Insurance Final Exam

A forty year old female has a husband, two children age 3 and 7, and currently no life insurance. She has an annual income of $150,000. She has determined that she needs $1 million of life insurance. She can buy whole life insurance at an annual premium of $10,412 or a 30 year term policy at an annual premium of $843. She can afford either premium, and believes she can invest any money saved at an interest rate of 8%. Suppose she chooses the 30 year term insurance and invests the premium difference for 30 years in a market account. Approximately how much will be in her account in 30 years?

$1,170,728

A forty year old female has a husband, two children age 3 and 7, and currently no life insurance. She has an annual income of $150,000. She has determined that she needs $1 million of life insurance. She can buy whole life insurance at an annual premium of $10,412. In an effort to minimize the initial insurance cost, she decides to purchase a series of 10 year policies. The premium for the first 10 years is $650 per year. For the second 10 years the premium is $800 per year. And for the 3rd 10 years the premium is $1300 per year. She can afford either set of premiums, and believes she can invest any money saved at an interest rate of 8%. Suppose she chooses the 30 year term insurance and invests the premium difference for 30 years in a market account. Approximately how much will be in her account in 30 years?

$1,179,104

A forty year old female has a husband, two children age 3 and 7, and currently no life insurance. She has an annual income of $150,000. She has determined that she needs $1 million of life insurance. She can buy whole life insurance at an annual premium of $10,412 or a 30 year term policy at an annual premium of $843. She can afford either premium, and believes she can invest any money saved at an interest rate of 8%. Suppose she chooses the 30 year term insurance and invests the premium difference for 30 years in a market account. Suppose she buys the term insurance, follows this strategy, earns the anticipated rate of return, and does not spend any of the money she saves. She dies at age 75. How much money is available for her to pass to her heirs? (Ignore any other insurance or savings.)

$1,720,183

Your house has a 14 year old roof on it. Unfortunately, the roof was destroyed during storms last night. You were looking to replace the roof already because of it's age, so you know it will cost $20,000 to replace the roof. You also know that the roof has about 1 year of life left, so the current cash value of the roof is $2,000. You purchased a standard cash value property insurance contract that promises to indemnify you for losses due to storms. Approximately how much money should you expect to receive from your insurer and why?

$2,000 because that is the cash value of the roof.

You own a building worth $100,000. During any given year, there is an 80% probability that the building will be perfectly fine, but there is a 20% chance that it will be completely destroyed. For simplicity, there is no possibility of anything in between. What is the expected loss during any given year?

$20,000

Julian, age 45, would like to determine how much life insurance to purchase using the human life value approach. He assumes his average annual earnings over the next 20 years will be $40,000. Of this amount, $20,000 is available annually for the support of his family. Julian will generate this income for 20 more years and he believes that 5 percent is the appropriate interest (discount) rate. The present value of one dollar payable for 20 years at a discount rate of 5 percent is $12.46. What is Julian's human life value?

$249,200

An insurer insures 300 buildings, each worth $100,000. During any given year, there is an 80% probability that any 1 building will be perfectly fine, but there is a 20% chance that any 1 building will be completely destroyed. For simplicity, there is no possibility of anything in between and losses to the buildings are completely independent of each other. What is the standard deviation of the insurers loss in any given year?

$4,761

An insurer writes property insurance on 100 buildings valued at $300,000 each. During the year, 3 of the buildings are totally destroyed and 20 more suffer average losses of $40,000. What is the pure premium rate (the rate necessary to cover the losses) for this insurance line? Measured in cost per $100 of insured property.

$5.67 per $100

An insurer writes property insurance on 100 buildings valued at $300,000 each. Each owner only insures 1/2 the value of their property. During the year, 3 of the buildings are totally destroyed and 20 more suffer average losses of $40,000. What is the pure premium rate (the rate necessary to cover the losses) for this insurance line, assuming typical coinsurance? Measured in cost per $100 of insured property.

$5.67 per $100

XYZ Company insured its building on a replacement cost basis for $450,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $500,000 when it sustained a $50,000 loss. How much will XYZ Company receive from its insurer, assuming no deductible applies?

