Insurance Quiz Questions

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 loss is not specifically excluded in the policy, the loss is covered." Based on the agent's answer, what type of insuring agreement appears in the policy?

"all-risks" coverage

Sam's stereo was destroyed by a fire. The stereo cost $1200 when it was purchased, but a similar new stereo now costs $1800. Assuming the stereo was 50 percent depreciated, what is the actual cash value of Sam's loss?

$900

Deductibles are used in all of the following types of insurance EXCEPT (a) life insurance. (b) health insurance. (c) property insurance. (d) automobile insurance.

(a) life insurance.

All of the following can be classified as casualty insurance EXCEPT: (a) marine insurance. (b) general liability insurance. (c) workers compensation insurance. (d) burglary and theft insurance.

(a) marine insurance.

All of the following are characteristics of insurance EXCEPT: (a) risk avoidance. (b) pooling of losses. (c) payment of fortuitous losses. (d) indemnification.

(a) risk avoidance.

All of the following are basic purposes of subrogation EXCEPT (a) to eliminate adverse selection. (b) to hold down the cost of insurance. (c) to prevent an insured from collecting twice for the same loss. (d) to hold the negligent person responsible for a loss.

(a) to eliminate adverse selection.

Of the following statements about the general agency system, all are true EXCEPT: (a) A general agent is responsible for hiring, training, and motivating new agents. (b) A general agent is a salaried employee whose responsibilities are limited to selling life insurance. (c) A general agent may receive an allowance for the expenses of maintaining an agency office. (d) A general agent receives a commission based on the amount of business produced.

(b) A general agent is a salaried employee whose responsibilities are limited to selling life insurance.

From the viewpoint of the insurer, all of the following are characteristics of an insurable risk EXCEPT: (a) The loss must be accidental. (b) The loss should be catastrophic. (c) The premium must be economically feasible. (d) There must be a large number of exposure units.

(b) The loss should be catastrophic.

All of the following statements about underwriting standards are true EXCEPT (a) The purpose of underwriting standards is to reduce adverse selection against the insurer. (b) The underwriter should select only those insureds who are expected to have no losses. (c) The underwriter should select a book of business so that there is a proper balance within each rate classification. (d) Equitable rates should be charged so that each group of policyowners pays its own way in terms of losses and expenses.

(b) The underwriter should select only those insureds who are expected to have no losses.

All of the following are methods of non-insurance transfer EXCEPT (a) entering into hold-harmless agreements. (b) avoiding dangerous activities. (c) hedging risk using stock index futures. (d) incorporating a business.

(b) avoiding dangerous activities.

All of the following are risk management objectives prior to the occurrence of loss EXCEPT (a) economy. (b) continued operations. (c) reduction of anxiety. (d) meeting externally imposed obligations.

(b) continued operations.

12.All of the following are benefits to society that result from insurance EXCEPT (a) less worry and fear. (b) elimination of moral hazard. (c) indemnification for loss. (d) loss prevention.

(b) elimination of moral hazard.

All of the following about administration of a risk management program are true EXCEPT: (a) The risk manager is an important part of a firm's management team. (b) A risk management policy statement can be used to educate top executives about the risk management process. (c) If a risk management program is properly designed, periodic review of the program is unnecessary. (d) In order to properly identify loss exposures, the risk manager needs the cooperation of other departments

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

All of the following are disadvantages of using insurance EXCEPT: (a) There is an opportunity cost because premiums must be paid in advance. (b) Considerable time and effort must be spent selecting and negotiating coverages. (c) It results in considerable fluctuations in earnings after a loss occurs. (d) Attitudes toward loss control may become lax.

(c) It results in considerable fluctuations in earnings after a loss occurs.

All of the following statements about retention are true EXCEPT: (a) It may be used deliberately if commercial insurance is unavailable. (b) It may be used passively because of ignorance. (c) Its use is most appropriate for low- frequency, high-severity types of risks. (d) Its use results in cost savings if losses are less than the cost of insurance.

(c) Its use is most appropriate for low- frequency, high-severity types of risks.

All of the following are reasons why mutual insurance companies convert to stock insurance companies EXCEPT (a) Stock companies can offer stock options to attract and retain key personnel. (b) Stock companies more easily raise capital. (c) Stock companies are exempt from state insurance regulation. (d) Stock companies offer greater flexibility to expand through acquisitions.

(c) Stock companies are exempt from state insurance regulation.

Which of the following statements about stock insurers is true? (a) They issue assessable policies. (b) They are not permitted to write property and liability insurance. (c) Stockholders bear any losses and share in any profits. (d) They are owned by their policyowners who participate in profits but not in losses.

(c) Stockholders bear any losses and share in any profits

All of the following statements about the settlement of a claim are true EXCEPT (a) The insurance policy usually has a provision specifying how a notice of loss is to be made to the insurance company. (b) One step in the investigation of a claim is to determine whether the policy was in force when the loss occurred. (c) The adjustor must file the proof of loss, which is a sworn statement supporting his or her decision regarding a claim. (d) A policy provision may determine how disputes over claim settlements are resolved.

