Insurance and Risk Management Midterm
Which of the following statements about Lloyd's of London is true? A) Coverage is actually written by syndicates who belong to Lloyd's of London. B) New individual members or Names who belong to the various syndicates have unlimited legal liability. C) It operates as an admitted insurer throughout the United States. D) It allows underwriters to write coverage without meeting stringent financial requirements.
A) Coverage is actually written by syndicates who belong to Lloyd's of London.
Temporary evidence of insurance until a policy is actually issued is provided by a(n) D) endorsement A) binder. B) brokerage agreement. C) pre-approval form. C) pre-approval form.
A) binder
R.I.P. Company manufactures herbicide and pesticide. The company had difficulty finding affordable liability insurance. R.I.P. established its own insurance company based in Bermuda for the purpose of insuring R.I.P.'s loss exposures. The company that R.I.P. formed is called a A) captive insurer. B) reciprocal insurer. C) fraternal insurer. D) holding company.
A) captive insurer.
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) to increase the unearned premium reserve.
RST Company has production facilities in Salt Lake City and Cleveland. The probability that in any given year a fire will damage the production facility in Salt Lake City is 5 percent. The probability that in any given year a fire will damage the Cleveland production facility is 4 percent. What is the probability that BOTH production facilities will be damaged by fire in any given year? A. 0.20 percent B. 2.00 percent C. 4.50 percent D. 9.00 percent
A. 0.20 percent
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. A. I only B. II only C. I and II D. Neither I nor II
A. I only
Which of the following statements is (are) true regarding insurance agents and insurance brokers? I. A property and liability insurance agent has the authority to bind the insurer for certain types of coverage. II. A licensed broker who is not a licensed agent has the legal authority to bind an insurer. A. I only B. II only C. Both I and II D. Neither I nor II
A. 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. A. I only B. II only C. Both I and II D. Neither I or II
A. I only
Which statement is (are) true regarding property and liability insurance market conditions? I. Premiums are high when the insurance market is "hard." II. Underwriting standards are tight when the insurance market is "soft." A. I only B. II only C. Both I and II D. Neither I or II
A. I only
The relative level of surplus in the insurance industry is called the industry's A. capacity B. liabilities C. reserves D. admitted assets
A. capacity
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. subjective probability.
A. objective probability.
Which of the following is a basic characteristic of insurance? A. pooling of losses B. avoidance of risk C. payment of intentional losses D. certainty about specific losses that will occur
A. pooling of losses
An integrated risk management program is a risk management program which combines A. pure and speculative risks. B. property and liability risks. C. personnel-related risk and property risk. D. direct and indirect loss risk.
A. pure and speculative risks.
The premature death of an individual is an example of a A. pure risk. B. speculative risk. C. nondiversifiable risk. D. physical hazard.
A. pure risk.
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. the identification and treatment of loss exposures.
The function of an actuary is to A) adjust claims. B) determine premium rates. C) negotiate reinsurance treaties. D) invest insurance company assets.
B) determine premium rates.
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. Nondiversifiable risk will decrease D. Objective risk will increase.
B. Actual results will more closely approach probable results.
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. A. I only B. II only C. I and II D. Neither
B. II only
Which of the following statements is (are) true regarding investment returns and the underwriting cycle? I. Investment returns have no impact upon the underwriting cycle. II. Investment returns can lengthen the duration of a soft market by offsetting underwriting losses. A. I only B. II only C. Both I and II D. Neither I and II
B. II only
Which of the following statements regarding the use of retention is (are) true? I. Retention is best used for loss exposures that have a low frequency and a high severity. II. A financially strong firm can have a higher retention level than a firm whose financial position is weak. A. I only B. II only C. Both I and II D. Neither
B. II only
Characteristics of a fortuitous loss include which of the following? A. The loss is certain to occur. B. The loss occurs as a result of chance. C. The loss occurs because of fraud
B. The loss occurs as a result of chance.
From the viewpoint of the insurer, all of the following are characteristics of an ideally 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. The loss should be catastrophic.
