Final Review Questions

Which one of the following describes a benefit to businesses of making insurance part of an overall risk management program instead of relying solely on insurance? A. Improved access to affordable insurance B. Stimulating economic growth C. Reducing the number of persons dependent on society for support D. Increased use of exposure avoidance

A. A benefit to businesses of making insurance part of an overall risk management program instead of relying solely on insurance is improved access to affordable insurance.

Actual cash value (ACV) is A. Replacement cost minus depreciation. B. Agreed value minus depreciation. C. Replacement cost plus depreciation. D. Replacement cost minus agreed value.

A. ACV is replacement cost minus depreciation.

A broad statement of an insurer's promises to the insured may be found in a policy's A. Declarations. B. Insuring agreements. C. Conditions. D. Endorsements.

B. A broad statement of an insurer's promises to the insured may be found in a policy's insuring agreements.

A loss exposure is A. The same thing as a peril. B. Any condition that presents the possibility of a loss. C. The same thing as a hazard. D. Any condition that precludes the chance of loss.

B. A loss exposure is any condition or situation that presents the possibility of a loss.

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

B. Authority that the insurance company specifically grants to an agent is called express authority.

In insurance terminology, equipment such as tractors, bulldozers, road graders, front-end loaders, and forklifts designed primarily for off-road use are considered to be A. Autos. B. Mobile equipment. C. Heavy vehicles. D. Recreational vehicles.

B. In insurance terminology, these are considered mobile equipment.

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 A. Fiduciary rights. B. Salvage rights. C. Constructive rights. D. Catastrophe rights.

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

A financial analyst determines that the combined ratio for the DEF Insurance Company was 112 percent for the prior year. Which one of the following statements best describes how the analyst can interpret this information for the year? A. The insurer's net profit had to be negative. B. The insurer had a loss ratio that was over 100 percent. C. The insurer had an underwriting loss. D. The insurer's expense ratio exceeded its loss ratio.

C. A combined ratio over 100 percent indicates that the insurer had an underwriting loss.

Compared to its net underwriting gain or loss, an insurer's overall gain or loss from operations gives a A. Distorted picture of an insurer's profitability. B. Less complete picture of an insurer's profitability. C. More complete picture of an insurer's profitability. D. More conservative picture of an insurer's profitability.

C. An insurer's overall gain or loss from operations provides a more complete picture because it includes net investment gains (or losses), which help offset any underwriting losses.

All of the following are true with regard to policyholders' surplus, EXCEPT: A. It measures the difference between what an insurer owns and what it owes. B. It provides a financial cushion for the insurer if losses turn out to be higher than expected. C. It equals nonadmitted assets. D. It provides resources for expansion.

C. 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.

People who handle claims may be staff claim representatives, independent adjusters, employees of third-party administrators, or A. Private claims representatives. B. Self-insurer claim representatives. C. Producers who sell policies to insureds. D. Special claims representatives.

C. Producers who sell policies to insureds sometimes have authority to handle small claims.

All of the following are true about the insurance agency relationship, EXCEPT: A. The agency agreement is a written agreement between the insurer and an agent. B. The agency agreement gives the agent the right to represent the insurer and sell insurance on the insurer's behalf. C. The principal is the party the agent authorizes to bind coverage. D. The agent is the party authorized by the principal to act on the principal's behalf.

C. The principal is the party the agent authorizes to bind coverage.

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

C. The process of restoring an individual or organization to a pre-loss financial condition is the process of indemnification.

When a wrongdoer commits an illegal act, the wrongdoer is subject to both civil law and criminal law in A. All cases. B. Most cases. C. Some cases. D. No cases.

C. The wrongdoer is subject to both civil law and criminal law in some cases.

All of the following are shown on an insurer's income statement, EXCEPT A. Net underwriting gain (loss) B. Net investment income C. Unearned premium reserve D. Net income

C.The unearned premium reserve is shown on an insurer's balance sheet. Net underwriting gain (loss), net investment income, and net income are shown on an insurer's income statement

A reservation of rights letter A. Lists all of the rights that an insurer has under an insurance policy. B. Advises the insurer that the insured has made a claim, but retains the right to withdraw the claim later. C. Lists all of the rights that an insured has under an insurance policy. D. Advises the insured that the insurer is investigating the claim but retains the right to deny coverage later.

