MID TERM

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Which of the following statements about the change of plan provision in a life insurance contract is (are) true? I. A change to a lower premium policy results in a refund of the difference in the cash values of the two policies. II. A change to a higher premium policy requires evidence of insurability. A) I only B) II only C) both I and II D) neither I nor II

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. A) I only B) II only C) both I and II D) neither I nor II

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. A) I only B) II only C) both I and II D) neither I nor II

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. A) I only B) II only C) both I and II D) neither I nor II

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. A) I only B) II only C) both I and II D) neither I nor II

Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new manufacturing facility. These devices are all examples of A) risk control. B) noninsurance transfer. C) risk avoidance. D) risk retention

A peril is A) a moral hazard. B) the cause of a loss. C) a condition that increases the chance of a loss. D) the probability that a loss will occur. Answer: B

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) A) holding company. B) attorney-in-fact. C) resident agent. D) captive manager

A situation or circumstance in which a loss is possible, regardless of whether a loss occurs, is called a A) deductible. B) loss exposure. C) loss avoidance. D) peri

Insurers obtain data that can be used to determine rates from A) pricing pools. B) insurance advisory organizations. C) banks. D) reciprocal exchanges

Which of the following statements about variable universal life insurance is (are) true? I Variable universal life insurance has fixed premium payments. II. Variable universal life insurance allows the policyowner to decide where the premiums are invested. A) I only B) II only C) both I and II D) neither I nor II

A shortcoming of state regulation of insurance according to Congressional committees and the General Accounting Office is that state regulation A) leads to decentralized governmental power. B) provides opportunities for innovation. C) provides inadequate consumer protection. D) is more responsive to local needs

Which of the following statements about subrogation is true? A) It is used primarily for losses paid under life insurance policies. B) It allows the insurer to sue its own insured who is negligent. C) The insured's right to collect benefits may be forfeited if the insured interferes with the insurer's subrogation rights after a loss occurs. D) The insurer is required to exercise its subrogation rights

Which of the following statements about the entire contract clause is true? A) It allows the insurer to change the policy terms without the insured's consent. B) It specifies that all statements in the application are considered warranties. C) It specifies that the life insurance policy and the attached application constitute the complete agreement between the parties. D) It prevents the insurance company from contesting a policy after it has been in force for two years during the lifetime of the insured

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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements is (are) true about life insurance company investments? I. The majority of life insurance company general account assets are invested in bonds. II. The majority of life insurance company separate account assets are invested in stocks. A) I only B) II only C) both I and II D) neither I nor II

A highly specialized technician who provides local agents in the field with technical help and assistance with marketing problems is called a(n) A) general agent. B) actuary. C) Certified Financial Planner. D) special agent.

Which of the following statements about life income settlement options is (are) true? I. Under a joint-and-survivor life income option, payments cease at the death of the first annuitant. II. Under a life income with guaranteed period, a contingent beneficiary is guaranteed a minimum number of payments regardless of when the primary beneficiary dies. A) I only B) II only C) both I and II D) neither I nor II

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 dividends to their policyholders

Which of the following statements about reinsurance is true? A) A reinsurer may not purchase reinsurance. B) The reinsurer is the first insurer that provides claims services to the insured after a loss occurs. C) The amount of insurance transferred to a reinsurer is called the net retention. D) The insurer transferring business to a reinsurer is called the ceding company

Which of the following statements about yearly renewable term insurance is (are) true? I. It requires evidence of insurability for renewal. II. It is most appropriate when an insured needs lifetime protection. A) I only B) II only C) both I and II D) neither I nor II

In addition to marketing life insurance, life insurers typically sell which of the following products? I. Retirement annuities II. Disability income insurance A) I only B) II only C) both I and II D) neither I nor II

The worst loss that could ever happen to a firm is referred to as the A) maximum possible loss. B) probable maximum loss. C) frequency of loss. D) severity of loss

A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that each farmer sustained. Which characteristic of insurance is embodied in this agreement? A) pooling of losses B) fortuitous losses C) risk avoidance D) indemnification

A life insurance contractual provision protects the beneficiary by not permitting the insurer to introduce outside information to deny payment of the claim. Such outside information might be notes that the agent took while the insured completed the application. This contractual provision is the A) entire contract clause. B) incontestable clause. C) reinstatement clause. D) change-of-plan provision

A pure risk is defined as a situation in which there is A) only the possibility of loss or no loss. B) only the possibility of profit. C) a possibility of neither profit nor loss. D) a possibility of either profit or loss

A risk that affects only individuals or small groups and not the entire economy is called a A) diversifiable risk. B) pure risk. C) speculative risk. D) nondiversifiable risk.

Abandoning an existing loss exposure is an example of A) avoidance. B) retention. C) noninsurance transfer. D) insurance transfer

All of the following are reasons for a primary insurer to use reinsurance EXCEPT A) to increase the unearned premium reserve. B) to increase underwriting capacity. C) to protect against catastrophic losses. D) to stabilize profits

All of the following statements about current assumption whole life insurance are true EXCEPT A) It is a form of participating whole life insurance that pays annual dividends. B) An accumulation account is credited with an interest rate based on present market conditions and company experience. C) Under the low-premium version, the premium is subject to change after an initial guaranteed period. D) Under the high-premium version, the premium may be discontinued after a period of time

All of the following statements about the interest settlement option are true EXCEPT A) The minimum guaranteed interest rate is usually equal to the prime rate. B) The interest can be paid monthly, quarterly, semiannually, or annually. C) The beneficiary may be allowed to withdraw part or all of the proceeds. D) The beneficiary may be allowed to change to another settlement option

All of the following statements about the tax treatment of life insurance purchased by an individual are true EXCEPT A) The annual increase in the cash value is currently taxable. B) Premium payments are not tax deductible. C) Death benefits received in a lump sum are not taxable income. D) Policyowner dividends are not considered taxable income

All of the following statements describe the flexibility available to the owner of a universal life insurance policy EXCEPT A) Policy loans are permitted on an interest-free basis. B) The frequency of premium payments can be varied. C) The death benefit can be increased with evidence of insurability. D) Premium payments can be any amount provided there is sufficient cash value to keep the policy in force.

