C. Physical inspection D. Interviews with management

Loss histories

There have been several recent burglaries in Sally's neighborhood. Which one of the following best describes a risk management technique and a corresponding example of that technique that Sally should consider due to the recent increase in burglaries? Select one: A. Separation, such as installing a new alarm system B. Loss prevention, such as installing a safe in her home C. Loss prevention, such as keeping doors and windows lockedCorrect. Sally should consider a loss prevention technique such as keeping doors and windows locked. D. Loss reduction, such as keeping doors and windows locked

Loss prevention, such as keeping doors and windows locked

The use of a seatbelt while driving a car is an example of Select one: A. Avoidance. B. Separation. C. Loss reduction.Correct. This is an example of loss reduction. D. Loss prevention.

Loss reduction

The best description of a third-party claim is a claim Select one: A. Made against the policyholder by someone to whom the policyholder may be liable.Correct. A third-party claim is a claim made against the policyholder by someone to whom the policyholder may be liable. B. Made by the policyholder against the insurer. C. Made by the insurer against the policyholder. D. Made by the liable party against the policyholder.

Made against the policyholder by someone to whom the policyholder may be liable

The best description of a first-party claim is a claim Select one: A. Made by the policyholder against the insurer. B. Made by the insurer against the policyholder. C. Made by the liable party against the policyholder. D. Made by the policyholder against someone to whom the policyholder may be liable.

Made by the policyholder against the insurer

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 valueCorrect. The goal of ERM is to maximize the organization's value. C. Reduce risk management costs D. Coordinate loss reduction efforts

Maximize the organization's value

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

Medical and Disability Income

Risk manager Maria Sanchez is evaluating her employer's current fleet of vehicles to ensure they are roadworthy and determine if any replacements are needed. Maria's activities are part of which one of the following steps in the risk management process? Select one: A. Monitoring results and revising the risk management programCorrect. Maria's activities replacing vehicles is part of monitoring results and revising the risk management program. B. Analyzing loss exposures C. Identifying loss exposures D. Implementing the selected risk management techniques

Monitoring results and revising the risk management program

Property insurance policies Select one: A. Must specify which financial consequences of a property loss are covered and which are not. B. Cover normal expenses that continue after the property has been damaged or destroyed, such as mortgage and taxes. C. Typically only cover the reduction in the value of property that results directly from damage to that property.Incorrect. Property insurance policies must specify which financial consequences of a property loss are covered and which are not. D. Cover direct and indirect losses for commercial insureds, but cover only direct losses for homeowners.

Must specify which financial consequences of a property loss are covered and which are not.

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. Incorrect. Mutual insurance companies include some large national insurers and many regional insurers. C. Mutual insurance companies include some large national insurers. D. Mutual insurers are exclusively regional or local insurers.

Mutual insurance companies include some large national insurers.

Which one of the following types of insurers is the most likely to include its bylaws as part of its policies? Select one: A. Auto insurers B. No-fault insurers C. Mutual insurers D. Workers compensation insurersIncorrect. Policyholders of mutual insurers typically have rights and duties associated with managing the insurer's operations. Their policies specify these rights and duties by incorporating corporate documents.

Mutual insurers

When property is lost or damaged, the value of the property is decreased. In addition to direct damage to the property, there could be indirect losses to the business. This latter type of loss is known as Select one: A. Residual income losses. B. Deferred income. C. Net income losses.Correct. This latter type of loss is known as net income losses. D. Historical income.

Net income losses

Jay purchased a used car that is painted purple with orange swirls, and its bumpers are green with yellow stripes. In his application for auto insurance, he was embarrassed to disclose the true colors of his car, so he wrote that it was white. Jay was later in an accident with the car. May his insurance insurer disclaim coverage for his losses because of the deliberate falsehood on his application? Select one: A. Yes, because Jay is guilty of a misrepresentation. B. No, because the falsehood did not involve a material fact.Correct. The falsehood did not involve a material fact, that is, a fact that would affect the insurer's decision to provide insurance. To constitute concealment and misrepresentation, a statement or omission of information must relate to a material fact. C. Yes, because Jay is guilty of concealment. D. No, because there was no intent to deceive; Jay was just trying to avoid embarrassment.