D. A reservation of rights letter advises the insured that the insurer is investigating the claim, but retains the right to deny coverage later.

Agencies, such as the Federal Trade Commission, state public utility commissions, and local zoning boards, derive their authority from A. Criminal law. B. Constitutional law. C. Common law. D. Statutory law.

D. Agencies, such as the Federal Trade Commission, state public utility commissions, and local zoning boards, derive their authority from statutory law.

Damages for disfigurement are a form of A. Out-of-pocket damages. B. Punitive damages. C. Special damages. D. General damages.

D. Damages for disfigurement are a form of general damages.

Given the complexity of commercial insurance, which one of the following is best suited for its distribution? A. Internet B. Direct response C. Group marketing D. Independent agencies

D. Independent Agencies

If you were a property owner and wanted the broadest coverage available to protect your building, you would purchase A. Basic form coverage. B. Broader form coverage. C. Broad form coverage. D. Special form coverage.

D. You would purchase special form coverage for the broadest coverage.

Expense Ratio

Hometown Insurer's expense ratio is its incurred underwriting expenses ($2,000,000) divided by its written premiums ($5,000,000), or 40 percent.

Juanita is the senior claim officer for Worthy Insurance Company, which uses the claim audit as a performance measure for its claim operations. Claim audits usually evaluate both quantitative and qualitative factors. Which one of the following factors is qualitative for Juanita and her staff? . A. Percentage of recovery from subrogation B. Accurate evaluation of insured's liability C. Average claim settlement value by claim type D. Accuracy and completeness of data entry

B. Accurate evaluation of insured's liability is a qualitative audit factor.

All of the following are correct with respect to fair evaluation of a claim, EXCEPT: A. A fair approach to evaluating liability claims is to evaluate them as if no coverage limit existed. B. Claim representatives are prohibited from discussing the evaluation of a claim with anyone not directly connected with that claim. C. Legislation often specifies a time limit within which evaluations of coverage and damages must be completed. D. Information about settlements or trial results from similar cases can help claim representatives knowledgably evaluate a claim.

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

Which one of the following statements about good faith negotiations is correct? A. Settlement negotiations should begin before the claim is evaluated. B. Claim representatives can use arbitration clauses to resolve disputes over the settlement amount. C. Claim representatives are expected to make unrealistic offers when confronted with outrageous demands. D. Claim representatives should always wait for a demand before presenting an offer to settle.

B. Claim representatives can use arbitration clauses to resolve disputes over the settlement amount.

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? A. Coverage sections B. Exclusions C. Additions D. Extensions

B. Coverage exclusions can serve to reduce the likelihood of coverage duplications.

Juan received a phone call from an angry policyholder. The insured received a bill as a result of a workers compensation premium audit. The individual does not understand why premium has increased when his total payroll is lower than originally projected. Juan advises the insured that he will contact the auditor, review the audit, and call back with an explanation. Which one of the following producer functions is Juan performing? A. Consulting B. Customer service C. Premium collection D. Risk management review

B. Customer service

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%

B. Hometown Insurer's expense ratio is its incurred underwriting expenses ($2,000,000) divided by its written premiums ($5,000,000), or 40 percent.

Which one of the following is true regarding the administration of the Insurance Regulatory Information System (IRIS)? A. If the insurer has financial ratios that are inside predetermined norms, IRIS identifies the company for regulatory attention. B. If regulators determine that an insurer is insolvent, the state insurance department places it in receivership. C. If an insurer cannot be rehabilitated, the state's guaranty fund may be available to increase the effects of the insurer insolvency. D. Under a special provision in state licensing laws, state regulators are empowered to completely take over an insurer at any time.

B. If regulators determine that an insurer is insolvent, the state insurance department places it in receivership. If an insurer cannot be rehabilitated, the state's guaranty fund may be available to reduce the effects of the insurer insolvency.

Which one of the following is a federal insurance plan in which the government acts as a partner with a private insurer that sells insurance and pays the claims, and then reimburses the insurer for the portion of losses that exceeds premiums and investment income? A.Beach and Windstorm Plan B.National Flood Insurance Program (NFIP) C.Terrorism Risk Insurance Program (TRIP) D. Residual Auto Plan

B. In the National Flood Insurance Program (NFIP), the government acts as a partner with a private insurer that sells insurance and pays the claims, and then reimburses the insurer for the portion of losses that exceeds premiums and investment income.

