Chapter 1: Basic Principles

Karen is a producer who has obtained personal information about a client without having a legitimate reason to do so. Under the McCarran-Ferguson Act, what is the minimum penalty for this? A) $0 B) $5,000 C) $10,000 D) $15,000

C) $10,000

Ken is a producer who has obtained Consumer Information Reports under false pretenses. Under the Fair Credit Reporting Act, what is the maximum penalty that may be imposed on Ken? A) $1,000 B) $3,000 C) $5,000 D) $7,000

C) $5,000

Which of the following is an insurer established by a parent company for the purpose of insuring the parent company's loss exposures? A) Participating insurer B) Fraternal insurer C) Captive insurer D) Mutual insurer

C) Captive insurer

An insurer enters into a contract with a third party to insure itself against losses from insurance policies it issues. What is this agreement called? A) Reinsurance B) Reserves C) Mutual D) Multi-line

A) Reinsurance

The Fair Credit and Reporting Act's main purpose is to A) assist in the underwriting of insurance policies B) protect insurers from an applicant's misrepresentation C) protect consumers with guidelines regarding credit reporting and distribution D) assist an insurer in determining an applicant's creditworthiness

C) protect consumers with guidelines regarding credit reporting and distribution

A plan in which an employer pays insurance benefits from a fund derived from the employer's current revenues is called A) A self-derived plan B) A multiple-employer plan C) A blanket plan D) A self-funded plan

D) A self-funded plan

Why are dividends from a mutual insurer not subject to taxation? A) Because insurance premiums are tax-deductible B) Because dividends are already subject to capital gains C) Because dividends are payable directly to the policyholder D) Because dividends are considered to be a return of premium

D) Because dividends are considered to be a return of premium

Which of the following is NOT considered advertising? A) A rating from a rating service company, such as A.M. Best B) An illustration C) A sales presentation D) Direct mailing from an agency

A) A rating from a rating service company, such as A.M. Best

Which of the following is NOT a characteristic of reinsurance? A) Increases the unearned premium reserve B) Protects against a very large claim C) Enables insurer to meet certain objectives D) A specialized branch of the insurance industry

A) Increases the unearned premium reserve

Which of the following is a contract that involves one party which indemnifies another when a loss arises from an unknown event? A) Insurance policy B) Indemnification agreement C) Loss contract D) Warranty arrangement

A) Insurance policy

Which of the following is NOT a benefit of insurance? A) Losses due to fraud are eliminated B) Reduces the uncertainty of loss exposures C) Makes a loss whole again D) Source of investment funds

A) Losses due to fraud are eliminated

What is considered to be the primary reason for buying life insurance? A) Provide death benefits B) Provide money for retirement C) Provide living benefits D) Provide money for college

A) Provide death benefits

When a mutual insurer becomes a stock company, the process is called A) Mutualization B) Demutualization C) Reinsurance D) Reorganization

B) Demutualization

One important function of an insurance company is to identify and sell to potential customers. Which of these BEST describes this function? A) Underwriting B) Marketing C) Reinsurance D) Regulation

B) Marketing

A participating company is also referred to as which type of insurer? A) Re-insurer B) Mutual insurer C) Domestic insurer D) Reciprocal insurer

B) Mutual insurer

John owns an insurance policy that gives him the right to share in the insurer's surplus. What kind of policy is this? A) Nonparticipating B) Participating C) Contributory D) Surplus

B) Participating

Which of the following is a type of insurance where an insurer transfers loss exposures from policies written for its insureds? A) Treaty insurance B) Reinsurance C) Mutual insurance D) Captive insurance

B) Reinsurance

An insurer's ability to make unpredictable payouts to policyowners is called A) investment values B) liquidity C) assets D) capital

B) liquidity

A type of insurer that is owned by its policyowners is called A) domestic B) mutual C) stock D) in-house

B) mutual

What kind of life insurance policy issued by a mutual insurer provides a return of divisible surplus? A) nonparticipating life insurance policy B) participating life insurance policy C) divisible surplus life insurance policy D) straight life insurance policy

B) participating life insurance policy

A life insurance company has transferred some of its risk to another insurer. The insurer assuming the risk is called the A) mutual insurer B) reinsurer C) reciprocal insurer D) participating insurer

B) reinsurer

What is a participating life insurance policy? A) Agreement that allows two or more beneficiaries to share in the death benefit B) Contract that gives beneficiaries the right to participate in any dividends C) Contract that allows the policyowner to receive a share of surplus in the form of policy dividends D) Agreement that insures two or more lives

C) Contract that allows the policyowner to receive a share of surplus in the form of policy dividends

What is the primary purpose of a rating service company such as A.M Best? A) Determine which insurer offers the best rates B) Determine which insurer offers the best policies C) Determine financial strength of an insurance company D) Determine which agent to use locally

C) Determine financial strength of an insurance company

Fraternal Benefit Society has each of the following characteristics EXCEPT A) Incorporated B) Without capital stock C) Exist for profit D) Exist for the benefit of its member

C) Exist for profit

Which of the following statements regarding a life insurance policy dividend is TRUE? A) It represents a refund of overcharged premium in a non-participating whole life policy B) It represents the build-up of cash value in a permanent insurance policy C) It is the distribution of excess of funds accumulated by the insurer on participating policies D) It is a stockholders return on his investment to the company

C) It is the distribution of excess of funds accumulated by the insurer on participating policies

AAA Insurance Company has transferred a portion of its loss exposure to BBB Insurance Company. In this reinsurance transaction, what is AAA Insurance Company called? A) Captive insurer B) Tertiary insurer C) Primary insurer D) Secondary insurer

C) Primary insurer

The Do Not Call Registry offers exemptions for calls placed from all of the following EXCEPT A) charities B) political organizations C) insurance sales calls D) surveys

C) insurance sales calls

An insurer owned by its policyholders is called a A) stock insurer B) reinsurer C) mutual insurer D) multi-line insurer

C) mutual insurer

A nonparticipating policy will A) provide a return of premium B) provide tax advantages C) not pay dividends D) give policyowners special privileges

C) not pay dividends

An insurer's claim settlement practices are regulated by the A) Securities and Exchange Commission (SEC) B) National Association of Claims Adjusters (NACA) C) National Association of Insurance Commissioners (NAIC) D) State insurance departments

D) State insurance departments

A nonparticipating company is sometimes called a(n) A) alien insurer B) mutual insurer C) reinsurer D) stock insurer

D) stock insurer