FIN 360 EXAM 3
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.
A) Coverage is actually written by syndicates who belong to Lloyd's of London.
Life insurance policyholders may borrow the cash value from their life insurance policies. Where are life insurance policy loans shown on a life insurance company's financial statements? A) as an asset B) as a liability C) as income D) as an expense
A) as an asset
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.
Under what type of rate regulation are insurers required to obtain approval of rates before using them if the rate change exceeds a specified predetermined range? A) flex-rating law B) prior-approval law C) file-and-use law D) use-and-file law
A) flex-rating law
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.
The portion of an insurance premium allocated to expenses, profit, and a margin for contingencies is called the A) loading. B) pure premium. C) gross premium. D) experience rate.
A) loading.
ABC Insurance Company entered into a reinsurance agreement with XYZ Reinsurance. Under the contract, XYZ Re has no liability unless ABC's loss ratio exceeds 85 percent for the year. XYZ Re agreed to pay all losses in excess of the 85 percent loss ratio. ABC Insurance Company is using reinsurance to A) stabilize profits. B) reduce the unearned premium reserve. C) provide large risk capacity. D) retire from a line or territory.
A) stabilize profits.
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
B) II only
Which of the following statements about methods for estimating loss reserves for property and casualty insurers is (are) true? I. The judgment method involves the use of a statutory formula to estimate the loss reserve. II. The average value method is used when the number of claims is large and the claims are settled quickly. A) I only B) II only C) both I and II D) neither I nor II
B) II only
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.
C) Stockholders bear any losses and share in any profits.
One life insurance company reserve is designed to smooth the company's reported surplus over time by absorbing fluctuations in security prices that are not attributable to changing interest rates. This reserve is called the A) asset write-off reserve. B) reserve for amounts held on deposit. C) unearned premium reserve. D) asset valuation reserve.
D) asset valuation reserve.
A loss reserve established for each individual claim when it is reported to a property and casualty insurance company is call a(n) A) admitted asset. B) incurred-but-not-reported (IBNR) reserve. C) unearned premium reserve. D) case reserve.
D) case reserve.
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.
B) They specialize in writing life and health insurance.
A property and casualty insurer in which the salesperson is an employee of the insurer, not an independent contractor, is called a A) fraternal insurance company. B) risk retention group. C) direct writer. D) captive insurance company.
C) direct writer.
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.
D) New exclusive agents may start as employees and after a training period become independent contractors.
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
A) I only
Which of the following statements about property and casualty insurance company operating results is (are) true? I. An insurance company can have a combined ratio greater than 1 (or 100 percent) and still be required to pay income taxes. II. By all measures, the property and casualty insurance industry is highly profitable when compared to other industries. A) I only B) II only C) both I and II D) neither I nor II
A) I only
Which of the following statements about state insurance guaranty funds is (are) true? I. They limit the amount that policyholders can collect if an insurer becomes insolvent. II. They are usually funded by general revenues of the states. A) I only B) II only C) both I and II D) neither I nor II
A) I only
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.
A) holding company.
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.
A) inspection report.
Nathan was hired as an actuary with ABC Insurance. Nathan was asked to calculate the annual premium for a new product and to explain his calculations to ABC's director of ratemaking. Nathan calculated the pure premium and presented this value as the final premium. After Nathan's presentation, the director of ratemaking said, "You left out something very important. If we sell coverage at the pure premium rate, we'll be out of business soon." What did Nathan overlook in his calculations? A) loading for expenses B) the underwriting cycle C) seasonality of claims D) investment income
A) loading for expenses
Gwen is in charge of accounting at Integrity Insurance Company. Integrity is a publicly-traded insurer. In describing her job, Gwen said, "There aren't too many businesses where you are required to keep two sets of books." Gwen's comment most likely refers to her company A) preparing accounting statements using statutory and GAAP accounting. B) preparing one set of records for the insurer's managers and another set for the policyholders. C) preparing one set of books using dishonest values and another set using current market values. D) preparing one set of accounting statements considering investment income and another set of accounting statements not considering investment income.
A) preparing accounting statements using statutory and GAAP accounting.
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.
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.
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
B) II only
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
B) II only
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
B) II only
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.
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.
In which of the following did the Court decide that insurance was interstate commerce when conducted across state lines, and therefore was subject to federal regulation? A) Paul v. Virginia B) South-Eastern Underwriters Association case C) McCarran-Ferguson Act D) Financial Modernization Act
B) South-Eastern Underwriters Association case
Which of the following statements about retrospective rating is true? A) The premium for the current period is determined by the loss experience in prior periods. B) The premium for the current period is determined by the loss experience during the current period. C) The premium for the current period is determined by predicted future loss experience. D) The premium for future periods is determined by the loss experience for the current period.
