Fundamentals of Property and Casualty Insurance Part 2
Bluebonnet Insurance Company's property insurance loss costs in Texas last year were much higher than its predicted loss costs. What is the most likely reason? Adverse selection A hurricane or other natural disaster Bad math Bad luck
A hurricane or other natural disaster
Why do most insurance policies covering buildings and their contents exclude coverage for nuclear hazard? It is difficult to tell when a nuclear incident occurs. Nuclear coverage on privately owned property should be obtained through the Nuclear Regulatory Commission. A nuclear incident can affect many insured properties at the same time. Nuclear radiation is a form of expected wear and tear.
A nuclear incident can affect many insured properties at the same time.
Roadrunner Insurance Company's auto loss costs in the Dallas region last year were much higher than its predicted loss costs. What is the most likely reason? Aggressive law enforcement A series of severe winter storms Increased wildlife population Mathematical error
A series of severe winter storms
Last year, Apache Insurance Company had a combined ratio of 98 percent. This indicates that Apache had an underwriting loss last year. Apache's premiums last year exceeded its expenses. Apache had an investment profit last year. Apache had an underwriting profit last year.
Apache had an underwriting profit last year.
Claude's auto insurance application indicates that he is a 25-year-old single male with three speeding tickets and one chargeable accident who drives a one-year-old sports car more than 15,000 miles per year and wants high limits of coverage. How will Claude's application probably be handled? Because this is not a routine application, it will be reviewed by an underwriter. The underwriter will want to accompany Claude on a test drive. The insurer's automated system will request a photograph of the license plate. It will be automatically be approved by a computer.
Because this is not a routine application, it will be reviewed by an underwriter.
Most property insurance policies on buildings and personal property used by a business cover explosions but exclude coverage for losses covered by a boiler explosion. Why do they have this exclusion? Boiler explosion losses are best insured with an equipment breakdown policy. Modern boilers rarely explode. Boiler inspections make insurance unnecessary. Boiler explosion losses are not insurable.
Boiler explosion losses are best insured with an equipment breakdown policy.
Miles is told that his application for auto insurance was rejected based on information in his motor vehicle report (MVR). Which of the following is material underwriting information that might have appeared on Miles' MVR? Number of miles he drives each year Conviction for driving under the influence (DUI) Driving records of his wife and children Low credit score
Conviction for driving under the influence (DUI)
When compared with the competition, Apache Insurance Company's pricing structure is very competitive, but Apache is experiencing underwriting losses. What important aspect of Apache's pricing structure seems to be missing? Apache's investment income may be inadequate. Premiums may be too low to attract the better customers. The pricing structure must allow a profit for the insurer. Apache's expense ratio may be too low.
The pricing structure must allow a profit for the insurer.
After reading his insurance policy, Travis discovers several attached documents that have "endorsement" in their titles. What is the purpose of these endorsements? They modify the provisions in the policy form. They validate the policy. They contain information unique to a particular policy, such as the name of the insured. They show that the policy is recommended by a credible person or organization.
They modify the provisions in the policy form.
Before permitting Roofing Repair Company to work on his roof, Delmar asks the company for a certificate of insurance. What is the purpose of the certificate? To show that the company is covered by insurance To provide temporary coverage until a policy is issued To show the company's previous losses To show the company's financial status
To show that the company is covered by insurance
Lucas, who just bought a $5,000 engagement ring, phones his insurance agent to insure it. After obtaining the necessary information, the agent tells Lucas that the ring is now covered for 30 days for $5,000 by a jewelry floater, effective immediately, and Lucas will receive a complete one-year policy in a week. The agent's oral statement that Lucas is covered is not legally enforceable. a legally enforceable binder. avoidable assurance. incomplete because vital information is missing.
a legally enforceable binder.
