INSR310 Exam 1 (Ch 1-9)

All of the following risks are privately insurable

-fire damage to personal property, -financial insecurity caused by the premature death of the family breadwinner, -legal liability arising out of negligent use of a car (NOT adverse commodity price movement)

All of the following are methods used to pay retained losses:

-funded reserve, -credit line, -current net income, (NOT insurance)

All of the following are benefits of insurance to society

-indemnifies losses, -enhances credit, -provides a pool of investment funds (NOT reduces INSCO Operating Exp)

All of the following are ideal characteristics for a risk to be privately insurable

-losses should not be catastrophic, -the chance of loss must be calculable, -there must be a large number of similar exposure units (The loss IS NOT in the EDs control)

Traditionally, corporate risk management considered all of the following risks:

-personnel risks, -property risks, -liability risks (NOT financial risks)

All of the following are burdens of risk on society

-risk requires funds to be set aside in case a loss occurs, -Risk deprives society of certain good and services, -risk creates fear and worry

All of the following statements about Lloyd's of London are true

1. Lloyd's of London does NOT write insurance; insurance is written by syndicates that are members of Lloyd's of London, 2. Lloyd's of London operates as a non admitted insurer in most states in the US, 3. Member of Lloyd's of London write coverage on many diverse loss exposures. (NOT Lloyd's of London syndicates are NOT permitted to write reinsurance.)

Property insurance contracts have all of the following distinct legal characteristics

1. aleatory contracts, 2. contracts of adhesion, 3. personal contracts (NOT they are bilateral contracts)

All of the following are regulatory objectives of rate making

1. assuring that insurance rates are not unfairly discriminatory, 2. assuring that insurance rates are not excessive, 3. assuring that insurance rates are adequate. (NOT assuring large profits for insurance companies)

The debate over whether insurance should be regulated by the states or regulated at the federal level continues. All of the following are arguments in favor of state regulation

1. greater opportunity for innovation, 2. unknown consequences of federal regulation, 3. greater responsiveness to local needs (NOT greater uniformity of insurance laws)

All of the following are property and liability insurance marketing systems

1. independent agency system, 2. exclusive agency system, 3. direct writer system. (NOT financial institution distribution system)

All of the following are methods of establishing case reserves

1. judgement method, 2. tabular method, 3. average value (NOT single premium method)

For a legally binding property insurance contract to be in force, all of the following elements are necessary

1. legal purpose, 2. competent parties, 3. exchange of consideration (NOT written document)

All of the following are objectives in claim settlement

1. provide assistance to the insured, 2. pay claims fairly and promptly, 3. verify that the loss is covered by insurance. (NOT delay payment to increase insurer profitability)

All of the following are principal methods used to regulate insurance

1. state insurance departments, 2. legislation, 3. courts (NOT the US Department of Insurance)

All of the following are reasons for an insurance company to use reinsurance

1. to protect against catastrophic losses, 2. to reduce underwriting capacity, 3. to stabilize profits (NOT to reduce underwriting capacity)

Which of the following said that continued regulation and taxation of the insurance industry by the states are in public interest and that federal anti-trust laws apply to the insurance industry only to the extent that the industry is not regulated by state law?

Congress in the McCarran-Ferguson Act

Mary Beth is an actuary for XYZ Property Insurance Company. Mary Beth calculated the pure premium rate for a coverage line to be $120. Assuming an expense ratio of 20 percent (expenses equal to 20 percent of the gross rate), what is the gross rate for this coverage?

Gross Rate = Pure Premium / (1-Expense Ratio) = 120/(1-20%) = $150

Which of the following is most likely to occur in a "HARD" insurance market?

HIGH insurance premiums and TIGHT underwriting standards

Which of the following statements is (are) true with regard to the time value of money? I. One dollar received today is worth more than one dollar received one year from today. II. Bringing a future value back to present value is called compounding.

I only I. One dollar received today is worth more than one dollar received one year from today.

