Risk Management & Insurance Exam One
97. Temporary evidence of insurance until a policy is actually issued is provided by a(n) (a) binder. (b) brokerage agreement. (c) pre-approval form. (d) endorsement.
A
31. Methods by which insurers may minimize or avoid catastrophic losses include which of the following? I. The use of reinsurance II. Concentrating coverage written in one geographic region (a) I only (b) II only (c) both I and II (d) neither I nor II
A
35. 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? (a) pooling of losses (b) fortuitous losses (c) risk avoidance (d) indemnification
A
38. Gina would like to buy a house. She will pay 10 percent of the cost of the house as a down payment and borrow the other 90 percent from a mortgage lender. The home will serve as collateral for the loan. The lender requires Gina to purchase property insurance on the home so that the collateral supporting the loan will be protected. This scenario illustrates which of the following benefits of insurance to society? (a) enhancement of credit (b) reduction of fear and worry (c) source of investment funds (d) incentives for loss prevention
A
40. Risk management is concerned with (a) the identification and treatment of loss exposures. (b) the management of speculative risks only. (c) the management of pure risks that are uninsurable. (d) the purchase of insurance only.
A
46. ABC Insurance retains the first $1 million of each property damage loss and purchases insurance for that part of any property loss that exceeds $1 million. The insurance for property losses above $1 million is called (a) excess insurance. (b) liability insurance. (c) coinsurance. (d) primary insurance.
A
76. The portion of a property and liability insurance contract that contains information about the property or activity to be insured is called the (a) declarations. (b) insuring agreement. (c) exclusions. (d) conditions.
A
78. Which of the following statements about "all-risks" coverage is (are) true? I. All losses are covered except those losses specifically excluded. II. The burden of proof is on the insured to prove that a loss is covered. (a) I only (b) II only (c) both I and II (d) neither I nor II
A
83. Deductibles are used in all of the following types of insurance EXCEPT (a) life insurance. (b) health insurance. (c) property insurance. (d) automobile insurance.
A
9. A pure risk is defined as a situation in which there is (a) only the possibility of loss or no loss. (b) only the possibility of profit. (c) a possibility of neither profit nor loss. (d) a possibility of either profit or loss.
A
92. Mark reviewed his homeowners policy. He learned that his personal property was insured on an actual cash value basis. He would like replacement cost coverage on the property. He contacted his agent who said, "I'll simply add an amendment to your contract that changes the basis of recovery to replacement cost." The written provision the agent was referring to is called a(n) (a) endorsement. (b) coinsurance clause. (c) binder. (d) deductible.
A
98. 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. (a) I only (b) II only (c) both I and II (d) neither I nor II
A
1. Objective risk is defined as (a) the probability of loss. (b) the relative variation of actual loss from expected loss. (c) uncertainty based on a person's mental condition or state of mind. (d) the cause of loss.
B
100. Which of the following is characteristic of a typical mass merchandising plan? (a) higher premiums than in the individual market (b) premiums may be paid through payroll deduction (c) group rather than individual underwriting (d) employer contributions to the cost of coverage
B
27. 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. (a) I only (b) II only (c) both I and II (d) neither I nor II
B
28. From the viewpoint of the insurer, all of the following are characteristics of an insurable risk EXCEPT (a) The loss must be accidental. (b) The loss should be catastrophic. (c) The premium must be economically feasible. (d) There must be a large number of exposure units.
B
36. 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 (a) mono-line policies. (b) multi-year policies. (c) multiple-line policies. (d) manuscript policies.
C
12. Which of the following is a reason why premature death may result in economic insecurity? I. Additional expenses associated with death may be incurred. II. The income of the deceased person's family may be inadequate to meet its basic needs. (a) I only (b) II only (c) both I and II (d) neither I nor II
C
30. 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. (a) I only (b) II only (c) both I and II (d) neither I nor II
C
39. 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, "Not a chance. We transferred most of that risk to other insurance companies." The shifting of part or all of the insurance originally written by one insurance company to another insurance company is called (a) hedging. (b) speculating. (c) reinsurance. (d) loss avoidance.
