INS EXAM 2

15) XYZ Insurance Company uses class rating to determine the rate to charge for insurance. For one type of insurance, the pure premium XYZ actuaries calculated is $75 per unit. If XYZ's expense ratio is 25 percent, what is the GROSS RATE for this coverage?

$100.00

XYZ Insurance Company expects $500,000 in claims and loss adjustment expenses for each 1,000 properties that it insures in a certain category of business insurance. What pure premium should XYZ charge for EACH property insured?

$500.00

Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance. Delta has a retention limit of $200,000, and nine lines of insurance are ceded to Eversafe. How much will Eversafe pay if a $1,600,000 building insured by Delta suffers an $800,000 loss?

$700,000

LMN Mutual Insurance Company has total liabilities of $300 million. The company has total assets of $380 million. What is LMN's policyholders' surplus?

$80 million

JKL Insurance Company reported the following information on its accounting statements last year: ### What was JKL's COMBINED RATIO last year?

108.3

JKL Insurance Company reported the following information on its accounting statements last year: ### What was JKL's EXPENSE RATIO last year?

33.3 percent

JKL Insurance Company reported the following information on its accounting statements last year: ### What was JKL's LOSS RATIO last year?

75.0 percent

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.

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 insurance 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 about the investments of property and liability insurers is (are) true? I. Income from investments is important in offsetting any unfavorable underwriting experience. II. Because premium income is continually being received, the investment objective of liquidity is of little importance.

I only

Which of the following statements about underwriting policy is (are) true? I. A company must establish an underwriting policy consistent with company objectives. II. Underwriting policy is usually subjective and allows the underwriter considerable flexibility with respect to lines written and forms used.

I only

Which of the following statements about Lloyds of London (are) true? I. The majority of the business underwritten by Lloyds of London is for unusual risks, such as valuable race horses and professional athletes. II. Lloyds of London is a group of underwriters who underwrite insurance, not an insurance company.

II only

Which of the following statements about reciprocal exchanges is (are) true? I. Reciprocal exchanges usually specialize in health insurance. II. Reciprocal exchanges are unincorporated mutual insurance companies.

II only

Which of the following statements is (are) true with respect to catastrophe bonds? I. The bonds are issued by the U.S. Government. II. The bonds have relatively high interest (coupon) rates.

II only

Which of the following statements about claims settlement is true?

Independent adjustors may be used in a geographic area where the volume of business is too low for an insurer to have its own adjustors.

One source of life and health insurance underwriting information is an organization that life and health insurance companies can join. As a member, life and health insurance companies report health impairments of applicants, and this information is shared with member companies. Although the information is shared, the underwriting decision of the member company is not disclosed. What is this organization called?

MIB

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.

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

Stock companies are exempt from state insurance regulation.

Which of the following statements about stock insurers is true?

Stockholders bear any losses and share in any profits.

All of the following statements about the settlement of a claim are true EXCEPT

The adjustor must file the PROOF OF LOSS, which is a SWORN statement supporting his or her decision regarding a claim.

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.

All of the following statements about life insurance company investments are true EXCEPT

The majority of these investments are short-term investments.

Which of the following statements about treaty reinsurance is true?

The reinsurer must accept all business that falls within the scope of the treaty.

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.

Which of the following statements about treaty reinsurance is true?

Using a reinsurance pool provides financial capacity to write large amounts of insurance.

Which of the following statements about the combined ratio is true?

a combined RATIO GREATER than 1 (or 100 percent) means an underwriting loss has occurred.

The unearned premium reserve of an insurer is

a liability representing the unearned portion of gross premiums on outstanding policies.

The underwriting process begins with the

agent

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

binder.