Which of the following statements about insurance companies is (are) true? I. Mutual insurance companies are owned by their policy-owners. II. Stock insurance companies can issue assessable policies.

I. Mutual insurance companies are owned by their policy-owners.

Which of the following statements is (are) true with respect to hazards? I. Many physical hazards can be reduced through risk control measures. II. Attitudinal hazard is more serious than moral hazard.

I. Only I. Many physical hazards can be reduced through risk control measures.

Which of the following statements is (are) true with regard to insurance fraud? I. Insurance fraud hurts insurers but does not affect policyholders. II. Fraudulent claims are a cost of insurance to society.

II Only II. Fraudulent claims are a cost of insurance to society.

Which of the following statements is (are) true with respect to pure risks? I. Pure risks may produce either a profit or a loss. II. Premature death and damage to property caused by a fire are pure risks.

II Only II. Premature death and damage to property caused by a fire are pure risks.

Which of the following statements about the independent agency system is (are) true? I. Independent agents are paid a higher commission rate on new business than on renewal business. II. Independent agents, rather than the insurers they represent, own the expiration rights to insurance business they write.

II. Independent agents, rather than the insurers they represent, own the expiration rights to insurance business they write.

Which of the following statements is (are) true with respect to insurance and gambling? I. Insurance is simply a wager that if a loss occurs, you'll be paid for the loss. II. Both gambling and insurance are socially productive.

Neither I nor II Insurance is not a simple wager, and gambling/insurance are NOT socially productive.

Actuaries at ABC Insurance Company are determining the pure premium rate to charge for a liability insurance line. The actuaries estimate that the losses and loss adjustment expenses for a group of 125,000 exposure units would be $10 million. What is the pure premium per unit for this coverage?

Pure Premium = (Losses & Loss Adjustment Expenses) / (# Exposures) ($10 million / 125,000) = $80

Denise purchased a dining room set for $2,800 and insured it on an actual cash value (ACV) basis. At the time the dining room set was destroyed by a covered peril, the set was 40 percent depreciated. A replacement set will cost $3,000. Assuming no deductible, how much will Denise collect from her insurer?

Replacement Cost - Depreciation = Actual Cash Value $3,000 - (3,000 x 40%) = $1,800

The difference between an insurer's total assets and total liabilities is called

policyholder surplus

Harris Petroleum, a fuel storage and delivery business, occasionally has difficulty in obtaining affordable pollution liability insurance. Jane Elmore, Risk Manager of Harris Petroleum, decided to form an insurance subsidiary for the purpose of writing pollution liability insurance for Harris Petroleum, as well as other insurance coverages. The insurance subsidiary will be based in Bermuda for regulatory reasons. What is such a subsidiary called?

a captive insurance company

April is employed by an insurance company. Her job is to calculate the premium that policy owners must pay for life insurance. April majored in mathematics and minored in statistics in college. April is a(n)

actuary

Claire does not own health insurance. For the past two weeks, she has been experiencing sharp abdominal pain. Given her condition, she would like to purchase health insurance. When higher-than-average risks (like Claire) are insured at average premiums, losses are higher than anticipated. What is this problem called?

adverse selection

There is a tendency for individuals who have a higher-than-average probability of loss to seek insurance at standard (average) rates. If not controlled by careful underwriting, higher-than-anticipated losses will occur. This problem is called

adverse selection

All of the following risk treatment techniques are classified as risk control methods:

avoidance, loss reduction, loss prevention (NOT insurance)

Which of the following statements is (are) true with respect to identifying potential loss exposures? I. A physical inspection of company plants and operations can help to identify major loss exposures. II. Historical claims data can help to identify major loss exposures.

both I and II I. A physical inspection of company plants and operations can help to identify major loss exposures. II. Historical claims data can help to identify major loss exposures.

Which of the following statements is (are) true with respect to the objectives of risk management? I. A pre-loss objective of risk management is the reduction of anxiety. II. A post-loss objective of risk management is the stabilization of earnings.

both I and II I. A pre-loss objective of risk management is the reduction of anxiety. II. A post-loss objective of risk management is the stabilization of earnings.