C
42. The basic functions of a risk manager include which of the following? I. Identifying potential losses. II. Selecting the appropriate techniques for treating losses. (a) I only (b) II only (c) both I and II (d) neither I nor II
C
49. All of the following statements about the administration of a risk management program are true EXCEPT (a) The risk manager is an important part of a firm's management team. (b) A risk management policy statement can be used to educate top executives about the risk management process. (c) If a risk management program is properly designed, periodic review of the program is unnecessary. (d) In order to properly identify loss exposures, the risk manager needs the cooperation of other departments.
C
22. 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 (a) pure risk. (b) subjective risk. (c) fundamental risk. (d) speculative risk.
D
29. Why is a large number of exposure units generally required before a pure risk is insurable? (a) It prevents the insurer from losing money. (b) It eliminates intentional losses. (c) It minimizes moral hazard. (d) It enables the insurer to predict losses based on the law of large numbers.
D
32. Which of the following types of risks is normally uninsurable by private insurers? (a) personal risks (b) property risks (c) liability risks (d) market risks
D
44. All of the following are potential advantages of retention EXCEPT (a) lower expenses. (b) increased cash flow. (c) encouragement of loss prevention. (d) protection from catastrophic losses.
D
48. Which of the following types of loss exposures are best met by the use of avoidance? (a) low-frequency, low-severity (b) low-frequency, high-severity (c) high-frequency, low-severity (d) high-frequency, high-severity
D
90. Eric's property was damaged in an accident. He phoned his agent to see if the loss was covered under his property insurance policy. The agent said, "As long as the loss is not specifically excluded in the policy, the loss is covered." Based on the agent's answer, what type of insuring agreement appears in the policy? (a) unconditional coverage (b) named-perils coverage (c) listed-perils-only coverage (d) "all-risks" coverage
D
108. The underwriting process begins with the (a) agent. (b) desk underwriter. (c) inspection report. (d) acceptance of the application.
A
10. The premature death of an individual is an example of a (a) pure risk. (b) speculative risk. (c) fundamental risk. (d) physical hazard.
A
101. Sarah owns a property and liability insurance agency. She is authorized to represent several insurance companies and is compensated by commissions. Sarah's agency owns the expiration rights to the business she sells. Sarah is a(n) (a) independent agent. (b) exclusive agent. (c) direct writer. (d) insurance broker.
A
103. Some investors decided to start an insurance company. Each investor contributed $50,000 to raise the capital required to charter a new company. Each investor received an ownership interest in the company. The company will raise additional capital by selling ownership rights to other investors. Under this type of organization, the customer and owner functions are separate. This type of insurer is called a (a) stock company. (b) reciprocal exchange. (c) factory mutual. (d) Lloyd's association.
A
112. All of the following are reasons for a primary insurer to use reinsurance EXCEPT (a) to increase the unearned premium reserve. (b) to increase underwriting capacity. (c) to protect against catastrophic losses. (d) to stabilize profits.
A
115. 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 applicant's degree of risk. Jan is a(n) (a) underwriter. (b) actuary. (c) loss control engineer. (d) claims adjustor.
A
119. Sue double-majored in mathematics and statistics in college. She also enrolled in a number of finance courses. After graduation, she was hired by Econodeath Insurance Company. Her job is to calculate premium rates for life insurance coverages. Sue is a(n) (a) actuary. (b) underwriter. (c) claims adjustor. (d) producer.
A
14. Following good health habits can be categorized as (a) loss prevention. (b) loss retention. (c) noninsurance transfer. (d) personal insurance.
A
20. Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new manufacturing facility. These devices are all examples of (a) loss control. (b) noninsurance transfer. (c) risk avoidance. (d) risk retention.
A
24. All of the following are characteristics of insurance EXCEPT (a) risk avoidance. (b) pooling of losses. (c) payment of fortuitous losses. (d) indemnification.
A
25. Which of the following is implied by the pooling of losses? (a) sharing of losses by an entire group (b) inability to predict losses with any degree of accuracy (c) substitution of actual loss for average loss (d) increase of objective risk
A
3. 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 (a) objective probability. (b) objective risk. (c) subjective probability. (d) subjective risk.
