RMI Exam
10) Which of the following is not likely to be found on a declarations page? A) Duties following a loss B) Identity of the named insured C) List of coverages provided by the contract D) Name of the insurer
Answer: A
17) Which of the following is a true statement? A) Insurers are significant financial intermediaries in the U.S. economy. B) Property insurers are prohibited from insuring commercial real estate. C) The insurance companies in the U.S. are estimated to be very profitable. D) Both A and C above are true statements.
Answer: A
2) Which of the following is a primary reason that insurance consumers are not well-informed? A) Insurers have not made much effort to inform consumers. B) The rewards of making informed decisions are not worth the cost of obtaining the needed information. C) State insurance regulators do not provide the needed information. D) Insurance prices are so low that most consumers do not care to be informed.
Answer: A
30) Which of the following pieces of information would be the LEAST useful to a property insurance underwriter? A) Age of the property owner B) Age of the property C) Use of the property D) What the surrounding properties are like
Answer: A
4) Insurer reserve requirements exist to: A) force the insurer to maintain a minimum amount of unencumbered assets B) allow the insurer to earn investment income C) allow the insurer to charge higher premiums D) set money aside for fixed asset acquisition
Answer: A
7) Which of the following is not provided on the private insurance market? A) Bank deposit insurance B) Life insurance C) Health insurance D) Commercial lines insurance
Answer: A
9) Which of the following items is not a benefit of standard insurance policies? A) Smaller insurers can offer cheaper insurance than larger companies if standard policies are used. B) Litigation should be reduced as policy meaning becomes understood. C) Consumers are more likely to learn the meaning of standard policies. D) Data collection and loss rate computation are easier and more accurate.
Answer: A
10) Which of the following statements is not correct about the insurance premium? A) The forecast of policyholders' losses is the starting point for the calculation of the risk premium for an insurance policy. B) The fair rate of return, which is a part of the insurance premium, is governed by law. C) Loading expenses increase the insurance premium. D) Most investment income of insurance companies comes from low risk investments, which reduces the insurance premium.
Answer: B
12) Consumers that have done some research to gather insurance information: A) make the insurance market less efficient B) probably will get better subsequent information from insurance companies C) probably will just get "razzle-dazzle" from insurance companies D) probably wasted their time
Answer: B
16) The primary difference between an insurance agent and an insurance broker is: A) their compensation scheme B) the parties they each legally represent C) the fringe benefits their employers provide D) there is no practical or legal difference between them, other than their titles.
Answer: B
18) What is the principle of indemnity? A) A court precedent that gives insureds the right to sue their insurers if they get bad claims service B) The rule that a person may not collect more than his actual loss in the event of damage caused by an insured peril C) The rule that a person will not be reimbursed for a loss unless he can show proof of loss D) A way of requiring a person to pay a premium
Answer: B
3) Which of the following is the most important goal of insurance regulation? A) Limiting the number of insurance companies in the state B) Promoting the solvency of insurance companies C) Mandating that all citizens purchase auto insurance and health insurance D) Approving the contractual language of insurance policies sold in the state
Answer: B
30) Which term below describes a contract in which there is an unequal dollar consideration? A) Commutative B) Aleatory C) Adhesion D) Unilateral
Answer: B
31) The doctrine of proximate cause: A) forces the insurer to pay for all claims arising out of an unbroken sequence of events if any one of the subsequent perils following the original excluded peril was covered B) forces the insurer to pay for all claims arising out of an unbroken sequence of events if the original insured peril was covered C) forces the insurer to pay for the loss when the proximate cause of the event is the insured's fault D) divides any loss payment among parties proximately affected by the loss
Answer: B
32) Under a contract of adhesion: A) subrogation is not allowed B) ambiguous features are interpreted against the writer of the contract C) ambiguous features are interpreted always against the insurer D) ambiguous features are decided based upon the intent of the parties when the contract was entered
Answer: B
35) The principle of insurable interest is important because it: A) makes insurance companies more profitable B) supports the principle of indemnity C) prevents insurers from unfairly denying insurance claims D) prevents an insurer from subrogating against a negligent third party
Answer: B
40) Which of the following is not a valid reason to reinsure an exposure? A) To make insured exposures similar in dollar size B) To provide the insured access to Lloyd's of London C) To buy services from the reinsurer D) To allow agents to be more competitive
Answer: B
8) To determine if a loss is covered by a property insurance contract, you should look at all of the following except: A) all applicable exclusions B) the subrogation clause C) what property is covered D) the dollar limitations for recovery
Answer: B
68) What is the difference between an agent and a broker?