$50,000

An insurer writes property insurance on 100 buildings valued at $300,000 each. Each owner only insures 1/2 the value of their property. During the year, 3 of the buildings are totally destroyed and 20 more suffer average losses of $40,000. What is the pure premium rate (the rate necessary to cover the losses) for this insurance line, assuming no coinsurance? Measured in cost per $100 of insured property.

$8.33 per $100

You own a building worth $100,000. During any given year, there is an 80% probability that the building will be perfectly fine, but there is a 20% chance that it will be completely destroyed. For simplicity, there is no possibility of anything in between. What is the standard deviation of the loss in any given year?

$82,462

A property insurer uses the pure premium method to set their rates. Over the course of the year, a line of single family home insurance experiences $15 million in losses on 8,000 homes insured. The insurer assigns an expense rate of 35% to this line. What rate should they assign to the properties in this line based on the pure premium method?

2,885

A forty year old female has a husband, two children age 3 and 7, and currently no life insurance. She has an annual income of $150,000. She has determined that she needs $1 million of life insurance. She can buy whole life insurance at an annual premium of $10,412 or a 30 year term policy at an annual premium of $843. She can afford either premium, and believes she can invest any money saved at an interest rate of 8%. Suppose she chooses the 30 year term insurance and invests the premium difference for 30 years in a market account. The whole life policy will pay the death benefit in the (unlikely) event that the insured lives to be 121. If the insured instead buys the 30 year term policy and invests the savings for 30 years, then leaves them in the account to continue earning until age 121, how much more or less will be in the investment account.

About $58,000,000 more

According to the law of large numbers, what should happen as an insurer increases the number of units insured?

Actual results will more closely approach expected results.

Ann Parks and Robert Evans jointly own a grocery store. Ann and Robert are both named insureds on the property insurance covering the store, but Ann is the first named insured. Which of the following statements is true with regard to Ann's status as the first named insured?

Ann is responsible for making sure that the premium has been paid.

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

Binder

What rate setting method is most used in property and casualty currently?

Class Rating

The policy provision requiring the filing of proof of loss with the insurer is an example of a(n)

Condition

ACME insurance refuses to pay the claim of Emily. Emily claims to be insured by ACME, but ACME disputes the existence of a valid contract. Emily sues ACME, and in court Emily is able to produce a document signed by her, someone purporting to be an agent of ACME, and a series of payment receipts from ACME. She provides no documents establishing the age of the ACME representative or showing the legality of the contract. Based on these facts, what is the likely outcome of Emily's suit?

Emily will win because she has provided evidence of a valid contract.

According to our lectures, which of the following should be the primary focus when selecting life insurance?

Enabling the most people to provide for their dependents in the case of a premature death.

According to our lecture and discussion, what is the most realistic way for most people to buy insurance when they need it?

Go online and buy term insurance from one of the online insurance shopping sites.

Jonathan has a wife and two children, aged 2 and 5. Based on his wife's salary and their current expenses, he estimates that he needs $1,000,000 in insurance to provide for his family in the event of his death. He further estimates that he can invest his money with a return of 8%. He can afford about $1000 per year in insurance. $1,000,000 in 20 year term life will cost about $500 per year, and $1,000,000 in whole life will cost about $8,000 per year. What insurance should he buy and why?

He should buy term because that is what he can afford that will provide the amount of insurance his family needs.

Which of the following statements about the definition of the insured is (are) true? I.In some cases, a person who is not specifically named may be classified as an insured. II.Under no circumstances can more than one person be named as an insured.

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 the needs approach for estimating the amount of life insurance to purchase is (are) true? I.It involves an analysis of various family needs which must be met if a family breadwinner dies. II.Its use is appropriate only if a person currently has no life insurance protection.

I only

Which of the following statements about the needs approach for estimating the amount of life insurance to purchase is (are) true? I.It involves an analysis of various family needs which must be met if a family breadwinner dies. II.Its use is appropriate regardless of if a person currently has no life insurance protection.

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 statement about a company's cost of risk is (are) true? I.Cost of risk includes insurance premiums and retained losses. II.Reducing the cost of risk decreases profitability.