The difference between an insurer's assets and its liabilities is called the

policyholders' surplus

Which of the following statements about law and the insurance agent is (are) true? i. An insurer is responsible for the acts of its agents when the agents are acting within the scope of the agency agreement. ii. Consumers should not assume that an agency relationship exists just because someone claims to represent an insurance company.

both i and ii. i. An insurer is responsible for the acts of its agents when the agents are acting within the scope of the agency agreement. ii. Consumers should not assume that an agency relationship exists just because someone claims to represent an insurance company.

In one type of property and casualty insurance rate making, exposures with similar characteristics are placed in the same underwriting category, and each is charged the same rate. This type of rate making is called

class rating

Claire is a salaried employee who works for LMN Insurance Company. It is Claire's job to verify that covered losses have occurred, to assist insureds who have experienced losses, and to help arrange for payments to insureds after covered losses have occurred. Claire is a(n)

company adjuster

An insurance contract must be accepted in its entirety and any ambiguity in the contract is construed against the insurer. Because of these characteristics, we can describe insurance contracts as

contracts of adhesion

One marketing system for life and health insurance and property and liability insurance does not use agents or brokers. Instead, potential customers are solicited by television, radio, print ads, and other media. This marketing system is called

direct response system

Hal sells property and liability insurance. He is an employee of XYZ Insurance Company and is paid a salary plus a bonus based on the amount of insurance he sells. Hal is a(n)

direct writer

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 program

When someone reasonably relies upon a representation of fact, what legal doctrine prevents the representation of fact from being retracted if the individual who relied upon the representation of fact would be harmed?

estoppel

Under one type of merit rating plan, the class rate is adjusted upward or downward based on the insured's past loss history. This type of merit rating plan is known as

experience rating

One type of insurance rating law permits insurers to file their rates with regulatory authorities and to use the rates immediately. Regulators have the authority to disapprove the rates later under certain circumstances. This type of rating law is called a(n)

file and use law

Boston Casualty is domiciled in Massachusetts. Boston Casualty has applied for permission to write insurance in Connecticut. Assume state regulatory authorities in Connecticut grant Boston Casualty permission to operate in Connecticut. In the state of Connecticut, Boston Casualty will be considered a(n)

foreign insurer

Brenda works for an insurance company that is owned by its policyowners. The company provides life and health insurance to members of a certain religious faith. The type of company that Brenda works for is called a(n)

fraternal insurer

A condition that increases the chance of loss is called a(n)

hazard

Which of the following statements is(are) true with respect to a property and casualty insurer's combined ratio? I. A combined ratio less than 1 (or 100 percent) indicates the insurer made money on its underwriting activities. II. Investment income is considered in the combined ratio calculation.

i. ONLY I. A combined ratio less than 1 (or 100 percent) indicates the insurer made money on its underwriting activities.

Which of the following statements regarding insurance company investments is (are) true? i. Investment income helps to reduce the premium charged for insurance. ii. Life insurance companies tend to invest in longer-term investments than do property and liability insurance companies.

i. and ii. i. Investment income helps to reduce the premium charged for insurance. ii. Life insurance companies tend to invest in longer-term investments than do property and liability insurance companies.

The first step in the risk management process is to:

identify loss exposures

Which of the following statements is (are) true with respect to insurance regulation? i. Currently, the insurance industry is regulated primarily at the federal level. ii. One goal of insurance regulation is to assure the solvency of insurers.

ii only ii. One goal of insurance regulation is to assure the solvency of insurers.

Which of the following statements is (are) true with respect to property and casualty insurers' loss reserves? i. Reserves are assets of property and casualty insurers. ii. Property and casualty insurers are required to maintain reserves for unearned premiums and for losses.

ii. ONLY ii. Property and casualty insurers are required to maintain reserves for unearned premiums and for losses.

