insurance test one
Which of the following statements about the investments of property and liability insurers is (are) true? I. Income from investments is important in offsetting any unfavorable underwriting experience. II. Because premium income is continually being received, the investment objective of liquidity is of little importance.
I only
All of the following are burdens to society because of the presence of risk EXCEPT
- risk provides an incentive for people to engage in loss control OR - Individuals may profit from accepting a speculative risk
The tendency for unhealthy people to seek life or health insurance at standard rates is an example of
adverse selection
Factors that may result in more restrictive underwriting decisions include which of the following? I. Inadequate rates; II. The unavailability of reinsurance at favorable terms.
both I and II
The terrorism risk in the United States
can be addressed through risk control and insurance
The function of an actuary is to
determine premium rates
Brad started a pest control business. To protect his personal assets against liability arising out of the business, Brad incorporated the business. Bradʹs use of the corporate form of organization to shield against personal liability claims illustrates
noninsurance transfer
Risk management is concerned with
the identification and treatment of loss exposures
Which of the following statements about mutual insurers is true?
They may pay dividends to their policyowners
Temporary evidence of insurance until a policy is actually issued is provided by a(n)
binder
A pure risk is defined as a situation in which there is
only the possibility of loss or no loss
Objective risk is defined as
the relative variation of actual loss from expected loss.
JKL Insurance Company reported the following information on its accounting statements last year: Premiums Written $90,000,000; Loss Adjustment Expenses $5,000,000; Underwriting Expenses $30,000,000; Premiums Earned $100,000,000; Incurred Losses $70,000,000. What was JKLʹs combined ratio last year?
108.3
JKL Insurance Company reported the following information on its accounting statements last year: Premiums Written $90,000,000; Loss Adjustment Expenses $5,000,000; Underwriting Expenses $30,000,000; Premiums Earned $100,000,000; Incurred Losses $70,000,000. What was JKLʹs expense ratio last year?
33.3 percent
JKL Insurance Company reported the following information on its accounting statements last year: Premiums Written $90,000,000; Loss Adjustment Expenses $5,000,000; Underwriting Expenses $30,000,000; Premiums Earned $100,000,000; Incurred Losses $70,000,000. What was JKLʹs loss ratio last year?
75.0 percent
According to the law of large numbers, what should happen as an insurer increases the number of units insured?
Actual results will more closely approach expected results
According to the law of large numbers, what happens as the number of exposure units increases?
Actual results will more closely approach probable results
All of the following are classified as casualty insurance EXCEPT
All of the following are classified as casualty insurance EXCEPT
Which of the following statements about Lloydʹs of London is true?
Coverage is actually written by syndicates who belong to Lloydʹs of London
Advantages of the direct response system for marketing life insurance include which of the following? I. Advertising can be specifically directed to selected markets. II. Complex products can be easily sold.
I only
Which of the following statements about adjustment bureaus is (are) true? I. They are frequently used to settle claims when a large number of losses occur in a given geographic location as a result of a catastrophic event. II. Their major advantage is low cost because of the use of part-time adjustors.
I only
Which of the following statements about brokers is (are) true? I. They legally represent the insured rather than the insurance company. II. They are prohibited from being licensed as agents
I only
Which of the following statements about liability risks is (are) true? I. Future income and assets can be attached to pay judgments if inadequate insurance is carried. II. There is an upper limit on the amount of loss.
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.
I only
Which of the following statements about the investments of property and liability insurers is (are) true? I. Income from investments is important in offsetting any unfavorable underwriting experience. II. Because premium income is continually being received, the investment objective of liquidity is of little importance
I only
Which of the following statements about underwriting policy is (are) true? I. A company must establish an underwriting policy consistent with company objectives. II. Underwriting policy is usually subjective and allows the underwriter considerable flexibility with respect to lines written and forms used.
I only
Which of the following statements regarding insurance and gambling is (are) true? I. Insurance is used to handle existing pure risks, while gambling creates a new speculative risk. II. Insurance usually involves risk avoidance, while gambling typically involves only risk reduction.