I only

Which of the following statements about chance of loss and risk is (are) true? I.If the chance of loss is identical for two groups, the objective risk must be the same. II.Two individuals may perceive differently the risk inherent in a given activity.

II only

Which of the following statements about consideration in an insurance contract is (are) true? I.The insured's total consideration is submission of a completed application. II.The insurer's consideration is the promise to do those things specified in the policy.

II only

Which of the following statements about variable universal life insurance is (are) true? IVariable universal life insurance guarantees a minimum interest rate or case value. II.Variable universal life insurance allows the policy owner to decide where the premiums are invested.

II only

All of the following statements about the administration of a risk management program are true EXCEPT

If a risk management program is properly designed, periodic review of the program is unnecessary.

All of the following statements about universal life insurance are true EXCEPT

Interest credited to a policy's cash value is taxable for the policyowner in the year credited.

All of the following statements about risk retention are false EXCEPT

It may be used passively because of ignorance.

What does a four corners clause do in an insurance contract?

It states that the entire contract is contained within the four corners of the written document, there are no side agreements or additions.

Which of the following statements about limited-payment life insurance is true?

Its use may be appropriate if a person wants paid-up life insurance during retirement.

Jordan has a verbal agreement with Smith Brothers Insurance to insure her car and pays for her insurance. When she is involved in a car accident, Smith Brothers refuses to pay her claim.

Jordan has a contract with Smith Brothers, but she may have trouble proving it.

Currently there are massive amounts of cargo sitting off the coast of the United States waiting to be unloaded. This cargo is extremely varied in type and value, as well as how long it may take to unload it. Which type of rating should an insurance company use to set the rates for insuring this cargo?

Judgement Rating

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?

Medical Information Bureau (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.

Thomas has saved $1.5 million dollars throughout his lifetime. The family home and cars are paid for, and all children are grown. Thomas and his wife estimate that she needs $500,000 to support herself for the rest of her life in the even of Thomas' death. What sort of life insurance, and in what amount, does Thomas need?

No life insurance.

You own a building worth $100,000. During any given year, there is an 80% probability that the building will be perfectly fine, but there is a 20% chance that it will be completely destroyed. For simplicity, there is no possibility of anything in between. Anticipating a potential loss, you have set aside $30,000 in a savings account. Ifa loss occurs during the year, is this amount likely to be enough?

No, if there is a loss it will be far more than you have set aside

You just bought a new car, and haven't had time to change your insurance yet, so you still have a policy on your old car that you traded in to purchase the new one. Given the tight used car market, your old car was immediately taken on a test drive after you traded it. Unfortunately the car was totaled on that test drive. Knowing your insurance is still in force, the auto dealer tells you that your insurance company will have to pay for the accident. Do they?

No, you had an insurable interest in the car when you purchased the policy, but you no longer have an insurable interest.

Last month, you applied for life insurance. As part of the application process, you stated that you did not have high blood pressure, and you insured on that basis. Today, you visited the doctor for your annual checkup, and for the first time she diagnosed you with high blood pressure. What happens to your life insurance?

Nothing, you did not know you had high blood pressure when you filled out the application.

What are the required elements for a contract?

Offer, Acceptance, Consideration

It's been a bad year for property insurers in Oklahoma, especially in Norman. ACME insurance expected casualty losses of 85% while collecting $2 million in premiums. Instead, they had losses of $2.3 million while collecting the same $2 million in premiums. How will rates change next year if ACME uses the loss ratio method and this year's experience to set rates for next year?

Rates will increase by 35%

All of the following are burdens to society because of the presence of risk EXCEPT

Risk provides an incentive for people to engage in risk control.

Which of the following is an example of public insurance?

Social Security

Which of the following statements about subrogation is true?

Subrogation helps to hold down the cost of insurance.

How do term life insurance premiums compare to whole life insurance premiums?

Term life is much cheaper

JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 2,000 homeowners this year?

The actual results will more closely approach the expected results.

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

The adjuster must file the proof of loss, which is a sworn statement supporting his or her decision regarding a claim.

Which of the following statements about the use of a captive insurance company by a parent firm is true?

The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers.

What is the legal significance of a material concealment by an insurance applicant?