No, because the falsehood did not involve a material fact

Insurance is not the only risk management transfer technique. When circumstances are appropriate, transfer can be accomplished through Select one: A. Retention. B. Noninsurance transfer techniques.Correct. A transfer technique that does not involve the use of insurance is a noninsurance transfer. C. Avoidance. D. Loss prevention.

Noninsurance transfer techniques

Loss histories can offer great insight into an organization's loss exposures. The problem with depending too heavily on this one source is that some past events might Select one: A. Not have been insured. B. Not have been recorded.Correct. The problem with depending too heavily on this one source is that some past events might not have been recorded. C. Have been insured. D. Still be unresolved.

Not have been recorded

An insurer's income statement shows its revenues, expenses, and net income Select one: A. Over a particular period of time.Correct. The income statement shows its revenues, expenses, and net income over a particular period of time, usually one year. B. Focusing primarily on revenues. C. Based upon assets minus expenses. D. At a particular point in time.

Over a particular period of time

What kind of liability exposure does a manufacturer face if it emits contaminants that cause environmental impairment? Select one: A. Business operations B. PollutionCorrect. This kind of liability exposure is pollution. C. Completed operations D. Premises

Pollution

Which one of the following statements is correct with respect to deductibles? Select one: A. Commercial property rates are developed with the assumption that the policy will be subject to a $5,000 deductible. B. Because deductible amounts are generally small, they have no significant impact on loss costs and, therefore, do not affect property rates. C. Reducing a deductible from $500 to $250 represents too small a reduction in loss payments to generate any reduction in premiums. D. Premiums are reduced in return for the insured's acceptance of a higher deductible.Correct. Premiums are reduced in return for the insured's acceptance of a higher deductible.

Premiums are reduced in return for the insured's acceptance of a higher deductible.

Analyzing the potential frequency and severity of a loss exposure enables the risk manager to Select one: A. Avoid loss exposures. B. Retain loss exposures. C. Transfer loss exposures.Incorrect. Analyzing the potential frequency and severity of a loss exposure enables the risk manager to prioritize loss exposures. D. Prioritize loss exposures.

Prioritize loss exposures.

One example of a person typically covered under a commercial general liability policy because of the person's business relationship with the insured is a Select one: A. Real estate manager for the named insured.Correct. One example of a person typically covered under a commercial general liability policy because of the person's business relationship with the insured is a real estate manager for the named insured. B. Landlord leasing property to the insured. C. Lessee occupying the insured's property. D. Contractor working on the insured's building.

Real estate manager for the named insured.

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. False advertising. B. Rebating.Correct. Rebating. C. Tie-in sales. D. Misrepresentation.

Rebating

Subrogation is the insurer's right to Select one: A. Drop a claim in exchange for an agreed amount of money. B. Estimate the value of the damaged property. C. Transfer coverage to a third party. D. Recover its claim payment from the responsible party.Correct. Subrogation is the insurer's right to recover its claim payment from the responsible party.

Recover its claim payment from the responsible party.

If an insured wants to receive "new for old" in the event of a property loss, he or she would purchase Select one: A. Actual cash value (ACV). B. Market value. C. Replacement cost.Correct. He or she would purchase replacement cost. D. Agreed value.

Replacement cost

Alpha's six-story building. Fearing a possible building collapse, fire officials required nearby businesses to close. Those businesses sued Alpha, seeking payment for lost income that resulted from the loss of use of their properties. How would Alpha's commercial general liability insurer respond to this claim? Select one: A. Respond to the claim, because Alpha's policy defines property damage to include loss of use of buildings that are not physically damaged. B. Deny the claim because the businesses' properties did not suffer physical damage. C. Deny the claim because the loss of income was caused by the fire department's action.Incorrect. Alpha's commercial general liability insurer would respond to the claim, because Alpha's policy defines property damage to include loss of use of buildings that are not physically damaged. D. Deny the claim because the businesses have no standing under Alpha's policy.

Respond to the claim, because Alpha's policy defines property damage to include loss of use of buildings that are not physically damaged.

