Insurance Operations Exam 2 Practice Exam

82. Which one of the following statements is correct with respect to ratemaking for different types of insurance? A. A five-year experience period is used almost universally for fire insurance because it is required by law in many states. B. Loss development factors are generally used for fire, inland marine, and auto physical damage insurance. C. In fire insurance, trending of claim severity is done based on the average value of all fire insurance claims. D. Losses from catastrophic events are included in ratemaking data because of the possibility that catastrophes will occur in the future.

A. A five-year experience period is used almost universally for fire insurance because it is required by law in many states.

70. Which one of the following best describes the role of an actuary? A. An actuary develops factors to apply to loss costs to reflect individual insurer experience and expenses. B. An actuary is a government employee charged with approving insurer rate filings. C. An actuary is an individual who compiles loss and expense data for an insurer. D. An actuary is a person who uses rate tables to calculate insurance premiums.

A. An actuary develops factors to apply to loss costs to reflect individual insurer experience and expenses.

48. Jerry is an experienced claim adjuster who handles claims for Jackson Insurance Company during hurricane season when Jackson's staff adjusters need assistance. Jerry is A. An independent adjuster. B. A hurricane adjuster. C. A public adjuster. D. A third-party adjuster.

A. An independent adjuster.

83. Which one of the following statements is correct with respect to increased limits above the basic coverage limits? A. Charges to increase commercial liability insurance limits frequently exceed 100 percent of the charge for basic coverage limits. B. Loss severity typically increases uniformly with increased coverage limits. C. Higher limits can require a portion of the coverage to be reinsured, which reduces the insurer's risk and hence the premium charged for the coverage. D. Because increased limits losses are typically well documented, they provide excellent data credibility.

A. Charges to increase commercial liability insurance limits frequently exceed 100 percent of the charge for basic coverage limits.

78. Which one of the following statements is correct with regard to rate filings? A. Depending on state law, formal approval of a rate filing by regulators might not be required. B. Generally, it is the marketing department that negotiates with regulators about rate filings. C. Regulators cannot require an insurer to withdraw rates once they are in use. D. Rate filings generally include the insurer's detailed financial statements.

A. Depending on state law, formal approval of a rate filing by regulators might not be required.

42. In handling a property claim under Special Form Coverage, a claim representative should gather facts about the cause of loss and then A. Determine if the cause of loss is excluded in the Special Form Coverage. B. Determine if the cause of loss applies to the Declarations Page. C. Determine if the cause of loss is a listed covered peril in the Special Form Coverage. D. Determine if the cause of loss is defined in the Definitions Section of the policy.

A. Determine if the cause of loss is excluded in the Special Form Coverage.

45. Antonia and Philip have their house insured with Durham Insurance under an HO-3 homeowner's policy. Philip is the named insured and there is no mortgagee shown on the policy. During a storm, a lightning strike results in a kitchen fire and high winds causes a tree to fall on the roof, leaving a large hole. The homeowners make emergency repairs to protect against further damage and report the loss to the insurer. The claim is assigned to Miguel who identifies the policy and performs an initial review. After discussing the loss with Antonia and Philip, which one of the following will Miguel most likely do? A. Determine whether lightning and windstorm are covered causes of loss and whether any exclusions apply B. Verify whether there is a mortgagee on the property that may need to be included in the loss settlement C. Verify that Antonia meets the policy definition of "insured" and is entitled to receive payment for her portion of the loss D. Take detailed statements from firefighters and neighbors to establish what the actual cause of loss was

A. Determine whether lightning and windstorm are covered causes of loss and whether any exclusions apply

60. From an insurer's perspective, the goal of ratemaking complements the goal of underwriting, which is to A. Develop and maintain a profitable book of business. B. Insure only those risks which will not suffer losses. C. Sell as many policies as possible. D. Ensure that all policyholders practice sound loss control.

A. Develop and maintain a profitable book of business.

72. Joe is hoping to insure his home for $100,000. This will include the contents of his home as well as other property that is defined in his homeowners policy as covered property. This "value" being insured by Joe is the A. Exposure base. B. Rate base. C. Expense base. D. Loss base.

A. Exposure base.

80. After data have been collected and adjusted, and after any territorial and class relativities have been determined, rate filings must be prepared. Which one of the following statements is true regarding rate filings? A. If an advisory organization files rates or loss costs on behalf of an insurer, it also handles any follow-up or negotiations. B. In all states, formal approval of rate filings by regulators is required. C. Generally, the submitted rate filing must include only the schedule of the proposed new rates and the expense provision data. D. Insurance producers are best qualified to answer technical questions that state regulators might raise regarding an insurer's rate filing.

A. If an advisory organization files rates or loss costs on behalf of an insurer, it also handles any follow-up or negotiations.

28. Chloe is a claim representative with Fredine Insurance Company. She has been assigned a personal lines automobile claim for insureds, Oscar and Sara. Oscar and Sara were involved in an accident with another vehicle, and there is damage to both vehicles. In addition, the driver of the other vehicle and Sara each suffered minor injuries in the accident and were treated in the emergency room. Chloe follows the usual steps in the claim handling process. She identifies the policy and sets her initial reserves. She also confirms the details of the accident in a conversation with Oscar and Sara. Using the framework for the claim handling process, which one of the following will most likely be Chloe's next step? A. Investigate the claim. B. Determine the loss amount. C. Conclude the claim. D. Confirm the loss reserves with Oscar and Sara.