All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT A) former ownership of property. B) potential legal liability. C) secured creditors. D) contractual right.

As an alternative to coinsurance, rate discounts can be given as the amount of insurance to value increases. This alternative is called A) graded rates. B) agreed value coverage. C) retrospective rating. D) manual rating

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) A) holding company. B) shell company. C) upstream company. D) downstream company

At what point in time must an insured meet the coinsurance requirement in a property insurance policy in order to avoid having to pay a portion of the loss? A) only at the time of loss B) only at the time when the policy is issued C) only at the time of policy application D) both at the time when the policy is issued and at the time of loss

Bruce lied about his health history when he purchased a life insurance policy. He died 3 years after the policy was issued. Which life insurance policy provision will require the life insurer to pay the beneficiary even though Bruce lied on the application? A) incontestable clause B) entire contract clause C) ownership clause D) change-of-plan provision

Deductibles are not used in which of the following type of insurance? A) life insurance B) health insurance C) property insurance D) disability income insurance

Following good health habits can be categorized as A) loss prevention. B) risk retention. C) noninsurance transfer. D) personal insurance.

The underwriting process begins with the A) agent. B) desk underwriter. C) inspection report. D) actuary

Gina would like to buy a house. She will pay 10 percent of the cost of the house as a down payment and borrow the other 90 percent from a mortgage lender. The home will serve as collateral for the loan. The lender will not make the loan to Gina unless the home is insured. Using insurance to secure the collateral for a loan illustrates which of the following benefits of insurance to society? A) enhancement of credit B) reduction of fear and worry C) source of investment funds D) incentives for loss prevention

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) A) inspection report. B) application. C) M.I.B. report. D) agent's report.

If insurers were to provide indemnification for losses that were deliberately caused, which characteristic of ideally insurable risks would not be met? A) The loss must be accidental and unintentional. B) The loss must be determinable and measurable. C) The loss should not be catastrophic. D) There must be a large number of similar exposure units

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) A) underwriter. B) actuary. C) loss control engineer. D) claims adjustor

Laura Evans is risk manager of LMN Company. Laura decided to retain certain property loss exposures. Which of the following is a method that Laura can use to fund the retained property losses? A) current net income B) private insurance C) noninsurance transfer D) high deductibles

Loss severity is defined as the A) probable size of the losses which may occur during some period. B) probable number of losses which may occur during some period. C) probability that any particular piece of property may be totally destroyed. D) probability that a liability judgment may exceed a firm's net worth

MLX Drug Company would like to market a new hypertension drug. While the Food and Drug Administration (FDA) was testing the drug, it discovered that the drug produced a harmful side effect. When MLX learned of the FDA's test result, MLX abandoned its plan to produce and distribute the drug. MLX's reaction illustrates A) risk avoidance. B) hedging. C) risk transfer. D) risk retention.

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) A) endorsement. B) coinsurance clause. C) binder. D) deductible

Neil needs insurance that is unavailable in the state where he lives. To obtain insurance from a nonadmitted insurer, Neil should contact a A) surplus lines broker. B) nonadmitted agent. C) general agency broker. D) direct writer

One of the reasons that deductible are used in insurance policies is to A) eliminate coverage for small claims. B) place restrictions or limits on the insurer's promise to perform. C) provide broader coverage by increasing the number of perils covered. D) exclude perils that are not insurableA

Purposes of the coinsurance clause in health insurance contracts include which of the following? I. To reduce premiums. II. To exclude coverage for certain medical procedures. A) I only B) II only C) both I and II D) neither I nor 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 A) captive insurer. B) reciprocal insurer. C) fraternal insurer. D) holding company.

Risk management is concerned with A) the identification and treatment of loss exposures. B) the management of speculative risks only. C) the management of pure risks that are uninsurable. D) the purchase of insurance only.

Sarah owns a property and liability insurance agency. She is authorized to represent several insurance companies and she is compensated by commissions. Sarah's agency owns the expiration rights to the business she sells. Sarah is a(n) A) independent agent. B) exclusive agent. C) direct writer. D) insurance broker

Sue double-majored in mathematics and statistics in college. She also enrolled in a number of finance courses. After graduation, she was hired by Econodeath Insurance Company. Her job is to calculate premium rates for life insurance coverages. Sue is a(n) A) actuary. B) underwriter. C) claims adjustor. D) producer

Temporary evidence of insurance until a policy is actually issued is provided by a(n) A) binder. B) brokerage agreement. C) pre-approval form. D) endorsement

That part of a property and liability insurance contract that contains information about the property or activity to be insured is called the A) declarations. B) insuring agreement. C) exclusions. D) conditions

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? A) active retention B) noninsurance transfer C) passive retention D) avoidance

What happens to the premiums for yearly renewable term insurance as an insured gets older? A) They increase at an increasing rate. B) They increase at a decreasing rate. C) They decrease at a constant rate. D) They remain level.

When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer? A) only at the time of the loss B) only at the inception of the policy C) only at the time the loss settlement takes place D) both at the time of the loss and at the inception of the policy

Which of the following is a basic characteristic of insurance? A) pooling of losses B) avoidance of risk C) payment of intentional losses D) certainty about specific losses that will occur

Which of the following is a fundamental purpose of the principle of indemnity? A) to reduce moral hazard B) to minimize physical hazards C) to settle property insurance losses on a replacement cost basis D) to require deductibles in all property insurance policies

Which of the following is authority given to the Federal Insurance Office created by the Dodd-Frank Act? A) to represent the federal government in international discussions of insurance regulation B) to license and charter new insurance companies that plan to operate nationally C) to be the primary monitor of insurance company solvency D) to be the primary regulator of all aspects of insurance

Which of the following is classified as casualty insurance? A) workers compensation insurance B) fire insurance C) marine insurance D) life insurance

Which of the following is implied by the pooling of losses? A) sharing of losses by an entire group B) inability to predict losses with any degree of accuracy C) substitution of actual loss for average loss D) increase of objective risk

Which of the following statements about "open-perils" 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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about Lloyd's of London is true? A) Coverage is actually written by syndicates who belong to Lloyd's of London. B) New individual members or Names who belong to the various syndicates have unlimited legal liability. C) It operates as an admitted insurer throughout the United States. D) It allows underwriters to write coverage without meeting stringent financial requirements.