If an insurer's admitted assets stayed the same but its liabilities decreased significantly, its policyholders' surplus would A. Either stay the same or decrease. B. Increase. C. Decrease. D. Either stay the same or increase.

B. Increase

Which one of the following statements is correct regarding the benefits provided by insurance? A. The reduction in losses paid by insurers due to risk control measures benefits individual insureds, but not society as a whole. B. Insurance helps reduce the financial burden to society by compensating accident victims. C. The primary role of insurance is to meet mandatory insurance requirements. D. Insurance reduces the financial consequences of loss exposures, but not the related uncertainty.

B. Insurance helps reduce the financial burden to society by compensating accident victims.

The salaries of investment professionals who are employed by an insurance company are categorized as A. General expenses. B. Investment expenses. C. Acquisition expenses. D. Other underwriting expenses.

B. Investment expenses include staff salaries related to the activities of the investment department.

Losses arising from maintenance perils are generally excluded from property insurance policies because A. Covering them would result in a moral hazard. B. They are either certain to occur over time or are avoidable. C. Maintenance agreements generally cover them. D. They are unexpected and therefore difficult to insure.

B. Losses arising from maintenance perils are generally excluded from property insurance policies because they are either certain to occur over time or are avoidable.

Loss exposure surveys or checklists are comprehensive and apply to almost any organization. The survey's major weakness is that they A. Are expensive. B. May omit an important exposure. C. Have to be custom designed for each business. D. Take too long to complete.

B. May omit an important exposure.

Retention is often used in combination with insurance as a way of treating loss exposures. One of the major downsides of individuals using retention alone is A. The unavailability of insurer loss control services. B. The potential for financial ruin. C. The record keeping associated with retained losses. D. Availability of insurer loss settlement services.

B. One of the major downsides of individuals using retention alone is the potential for financial ruin.

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

B. The best description of a first-party claim is a claim made by the policyholder against the insurer.

The homeowners policy excludes coverage for large watercraft in an attempt to A. Avoid covering uninsurable losses. B. Eliminate coverage that most insureds do not need. C. Eliminate duplicate coverage. D. To avoid insuring losses that could be prevented.

B. The homeowners policy excludes coverage for large watercraft in an attempt to eliminate coverage that most insureds do not need.

The monetary amount of damage that results from a loss is known as A. The deductible. B. Loss severity. C. Loss frequency. D. The retention.

B. The monetary amount of damage that results from a loss is known as loss severity.

Some loss exposures are not easy to retain, avoid, or control. What risk management technique is frequently used to treat such exposures? A. Reinsurance B. Transfer C. Prevention D. Reunderwriting

B. The risk management technique of transfer is often used to treat loss exposures that are not easily treated by retention, avoidance, or control.

What purpose do insurance-to-value provisions serve in property insurance policies? A. They discourage insurance fraud by ensuring that the property is worth the value requested in the policy limits. B. They encourage insureds to purchase an amount of insurance that is equal to, or close to, the value of the covered property. C. They establish the maximum amount the insurance company will pay for any loss. D. They establish the options available to the insurance company in settling the loss.

B. They encourage insureds to purchase an amount of insurance that is equal to, or close to, the value of the covered property.

Sally went downhill skiing on vacation. On the back of her lift ticket was printed an agreement that the skier would not hold the ski resort responsible for any injury incurred. From the ski resort's perspective, this is an example of A. Insurance. B. Noninsurance transfer. C. Retention. D. Loss reduction.

B. This is an example of noninsurance transfer.

A commercial general liability policy typically provides insured status to A. Resident relatives of the named insured. B. Independent contractors working on behalf of the named insured. C. Any organization newly acquired by the named insured for up to a certain number of days. D. Persons filing liability claims against the named insured.

C. A commercial general liability policy typically provides insured status to any organization newly acquired by the named insured for up to a certain number of days.

Which one of the following statements about policy parts is true? A. An insuring agreement establishes procedures for implementing the policy. B. Exclusions define terms to clarify ambiguity. C. A condition clarifies an insurer's promise or an insured's duty. D. Declarations state what an insurer will not cover.

C. A condition clarifies an insurer's promise or an insured's duty.

Which one of the following statements is true regarding traditional marketing systems for insurance? A. The three traditional marketing systems are the independent agency system, the captive agency system, and the exclusive agency system. B. An insurer operating through a managing general agent can expect higher fixed costs. C. 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.