The contract is voidable at the insurer's option.

What is the legal significance of a material misrepresentation in an insurance application?

The contract is voidable at the insurer's option.

An agent for WewinYoulose Insurance Company tells an insured to withdraw a small pending property claim because it is unlikely to be successful. The agent further informs the insured that the withdrawal cannot be held against the insured in the future. Several months later, the insured property suffers major damage. The insurance company pays part of the claim, but refuses to pay any additional damages to the portions of the property that were slightly damaged in the first small claim. Which of the following statements is most likely true?

The insurance company will be estopped from refusing payment for the additional damages because of the statements by their agent.

Insurance contracts are contracts of adhesion. What does this mean?

The insurance company writes the contract, and the insured has very little opportunity to negotiate the terms. So any uncertainties in the contract are interpreted against the insurer.

Which of the following statements about subrogation is true?

The insured's right to collect benefits may be forfeited if the insured interferes with the insurer's subrogation rights after a loss occurs.

Which of the following statements about an excess insurance plan is true?

The insurer does not participate in a loss until the loss exceeds the amount the firm has decided to retain.

Which of the following statements about reinsurance is true?

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

In the real world, which of the following most accurately describes the claim process often used by many insurers?

The insurer will offer a claim settlement amount relatively quickly, but that amount will often be well below what is actually owed, forcing the insured to take more time to negotiate for a higher amount.

From the standpoint of the insurer, which of the following is not a characteristic of an ideally insurable risk?

The loss must be indeterminable.

How does the loss ratio method rating method differ from the experience rating method?

The loss ratio method uses losses of the entire class to set future rates, while the experience method focuses on losses of this particular insured to set future rates.

XYZ Insurance Company writes coverage for most perils which can damage property. XYZ, however, does not write flood insurance on property located in flood plains. Which requirement of an ideally insurable risk might be violated if XYZ wrote flood insurance on property located in flood plains?

The loss should not be catastrophic.

A husband and wife both have family health insurance plans at their jobs, and they have two children. Which of the following statements is correct regarding their insurance and its use?

They are wasting a lot of money. Family insurance is very expensive, and only one of them needs to have it to insure their children.

Which of the following statements about mutual insurers is true?

They may pay dividends to their policyholders.

Which of the following statements about treaty reinsurance is true?

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

Your property insurer has refused to pay for the recent destruction of you home in a fire. The insurer maintains that there is no insuring contract between you. During trial, you have produced a signed contract containing very strong evidence of an offer and acceptance by each party, as well as a series of cancelled checks showing payment for the policy. You have not been able to provide any evidence about your mental status or competency at the time the contract was signed however. Based on this information, are you likely to win or lose this case.

Win, because you have proven there was an offer, acceptance, and consideration for the contract, but you do not have to prove your mental status.

Recently, you started an imaging company with three friends using drones to image properties, events, and weather for various clients. You are one of the two people in the group who has a drone pilot license, the others concentrate more on finances, marketing, and other issues. Your three friends want to take out a life insurance policy on you. Can they do this and why?

Yes, they have an insurable interest in your life because of the business relationship.

You were recently involved in a car accident. The other driver was at fault, but due to the length of time it took to establish this fault you elected to file a claim under your car insurance and have received payment from you insurer. What are your obligations now?

You must cooperate with your insurer when they seek to be reimbursed by the other insurance company.

A forty year old female has a husband, two children age 3 and 7, and currently no life insurance. She has an annual income of $100,000. She believes that if she invests the difference between whole life premiums and term life premiums, she will have an investment account balance approximately equal to the face value of her insurance policy in 30 years. But she is really concerned that she will have no insurance in 30 years when the term policy expires. Which of the following is not an appropriate response to this concern.

You should buy whole life insurance because only whole life will provide you with the coverage you need after 30 years.