A
57. Which of the following is a fundamental purpose of the principle of indemnity? (a) to reduce moral hazard (b) to minimize physical hazards (c) to settle property insurance losses on a replacement cost basis (d) to require deductibles in all property insurance policies
A
60. All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT (a) ties of blood and marriage. (b) potential legal liability. (c) a creditor-debtor relationship. (d) a contract right.
A
61. When must an insurable interest legally exist in property insurance? (a) only at the time of loss (b) only at the inception of the policy (c) only at the time the loss settlement process takes place (d) both at the time of loss and at the inception of the policy
A
72. What is the practical effect of an insurance policy being a conditional contract? (a) The insurer can refuse to pay claims unless the insured has complied with all policy conditions. (b) The insured can assign the policy only with the insurer's consent. (c) The insurer can sue the insured for failure to pay any premiums. (d) The insured gets the benefit of the doubt if a policy contains any ambiguities or uncertainties.
A
105. The financial services field is currently experiencing consolidation and convergence. If both these trends continue, in the future we should observe (a) fewer financial institutions offering a narrower range of financial services products. (b) fewer financial institutions offering a wider range of financial services products. (c) more financial institutions offering a narrower range of financial services products. (d) more financial institutions offering a wider range of financial services products.
B
106. The function of an actuary is to (a) adjust claims. (b) determine premium rates. (c) negotiate reinsurance treaties. (d) invest insurance company assets.
B
107. All of the following statements about underwriting standards are true EXCEPT (a) The purpose of underwriting standards is to reduce adverse selection against the insurer. (b) The underwriter should select only those insureds who are expected to have no losses. (c) The underwriter should select a book of business so that there is a proper balance within each rate classification. (d) Equitable rates should be charged so that each group of policyowners pays its own way in terms of losses and expenses.
B
11. All of the following are programs to insure fundamental risks EXCEPT (a) federally subsidized flood insurance. (b) automobile physical damage insurance. (c) Social Security. (d) unemployment compensation.
B
113. Which of the following statements about treaty reinsurance is true? (a) The reinsurer is required to underwrite each individual applicant that is reinsured. (b) The reinsurer must accept all business that falls within the scope of the treaty. (c) The ceding insurer can choose which business falling within the scope of the treaty it wishes to reinsure. (d) It protects the reinsurer by requiring the ceding insurer to charge adequate premiums.
B
118. Ross studied engineering in college. After graduation, he went to work for an insurance company. Ross visits properties insured by his company. He conducts inspections and makes recommendations about alarm systems, sprinkler systems, and building construction. In what functional area does Ross work? (a) underwriting (b) loss control (c) data processing and management (d) claims adjusting
B
120. Easy Pay Insurance Company requires 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 (a) binder. (b) proof of loss. (c) claims report. (d) notice of loss.
B
13. All of the following are burdens to society because of the presence of risk EXCEPT (a) The size of an emergency fund must be increased. (b) Insurance is unavailable, particularly for pure risks. (c) Society is deprived of certain goods and services. (d) Mental fear and worry are present.
B
15. The use of fire-resistive materials when constructing a building is an example of (a) risk transfer. (b) loss control. (c) risk avoidance. (d) risk retention.
B
17. All of the following are methods of noninsurance transfer EXCEPT (a) entering into hold-harmless agreements. (b) avoiding dangerous activities. (c) hedging risk using stock index futures. (d) incorporating a business.
B
18. Curt borrowed money from a bank to purchase a fishing boat. He purchased property insurance on the boat. Curt had difficulty making loan payments because he did not catch many fish, and fish prices were low. Curt intentionally sunk the boat, collected from his insurer, and paid off the loan balance. This scenario illustrates the problem of (a) adverse selection. (b) moral hazard. (c) fundamental risk. (d) morale hazard.
B
19. Brad started a pest control business. To protect his personal assets against liability arising out of the business, Brad incorporated the business. Brad's use of the corporate form of organization to shield against personal liability claims illustrates (a) fundamental risk. (b) noninsurance transfer. (c) risk retention. (d) objective risk.
B
2. Uncertainty based on a person's mental condition or state of mind is known as (a) objective risk. (b) subjective risk. (c) objective probability. (d) subjective probability.