All of the following are benefits to society that result from insurance EXCEPT A. less worry and fear. B. elimination of moral hazard. C. indemnification for loss. D. loss prevention.
B. elimination of moral hazard.
A situation or circumstance in which a loss is possible, regardless of whether a loss occurs, is called a A. deductible B. loss exposure C. loss avoidance D. peril
B. loss exposure
An earthquake is an example of A. moral hazard B. peril C. physical hazard D. objective risk
B. peril
Which of the following is a source of information a risk manager could use to help identify pure loss exposures? A. commodity prices B. physical inspections C. currency exchange rates D. interest rate movements
B. physical inspections
Which of the following types of risks best meets the requirements for being insurable by private insurers? A. market risks B. property risks C. financial risks D. political risks
B. property risks
Uncertainty based on a person's mental condition or state of mind is known as A. objective risk. B. subjective risk. C. objective probability.
B. subjective risk.
A peril is A. a moral hazard B. the cause of a loss C. a condition that increases the chance of a loss. D. the probability that a loss will occur.
B. the cause of a loss
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.
B. the relative variation of actual loss from expected loss.
Traditionally, risk has been defined as A. any situation in which the probability of loss is one. B. uncertainty concerning the occurrence of loss. C. any situation in which the probability of loss is zero.
B. uncertainty concerning the occurrence of loss.
The financial services field is currently experiencing consolidation and convergence. If both of 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.) fewer financial institutions offering a wider range of financial services products.
Which of the following statements about stock insurers is true? A) They issue assessable policies. B) They are not permitted to write property and liability insurance. C) Stockholders bear any losses and share in any profits. D) They are owned by their policyholders
C) Stockholders bear any losses and share in any profits.
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) The insurer rather than the agent owns the renewal rights to the business.
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) A) quota-share reinsurance treaty. B) surplus-share reinsurance treaty. C) excess-of-loss reinsurance treaty. D) reinsurance pool.
C) excess-of-loss reinsurance treaty.
The leaders of a religious group decided to start a life insurance organization to insure members of the religious group. The insurer will operate as a nonprofit organization, thus receiving favorable tax treatment. The insurer formed will be a A) health maintenance organization. B) stock insurer. C) fraternal insurer. D) reciprocal exchange.
C) fraternal insurer.
A company has a fleet of 200 vehicles. On average, 50 vehicles per year experience property damage. What is the probability that any vehicle will be damaged in any given year? A. 10 % B. 20% C. 25% D. 50%
C. 25%
RST Company has production facilities in Salt Lake City and Cleveland. The probability that in any given year a fire will damage the production facility in Salt Lake City is 5 percent. The probability that in any given year a fire will damage the Cleveland production facility is 4 percent. What is the probability that AT LEAST ONE of the production facilities will be damaged by fire in any given year? A. 0.20 percent B. 2.00 percent C. 8.80 percent D. 9.00 percent
C. 8.80 percent
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. A. I only B. II only C. I and II D. Neither I nor II
C. 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 A. I only B. II only C. I and II D. Neither, those are post risk loss objectives
C. I and II
Reasons why market, financial, and production risks are often uninsurable include which of the following? I. The potential to produce a catastrophic loss is great. II. The chance of loss cannot be accurately estimated. A. I only B. II only C. I and II D. Neither I or II
C. 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. A. I only B. II only C. I and II D. Neither I nor II
C. I and II
Which of the following statements about the use of a captive insurance company by a parent firm is true? A. The captive may not write outside, non-parent company, business. B. Captives are not permitted to use reinsurance, so any business insured by the captive stays with the captive. C. The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers. D. Business placed with the captive is always considered retained risk and is never considered transferred risk
C. The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers.
Which of the following statements about a priori probabilities is correct? A. They are subjective probabilities based on ambiguity in the way probability is perceived. B. They are subjective probabilities that may vary among individuals because of factors such as age, gender, education, and the use of alcohol. C. They are objective probabilities that can be determined by deductive reasoning D. They are objective probabilities that can be determined by subjective reasoning.