A. Investigate the claim.

55. Liability policies cover insureds for compensatory damages an insured owes to a third party. Compensatory damages normally covered by the policy include A. Pain and suffering and out-of-pocket expenses claimed up to the policy limit. B. General damages within the policy limit and all special damages. C. Punitive Damages and legal expenses. D. Damages from deceitful or malicious acts of an insured.

A. Pain and suffering and out-of-pocket expenses claimed up to the policy limit.

2. Which one of the following statements is correct regarding insurers' involvement in safety management programs for insureds? A. Part of a risk control consultants role in developing a safety management program is assisting the insured in establishing risk control goals. B. Risk control consultants typically have the authority to exercise a management role in the insured's safety program. C. Once the safety management program is implemented, the risk control consultant generally is not able to provide technical assistance in the monitoring phase of the program. D. Risk control consultants are usually actively involved in implementing safety management programs.

A. Part of a risk control consultants role in developing a safety management program is assisting the insured in establishing risk control goals.

4. Which one of the following statements is correct with respect to premium audits? A. Policyholders are far less likely to submit false or misleading information when they know it will be verified by a premium auditor. B. Premium audits are typically conducted by specially trained representatives of the state insurance department. C. Premium audits generally leave policyholders with the impression that the insurer is looking for ways to charge additional premiums. D. Premium audits focus strictly on accounting documents and rarely generate additional underwriting information about a policyholder.

A. Policyholders are far less likely to submit false or misleading information when they know it will be verified by a premium auditor.

30. Which one of the following statements is true concerning claim information users? A. Producers must have policyholder loss information to prepare renewal policies properly. B. Actuaries, by reviewing claim files, can detect material aspects of an insured's loss exposures since the policy was first underwritten. C. Actuaries evaluate losses that sometimes reveal an undetected loss exposure. D. Marketing establishes reserves for IBNR losses and projects development of claims for which the reserves may change over the life of the claim.

A. Producers must have policyholder loss information to prepare renewal policies properly.

8. Which one of the following is a way in which risk control activities can help insurers meet their profit goals? A. Providing an additional source of revenue B. Eliminating premium audits C. Improving staff credibiilty D. Confirming rating values

A. Providing an additional source of revenue

51. Files chosen by managers or technical support staff for internal claim audits are selected on the basis of the A. Reason for audit. B. Total incurred value. C. Criteria mandated by the insurance commissioner. D. Total reserve value.

A. Reason for audit.

85. The main components of an insurer's bulk (or aggregate) loss reserves are reserves for unreported claims plus A. Reserves for losses that have inadequate case reserves and reserves for claims that have settled and then reopened. B. Reserves for losses that have inadequate case reserves and case reserves. C. Reserves for losses that have inadequate case reserves and reserves for payments made but not yet received. D. Reserves for losses covered by reinsurance and case reserves.

A. Reserves for losses that have inadequate case reserves and reserves for claims that have settled and then reopened.

29. Alexis has inherited a family cottage that she has insured with Millstone Insurance for $100,000. One weekend while Alexis is at the cottage, a fire starts in the night. The cottage is a total loss. Alexis calls her insurance agent who reports the claim to Millstone. The claim is assigned to Victor, a property claim representative. After entering the information from the notice of loss into Millstone's claim-processing system, which one of the following will Victor most likely do? A. Set preliminary loss reserves B. Advise the agent that the policy is in force C. Verify whether any exclusions apply D. Verify that Alex owns the cottage

A. Set preliminary loss reserves

79. After data have been collected and adjusted, and after class and territorial relativities have been determined, rate filings must be prepared. A rate filing is a document submitted to A. State regulatory authorities. B. All insurers licensed in the state. C. The state guaranty board. D. The National Association of Insurance Commissioners (NAIC).

A. State regulatory authorities.

32. One of the primary goals of the claim function is A. Supporting the insurer's financial goals. B. Sharing accurate loss information with an insurer's actuarial department. C. Informing producers of court rulings that affect the insurer's loss exposures or pricing. D. Reviewing post-loss evaluations with the underwriting department.

A. Supporting the insurer's financial goals.

77. For which one of the following types of insurance would the judgment method of ratemaking most likely be used? A. Terrorism coverage B. Workers compensation coverage C. Crime coverage D. Professional liability coverage

A. Terrorism coverage

17. Timely and correct premium audits can significantly benefit A. The insurer's collections. B. Employee relations. C. The insurer's loss ratio. D. The insurer's assets.

A. The insurer's collections.

64. Responsiveness is a desirable ratemaking characteristic. Because conditions are constantly changing, any delay between when data are collected and when they are used tends to reduce the accuracy of rates. The delay in reflecting loss experience in rates stems from several sources, including which one of the following? A. Time period during which rates are in effect, usually a full year B. Delays in obtaining police reports and claim documentation C. Time required to receive investment income D. Delays in the payment of losses by insurers

A. Time period during which rates are in effect, usually a full year

10. Which one of the following best describes the purpose of a safety program developed by an insurer's risk control representative? A. To raise workers' awareness of loss exposures and appropriate safety behaviors B. To provide complete evaluation of the policyholder's operations C. To raise policyholders' awareness of discounts available for following safety programs D. To provide written analysis of the policyholder's loss history

A. To raise workers' awareness of loss exposures and appropriate safety behaviors

53. An important aspect of acknowledging a claimant's liability claim, upon first contact, is A. To try to obtain information on the nature and extent of the injury. B. To try to obtain information on the claimant's medical history. C. To try to obtain information on the claimant's accident history. D. To try to obtain information on the claimant's sources of additional income.

