Chapter 6 - Reinsurance
13) 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.
A) I only
24) 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.
A) I only
34) 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.
7) If an underwriter suspects moral hazard, the underwriter may ask an outside firm to investigate the applicant and make a detailed report to the insurer. This report is called a(n)
A) inspection report.
50) Gwen is in charge of accounting at Integrity Insurance Company. Integrity is a publicly-traded insurer. In describing her job, Gwen said, "There aren't too many businesses where you are required to keep two sets of book." Gwen's comment most likely refers to her company
A) preparing accounting statements using statutory and GAAP accounting.
47) ABC Insurance Company entered into a reinsurance agreement with XYZ Reinsurance. Under the contract, XYZ Re has no liability unless ABC's loss ratio exceeds 75 percent for the year. XYZ Re agreed to pay all losses in excess of the 75 percent loss ratio. ABC Insurance Company is using reinsurance to
A) stabilize profits.
16) All of the following are reasons for a primary insurer to use reinsurance EXCEPT
A) to increase the unearned premium reserve.
26) 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.
21) Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance. Delta has a retention limit of $200,000, and nine lines of insurance are ceded to Eversafe. How much will Eversafe pay if a $1,600,000 building insured by Delta suffers an $800,000 loss?
B) $700,000
37) Which of the following statements is (are) true with respect to catastrophe bonds? I. The bonds are issued by the U.S. Government. II. The bonds have relatively high interest (coupon) rates.
B) II only
12) Which of the following statements about claims settlement is true?
B) 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.
8) One source of life and health insurance underwriting information is an organization that life and health insurance companies can join. As a member, life and health insurance companies report health impairments of applicants, and this information is shared with member companies. Although the information is shared, the underwriting decision of the member company is not disclosed. What is this organization called?
B) Medical Information Bureau (MIB)
19) Which of the following statements about treaty reinsurance is true?
B) The reinsurer must accept all business that falls within the scope of the treaty.
17) The unearned premium reserve of an insurer is
B) a liability representing the unearned portion of gross premiums on outstanding policies.
42) Most insurance companies require their marketing representatives to submit an evaluation of the prospective insured. This important source of underwriting information is called the
B) agent's report.
32) 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?
B) loss control
35) 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(n)
B) proof of loss.
36) All of the following are methods that a property and liability insurance company can use to protect against catastrophic losses EXCEPT
B) purchase of common stock.
33) Amy heads the legal staff of a large property and liability insurance company. Amy's staff is likely involved in which of the following activities?
B) reviewing language and policy provisions in insurance contracts
48) Granite Insurance Company entered into a treaty reinsurance agreement with Rock Solid Reinsurance (RSR). Granite's retention limit is $400,000 and RSR agreed to provide reinsurance for up to $2.0 million. If Granite writes an $800,000 policy, RSR is responsible for 50 percent of the losses. If Granite insures a $1.6 million risk, RSR is responsible for 25 percent of any losses. What type of reinsurance arrangement did Granite enter into with RSR?
B) surplus share reinsurance
30) New Liability Insurance Company began operations last year and has been very successful. The company's ability to grow is being restricted by an accounting rule that requires insurers to realize acquisition expenses immediately, while not realizing premiums received as income until some time has passed. Reinsurance is often used in such cases for which of the following purposes?
B) to reduce the unearned premium reserve
14) All of the following statements about the settlement of a claim are true EXCEPT
C) The adjustor must file the proof of loss, which is a sworn statement supporting his or her decision regarding a claim.
25) Functions of an insurance company's legal department include which of the following? I. Lobbying for legislation favorable to the insurance industry. II. Drafting policy provisions.
C) both I and II
40) Which of the following statements is (are) true about life insurance company investments? I. The majority of life insurance company general account assets are invested in bonds. II. The majority of life insurance company separate account assets are invested in stocks.
C) both I and II
44) Which of the following statements is true regarding the information systems functional area of an insurance company? I. Computers and information systems are able to perform some tasks that previously were performed directly by employees. II. Information systems can speed the processing of policies by insurers.
C) both I and II
9) 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.
C) both I and II
38) Pac-Coast Insurance (PCI) concentrates its underwriting activities in California. The company is concerned that if a catastrophic earthquake occurs, it might threaten the solvency of the company. To address this risk, PCI issued some debt securities. If a catastrophic earthquake occurs, PCI does not have to repay the full amount borrowed or pay interest. The securities PCI issued are called
C) catastrophe bonds
22) Huge Insurance Company is a property insurer that is interested in protecting itself against cumulative losses that exceed $200 million during the year. This protection can best be obtained using a(n)
C) excess-of-loss reinsurance treaty.
29) 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)
C) independent adjustor.
31) Liability Insurance Company (LIC) was approached by a regional airline to see if LIC would write the airline's liability coverage. LIC agreed to write the coverage and entered into an agreement with a reinsurer. Under the agreement, LIC retains 25 percent of the premium and pays 25 percent of the losses, and the reinsurer receives 75 percent of the premium and pays 75 percent of the losses. This reinsurance arrangement is best described as
C) quota-share reinsurance.
45) The price per unit of insurance is called the
C) rate.
39) The process of transferring risk to the capital markets through the use of financial instruments such as bonds, futures contracts, and options is known as
C) securitization of risk.
28) 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
C) verify that a covered loss has occurred.
15) Which of the following statements about reinsurance is true?
D) The insurer transferring business to a reinsurer is called the ceding company.
23) All of the following statements about life insurance company investments are true EXCEPT
D) The majority of these investments are short-term investments.
46) 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?
D) There should be equity among policyholders.
20) Which of the following statements about treaty reinsurance is true?
D) Using a reinsurance pool provides financial capacity to write large amounts of insurance.
18) 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
D) facultative reinsurance
27) 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 hired an outside firm to investigate the applicant and to prepare a report about the applicant. This report is called a(n)
D) inspection report.
11) 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.
D) neither I nor II
41) One method through which reinsurance is provided is through an organization of insurers that underwrites insurance on a joint basis. Through the organization, financial capacity is available for large commercial risks. This reinsurance arrangement is a(n)
D) reinsurance pool.
43) Catastrophe bonds are made available to institutional investors in the capital markets through an entity that is specially created for that purpose. This is entity is called a
D) special purpose reinsurance vehicle.
6) Common sources of underwriting information for life and health insurance include all of the following EXCEPT
D) the applicant's income tax return.
10) Which of the following is a function of the marketing department of an insurance company?
D) to identify production goals
49) State insurance regulators require LMN Life Insurance Company to maintain a separate account. The assets in the separate account would support the liabilities for which of the following products?
D) variable life insurance
3) 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
5) The underwriting process begins with the
agent.
4) 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
1) The function of an actuary is to
determine premium rates.
2) Insurers obtain data which can be used to determine rates from
insurance advisory organizations.