RMIN 200
Which one of the following correctly describes a reason for government involvement in property-casualty insurance?
Government programs can meet legitimate public demands unmet by private insurers.
In deciding among a variety of deductible levels under property insurance policies, an insured must balance the benefits of premium reduction with the need to
Have insurance protection for large losses.
An empirical probability distribution is based on:
Historical data
Which one of the following statements is correct with regard to property loss exposures?
Homes can be grouped into classes that face essentially the same loss potential.
Insurance products are often designed around which one of the following types of loss exposures?
Low-frequency, high-severity
How can a risk management plan benefit individuals and organizations? (Check all that apply)
Lowers expected losses preserves financial resources by reducing expected losses provides a sense of confidence that capital is protected against future losses
Delmond Corporation wishes to purchase key person life insurance to provide a financial cushion against the loss of its chief executive officer (CEO). This exposure may fail to meet which one of the following characteristics of an ideally insurable risk?
Measurable
In addition to implementing effective and efficient measures, complying with legal requirements, and promoting safety, risk control should aim to
Minimize or eliminate significant business interruptions, whatever their cause.
Auto insured Tom was surprised when he was invited to his mutual auto insurer's election of its board of directors. Tom would most likely find information relating to this type of election, in his policy's
Miscellaneous provisions
Edna, who participates in a homeowners' reciprocal exchange knows that the members of the exchange insure members' loss exposures. A policy issued by the reciprocal insurer specifies the attorney-in-fact's authority to implement its powers on behalf of Edna and the other members of the exchange. Information regarding the powers of the attorney-in-fact is most likely to be found in Edna's policy's "
Miscellaneous provisions.
Which is a true statement regarding possibility and probability?
Probability is measurable
Pravalt Construction Company pays less than its competitors for workers' compensation insurance because Pravalt has had substantially fewer employee injuries than other firms in its class. This illustrates which one of the following benefits of insurance?
Promote loss control activity
Which one of the following statements relating to the use of property insurance deductibles is correct?
Property insurance deductibles reduce premium costs by encouraging insureds to prevent or reduce losses.
Daniel has developed a business continuity plan to address the threat of the loss of utility services at his company's large manufacturing plant. The management team has reviewed his plan and agrees that the plan can be quickly read and understood and should be effective in the event of a crisis. Daniel has provided copies of the plan to all relevant parties. Which one of the following should be Daniel's next step?
Provide training and periodic rehearsals of the procedures
Under the Prouty Approach to analyzing losses, there are four categories of loss frequency and three categories of loss severity. Which one of the following is a loss severity category?
Significant
When developing loss severity distributions, insurance and risk management professionals should organize loss data by:
Size of loss
Which one of the following statements is correct with respect to the characteristics of the products liability loss exposure?
"If a product has been widely distributed, a loss could be catastrophic in terms of number of claims."
Which one of the following describes the law of large numbers?
"It states that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes also increases."
Which one of the following statements is true regarding the use of personal inspections to identify loss exposures?
"To be effective, personal inspections should be accompanied by discussions with front-line personnel who can identify nonobvious loss exposures."
Assume a covered settlement amount of $1,300,000 under a liability insurance policy including a limit of $1,000,000, and a self-insured retention (SIR) of $100,000. Under normal circumstances, the insurer will pay which one of the following amounts for this settlement?
$1,000,000
Oliver has a commercial property policy covering his retail store. The policy has an 80% coinsurance clause, and the insurable value of the store is its replacement cost. When the policy was written, the value of the store was $160,000. Assuming the current replacement cost of the store is $150,000, and that it is insured for $120,000, how much will Oliver recover under his insurance policy if the store suffers a $30,000 covered loss?
$30,000
Company T has a liability policy with Insurer A with a $1 million policy limit. Company T was found liable for a $700,000 judgment. Defense costs amounted to $400,000. Assuming the insurer's payments for defense costs are applied to reduce the policy limit, how much would Insurer A pay toward the $700,000 judgment?
$600,000
Insurer A knows the expected value of a severity distribution for dwelling property losses is $3,280, and assumes a simple frequency distribution that has only the two possibilities- 70 percent of the time no loss would occur and 30 percent of the time one loss would occur. Which one of the following represents the approximate expected loss?