A. To try to obtain information on the nature and extent of the injury.

37. State insurance regulators conduct claim audits to ensure A. Understanding of reserving practices. B. Compliance with reinsurance treaties. C. Fair and appropriate pricing. D. Equal workloads of claim representatives.

A. Understanding of reserving practices.

24. Premium auditor Ralph became concerned about an increase in hazard from the insured's chemical operations. In an audit Ralph discovered the plant had added a product that could greatly increase the products liability exposure. Due to the misclassification of the current loss exposures, the information discovered by Ralph is most useful to which one of the following insurer functions? A. Underwriting B. Risk control C. Marketing and sales D. Claims

A. Underwriting

65. Auto Insurer T insured 100,000 cars each year during a three year experience period, and its incurred losses were $30 million. What is the pure premium per car year? A. $30 B. $100 C. $300 D. $1,000

B. $100

35. An employee of an insurance company who performs some or all of the insurer's claim-handling activities is called A. An inside claim representative. B. A staff claim representative. C. A field claim adjuster. D. A public adjuster.

B. A staff claim representative.

38. Which one of the following is a claim control used to help meet regulatory compliance? A. Special damages B. Access security C. Annual Statements D. Structured settlements

B. Access security

58. Insurers with limited data for ratemaking rely on rates or loss costs prepared by actuaries at A. Professional trade association. B. Advisory organizations. C. Independent financial organizations. D. The NAIC.

B. Advisory organizations.

69. Which one of the following statements is correct? A. Underwriting managers usually supervise ratemaking activities. B. An actuary is a person who puts a price on risk. C. Every insurance company employs one or more staff actuaries. D. Insurers rarely use the services of outside actuarial consultants.

B. An actuary is a person who puts a price on risk.

94. A facultative reinsurance agreement is written for a specified time period A. But can be cancelled at any time by the primary insurer. B. And cannot be cancelled by either party unless contractual obligations, such as payment of premiums, are not met. C. And cannot be cancelled without the express written permission of the insured whose coverage is the subject of the agreement. D. But can be cancelled at any point during that period by the reinsurer for any reason, provided adequate notice is provided to the primary insurer.

B. And cannot be cancelled by either party unless contractual obligations, such as payment of premiums, are not met.

9. The risk control service of conducting a physical survey consists of A. Implementing a service contract with the business owner or manager. B. Collecting underwriting information on a customer's loss exposures. C. Implementing a safety management program designed by senior risk control consultants. D. Submitting written recommendations to a business owner or manager.

B. Collecting underwriting information on a customer's loss exposures.

96. Which one of the following statements is correct regarding finite risk reinsurance? A. Finite risk reinsurance agreements generally allow the reinsurer to assess additional premium if losses exceed premium. B. Finite risk reinsurance agreements typically have a three to five year term. C. Finite risk reinsurance is less expensive than most traditional types of reinsurance. D. Finite risk reinsurance is designed to cover high frequency and low severity loss exposures.

B. Finite risk reinsurance agreements typically have a three to five year term.

20. Many of Fredine Insurance Company's risk control activities help the insurer reach its profit goals by reducing the frequency and severity of covered losses that would detract from Fredine's profits. Which one of the following activities provides an additional revenue source that contributes directly to Fredine's profit goals? A. Fredine risk control representatives identify unsafe conditions that policyholders can correct. B. Fredine sells unbundled risk control services to self-insured companies. C. The quality of Fredine's risk control services helps retain policyholders. D. The underwriting information provided by Fredine's risk control representatives leads to better underwriting decisions.

B. Fredine sells unbundled risk control services to self-insured companies.

27. Jessica has her car insured for liability, collision, and comprehensive coverage with Greatview Insurance. She has decided to purchase a pickup truck as a second vehicle. As she is leaving the dealership with her new pickup, she accidently collides with another vehicle, causing damage to both. Neither she nor the other driver is injured. Jessica returns home and calls her insurer to advise of her new purchase and to report the claim. Her claim is assigned to Lucas. After identifying the policy and entering initial loss information, which one of the following describes how Lucas would most likely proceed? A. He would set a liability reserve for general damages arising from the accident. B. He would confirm that a "newly acquired auto" meets the policy definition of "your covered auto." C. He would check whether the dealership has insurance to cover damage to Jessica's new truck. D. He would advise Jessica that there is no coverage because the pickup is not listed on the policy.

B. He would confirm that a "newly acquired auto" meets the policy definition of "your covered auto."

39. When the investigation has been completed and all documentation has been received, the claim representative must decide whether to pay the claim or deny it. Which one of the following statements is correct with respect to this element of claim handling? A. To deny a claim, a claim representative need only verbally inform the insured that no payment will be made. B. If a disagreement arises over the value of a claim, alternative dispute resolution methods may be used to resolve the situation. C. State insurance regulations typically prohibit an insurer from advising an insured of the reason for a claim denial. D. Because of the variety of alternative dispute resolution methods available, very few claims are concluded through litigation.