C. They are objective probabilities that can be determined by deductive reasoning
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(n) A. currency exchange rate risk. B. property risk. C. commodity price risk. D. interest rate risk.
C. commodity price risk.
A name 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. enterprise risk.
The bar at the local franchise of a national chain continued to serve a drunk customer. The customer left the bar and tried to drive home. The drunk driver hit and killed three people who were riding bicycles. The legal representatives of those who were killed filed a multi-million dollar lawsuit against the national chain. As jury awards in the city where the incident occurred tend to be high, insurers marketing liquor liability insurance refused to issue new coverage until the case was resolved. Because no admitted insurers were willing to offer the coverage, liquor liability in this case is considered a(n) A. High margin business B. An example where the The agent who wrote the coverage has personal liability too C. surplus line
C. surplus line
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 A. underwriting by exception method B. business cycle. C. underwriting cycle. D. account underwriting method.
C. underwriting cycle.
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. A. I only B. II only C. Both I and II D. Neither I nor II are true
D. Neither I nor II are true
Which of the following statements about reinsurance is true? A) A reinsurer may not purchase reinsurance. B) The reinsurer is responsible for providing claims services to the insured after a loss occurs. C) The amount of insurance transferred to a reinsurer is called the net retention. D) The insurer transferring business to a reinsurer is called the ceding company.
D) The insurer transferring business to a reinsurer is called the ceding company.
Why are some mutual insurers referred to as "assessment mutuals"? A) They charge low premiums because the loss exposures of their insureds are thoroughly assessed before a policy is written. B) They are noted for being very thorough in their assessment of investment opportunities. C) They are assessed for state premium taxes only if they make a profit. D) They can assess policyholders if premiums are insufficient to pay losses and expenses.
D) They can assess policyholders if premiums are insufficient to pay losses and expenses.
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 A) a reinsurance pool. B.) automatic treaty reinsurance. C) retrocession. D) facultative reinsurance
D) facultative reinsurance
Common sources of underwriting information for life and health insurance include all of the following EXCEPT . A) the application. B) a physical examination. C) the Medical Information Bureau D) the applicant's income tax return.
D) the applicant's income tax return.
Acme Company has three identical manufacturing plants, one on the Texas Gulf Coast, one in southern Alabama, and one in Florida. Each plant is valued at $200 million. Acme's risk manager is concerned about the damage which could be caused by a single hurricane. The risk manager believes there is an extremely low probability that a single hurricane could destroy two or all three plants because they are located so far apart. What is the maximum possible loss associated with a single hurricane? A. 0 B. $200 million C. $400 Million D. $600 million
D. $600 million
All of the following statements about avoidance are true EXCEPT A. Certain loss exposures are never acquired. B. Certain loss exposures may be abandoned. C. The chance of loss for certain loss exposures may be reduced to zero. D. It can be used for any loss exposure facing a firm.
D. It can be used for any loss exposure facing a firm.
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 more accurately.
D. It enables the insurer to predict losses more accurately.
Mark owns a 2006 sedan. The last time Mark renewed his auto insurance, he decided to drop the physical damage insurance on this vehicle. How is Mark dealing with the auto physical damage exposure in his personal risk management program? A. risk reduction B. passive retention C. avoidance D. active retention
D. active retention
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. attitudinal hazard. D. adverse selection.
D. adverse selection.
Carelessness or indifference to a loss is an example of A. physical hazard. B. objective probability. C. moral hazard. D. attitudinal hazard.
D. attitudinal hazard.
A comprehensive risk management program that addresses an organization's pure risks, speculative risks, strategic risks, and operational risks is called a(n) A. risk management information system. B. financial risk management plan. C. speculative risk management plan. D. enterprise risk management plan
D. enterprise risk management plan
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 in the lease is an example of A. retention. B. self-insurance. C. insurance. D. noninsurance transfer.
D. noninsurance transfer.
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. protection from catastrophic losses.