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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about self-insurance is (are) true? I. It is a form of planned retention. II. State law usually prohibits its use for workers compensation. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about the use of interest-adjusted cost data for comparing life insurance policies is (are) true? I. Using interest-adjusted cost data provides a more accurate measure of the cost of life insurance than is provided if the time value of money is ignored. II. Its use is most appropriate in deciding between policies when the cost variation is very small. A) I only B) II only C) both I and II D) neither I nor II

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. A) I only B) II only C) both I and II D) neither I nor II

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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements is (are) true regarding taxation of life insurance? I. Life insurance proceeds paid in a lump-sum to a designated beneficiary are received free of federal income taxes. II. The policyowner must pay taxes annually on the amount by which the cash value of his or her life insurance policy has increased. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements regarding insurance and gambling is (are) true? I. Insurance is used to handle existing pure risks, while gambling creates a new speculative risk. II. Insurance usually involves risk avoidance, while gambling typically involves only risk reduction. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements regarding private insurance and government insurance is (are) true? I. Private insurance programs include life and health insurance and property and liability insurance. II. Social insurance programs are government insurance programs that are voluntary and financed entirely by contributions from covered employers. A) I only B) II only C) both I and II D) neither I nor II

Under the needs approach, when is the dependency period of a surviving spouse assumed to end? A) 1 or 2 years after the breadwinner's death B) when the youngest child reaches age 18 C) when the surviving spouse reaches age 65 D) when the surviving spouse dies

A special form of planned retention by which part or all of a give loss exposure is retained by the firm is called A) hedging. B) self-insurance. C) passive retention. D) noninsurance transfer.

A whole life insurance policy in which premiums are reduced for an initial period (e.g. 3 years) and are higher thereafter is an example of a A) level-term policy. B) modified life policy. C) limited-payment whole life policy. D) variable life policy.

ABC Insurance Company sells auto insurance in one state. Recently, the state legislature passed a law that limits the use of an individual's credit history by insurers when selecting applicants to insure. This change in law will increase the possibility of unprofitable results for ABC. This type of hazard is an example of A) physical hazard. B) legal hazard. C) moral hazard. D) attitudinal hazard

According to the law of large numbers, what happens as the number of exposure units increases? A) Actual results will increasingly differ from probable results. B) Actual results will more closely approach probable results. C) Nondiversifiable risk will decrease. D) Objective risk will increase.

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

All of the following are burdens to society because of the presence of risk EXCEPT A) The size of an emergency fund must be increased. B) Risk provides an incentive for people to engage in loss control. C) Society is deprived of certain goods and services. D) Mental fear and worry are present

Amy purchased a life insurance policy with the intent of committing suicide to pay all the debts that were burdening her family. If she commits suicide 9 months after the policy is purchased, and the insurer is able to prove that her death was a suicide, how much will be paid by the insurance company? A) nothing, because the policy is void B) the premiums paid for the policy C) the policy's cash value D) the face value of the policy

An automobile that is a total loss as a result of a collision is an example of which of the following types of risk? I. Speculative risk II. Diversifiable risk A) I only B) II only C) both I and II D) neither I nor II

An earthquake is an example of a(n) A) moral hazard. B) peril. C) physical hazard. D) objective risk

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 A) legal hazard. B) adverse selection. C) attitudinal hazard. D) nondiversifiable risk

BBB Auto Club provides emergency road service and other services to its members. BBB Auto Club charges a higher membership fee to new members than it charges to members who are renewing their membership. When asked to explain this pricing policy, the auto club president noted, "New members often sign-up prior to taking a long road trip, so we have to charge more as first-year members have higher service utilization rates." A similar phenomenon observed in insurance markets is called A) attitudinal hazard. B) adverse selection. C) risk aversion. D) moral hazard

Ben is concerned that if he injures someone or damages someone's property he could be held legally responsible and required to pay damages. This type of risk is called a A) speculative risk. B) liability risk. C) nondiversifiable risk. D) property risk.

Characteristics of a fortuitous loss include which of the following? I. The loss is certain to occur. II. The loss occurs as a result of chance. A) I only B) II only C) both I and II D) neither I nor II

Faking an accident to collect insurance proceeds is an example of A) physical hazard. B) objective risk. C) moral hazard. D) attitudinal hazard

Dave and Meagan Philips borrowed $150,000 from Fifth National Bank to help fund the purchase of a new home. The home serves as collateral for the loan. Fifth National has an insurable interest in the home based on A) potential responsibility for legal liability. B) being a secured creditor. C) expectation of ownership. D) having a contractual right

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

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? A) $600,000 B) $700,000 C) $720,000 D) $800,000

Exclusions are used in insurance policies for all of the following reasons EXCEPT A) to reduce moral hazard. B) to waive policy conditions. C) to eliminate coverage for uninsurable perils. D) to eliminate coverage not needed by typical insureds

Five years ago, Shannon decided to start investing monthly in the common stock of ABC Telecom Company. Her financial well-being will be harmed if the price of ABC Telecom stock drops significantly. The risk of investment loss can be reduced if she invests in other companies and other types of financial assets. The risk Shannon faces with regard to her investments is a(n) A) enterprise risk. B) diversifiable risk. C) pure risk. D) nondiversifiable risk.

From the viewpoint of the insurer, all of the following are characteristics of an ideally 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

Fundamental purposes of the principle of indemnity include which of the following? I. To reduce physical hazards II. To prevent the insured from profiting from insurance A) I only B) II only C) both I and II D) neither I nor II

In a reinsurance transaction, the ceding commission is paid by A) the insured to the ceding company. B) the reinsurer to the ceding company. C) the ceding company to the insured. D) the ceding company to the reinsurer.