B. If a disagreement arises over the value of a claim, alternative dispute resolution methods may be used to resolve the situation.

49. Under certain circumstances, an insurer may authorize the adjustment of claims by producers. One of the benefits of providing producers with draft authority is that A. It gives agents the option of providing coverage for smaller claims that staff adjusters might deny. B. If an agent can issue a draft directly to the insured, it reduces the time an insured waits for payment. C. Claim payments by producers are not included in loss ratio calculations. D. Claim handling by producers is immune to regulatory scrutiny.

B. If an agent can issue a draft directly to the insured, it reduces the time an insured waits for payment.

12. Which one of the following statements is true concerning premium audits? A. Insurers perform premium audits for only two coverages-workers compensation and commercial general liability. B. Insurers conduct premium audits to determine correct policy premiums. C. Insurers perform premium audits because business owners do not submit payrolls to the insurers. D. Insurance premium auditors follow arbitrary processes for each audit.

B. Insurers conduct premium audits to determine correct policy premiums.

43. Riko is an automobile claim representative who has been assigned a claim submitted by John. John owns a Honda Civic, which is insured in his name for liability, collision, and comprehensive coverage on a Personal Auto Policy (PAP). He is the only named insured on the policy. John lives with his parents and his sister, Carla. One Saturday, while John is asleep, Carla borrows his car to run errands. Unfortunately she backs into the concrete base of a sign at the mall, damaging the vehicle. Riko confirms that the Honda is the covered vehicle, that it is insured against collision, and that the loss occurred during the policy period. Which one of the following will she most likely determine next? A. Is the mall parking lot a covered location? B. Is Carla covered as a driver of the damaged vehicle? C. Does the loss meet the policy definition of "collision"? D. Does any other insurance apply to this loss?

B. Is Carla covered as a driver of the damaged vehicle?

25. During a premium audit the insured mentioned plans to expand operations and erect new buildings to Gail, the premium auditor. Gail can benefit both the insured and the insurer by notifying A. Underwriting. B. Marketing (sales). C. Claims. D. Risk control.

B. Marketing (sales).

75. When basing new rates on an experience period, a primary reason for an insurer to wait longer to start the ratemaking process is to A. Allow for regulatory changes. B. Permit loss data to mature. C. Absorb economic market fluctuations. D. Properly allocate expenses.

B. Permit loss data to mature.

15. Which one of the following statements about premium auditing is true? A. Premium auditors exclude from the audit report any payroll that has been improperly classified. B. Premium auditors determine whether a given policy uses the correct rating classification(s). C. Premium audits are conducted at the beginning of each policy period. D. Premium audits determine the estimated premium an insured must pay.

B. Premium auditors determine whether a given policy uses the correct rating classification(s).

59. Ideally, insurance rates should have five characteristics. Which one of these characteristics is demonstrated by an insurer that provides lower rates to policyholders who install automatic sprinkler systems in their homes? A. Stability B. Promoting risk control C. Responsiveness D. Providing for contingencies

B. Promoting risk control

62. Which one of the following statements is correct? A. The investment return earned by an insurer is independent of the types of insurance written, the loss reserves, or unearned premium reserves. B. Property losses are usually paid relatively quickly, while liability losses often are not paid until years after the losses occur. C. Investment returns are more likely to affect property insurance rates than liability insurance rates. D. An insurer's loss reserves for property insurance are usually much greater than its loss reserves for an equivalent amount of liability insurance.

B. Property losses are usually paid relatively quickly, while liability losses often are not paid until years after the losses occur.

99. Blue Sky Enterprises wants to join with a small group of other organizations to create an entirely new type of medical device for heart transplant patients. ABC Insurer is interested in working with the group to meet their insurance needs. However, ABC has no experience in the biotechnology field. Which function of reinsurance would be most beneficial to ABC Insurer? A. Stabilize loss experience B. Provide underwriting guidance C. Increase large line capacity D. Provide catastrophe protection

B. Provide underwriting guidance

84. The purpose of loss reserve analysis is to determine whether the carried loss and loss adjustment expense reserves can be expected to adequately cover the losses that have bee incurred but not yet paid. Which one of the following would participate in loss reserve analysis on behalf of potential investors or creditors? A. The insurer's auditors B. Rating agencies C. The insurer's management D. Insurance regulators

B. Rating agencies

21. Which one of the following statements is correct regarding the interaction between risk control and other insurer functions? A. Risk control representatives are responsible for compiling all the information required for a premium audit. B. Risk control personnel can assist underwriters in modifying a new applicant's loss exposures to meet eligibility requirements. C. Risk control representatives compile detailed data for the actuarial department to use in establishing rates. D. Risk control personnel are responsible for answering any complex questions that insureds have about premium audits.

B. Risk control personnel can assist underwriters in modifying a new applicant's loss exposures to meet eligibility requirements.

88. Plastics Manufacturing Company (PMC) operates globally with property values approaching $100 million. Liability exposures are considerable particularly for products liability. Because of its size, PMC decides to form a captive insurer. PMC's board of directors is unwilling to risk huge losses as the captive begins operations. Which function of reinsurance would be most beneficial to PMC and its captive insurer? A. Increase large line capacity B. Stabilize loss experience C. Provide underwriting guidance D. Provide catastrophe protection

B. Stabilize loss experience

68. Loss trending practices vary by type of insurance. A special trending problem unique to workers compensation insurance exists because A. Trending is needed for both premium and losses. B. Statutory benefits can change unexpectedly. C. Loss frequency is very low. D. Inspection and risk control services are a significant portion of the rate.