Answer: Both agents and brokers are controlled by the principle agency legal relationship. However, the principle agent relationship exists between the insurer and the agent in the agent relationship. It exists between the client and the broker in the brokerage relationship. Therefore, any knowledge told to an agent is automatic knowledge of the insurance company. Anything told to the broker is not automatic knowledge of the company.
14) The principle of utmost good faith: A) holds the insurer to a higher standard of honesty B) does not apply in life insurance C) holds the insured to a higher standard of honesty D) requires the insurer and insured to enter the contract with utmost good faith
Answer: C
2) The regulator's objective with respect to insurance rates is to ensure that rates are: A) understood by consumers and affordable for most consumers B) equal for all applicants, adequate, and minimally discriminatory C) fair, adequate and not unfairly discriminatory D) fair, not excessive, and affordable
Answer: C
37) Joe has a dispute with his insurance company regarding how much he is entitled to recover on a claim. Joe believes he is entitled to get $8,000 based upon his interpretation of the policy wording. The insurer says the claim is not covered by the policy. Joe sues and a court of law decides that the policy wording is vague and ambiguous, and rules that the loss IS covered. What legal characteristic of insurance resulted in the court's decision? A) Insurance is aleatory. B) Insurance is a contract of indemnity. C) Insurance is a contract of adhesion. D) Insurance is personal.
Answer: C
4) All the following are true about underwriting except: A) a major purpose of underwriting is to reduce adverse selection against the insurance company B) fair rates should be charged so that each group of insureds is not subsidized by other groups C) the underwriter should select only those insureds that are expected to have no losses D) the underwriter makes decisions based on criteria established by the company management
Answer: C
5) Deductibles serve three major purposes, and two of those are: A) reduce moral hazards; save on claims handling expenses B) reveal moral hazards; eliminate morale hazards C) reduce morale hazards; save on claims handling expenses D) reveal morale hazards, eliminate moral hazards
Answer: C
5) One of the reasons why there is not sufficient supply for high-risk insurance applicants is: A) consumers will not buy insurance if prices are increased B) the existence of joint underwriters associations C) regulators have limited the premiums that insurers can charge for such customers D) the number of insurance contracts written by an insurer is totally regulated
Answer: C
7) Which part of the insurance contract personalizes the coverage to the individual's exposure? A) Exclusions B) Insuring agreements C) Declaration page D) Conditions
Answer: C
8) Most markets involve two parties. How many does the insurance market have? A) 1 B) 2 C) 3 D) 4
Answer: C
52) When entering into a legally enforceable insurance contract consideration must exist. Explain what consideration is and the form it takes in insurance contracts.
Answer: Consideration is an exchange of tangible property or promise(s) in order to start an enforceable contract. Consideration in property insurance is the money exchanged (or the promise to pay) and abiding by the conditions and stipulations in the contract. In life insurance it is money exchanged and making truthful statements in the application.