Insurance companies collect premiums in advance. Since the premiums collected are not needed to pay losses and expenses immediately, the funds can be loaned to business firms. Because of this fact, insurance benefits society by A) enhancing credit. B) providing a source of investment funds. C) indemnifying losses. D) providing an incentive for loss prevention

JKL Insurance Company reported the following information on its accounting statements last year: Premiums Written $90,000,000 Loss Adjustment Expenses $5,000,000 Underwriting Expenses $30,000,000 Premiums Earned $100,000,000 Incurred Losses $70,000,000 What was JKL's loss ratio last year? A) 70.0 percent B) 75.0 percent (70,000,000 + 5,000,000)/100,000,000 C) 83.3 percent D) 90.0 percent

Katelyn was just named Risk Manager of ABC Company. She has decided to create a risk management program which considers all of the risks faced by ABC—pure, speculative, operational, and strategic—in a single risk management program. Such a program is called a(n) A) financial risk management program. B) enterprise risk management program. C) fundamental risk management program. D) consequential risk management program

Loss frequency is defined as the A) probable size of the losses that may occur during some period. B) probable number of losses that may occur during some period. C) probability that any particular piece of property may be totally destroyed. D) probability that a liability judgment may exceed a firm's net worth

Low-frequency, low-severity loss exposures are best handled by A) avoidance. B) retention. C) insurance. D) noninsurance transfer.

Maggie purchased a life insurance policy. She was concerned that if she became disabled, she would no longer be able to pay the premiums. Her agent added an amendment of the policy stating that if she became disabled, future premium payments would be waived. Such an amendment to a life insurance policy is called a(n) A) binder. B) rider. C) warranty. D) schedule

Maria's home was damaged by an earthquake. As Maria has open-perils coverage on her home, she was surprised to learn that her loss was not covered. Which section of a property insurance policy specifies which perils, property, and types of losses are not covered? A) the declarations B) the exclusions C) the conditions D) the insuring agreement

MedProf Insurance markets medical malpractice insurance. The company's combined ratio in 2015 was 95.4. Its expense ratio was 25.4. What was the company's loss ratio? A) 60.4 B) 70.0 95.4 = Loss ratio + 25.4 C) 88.2 D) 120.8

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? A) to stabilize profitability B) to reduce the unearned premium reserve C) to provide protection against catastrophic losses D) to withdraw from a line of business or territory

Objective risk is defined as A) the probability of loss. B) the relative variation of actual loss from expected loss. C) uncertainty based on a person's mental condition or state of mind. D) the cause of loss.

One branch of government insurance programs has a number of distinguishing characteristics. These programs are compulsory, they are financed by mandatory contributions rather than general tax revenues, and benefits are weighted in favor of low-income groups. These government insurance programs are called A) welfare programs. B) social insurance programs. C) casualty insurance programs. D) private insurance programs.

One of the speculative financial risks considered in an enterprise risk management program is the risk of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money. This risk is called A) property risk. B) financial risk. C) strategic risk. D) operational risk.

One provision of the Dodd-Frank Act was creation of the Financial Stability Oversight Council. This council is charged with identifying nonbank financial companies that could increase the risk of collapse of the entire financial system. This risk is called A) market risk. B) systemic risk. C) diversifiable risk. D) enterprise risk.

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? A) Fair Isaac Corporation (FICO) B) Medical Information Bureau (MIB) C) National Association of Insurance Commissioners (NAIC) D) National Association of Mutual Insurance Companies (NAMIC

Paul is shopping for a life insurance policy. An agent asked Paul if he would like to purchase a participating policy. What is a "participating" policy? A) a policy which has a cash value B) a policy which pays dividends C) a policy which invests in common stock D) a policy which provides for an increasing death benefit

Sarah is using the needs approach to determine how much life insurance to buy. Her cash needs are $30,000; her income needs are $140,000; and special needs are $100,000. Sarah has the following assets: $20,000 in bank accounts, $30,000 in retirement plans, and $40,000 in investment accounts. Sarah owns no individual life insurance. She is covered by a $50,000 group life insurance policy through her employer. Based on this information, how much additional life insurance should Sarah purchase? A) $80,000 B) $130,000 C) $150,000 D) $160,000

Some members of Congress are concerned that if one or two large U.S. banks fail, it could lead to the collapse of the entire U.S. financial sector. This risk is called A) objective risk. B) systemic risk. C) enterprise risk. D) subjective risk.

The Dodd-Frank Act created a federal body with some limited regulatory authority. For example, the organization can represent the federal government in international negotiations regarding insurance and it can preempt state law where it conflicts with negotiated international agreements. This body is called the A) National Insurance Bureau. B) Federal Office of Insurance. C) Department of International Insurance. D) International Insurance Bureau

The corporate structure of mutual insurers has changed in recent years. All of the following are examples of significant changes EXCEPT A) demutualization of some insurers. B) sharp increase in the number of mutual insurance companies. C) increase in company mergers. D) formation of mutual holding companies

The policy provision requiring the filing of proof of loss with the insurer is an example of a(n) A) declaration. B) condition. C) insuring agreement. D) miscellaneous provision

The practice of buying the life insurance policy of a terminally ill insured at a discount is referred to as a A) collateral assignment. B) viatical settlement. C) catastrophic illness conversion. D) grace period transaction

The primary function of an actuary is to A) adjust claims. B) determine premium rates. C) negotiate reinsurance treaties. D) invest insurance company assets.

The primary purpose of coinsurance in property insurance is to A) reduce moral hazard. B) achieve equity in rating. C) minimize problems in settling claims. D) eliminate small losses.

The unearned premium reserve of an insurer is A) an asset representing the investments made with premium income. B) a liability representing the unearned portion of gross premiums on outstanding policies. C) a liability representing claims that have been filed, but not yet paid. D) the portion of the insurer's net worth belonging to policyowners

The use of fire-resistive materials when constructing a building is an example of A) risk transfer. B) risk control. C) risk avoidance. D) risk retention.

The worst loss that is likely to happen is referred to as the A) maximum possible loss. B) probable maximum loss. C) frequency of loss. D) severity of loss.