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

Broad pollution coverage is not typically included in liability policies primarily as an attempt to A. Eliminate duplicate coverage. B. Avoid covering uninsurable losses. C. Keep premiums reasonable. D. Avoid insuring losses that could be prevented.

C. Broad pollution coverage is not typically included in liability policies primarily as an attempt to keep premiums reasonable.

Buildings, investments, patents, and human resources are all examples of A. Causes of loss, or perils. B. Financial consequences of loss. C. Assets exposed to loss. D. Tangible and intangible hazards.

C. Buildings, investments, patents, and human resources are all examples of assets exposed to loss.

Which one of the following statements is true regarding elements of good-faith claim handling? A. A claim file's medical bills, doctors' reports, and other information on each claimant should be in chronological order. B. Once contact with the insured is made, the claim representative should acknowledge and assign the claim. C. Claim representatives should use policy provisions, such as arbitration clauses, when applicable, to resolve disputes over the settlement amount. D. Generally, the first activity of the insurer in the claim handling process involves two functions—investigating the claim and concluding the claim.

C. Claim files should be in a logical order that results in more efficient claim processing. Claim representatives should use policy provisions, such as arbitration clauses, when applicable, to resolve disputes over the settlement amount.

Which one of the following statements concerning government insurance programs is true? A. Businesses seeking flood insurance under the National Flood Insurance Program (NFIP) must purchase it at local federal government offices. B. Various state insurance programs provide crop insurance for perils such as drought, disease, excessive rain and hail. C. Fair Access to Insurance Requirements (FAIR) plans make basic property insurance available to property owners who can't get it otherwise. D. The federal government provides workers compensation insurance to employers who cannot get it from private insurers.

C. Fair Access to Insurance Requirements (FAIR) plans make basic property insurance available to property owners who can't get it otherwise because of their property's location or any other reason.

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

C. He or she would purchase replacement cost.

Gulford Insurance Company (Gulford) is a direct writer of commercial insurance in Pennsylvania. Management is frustrated by the continued lack of success in the more rural western part of the state. They believe that there is a profitable market in this territory, but have trouble continuing to justify the cost of assigning agents to this territory. It is difficult to penetrate the market without a local presence. Which one of the following distribution systems should Gulford consider for this territory? A. Managing general agents B. Surplus lines brokers C. Independent agents D. National brokers

C. Independent agents

An insuring agreement may state the insurer's promise to do all of the following in the event of a covered loss, EXCEPT: A. Indemnify the insured B. Defend against the claim C. Surcharge the insured D. Pay the claim

C. Insuring agreements do not concern surcharges. Following a loss, the insurer seeks to fulfill the promise set out in the insuring agreement to pay, defend, or indemnify the insured in the event of a covered claim.

Most claims-made policies contain a retroactive date, which is A. Always the same as the policy inception date. B. Typically subsequent to the policy inception date. C. The date on or after which a claim must be reported in order to be covered. D. The date on or after which injury or damage must occur in order to be covered.

C. Most claims-made policies contain a retroactive date, which is the date on or after which injury or damage must occur in order to be covered.

Most states regulate the excess and surplus lines market by A. Establishing a monitoring board comprised of all insurers licensed to do business in the state. B. Examining the market conduct practices of the unlicensed insurers. C. Requiring that licensed surplus lines brokers transact business with the unlicensed insurers. D. Approving the policy forms and rates used by the unlicensed insurers.

C. Most states have surplus lines laws that require that all surplus lines business be placed through a surplus lines broker.

Properly estimating loss severity is essential in treating a loss exposure because the potential severity is a major consideration in determining whether to A. Use risk control or risk financing. B. Use loss avoidance or loss prevention. C. Insure or retain a particular loss exposure. D. Physically inspect or rely on a loss exposure survey.

C. Potential severity is a major consideration in determining whether to insure or retain a particular loss exposure.

Bruce Picket owns and operates a small plumbing business. One of Bruce's employees broke a water pipe while installing a new sink in a customer's apartment, causing damage to the customer's property as well as to property in the apartment below. Using liability insurance terminology, this loss would be categorized as which one of the following? A. Premises liability B. Products liability C. Business operations liability D. Completed operations liability

C. This loss would be categorized as business operations liability.

Kid Smart manufacturing makes a line of childrens toys. The possibility that a child may be injured because of a defect in a Kid Smart toy is what type of liability loss exposure for this toy manufacturer? A. Business operations B. Completed operations C. Products D. Professional activities

C. This type of liability loss exposure for the toy manufacturer is products.

Traditionally, the risk management professional's role has been associated with loss exposures related to A. Business risk. B. Operational risk. C. Pure risk. D. Speculative risk.

