Chapter 5 - Types of Insurers and Marketing Systems

A property and casualty insurer in which the salesperson is an employee of the insurer, not an independent contractor, is called a

Direct writer

Temporary evidence of insurance until a policy is actually issued is provided by a(n)

Binder

Which of the following statements about Blue Cross and Blue Shield plans is (are) true? I. ​Blue Cross and Blue Shield plans can be organized on a nonprofit basis or on a for-profit basis. II. ​Blue Cross provides coverage for hospital services; Blue Shield provides coverage for physicians' and surgeons' fees.

Both I and II

Which of the following statements about personal producing general agents is (are) true? I. ​They often have the option of recruiting and training sub-agents. II. ​They are independent agents who produce substantial amounts of life insurance with one insurer.

Both I and II

R.I.P. Company manufactures herbicide and pesticide. The company had difficulty finding affordable liability insurance. R.I.P. established its own insurance company based in Bermuda for the purpose of insuring R.I.P.'s loss exposures. The company that R.I.P. formed is called a

Captive insurer

In 2008, Liberty Mutual Insurance Company acquired Safeco Insurance Company. This acquisition demonstrates which financial services industry trend?

Consolidation

A personal lines insurance company initiating banking and investment services for its policyowners demonstrates which financial services industry trend?

Convergence

Which of the following statements about Lloyd's of London is true?

Coverage is actually written by syndicates who belong to Lloyd's of London

Big Mutual Insurance Company would like to take advantage of financial services deregulation by acquiring a bank and a stock brokerage firm. Big Mutual, however, would have trouble raising the funds needed to make these acquisitions under the mutual form of organization. Big Mutual is planning to switch from the mutual form of organization to the stock form, and to issue shares of common stock to raise capital. This change in organizational structure is called

Demutualization

ABC Term Life Insurance Company uses an interesting marketing system—it has no agents. Instead, the company markets its coverages through television and radio ads, newspaper inserts, and the Internet. The type of marketing system that ABC Term Life Insurance Company uses is called the

Direct response system

RST Insurance is an interesting company. It doesn't have any agents. Instead, the company sells insurance through radio ads, telemarketers, and newspaper and magazine inserts. This distribution method is called

Direct response system

Marcy advises her clients on investments, taxes, wealth management, estate issues, budgeting, and insurance. Marcy is also a licensed life insurance agent. When Marcy sells life insurance to a client, the distribution channel used is a(n)

Financial planner

The leaders of a religious group decided to start a life insurance organization to insure members of the religious group. The insurer will operate as a nonprofit organization, thus receiving favorable tax treatment. The insurer formed will be a

Fraternal insurer

Advantages of the direct response system for marketing life insurance include which of the following? I. ​Advertising can be specifically directed to selected markets. II. ​Complex products can be easily sold.

I only

Which of the following statements about brokers is (are) true? I. ​They legally represent the insured rather than the insurance company. II. ​They are prohibited from being licensed as agents.

I only

Which of the following statements is (are) true regarding insurance agents and insurance brokers? I. ​A property and liability insurance agent has the authority to bind the insurer for certain types of coverage. II. ​A licensed broker who is not a licensed agent has the legal authority to bind an insurer.

I only

Which of the following statements about a reciprocal exchange is (are) true? I. ​It usually specializes in health insurance. II. ​It is an unincorporated mutual insurance company.

II only

Which of the following statements is (are) true about savings bank life insurance (SBLI)? I. ​Each depositor at the savings bank receives life insurance equal to his or her savings account balance. II. ​The goal of SBLI is to provide low-cost life insurance to consumers.

II only

Which of the following statements is (are) true with respect to the financial services industry? I. ​The number of life insurers operating in the industry continues to increase at a rapid rate. II. ​The Financial Modernization Act of 1999 permits financial institutions to compete in other financial markets outside their core business area.

II only

Sarah owns a property and liability insurance agency. She is authorized to represent several insurance companies and she is compensated by commissions. Sarah's agency owns the expiration rights to the business she sells. Sarah is a(n)

Independent agent

Scott works in property and liability insurance marketing. He legally represents insurance purchasers, rather than insurance companies. Scott is paid a commission on the insurance placed with insurers. Scott is a(n)

Insurance broker

Cathy just started a job with XYZ Manufacturing Company. She attended an orientation and was given a packet providing information about the various employee benefits XYZ offers. One item in the packet was a booklet and application form from an auto insurer. The insurer offers lower premiums to XYZ employees. The insurer's plan for selling individually-underwritten auto insurance to employees of XYZ Manufacturing Company is called

Mass merchandising

ABC Insurance has always used the exclusive agency system to market coverages. ABC, however, cannot afford full-time agents in sparsely-populated areas. To reach customers in these areas, ABC enters into agreements with local independent agents. Using more than one marketing system is called employing a

Multiple distribution system

Which of the following statements about the sale of property and liability insurance through the direct response system is (are) true? I. ​Selling expenses are higher because market segmentation tends to be less precise than with other marketing methods. II. ​It is the most appropriate system for selling complex products.