The unearned premium reserve of an insurer is

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

The production facility for ABC Manufacturing is located in a flood plain. Although the risk of flood is low, ABC's risk manager is concerned that a flood could damage the plant and equipment. He received bids on flood insurance from two insurance agents, but decided the cost of coverage was too high relative to the risk. So he did not purchase flood insurance. Which risk management technique is ABC using with respect to the risk of flood?

active retention

Roger owns some farmland that he rents to a tenant. The tenant lives in an old farmhouse on the property and raises crops on the land. Roger is concerned about legal liability if the tenant injures someone. Roger requires the tenant to have liability insurance and to add himself to the liability coverage through an endorsement. Under the tenant's liability insurance, Roger is a(n)

additional insured.

Ashley opened an all-you-can-eat buffet restaurant. The price per-person was based on what Ashley believed an average restaurant patron would consume. The restaurant began to lose money. Ashley concluded that her patrons had "above average" appetites, and were attracted to her restaurant because they could eat as much as they wanted while being charged an average price. A similar phenomenon exists in insurance markets. This problem is called

adverse selection.

The tendency for unhealthy people to seek life or health insurance at standard rates is an example of

adverse selection.

A total loss under a valued policy is settled on the basis of the

amount of insurance covering the loss.

A reciprocal exchange is managed by a corporation that is authorized to collect premiums, pay losses, invest funds, seek new members, and perform other functions. This corporate manager is called a(n)

attorney-in-fact.

Factors a risk manager must consider in selecting an insurer include which of the following? I.The availability of risk management services II.The financial strength of the insurer

both I and II

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

Preloss objectives of risk management include which of the following? I.Preparing for potential losses in the most economical way II.Reduction of anxiety

both I and II

Reasons why a peril may be considered uninsurable and therefore excluded from insurance contracts include which of the following? I.The losses from the occurrence of the peril may be due to a predictable decline in value. II.The losses from the occurrence of the peril may be incalculable and catastrophic.

both I and II

Reasons why market, financial, and production risks are often uninsurable include which of the following? I.The potential to produce a catastrophic loss is great. II.The chance of loss cannot be accurately estimated.

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 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 the selection of risk management techniques and insurance market conditions is (are) true? I.It's easier to purchase affordable insurance during a "soft" market than during a "hard" market. II.Retention is used more during a "hard" market than during a "soft" market.

both I and II

Which statement is true concerning the economic problem of premature death in the United States? I.The economic impact of premature death of the breadwinner varies for different types of families. II.Increased life expectancy has increased the economic needs of surviving dependents over time.

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.

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.

Tamara purchased a term insurance policy when she had high life insurance needs and limited income. Now Tamara can afford whole life insurance. What term life insurance provision will permit Tamara to switch her term insurance to whole life insurance without having to show that she is still insurable?

conversion provision

Dave purchased a life insurance policy. The policy is nonparticipating and the cash values are based on the insurer's present mortality, investment, and expense experience. After 2 years, the insurer will recalculate the premium based on the mortality, investment, and expense experience at that time. Dave purchased

current assumption whole life

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 Term Life Insurance Company uses is called the

direct response system.

A risk that affects only individuals or small groups and not the entire economy is called a

diversifiable risk.

Which of the following is least likely to occur during a "hard" insurance market period?

ease in obtaining insurance

Shauna hurt her back and was unable to work. She filed a claim under her disability income insurance policy. Under terms of the policy, a period of time must pass between when the injury occurred and when the insurer begins to replace lost earnings. This time period is called a(n)

elimination (waiting) period.

Mark reviewed his homeowners policy. He learned that his personal property was insured on an actual cash value basis. He would like replacement cost coverage on his personal property. He contacted his agent who said, "I'll simply add an amendment to your contract that changes the basis of recovery to replacement cost." The written provision the agent was referring to is called a(n)

endorsement.

A name that encompasses all of the major risks faced by a business firm is

enterprise risk.

Frank asked his company's employee benefits director if his group health coverage could be converted to individual coverage. The benefits director said, "Yes, you can convert to an individual policy, and the coverage is identical to your group coverage." Frank quit his job and converted to an individual policy. Six months later he filed a claim. He was dismayed to learn the conversion policy was more limited compared to the group coverage, and his claim was denied. What legal doctrine will allow Frank to bring a successful legal action against his former employer because he was financially harmed due to his reasonable reliance upon a representation of fact?

estoppel

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.

The exclusion of flood in a homeowners policy is an example of an

excluded peril.