1) Insurance brokers are: A) compensated by a flat salary B) legally, agents of the insurance company C) only used in life insurance D) legally, agents of the insurance consumer
Answer: D
1) The A.M. Best Company can help you to determine which of the following about your insurer? A) Its reputation for settling claims B) Its customer service rating C) How many complaints have been filed against it D) Its financial strength rating
Answer: D
10) Compulsory Auto Liability Insurance laws are designed to: A) reduce automobile insurance rates B) decrease the number of people who carry automobile insurance C) reduce the number of automobile accidents D) force individuals to purchase auto liability insurance
Answer: D
10) Which of the following is the best driver to maintain an adequate supply of insurance at affordable prices? A) Regulations B) Excluding high-risk applicants C) Excluding low-risk applicants D) Competition among insurers
Answer: D
11) All of the following persons are covered under Larry's PAP except: A) Larry's wife, who borrows a neighbor's car B) Larry's son, who borrows a friend's car to get to work C) Larry, while driving a car he borrowed from his employer to run an errand D) Larry, while driving a borrowed commercial wrecker truck to tow his car to a repair garage
Answer: D
11) Why do regulators care whether high-risk drivers have insurance? A) Regulators are silly and have nothing better to do. B) Otherwise insurance companies would lose too much money. C) Excluding high-risk drivers is a violation of the Constitution. D) The societal costs associated with the accidents caused by high-risk drivers is at least somewhat reduced by having them pay an insurance premium, even if it is too low for the associate risk
Answer: D
12) All the following features are unique to insurance contracts (versus other business contracts) except: A) insurable interest B) subrogation C) utmost good faith D) consideration
Answer: D
12) Which of the following is not a duty of an actuary? A) Calculate rates B) Calculate dividends C) Calculate loss reserves D) Identify individual exposures that are going to have a loss
Answer: D
13) Which of the following was not listed in the text as a duty of an agent? A) Loyalty to the principal B) Carefully handling all money and keeping proper records C) Carefully conveying all relevant information D) Duty to select profitable business for carriers
Answer: D
14) The efficient insurance market requires all of the following conditions except: A) numerous sellers and buyers B) well-informed consumers C) numerous purchase substitutes (homogeneity) D) a government subsidy for lower-income citizens
Answer: D
15) The ________ clause in an insurance policy says that when the insurer indemnifies the insured for a loss, it takes over the insured's right to collect payment from any negligent third party that may have caused the loss. A) indemnity B) proof of loss C) adhesion D) subrogation
Answer: D
23) In which case is there no insurable interest? A) Barb's 25% ownership in an oil well B) A dry cleaner in its customers' clothes C) A bank (creditor) in property used to secure a loan D) A school principal in the lives of the students attending his school
Answer: D
28) Which one of the following is false concerning subrogation? A) It reinforces the principle of indemnity. B) It holds rates below what they would otherwise be. C) It places the burden of loss on one or more responsible parties. D) The insured can never receive any money collected through subrogation.
Answer: D
29) The fact that insured have reasonable expectations has typically resulted in: A) a reduction in the scope of insurance coverage B) an increase in morale hazard C) difficulties preventing adverse selection D) insurers having to cover things they never anticipated covering
Answer: D
4) All the following are necessary for an ideally insurable loss exposure except: A) large number of homogeneous exposures B) losses must be accidental and unintentional from the point of view of the insured C) losses must be measurable D) low probability of loss
Answer: D
4) An efficient insurance market requires all of the following conditions except: A) numerous sellers and buyers B) well-informed consumers C) numerous purchase substitutes (homogeneity) D) a government subsidy for lower-income citizens
Answer: D
41) Which one of the following is false concerning the standardization of insurance policies? A) It reduces the risk for the insurance companies resulting from the principle of adhesion. B) It holds rates below what they would otherwise be. C) It reduces adverse selection. D) It increases flexibility
Answer: D
42) Which one of the following is not a basic part of an insurance contract? A) Deductibles B) Conditions C) Declarations D) All of the above are a basic part of an insurance contract.
Answer: D
6) Participants in the private insurance market include all of the following except: A) insurance buyers B) insurance companies C) insurance regulators D) the FDIC
Answer: D
57) What are some of the reasons exclusions are found in insurance contracts?