B. Statutory benefits can change unexpectedly.

91. All of the following are sources of reinsurance, EXCEPT: A. Reinsurance pools, syndicates, and associations B. The Brokers & Reinsurance Markets Association (BRMA) C. Professional reinsurers D. Reinsurance departments of primary insurers

B. The Brokers & Reinsurance Markets Association (BRMA)

61. Insurance ratemaking is challenging because A. A rate can be adequate or it can be competitive, but it cannot be both adequate and competitive at the same time. B. The amounts of fortuitous future losses and their associated expenses are unknown when rates are developed. C. Regulators do not allow insurers to include a factor for profits when developing rates. D. Rates are based on what consumers would be willing to pay for insurance coverage, which can be difficult to determine.

B. The amounts of fortuitous future losses and their associated expenses are unknown when rates are developed.

22. Which one of the following statements is correct with respect to premium auditing? A. Voluntary audits do little to deter or detect fraud on the part of the insured. B. The need for a premium audit arises because some insurance policies have adjustable premiums. C. Insureds are usually able to assemble the necessary audit information and determine the actual earned premium. D. Insurance regulation requires premium audits on any commercial account for which the premium is based on payroll or sales.

B. The need for a premium audit arises because some insurance policies have adjustable premiums.

81. Which one of the following statements is true regarding ratemaking in different types of insurance? A. Most losses from catastrophic events, such as hurricanes, are included in ratemaking data in the affected states. B. Trending of losses in fire insurance is generally restricted to claim severity. C. The experience period used for property causes of loss other than fire is usually five years or less. D. Applying loss development factors to data is critical when claims settle quickly and loss reserves are relatively small.

B. Trending of losses in fire insurance is generally restricted to claim severity.

95. An amusement park ride malfunctioned, injuring four individuals. ABC Insurer, the general liability insurer for the both the amusement park and the ride manufacturer, paid each of the four individuals $500,000 under the amusement park's policy and paid each of the four individuals $250,000 under the ride manufacturer's policy. ABC has a $5 million xs $200,000 per occurrence excess of loss treaty with XYZ Reinsurer. How much would XYZ pay for these losses? A. $1,400,000 B. $1,500,000 C. $2,800,000 D. $3,000,000

C. $2,800,000

7. New exposures are an important area in which an auditor might provide information to underwriting. New exposures can result from a change in operations or from A. Unreported claim activity. B. Implementation of risk control measures. C. A new venture. D. Physical hazards.

C. A new venture.

5. Which one of the following statements is true concerning the premium auditing process? A. The process the premium auditor uses is known as auditing the policy because the focus is on the exposures identified on the policy. B. An examination of the insured's books and records at the insured's premises is referred to as a voluntary audit. C. A premium auditor's job involves not only counting loss exposures, but also classifying them correctly.

C. A premium auditor's job involves not only counting loss exposures, but also classifying them correctly.

36. Worthley Insurance Company uses claim audits to ensure compliance with best practices. These audits evaluate both quantitative and qualitative factors. Which one of the following factors that Worthley evaluates is a qualitative factor? A. Average claim settlement value by claim type B. Timeliness of reserving C. Accurate evaluation of insured's liability D. Accuracy of data entry

C. Accurate evaluation of insured's liability

44. Anil has his automobile insured with ABC Insurance through his agent, Chad. Returning to his car in a shopping mall parking lot, Anil sees that vandals have spray painted graffiti on his vehicle. He calls Chad to report the damage and ask what he should do. Chad tells him to report the vandalism to the police, follow their instructions, and then take the vehicle home and wait for a call from a claim representative. Chad then reports the loss to ABC. Melissa is the claim representative assigned Anil's loss. Which one of the following will be the first step Melissa takes? A. Verify that Anil reported the loss to the police. B. Call Anil and take a statement regarding the details of the claim. C. Acknowledge receipt of the claim to Chad and enter the claim information into ABC's computer system. D. Verify that Anil's automobile policy covers vandalism damage.

C. Acknowledge receipt of the claim to Chad and enter the claim information into ABC's computer system.

18. In which one of the following ways are premium auditors most helpful to claim representatives? A. By providing a comparison of anticipated loss exposures to actual loss exposures B. By providing information on the desirability of an account C. By verifying the earnings of injured employees for workers compensation claims D. By verifying the proper classification for new exposures

C. By verifying the earnings of injured employees for workers compensation claims

3. Developing a safety management program begins with a A. Series of safety-related subjects. B. Service contract to provide periodic testing and maintenance of all fire protection systems. C. Complete evaluation of the policyholder's operations. D. Positive safety attitude among all workers.

C. Complete evaluation of the policyholder's operations.

33. Which one of the following statements is correct with respect to state insurance regulators' involvement in the claim handling process? A. Market conduct investigations that are periodically performed by insurance regulators are limited to the review of claim practices. B. Consumer complaints to state insurance departments about claim service typically result in the loss of the claim representative's license. C. Enforcement of controls by state insurance regulators is usually handled under the Unfair Claims Settlement Practices Act or similar legislation. D. All states currently license claim representatives, and standard procedures and uniform regulation are in place for doing so.