I only
Which of the following statements regarding private insurance and government insurance is (are) true? I. Private insurance programs include life and health insurance and property and liability insurance. II. Social insurance programs are government insurance programs that are voluntary and financed entirely by contributions from covered employers.
I only
Which statement is (are) true with respect to enterprise risk management programs? I. They address traditional property, liability, and personnel loss exposures. II. They do not address financial risks.
I only
Characteristics of a fortuitous loss include which of the following? I. The loss is certain to occur. II. The loss occurs as a result of chance.
II only
Which of the following conditions is (are) appropriate for using retention? I. Losses are difficult to predict. II. The worst possible loss is not serious.
II only
Which of the following statements about a reciprocal exchange is (are) true? I. It usually specializes in health insurance. II. It is an unincorporated mutual insurance company.
II only
Which of the following statements about the managerial system of marketing life insurance is (are)true? I. It uses branch offices run by independent agents who represent several companies. II. The branch manager is an employee of the insurer who has the responsibility for hiring and training new agents.
II only
Which of the following statements about the scope of risk management is (are) true? I. Traditionally, risk management was limited in scope to speculative loss exposures. II. In the 1990s, some businesses began to expand the scope of risk management to include financial risks.
II only
Which of the following types of loss exposures may be appropriately handled through the purchase of insurance? I. High-frequency, low-severity loss exposures II. Low-frequency, high-severity loss exposures
II only
Which of the following statements about claims settlement is true?
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.
Which of the following statements is true regarding insurance market conditions and underwriting results?
Insurance rates are high and underwriting standards are tight when the insurance market is "hard."
Why is a large number of exposure units generally required before a pure risk is insurable?
It enables the insurer to predict losses more accurately.
Which of the following is a result of adverse selection?
Persons most likely to have losses are also most likely to seek insurance at standard rates.
Monopoly Insurance is the only company marketing a certain line of insurance in a state. After complaints from several consumers, the State Insurance Department investigated Monopolyʹs rates. The regulators determined that Monopoly was taking advantage of being the only insurer offering the line by charging more than double the actuarial cost of the coverage. Which regulatory rating objective was Monopoly violating?
Rates must not be excessive
Metro City has six different zip codes. XYZ Insurance Company markets coverages in Metro City. Any applicant who lists one particular zip code is automatically quoted a premium that is three times the average premium for applicants from the other five zip codes. Which regulatory objective is not being met given XYZʹs premium structure?
Rates must not unfairly discriminate.
The corporate structure of mutual insurers is changing rapidly. All of the following are current trends EXCEPT
Sharp increase in the number of mutual insurance companies.
JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 2,000 homeowners this year?
The actual results will more closely approach the expected results
Which of the following is a demographic factor that has increased losses from climate change in the United States?
The increasing population in Southern states such as Florida, Texas, and South Carolina.
All of the following statements about the independent agency system are true EXCEPT
The insurer rather than the agent owns the renewal rights to the business.
XYZ Insurance Company writes coverage for most perils which can damage property. XYZ, however, does not write flood insurance on property located in flood plains. Which requirement of an insurable risk might be violated if XYZ wrote flood insurance on property located in flood plains?
The loss should not be catastrophic
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?
There should be equity among policyholders
All of the following statements about fraternal insurers are true EXCEPT
They specialize in writing property and liability insurance
The unearned premium reserve of an insurer is
a liability representing the unearned portion of gross premiums on outstanding policies
An individualʹs personal estimate of the chance of loss is
a subjective probability
The underwriting process begins with the
agent
Life insurance policyowners may borrow the cash value from their life insurance policies. Where are life insurance policy loans shown on a life insurance companyʹs financial statements?
as an asset
Carelessness or indifference to a loss is an example of A) physical hazard.
attitudinal hazard
All of the following are programs to insure fundamental risks EXCEPT
auto physical damage insurance
Abandoning an existing loss exposure is an example of
avoidance
All of the following are methods of noninsurance transfer EXCEPT
avoiding dangerous activities
Loss control includes which of the following? I. Loss reduction; II. Loss prevention
both I and II
Preloss objectives of risk management include which of the following? I. Preparing for potential losses in the most economical way II. Reduction of anxiety
both I and II
Reasons for the unearned premium reserve include which of the following? I. To pay losses that occur during the policy period. II. To pay premium refunds to policyholders in the event of cancellation.
both I and II
Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable? I. The loss must be definite as to place. II. The loss must be definite as to amount.