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

From the standpoint of the insurer, all of the following are characteristics of an insurable risk EXCEPT (a) The loss must be unintentional. (b) The chance of loss must be calculable. (c) The loss must be indeterminable. (d) The loss must be measurable.

(c) The loss must be indeterminable.

All of the following statements about captive insurers are true EXCEPT: (a) They may act as a profit center by insuring parties other than the parent company. (b) They are a method for obtaining types of insurance that may be unavailable from commercial insurers. (c) They increase the volatility of a firm's earnings. (d) They make it easier for a firm to have access to reinsurance.

(c) They increase the volatility of a firm's earnings.

The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT (a) representations. (b) warranty. (c) subrogation. (d) concealment.

(c) subrogation.

All of the following statements about claims settlement are true EXCEPT (a) Agents may have the authority to settle claims. (b) 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. (c) Company adjustors are salaried employees who work for one insurer. (d) A public adjustor is usually paid a flat fee that is independent of the size of a claim.

(d) A public adjustor is usually paid a flat fee that is independent of the size of a claim.

All of the following statements about reinsurance are true EXCEPT (a) A reinsurer may also purchase reinsurance. (b) Reinsurance involves the shifting of all or part of the insurance originally written by one insurer to another insurer. (c) The insurer transferring business to a reinsurer is called the ceding insurer. (d) The amount of insurance transferred to a reinsurer is called the net retention.

(d) The amount of insurance transferred to a reinsurer is called the net retention.

All of the following statements about endorsements and riders are true EXCEPT (a) They are usually written. (b) They can be used to add or delete policy provisions. (c) They normally take precedence over other conflicting policy provisions. (d) They are primarily used to circumvent the purpose of legislation requiring specific policy provisions.

(d) They are primarily used to circumvent the purpose of legislation requiring specific policy provisions

Which of the following statements about mutual insurers is true? (a) They are legally organized as partnerships. (b) They have a board of directors which is selected by state insurance departments. (c) They are owned by their stockholders. (d) They may pay policy dividends or give rate reductions in advance.

(d) They may pay policy dividends or give rate reductions in advance.

All of the following are exceptions to the principle of indemnity EXCEPT (a) life insurance. (b) valued policies. (c) replacement cost property insurance. (d) actual cash value property insurance.

(d) actual cash value property insurance.

Which of the following types of loss exposures are best met by the use of avoidance?

(d) high-frequency, high-severity

A false statement made by an applicant for insurance is an example of a

(d) misrepresentation.

Common sources of underwriting information for life and health insurance include all of the following EXCEPT (a) the application. (b) a physical examination. (c) the Medical Information Bureau. (d) the insured's income tax return.

(d) the insured's income tax return.

All of the following are purposes of deductibles EXCEPT (a) to eliminate small claims. (b) to reduce premiums. (c) to reduce morale hazard. (d) to exclude uninsurable perils.

(d) to exclude uninsurable perils.

According to the law of large numbers, what happens as the number of exposure units increases?

Actual results will more closely approach probable results.

Reasons why market, financial, & production risks are 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 Lloyd's of London is true?

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

Helen and John both own automobiles on which they carry liability insurance. If Helen is negligent and has an accident while driving John's car, how will each insurer respond to any liability judgment against Helen?

Helen's insurance will pay on excess basis if John's insurance is insufficient to cover the judgment.

11.Which of the following statements about an insurance warranty is (are) true? I. It is part of the insurance contract. II. Statements made by an insurance applicant are considered warranties rather than representations.

I only

Advantages of the direct response system include which of the following? I. Advertising can be aimed at selected markets. II. Complex products can be easily sold.

I only

Which of the following statements about "all-risks" coverage is (are) true? I. All losses are covered except those losses specifically excluded. II. The burden of proof is on the insured to prove that a loss is covered.

I only

Which of the following statements about liability risks is (are) true? I. Future income and assets can be attached to pay judgments if inadequate insurance is carried. II. There is an upper limit on the amount of loss.

I only

Which of the following statements about the definition of the insured is (are) true? I. Under some circumstances, 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 use of deductibles is (are) true? I. They represent risk retention by insurance purchasers. II. They tend to increase the cost of adjusting small claims.

I only

Which of the following types of insurance policies can usually be assigned without the insurer's consent? I. Life insurance II. Property insurance

I only

Which of the following conditions is (are) appropriate for using retention? I. Losses are difficult to predict. II. The worst possible loss is not serious.

II only

Which of the following statements about a reciprocal exchange is (are) true? I. It usually specializes in health insurance. II. It is managed by an attorney- in-fact authorized to perform various management functions.

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 the managerial system (are) true? I. It uses branch offices run by independent agents who represent several companies. II. The branch manager is an employee of the insurer who hires & trains new agents.

II only

Which of the following statements about the principle of insurable interest is (are) true? I. It makes it difficult to measure the amount of an insured's loss. II. It reduces moral hazard.