The premium that insurance companies charge does not cover the cost of expected losses only. The premium must also cover the cost of compensating agents and other costs of doing business. The amount added to the pure premium to cover these costs is called the

expense loading.

A discount store chain is concerned that cashiers might steal money from cash registers. To provide protection against theft by the cashiers, the discount store chain can purchase a

fidelity bond.

Inland marine insurance provides coverage for

goods being shipped on land.

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.

Powers necessary for an agent to perform incidental acts to fulfill the agency agreement on behalf of a principal are

implied authority.

To calculate a human life value, it is necessary to deduct certain costs from a person's average annual earnings. These costs include

income taxes.

Ryan decided to review his personal risk management program. His car is 10 years old, and he would receive little money from his insurer if the car was damaged or destroyed. Ryan decided to drop the physical damage insurance on the car. From a risk management perspective, dropping the physical damage insurance on the car is best described as

increasing the use of retention in the risk management program.

Gwen purchased an interesting life insurance policy. A minimum interest rate is guaranteed on the cash value, but additional interest may be credited based on the investment performance of a group of common stocks. There is also a cap on the additional interest credited to the policy. Based on this information, what type of life insurance did Gwen purchase?

indexed universal life insurance

Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called

legal hazard.

Which of the following is an example of private insurance?

life insurance

All of the following are examples of personal risks EXCEPT

loss of business income.

A specialized type of "wholesale" producer that unlike "retail" producers, is vested with underwriting authority from an insurer is a(n)

managing general agent.

Vincent is a specialized wholesale producer who had been vested with underwriting authority by an insurer. Vincent helps to write professional liability insurance, surplus lines, and some personal lines in a sparsely populated area in his territory. Vincent is a(n)

managing general agent.

Hank bought a farm that had an old barn. He noticed one day that the roof of the barn was swaying in the wind. Hank went to see his insurance agent and he insured the barn for $20,000. The agent asked if the roof might collapse, and Hank said he had no reason to think so. One week later there was a strong wind and the roof collapsed. Assuming the insurer can prove it, under what legal grounds could the insurer deny payment of the claim?

misrepresentation

Eric's property was damaged in an accident. He phoned his agent to see if the loss was covered under his property insurance policy. The agent said, "As long as the cause of loss is included in the policy, the loss is covered." Based on the agent's answer, what type of insuring agreement appears in the policy?

named-perils coverage

Which of the following statements about a calendar-year deductible is (are) true? I.It requires the insured to pay a specified amount of each claim regardless of when the claim occurs during the year and regardless of any previous claims during the year. II.It is used only in policies which cover direct property losses.

neither I nor II

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

The difference between the legal reserve of a whole life policy and the face amount of insurance is the

net amount at risk.

Rapid inflation, cyclical unemployment, war, hurricanes, and floods are all examples of

nondiversifiable risks

Brad started a pest control business. To protect his personal assets against liability arising out of the business, Brad incorporated the business. Brad's use of the corporate form of organization to shield against personal liability claims illustrates

noninsurance transfer.

ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects that 8 homeowners out of every 100, on average, will report claims each year. The variation between the rate of loss that ABC expects to occur and the rate of loss that actually occurs is called

objective risk.

Most family heads need substantial amounts of life insurance. However, with limited income, money spent on life insurance reduces the amount of discretionary income available for other high-priority needs. What an insured person gives up when he or she purchases life insurance instead of using the premium dollars for other purposes is called the

opportunity cost of buying life insurance.

Alex, age 26, purchased a 20-payment whole life insurance policy. After Alex has made 20 premium payments, his life insurance policy is considered

paid-up.

Barb, who is self-employed, is the main breadwinner for her family. Barb does not have disability income insurance because she has never stopped to consider the impact of a long-term disability upon her family. Barb's treatment of the risk of disability is best described as

passive retention.

A pharmaceutical company employs a young chemist who is responsible for three new patents last year and for the development of the company's two best-selling drugs. The company purchased a large life insurance policy on the chemist. In this case, the insurable interest requirement was met because of a(n)

pecuniary interest.

