Chapt 5 risk and insurance

35) 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.

EXCEPT C) Stock companies are exempt from state insurance regulation.

15) 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.

EXCEPT C) The insurer rather than the agent owns the renewal rights to the business.

8) 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.

A) BINDER

7) 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) Its underwriters specialize in writing life and health insurance. C) It operates as an admitted insurer throughout the United States. D) It allows underwriters to write coverage without meeting stringent financial requirements.

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

13) Advantages of the direct response system for marketing life insurance include which of the following? I. Advertising can be specifically directed to selected markets. II. Complex products can be easily sold. A) I only B) II only C) both I and II D) neither I nor II

A) I I. Advertising can be specifically directed to selected markets.

9) Which of the following statements about 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

A) I. They legally represent the insured rather than the insurance company.

30) Some investors decided to start an insurance company. Each investor contributed $50,000 to raise the capital required to charter a new company. Each investor received an ownership interest in the company. The company will raise additional capital by selling ownership rights to other investors. Under this type of organization, the customer and owner functions are separate. This type of insurer is called a A) stock company. B) reciprocal exchange. C) fraternal company. D) mutual company.

A) STOCK COMPANY

37) 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.

A) captive insurer.

39) A personal lines insurance company initiating banking and investment services for its policyowners demonstrates which financial services industry trend? A) convergence B) demutualization C) mass merchandising

A) convergence

21) 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.

A) independent agent.

10) 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.

A) surplus lines broker.

31) RST Insurance is an interesting company. It doesn't have any agents. Instead, the company sells insurance through radio ads, telemarketers, and newspaper and magazine inserts. This distribution method is called A) reciprocal exchange. B) direct response system. C) mass merchandising. D) multiple distribution system.

B) DIRECTOR RESPONSE SYSTEM

26) Brian is a life insurance agent. He is licensed to represent one company and has been assigned a territory. In addition to marketing life insurance products in the territory, Brian is also responsible for recruiting, training, and motivating new agents for the company in his territory. Brian is a(n) A) exclusive agent. B) general agent. C) insurance broker. D) personal-producing general agent.

B) GENERAL AGENT

12) Which of the following statements about the managerial system of marketing life insurance is (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 has the responsibility for hiring and training new agents. A) I only B) II only C) both I and II D) neither I nor II

B) ONLY II. The branch manager is an employee of the insurer who has the responsibility for hiring and training new agents.

25) Cathy just started a job with XYZ Manufacturing Company. She attended an orientation and was given a packet providing information about the various employee benefits XYZ offers. One item in the packet was a booklet and application form from an auto insurer. The insurer offers lower premiums to XYZ employees. The insurer's plan for selling individually-underwritten auto insurance to employees of XYZ Manufacturing Company is called A) direct response. B) mass merchandising. C) personal selling. D) multiple marketing.

B) mass merchandising.

19) Which of the following is characteristic of a typical mass merchandising plan? A) higher commission scales for agents and higher administrative expenses B) payment of premiums through payroll deduction C) group rather than individual underwriting D) contributions by the employer to the cost of coverage

B) payment of premiums through payroll deduction

20) David has always been successful in sales. Recently, he was approached by a life insurer interested in hiring him. Initially, David was not interested in the job because he feared it would require a lot of administrative work. "You're a super salesperson, David," he was told, "We're hiring you to do one thing and one thing only-SELL!" David accepted the position. David is a(n) A) exclusive independent agent. B) personal-producing general agent. C) branch office agent/manager. D) direct writing exclusive agent.

B) personal-producing general agent.

16) Salespersons of a direct writer are considered to be A) independent agents. B) independent contractors. C) employees. D) brokers.

C) EMPLOYEES

1) 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.

C) Stockholders bear any losses and share in any profits.

22) 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.

C) fraternal insurer.

24) ABC Insurance has always used the exclusive agency system to market coverages. ABC, however, cannot afford full-time agents in sparsely-populated areas. To reach customers in these areas, ABC enters into agreements with local independent agents. Using more than one marketing system is called employing a A) direct response system. B) general agency system. C) multiple distribution system. D) branch office system.

C) multiple distribution system.

36) The demutualization process is expensive and time consuming. As an alternative to demutualization, many states have enacted legislation allowing a mutual company to reorganize as a company that directly or indirectly controls another insurer. The other insurer is a stock company that can issue additional shares of stock to raise capital. The reorganized company is called a A) captive insurance company. B) conglomerate. C) mutual holding company. D) stock holding company.

C) mutual holding company.

32) One type of insurer is a community-oriented health insurer. In most states, this insurer is set-up as a non-profit organization that provides coverage for hospital services, physicians' and surgeons' fees, and other medical services. This type of insurer is called a A) stock insurer. B) captive insurer. C) health maintenance organization (HMO). D) Blue Cross/Blue Shield Plan.

D) Blue Cross/Blue Shield Plan.

28) 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.

D) DEMUTUALIZATION

14) 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 usually start as employees and after a training period become independent contractors.

D) New exclusive agents usually start as employees and after a training period become independent contractors.

3) 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 policyowners if premiums are insufficient to pay losses and expenses.

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

2) 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 policyowners.

D) They may pay dividends to their policyowners.

40) In 2008, Liberty Mutual Insurance Company acquired Safeco Insurance Company. This acquisition demonstrates which financial services industry trend? A) convergence B) demutualization C) mass merchandising D) consolidation

D) consolidation

23) 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.

D) insurance broker.

17) Which of the following statements about the sale of property and liability insurance through the direct response system is (are) true? I. Selling expenses are higher because market segmentation tends to be less precise than with other marketing methods. II. It is the most appropriate system for selling complex products. A) I only B) II only C) both I and II D) neither I nor II

D) neither I nor II

5) All of the following statements about fraternal insurers are true EXCEPT A) They are a form of mutual insurer. B) They specialize in writing property and liability insurance. C) They enjoy tax advantages because of their nonprofit or charitable status. D) They market their coverage to members of a social organization or religious group.

EXCEPT B) They specialize in writing property and liability insurance.

11) All of the following statements about the general agency system used for selling life insurance 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.

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

4) The corporate structure of mutual insurers is changing rapidly. All of the following are current trends 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.

EXCEPT B) Sharp increase in the number of mutual insurance companies.

38) 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

ONLY B) II. The goal of SBLI is to provide low-cost life insurance to consumers.

29) Jim would like to start a business raising thoroughbred racehorses. The business would be the first of its kind in the state where he lives. Obtaining insurance on the horses is a key concern, and he was dismayed to learn that none of the insurers authorized to operate in his state offer this specialty insurance. What is the name of the intermediary which Jack can use to place this coverage with an insurer not admitted to his state? A) alien insurer B) general agent C) surplus lines broker D) direct writer

c) SURPLUS LINE BROKER