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
both I and II
Which of the following statements is (are) true concerning investments of property and casualty insurers and life insurers? I. Property and casualty insurance companies place greater emphasis on liquidity than do life insurers. II. Life insurance company investments are, on average, of longer duration than property and casualty insurance company investments.
both I and II
R.I.P. Company manufactures herbicide and pesticide. The company had difficulty finding affordableliability insurance. R.I.P. established its own insurance company based in Bermuda for the purpose of insuring R.I.P.ʹs loss exposures. The company that R.I.P. formed is called a
captive insurer
Insurance Brokerage Company uses a computer-based method of estimating the losses its clients will suffer if a severe storm or earthquake occurs. This method of estimating losses is called
catastrophe modeling
A property and casualty insurerʹs loss reserve includes estimates for all of the following EXCEPT
claims anticipated but not yet incurred
An emerging concern for risk managers is the greater volatility that has been observed in weather patterns—higher high temperatures, lower low temperatures, record rainfall, drought, etc. Collectively, this risk is called
climate change risk
Mid-States Beef is a commercial feedlot business. Currently, the company has over 10,000 cattle in feedlots. Mid-States is concerned that the price of corn, the grain fed to the cattle, will increase significantly. The risk that the price of corn may increase and harm the profitability of Mid-States Beef's operations is a
commodity price risk
Which of the following is a post-loss risk management objective?
continuing operations
Bronson Company manufactures tools that it sells to wholesalers. Bronson is concerned that it may be unable to collect money the company is owed by the wholesalers. To address this risk, Bronson Company could purchase
credit insurance
Melanie was just hired as the risk manager of JKL Company. The company president asked her to make a thorough review of all of the company's loss exposures. Melanie noted that many employees were too heavily invested in stock issued by the company in their 401-k plan. Melanie suggested that the employees change some of their investment holdings to mutual funds that invest in stock issued by different companies. The risk control method that Melanie suggested is
diversification
The salespersons of a direct writer are considered to be
employees
Which of the following is an example of a noninsurance risk transfer?
entering into a hold-harmless agreement
A name that encompasses all of the major risks faced by a business firm is
enterprise risk
A phrase that encompasses all of the major risks faced by a business firm is
enterprise risk
A comprehensive risk management program that addresses an organization's pure risks, speculative risks, strategic risks, and operational risks is called a(n)
enterprise risk management plan.
Katelyn was just named Risk Manager of ABC Company. She has decided to create a risk management program which considers all of the risks faced by ABC-pure, speculative, operational, and strategic-in a single risk management program. Such a program is called a(n)
enterprise risk management program
ABC Insurance Company calculated the amount that it expected to pay in claims under each policy sold. Rather than selling the insurance for the amount it expected to pay in claims, ABC added an allowance to cover the cost of doing business, including commissions, taxes, and acquisition expenses.This allowance is called a(n)
expense loading
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
experience rating
The unit of measurement used in property and casualty insurance pricing is called the
exposure unit
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
facultative reinsurance.
All of the following are examples of personal risks EXCEPT
flood or loss of business income
Brian is a life insurance agent. He is licensed to represent one company and has been assigned a territory. In addition to marketing life insurance products in the territory, Brian is also responsible for recruiting, training, and motivating new agents for the company in his territory. Brian is a(n)
general agent
Which of the following is a form of casualty insurance?