Uncertainty based on a person's mental condition or state of mind is known as A) objective risk. B) subjective risk. C) objective probability. D) subjective probability

What information is contained in the insuring agreement of an insurance policy? A) a description of the property or life to be insured B) a summary of the major promises of the insurer C) a summary of the obligations of the insured D) a list of the property, losses, and perils that are not covered

What is the length of the readjustment period which is considered when the needs approach is used to determine the amount of life insurance to own? A) 3 to 6 months B) 1 to 2 years C) until the youngest child reaches age 18 D) until the surviving spouse reaches age 65

When must an insurable interest legally exist in life insurance? A) only at the time of the insured's death B) only at the inception of the policy C) only at the time the beneficiary is paid D) both at the time of the insured's death and at the inception of the policy

When using the needs approach, several "special needs" should be considered. One special need is money to cover unexpected events, such as major car repairs, dental bills, or home repairs. Money set aside for this purpose is called a(n) A) estate clearance fund. B) emergency fund. C) readjustment period fund. D) mortgage redemption fund

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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following is a form of casualty insurance? A) fire insurance B) general liability insurance C) inland marine insurance D) ocean marine insurance

Which of the following is a post-loss risk management objective? A) treating loss exposures in the most economical way B) continuing operations C) reduction of anxiety D) meeting externally imposed legal obligations

Which of the following is a source of information a risk manager could use to help identify pure loss exposures? A) commodity prices B) physical inspections C) currency exchange rates D) interest rate movements

Which of the following is an example of a commercial risk? A) the risk of insufficient retirement income B) the loss of business income C) the risk of premature death D) the risk of being unemployed

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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about a personal risk management program is (are) true? I. Insurance and retention are the only techniques used to handle potential losses. II. The steps in a personal risk management process are the same steps used by businesses. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about a variable universal life insurance policy is (are) true? I. There is a minimum guaranteed interest rate for the cash value. II. The policyowner has a variety of investment options for the savings component of the policy. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about an insurable interest in life insurance is (are) true? I. It is required of any person named as beneficiary. II. It may result from a pecuniary (financial) interest. A) I only B) II only C) both I and II D) neither I nor II

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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about claims settlement is true? A) Agents are never authorized 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) A public adjustor is a salaried employee who works for one insurer. D) A staff claims representative is hired by a policyholder to represent him or her if the policyholder does not agree with the claim settlement offered by the insurer.

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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about subrogation is true? A) Subrogation eliminates adverse selection. B) Subrogation helps to hold down the cost of insurance. C) Subrogation results in violation of the principle of indemnity. D) Subrogation permits a party who caused a loss to avoid responsibility for the loss

Which of the following statements about term insurance is true? A) The coverage is appropriate if the goal is permanent lifetime protection. B) Most policies can be renewed for additional periods without evidence of insurability. C) Premiums increase at a constant rate each time the policy is renewed. D) Most policies have a cash value that is refunded when coverage ceases

Which of the following statements about the combined ratio is true? A) It is equal to the loss ratio minus the expense ratio. B) A combined ratio greater than 1 (or 100 percent) means an underwriting loss has occurred. C) The combined ratio considers the company's investment income. D) A combined ratio less than 1 (or 100 percent) indicates an underwriting loss has occurred

Which of the following statements about the ownership of a life insurance policy is (are) true? I. Under the ownership clause, the policyholder and beneficiary equally share all contractual rights in the policy while the insured is living. II. The policyholder can designate a new owner by filing an appropriate form with the insurance company. A) I only B) II only C) both I and II D) neither I nor II

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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about treaty reinsurance is true? A) The reinsurer is required to underwrite each individual applicant that is reinsured. B) The reinsurer must accept all business that falls within the scope of the treaty. C) The ceding insurer can choose which business falling within the scope of the treaty it wishes to reinsure. D) It protects the reinsurer by requiring the ceding insurer to charge adequate premiums

Which of the following statements about universal life insurance is (are) true? I. The current interest rate credited to the cash value at the time the policy is issued remains fixed for the life of the policy. II. A monthly deduction is made from the policy's cash value for the cost of insurance protection. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements concerning social insurance benefits is (are) correct? I. Social insurance benefits are heavily weighted in favor of upper-income groups because of their higher earnings. II. Social insurance benefits are financed entirely or in part by mandatory contributions by covered employers and employees, and not by general revenues of the government. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements is (are) true about savings bank life insurance (SBLI)? I. Each depositor at the savings bank receives life insurance equal to his or her savings account balance. II. The goal of SBLI is to provide low-cost life insurance to consumers. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements is (are) true about the loss ratio method of class rating? I. The pure premium is calculated, and it is loaded to cover expenses, profit, and contingencies. II. The actual loss ratio is compared to the expected loss ratio, and the rate is adjusted accordingly. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements is (are) true regarding exclusions in life insurance contracts? I. Life insurance policies are remarkably restrictive, including numerous exclusions. II. A life insurer may exclude death attributable to certain activities or hobbies disclosed on the application. A) I only B) II only C) both I and II D) neither I nor II

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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements is true about fraternal insurers? A) They are legally organized as stock insurers. B) They specialize in writing life and health insurance. C) They are taxed more heavily than other types of insurers because of discriminatory marketing practices. D) They account for the majority of life insurance in force in the United States.

Which of the following statements regarding insurance and hedging is true? A) Both insurance and hedging deal only with pure risks. B) Insurance reduces objective risk while hedging involves only risk transfer and not risk reduction. C) Hedging reduces objective risk while insurance involves only risk reduction and not risk transfer. D) Both insurance and hedging reduce objective risk but do not involve the transfer of risk

Which of the following statements regarding the use of retention is (are) true? I. Retention is best used for loss exposures that have a low frequency and a high severity. II. A financially strong firm can have a higher retention level than a firm whose financial position is weak. A) I only B) II only C) both I and II D) neither I nor II

Which of the following types of loss exposures may be appropriately handled through the purchase of insurance? I. High-frequency, low-severity loss exposures II. Low-frequency, high-severity loss exposures A) I only B) II only C) both I and II D) neither I nor II

Why is a large number of exposure units generally required before a pure risk is insurable? A) It prevents the insurer from losing money. B) It eliminates intentional losses. C) It minimizes moral hazard. D) It enables the insurer to predict losses more accurately.

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? A) There must be a large number of similar exposure units. B) The loss should not be catastrophic. C) The chance of loss must be calculable. D) The losses must be determinable and measurable.

From the standpoint of the insurer, which of the following is a characteristic of an ideally insurable risk? A) The loss must be intentional. B) There must be a small number of unique loss exposures. C) The chance of loss must be calculable. D) The loss must be indeterminable.