The spreading of losses incurred by a few individuals over a larger group, so that average loss is substituted for actual loss, is known as

pooling of losses

The sales and marketing activities of insurers are known as

production

Which of the following statements regarding reinsurance is (are) true? i. Under treaty reinsurance, the primary insurer must shop for a reinsurer each time the primary company needs reinsurance. ii. Reinsurance can help a primary insurer to stabilize its profitability.

ii. Only ii. Reinsurance can help a primary insurer to stabilize its profitability.

Which of the following statements about the principle of insurable interest is (are) true? i. In life insurance, the insurable interest requirement must be met only at the time of the loss to receive life insurance proceeds after the insured has died. ii. The insurable interest requirement helps to reduce the problem of moral hazard.

ii. only ii. The insurable interest requirement helps to reduce the problem of moral hazard.

Kyle opened a sporting goods store. After a fire damaged the store, Kyle was forced to close the business for four weeks while repairs were completed. The loss of profits that could have been earned if the business had remained open is best described as a(n)

indirect loss (consequential)

Tony has worked as an underwriter for ABC Insurance Company for the past 20 years. Recently, a property insurance application for a factory looked 'funny' to Tony. He suspected that the owner of the factory might be planning to intentionally cause a loss after the insurance was in force. Tony asked an outside firm to investigate the applicant and submit a written summary of the findings. This source of underwriting information is called a(n)

inspection report

Paula is involved in insurance marketing. She represents insurance purchasers rather than insurance companies. She solicits insurance applications and then attempts to place the coverage with the appropriate insurer. Paula does not have the authority to bind the insurance coverage. Paula is a(n)

insurance broker

The assignment of property insurance by the seller of the property to the purchaser of the property is only valid if the insurer approves the assignment. The reason that the insurer must approve the assignment of a property insurance policy is that

insurance contracts are PERSONAL contracts

Franklin is concerned that if he damages someone else's property or injures someone, he will have to pay a large damage award. What kind of insurance can Franklin purchase to protect himself against such claims?

liability insurance

An individual may commit an act that results in bodily injury or damage to someone's property. A court of law may order the person responsible for the wrongful act to pay damages to the party who was injured. This type of risk is called the

liability risk

XYZ Insurance Company provides advice to its insureds on alarm systems, sprinkler systems, fire prevention, and workplace safety. What functional area at XYZ provides this assistance?

loss control

Dean's Discount Store has been experiencing problems with shoplifting losses. Dean decided to install a camera monitoring system and to use magnetic price tags on products. If a tag is not demagnetized before the product bearing the tag leaves the store, an alarm bell sounds. These measures are examples of

loss prevention

Some property and liability insurance companies market coverages to individuals who are members of a group under a single program of insurance at reduced premiums. Individual underwriting is used. This type of marketing system is known as a(n)

mass merchandising system

When Maria applied for a life insurance policy, she answered "No" in response to the question "Have you visited a doctor for any reason during the previous 12 months?" In fact, Maria visited a doctor five weeks ago after experiencing chest pains. She was referred to a specialist who determined that Maria has severe heart disease. If Maria dies shortly after the life insurance policy is issued, on what grounds will the insurer be successful in denying the claim?

misrepresentation

In analyzing the probability that certain events will occur, a risk manager knows that certain events cannot occur together because the occurrence of the first event precludes the occurrence of the second event. Such events are called

mutually exclusive events

Which of the following statements is (are) true with respect to insurance industry consolidation? I. Although insurance companies may merge with or acquire other insurers, insurance brokers are not permitted to merge with or acquire other insurance brokers. II. Cross-industry consolidation (e.g., a bank and an insurance company merging) is not permitted in the financial services field.