$984
As an incentive for insuring to value, many policies include insurance to value provisions that reduce the amount payable for both partial and total losses if the insured has not purchased adequate limits of coverage. Coinsurance clauses, one such type of provision, are found in many commercial property insurance policies. The most common coinsurance percentages for buildings and business personal property are 90 percent, 100 percent and
80 percent.
Which one of the following is correct regarding captive programs
A captive collects premium, issues policies, purchases reinsurance, invests assets and pays losses, just like any other insurer
Which one of the following risk financing measures can reduce an organization's cost of risk over time, but has significant start-up costs relative to the other measures?
A captive plan
Which one of the following statements regarding the extent of damages in liability claims is true?
A claimant in a bodily injury or property damage liability claim has a duty to mitigate loss after an accident
Which one of the following statements is correct regarding characteristics of ideally insurable loss exposures?
A common function that insurance provides is a spreading of risk across a large number of similar exposure units within the same period.
Which one of the following planned retention funding measures recognizes in advance the potential for loss, and supports that potential by allocating cash, securities, or other liquid assets to meet obligations?
A funded reserve
Which one of the following is a noninsurance risk transfer measure?
A hold-harmless agreement
Which of the rolling are examples of how can an organization or individual can experience a financial loss? (Select all that apply)
A loss can result from a reduction in net income from property, liability, or personnel loss. A loss can result from a claim alleging legal responsibility for bodily injury. A loss can result from damage to property where there is no financial interest. A loss can result from a key person's retirement.
In a court of law, during policy analysis, which one of the following types of policies or forms is most difficult to interpret?
A manuscript policy
Which one of the following types of insurance policies is least likely to be considered a contract of adhesion?
A manuscript policy
Since manuscript forms do not have the same history of court interpretations with regard to policy analysis, substantial delays in claim adjusting or strained relations between the insured and the insurer can occur. To reduce the likelihood of such problems, most manuscript forms are
Adapted from wording previously developed and used in standard forms.
Lucy purchased a property for $200,000 and has a mortgage on the property for $150,000. Al , the original owner of the property had $95,000 equity in the property prior to the sale. In terms of insurable interest
Al, Lucy, and the mortgagor all have insurable interest in the property
Once a claims adjuster has reviewed a claim and the loss successfully passes each step of the DICE method, what is the next step the claims adjuster must do?
Amount payable.
Which one of the following statements is true regarding the insured's or insurer's right to transfer insurance policies?
An insurer can transfer all of its business if it is acquired by another insurer.
Which one of the following statements is correct with respect to retrospective rating plans?
An organization must have a substantial insurance premium to benefit from retrospective rating.
Which one of the following statements is correct with respect to applying risk control techniques to the various types of loss exposures?
Any measure that controls property, liability, or personnel loss exposures also indirectly controls associated net income loss exposures
Which one of the following statements is true?
As an organization s retention level increases, so does the level of liquidity required
The state of Maryland operates a residual market plan (the Maryland Auto Insurance Fund MAIF) that provides coverage for drivers who are unable to obtain coverage from private insurers. Which one of the following is the best rationale for the MAIF program?
Auto insurance is compulsory, and the program makes it possible for all drivers to have reasonably priced insurance.
Which one of the following types of loss exposures meets all of the characteristics of ideally insurable personal loss exposures?
Automobile liability
A manufacturer that elects to discontinue a particular product due to potential liability loss exposures is practicing which one of the following risk control techniques?
Avoidance
Which one of the following statements is correct regarding personnel loss exposures?
Because retirement is usually planned, most resulting personnel losses can be handled with proper planning
Which one of the following statements is correct with respect to property loss exposures?
Commercial property loss exposures are commonly examined based on construction, occupancy, protection, and environment
Which one of the following is considered the primary advantage of using retention as a risk financing technique?
Cost savings
The insuring agreement often contains policy provisions regarding the
Covered causes of loss.
Bob's manufacturing sold four very expensive units of equipment to star retailers. Payment is due 15 days after delivery. If star fails to pay, what type of risk is Bob's manufacturing facing:
Credit risk
Which one of the following statements is true regarding probability distributions?
Cumulative probabilities can be used to evaluate the effect of various deductibles and policy limits on insured loss exposures.
