CHAPTER 1: practice exam questions

Events in which a person has both the chance of winning or losing are classified as A. retained risk B. speculative risk C. insurable D. pure risk

Speculative risk

which of the following produces evaluations of insurers financial status often used by state departments of insurance A. AM best B. NAIC C. consumers guide D. SEC

AM best

what are the 4 required elements of an insurance contract

Agreement, consideration, competent parties and legal purpose

The proposed insured makes the premium payment on a new insurance policy. if the insured should die, the insurer will pay the death benefit to the beneficiary if the policy is approved. This is an example of what kind of contract? A. Conditional B. adhesion C. personal D.unilateral

Conditional

an insurance contract requires that both the insured and insurer meet certain conditions in order for the contract to be enforceable. What contract characteristic does this describe? A. contingent B. aleatory C. unilateral D. Conditional

Conditional

An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated? A. adhesion B.consideration C. good faith D. representation

Consideration

which of the following is a unit measurement and underwriter uses when determining the premium rates for insurance? A. Exposure B. loss C. hazard D. risk

Exposure

The authority granted to an agent through the agents contract is referred to as A. express authority B. apparent authority C. implied authority D. absolute authority

Express authority

Which of the following entities is not an insurer but an organization formed to provide insurance benefits for members of an affiliated lodge or religious organization? A. fraternal benefit society B. mutual company C. stock company D. reciprocal association

Fraternal benefit society

When would a misrepresentation on the insurance application be considered fraud? A. Never: statements by the applicant are only representations B. when the application is incomplete C. any misrepresentation is considered fraud D. it is intentional and material

If it is intentional and material

Which of the following organizations has the primary responsibility forms for the standard market? A. governors office B. insurance services office C. office of financial services D. national association of insurance commissioners

Insurance services office

which statement regarding insurable risks is NOT correct? A. the insurable risk needs to be statistically predictable B. an insurable risk must involve a loss that is definite as to cause, time, place, and amount C. insureds cannot be randomly selected D. insurance cannot be mandatory

Insureds cannot be randomly selected

Which of the following is true regarding a risk retention group? A. it is a company owned by the stockholders that provides nonparticipating policies B. it is a liability insurance company owned by its members C. it provides support for underwriters and is not an insurance company D. it is a benefit society formed to provide insurance for members of an affiliated lodge.

It is a liability insurance company owned by its members

what type of risk is insurable?

Only pure risk that results in a loss or no change

A participating insurance policy may do which of the following? A. provide group coverage B. pay dividends to the stockholder C. require 80% participation D. pay dividends to the policyowner

Pay dividends to the policyholder

who is a mutual insurer owned by

Policyholders

Pertaining to insurance, which of the following is an example of a producers fiduciary responsibility A. promptly forwarding premiums to the insurance company B. helping insureds to file claims c. performing reviews of insureds coverage D. offering additional coverage to insureds

Promptly forwarding premiums to the insurance company

A situation in which a person can only lose or have no change represents A. speculative risk B. adverse selection C. hazard D. pure risk

Pure risk

Which of the following insurance options would be considered a risk-sharing arrangement A. stock B. mutual C. surplus lines D. reciprocal

Reciprocal

what method do insurers use to protect themselves against catastrophic losses?

Reinsurance

The formation and recommendation of model insurance legislation and regulations designed to bring uniformity from state to state is one of the purposes A. The association for insurance regulation B. the NAIC C. The guaranty association D. the insurance legislation commission

The NAIC

In terms of parties to a contract, which of the following does NOT describe a competent party? A. the person must have at least completed secondary education B. the person must not be under the influence of drugs or alcohol C. the person must be of legal age D. the person must be mentally competent to understand the contract

The person must have at least completed secondary education

Which of the following is NOT a goal of risk retention? A. to reduce expenses and improve cash flow B. to increase control of claim reserving and claims settlements C. to fund losses that cannot be insured D. to minimize the insureds level of liability in the event of loss

