RMIN Chapter 8
11) Which of the following statements about the regulation of insurance company investments is (are) true? I. The purpose of regulating insurance company investments is to prevent insurers from making unsound investments which could threaten their solvency. II. Life insurers can invest an unlimited amount of their assets in common stocks. A) I only B) II only C) both I and II D) neither I nor II
A
13) Which of the following statements about state insurance guaranty funds is (are) true? I. They limit the amount that policyowners can collect if an insurer becomes insolvent. II. They are usually funded by general revenues of the states. A) I only B) II only C) both I and II D) neither I nor II
A
15) Under what type of rate regulation are insurers required to obtain approval of rates before using them if the rate change exceeds a specified predetermined range? A) flex-rating law B) prior-approval law C) file-and-use law D) use-and-file law
A
22) The principal methods of ensuring insurer solvency include all of the following EXCEPT A) Security and Exchange Commission oversight of investments. B) risk-based capital standards. C) field examinations. D) review of required annual financial statements.
A
28) Mutual Property Insurance Company has a surplus of $2 million. According to a conservative rule of thumb, how much new net premiums can Mutual Property Insurance Company safely write? A) $2 million B) $8 million C) $10 million D) $20 million
A
29) Fly-By-Night Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If Fly -By-Night becomes insolvent, which of the following will help pay the unpaid claims of the insurer? A) guaranty fund B) premium rebates C) risk-based capital D) admitted assets
A
3) The basis for current state regulation of insurance is A) the McCarran-Ferguson Act. B) Paul v. Virginia. C) the South-Eastern Underwriters Association case. D) the National Association of Insurance Commissioners.
A
30) Grace is a life insurance agent. She is attempting to sell a large life insurance policy, but the prospective purchaser is having second thoughts. To persuade the prospective purchaser, Grace said, I will earn a $1,000 commission if you buy this policy. I ll give you $500 of my commission if you buy the policy. In most states, what illegal sales practice will Grace be guilty of if she splits her commission with the purchaser? A) rebating B) churning C) twisting D) backdating
A
38) All of the following are methods helping to insure the solvency of insurers EXCEPT A) commercial lines deregulation B) risk-based capital standards. C) the NAIC s early warning system. D) the NAIC s FAST screening system.
A
5) Which of the following statements about the licensing of insurance companies is (are) true? I. A new capital stock insurer must meet minimum capital and surplus requirements, which vary by state and line of insurance. II. The licensing requirements for insurance companies are less stringent than those imposed on most other types of firms. A) I only B) II only C) both I and II D) neither I nor II
A
9) The policyholders surplus of an insurer is defined as the difference between its A) assets and its liabilities. B) premium income and its expenses. C) reserves and its liabilities. D) assets and its nonadmitted assets.
A
18) Advantages cited by proponents of federal regulation of insurance include all of the following EXCEPT A) greater efficiency. B) greater opportunity for innovation. C) uniformity of laws. D) more competent regulators.
B
2) The right of the states to regulate the business of insurance was first established by A) the South-Eastern Underwriters Association case. B) Paul v. Virginia. C) the Financial Modernization Act. D) the Sherman Act.
B
25) In which of the following did the Court decide that insurance was interstate commerce when conducted across state lines, and therefore was subject to federal regulation? A) Paul v. Virginia B) South-Eastern Underwriters Association case C) McCarran-Ferguson Act D) Financial Modernization Act
B
27) XYZ Mutual Insurance Company has total assets of $10 million. The policyholders surplus is $2 million. What are XYZ Mutual s total liabilities? A) $4.0 million B) $8.0 million C) $10.0 million D) $12.0 million
B
34) The regulation of insurers in areas that affect consumers, which include claims handling, underwriting, complaints, advertising, sales practices, and other trade practices is called A) solvency surveillance. B) market conduct regulation. C) combined ratio analysis. D) market share regulation.