Which one of the following refers to dollar values today and involves inflating historical values to reflect the effect of inflation?
Current dollars
Which one of the following planned retention funding measures is the least formal and the least expensive to administer?
Current expensing of losses
Which one of the following planned retention measures is appropriate for funding losses with a low expected value, but becomes less advisable as the expected value of losses gets larger?
Current expensing of losses
In an array of historical and adjusted auto physical damage losses the adjusted amount column is the historical loss amount adjusted to
Current year dollars using a price index.
The primary method of post-loss policy analysis of a claim is the
DICE method.
Insurance policy rating information and the policy premium are found in the policy
Declarations
The numbers and edition dates of all attached forms and endorsements are found in the policy
Declarations
The property casualty insurance policy provisions that indicate who or what is covered, and where and when coverage applies, are found in which section of an insurance policy?
Declarations
In a policy's insuring agreement, the insurer promises to pay to the insured, to pay on behalf of the insured and to
Defend the insured.
Commercial general liability insurance policies written on an occurrence basis apply to bodily injury and property damage that occurs during the policy period. This provision supports the principle that insurable loss exposures must, ideally, be
Definite
The relationship between the expected value and the standard deviation of a normal distribution can have useful practical application. Which one of the following best describes such a practical application?
Determining a maintenance schedule for equipment that could become dangerous if it were to fail
The risk control technique that spreads loss exposures over numerous projects, products, regions, or markets is
Diversification
Which one of the following risk control techniques is more commonly applied to managing business risk rather than hazard risk?
Diversification
The expensive and inefficient process of insuring low severity small claims is referred to as
Dollar trading.
Which one of the following risk control techniques will reduce loss severity and make losses more predictable, without increasing loss frequency
Duplication
The depreciation amount used in calculating actual cash value (ACV) under property insurance policies is based on
Economic depreciation.
A term widely used to describe a broader view of risk management that encompasses all types of risk associated with an organization:
Enterprise risk management
Which of the following are part of the four steps required to monitor and revise a risk management program? (Check all that apply)
Establishing standards of acceptable performance Correcting substandard performance Evaluating standards that have substantially exceeded
As the number of members in a pool increases, on a per member basis the
Expected value of losses remains unchanged.
A nondiversifiable risk will typically affect a small segment of society. Examples of nondiversifiable risks include inflation, unemployment, and natural disasters.
False
Individuals always adhere to a formal risk management plan..
False
When analyzing a loss exposure loss frequency is the amount in dollars from a loss for a specific period of time; and loss severity is the number of losses within a specific period of time.
False
Which of the following are methods used for identifying loss exposures? (Check all that apply)
Flow charts organizational charts inspections contract analysis questionnaires and checklists compliance reviews, insurance policies loss history reports financial statement and accounting record
Insurance deals primarily with loss exposures that are fortuitous. Which one of the following statements best characterizes fortuitous losses?
Fortuitous losses are beyond the insured s control.
The most common violations of the concept of utmost good faith in insurance policies involve buildup in insurance claims filed by insureds and/or
Fraud
Aaron finds ten new laptop computers in the basement of his office building. The attached invoice indicates that each laptop was purchased for $1,500 four years ago. Hoping to sell them, Aaron was disappointed to learn each unit is now only worth $500. This discrepancy in valuation of the laptop computers is most likely due to
Functional depreciation.
Which one of the following statements is correct with respect to evaluating the efficiency of alternative risk control measures?
Given a loss exposure and alternative risk control measures, the risk management professional can determine which is most efficient by using cash flow analysis
Which of the following are included in the six steps of risk management? (Check all that apply)
Identify loss exposure analyze the loss exposures examine the feasibility of risk management techniques select the appropriate risk management technique implement the selected risk management techniques monitor results and continue with the existing risk management program.
Which one of the following activities is the first step in the business continuity process?
Identify the organization's critical functions.
Which one of the following best describes one of the steps in the business continuity process?
Identify the risks to the organization's critical functions
Which one of the following statements is true regarding endorsements and other related documents?
In certain circumstances, the insurer's bylaws are incorporated into an insurance policy.
Which one of the following statements is correct regarding sources of recovery under insurance policies?