C. Enforcement of controls by state insurance regulators is usually handled under the Unfair Claims Settlement Practices Act or similar legislation.

90. Reinsurance pools, syndicates, and associations are A. Advisory organizations that provide information about primary insurers to reinsurers. B. Membership organizations in which reinsurers share statistical data. C. Groups of insurers that share the loss exposures of the group, usually through reinsurance. D. Professional development organizations for reinsurance intermediaries.

C. Groups of insurers that share the loss exposures of the group, usually through reinsurance.

87. Smith Enterprises is a national plastics distributor with property values in excess of $20 million spread throughout the country. Smith Enterprises wants to insure all of its property exposures with the same insurer. Which function of reinsurance would be most beneficial to Smith's primary insurer? A. Provide underwriting guidance B. Stabilize loss experience C. Increase large-line capacity D. Provide catastrophe protection

C. Increase large-line capacity

6. Insurer P considered an insured's industrial class to be in classification A while premium auditors in the same state classified it differently. This discrepancy in rating the industrial class differently results in A. Increased claim activity due to rating errors. B. Decreased underwriting capacity overall. C. Inequitable rates for all insureds in the state for those two classes. D. A significant distortion of profits for the insurer.

C. Inequitable rates for all insureds in the state for those two classes.

76. Which one of the following statements is correct with regard to loss estimates? A. Past loss experience rarely is used to estimate future losses. B. The value of incurred losses for a given period can be easily determined. C. Insurers are legally required to show loss reserves on their balance sheets. D. If loss reserves are too low, rates will probably be too high.

C. Insurers are legally required to show loss reserves on their balance sheets.

67. When using prospective loss costs supplied by advisory organizations to produce rates, each insurer must apply its own A. On-level factor. B. Credibility factors. C. Loss cost multiplier. D. Loss development factors.

C. Loss cost multiplier.

63. Which one of the following statements is correct with respect to estimating losses for use in the ratemaking process? A. Insurers include data only on paid losses in the ratemaking process. B. Incurred but not reported (IBNR) losses are not included in ratemaking because their values are uncertain. C. Rates are based on incomplete loss experience. D. Consistent errors in estimating future losses cannot be corrected through actuarial methods.

C. Rates are based on incomplete loss experience.

89. Gemini Insurance Company would like to purchase reinsurance for the professional liability insurance it will sell in the coming year. Which one of the following statements is true concerning the various sources of reinsurance? A. Gemini must use a reinsurance broker to place business with a direct writing reinsurer. B. Gemini must pay a ceding commission to a reinsurance broker that places Gemini's business with a reinsurer. C. Reinsurance pools (syndicates) can offer reinsurance to insurers that are not members of the pool. D. Primary insurers that offer reinsurance usually run both of these operations from the same unit for administrative ease.

C. Reinsurance pools (syndicates) can offer reinsurance to insurers that are not members of the pool.

19. Which one of the following statements is correct with regard to the risk control function of insurers? A. Insurance regulation in all states requires insurers to provide a minimal level of risk control services to commercial policyholders. B. Insurance regulation in all states prohibits insurers from selling unbundled risk control to firms that self-insure. C. Risk control helps insurers meet profit goals by improving the quality of underwriting decisions. D. Providing risk control services increases the chance of policyholders making errors and omissions claims based on insurer negligence.

C. Risk control helps insurers meet profit goals by improving the quality of underwriting decisions.

46. The first goal of the claim function is to A. Pay as little as possible when settling covered losses. B. Be sensitive and empathetic to those who have suffered a loss. C. Satisfy the insurer's obligations to the policyholder. D. Look for reasons to avoid paying reported claims.

C. Satisfy the insurer's obligations to the policyholder.

54. Insurers use a variety of different methods when setting claim reserves. Which one of the following statements is correct with respect to loss reserves? A. The individual case method and the roundtable method rely on statistical analysis rather than the claim representative's judgment. B. The preferred method is to set a modest initial reserve, and then raise the reserve when it is time to issue payments. C. Setting accurate and adequate reserves is important to an insurer's continued solvency and ability to write new business. D. The accuracy or adequacy of reserves over time generally has little impact on an insurer's ratemaking process.

C. Setting accurate and adequate reserves is important to an insurer's continued solvency and ability to write new business.

73. Once an insurance rate is calculated, it is multiplied by which one of the following to produce a premium? A. The expense factor. B. The pure premium. C. The appropriate number of exposure units. D. The desired policy limits.

C. The appropriate number of exposure units.

26. Claim representatives are responsible for determining the cause of loss, liability, and the loss amount. Which one of the following statements is correct with respect to this process? A. When an insurer pays a claim to an insured for a loss caused by a negligent third party, the insurer cannot recover from the third party. B. If there are several causes of loss, the claim representative need only identify one that is covered under the policy. C. The claim representative reviews all component parts of the policy and applies them to the facts of the case. D. Claim payments are not typically subject to sublimits, deductibles, or coinsurance provisions in the policy.

