Chapter 1 Exam - Basic Principles of Insurance

One important function of an insurance company is to identify and sell to potential customers. Which of these BEST describes this function? a. Underwriting b. Reinsurance c. Regulation d. Marketing

d. Marketing Marketing can be best defined as identifying and selling to potential customers.

An insurer owned by its policyholders is called a a. multi-line insurer b. stock insurer c. reinsurer d. mutual insurer

d. Mutual insurer A mutual insurer is the property of his insured.

John owns an insurance policy that gives him the right to share in the insurer's surplus. What kind of policy is this? a. Surplus b. Nonparticipating c. Contributory d. Participating

d. Participating policies give the policy owner the right to share in the insurer's surplus.

Which of the following is an insurer established by a parent company for the purpose of insuring the parent company's loss exposures? a. Captive insurer b. Mutual insurer c. Fraternal insurer d. Participating insurer

a. Captive insurer An insurer established and owned by a parent firm for the purpose of insuring the parent firm's loss exposures is known as a captive insurer

What is a participating life insurance policy? a. Contract that allows the policy owner to receive a share of surplus in the form of policy dividends. b. Agreement that allows two or more beneficiaries to share in the death benefit c. Agreement that insurers two or more lives d. Contract that gives beneficiaries the right to participate in any dividends.

a. Contract that allows the policy owner to receive a share of surplus in the form of policy dividends. A participating life insurance policy is defined as a contract that allows the policy owner to receive a share of surplus in the form of policy dividends.

When a mutual insurer becomes a stock company, the process is called a. Demutualization b. Reinsurance c. Reorganization d. Mutualization

a. Demutualization The process whereby a mutual insurer becomes a stock company is called demutualization.

An insurer enters into a contract with a third party to insure itself against losses from insurance policies it issues. what is this agreement called? a. Reinsurance b. Mutual c. Reserves d. Multi-line

a. Reinsurance Reinsurance is an arrangement by whicj an insurance company transfer a portion of a risk it has assumed to another insurer.

Which of the following is Not a characteristic of reinsurance? a. Enables insurer to meet certain objectives b. Increases the unearned premium reserve c. A specialized branch of the insurance indusgry d. Protects against a very large claim

b. Increases the unearned premium reserve All of these are reinsurance features except Increases the unearned premium reserve

Which of the following is a contract that involves one party which indemnifies another when a loss arises from an unknown event? a. Loss contract b. Insurance policy c. Warranty arrangement d. Indemnification arrangement

b. Insurance policy An insurance policy is a contract where one party promises to indemnify another against loss that arises from an unknown event.

Which of the following is NOT a benefit of insurance? a. Makes a loss whole again b. Losses due to fraud are eliminated c. Reduces the uncertainty of loss exposures d. Source of investment funds

b. Losses due to fraud are eliminated is NOT a benefit of insurance.

AAA Insurance Company has transferred a portion of its loss exposure to BBB Insurance Company. In this reinsurance transaction, what is AAA Insurance Company called? a. Tertiary Insurer b. Primary Insurer c. Captive Insurer d. Secondary Insurer

b. Primary Insurer In a reinsurance agreement, the insurance company that transfers its loss exposure to another insurer is called the primary insurer.

A participating company is also referred to as which type of insurer? a. Domestic insurer b. Re-insurer c. Mutual insurer d. Reciprocal insurer

c. Mutual insurer A mutual insurer is also referred to as a participating company.

Which of the following is a type of insurance where an insurer transfers loss exposures from policies written for its insureds? a. Treaty insurance b. Mutual insurance c. Reinsurance d. Captive insurance

c. Reinsurance Reinsurance is an arrangement by which an insurance company transfers a portion of a risk it has assumed to another insurer.