B
23. Ben is concerned that if he injures someone or damages someone's property he could be held legally responsible and required to pay damages. This type of risk is called a (a) speculative risk. (b) liability risk. (c) fundamental risk. (d) property risk.
B
26. According to the law of large numbers, what happens as the number of exposure units increases? (a) Actual results will increasingly differ from probable results. (b) Actual results will more closely approach probable results. (c) Fundamental risk will decrease. (d) Objective risk will increase.
B
37. One branch of government insurance programs has a number of distinguishing characteristics. These programs are compulsory, they are financed by mandatory contributions rather than general tax revenues, and benefits are weighted in favor of low-income groups. These government insurance programs are called (a) welfare programs. (b) social insurance programs. (c) casualty insurance programs. (d) private insurance programs.
B
4. An earthquake is an example of a (a) moral hazard. (b) peril. (c) physical hazard. (d) objective risk.
B
41. All of the following are risk management objectives prior to the occurrence of loss EXCEPT (a) economy. (b) continued operations. (c) reduction of anxiety. (d) meeting externally imposed obligations.
B
43. Sources of information that can be used by a risk manager to identify loss exposures include all of the following EXCEPT (a) risk analysis questionnaires. (b) the firm's stock price to earnings ratio. (c) physical inspections. (d) reports on past losses.
B
47. Which of the following types of loss exposures may be appropriately handled through the purchase of insurance? I. High-frequency, low-severity II. Low-frequency, high-severity (a) I only (b) II only (c) both I and II (d) neither I nor II
B
51. Anne, who is self-employed, is the main breadwinner for her family. Anne does not have disability income insurance because she has never stopped to consider the impact of a long-term disability upon her family. Anne's treatment of the risk of disability is best described as (a) risk transfer. (b) passive retention. (c) risk avoidance. (d) active retention.
B
53. In reviewing his company's operations, a risk manager noticed that all of the company's finished goods were stored in a single warehouse. The risk manager recommended that the finished goods be divided among three warehouses to prevent all of the finished goods from being destroyed by the same peril. Dividing the finished goods among three warehouses illustrates (a) risk avoidance. (b) risk control. (c) insurance. (d) noninsurance transfer.
B
54. Bev lives in the suburbs and works downtown. She drives to work, and her most direct route to work would require her to pass through an area where carjackings and drive-by-shootings are common. Bev does not drive through this area. Instead, she uses a route which adds 10 minutes to her commute. Which risk management technique is Bev using with respect to the risk of injury while driving through the dangerous area? (a) noninsurance transfer (b) avoidance (c) passive retention (d) loss reduction
B
56. Fundamental purposes of the principle of indemnity include which of the following? I. To reduce physical hazards. II. To prevent the insured from profiting from insurance. (a) I only (b) II only (c) both I and II (d) neither I nor II
B
58. Sam's stereo was destroyed by a fire. The stereo cost $1200 when it was purchased, but a similar new stereo now costs $1800. Assuming the stereo was 50 percent depreciated, what is the actual cash value of Sam's loss? (a) $600 (b) $900 (c) $1200 (d) $1800
B
59. Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis? (a) Losses are settled without the applicable deductible. (b) Losses are settled without a deduction for depreciation. (c) The insurer must replace the damaged or destroyed property in lieu of a cash settlement. (d) The policy is converted to a valued policy.
B
64. What is the legal significance of a material misrepresentation in an insurance application? (a) The contract is automatically voided from its inception. (b) The contract is voidable at the insurer's option. (c) Loss payments are reduced by the degree of the misrepresentation. (d) The insurer is immediately entitled to a higher premium.
B
68. Which of the following statements about consideration in an insurance contract is (are) true? I. The insured's total consideration is submission of a completed application. II. The insurer's consideration is the promise to do those things specified in the policy. (a) I only (b) II only (c) both I and II (d) neither I nor II
B
70. Why are insurance contracts said to be contracts of adhesion? (a) The values exchanged are not equal. (b) One party writes the contract, and the other party must accept the contract as written. (c) Only one party makes a legally enforceable promise. (d) Conditions are placed on the insurer's promise to perform.