Answer: Exclusions are found in insurance contracts to: 1) eliminate catastrophic losses, 2) control the moral and morale hazards, 3) eliminate coverage for events/property where an extra charge is needed, and 4) eliminate coverage in which a specific contract is designed for that need.
18) Insurance companies offer identical and perfectly substitutable products.
Answer: FALSE
19) Comparison shopping for insurance is generally not worthwhile since very little price variation is found in either life or property insurance.
Answer: FALSE
44) Since the automobile insurance policy is written by the insurer, ambiguities are interpreted in favor of the insurer.
Answer: FALSE
45) Exclusions are not a basic part of an insurance contract
Answer: FALSE
46) The principle of indemnity says that the insured should profit from insurance
Answer: FALSE
49) "Actual cash value" means "historical cost less depreciation."
Answer: FALSE
54) Explain the principle of subrogation. Provide a mathematical example of its use.
Answer: Subrogation allows a party to collect from a negligent third party to the extent that they have paid for the rights. John's car is damaged $5,000 by a negligent driver and collects $4,500 due to a $500 deductible. The insurer subrogates against the negligent driver for payment. If the insurer collects anything it goes to John to first collect the $500. Any collection in excess goes to the insurer.
21) The insurance commissioner applies the state insurance code to regulate insurance companies and their activities.
Answer: TRUE
45) The insurer's efficiency and underwriting practices are much more important to the consumer than the insurer's legal form of organization.
Answer: TRUE
47) Ambiguities in the wording of an insurance contract are always construed against the writer
Answer: TRUE
50) Concealment or fraud before, during, or after a loss generally allows an insurer to contest property insurance contracts.
Answer: TRUE
51) Standardized insurance policies make it easier to calculate an insurance rate than do non-standardized policies.
Answer: TRUE
54) If an applicant for insurance informs his broker of all material facts regarding the risk, and the broker does not pass those facts along to the insurer, it's possible that the insurer can legally deny any subsequent claim.
Answer: TRUE
55) An insurance broker legally represents the insurance consumer.
Answer: TRUE
56) Mathematicians specializing in insurance statistics are called "actuaries."
Answer: TRUE
57) An agency contract determines the rights and duties of both the agent and the insurer.
Answer: TRUE
56) Explain the purpose of the declaration page found in insurance contracts.
Answer: The declaration page declares many of the variables one would find between insureds. For example, the following pieces of information are declared that would be unique from insured to insured. 1) the named insured, 2) the location of the property, 3) the deductibles, 4) premium charged, 5) policy limits, 6) type of coverage, and, 7) extent of coverage purchased (perils).
55) What is the doctrine of utmost good faith? What situations arise out of its application? Explain.
Answer: The doctrine of utmost good faith raises the degree of honesty in insurance contracts above normal business contracts. Representations, concealments, and warranties arise. Representations, when false and material, allow the company to avoid payment. Material concealments do the same as well as breaches of warranties.
53) Explain the principle of indemnity. How does one measure indemnity?
Answer: The principle of indemnity states that a person should be financially put back in the same position after a loss compared to before. The usual definition of indemnity is replacement cost less depreciation. Replacement cost is the amount needed to repair or replace property with like kind of material. Depreciation is a measurement of betterment for receiving new for old once repaired.
71) What is the relationship between the underwriter and the actuary? How do they interact?
Answer: The underwriter uses the classification scheme and rates to select, reject and price exposures to loss. The actuary develops the classification scheme and rates for each classification. If the actuary does his/her job correctly and the underwriter classifies and charges the appropriate price, the insurer should be successful in its underwriting experience.
22) Explain briefly why increasing or decreasing price artificially can decrease the supply of insurance.
Answer: When insurance prices are decreased, companies will reduce writings to minimize the loss of profits or minimize losses. Since there has to be a level of capital to support premiums, all other factors the same, as prices increase, fewer policies can be written. Therefore, increasing or decreasing prices can both reduce the availability of coverage.