Virgil bought a $5,000 speedboat and calls his insurance agent to insure it. After obtaining the necessary information, the agent tells Virgil that the boat is now covered for 30 days for $5,000 by a watercraft policy, effective immediately, and Virgil will soon receive a complete one-year policy. The agent's assurance that Virgil is covered is a legally enforceable declaration. not legally enforceable. incomplete because vital information is missing. a legally enforceable binder.
a legally enforceable binder.
A legally enforceable insurance binder should clearly include all the following information EXCEPT: when coverage begins. when coverage ends. a notary public's stamp. the name of the insurer providing coverage.
a notary public's stamp.
Madeleine, an underwriter for QRS Insurance Company, is not able to provide the coverage requested in Orlando's insurance application. Madeleine can reject the application, or she can accept the application with modifications appeal it repeal it refer the application to the claims department
accept the application with modifications
According to Rattler Insurance Company's underwriting guidelines, Rattler will not issue a homeowners insurance policy to an applicant who owns a pit bull dog. Phil, an agent who represents Rattler, receives a homeowners application from Alexandra that indicates she owns a pit bull, so he informs her that he is not able to insure her with Rattler. This is an example of agency underwriting informal underwriting producer underwriting field underwriting
agency underwriting
Coworkers who live near her residence ride to work in Felicia's car and help pay for her gas and other expenses. An exclusion in Felicia's auto insurance policy says it does not cover a vehicle while it is carrying persons for a fee but then also says the exclusion does not apply to a share-the-expense carpool. What is this apparent contradiction? an exception to an exclusion an ambiguity that works in Felicia's favor not applicable to Felicia's carpool an ambiguity that works in the insurer's favor
an exception to an exclusion
Storm damage to utility wires caused a power surge that ruined Delmar's large flat screen TV. Delmar submitted a homeowners insurance claim that was denied because his policy, like almost all policies on buildings and their contents, excludes coverage for televisions. electronic equipment. lightning. artificially generated electrical current.
artificially generated electrical current.
Underwriters use underwriting information from many sources. Which one of the following is not a source of underwriting information? loss history motor vehicle record agent's report binder
binder
Many endorsements are attached to Bettie's policy. If she examines them closely, she will probably find one or more endorsements that do all the following EXCEPT: expand coverage to cover a specific exposure. add exclusions. eliminate an exclusion. cancel the policy.
cancel the policy.
Eleanor's insurance company charges her the same premium it would charge to other female drivers her age who have the same coverages and limits, the same car, and the same driving record, and live in the same rating territory. What rating system does this insurer use? individual rating schedule rating class rating judgment rating
class rating
With respect to property and casualty insurance premium rates, which of the following approach is used with high-volume insurance coverages, such as auto and homeowners insurance? individual rating specific rating class rating judgment rating
class rating
An insurance application or "app" is typically completed by the insurance company. completed by the insurance agent. completed by the insurance underwriter. completed by the insurance buyer.
completed by the insurance buyer.
All the following liability claim-related costs are paid through the supplementary payments section of the businessowners policy EXCEPT all expenses the insurance company incurs in settling or defending a covered claim damages awarded the plaintiff defense costs investigation costs
damages awarded the plaintiff
What part of the policy should the insured review to ensure that his or her name is spelled correctly? insuring agreements definitions endorsements declarations
declarations
While reading a standard fire policy, Carolyn notices a page that contains a full description and location of the insured property, the limit of insurance on the insured property, and the insured's name and mailing address. What part of the policy is she looking at? declarations policy conditions loss conditions insuring agreement
declarations
While reading a standard fire policy, Carolyn notices a page that contains a full description and location of the insured property, the limit of insurance on the insured property, and the insured's name and mailing address. What part of the policy is she looking at? policy conditions loss conditions declarations insuring agreement
declarations
In an insurance policy, which of the following sets forth the name of the insured, insured address, amount of coverage, and duration of the contract? conditions declarations page insuring agreement terms
declarations page
Four types of provisions found in a typical insurance policy are declarations, insuring agreement, conditions, exclusions declarations, consideration, conditions, exclusions declarations, insuring agreement, conditions, limitations declarations, insuring agreement, consideration, conditions
declarations, insuring agreement, conditions, exclusions
Julie, a premium auditor for an Bluebonnet Insurance Company, examines the records of the Walking C Company, an insured claimant, to search for evidence of fraud. verify that premiums were paid on time. determine whether a claimed loss is legitimate. determine the actual premium earned during the past policy period.
determine the actual premium earned during the past policy period.