B
75. When Ben applied for life insurance, he was asked on the application if he smoked or used tobacco products. Ben answered "No." In reality, Ben smokes two packs of cigarettes a day. The policy was issued at the "preferred, nonsmoker rate." If Ben dies 6 months after the policy is issued, upon what grounds will the insurer be able to legally deny the claim? (a) warranty (b) misrepresentation (c) waiver (d) concealment
B
77. What information is contained in the insuring agreement of an insurance policy? (a) a description of the property or life to be insured (b) a summary of the major promises of the insurer (c) a summary of the obligations of the insured (d) a list of the property, losses, and perils that are excluded
B
80. Exclusions are used in insurance policies for all of the following reasons EXCEPT (a) to reduce moral hazard. (b) to waive policy conditions. (c) to eliminate coverage for uninsurable perils. (d) to eliminate coverage not needed by typical insureds.
B
81. The policy provision requiring the filing of proof of loss with the insurer is an example of a(n) (a) declaration. (b) condition. (c) insuring agreement. (d) miscellaneous provision.
B
86. The primary purpose of coinsurance in property insurance is to (a) reduce moral hazard. (b) achieve equity in rating. (c) minimize problems in settling claims. (d) eliminate small losses.
B
93. ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies? (a) $33,333 (b) $35,000 (c) $36,000 (d) $40,000
B
95. Kathy entered into an insurance contract with XYZ Insurance Company. When the agent who sold the coverage witnessed Kathy doing something that violated the terms of the contract, he threatened to sue her to make her comply with terms of the contract. Which distinct legal characteristic of insurance contracts states that only the insurer's promise to perform is legally enforceable? (a) contracts of adhesion (b) unilateral contracts (c) aleatory contracts (d) personal contracts
B
96. All of the following statements about fraternal insurers are true EXCEPT (a) They are a form of mutual insurer. (b) They specialize in writing property and liability insurance. (c) They enjoy tax advantages because of their nonprofit or charitable status. (d) They market their coverage to members of a social organization or religious group.
B
63. The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT (a) representations. (b) warranty. (c) subrogation. (d) concealment.
C
109. Factors that may result in more restrictive underwriting decisions include which of the following? I. Inadequate rates. II. The unavailability of reinsurance on favorable terms. (a) I only (b) II only (c) both I and II (d) neither I nor II
C
116. 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 (a) determine the amount of the loss. (b) attempt to deny the claim regardless of whether he believes the claim is covered. (c) verify that a covered loss has occurred. (d) delay paying the claim if the claim is covered.
C
117. 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) (a) public adjustor. (b) adjustment bureau. (c) independent adjustor. (d) company adjustor.
C
16. All of the following statements about retention are true EXCEPT (a) It may be used deliberately if commercial insurance is unavailable. (b) It may be used passively because of ignorance. (c) Its use is most appropriate for low-frequency, high-severity types of risks. (d) Its use results in cost savings if losses are less than the cost of insurance.
C
21. Cathy's car hit a patch of ice on the road. The car skidded off the road and hit a tree. The presence of ice on the road is best described as a(n) (a) peril. (b) subjective risk. (c) physical hazard. (d) indirect loss.
C
34. Which of the following statements about the insurance industry as a source of investment funds is (are) true? I. These funds result in a lower cost of capital than would exist in the absence of insurance. II. These funds tend to promote economic growth and full employment. (a) I only (b) II only (c) both I and II (d) neither I nor II
C
5. Faking an accident to collect insurance proceeds is an example of a (a) physical hazard. (b) objective risk. (c) moral hazard. (d) morale hazard.
C
50. Cal was just hired as XYZ Company's first risk manager. Cal would like to employ the risk management process. The first step in the process Cal should follow is to (a) evaluate potential losses faced by XYZ Company. (b) formulate a treatment plan for XYZ Company's loss exposures. (c) identify potential losses faced by XYZ Company. (d) implement and administer a risk management plan for XYZ Company.
C
52. To better understand her company's operations, a risk manager asked a production manager to draw a diagram tracing the steps in the production and distribution of the company's products. Such a diagram, which is useful in risk identification, is called a (a) financial statement. (b) risk management matrix. (c) flowchart. (d) risk management audit.