Factors that may result in more restrictive underwriting decisions include which of the following? I. Inadequate rates. II. The unavailability of reinsurance at favorable terms.

both I and II

Functions of an insurance company's legal department include which of the following? I. Lobbying for legislation favorable to the insurance industry. II. Drafting policy provisions.

both I and II

Reasons for the unearned premium reserve include which of the following? I. To pay losses that occur during the policy period. II. To pay premium refunds to policyholders in the event of cancellation.

both I and II

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

Which of the following statements about underwriting standards is (are) true? I. One purpose of underwriting standards is to reduce adverse selection against the insurer. II. Equitable rates should be charged so that each group of policyowners pays its own way in terms of losses and expenses.

both I and II

Which of the following statements concerning regulatory objectives of rate making is (are) true? I. Rates must not be unfairly discriminatory. II. Rates must be adequate.

both I and II

A loss reserve established for each individual claim when it is reported to a property and casualty insurance company is call a(n)

case reserve

Pac-Coast Insurance (PCI) concentrates its underwriting activities in California. The company is concerned that if a catastrophic earthquake occurs, it might threaten the solvency of the company. To address this risk, PCI issued some debt securities. If a catastrophic earthquake occurs, PCI does not have to repay the full amount borrowed or pay interest. The securities PCI issued are called

catastrophe bonds

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

The primary function of an actuary is to

determine premium rates

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

direct response system

RST Insurance Company does not 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

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

direct writer.

Huge Insurance Company is a property insurer that is interested in protecting itself against cumulative losses that exceed $200 million during the year. This protection can best be obtained using a(n)

excess-of-loss reinsurance treaty.

In schedule rating, each building is individually evaluated based on several rating factors. One factor refers to the possibility that the building will be DAMAGED or DESTROYED by a fire that starts at an adjacent property and spreads to the building. This rating factor is known as

exposure

A reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer is called

facultative reinsurance.

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

As an alternative to demutualizing, Big Mutual Insurance Company reorganized itself into a corporate form that can directly or indirectly own a stock insurance company. This form of organization is called a(n)

holding company

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

If an underwriter suspects moral hazard, the underwriter may ask an outside firm to investigate the applicant and make a detailed report to the insurer. This report is called a(n)

inspection report

Insurers obtain data that can be used to determine rates from

insurance advisory organizations

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

A property and liability insurance company's loss reserve and unearned premium reserve are

liabilities

Nathan was hired as an actuary with ABC Insurance. Nathan was asked to calculate the annual premium for a new product and to explain his calculations to ABC's director of ratemaking. Nathan calculated the pure premium and presented this value as the final premium. After Nathan's presentation, the director of ratemaking said, "You left out something very important. If we sell coverage at the pure premium rate, we'll be out of business soon." What did Nathan overlook in his calculations?

loading for expenses

One item that appears on an insurance company's financial statements is a liability that represents an estimate of the claims reported and adjusted but not yet paid, claims reported and filed but not yet adjusted, and claims incurred but not yet reported to the company. This liability is called the insurer's

loss reserves

Which of the following would not appear in the asset section of an insurance company's balance sheet?

loss reserves

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 claim settlement is (are) true? I. The fair payment of claims requires an insurer to adopt a very liberal claims policy. II. To prevent lawsuits, an insurer should provide no personal assistance to a claimant other than that which is required by contractual obligations.

neither I nor II

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

An Econodeath Insurance Company actuary calculated the present value of the expected death claim the company will pay if it sells whole life insurance to a 30-year-old woman. This value is called the

net single premium

A strip-mall includes eight identical-sized retail units. All of the units were built at the same time and each has an identical sprinkler system. Unit number two is a dry cleaning business. Unit number three is a bar and grill. Unit number four is a dress shop. The owners of these three units are all insured by the same insurance company, but the property insurance premiums vary significantly. Which of the following rating factors best explains the difference in premiums?

occupancy

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

payment of premiums through payroll deduction

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 subagents and receive an over-riding commission based on the amount of life insurance the subagents sell. Based on this description, David is a(n)

personal-producing general agent

Which of the following items would appear in the income section of an insurance company's income and expense statement?

premiums

Gwen is in charge of accounting at Integrity Insurance Company. Integrity is a publicly- traded insurer. In describing her job, Gwen said, "There aren't too many businesses where you are required to keep two sets of books." Gwen's comment most likely refers to her company

preparing accounting statements using statutory and GAPP accounting.