C. Traditionally, the risk management professional's role has been associated with loss exposures related to pure risk.

Which one of the following is part of written premiums? A. Investment income B. Policyholders' surplus C. Unearned premiums D. Underwriting expenses

C. Unearned premiums are part of written premiums and apply to the part of the policy period that has not yet occurred.

Which one of the following allegations in insurance claims handling result from criticisms of claim representatives' actions, sometimes regardless of validity? A. Use of improper valuation techniques allegations B. Unfair rating practices allegations C. Bad faith allegations D. Contract or policy manipulation allegations

C. While insurers are accused of unfair rating, contract manipulation or of improper valuation, bad faith allegations remain as one of the most troublesome and controversial issues for claim representatives and insurers.

Which one of the following types of agent is usually paid the same commission rate for new business and renewals? A. Exclusive agent B. Direct writer sales agent C. Managing agent D. Independent agent

D. An independent agent is given a flat percent commission on all new and renewal business.

Which one of the following is the correct formula for an insurer's overall operating ratio? A. Loss ratio + Expense ratio B. Combined ratio − Dividend ratio C. Loss ratio + Dividend ratio D. Combined ratio − Investment income ratio

D. An insurer's overall operating ratio equals its combined ratio minus its investment income ratio.

Binding authority is a form of A. Absolute authority. B. Apparent authority. C. Implied authority. D. Express authority.

D. Binding authority is a form of express authority.

T. Roy Insurance Company is selecting a distribution system and channel for its products. Which one of the following best describes the type of consideration that T. Roy should give to its operations? A. What are customer's expectations regarding accessibility? B. Will customers be willing to pay a premium for services? C. Can customers navigate easily within the channel? D. Does it have the necessary financial resources?

D. Does it have the necessary financial resources?

Which one of the following is true regarding enterprise-wide risk management (ERM)? A. ERM is an approach to risk management that focuses primarily on loss exposures associated with pure risk. B. In practice, implementation of ERM occurs at the departmental or business unit level. C. Implementation of ERM is fairly consistent among organizations, regardless of their size, nature, or complexity. D. ERM is an approach to managing all of an organization's key risks and opportunities.

D. ERM is an approach to managing all of an organization's key risks and opportunities.

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. Avoidance. C. Loss control. D. Risk tarnsfer.

D. For someone in Sally's situation, risk transfer is the most practical technique.

Loss reserves are funds held by an insurer to pay claims for losses that have occurred but have not yet been settled. Such funds assigned to an individual claim create a A. Damage reserve. B. Suit reserve. C. Claim reserve. D. Case reserve.

D. Incorrect. A case reserve is a loss reserve assigned to an individual claim.

Because insurance contracts impose an obligation of complete honesty on the parties, an insurance contract is called a A. Contract of indemnity. B. Contract of adhesion. C. Conditional contract. D. Contract of utmost good faith.

D. Insurance contacts are considered contracts of utmost good faith because both parties are obligated to be completely honest with each other.

Which one of the following statements is correct regarding the benefits that insurance provides? A. The premiums collected by insurers must be held in cash to be available to pay claims. B. Insurance provides a source of investment funds for insurers, but not for insureds. C. Insurers are prohibited from investing in such things as research or technological advancements. D. Investment income helps keep insurance premiums at a reasonable level.

D. Investment income helps keep insurance premiums at a reasonable level.

Legal liability imposed by a specific statute or law is called A. Liability under law. B. Legislative liability. C. No-fault liability. D. Statutory liability.

D. Legal liability imposed by a specific statute or law is called statutory liability.

What is the most common reason premium audits are conducted? A. The amount of actual losses are not known at the start of the policy period. B. Loss control activities during the policy period may reduce the risk of loss. C. Claim examiners have discovered unacceptable operations during the policy period. D. The amount of the loss exposure is unknown at the start of the policy period.

D. Premium audits are conducted because the amount of the loss exposure is unknown at the start of the policy period, and the premium must be adjusted to reflect the actual loss exposure during the period.