C
55. A useful measure for an organization is the total of the organization's expenditures for treating loss exposures including retained losses, loss control expenses, insurance premium, and other related expenses. This measure is called the organization's (a) cost of capital. (b) cost of goods sold. (c) cost of risk. (d) cost or equity.
C
67. Which of the following statements about offer and acceptance for insurance contracts is true? (a) In property insurance, the applicant accepts the offer by completing the application and paying the first premium. (b) In life insurance, the agent can usually accept an offer by immediately binding coverage. (c) In property insurance, the offer and acceptance are usually in writing but may be oral. (d) In life insurance, the offer is merely the promise to pay the first premium.
C
7. A phrase that encompasses all of the major risks faced by a business firm is (a) financial risk. (b) speculative risk. (c) enterprise risk. (d) pure risk.
C
85. David owns a commercial building with a replacement cost of $4 million. The building is insured on a replacement cost basis for $3 million under a fire insurance policy that has an 80 percent coinsurance clause. How much will David collect if the building sustains a covered fire loss with a replacement cost of $320,000? (a) $266,667 (b) $275,000 (c) $300,000 (d) $320,000
C
88. Lisa has three fire insurance policies on her office building. The policy from company A is for $400,000, and the policies from companies B and C are for $100,000 each. If Lisa has a $360,000 loss, how much of the loss will be covered by each policy if the loss is settled on a pro rata basis by the insurers? (a) each policy: $120,000 (b) policy A: $160,000, policies B and C: $100,000 each (c) policy A: $240,000, policies B and C: $60,000 each (d) policy A: $360,000, policies B and C: nothing
C
99. All of the following statements about the independent agency system are true EXCEPT (a) Agents are often authorized to adjust small claims. (b) Agents are compensated on the basis of commissions. (c) The insurer rather than the agent owns the renewal rights to the business. (d) The agent is an independent business person who represents several insurers.
C
102. 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) (a) exclusive agent. (b) direct writer. (c) branch manager. (d) insurance broker.
D
104. One type of insurer is a community-oriented health insurer. In most states, this insurer is set-up as a non-profit organization that provides pre-paid hospital services and coverage for physicians' and surgeons' fees and other medical services. This type of insurer is called a(n) (a) fraternal insurer. (b) American Lloyd's. (c) health maintenance organization (HMO). (d) Blue Cross/Blue Shield Plan.
D
110. All of the following are functions of the marketing department of an insurance company EXCEPT (a) to advertise the insurer's products. (b) to develop new products. (c) to identify production goals. (d) to make final underwriting decisions.
D
111. All of the following statements about reinsurance are true EXCEPT (a) A reinsurer may also purchase reinsurance. (b) Reinsurance involves the shifting of all or part of the insurance originally written by one insurer to another insurer. (c) The insurer transferring business to a reinsurer is called the ceding insurer. (d) The amount of insurance transferred to a reinsurer is called the net retention.
D
114. Which of the following statements about treaty reinsurance is true? (a) Under a surplus-share treaty, 100 percent of the ceding insurer's liability must be transferred to the reinsurer. (b) Using a quota-share treaty increases the ceding insurer's unearned premium reserve. (c) Under an excess-of-loss treaty, the reinsurer pays losses in full only if they are less than the ceding insurer's retention limit. (d) Using a reinsurance pool provides financial capacity to write large amounts of insurance.
D
33. The tendency for unhealthy people to seek life or health insurance at standard rates is an example of (a) moral hazard. (b) fundamental risk. (c) morale hazard. (d) adverse selection.
D
45. A restaurant owner leased a meeting room at the restaurant to a second party. The lease specified that the second party, not the restaurant owner, would be responsible for any liability arising out of the use of the meeting room, and that the restaurant owner would be "held harmless" for any damages. The restaurant owner's use of the hold-harmless agreement is an example of (a) retention. (b) self-insurance. (c) insurance. (d) noninsurance transfer.
D
6. Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called (a) moral hazard. (b) physical hazard. (c) morale hazard. (d) legal hazard.
D
62. Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for her loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of (a) warranty. (b) insurable interest. (c) utmost good faith. (d) subrogation.