DSC Insurance Company uses class rating to determine the premiums for its auto insurance policies. This means that the rate for every insured driver is based on the underwriter's judgment of that individual applicant. based solely on that driver's past loss experience. developed by evaluating the vehicle's construction, protection, and other factors. determined by placing the driver and vehicle into a class with other similar drivers and vehicles.
determined by placing the driver and vehicle into a class with other similar drivers and vehicles.
Events and properties not covered under an insurance policy are listed as contingencies exemptions exclusions exceptions
exclusions
When reading a section of his businessowners policy, Owen notices that it addresses causes of loss that the policy does not cover. What section of the policy is Owen reading? exclusions insuring clause conditions declarations
exclusions
Lucas' commercial property policy, like many other policies that cover buildings, contains an "Ordinance or Law" exclusion. What does this exclusion most likely deal with? extra expenses required to comply with current building codes when repairing damaged property expected losses that are not covered the cost of building permits that might be required before damaged property can be repaired illegal acts that are not covered
extra expenses required to comply with current building codes when repairing damaged property
Calvin's property insurance policy contains a lengthy water damage exclusion that concerns him because his building has a lot of plumbing. If he examines the exclusion closely, he will probably find that it essentially excludes losses from floods plumbing fixture leaks broken pipes wear and tear
floods
Roadrunner Insurance Company's rates for the year include a 5 percent allowance for profits and contingencies. If Roadrunner's losses or expenses are higher than predicted, Roadrunner will have an underwriting loss. earn a 5 percent profit. have a reduced profit, break even, or have an underwriting loss. draw on its contingency fund to remain profitable.
have a reduced profit, break even, or have an underwriting loss.
Which one of the following is not a provision usually found in property and casualty insurance policies? conditions definitions declarations inclusions
inclusions
Which one of the following is not a provision usually found in property and casualty insurance policies? declarations inclusions conditions definitions
inclusions
Apache Insurance Company is raising its rates because its expenses last year were higher than expected. This might be due to any of the following factors, EXCEPT: increased claims severity salary increases tax increases increased costs of leasing office space
increased claims severity
An insurance binder cannot be enforced unless it is in writing. is a temporary contract of insurance. meets legal requirements but provides no actual coverage. is a means of keeping commercial package insurance policies.
is a temporary contract of insurance.
Which one of the following is not a component of an insurance rate? expenses judgment margin for profits and contingencies loss costs
judgment
Despite 10 years of underwriting experience, Latonya has never written property insurance on a Henway poultry processor, and her underwriting guidelines do not contain a rate for a floater policy covering Milford's Henway. What type of rating will Latonya's quote be based on? class rating individual rating schedule rating judgment rating
judgment rating
In underwriting Taylor Company's business insurance application, Meghan wants to examine a record of Taylor's loss claims over the last several years. Therefore, Meghan will ask the agent who submitted Taylor's application to provide a copy of Taylor Company's loss run claim log Dun and Bradstreet (D&B) report loss expenses
loss run
What two things does an insurance company's loss ratio for a given period compare? losses and expenses profits and losses losses and premiums profits and expenses
losses and premiums
A policyholder's risk characteristics can change over time. That is why it is important for underwriters to monitor underwriting results. overlook loss trends. price conservatively. price aggressively.
monitor underwriting results.
Josie claims she called her insurance agent to increase the coverage limit on the property in her home from $25,000 to $40,000. She says the agent told her that the higher limit was effective immediately. However, Josie cannot prove to her adjuster that the conversation took place, and her agent now says he does not remember her call. This illustrates one of the problems associated with oral binders. adverse selection. agency underwriting. written binders.
oral binders.