In schedule rating, each building is individually rated on several factors. One factor refers to the quality of the city's water supply and fire department, and the RISK CONTROL DEVICES installed in the building. This factor is called

protection

Monopoly Insurance is the only company marketing a certain line of insurance in a state. After complaints from several consumers, the State Insurance Department investigated Monopoly's rates. The regulators determined that Monopoly was taking advantage of being the only insurer offering the line by charging more than double the actuarial cost of the coverage. Which regulatory rating objective was Monopoly violating?

rates must not be excessive

Small Town used to be just that—a small town 6 miles from Large City. Over the years, the area between Small Town and Large City has developed, and now Small Town is part of the suburbs surrounding Large City. An auto insurer that operated in the area had a large increase in auto claims from Small Town insureds. The insurer did not adjust its rates, and this year will lose money because of claims attributable to higher population density. Which business rating objective did this insurer fail to meet?

responsiveness

A manufacturing company just hired a new risk manager, and she has instituted several employee safety programs. She has persuaded the insurer writing the company's workers compensation insurance to base the premium on the company's actual loss experience during the current coverage period rather than on the company's historical performance. This type of plan is called a(n)

retrospectively rated plan.

Amy heads the legal staff of a large property and liability insurance company. Amy's staff is likely involved in which of the following activities?

reviewing language and policy provisions in insurer's contracts

The process of transferring risk to the capital markets through the use of financial instruments such as bonds, futures contracts, and options is known as

securitization of risk.

The corporate structure of mutual insurers has changed in recent years. All of the following are examples of significant changes EXCEPT

sharp increase in the number of mutual insurance companies.

Morgan was hired by an insurance company after she graduated from college. Upon completion of a training program, Morgan was assigned to a territory where she adjusts claims of the insurer's policyowners. Morgan is a(n)

staff claims representative

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.

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

Jim would like to start a business raising thoroughbred racehorses. 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 that 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.

Granite Insurance Company entered into a treaty reinsurance agreement with Rock Solid Reinsurance (RSR). Granite's retention limit is $400,000 and RSR agreed to provide reinsurance for up to $2.0 million. If Granite writes an $800,000 policy, RSR is responsible for 50 percent of the losses. If Granite insures a $1.6 million risk, RSR is responsible for 25 percent of any losses. What type of reinsurance arrangement did Granite enter into with RSR?

surplus share reinsurance

Under one method of estimating a loss reserve, the reserve is based on life expectancy, duration of disability, and similar factors. This method of estimating loss reserves is called the

tabular value method.

Common sources of underwriting information for life and health insurance include all of the following EXCEPT

the applicants income tax return

Which of the following statements about reinsurance is true?

the insurer transferring business to a reinsurer is called the ceding company.

A property and liability insurance company's loss ratio and expense ratio, respectively, for 2013 - 2015 were: 2013: 74% 31% 2014: 68% 33% 2015: 66% 30% Which of the following statements is true about the company's underwriting results for this time period?

the insurer's profitability from underwriting has been improving each year.

In a reinsurance transaction, the ceding commission is paid by

the reinsurer to the ceding company.

Which of the following is a function of the marketing department of an insurance company?

to identify production goals

All of the following are reasons for a primary insurer to use reinsurance EXCEPT

to increase the unearned premium reserve.

State insurance regulators require LMN Life Insurance Company to maintain a separate account. The assets in the separate account would support the liabilities for which of the following products?

variable life insurance

Under one life insurance marketing system, agents 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 low-income and middle-income workers. This life insurance marketing system is called the

worksite marketing system