C. The claim representative reviews all component parts of the policy and applies them to the facts of the case.

34. All of the following correctly describe reasons for the use of independent adjusters, EXCEPT: A. In the case of a catastrophic loss such as a hurricane, an insurer may not have sufficient staff to manage the large number of claims, and may use independent adjusters. B. In some areas it is not economically feasible to set up claim offices, and insurers may contract with independent adjusters to handle claims in these remote areas. C. The insured may retain an independent adjuster if settlement negotiations with the insurer are not progressing satisfactorily. D. Insurers may use independent adjusters when special skills and expertise are needed, for example to investigate aircraft accidents.

C. The insured may retain an independent adjuster if settlement negotiations with the insurer are not progressing satisfactorily.

56. Benjamin has his home insured with Westfork Mutual under an HO-3 policy for $100,000. He is the named insured on the policy. There are three other residents of the home: Maria, Benjamin's mother; Daniel, his nephew; and Cian, a family friend. An accidental fire causes damage to the home and to personal property of all four occupants. Benjamin reports the loss to Westfork and Fatima, a claim representative, is assigned the claim. Which one of the following will most likely be Fatima's principal concern when analyzing coverage for the loss? A. Whether any policy exclusions preclude coverage for the loss B. Whether the limit of insurance is sufficient to cover the damage C. Whether Maria's, Daniel's, and Cian's property would be covered D. Whether fire is a covered cause of loss under the H0-3 policy

C. Whether Maria's, Daniel's, and Cian's property would be covered

66. Insurer A has calculated its actual loss ratio to be 54 percent. The expected loss ratio was 60 percent. Using the loss ratio ratemaking method, which one of the following statements is true? A. A 6 percent rate increase is indicated. B. A 10 percent increase in rates is indicated. C. A 6 percent rate decrease is indicated. D. A 10 percent decrease in rates is indicated.

D. A 10 percent decrease in rates is indicated.

57. Which one of the following statements is correct? A. Rates developed by advisory organizations rarely require regulatory approval. B. Insurers using Insurance Services Office (ISO) services all have the same rates. C. Advisory organizations are prohibited from providing non-actuarial services. D. Advisory organizations collect loss data and calculate prospective loss costs.

D. Advisory organizations collect loss data and calculate prospective loss costs.

1. Which one of the following statements is correct? A. All states require insurers to provide a minimum level of risk control services to commercial policyholders. B. While risk control services benefit insurers and policyholders, they have little or no impact on society as a whole. C. Policyholders generally consider an insurer's risk control recommendations to be a source of unnecessary expenses and a financial burden. D. By exercising sound risk control, organizations fulfill occupational safety and health standards and comply with local, state, and federal laws.

D. By exercising sound risk control, organizations fulfill occupational safety and health standards and comply with local, state, and federal laws.

52. Regarding file documentation, the activity log form should be completed as events occur and include the day, month, time, and person making notes. It should also be a brief notation of file activities and analysis. This described procedure is known as a A. Claim audit. B. Supervisor and manager review. C. Control. D. Claim guideline.

D. Claim guideline.

50. Whenever a claim representative performs an activity related to a claim that is being managed, a notation is made into an activity log. This is an example of which one of the following? A. Legal requirements B. Management reviews C. Claim audits D. Claim guidelines

D. Claim guidelines

40. Soon after a loss has been assigned and initial reserves have been established, a claim representative contacts the insured or the insured's representative. Which one of the following statements is correct with respect to that contact? A. At the initial contact, claim representatives typically find that insureds fully understand the details of their insurance coverage. B. The initial contact is when claim representatives complete the proof of loss form to document the details and the value of the claim. C. Claim representatives should usually avoid highlighting any possible policy violations, exclusions, or limitations that can affect coverage. D. Claim representatives must be careful not to give the impression that a claim will be paid if potential grounds exist to deny the claim.

D. Claim representatives must be careful not to give the impression that a claim will be paid if potential grounds exist to deny the claim.

31. Which one of the following statements is correct with respect to claimants' representation by lawyers? A. When claimants hire lawyers, the insurer must pay the claimants' lawyer fees in addition to the settlement amount. B. Legal representation of claimants generally guarantees a faster claim settlement. C. Legal representation generally results in higher insurance settlements for claimants. D. For some types of claims and in certain areas of the U.S., claimants are more likely to hire lawyers.

D. For some types of claims and in certain areas of the U.S., claimants are more likely to hire lawyers.

23. Premium that has been developed by audit is A. Not taxable to the insurer. B. Unearned. C. Partially earned. D. Fully earned.

D. Fully earned.

98. A primary insurer that plans to grow is likely to need additional reinsurance for all of the following reasons, EXCEPT: A. Growth could entail expanding into markets with greater coverage requirements. B. Variability of the loss ratio on new policies could cause instability of underwriting results. C. Growth usually causes a drain on policyholders' surplus. D. Growth could lead to geographic diversification of loss exposures.

D. Growth could lead to geographic diversification of loss exposures.

92. Which one of the following statements is correct regarding the use of treaty and facultative reinsurance? A. A primary insurer's underwriting policy and underwriting guidelines are usually developed by its treaty reinsurer. B. Usually, primary insurers have only one reinsurance treaty with a single reinsurer. C. Primary insurers generally use facultative reinsurance as the foundation of their reinsurance program. D. Most treaties require that all loss exposures within the treaty's terms be reinsured.