JKL Insurance Company reported the following information on its accounting statements last year: Premiums Written $90,000,000 Loss Adjustment Expenses $5,000,000 Underwriting Expenses $30,000,000 Premiums Earned $100,000,000 Incurred Losses $70,000,000 What was JKL's expense ratio last year? A) 5.0 percent B) 30.0 percent C) 33.3 percent 30,000,000/90,000,000 D) 50.0 percent

A factor that can be ignored when determining the cost of life insurance is A) time value of money. B) premiums paid. C) settlement options. D) dividends

A name that encompasses all of the major risks faced by a business firm is A) financial risk. B) speculative risk. C) enterprise risk. D) pure risk.

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) A) ownership interest. B) close family relationship. C) pecuniary interest. D) economic family relationship

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? A) The insurer made money from its underwriting activities each year. B) The insurer's profitability from underwriting has been deteriorating each year. C) The insurer's profitability from underwriting has been improving each year. D) The insurer lost money from its underwriting activities each year.

A risk manager is concerned with which of the following? I. Identifying potential losses II. Selecting the appropriate techniques for treating loss exposures A) I only B) II only C) both I and II D) neither I nor II

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 A) objective probability. B) subjective probability. C) objective risk. D) subjective risk

According to the law of large numbers, what should happen as an insurer increases the number of units insured? A) The amount the insurer expects to pay in claims should decrease. B) Underwriting expenses should decrease. C) Actual results will more closely approach expected results. D) The insurer's profitability should become more variable.

To correct abuses in the financial services industry, Congress passed an Act in 2010 that included numerous provisions to reform the financial services industry. This Act was the A) Financial Modernization Act. B) McCarran-Ferguson Act. C) Dodd-Frank Act. D) Biggert-Waters Act.

All of the following are disadvantages of noninsurance transfers EXCEPT A) The party to whom the potential loss is transferred may be unable to pay. B) The transfer may fail because the contract language is ambiguous. C) The only potential losses that can be transferred are those that are not commercially insurable. D) The noninsurance transfer may be costly

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 can raise new capital more easily. C) Stock companies are exempt from state insurance regulation. D) Stock companies offer greater flexibility to expand through acquisitions

All of the following statements about risk retention are true EXCEPT A) It may be used intentionally 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

All of the following statements about the income tax treatment of individually-purchased life insurance are true EXCEPT A) policyowner dividends are received tax-free. B) the annual increase in cash value is not taxable while the policy remains in force. C) premiums paid for individual life insurance are a tax deductible expense. D) life insurance proceeds paid to a beneficiary in a lump-sum are received tax-free

All of the following statements about the independent agency system are true EXCEPT A) Agents are often authorized to adjust small claims. B) Agents are compensated on the basis of commissions. C) The insurer rather than the agent owns the renewal rights to the business. D) The agent is an independent business person who represents several insurers.

All of the following statements about universal life insurance are true EXCEPT A) Interest is credited to the policy's cash value each month. B) Any withdrawal of a policy's cash value reduces the amount of the death benefit. C) Interest credited to a policy's cash value is taxable for the policyowner in the year credited. D) The policyowner can add to a policy's cash value at any time subject to policy guidelines

An individual's personal estimate of the chance of loss is a(n) A) objective probability. B) objective risk. C) subjective probability. D) a priori probability.

Cathy's car hit a patch of ice on the road. The car skidded off the road and hit a tree. The presence of ice on the road is best described as a(n) A) peril. B) subjective risk. C) physical hazard. D) indirect loss

Consumer experts typically recommend all of the following rules when buying life insurance EXCEPT A) Consider the financial strength of the insurer. B) Deal with a competent agent. C) Ignore all factors other than cost. D) Shop around for a low-cost policy

Dense fog that increases the chance of an automobile accident is an example of a A) speculative risk. B) peril. C) physical hazard. D) moral hazard

Disadvantages of life insurance settlement options include which of the following? I. Higher yields can often be obtained elsewhere. II. Life income options have limited usefulness at younger ages. A) I only B) II only C) both I and II D) neither I nor II

Each of the following helps to reduce federal estate taxes EXCEPT A) the marital deduction. B) the applicable unified tax credit amount. C) life insurance policies in which the deceased had an incidents of ownership at the time of death. D) expenses such as the cost of the funeral, estate settlement costs, and probate costs

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. A) I only B) II only C) both I and II D) neither I nor II

Jane purchased a life insurance policy on her own life and named her daughter, Cheryl, as beneficiary. Cheryl has a history of not managing money well. Jane wants the death benefit paid to Cheryl in monthly installments over 20 years. Which settlement option should Jane pre-select for Cheryl? A) lump sum B) fixed amount C) fixed period D) interest option

LMN Insurance sells homeowners insurance. The LMN homeowners policy combines property and casualty insurance in the same contract. Insurance policies combining property and casualty coverage in the same contract are called A) mono-line policies. B) multi-year policies. C) multiple-line policies. D) manuscript policies.

Loss control includes which of the following? I. Loss reduction II. Loss prevention A) I only B) II only C) both I and II D) neither I nor II

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 A) catastrophe futures contracts. B) interest rate swaps. C) catastrophe bonds. D) contingent options contracts

Rapid inflation, cyclical unemployment, war, hurricanes, and floods are all examples of A) diversifiable risks. B) physical hazards. C) nondiversifiable risks

Rather than storing all of its finished goods in a single location, Davis Company divides the finished goods between two warehouses. This simple risk control technique which is designed to limit losses should a warehouse fire occur is called A) duplication. B) risk transfer. C) separation.

Reasons for regulation of insurance include which of the following? I. Maintaining insurer solvency II. Ensuring reasonable rates A) I only B) II only C) both I and II D) neither I nor 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. A) I only B) II only C) both I and II D) neither I nor II

The deductible used for automobile collision losses is an example of a(n) A) calendar year deductible. B) elimination period. C) straight deductible. D) aggregate deductible

The first step in "shopping for life insurance" is to A) estimate the amount of life insurance to purchase. B) decide whether you want a policy which pays dividends. C) determine if you need life insurance. D) decide on the best type of life insurance for you.

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 A) health maintenance organization. B) stock insurer. C) fraternal insurer. D) reciprocal exchange

The price per unit of insurance is called the A) premium. B) loss adjustment expense. C) rate. D) loss reserve.