Small United States unincorporated insurance associations, domiciled mainly in Texas, are known as A. American reciprocals. B. American mutuals. C. American captives. D. American Lloyds.

D. Small United States unincorporated insurance associations, domiciled mainly in Texas, are known as American Lloyds.

Which one of the following best identifies types of organizations that should be concerned with personnel loss exposures from a manager leaving for another organization? A. Sole proprietorships, but not corporations with separation of ownership and control B. Close corporations, but not sole proprietorships C. Sole proprietorships and close corporations, but not corporations with separation of ownership and control D. Sole proprietorships, close corporations, and corporations with separation of ownership and control

D. Sole proprietorships, close corporations, and corporations with separation of ownership and control should be concerned with personnel loss exposures from a manager leaving for another organization.

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? A. Was the chicken coop constructed within the standards of the local building code? B. How old is the chicken coop? C. How many chickens died in the fire? D. Is the damaged property covered by the policy?

D. The adjuster should first answer, " Is the damaged property covered by the policy?"

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? A. Decrease the deductible to $500 B. Increase the deductible to $2,000 C. Implement loss reduction programs D. Implement loss prevention programs

D. The best management option for addressing the increased frequency of accidents is to implement a loss prevention program.

When selecting a distribution channel, which one of the following is an important consideration with regard to customers' needs and characteristics? A. The target market B. The compatibility of the channel with established channels C. The expertise of current staff D. The ease of accessibility within the channel

D. When selecting an alternative distribution channel, insurers or producers should consider the ease of accessibility within the channel.

Which one of the following losses would be covered under a typical broad form property policy but not under a basic form policy? A. A large limb from a decaying tree falls onto a building causing damage to the building. B. A sinkhole collapse damages a building. C. Maintenance workers accidentally bang a ladder against a sprinkler head, which discharges, causing water damage to a building. D. The sudden malfunction of the oil-burning furnace discharges grimy, sooty smoke throughout a building, damaging its interior.

A. A broad form policy would cover damage caused by a falling tree limb.

All of the following are true with regard to the listing of a named insured on a property insurance policy, EXCEPT: A. The secured lender (mortgagee) for a building is usually the named insured on a policy covering the building. B. The owner and occupier of a building is usually the named insured on a policy covering both the building and personal property in the building. C. The tenant of a building is usually the named insured on a policy covering the tenant's personal property in the building. D. The owner of a building is usually the named insured on a policy covering the building.

A. A secured lender for a building is usually not listed as a named insured, but instead is listed in the policy declarations as a mortgagee.

Among other things, a binder provides A. Applicable coverages and limits. B. Operations of the insured. C. Policy conditions and exclusions. D. Insured's financial profile.

A. Among other things, a binder provides applicable coverages and limits.

All of the following are similarities between agents and brokers, EXCEPT: A. Both are legal representatives of insurers. B. Both collect premiums from insureds and remit to insurers. C. Both are intermediaries between insurers and insurance buyers. D. Both sell insurance appropriate to customers' insurance needs.

A. Brokers are not legal representatives of insurers.

Which one of the following statements describes the monitoring and revising step in the risk management process? A. Check to make sure the decisions made are still valid, and make changes as needed. B. Create a new workflow and identify new bottlenecks that have occurred. C. Make sure insurance is not being used as a substitute for loss control. D. Identify noninsurance transfers through hold-harmless agreements.

A. Check to make sure the decisions made are still valid, and make changes as needed... is the statement that describes the monitoring and revising step in the risk management process.

Claim representative Beth adjusted a property damage claim in which the insured's loss totaled $2,500. She knew that the insured had suffered some financial hardships and was eager to receive some cash as soon as possible. Optimistic that the insured could be persuaded to take less than the full value of the claim if a draft was delivered right away, she offered $1,500 to settle the claim. The insured surprised Beth by filing a small claims suit against the insurer in which he recovered the full $2,500 value of the claim. This is not the first time this tactic has backfired on Beth. Beth may be in violation of which one of the following unfair claim practices regulations? A. Compelling an insured to sue to recover amounts due under an insurance policy B. Failing to respond to demands to settle under an insurance policy C. Misrepresenting insurance policy provisions D. Failing to reasonably investigate claims for damages under insurance policies

A. Compelling an insured to sue to recover amounts due under insurance policies by offering amounts that are substantially lower than the amounts ultimately recovered in legal actions brought by such insureds is usually a prohibited practice.