Felix owns an 80-year-old apartment building with narrow stairways. If his building is seriously damaged, Felix will not be permitted to rebuild it unless he makes the stairways wide enough to meet the current building code. His property insurance will not cover the extra cost of such an alteration if the policy contains a typical obsolescence exclusion ordinance or law exclusion building code exclusion escalator clause
ordinance or law exclusion
Loss costs, also called "pure premium," are the largest component of a property and casualty insurance rate. Loss costs reflect the insurer's actual losses during the policy period the insurer's commissions payable to producers and other underwriting expenses the insurer's losses and expenses during recent policy periods past claims (historical loss costs) and estimated future claims (prospective loss costs)
past claims (historical loss costs) and estimated future claims (prospective loss costs)
Corinne, the adjuster assigned to Darren's claim, would have paid Darren's boat claim if he had an insurance policy with her company, the Marvelous Insurance Company. However, while he remembers completing an application all Darren has as evidence of coverage is a piece of paper, signed and dated by his insurance agent, on which is written "Your new boat is now covered for $5,000 by the Marvelous Insurance Company." Corinne called the agent, who vaguely remembered taking the application on a day when he had a lot of other things going on. Under these circumstances, Corinne should report the agent to the state's insurance department. deny the claim. pay the claim. report Darren to law enforcement for attempted fraud.
pay the claim.
Jackie pays $500 per year for property insurance on the building she owns, which is insured for $100,000. Her agent explains that the insurer is charging her 50 cents for each $100 of insurance. In this case, what is the $500 Jackie pays every year? loss cost premium exposure unit rate
premium
Rosemarie pays $500 per year for property insurance on the building she owns, which is insured for $100,000. Her agent explains that the insurer is charging her 50 cents for each $100 of insurance. In this case, what is technical term for each $100 of insurance to which the charge applies? exposure unit rate premium loss cost
premium
Rattler Insurance Company rates reflect its expected loss costs, its project expenses, and what third factor? profits and contingencies. premium tax rate. protection and indemnity. sales tax rate.
profits and contingencies.
Casey pays $500 per year for property insurance on the building she owns, which is insured for $100,000. Her agent explains that the insurer is charging her 50 cents for each $100 of insurance. In this case, what is technical term for the 50-cent charge? loss cost exposure unit premium rate
rate
The price an insurer charges to cover each exposure unit is known as the rate expense ratio loss cost premium
rate
Apache Insurance Company adopts more restrictive underwriting guidelines, expecting to reduce to the costs of losses. All else being equal, this change may also allow Apache to decrease its expenses. rates. office expenses. margin for profits and contingencies.
rates.
Doris has a homeowners insurance policy and a separate insurance policy that covers her jewelry. A provision in her homeowners policy states "We do not cover articles specifically insured in another insurance policy." What is the purpose of this exclusion? to remove coverage for uninsurable risks to remove coverage not needed by a typical insured to eliminate or reduce overlapping coverage to reduce the incentive to create losses and provide an incentive to prevent losses
to eliminate or reduce overlapping coverage
As an English teacher, Omar is annoyed that so many words and phrases in his insurance policy appear in quotation marks. Why do insurance policies use quotation marks with certain words and phrases? to call attention to words and phrases that are especially important to recognize copyrighted material that was taken from another source to show that these words and phrases are defined in a standard dictionary to identify words and phrases that are defined in the policy
to identify words and phrases that are defined in the policy
Because he doesn't own an airplane, Lanny thinks it silly that his homeowners insurance policy contains exclusions that apply to aircraft. What is the purpose of these exclusions? to eliminate or reduce overlapping coverage to remove coverage for uninsurable risks to reduce the incentive to create losses and provide an incentive to prevent losses to remove coverage not needed by a typical insured
to remove coverage not needed by a typical insured
Edmond suspects that a broken pipe is leaking water into the ceiling of his barber shop, but he ignores it because the water conveniently drips into a sink. When the ceiling collapses due to water damage, Edmond finally submits an insurance claim. The insurer denies it, citing an exclusion for water leakage or seepage rust mechanical breakdown water damage
water leakage or seepage
In general, the objective of underwriting is for the insurance company to issue as many new policies as possible. sell a relatively small number of relatively high-priced policies. write a book of business in which actual losses are consistent with the insurer's expected losses. issue as few insurance policies as possible.
write a book of business in which actual losses are consistent with the insurer's expected losses.