The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT A) representations. B) warranty. C) subrogation. D) concealment.

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 A) consolidation of risk. B) avoidance of risk. C) securitization of risk. D) compartmentalization of risk

Traditionally, risk has been defined as A) any situation in which the probability of loss is one. B) any situation in which the probability of loss is zero. C) uncertainty concerning the occurrence of loss. D) the probability of a loss occurring.

Which of the following is an example of consequential (indirect) loss? A) the theft of a person's jewelry B) the destruction of a firm's manufacturing plant by an earthquake C) the cost of renting a substitute vehicle while a collision-damaged car is being repaired D) the vandalism of a person's automobile

Which of the following is an example of private insurance? A) unemployment insurance B) Social Security C) life insurance D) federal deposit insurance

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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about life insurance settlement options is true? A) Under the fixed period option, the beneficiary normally has the right to make partial withdrawals in case of emergency. B) Under the fixed period option, any remaining proceeds revert to the insurer if the beneficiary dies before the end of the fixed period. C) Under the fixed amount option, the beneficiary can be given the right to increase or decrease the fixed amount. D) Under the fixed amount option, any interest credited in excess of the guaranteed rate increases the amount of each periodic payment

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. A) I only B) II only C) both I and II D) neither I nor II

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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about speculative risks is true? A) They are almost always insurable by private insurers. B) They are more easily predictable than pure risks. C) They may benefit society even though a loss occurs. D) They involve only a chance of loss

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 policyholders

Which of the following statements is (are) true with regard to using interest-adjusted cost data when shopping for life insurance? I. Cost indexes apply to new policies and should not be used to determine whether to replace a policy. II. Cost indexes should only be used to compare similar plans of insurance. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements is true regarding independent insurance agents in property and liability insurance? A) The insurer owns the expiration rights, not the independent agent. B) Independent agents are only permitted to represent one insurance company. C) Independent agents are paid the same commission rate on new and renewal business. D) Independent agents are not permitted to sell life and health insurance

Which of the following types of families is likely to have the least need for a large amount of life insurance? A) a blended family B) a traditional family C) a single person family D) a sandwiched family

Which of the following would be a valid reason for an insurer to contest a policy after the contestable period has ended? A) The policyholder made a material misrepresentation in the application process. B) The insurer's loss ratio is running higher than the insurer anticipated. C) The applicant had someone else take the medical examination required for policy approval for her. D) The policyholder concealed a material fact at the time of application

Which statement about the incontestable clause is true? I. It protects the beneficiary if the insurer tries to deny a claim years after the policy is issued. II. If protects the insurer from having to pay a claim during the first two years if the insured made a material misrepresentation or concealed material information in the application. A) I only B) II only C) both I and II D) neither I nor II

Which statement is true regarding using interest-adjusted cost data and purchasing life insurance? A) Cost indices can help to determine whether a policy should be replaced. B) The type of policy you purchase should he based solely on a cost index. C) Small variations in cost indices should be ignored. D) Cost indices should be used to select an insurer, not an individual policy

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 A) a reinsurance pool. B) automatic treaty reinsurance. C) retrocession. D) facultative reinsurance

A restaurant owner leased a meeting room at the restaurant to a second party. The lease specified that the second party, not the restaurant owner, would be responsible for any liability arising out of the use of the meeting room, and that the restaurant owner would be "held harmless" for any damages. The restaurant owner's use of the hold-harmless agreement in the lease is an example of A) retention. B) self-insurance. C) insurance. D) noninsurance transfer.

A student who has skipped many classes and not studied the course material was surprised to learn there was a test when he showed-up for class. The student's mental uncertainty about whether or not he will pass the test is called A) objective risk. B) objective probability. C) subjective probability. D) subjective risk.

ABC Appliance offers a warranty requiring an annual fee. The warranty may be purchased at the time of sale or at any time within the first year after the appliance was purchased. The warranty fee after the date of purchase is twice the time-of-purchase fee. When asked why the fee was higher after the date of purchase, ABC's president said, "Buying a warranty is voluntary. We've noted that those who buy the warranty after the purchase date have a greater need for service." Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers? A) excessive premiums B) reduced claims C) bad investments D) adverse selection

According to the law of large numbers, what should happen as an insurance company increases the number of loss exposures that it insures? A) Fewer losses should be expected to occur. B) The amount of premiums needed to cover losses should decrease. C) The volatility of the insurance company's underwriting results should increase. D) The difference between actual and expected results should decrease.

Adverse selection occurs A) when an insurance company loses money on its investments. B) when insurance purchasers buy insurance but do not have a loss. C) when catastrophic losses occur as a result of a natural disaster. D) when applicants with a higher-than-average chance of loss seek insurance at standard rates

Alex, age 26, purchased a 20-payment whole life insurance policy. After Alex has made 20 premium payments, his life insurance policy is considered A) matured. B) reduced. C) expired. D) paid-up

All of the following are potential advantages of retention EXCEPT A) lower expenses. B) increased cash flow. C) encouragement of loss prevention. D) protection from catastrophic losses

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

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 legislation requiring specific policy provisionsD

All of the following statements about life insurance company investments are true EXCEPT A) Funds for these investments are derived primarily from premium income, investment earnings, and maturing investments that must be reinvested. B) Income from these investments reduces the cost of insurance. C) A primary objective in making these investments is safety of principal. D) The majority of these investments are short-term investments.

All of the following statements about the requirements to reinstate a lapsed life insurance policy are true EXCEPT A) Evidence of insurability is required. B) The lapse must have resulted from other than the surrender of the policy for its cash value. C) All overdue premiums must be paid along with interest from the premium due dates. D) There is no time limit on when the policy may be reinstated.

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 A) mutualization. B) retrocession. C) reinsurance. D) demutualization

Brenda identified all of the pure loss exposures her family faces. Then she analyzed these loss exposures, developed a plan to treat these risks, and implemented the plan. The process Brenda conducted is called A) personal insurance programming. B) personal estate planning. C) personal financial planning. D) personal risk management

Carelessness or indifference to a loss is an example of A) physical hazard. B) objective probability. C) moral hazard. D) attitudinal hazard.