II only

Which of the following types of losses may be best handled through the purchase of insurance? I. High-frequency, low-severity II. Low-frequency, high-severity

II only

All of the following statements about avoidance are true EXCEPT (a) Certain loss exposures are never acquired. (b) Certain loss exposures may be abandoned. (c) The chance of loss for certain loss exposures may be reduced to zero. (d)It can be used for any loss exposure facing a firm.

It can be used for any loss exposure facing a firm.

Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis?

Losses are settled without a deduction for depreciation.

Why are insurance contracts said to be contracts of adhesion?

One party writes the contract, and the other party must accept the contract as written.

What is the practical effect of an insurance policy being a conditional contract?

The insurer can refuse to pay claims unless the insured has complied with all policy conditions.

What is the practical effect of an insurance policy being a contract of adhesion?

The policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties.

Which of the following statements about speculative risks is true?

Their occurrence may benefit society

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

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

Which of the following is a result of adverse selection?

Those persons who are most likely to have losses are also the most likely to seek insurance at standard rates.

What information is contained in the insuring agreement of an insurance policy?

a summary of the major promises of the insurer

The primary purpose of coinsurance in property insurance is to

achieve equity in rating.

The underwriting process begins with the

agent

A contract in which the values exchanged are not equal because chance is involved is called a(n)

aleatory contract.

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

binder

Which of the following statements about problems arising from the use of a coinsurance clause is (are) true? I. The amount of insurance should be periodically evaluated to avoid a coinsurance penalty because of inflation. II. An agreed value coverage option is one method used to solve the problem of values that fluctuate throughout the policy term.

both I & II

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

both I and II

Which of the following is a reason why premature death may result in economic insecurity? I. Additional expenses associated with death may be incurred. II. The income of the deceased person's family may be inadequate to meet its basic needs.

both I and II

Janet hit a wall causing a large dent in her fender. She was busy at work and delayed reporting the damage to her insurer for 9 months. The insurer denied the claim, stating, "Although such a loss is usually covered, you are required to provide prompt notification in case of loss." The prompt notification requirement is an example of a(n)

condition

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

condition

The portion of a property and liability insurance contract that contains information about the property or activity to be insured is called the

declarations

The function of an actuary is to

determine premium rates.

RST Ins. Co. doesn't have any agents! The Co. sells insurance through radio & newspaper ads, and telemarketers. This distribution method is called

direct response system

Gina would like to buy a house. She will pay 10% of the cost of the house as a down payment & borrow the other 90% from a lender. The home will serve as collateral. The lender requires Gina to purchase property insurance so that the collateral supporting the loan is protected. This illustrates which of the following benefits of insurance to society?

enhancement of credit

ABC Insurance retains the first $1 MIL of each property damage loss and purchases insurance for that part of any property loss that exceeds $1MIL. The insurance for losses above $1 million is called

excess insurance

ABC Ins. Co. calculated the amount it expected to pay in claims under each policy sold. Rather than sell insurance for the amount it expected to pay in claims, ABC added an allowance to cover the cost of doing business to include commissions, taxes, & acquisition expenses. This is called a(n)

expense loading.

The financial services field is experiencing consolidations and mergers. If both these trends continue, in the future we should observe

fewer financial institutions offering a wider range of financial services products.

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

Inland marine insurance provides coverage for

goods being shipped on land.

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

independent agent

The extra expense incurred by a business to stay in operation following a fire is an example of a(n)

indirect loss

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

Ben is concerned that if he injures someone or damages their property he could be held legally responsible. This type of risk is called a

liability risk

Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new facility. These devices are all examples of

loss control.

A situation or circumstance in which a loss is possible, regardless or whether a loss occurs, is called a

loss exposure.

Faking an accident to collect insurance proceeds is an example of a

moral hazard

When must an insurable interest legally exist in life insurance?

only at the inception of the policy

Dense fog that increases the chance of an automobile accident is an example of a

physical hazard

The purpose of other- insurance provisions is to

preserve the principle of indemnity.

Loss frequency is defined as the

probable number of losses that may occur during some period.

Loss severity is defined as the

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

The term "multiple-line insurance" is used to describe a type of insurance that combines which of the following coverages into a single contract?

property and casualty insurance

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

property risks

Low-frequency, low-severity loss exposures are best handled by

retention.

MLX Drug Company would like to market a new drug. The Food and Drug Administration (FDA) discovered the drug produced a harmful side effect. When MLX learned of this they abandoned plans to produce and distribute the drug. This illustrates

risk avoidance

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

risk retention

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

sharing of losses by an entire group

One branch of government insurance programs has a few unique characteristics. These programs are compulsory, financed by mandatory contributions, not tax revenues, and benefits are weighted in favor of low-income groups. These programs are called

social insurance programs

The deductible for auto 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.

Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for her loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of

subrogation

A peril is

the cause of a loss.

Risk management is concerned with

the identification and treatment of loss exposures.

Which of the following is a fundamental purpose of the principle of indemnity?

to reduce moral hazard

Insurance authors have traditionally defined risk as

uncertainty concerning occurrence of loss.