general liability insurance
All of the following are social costs associated with insurance EXCEPT
increased cost of capital
Beverly lives in a sparsely populated area in northern Idaho. Some insurance companies marketing coverage in northern Idaho cannot afford to have full-time adjustors there. Several insurers hire Beverly to adjust claims for their insureds. Beverly charges the insurers a fee for each claim that she settles. Beverly is a(n)
independent adjustor
Sarah owns a property and liability insurance agency. She is authorized to represent several insurance companies and is compensated by commissions. Sarahʹs agency owns the expiration rights to the businessshe sells. Sarah is a(n)
independent agent
Jenna opened a successful restaurant. One night, after the restaurant had closed, a fire started when the electrical system malfunctioned. In addition to the physical damage to the restaurant, Jenna also lost profits that could have been earned while the restaurant was closed for repairs. The lost profits are an example of
indirect loss
The extra expense incurred by a business to stay in operation following a fire is an example of a(n)
indirect loss
If an underwriter suspects moral hazard, the underwriter may ask an outside firm to investigate theapplicant and make a detailed report to the insurer. This report is called a(n)
inspection report
Mark has been an underwriter for 20 years. An application he recently reviewed looked odd to him. The building value in the application seemed far too high, and Mark suspected the applicant might be planning to destroy the property after it is insured. Mark contacted an outside firm and hired someone to investigate the applicant and to prepare a report about the applicant. This report is called a(n)
inspection report
Insurers obtain data which can be used to determine rates from
insurance advisory organizations
Scott works in property and liability insurance marketing. He legally represents insurance purchasers, rather than insurance companies. Scott is paid a commission on the insurance placed with insurers. Scott is a(n)
insurance broker
Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called
legal hazard
Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award. The characteristics of the judicial system that increase the frequency and severity of losses are known as
legal hazard
The portion of an insurance premium allocated to expenses, profit, and a margin for contingencies is called the
loading
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?
loss control
The use of fire-resistive materials when constructing a building is an example of
loss control
A situation or circumstance in which a loss is possible, regardless of whether a loss occurs.
loss exposure
One item that appears on an insurance companyʹs financial statements is a liability that represents an estimate of the claims reported and adjusted but not yet paid, claims reported and filed but not yet adjusted, and claims incurred but not yet reported to the company. This liability is called the insurerʹs
loss reserve
Which of the following would not appear in the asset section of an insurance company's balance sheet?
loss reserves
An insurance policy specifically written and designed to meet the needs of an insurance purchaser is called a(n)
manuscript policy.
Which of the following types of risks is normally uninsurable by private insurers?
market risks
Which of the following types of risks is normally uninsurable by private insurers?
market risks or political risks
The worst loss that could ever happen to a firm is referred to as
maximum possible loss
Faking an accident to collect insurance proceeds is an example of a
moral hazard
Indifference to loss because of the existence of insurance is an example of a
morale hazard
LMN Insurance markets homeowners insurance. The LMN homeowners policy combines property and casualty insurance in the same contract. Insurance policies combining property and casualty coverage in the same contract are called
multiple-line policies
An automobile that is a total loss as a result of a collision is an example of which of the following types of risk? I. Speculative risk II. Fundamental risk
neither I nor II
Which of the following statements about claim settlement is (are) true? I. The fair payment of claims requires an insurer to adopt a very liberal claims policy. II. To prevent lawsuits, an insurer should provide no personal assistance to a claimant other than that which is required by contractual obligations.
neither I nor II
Which of the following statements about financial risk is (are) true? I. Enterprise risk does not include financial risk. II. Financial risk is easily addressed through the purchase of insurance.
neither I nor II
An automobile that is a total loss as a result of a collision is an example of which of the following types of risk? I. Speculative risk II. Fundamental risk
neither I or II
Under one life insurance marketing system, an insurer sells its products through established agents who are already engaged in life insurance sales. Under this system, an insurer enters into contracts with successful agents who agree to sell the insurerʹs products. This life insurance marketing system is called the
nonbuilding agency system
The long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called
objective probability
ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects that 8 homeowners out of every 100, on average, will report claims each year. The variation between the rate of loss that ABC expects to occur and the rate of loss that actually does occur is called
objective risk
All of the following are characteristics of the liability risk that most people face EXCEPT
owning liability insurance eliminates the possibility of being held legally liable.