Insurance deals primarily with loss exposures that are fortuitous. Which one of the following statements best characterizes fortuitous losses? A. Fortuitous losses are beyond the insured's control. B. Fortuitous loss exposures are expected. C. Fortuitous loss exposures are generally predictable. D. Fortuitous losses are intentional.

A. Fortuitous losses are beyond the insured's control.

At mid-year, Highhill Insurance Company (HIC) has experienced an increase in its YTD actual loss ratio compared with its target. The following chart shows its YTD loss ratio results as compared to its goals. Based on this information, which one of the following factors is likely to be contributing to HIC's higher loss ratio? A. Loss severity B. Loss frequency C. Unrealistic goals D. Too early to tell

A. Incorrect. Loss severity, as the per loss average is running above the goal (121%).

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

A. Insurers are required to submit annual financial statements to state insurance departments.

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

A. Investment expenses are separate from the expenses associated with underwriting activities.

Which one of the following is true concerning the direct response distribution channel to market insurance? A. It relies heavily on advertising. B. It relies heavily on producer interaction. C. Commision costs are generally increased. D. There is less contact between the insurer and the customer with its use.

A. It relies heavily on advertising.

Laws made by formal enactments of legislative bodies are referred to as A. Statutory law. B. Common law. C. Case law. D. Constitutional law.

A. Laws made by formal enactments of legislative bodies are referred to as statutory law.

Commercial general liability insurance policies written on an occurrence basis apply to bodily injury and property damage that occurs during the policy period. This provision supports the principle that insurable loss exposures must ideally be A. Definite. B. Fortuitous. C. Independent. D. Pure risks.

A. Losses that occur during the policy period are definite in time.

Martha works in the city and drives to work each day. She is concerned about her auto exposures due to driving in the city. If Martha sells her vehicle and begins using public transportation, which one of the following risk management techniques will she be applying to her situation? A. Avoidance B. Loss control C. Noninsurance transfer D. Retention

A. Martha will be applying the risk management techniques of avoidance to her situation.

Prompt and professional loss adjustment services are a responsibility of what part of an insurer's organization? A. The claims function B. The loss control function C. The premium audit function D. The underwriting function

A. Prompt and professional loss adjustment services are a responsibility of the claims function.

One of the benefits to a business of retaining a loss exposure instead of insuring it is A. A reduction in expenses. B. A greater peace of mind. C. Access to the insurer's loss control services. D. Increase in expenses.

A. Retaining losses rather than insuring them creates a reduction in expenses.

A policy exclusion can serve all of the following purposes, EXCEPT: A. State the coverages exclusively provided by the policy. B. Eliminate coverage for uninsurable loss exposures. C. Help manage morale hazards. D. Eliminate coverages requiring special treatments.

A. Stating the coverages exclusively provided by the policy is not a purpose of exclusions.

For a one-year policy covering losses that take several years to develop, all of the following ratios are likely to be revised for several years following the policy period, EXCEPT: A. Expense ratio B. Combined ratio C. Loss ratio D. Overall operating ratio

A. The loss ratio, combined ratio, and overall operating ratio all would change as the losses develop for several years after the policy period.

For a one-year policy covering losses that take several years to develop, all of the following ratios are likely to be revised for several years following the policy period, EXCEPT: A. Expense ratio B. Combined ratio C. Loss ratio D. Overall operating ratio

A. The loss ratio, combined ratio, and overall operating ratio all would change as the losses develop for several years after the policy period.

Which one of the following identifies the two broad categories of risk management techniques? A. Risk control and risk financing B. Loss prevention and loss reduction C. Separation and duplication D. Insurance and noninsurance

A. The two broad categories of risk management techniques are risk control and risk financing.

Earned premium for XYZ Insurance (XYZ) for the year was $500 million and incurred losses were $400 million. Incurred underwriting expenses were $60 million. XYZ had a net investment gain of $40 million for the year. Which one of the following is XYZ's overall gain or loss from operations? A. $80 million gain B. $80 million loss C. $200 million gain D. $200 million loss

A. XYZ's overall gain or loss from operations is $500 million earned premium minus $400 million incurred losses minus $60 million underwriting expenses plus $40 million net investment gain, for an $80 million gain.