In situations involving a loss covered by two similar policies with different insurers, the insurers usually share the loss.
An advantage that retention offers an individual or organization is
Incentive for risk control.
Which one of the following statements is correct with regard to risk and ideally insurable characteristics of loss exposures?
Indemnification is the process of restoring an insured to a pre-loss financial condition.
When a loss at one loss exposure has no effect on the probability of a loss at another loss exposure, those exposures are said to be
Independent
A loss that results from, but is not directly caused y a particular cause of loss is a(n):
Indirect loss
Business continuity management was initially developed with a focus on
Information technology concerns.
Which of the following is not a one of the four dimensions of a loss exposure?
Insurance - the amount paid by insurance to cover the loss
Which one of the following statements is correct?
Insurers investment income helps keep premiums at a reasonable level.
A patent or copyright is a form of:
Intangible property
The fundamental difference between moral hazards and morale hazards is:
Intent
Which one of the following statements is correct regarding the benefits that insurance provides?
Investment income helps keep insurance premiums at a reasonable level.
The level of cash flow variability that an organization is willing to accept
Is impacted by the risk appetite of its stakeholders
Which one of the following is an advantage of a manuscript form
It can be specifically drafted or selected to cover a unique loss exposure.
Which one of the following is true regarding standard deviation?
It indicates how widely dispersed the values in a distribution are
Which one of the following is correct with respect to a business continuity plan?
It is designed to be used during a crisis, so it should be clear and able to be quickly read and understood.
Which one of the following statements is correct with respect to self-insurance?
It is often used to cover workers' compensation and other loss exposures that have claim payments that extend over time.
Loss exposures are analyzed along four dimensions. Which is not one of those dimensions?
Legal costs
In terms of insurance to value principles applying to liability insurance policies, which one of the following statements is true?
Liability insurers seek to use insurance rates that are adequate for whatever ""layer"" of coverage they are insuring
Which one of the following focuses on the minimum building design, construction, operation, and maintenance requirements necessary to assure occupants of a safe exit from the burning portion of a building?
Life safety
The other insurance provisions clause is used by insurers in most property and liability policies to
Limit overindemnification.
Which of the following can affect the financial consequence of a loss (Check all that apply)
Loss frequency loss exposure the cause of loss loss severity
Greg manages a small ski resort. He notes upon reviewing the injury claims he has received that many of them occurred on the same slope. To manage this exposure, Greg widens the slope and reduces the steepness. He believes these changes will reduce the number of injuries. Which one of the following risk control techniques is Greg using?
Loss prevention
Which one of the following risk control techniques is primarily used to reduce the frequency of losses, although it may also mitigate loss severity?
Loss prevention
Automatic sprinklers are a classic example of which one of the following risk control techniques?
Loss reduction
Company X sells earth-moving equipment and has a large inventory. The company's risk management professional wants to make sure that the insurance is carefully designed and has coordinated provisions in the various forms to minimize the possibility of gaps and overlaps in coverage. The most appropriate policy for Company X is a
Modular policy.
The basic structure of an insurance policy can be either a self-contained policy or a
Modular policy.
Bob's manufacturing is facing overwhelming debt due to unpaid invoices. The owner is considering intentionally causing a loss in order to collect the insurance payment. This is a type of:
Moral hazard
Which one of the following statements is correct with respect to risk transfer measures?
Most risk transfer measures limit the potential loss amounts being transferred.
Which one of the following statements is correct regarding net income loss exposures?
Net income loss exposures associated with property losses exhibit almost all the characteristics of ideally insurable risks.
Which one of the following statements is correct with respect to personal net income loss exposures?
Net income losses resulting from unemployment may or may not be fortuitous, depending on the individual involved
A hold harmless agreement is a
Noninsurance risk transfer measure.
All of the following are examples used for identifying loss exposure through document analysis except:
Note taking
Which one of the following describes how probabilities are expressed?
Numerically, as a fraction, a percentage, or a decimal
This quadrant of risk includes employee turnover, online security breach, and supplier business interruption:
Operational risks
Which one of the following types of data organization is the foundation for developing loss severity distributions or loss trends over time?
Organizing losses by size
Sara is involved in an automobile accident while on her way to a business appointment. She suffers minor injuries. Sara is not sure whether her auto policy or her worker's compensation policy will cover her injuries. This is an example of which one of the following other sources of recovery?