Neither I nor II

Which of the following statements about the exclusive agency system for marketing property and liability insurance is true?

New exclusive agents may start as employees and after a training period become independent contractors.

Which of the following statements about life insurance marketing systems is true?

Some exclusive agents who market property and liability insurance also sell life insurance

Brian buys and sells investment securities for his clients. Brian also decided to become a licensed life insurance agent to better serve his customers. While Brian's primary focus is buying and selling financial securities for his clients in exchange for commissions, he also earns commissions on his life insurance sales. Brian is a(n)

Stock broker

All of the following are reasons why mutual insurance companies convert to stock insurance companies EXCEPT

Stock companies are exempt from state insurance regulation.

Some investors decided to start an insurance company. Each investor contributed $50,000 to raise the capital required to charter a new company. Each investor received an ownership interest in the company. The company will raise additional capital by selling ownership rights to other investors. Under this type of organization, the customer and owner functions are separate. This type of insurer is called a

Stock company

Which of the following statements about stock insurers is true?

Stockholders bear any losses and share any profits

The bar at the local franchise of a national chain continued to serve a drunk customer. The customer left the bar and tried to drive home. The drunk driver hit and killed three people who were riding bicycles. The legal representatives of those who were killed filed a multi-million dollar lawsuit against the national chain. As jury awards in the city where the incident occurred tend to be high, insurers marketing liquor liability insurance refused to issue new coverage until the case was resolved. Because no admitted insurers were willing to offer the coverage, liquor liability in this case is considered a(n)

Surplus line

Jim would like to start a business raising thoroughbred racehorses. The business would be the first of its kind in the state where he lives. Obtaining insurance on the horses is a key concern, and he was dismayed to learn that none of the insurers authorized to operate in his state offer this specialty insurance. What is the name of the intermediary which Jim can use to place this coverage with an insurer not admitted to his state?

Surplus lines broker

Neil needs insurance that is unavailable in the state where he lives. To obtain insurance from a nonadmitted insurer, Neil should contact a

Surplus lines broker

All of the following statements about the independent agency system are true EXCEPT

The insurer rather than the agent owns the renewal rights to the business

Why are some mutual insurers referred to as "assessment mutuals"?

They can assess policyholders if premiums are insufficient to pay losses and expenses

Which of the following statements about mutual insurers is true?

They may pay dividends to their policyholders

Which of the following statements is true about fraternal insurers?

They specialize in writing life and health insurance

Under one life insurance marketing system, individual producers conduct sales interviews at the workplace with the approval of the management of the business. There are few direct costs to the employer, and this marketing system is especially appropriate for the low-income and middle-income workers. This life insurance marketing system is called the

Worksite marketing

The financial services field is currently experiencing consolidation and convergence. If both of these trends continue, in the future we should observe

fewer financial institutions offering a wider range of financial services products

Big Life Insurance Company purchased Regional Bank. Regional Bank has 27 branches in four states. Big Life Insurance Company required one employee at each bank branch to become a licensed life insurance agent and to sell Big Life Insurance Company annuities and life insurance products. This distribution channel is an example of the

financial institution distribution system.

Which of the following is characteristic of a typical mass merchandising plan?

payment of premiums through payroll deduction

Peggy is an independent insurance agent who places substantial amounts of business with XYZ Insurance Company. XYZ pays Peggy a bonus when she meets a sales goal. XYZ also allows Peggy to recruit and train sub-agents. She receives additional commissions based on the sales generated by the sub-agents. Based on this description, we can conclude that Peggy is a

personal producing general agent

David is a successful independent insurance agent. Recently, one of the life insurance companies with whom he places business offered him a special financial arrangement. If David meets sales targets, he will receive large bonuses. He will also be able to recruit and train sub- agents and receive an over-riding commission based on the amount of life insurance the sub- agents sell. Based on this description, David is a(n)

personal-producing general agent.

The corporate structure of mutual insurers is changing rapidly. All of the following are current trends EXCEPT

sharp increase in the number of mutual insurance companies