B) The premium for the current period is determined by the loss experience during the current period.
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.
B) The reinsurer must accept all business that falls within the scope of the treaty.
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.
B) a liability representing the unearned portion of gross premiums on outstanding policies.
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.
B) attorney-in-fact.
The primary function of an actuary is to A) adjust claims. B) determine premium rates. C) negotiate reinsurance treaties. D) invest insurance company assets.
B) determine premium rates.
Insurers obtain data that can be used to determine rates from A) pricing pools. B) insurance advisory organizations. C) banks. D) reciprocal exchanges.
B) insurance advisory organizations.
Ross studied engineering in college. After graduation, he went to work for an insurance company. Ross visits properties insured by his company. He conducts inspections and makes recommendations about alarm systems, sprinkler systems, and building construction. In what functional area does Ross work? A) underwriting B) loss control C) information systems D) claims adjusting
B) loss control
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) financial institution distribution. D) multiple marketing.
B) mass merchandising.
Which of the following is a 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
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.
B) personal-producing general agent.
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.
B) sharp increase in the number of mutual insurance companies.
Morgan was hired by an insurance company after she graduated from college. Upon completion of a training program, Morgan was assigned to a territory where she adjusts claims of the insurer's policyowners. Morgan is a(n) A) public adjustor. B) staff claims representative. C) agent. D) independent adjustor.
B) staff claims representative.
Brian buys and sells investment securities for his clients. Brian also decided to become a licensed life insurance agent to better serve his customers. While Brian's primary focus is buying and selling financial securities for his clients in exchange for commissions, he also earns commissions on his life insurance sales. Brian is a(n) A) direct writer. B) stock broker. C) insurance broker. D) personal-producing general agent.
B) stock broker.
Granite Insurance Company entered into a treaty reinsurance agreement with Rock Solid Reinsurance (RSR). Granite's retention limit is $400,000 and RSR agreed to provide reinsurance for up to $2.0 million. If Granite writes an $800,000 policy, RSR is responsible for 50 percent of the losses. If Granite insures a $1.6 million risk, RSR is responsible for 25 percent of any losses. What type of reinsurance arrangement did Granite enter into with RSR? A) facultative reinsurance B) surplus share reinsurance C) quota share reinsurance D) excess of loss reinsurance
B) surplus share reinsurance
Under one method of estimating a loss reserve, the reserve is based on life expectancy, duration of disability, and similar factors. This method of estimating loss reserves is called the A) judgment method. B) tabular value method. C) loss ratio method. D) average value method.
B) tabular value method.
The right of the states to regulate the business of insurance was first established by A) the South-Eastern Underwriters Association case. B) the case of Paul v. Virginia. C) the Financial Modernization Act. D) the Sherman Act.
B) the case of Paul v. Virginia.
Under one life insurance marketing system, agents conduct sales interviews at the workplace with the approval of the management of the business. There are few direct costs to the employer, and this marketing system is especially appropriate for low-income and middle-income workers. This life insurance marketing system is called the A) direct response system. B) worksite marketing system. C) independent agency system. D) personal producing general agency system.
B) worksite marketing system.
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.
C) Independent agents are paid the same commission rate on new and renewal business.
All of the following statements about the settlement of a claim are true EXCEPT A) The insurance policy usually has a provision specifying how a notice of loss is to be made to the insurance company. B) One step in the investigation of a claim is to determine whether the policy was in force when the loss occurred. C) The adjustor must file the proof of loss, which is a sworn statement supporting his or her decision regarding a claim. D) A policy provision may determine how disputes over claim settlements are resolved.
C) The adjustor must file the proof of loss, which is a sworn statement supporting his or her decision regarding a claim.
All of the following statements about class rating are true EXCEPT A) Exposures with similar characteristics are placed in the same underwriting class. B) The rate charged for each class reflects the average loss experience for that class. C) The complexity of class rating makes it inappropriate for personal lines coverages. D) It is based on the assumption that future losses to insureds will be determined by the same classification factors currently in use.
C) The complexity of class rating makes it inappropriate for personal lines coverages.
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.
C) The insurer rather than the agent owns the renewal rights to the business.
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
C) both I and II
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
C) both I and II
Which of the following statements about schedule rating is (are) true? I. It involves the determination of a basis rate for each exposure, which is then modified by credits or debits. II. It is based on the assumption that certain physical characteristics of the insured's operations will influence the insured's future loss experience. A) I only B) II only C) both I and II D) neither I nor II
C) both I and II
Which of the following statements about underwriting standards is (are) true? I. One purpose of underwriting standards is to reduce adverse selection against the insurer. II. Equitable rates should be charged so that each group of policyowners pays its own way in terms of losses and expenses. A) I only B) II only C) both I and II D) neither I nor II
C) both I and 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
C) both I and 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.