Barb, who is self-employed, is the main breadwinner for her family. Barb does not have disability income insurance because she has never stopped to consider the impact of a long-term disability upon her family. Barb's treatment of the risk of disability is best described as
passive retention
An earthquake is an example of a
peril
10) Dense fog that increases the chance of an automobile accident is an example of a
physical hazard
A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that the farmer sustained. Which characteristic of insurance is embodied in this agreement?
pooling of losses
Which of the following is a basic characteristic of insurance?
pooling of losses
Loss frequency is defined as the
probable number of losses that may occur during some period.
Loss severity is defined as the
probable size of the losses which may occur during some period
Easy Pay Insurance Company may require insureds who suffer a loss to submit a sworn statement to substantiate that a loss occurred and to describe the conditions under which the loss occurred. This sworn statement is called a
proof of loss
Which of the following types of risks best meets the requirements for being insurable by private insurers?
property risks
Under the pure premium method of determining class rates, the gross rate is determined by which of the following formulas?
pure premium/(1 - expense ratio)
The premature death of an individual is an example of a
pure risk
the price per unit of insurance is called the
rate
All of the following are expenses of life insurance companies EXCEPT
realized capital gains
Apex Insurance Company wrote a large number of property insurance policies in an area where earthquake losses could occur. When the president of Apex was asked if she feared that a severe earthquake might put the company out of business, she responded, ʺNot a chance. We transferred most of that risk to other insurance companies.ʺ An arrangement by which an insurer that initially writes insurance transfers to another insurer part or all of the potential losses associated with such insurance is called
reinsurance
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 was 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?
responsiveness
RST is a manufacturer. The company does not have a good safety record and pays high workers compensation premiums. RST just hired a new risk manager, and she has instituted several employee safety programs. She has also persuaded the insurer writing RSTʹs workers compensation insurance to base the premium on RSTʹs actual loss experience during the current period rather than on the companyʹs historical performance. This type of plan is called a(n)
retrospectively rated plan
All of the following are characteristics of insurance EXCEPT
risk avoidance
Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new manufacturing facility. These devices are all examples of
risk control
the first step in the enterprise risk management process is
risk identification
From the insuredʹs perspective, the use of deductibles in insurance contracts is an example of
risk retention
Purchasing health insurance illustrates the use of which personal risk management technique?
risk transfer
Which of the following is implied by the pooling of losses?
sharing of losses by an entire group
Jim and Paula Franklin started a dry cleaning business. The business may be successful or it may fail. The type of risk that is present when either a profit or loss could occur is called
speculative risk
Uncertainty pertaining to the organization's goals and objectives and the organization's strengths, weaknesses, opportunities, and threats is called
strategic risk
Uncertainty based on a personʹs mental condition or state of mind is known as
subjective risk
Jim would like to start a business raising thoroughbred racehorses. The business would be the first of its kind in the state where he lives. Obtaining insurance on the horses is a key concern, and he was dismayed to learn that none of the insurers authorized to operate in his state offer this specialty insurance. What is the name of the intermediary which Jack can use to place this coverage with an insurer not admitted to his state?
surplus lines broker
Neil needs insurance that is unavailable in the state where he lives. To obtain insurance from a nonadmitted insurer, Neil should contact a
surplus lines broker
Common sources of underwriting information for life and health insurance include all of the following EXCEPT
the applicantʹs income tax return
a peril is
the cause of a loss
Reasons to adopt an enterprise risk management plan include all of the following EXCEPT
to increase earnings volatility.
Traditionally, risk has been defined as
uncertainty concerning the occurrence of loss
Jan is employed by an insurance company. She reviews applications to determine whether her company should insure the applicant. If insurable, Jan assigns the applicant to a rating category based on the applicantʹs degree of risk. Jan is a(n)
underwriter
The property and liability insurance industry is characterized by a repetitive pattern of loose underwriting standards with low premiums followed by tight underwriting standards with high premiums. This repetitive pattern is called the
underwriting cycle
Antonio is a claims adjustor for LMN Insurance Company. After the insurer is notified that there has been a loss, Antonio meets with the insured. The first step in the claims process that Antonio should follow is to
verify that a covered loss has occurred