Catastrophe bonds are made available to institutional investors in the capital markets through an entity that is specially created for that purpose. This is entity is called a A) risk retention group. B) fraternal insurance company. C) captive insurance company. D) special purpose reinsurance vehicle.

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 applicant's income tax return.

Consumer experts typically recommend which of the following rules when purchasing life insurance? I. Avoid policies which pay dividends. II. Purchase life insurance equal to ten times your annual salary. A) I only B) II only C) both I and II D) neither I nor II

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 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? A) unconditional coverage B) named-perils coverage C) extended-perils coverage D) "open-perils" coverage

Frazier Electric keeps a paper copy of business records at the company's headquarters. The company also has two back-up copies of business records stored in electronic files. The electronic files are kept in the event the paper records are damaged or destroyed. The back-up files illustrate which of the following risk control techniques? A) loss prevention B) loss reduction C) diversification D) duplication

From the insured's perspective, the use of deductibles in insurance contracts is an example of A) risk transfer. B) risk control. C) risk avoidance. D) risk retention

JKL Insurance Company reported the following information on its accounting statements last year: Premiums Written $90,000,000 Loss Adjustment Expenses $5,000,000 Underwriting Expenses 30,000,000 Premiums Earned $100,000,000 Incurred Losses $70,000,000 What was JKL's combined ratio last year? A) 100.0 B) 103.3 C) 105.0 D) 108.3

Janet hit a wall causing a large dent in the fender of her car. She was busy at work and delayed reporting the damage to her insurer for 9 months. When she finally reported the claim, her insurer denied payment, stating, "Although such a loss is usually covered, you are required under the terms of the contract to provide prompt notification in case of loss." The prompt notification requirement is an example of a(n) A) declaration. B) definition. C) insuring agreement. D) condition

Jenna opened a successful restaurant. One night, after the restaurant had closed, a fire started when the electrical system malfunctioned. In addition to the physical damage to the restaurant, Jenna lost profits that could have been earned while the restaurant was closed for repairs. The lost profits are an example of A) direct loss. B) nondiversifiable risk. C) speculative risk. D) indirect loss.

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 A) pure risk. B) subjective risk. C) nondiversifiable risk. D) speculative risk.

One method through which reinsurance is provided is through an organization of insurers that underwrites insurance on a joint basis. Through the organization, financial capacity is available for large commercial risks. This reinsurance arrangement is a(n) A) quota-share treaty. B) surplus-share treaty. C) excess-of-loss treaty. D) reinsurance pool.

Property insurance policies contain declarations, conditions, definitions, exclusions, and an insuring agreement. However, some policy terms, such as subrogation, cancellation, other insurance, and assignment do not fall into these categories. The part of an insurance contract in which these provisions can be found is the A) endorsements. B) binders. C) conditions. D) miscellaneous provisions

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) A) exclusive agent. B) direct writer. C) branch manager. D) insurance broker

Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called A) moral hazard. B) physical hazard. C) attitudinal hazard. D) legal hazard

Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of A) warranty. B) insurable interest. C) utmost good faith. D) subrogation

Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award to a smoker harmed by the company's cigarettes. The characteristics of the judicial system that increase the frequency and severity of loss are known as A) moral hazard. B) particular risk. C) speculative risk. D) legal hazard

The exclusion of flood in a homeowners policy is an example of an A) excluded activity. B) excluded condition. C) excluded property. D) excluded peril

The extra expense incurred by a business to stay in operation following a fire is an example of a(n) A) fundamental risk. B) speculative risk. C) direct loss. D) indirect loss.

The loss settlement under which of the following supports the principle of indemnity? A) life insurance B) valued policies C) replacement cost property insurance D) actual cash value property insurance

The purpose of other-insurance provisions is to A) eliminate the need for deductibles. B) penalize those insureds who carry inadequate amounts of insurance. C) specify who will pay losses if the insurer is bankrupt. D) preserve the principle of indemnity

The section of the insurance policy that includes provisions that qualify or limit the insurer's promise to perform is the A) definitions. B) insuring agreement. C) exclusions. D) conditions.

The tendency for unhealthy people to seek life or health insurance at standard rates is an example of A) moral hazard. B) fundamental risk. C) attitudinal hazard. D) adverse selection

Which life insurance policy provision specifies that it is the policyholder, and not the insured or beneficiary, who possesses all contractual rights while the policy is in force? A) nonforfeiture options B) entire contract clause C) incontestable clause D) ownership clause

Which of the following is a function of the marketing department of an insurance company? A) to settle claims after a loss has been reported B) to determine the cost of products the insurer sells C) to make final underwriting decisions D) to identify production goals

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. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about financial risk is (are) true? I. Enterprise risk does not include financial risk. II. Financial risk is easily addressed through the purchase of insurance. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements about the exclusive agency system for marketing property and liability insurance is true? A) Exclusive agents typically have complete ownership of policy expirations. B) A higher commission rate is usually paid on exclusive agents' renewal business than on new business. C) Exclusive agents represent several different insurance companies. D) New exclusive agents may start as employees and after a training period become independent contractors

Which of the following statements about treaty reinsurance is true? A) Under a surplus-share treaty, 100 percent of the ceding insurer's liability must be transferred to the reinsurer. B) Using a quota-share treaty increases the ceding insurer's unearned premium reserve. C) Under an excess-of-loss treaty, the reinsurer pays losses in full only if they are less than the ceding insurer's retention limit. D) Using a reinsurance pool provides financial capacity to write large amounts of insurance

Which of the following statements is (are) true concerning settlement options? I. A straight life annuity provides the lowest amount of periodic income of all the life income options. II. Fixed-period and fixed-amount are life income options. A) I only B) II only C) both I and II D) neither I nor II

Which of the following statements is true with regard to career life insurance agents? A) They represent several different life insurance companies. B) They are compensated largely through a salary and not through commissions. C) They are paid the same commission rate on new and renewal business. D) The insurer provides financing, training, supervision, and office facilities for career agents.

Why are some mutual insurers referred to as "assessment mutuals"? A) They charge low premiums because the loss exposures of their insureds are thoroughly assessed before a policy is written. B) They are noted for being very thorough in their assessment of investment opportunities. C) They are assessed for state premium taxes only if they make a profit. D) They can assess policyholders if premiums are insufficient to pay losses and expenses

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