B
37) Which of the following statements concerning the proposed optional federal charter for life insurers is (are) true? I. Large insurers operating in many states would more likely prefer a state charter while smaller, regional, insurers would more likely choose a federal charter. II. Proponents of the federal charter argue that it would speed the development and approval of new products. A) I only B) II only C) both I and II D) neither I nor II
B
39) A score derived from an individual s credit history and other factors that is used by many auto and homeowners insurers for underwriting and rating purposes is called a(n) A) CLUE score. B) insurance score. C) expense ratio score. D) combined ratio score.
B
4) All of the following statements about the methods of regulating insurance are true EXCEPT A) All states have insurance laws that regulate the operations of insurers. B) Insurers are totally exempt from regulation by federal agencies and laws. C) The courts regulate insurance in many ways, including the interpretation of policy clauses and provisions. D) State insurance commissioners, through administrative rulings, have considerable power over insurers doing business in their states.
B
40) All of the following are arguments in favor of using an applicant s credit record in personal lines underwriting EXCEPT A) Most consumers have good credit records and benefit when credit history is used as a rating factor. B) Use of credit data in underwriting or rating discriminates against certain groups. C) Underwriting and rating may be more consistent if applicants credit histories are considered. D) There is high correlation between an applicant s credit record and future claims experience.
B
42) A systemic risk is a risk that A) can be eliminated through diversification. B) can be the cause of the collapse of an entire system. C) can be insured privately. D) can be easily contained so that it does not spread.
B
6) An insurance company incorporated in another state has been licensed to operate in your state. In your state, the insurer would be considered a(n) A) nonadmitted insurer. B) foreign insurer. C) alien insurer. D) reciprocal insurer.
B
1) Reasons for regulation of insurance include which of the following? I. Maintaining insurer solvency. II. Ensuring reasonable rates. A) I only B) II only C) both I and II D) neither I nor II
C
10) Which of the following statements about the use of risk-based capital requirements is (are) true? I. Insurers must have a certain amount of capital depending on the riskiness of their investments and insurance operations. II. Insurers may be required to take certain actions depending on how much capital they have relative to their risk-based capital requirements. A) I only B) II only C) both I and II D) neither I nor II
C
12) Which of the following statements about the regulation of life insurance companies is (are) true? I. The percentage of assets a life insurance company may invest in a specific type of asset (e.g., stocks or bonds) is generally limited by law. II. The purpose of limiting the accumulation of surplus is to prevent an insurer from increasing its surplus at the expense of policyowner dividends. A) I only B) II only C) both I and II D) neither I nor II
C
20) Shortcomings of state regulation of insurance found by Congressional committees and the General Accounting Office include all of the following EXCEPT A) inadequate protection of consumers. B) inadequate market conduct examinations. C) inability to respond to unique local needs. D) regulator s over-responsiveness to the insurance industry.
C
21) The major reasons for insurer insolvency include which of the following? I. Inadequate pricing and loss reserves. II. Rapid growth and inadequate surplus. A) I only B) II only C) both I and II D) neither I nor II
C
24) The number of title insurance companies operating in State Z is relatively low. Recently, the largest of these companies (50 percent market share) acquired the second largest company (30 percent market share). Immediately after the acquisition, the insurer raised premiums by 75 percent. This scenario demonstrates which of the following rationales for the regulation of insurance? A) maintain insurer solvency B) compensate for inadequate consumer knowledge C) ensure reasonable rates D) make insurance available
C
33) Under one type of rating law, insurers are free to change rates and to use modified rates immediately. However, the new rate must be filed with regulators within a specified period, such as 60 days after the modified rate is employed. This type of rating law is called A) prior approval. B) file-and-use. C) use-and-file. D) flex rating.
C
35) The National Association of Insurance Commissioners (NAIC) administers an early warning system to help ensure insurance company solvency. This system uses data provided in the annual statement to identify companies that may pose a solvency risk. This early warning system is called A) the risk-based capital requirements. B) an insurance guaranty fund. C) the Insurance Regulatory Information System (IRIS) D) the assessment method.
C
41) All of the following statements about insurance regulation are true EXCEPT A) Insurance commissioners are appointed in some states and elected in some states. B) Insurers are subject to regulation by certain federal agencies and laws. C) The National Association of Insurance Commissioners (NAIC) can force states to adopt the model laws that it drafts. D) An insurance commissioner can revoke or suspend an insurer s license to do business in his or her state.