Other insurance in dissimilar policies
Brenda wrote a song that she sent to her sister who sold the lyrics to a recording company. Learning of the sale, Brenda became upset. Brenda has an insurable interest in the song she wrote because it is a type of "property," the legal basis of her insurable interest arises out of
Ownership interest in property.
For most insureds, the primary source of information for generating scenarios for pre-loss policy analysis is
Past loss experience.
Bob owns and manages Bob's manufacturing. The untimely death of Bob could result in chaos at the company. To the company, Bob's death would be:
Personnel Loss exposure
Under which one of the following types of insurance policies are the insurer's payments for defense costs and supplemental payments typically applied to reduce the policy limits?
Pollution liability
Business continuity is designed to meet both the primary risk management program post-loss goal of continuity of operation and the
Post-loss goal of survival.
Having a theoretically infinite number of possible loss scenarios is one of the limitations of
Pre-loss policy analysis
Which one of the following statements is correct with respect to the characteristics of premises and operations liability loss exposures?
Premises and operations liability losses are definite in time, cause, and location, and are measurable.
Following the 9/11 terrorist attacks, insurers became reluctant to provide property insurance on target properties until the federal Terrorism Risk Insurance Program (TRIP) was introduced. What social goal did this government insurance program achieve?
Prevent economic disruption
Which one of the following statements regarding probability is correct?
Probabilities associated with events such as coin tosses can be developed from theoretical considerations and are unchanging.
The primary advantage of risk transfer measures is that they
Reduce exposure to large losses.
Which one of the following is an advantage of risk transfer that appears to be valued by investors?
Reducing cash flow variability
Ella, the owner of a dry cleaning establishment, maintains insurance on customers' clothing and other property. She does so because she is acting as a bailee of customers' property while it is in her possession. In the event that a customer's property becomes damaged while in her care, Ella will pay any insurance proceeds to the customer. Which one of the following is the legal basis for insurable interest demonstrated by this example?
Representation of another party
Which one of the following statements is correct with respect to retention s ability to meet risk financing goals?
Retention enables an organization to manage its cost of risk.
Which one of the following types of personal loss exposures is not usually fortuitous?
Retirement loss exposures
Which one of the following rating plans adjusts the premium for the current policy period to recognize the insured's actual losses during the current policy period?
Retrospective rating plan
Which one of the following is the fourth step in the DICE method of policy analysis?
Review of policy exclusions to determine whether they preclude coverage of the loss
To determine the extent of coverage a policy provides, pre-loss policy analysis almost exclusively relies on
Scenario analysis
Restricting the number of key employees who can travel on the same aircraft is an example of which one of the following risk control techniques?
Separation
Warehousing a company s inventory at different locations in different cities is an example of which one of the following risk control techniques
Separation
Which two risk control measures are directly aimed at reducing the severity of net income losses?
Separation and duplication
Life, health, and retirement causes of loss are
Subject to moral and morale hazard problems
Under The Prouty Approach of analyzing loss exposures, the four broad categories of loss frequency and the three loss severity categories are
Subjective
Which one of the following is the name of the insurance policy provision that addresses the situation where recovery from a negligent third party overlaps with first-party insurance coverage?
Subrogation
Business continuity management is primarily designed to meet which one of the following risk management goals?
Survival
Which one of the following statements is correct with respect to an organization s risk financing goals?
The acceptable cash flow variability level for an organization depends on factors such as its size and financial strength.
To accurately analyze loss exposures using data on past losses, the data should meet certain criteria. Which one of the following lists those criteria?
The data should be relevant, complete, consistent, and organized.
Candice owns a 120 year old historical building that she uses as an art studio. If her studio was destroyed, the property valuation could become complex due to the antique fixtures and materials used in the structure and design of the building. Which one of the following valuation methods is most appropriate?
The functional value method
If a liability claim goes to trial, although the policy limits restrict the insurer's liability, the jury and judge are not bound to confine an award to the amount of such policy limits. If the court awards a judgment that exceeds policy limits, which one of the following parties is responsible for paying the excess award?
The insured/defendant
Of all the characteristics of an ideally insurable loss exposure, probably the most important is that
The insurer is able to charge a premium that the insured can afford to pay.