D
65. A false statement made by an applicant for insurance is an example of a (a) concealment. (b) breach of warranty. (c) lack of offer and acceptance. (d) misrepresentation.
D
66. David lives in an apartment in a high-crime area. In order to obtain physical damage insurance on his car, David promised to park the car in a garage with 24-hour security. This agreement, which was incorporated into the insurance contract, is an example of a (a) representation. (b) unilateral contract. (c) contract of adhesion. (d) warranty.
D
69. A contract in which the values exchanged are not equal because chance is involved is called a(n) (a) contract of adhesion. (b) unilateral contract. (c) conditional contract. (d) aleatory contract.
D
71. Why does the insured get the benefit of the doubt if an insurance policy contains any ambiguities or uncertainties? (a) because insurance contracts are aleatory (b) because insurance contracts are unilateral (c) because insurance contracts are conditional (d) because insurance contracts are contracts of adhesion
D
73. The voluntary relinquishment of a legal right is called (a) subrogation. (b) adhesion. (c) estoppel. (d) waiver.
D
74. Jacob sold his house to Shelia for $140,000 in cash. Jacob "threw in" insurance on the house as part of the deal and did not bother telling the insurer that there was a new owner. Four months after Shelia purchased the home, a windstorm damaged the roof. Which of the following legal characteristics of insurance contracts could the insurer use to legally deny payment for the damage to the roof? (a) Insurance contracts are unilateral contracts. (b) Insurance contacts are contracts of adhesion. (c) Insurance contracts are aleatory contracts. (d) Insurance contracts are personal contracts.
D
79. The exclusion of flood in a homeowners policy is an example of an (a) excluded loss. (b) excluded condition. (c) excluded property. (d) excluded peril.
D
8. All of the following are considered financial risks EXCEPT (a) the decline in the value of a bond portfolio because of rising interest rates. (b) increased cost of production because of rising commodity prices. (c) loss of money because of adverse movements in currency exchange rates. (d) loss of profits after a physical damage loss occurs.
D
82. All of the following statements about endorsements and riders are true EXCEPT (a) They are usually written. (b) They can be used to add or delete policy provisions. (c) They normally take precedence over other conflicting policy provisions. (d) They are primarily used to circumvent the purpose of legislation requiring specific policy provisions.
D
84. All of the following are purposes of deductibles EXCEPT (a) to eliminate small claims. (b) to reduce premiums. (c) to reduce morale hazard. (d) to exclude uninsurable perils.
D
87. The purpose of other-insurance provisions is to (a) eliminate the need for deductibles. (b) penalize those insureds who carry inadequate amounts of insurance. (c) specify who will pay losses if the insurer is bankrupt. (d) preserve the principle of indemnity.
D
89. Kevin has three liability policies which provide for contribution by equal shares in case other insurance applies to a loss. How much will each policy pay for a $3,000,000 liability judgment if policy A provides $500,000 of coverage, policy B provides $1,000,000 of coverage, and policy C provides $3,000,000 of coverage? (a) Each policy will pay $500,000, and Kevin must assume the remaining $1,500,000. (b) Policy A will pay $500,000, policies B and C will each pay $1,000,000, and Kevin must assume the remaining $500,000. (c) Policy A will pay nothing, policy B will pay $1,000,000, and policy C will pay $2,000,000. (d) Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay $1,500,000.
D
91. Janet hit a wall causing a large dent in the fender of her car. She was busy at work and delayed reporting the damage to her insurer for 9 months. The insurer denied the claim, stating, "Although such a loss is usually covered, you are required under the terms of the contract to provide prompt notification in case of loss." The prompt notification requirement is an example of a(n) (a) declaration. (b) definition. (c) insuring agreement. (d) condition.
D
94. Ted's insurance claim was denied by XYZ Insurance Company. When Ted inquired why the claim was denied, he was told to, "Read the exclusion on page 5 of the policy." Ted read the exclusion. In his opinion, the exclusion was poorly worded and vague. If a court of law agrees with Ted's assessment of the exclusion, Ted may still be able to have his claim paid by the insurer because insurance contracts are (a) personal contracts. (b) unilateral contracts. (c) aleatory contracts. (d) contracts of adhesion.
D