A producer will generally review a company's loss run report while performing which one of the following functions? Select one: A. Customer service B. Sales C. Risk management reviewCorrect. A producer will generally review a company's loss run report while performing risk management review. D. Claims handling

Risk management review

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. Fiduciary rights. B. Catastrophe rights. C. Constructive rights. D. Salvage rights.Correct. Salvage rights allow the insurer to recover and sell or otherwise dispose of insured property on which the insurer has paid a total loss.

Salvage rights.

Financial management decisions are made during which one of the following steps in the risk management process? Select one: A. Examining the feasibility of risk management techniques B. Implementing the selected risk management techniques C. Selecting the appropriate risk management techniquesCorrect. Financial management decisions are made during step 4, selecting the appropriate risk management techniques. D. Analyzing loss exposures

Selecting the appropriate risk management techniques

An excess policy that contains all the agreements between the insured and insurer and that forms a complete insurance policy is a Select one: A. Combination policy.Incorrect. A self-contained excess policy is subject to only its own terms, meaning that a loss must be specifically covered by the policy to apply. B. Drop-down policy. C. Self-contained policy. D. Following-form policy.

Self-contained policy.

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. SeparationCorrect. This is an example of separation. C. Avoidance D. Duplication

Separation

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.Correct. Jan's approach in setting the case reserve would be to set it at $3,000, representing an estimate of what Jan expects to pay to settle the claim.

Set it at $3,000, representing an estimate of what Jan expects to pay to settle the claim.

The dollar amount of damage that results from a loss is the loss Select one: A. Severity.Correct. The dollar amount of damage that results from a loss is the loss severity. B. Prevention. C. Reduction. D. Frequency.

Severity

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

Society

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. Punitive damages. B. Measurable damages. C. Special damages. D. General damages.

Special damages

Damages awarded to pay surgeon's fees following an auto accident, are referred to as Select one: A. Surgical damages. B. Punitive damages. C. General damages. D. Special damages.Correct. In this case, damages paid to surgeons are special damages.

Special damages

In the claim evaluation process, specific, out-of-pocket expenses are called Select one: A. Compensatory damages. B. Negotiated damages. C. Special damages. D. General damages.

Special damages

Insurers are required to submit annual financial statements to Select one: A. The National Association of Insurance Commissioners (NAIC). B. The Insurance Regulatory Information System (IRIS). C. The state guaranty fund. D. State insurance departments.Correct. Insurers are required to submit annual financial statements to state insurance departments.

State insurance departments

Rating systems rely on Select one: A. Assigning all insureds to classes. B. Investment earnings supplementing premiums. C. Grouping insureds with similar loss characteristics. D. Statistical analysis of past losses.Correct. Rating systems rely on statistical analysis of past losses.

Statistical analysis of past losses

Which one of the following statements about insurance distribution systems and channels is true? Select one: A. Exclusive agents are usually free to represent as many or as few insurers as they want. B. Surplus lines brokers can place coverage that is not available through standard market insurers.Correct. Surplus lines brokers can place coverage that is not available through standard market insurers. C. Direct writer marketing systems use sales persons who are independent contractors. D. Managing general agents (MGAs) serve as employees of direct writer companies.

Surplus lines brokers can place coverage that is not available through standard market insurers.

Which one of the following statements is true regarding the agency contract? Select one: A. The agent is the principal in the agency contract relationship. B. Insurance agency contracts usually have a fixed expiration date, at which time the parties negotiate the renewal. C. The agency contract states the scope of the agency's authority to conduct business for the insurer.Correct. The agency contract states the scope of the agency's authority to conduct business for the insurer. D. An agency contract is also known as an agency endowment.

The agency contract states the scope of the agency's authority to conduct business for the insurer

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 expertise of current staff B. The ease of accessibility within the channelCorrect. When selecting an alternative distribution channel, insurers or producers should consider the ease of accessibility within the channel. C. The compatibility of the channel with established channels D. The target market

The ease of accessibility within the channel

Which one of the following statements is correct with respect to insurance distribution systems? Select one: A. The expertise of current staff and producers must be sufficient to manage the selected system.Correct. The expertise of current staff and producers must be sufficient to manage the selected system. B. Multiple distribution systems cannot be used simultaneously because they do not generally complement each other. C. All insurance distribution systems are equally effective in accomplishing both sales and service activities. D. Insurers specializing in large commercial accounts should select a direct response distribution system.