Victoria's full name appears on the declarations page of her insurance policy where she is the only person identified as a named insured. Within the body of the policy, what word or phrase refers specifically to Victoria? the insured the insurer you we
you
The application for businessowners coverage on Beth's store reveals that the store has been burglarized twice within the last three years. What modification is most likely to make this risk acceptable from an underwriting standpoint? Higher limits of liability insurance Installation of a burglar alarm Higher limits of property insurance A premium discount
Installation of a burglar alarm
The statement, "We (the insurer) will pay for direct and accidental loss to your (the named insured's) covered auto," would be found in what section of a personal auto policy? Endorsements Insuring agreement Definitions Conditions
Insuring agreement
What is the purpose of the insuring agreement in an insurance policy? It establishes the name and address of the insured and the amount of coverage. It identifies the insurance company. It confirms the premium amount. It establishes the promises of the policy.
It establishes the promises of the policy.
Why do most insurance policies that cover buildings and their contents exclude earthquake coverage? It is difficult to tell when an earthquake occurs. Earthquake damage is a form of expected wear and tear. A severe earthquake can damage many insured properties at the same time. Earthquake coverage should be obtained through the National Earthquake Insurance Program.
It is difficult to tell when an earthquake occurs.
A provision in Laurence's auto insurance policy states "We will pay compensatory damages which an 'insured' is legally entitled to recover from the owner or operator of an 'uninsured motor vehicle' because of 'bodily injury' sustained by an insured and caused by an auto accident." What is the purpose of this statement? It sets forth the declarations. It is the insuring agreement. It defines the terms of the policy. It lists the policy's conditions.
It is the insuring agreement.
Jewell applies for a musical instruments floater to cover her harp. Jewell writes a check in payment of the premium, and her insurance agent gives her a document that she must retain until the policy is issued. What is the purpose of this document? It discloses the exclusions from coverage. It contains the policy's declarations. It summarizes the information in the application. It legally binds the insurer to provide temporary coverage.
It legally binds the insurer to provide temporary coverage.
Underwriters of property or casualty insurance policies typically do not use which of the following sources of information when deciding to accept or reject a risk? Medical records Loss history data Motor vehicle record Credit report
Medical records
Burt, an insurance agent, tells Sofia that her auto insurance application was rejected because her MVR shows several accidents and violations that she did list on the application. What is the MVR? Motor vehicle record. Moving violations record. Manual of vehicular registrations. Motor vehicle registry.
Motor vehicle record.
Last year, PDQ Insurance Company had a combined ratio of 105 percent. What does this tell? PDQ's premiums last year exceeded its expenses. PDQ had an underwriting profit last year. PDQ had an underwriting loss last year. PDQ had an investment profit last year.
PDQ had an underwriting loss last year.
Rodney doesn't understand why an auto insurance underwriter would want to review his credit report. His insurance agent explains that credit reports are useful underwriting tools for all the following reasons, EXCEPT: Some individuals with poor credit records may be more likely to have insurance claims. People with major financial problems may be more inclined to exaggerate a loss. People with bad credit usually have substance abuse problems that create a driving hazard. A person with financial difficulties might not have the funds to maintain his car.
People with bad credit usually have substance abuse problems that create a driving hazard.