D. Most treaties require that all loss exposures within the treaty's terms be reinsured.

14. Which one of the following statements is correct with respect to the premium auditing process? A. The written audit report summarizes the results of the audit, but does not document the process or the sources of the data used. B. Advisory organizations specify the amount of evidence required to ascertain loss exposures and classifications with reasonable certainty. C. Premium auditors use rules, rather than judgment, when analyzing and verifying premium data to ensure audit validity. D. Once premium auditors have obtained the data necessary for calculating the premium, they must decide whether the data are reasonable.

D. Once premium auditors have obtained the data necessary for calculating the premium, they must decide whether the data are reasonable.

16. Which one of the following statements is correct with regard to the importance of accurate premium audits? A. Inconsistency or inaccuracy of classification and measurement of exposure units effects individual premiums but generally not class rates. B. It is appropriate for premium auditors in one area of a state to classify a particular industrial class differently than auditors in another area of the state. C. Errors in premium auditing have implications for billing, but rarely other departments within the insurer. D. Premium audit errors can cause an insurer problems in customer retention, goodwill, efficiency, and collections.

D. Premium audit errors can cause an insurer problems in customer retention, goodwill, efficiency, and collections.

71. Which one of the following statements is correct? A. The level of insurance expertise is generally much lower for commercial insurance customers than for personal insurance customers. B. It is preferable that producers and underwriters avoid understanding ratemaking systems. C. Insurers rarely use the ratemaking process to influence policyholders' decisions regarding loss control. D. Rate stability could conflict with the ideal characteristic that rates should be responsive.

D. Rate stability could conflict with the ideal characteristic that rates should be responsive.

47. Which one of the following statements is true concerning claim department contacts? A. Expense management for defense is a nonessential component of the overall claim function. B. Technological improvements have weakened the quality of claim service. C. All states require claim adjusters to be licensed. D. State regulators monitor insurers' activities in the claim settlement process.

D. State regulators monitor insurers' activities in the claim settlement process.

41. When the policy does not define a cause of loss or another term, which one of the following can the claim representative use to determine the meaning? A. Best practices B. Underwriting guidelines C. Miscellaneous provisions D. Statutory provisions

D. Statutory provisions

74. The amount included in the insurance rate to protect insurers against the possibility that actual claims or expenses will exceed projections is referred to as A. The claims and eventualities factor. B. The expense factor. C. The prospective loss costs. D. The loading for profits and contingencies.

D. The loading for profits and contingencies.

11. Which one of the following statements is correct regarding the relationship between risk control and claims? A. The claim department has its own technical resources and rarely relies on the risk control department for expertise. B. While the details of individual losses are useful to risk control representatives, frequency and severity data by line of business are rarely used. C. While risk control representatives carefully review property claims, they rarely examine liability or workers' compensation losses. D. The risk control department needs claim experience information to direct loss-control resources and efforts to crucial areas.

D. The risk control department needs claim experience information to direct loss-control resources and efforts to crucial areas.

93. Which one of the following statements is correct with regard to the use of facultative reinsurance? A. The administrative costs associated with placing facultative reinsurance are relatively low. B. Facultative reinsurance is generally not an option for insuring loss exposures that are inconsistent with the primary insurer's typical portfolio. C. Facultative reinsurance is generally not an option for insuring classes of loss exposures that are excluded under treaty reinsurance. D. The treaty reinsurer is usually willing to allow the primary insurer to remove high-hazard loss exposures from the treaty by using facultative reinsurance.

D. The treaty reinsurer is usually willing to allow the primary insurer to remove high-hazard loss exposures from the treaty by using facultative reinsurance.

97. Which one of the following is a benefit of contingent surplus notes as an alternative to traditional reinsurance? A. They are linked to industry experience rather than that of the primary insurer. B. The investors assume a portion of the primary insurer's risk. C. The primary insurer may receive both a ceding commission and profit commission. D. They increase a primary insurer's assets without increasing its liabilities.

D. They increase a primary insurer's assets without increasing its liabilities.

100. Which one of the following is the primary business purpose of a professional reinsurer? A. To offer reinsurance to affiliated insurers B. To create pools so that groups of insurers can share the loss exposures of the group C. To create a syndication of reinsurance intermediaries D. To serve insurers' reinsurance needs

D. To serve insurers' reinsurance needs

86. Crimson Casualty Company began insurance operations last year. The company experienced phenomenal success and wrote far more premiums than expected. A representative from the state insurance department contacted Crimson Casualty and warned the company that it was growing too fast and risking insolvency. The insurance regulator added, "Of course you can use reinsurance to help remedy your situation." The regulator was referring to which one of the following functions of reinsurance? A. Using reinsurance to stabilize loss experience B. Using reinsurance to protect against catastrophic losses C. Using reinsurance to provide large-line capacity D. Using reinsurance to provide surplus relief

D. Using reinsurance to provide surplus relief

13. Which one of the following statements is correct with respect to premium audits? A. There is no strictly defined procedure for premium audits, and individual auditors may consider different factors during an audit. B. Policyholders are required to present accounting information and other data to the auditor in the specified form required by the manual rules. C. Workers compensation insurance is the one line of commercial insurance that is rarely subject to premium audit requirements. D. When a policy is written subject to audit, the exact exposure and premium bases cannot be known until the end of the policy period.

D. When a policy is written subject to audit, the exact exposure and premium bases cannot be known until the end of the policy period.