C) catastrophe bonds.
Under one type of merit rating, the class or manual rate is adjusted upward or downward based on past loss history. This type of merit rating is called A) schedule rating. B) judgment rating. C) experience rating. D) retrospective rating.
C) experience rating.
The unit of measurement used in property and casualty insurance pricing is called the A) unit rate. B) premium. C) exposure unit. D) experience unit.
C) exposure unit.
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.
An Econodeath Insurance Company actuary calculated the present value of the expected death claim the company will pay if it sells whole life insurance to a 30-year-old woman. This value is called the A) net level premium. B) gross premium. C) net single premium. D) life insurance policy reserve.
C) net single premium.
The price per unit of insurance is called the A) premium. B) loss adjustment expense. C) rate. D) loss reserve.
C) rate.
Small Town used to be just that—a small town 6 miles from Large City. Over the years, the area between Small Town and Large City has developed, and now Small Town is part of the suburbs surrounding Large City. An auto insurer that operated in the area had a large increase in auto claims from Small Town insureds. The insurer did not adjust its rates, and this year will lose money because of claims attributable to higher population density. Which business rating objective did this insurer fail to meet? A) simplicity B) stability C) responsiveness D) encouragement of loss control
C) responsiveness
To protect policyholders, state laws place limitations on a life insurance company's investments. The assets backing interest-sensitive products, such as variable life insurance and variable annuities, are not subject to these restrictions. Assets backing interest-sensitive products are placed in a special account called the life insurer's A) policy reserve account. B) policy loan account. C) separate account. D) policyholders surplus.
C) separate account.
The National Association of Insurance Commissioners (NAIC) administers an "early warning system" to help ensure insurance company solvency. This system uses data provided in the annual statement to identify companies that may pose a solvency risk. This early warning system is called A) the risk-based capital requirements. B) an insurance guaranty fund. C) the Insurance Regulatory Information System (IRIS). D) the assessment method.
C) the Insurance Regulatory Information System (IRIS).
When a fraternal insurer began operations, it asked each member, regardless of age, to pay $20 per month to the fraternal's group life insurance plan. In exchange, each member received the same amount of life insurance. Soon younger members of the group began to drop out when they realized their premiums were subsidizing a group with a higher chance of loss. Which important underwriting principle was violated in this case? A) An underwriting profit should be attained. B) Moral hazard should be avoided. C) Insureds should be selected according to underwriting standards. D) There should be equity among policyholders.
D) There should be equity among policyholders.
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.
D) They can assess policyholders if premiums are insufficient to pay losses and expenses.
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.
D) They may pay dividends to their policyholders.
In schedule rating, each building is individually evaluated based on several rating factors. One factor refers to the possibility that the building will be damaged or destroyed by a fire that starts at an adjacent property and spreads to the building. This rating factor is known as A) occupancy. B) protection. C) maintenance. D) exposure.
D) exposure.
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.
D) facultative reinsurance.
One liability on a property and liability insurance company's balance sheet is for the costs associated with settling and paying reserved claims. This liability is the A) pre-paid expense reserve. B) loss reserve. C) unearned premium reserve. D) loss adjustment expense reserve.
D) loss adjustment expense reserve.
A plan for selling individually underwritten property and liability insurance to members of a group is called A) direct response. B) multiple distribution. C) niche marketing. D) mass merchandising.
D) mass merchandising.
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
A strip-mall includes eight identical-sized retail units. All of the units were built at the same time and each has an identical sprinkler system. Unit number two is a dry cleaning business. Unit number three is a bar and grill. Unit number four is a dress shop. The owners of these three units are all insured by the same insurance company, but the property insurance premiums vary significantly. Which of the following rating factors best explains the difference in premiums? A) exposure B) protection C) construction D) occupancy
D) occupancy
Which of the following items would appear in the income section of an insurance company's income and expense statement? A) underwriting expense B) bonds C) loss reserves D) premiums
D) premiums
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.
D) reinsurance pool.
State X's premium tax rate is 2 percent. State Y's premium tax rate is 3 percent. State X insurers are required to pay the 3 percent rate on business written in State Y. State X requires insurers from State Y to pay a 3 percent premium tax on business written in State X, even though the premium tax rate is only 2 percent in State X. This practice is known as a A) tax tariff. B) guaranty fund assessment. C) risk-based capital requirement. D) retaliatory tax law
D) retaliatory tax law
State insurance regulators require LMN Life Insurance Company to maintain a separate account. The assets in the separate account would support the liabilities for which of the following products? A) term life insurance B) whole life insurance C) fixed annuity D) variable life insurance
D) variable life insurance