Phillip's car rear-ended Inez's car after she cut in front of him on the expressway. In her claim against Phillip to recover damages for the damage to her car, Inez says he hit her on purpose, but Phillip insists the collision was accidental. His personal auto policy excludes losses from intentional damage. What coverage is he entitled to under the terms of his personal auto policy's liability insuring agreement? Phillip's insurer is not obligated to defend him against allegations of intentional damage but it will pay for the damage if Phillip himself proves the collision was accidental. Phillip's insurer will defend him at its expense and deny payment if it is determined that Phillip accidentally ran into Inez. Phillip's insurer will defend him at its expense and pay damages if coverage applies. Phillip's insurer has no obligation to protect Phillip against allegations of intentional damage or to pay any related damages.
Phillip's insurer will defend him at its expense and pay damages if coverage applies.
On what are an insurance company's loss costs for a given risk based? The insured's future loss experience The insured's past loss experience Past losses of all insureds in the same class Predicted future losses based on past loss data
Predicted future losses based on past loss data
John thinks his insurance bill is too high. In technical terms, what does John believe is too high? Losses Premium Loss costs Rate
Premium
How does an insurance company determine its loss ratio? Dividing its earned premiums by its incurred losses Dividing its incurred losses by its underwriting expenses Dividing its incurred losses by its earned premiums Dividing its combined ratio by its expense ratio
Dividing its incurred losses by its earned premiums
A water damage exclusion in Sadie's property insurance policy excludes coverage for any damage that might be caused by a flood. If Sadie wants flood coverage, from where can she get a flood insurance policy? Her state's FAIR plan National Oceanic and Atmospheric Administration National Weather Service Federal government's National Flood Insurance Program
Federal government's National Flood Insurance Program
Matt insures his real property and business personal property under his commercial property insurance policy. His insurance company is likely to consider information from all the following sources when underwriting his property for coverage, EXCEPT: Insurance application Insurance agent Business credit reports Federal income tax return
Federal income tax return
An insurance company evaluates the results of its underwriting by determining all of the following ratios EXCEPT: Expense ratio Loss ratio Combined ratio Reserve ratio
Reserve ratio
The declarations of their homeowners insurance policy lists Rich and Allyson as the named insureds. However, the policy also covers relatives living in their household, which would include their sons Kyle and James. When this policy uses the word "you," to whom is it referring? Kyle and James Rich, Allyson, Kyle, and James Rich and Allyson Rich
Rich and Allyson
Sue is examining her commercial property policy's declarations page. In addition to listing the amounts of insurance her building and business personal property are insured for, it also lists a variety of other information. Which of the following is least likely to be listed on her commercial property declarations page? construction of her building loss settlement basis deductible Social Security Number
Social Security Number
Sue is examining her commercial property policy's declarations page. In addition to listing the amounts of insurance her building and business personal property are insured for, it also lists a variety of other information. Which of the following is least likely to be listed on her commercial property declarations page? loss settlement basis deductible construction of her building Social Security Number
Social Security Number
Assuming all the following information can easily be obtained, which of the following is not information that an underwriter would use in deciding whether to accept or decline an application for a personal auto policy? Social Security number Credit information Motor vehicle record (MVR) Current photo of the car
Social Security number
Bluebonnet Insurance Company pays its agents a 15 percent commission for new policies in a given line of business. How, if at all, do these commissions affect the premiums Bluebonnet charges to its policyholders? The commissions are part of Bluebonnet's loss costs. The commissions are part of Bluebonnet's expenses. They have no effect; the commissions are charged separately. The commissions are part of Bluebonnet's profits and contingencies.
The commissions are part of Bluebonnet's expenses.
Jonathan, a commercial lines underwriter, is glad to see that Rosalinda included an agency report in her cover letter that accompanied the Olsen Company's application for insurance. He expects that Rosalinda's report will provide some useful insights into all the following aspects of the Olsen Company risk, EXCEPT: Olsen Company's operations. Olsen Company's current loss control programs. The prevailing weather conditions in the county. Rosalinda's overall evaluation of the risk.
The prevailing weather conditions in the county.