To minimize the insureds level of liability in the event of loss

The insurer must be able to rely on the statements in the application, and the insured must be able to rely on the insurer to pay valid claims. In the forming of an insurance contract, this is referred to as A. utmost good faith B. reasonable expectations C. a warranty D. implied warranty

Utmost good faith

An insurance company receives an application with some information missing and issues the policy anyway. What is this called? A. Aleatory B. Waiver C. Estoppel D. Subrogation

Waiver

Events or conditions that increase the chances of insured loss occurring are referred to as

hazards

The formation and recommendation of model insurance legislation and regulations designed to bring uniformity from state to state is one of the purposes of A. the guaranty association B. the insurance legislation commission C. the association for insurance regulation D. the NAIC

the NAIC

which of the following is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract?

warranty

Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. What contract characteristic does this describe? A. unilateral B. conditional c. personal D. adhesion

Adhesion

An insured pays $100 premium every month for his insurance coverage, yet the insurer promises to pay $10,000 for a covered loss. What characteristic of an insurance contract does this describe? A. good health B. adhesion C. conditional D. aleatory

Aleatory

When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as which of the following? A. contract of adhesion B. acceptance C. consideration D. legal purpose

Consideration

What are the 3 types of producer authority?

Express, implied, apparent

The insurer may suspect that a moral hazard exists if the policyholder A. always drives over the speed limit B. is not honest about his health on an application for insurance C. is prone to depression D. is indifferent to activities that may be dangerous

Is not honest about his health on an application for insurance

In case of a loss, the indemnity provision in insurance policies A. allows the insured to collect 20% more than the actual loss B. pays the insured a percentage of the loss above and beyond the loss C. pays the insured as much as 95% of the loss D. restores an insured person to the same financial state as before the loss

Restores an insured person to the same financial state as before the loss

payment for medical expenses, loss of wages, funeral expenses, or the cost to repair to replace damaged property are known as what type of compensatory damages A. normal B. general C. special D. tort

Special

what are the two types of compensatory damages? A. normal and punitive B. special and general C. pure and speculative D. tort and general

Special and general

What is reinsurance? A. an agreement between a ceding insurer an assuming insurer B. an agreement between an originating insurer and a ceding insurer C. an agreement between a domestic insurer and a foreign insurer D. an agreement between an insurer and an insured

an agreement between a ceding insurer an assuming insurer

The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called A. sharing B. avoidance C. transfer D. reduction

avoidance

an insurance producer who by contract is bound to write insurance for only one company is classified as a/an A. independent producer B. captive agent C. soliciter D. broker

captive agent

which of the following is considered to be a morale hazard? A. working as a firefighter B. engaging in illegal activities C. driving recklessly D. smoking

driving recklessly

which of the following are the authorities an agent can hold? A. apparent and allowed B. authorized and admitted c. primary and secondary D. express and implied

express and implied

Which law is the foundation for the statistical prediction of loss upon which rates for insurance are calculated? A. law of group evaluation B. law of large numbers C. law of masses D. law of averages

law of large numbers

The causes of loss insured against in an insurance policy are known as A. perils B. losses C. risks D. hazards

perils

Who might receive dividends from a mutual insurer? A. subscribers B. stockholders C. agents D. policyholders

policyholders

Planned assumption of risk, or acceptance of responsibility for the loss by an insured through the use of deductibles, copayaments, or self insurance

premiums

All of the following are marketing arrangements used by insurers EXCEPT A. direct response marketing system B. independent agency system C. reinsurance system D. general agency system

resinsurance system

hazard is best defined as A. the uncertainty of loss B. neglect to communicate a material fact C. a deliberate attempt to decieve D.. something that increases the risk of loss

something that increases the risk of loss

which of the following are the authorities that an agent can hold? A. primary and secondary B. express and implied C. apparent and allowed D. authorized and admitted

express and implied