A pharmaceutical company employs a young chemist who is responsible for three new patents last year and for the development of the company's two best-selling drugs. The company purchased a large life insurance policy on the chemist. In this case, the insurable interest requirement was met because of a(n) Correct!

pecuniary interest.

Icy roads that increase the chance of an automobile accident are an example of a

physical hazard.

Which of the following is a basic characteristic of insurance?

pooling of losses

The worst loss that is likely to happen is referred to as the

probable maximum loss.

Loss severity is defined as the

probable size of the losses which may occur during some period.

Intermediaries who are licensed as agents and/or brokers who sell most insurance policies are called

producers

Which of the following types of risks best meets the requirements for being insurable by private insurers?

property risks

A special coverage policy is a policy that

provides open-perils coverage.

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 insurance contracts

The use of fire-resistive materials when constructing a building is an example of

risk control.

From the insured's perspective, the use of deductibles in insurance contracts is an example of

risk retention.

Discount Department Stores is a national retail chain. The company had one large, central warehouse. At the suggestion of the risk manager, the company decided to build four smaller regional warehouses so that a loss at the central warehouse would not be a catastrophic blow to the company's distribution system. Splitting the inventory between four regional warehouses illustrates which risk management technique?

separation

Which of the following is implied by the pooling of losses?

sharing of losses by an entire group

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.

A highly specialized technician who provides local agents in the field with technical help and assistance with marketing problems is called a(n)

special agent.

Jim and Paula Franklin started a dry cleaning business. The business may be successful or it may fail. The type of risk that is present when either a profit or loss could occur is called

speculative risk.

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.

The deductible used for automobile collision losses is an example of a(n)

straight deductible.

Uncertainty based on a person's mental condition or state of mind is known as

subjective risk.

The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT

subrogation.

The local franchise of a national bar and grill chain continued to serve a drunk customer. The drunk customer tried to drive home. He hit and killed two people who were riding bicycles. The representatives of those who were killed filed a lawsuit against the national chain. As jury awards in the area where the incident occurred are high, insurers selling liquor liability insurance refused to issue new coverage until the case was resolved. Because no admitted insurers sell the coverage, liquor liability insurance in this case is considered a(n)

surplus line.

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 75 percent of any losses. What type of reinsurance arrangement did Granite enter into with RSR?

surplus share reinsurance

Risk management is concerned with

the identification and treatment of loss exposures.

Which of the following is an example of a commercial risk?

the loss of business income

Melody's car was damaged when another driver ran a stop sign and hit her car. Melody decided to collect from her own insurer and to let her insurer recoup the loss payment from the negligent driver who hit her. What fundamental legal principle is illustrated in this scenario?

the principle of subrogation

Objective risk is defined as

the relative variation of actual loss from expected loss.

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

to identify production goals

New Liability Insurance Company began operations last year and has been very successful. The company's ability to grow is being restricted by an accounting rule that requires insurers to realize acquisition expenses immediately, while not realizing premiums received as income until some time has passed. Reinsurance is often used in such cases for which of the following purposes?

to reduce the unearned premium reserve

Traditionally, risk has been defined as

uncertainty concerning the occurrence of loss.

Jan is employed by an insurance company. She reviews applications to determine whether her company should insure the applicant. If insurable, Jan assigns the applicant to a rating category based on the applicant's degree of risk. Jan is a(n)

underwriter.

Ann is considering the purchase of a life insurance policy with these characteristics: flexible premium payments, the insurance and savings components are separate, the interest rate credited to the cash value is tied to a changing market interest rate but a minimum interest rate is guaranteed, and a monthly administrative fee is charged. Ann is considering buying

universal life insurance

Janice mistakenly thought that Medicare covers the cost of a long-term care in a nursing home. So she did not purchase long-term care insurance or save in case she needed a long stay in a nursing home. Janice's treatment of the risk of a long-term stay in a nursing home is best described as

unplanned retention.

The voluntary relinquishment of a legal right is called

waiver.

David owns a liquor store in a high-crime area. In order to obtain a reduced insurance premium, David promised to have a burglar alarm operating at the store when the store was closed. This agreement, which was incorporated into the insurance contract, is an example of a

warranty.

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.