neither I nor II

Olivia is Risk Manager of ABC Company. She is trying to determine if a loss control investment is justified. Olivia calculated the present value of the future cash flows she expects the project will generate. She summed the present value of the future cash flows and then subtracted the cost of the loss control equipment. The resulting value is called the project's

net present value

Bruce is an actuary for The Feelings Mutual Life Insurance Company. Bruce calculated the present value of the future death benefit payable under a life insurance policy. The value he calculated considered mortality and investment income only, and did not include a loading for insurance company expenses. The value that Bruce calculated is known as the

net single premium

Rather than purchasing computers and software, ABC Company entered into a lease agreement with Computer Solutions Company (CSC). Under terms of the lease, CSC provides computers and software and is responsible for damage to the computers and software. ABC uses the lease to shift responsibility for hardware and software losses to CSC. ABC's use of the lease illustrates which method of dealing with risk?

non-insurance transfer

A risk that affects the entire economy, or a large number of persons or groups within the economy, is called a(n)

nondiversifiable risk

The relative variation between expected losses and actual losses is called

objective risk

As an inducement to convince a prospective purchaser to buy a life insurance policy, an agent offered to split her commission with the prospective purchaser. Offering a financial reward in an effort to induce a purchase is an illegal sales practice in almost all states. This illegal sales practice is called

rebating

An unincorporated mutual in which insurance is exchanged among the members with each member insuring the other members and, in turn, being insured by the other members, is called a

reciprocal exchange

Jonathan believes there is a relationship between the number of miles driven by his company's delivery vehicles and the number of physical damage claims that will occur. Jonathan collected data on the number of claims and the number of miles driven for the past 15 years. Using a computer, Jonathan determined the coordinates of a line that best fit these data. Armed with this information, he can predict how many losses will occur next year. The type of analysis that Jonathan employed is called

regression analysis

Tindall Company manufactures electronic components. Managers of the company are considering several diversification options. One possibility is production of prescription drugs. When Tindall Company managers learned of the potential legal liability that could result from the manufacture and sale of prescription drugs, the managers rejected the idea and decided to consider other diversification options. How did Tindall Company choose to deal with the risk of legal liability arising from the manufacture and sale of prescription drugs?

risk avoidance

A computerized database that permits the risk manager to store and analyze risk management data is called a

risk management information system

The risk management departments of some companies have developed interactive networks incorporating search capabilities. These networks are designed for limited, internal use. Such networks are called

risk management intranets

A written document that outlines the risk management objectives of a firm, as well as company policy with respect to the treatment of loss exposures, is called a

risk management policy statement

A publishing company solicits manuscripts for publication. The publishing company is concerned that an author might plagiarize material and that the person who was plagiarized might sue the publisher. To address this risk, the contract with the author includes a hold-harmless agreement. Through this agreement, the author, rather than the publisher, is held liable for plagiarism. In this situation, the publisher is using the hold-harmless agreement as what type of risk treatment measure?

risk transfer

To reduce the risk of insolvency, life and health insurance companies must meet certain capital standards based on the riskiness of their operations and types of investments. These standards are based on a model law drafted by the National Association of Insurance Commissioners (NAIC). These standards are called

risk-based capital requirements

Government insurance programs include insurance designed to deal with complex economic problems that are difficult to insure privately. These programs are compulsory, and the right to benefits is based upon past contributions or coverage under the program. These programs, which include workers compensation and social security, are called

social insurance programs

Kyle purchased collision insurance on his new car. While Kyle was driving home from work, another driver failed to stop at a stop sign and hit Kyle's car. Kyle phoned his insurance agent and reported the accident. The agent said, "Don't worry, Kyle, we'll pay to get your car fixed. And after we pay for the damage to your car, we will try to collect from the driver who damaged your car." The process the agent described is called

subrogation

Risk managers must consider the range of outcomes that could occur. The worst loss that is LIKELY to happen is called

the MPL - Max Probable Loss

Inducing a policyowner to drop an existing policy and to replace it with one that provides little or no economic benefit to the policyowner is unlawful. This illegal sales practice is called

twisting

Insurers use a process of selecting and classifying insurance applicants to prevent individuals who have a higher-than-average probability of loss from obtaining insurance at average rates. This process is called

underwriting