C
43) In 2008, the U.S. federal government stepped-in to prevent the financial failure of the world s largest insurer, the American International Group (AIG). AIG s near insolvency was caused by A) catastrophic hurricane and earthquake losses that were not reinsured. B) fraudulent accounting practices that had inflated earnings for many years. C) losses on derivative loan guarantees issued by the company. D) over-investment in U.S. equity markets and the sharp drop in U.S. equity values.
C
7) An insurance company chartered in another country has been licensed to operate in your state. In your state, the insurer would be considered a(n) A) nonadmitted insurer. B) foreign insurer. C) alien insurer. D) reciprocal insurer.
C
14) Under one type of rate regulation, insurers are not required to file their rates with the state insurance department. However, insurers may be required to furnish rate schedules and supporting data to state officials. A fundamental assumption underlying this type of rating law is that market forces will determine the price and availability of insurance, rather than discretionary acts of regulators. This type of rate regulation is called A) a flex-rating law. B) a prior-approval law. C) a file-and-use law. D) no filing required.
D
16) By misrepresenting the true facts, Gretchen was able to convince a client to drop a life insurance policy with another company and to purchase a policy from the company that Gretchen represents. Gretchen has engaged in an illegal sales practice called A) bait and switch. B) rebating. C) retaliating. D) twisting.
D
17) Which of the following statements about premium taxes is (are) true? I. They are levied by the federal government as a result of the McCarran -Ferguson Act. II. Their primary purpose is to provide funds for insurance regulation. A) I only B) II only C) both I and II D) neither I nor II
D
19) Advantages cited by proponents of state regulation of insurance include all of the following EXCEPT A) uniformity of laws by the NAIC. B) greater opportunity for innovation. C) greater responsiveness to local needs. D) centralization of political power.
D
23) Which of the following is an argument for repealing the McCarran-Ferguson Act? A) It would make it easier for small insurers to compete. B) It would encourage sharing of information. C) It would make it easier to develop common coverage forms. D) It would correct for defects in state regulation.
D
26) A life insurance company based in Canada was licensed to operate in Massachusetts. When operating in Massachusetts, the Canadian insurer would be considered a(n) A) domestic insurer. B) captive insurer. C) foreign insurer. D) alien insurer.
D
31) State X s premium tax rate is 2 percent. State Y s premium tax rate is 3 percent. State X insurers are required to pay the 3 percent rate on business written in State Y. State X requires insurers from State Y to pay a 3 percent premium tax on business written in State X, even though the premium tax rate is only 2 percent in State X. This practice is known as a A) tax tariff. B) guaranty fund assessment. C) risk-based capital requirement. D) retaliatory tax law.
D
32) ABC Insurance Company would like to purchase a bank. For many years, ABC was not permitted under federal law to enter into banking operations. Which of the following legislative acts eliminated the prohibition that prevented banks, insurers, and investment firms from entering into one another s markets? A) The McCarran-Ferguson Act B) The Tax Reform Act C) The Consolidated Omnibus Budget Reconciliation Act D) The Financial Modernization Act (Gramm-Leach-Bliley Act)
D
36) Which of the following statements is (are) true regarding the quality of insurance regulation? I. The quality of insurance regulation is uniform from state to state. II. All evidence suggests federal regulation of insurance would improve the quality of regulation. A) I only B) II only C) both I and II D) neither I nor II
D
44) The near demise of American International Group (AIG) in 2008 was caused by AIG s issuance of a complex derivative. This derivative guaranteed mortgage-backed securities held by investors. As the real estate market collapsed, AIG was required to post billions of dollars of collateral that it did not have. What were the derivative loan guarantees issued by AIG called? A) real estate investment trusts B) collateralized mortgage obligations C) catastrophe put options D) credit default swaps
D
8) Which of the following is considered a nonadmitted asset for an insurer? A) cash B) preferred stocks C) real estate D) office furniture
D