All of the following are reasons insurers restrict the use of deductibles in liability insurance policies, EXCEPT
The insurer loses its right to provide a defense under liability insurance policies that include a deductible.
Which one of the following correctly describes how liability policies that include a deductible usually handle the defense of claims?
The insurer pays all defense costs without contribution from the insured.
Pooling arrangements reduce the most risk to the group when
The loss exposures being pooled are independent of one another.
Which one of the following statements is true regarding central tendency when comparing the characteristics of probability distributions?
The measures of central tendency represent the best guess as to what the outcome will be.
Which one of the following statements is true regarding avoidance as a risk control technique?
The most effective way of managing any loss exposure is to avoid the exposure completely.
One of the ways in which probabilities can be developed is theoretically. Which one of the following is an example of an event for which probability can be determined theoretically?
The number of times heads can be expected to turn up over multiple coin tosses
Uncertainty of outcome is one of the two elements within the definition of risk. The other is:
The possibility of a negative outcome
Which one of the following statements is correct with respect to finite risk insurance plans?
The premium in a finite risk insurance plan is a very high percentage of the policy limits.
Which one of the following statements is correct with respect to transfer s ability to meet risk financing goals?
The primary benefit of transfer is certainty regarding the ability to pay losses
Which one of the following statements is true regarding the use of checklists and questionnaires to identify loss exposures?
The questions included in questionnaires and checklists developed by insurers relate mainly to loss exposures for which commercial insurance is generally available.
Pre-loss policy analysis almost exclusively relies on scenario analysis to determine the possible need for coverage. For a policyholder, the primary source of information for generating potential scenarios comes from...
Their past loss experience, or loss history.
Which one of the following best describes effective and efficient risk control measures?
They are the least expensive measures that achieve an organization s risk management goals.
Deductibles in property insurance policies are most effective in reducing insurers' expenses when
They are used with coverages in which small, partial losses are common
In addition to document analysis, insurance and risk management professionals may also conduct compliance reviews to identify loss exposures. Which one of the following is a benefit of conducting compliance reviews?
They can help minimize or avoid liability loss exposures.
Which one of the following statements is correct with respect to empirical probability distributions?
They provide a mutually exclusive, collectively exhaustive list of outcomes.
An effective risk management program will put in place measures should a loss occur. Post loss goals include a plan to stay alive, keeping a business profitable, forecasting risk management costs, maintaining relationships, and to protect resources. So future growth can occur.
True
In enterprise risk management, the entire organization at all levels become responsible for risk management.
True
Pre-loss goals are to be accomplished before a loss occurs. Pre-loss goals focus responsibility, economy of operations, tolerable uncertainty, and legality.
True
The risk of hurricane damaging an office building is an example of pure risk.
True
Which one of the following statements is true regarding insurance contracts?
Typical insurance contracts are contracts of adhesion.
Regarding the use of deductibles on liability insurance policies, which one of the following statements is true?
Under liability policies that include a deductible, the insurer usually pays all defense costs on a first-dollar basis
Captive insurers are
Used to insure property loss exposures that are difficult to insure in the primary market.
As a single mother on a very tight budget, Ciara is tempted to skimp on her insurance. However, her friend Mehmet tells her not to skimp on insurance, because it will help manage her cash flows. Which one of the following examples best illustrates Mehmet s point?
When her car s windshield breaks, Ciara has to pay only $100 of the $600 cost of replacing it
In Fred's large landscaping business, he knows that there is a point where equipment becomes unsafe and difficult to maintain. Fred realizes that after 2,000 miles of use, his costs for maintenance on his large mowers and sod busters dramatically rise. Using probability analysis Fred can better know
When to replace equipment
Insurance professionals may be able to use measures of dispersion around estimated losses to determine
Whether to offer insurance coverage to a potential insured.
Which one of the following documents would best help to identify bottlenecks in an organization's operations that might present critical loss exposures?
Which one of the following documents would best help to identify bottlenecks in an organization's operations that might present critical loss exposures?
Causes of loss are commonly categorized accounting to the quadrants of risk developed by ERM. New competitors, political risks, and changes in consumer demand all fall into which quadrant?
strategic risks