The expertise of current staff and producers must be sufficient to manage the selected system

Renata owns a valuable antique sculpture by a famous artist. One day she accidentally dropped the sculpture and a piece of it broke off. Renata took the sculpture to an art restorer, who reattached the broken piece and repaired the surface. From a distance, the statue looks the same as it did before Renata dropped it, but a close inspection reveals the repair. Which one of the following best describes the financial consequences of the accident? Select one: A. Renata has incurred a total loss because original artwork is impossible to replace. B. The financial consequences include the cost of the repair and the reduction in value resulting from the repaired damage.Correct. The financial consequences include the cost of the repair and the reduction in value resulting from the repaired damage. C. There are no financial consequences because the piece looks the same as it did before the accident. D. The only financial consequence of the accident is the money Renata paid the art restorer for the repair.

The financial consequences include the cost of the repair and the reduction in value resulting from the repaired damage.

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 monitors the results of the primary insurer's underwriting guidelines to ensure compliance. B. The reinsurer assumes a portion of the losses from all policies that have been specifically listed and insured under the treaty. 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.Correct. By assuming a portion of all of the primary insurer's insurance, treaty reinsurance helps an insurer meet its obligations.

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. The majority of customers prefer to speak with a producer or service representative rather than access their account information online. B. The primary consideration is what approach will allow the insurer to operate efficiently. C. The types of insurance products and services to be delivered by the insurer must fit the marketing channel selected.Correct. The types of insurance products and services to be delivered by the insurer must fit the marketing channel selected. D. Customers are prepared to spend a reasonable amount of time and effort interacting with a distribution channel if that channel saves them money.

The types of insurance products and services to be delivered by the insurer must fit the marketing channel selected

In liability claims, the claimant is referred to as the Select one: A. Primary party. B. First party. C. Second party. D. Third party.

Third party

People who handle claims fall into a number of categories. Those who handle claims, keep claim records, and perform statistical analysis on behalf of self-insureds are called Select one: A. Claim managers. B. Third-party administrators.Correct. Those who handle claims, keep claim records, and perform statistical analysis on behalf of self-insureds are called third-party administrators. C. Independent adjusters. D. Staff claim representatives.

Third-party administrators

Risk management concepts in one form or another apply Select one: A. Only to international companies. B. To all companies and families. C. Only to large companies. D. To all companies but not families.

To all companies and families.

In managing loss exposures using the risk management process, the key to identifying loss exposures is Select one: A. An organizational process flowchart. B. A financial analysis of customers and suppliers. C. Understanding how the household or organization operates. D. Understanding the loss frequency and loss severity.

Understanding how the household or organization operates.

While basic form policies cover certain perils, other property insurance policies cover additional causes of loss that are commonly referred to as broad form coverage or broad form perils. Which one of the following is one of these additional broad form perils? Select one: A. Sinkhole collapse B. Sprinkler leakageIncorrect. Weight of ice, snow, or sleet is one of the additional broad form perils. C. Weight of ice, snow, or sleet D. Volcanic eruption

Weight of ice, snow, or sleet

Other than some type of merger, layoff, or organizational change, which one of the following is an example of a situation where an entire group of employees might leave an organization? Select one: A. When employees follow a manager to a new organizationCorrect. An example of a situation where an entire group of employees might leave an organization, other than some type of merger, layoff, or organizational change, is when employees follow a manager to a new organization. B. When an organization offers excessive compensation C. When statutes make it more attractive to pursue other career opportunities D. When the economy is in a long term period of inflation

When employees follow a manager to a new organization

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

Workers compensation policy

ABC Company manufactures hot beverage containers and distributes them to various retail outlets. A customer who purchased one of these containers at a retail store is burned by hot coffee after the lid on a container falls off. Which one of the following principles of law would be the basis for a suit brought by the injured party? Select one: A. Express warranty B. Implied warrantyCorrect. Implied warranty is an obligation that the courts impose on a seller to warrant certain facts about a product even though not expressly stated by the seller. C. Assumption of risk D. Misrepresentation

implied warranty