Principles of Risk Management and Insurance: Principles of Risk Management and Insurance - Chapter 5 Flashcards

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.

Answer: C

Which of the following statements about mutual insurers is true?
A) They are legally organized as partnerships. B)
They have a board of directors which is selected by state insurance
departments. C) They are owned by their stockholders.
D) They may pay dividends to their policyholders.

Answer: D

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.

Answer: D

The corporate structure of mutual insurers has changed in recent
years. All of the following are examples of significant changes EXCEPT
A) demutualization of some insurers. B) sharp
increase in the number of mutual insurance companies. C)
increase in company mergers. D) formation of mutual holding
companies.

Answer: B

Which of the following statements is true about fraternal insurers?
A) They are legally organized as stock insurers. B)
They specialize in writing life and health insurance. C)
They are taxed more heavily than other types of insurers because of
discriminatory marketing practices. D) They account for the
majority of life insurance in force in the United States.

Answer: B

Which of the following statements about reciprocal exchanges is (are) true?
Reciprocal exchanges usually specialize in health
insurance. Reciprocal exchanges are unincorporated mutual
insurance companies. A) I only B) II only
C) both I and II D) neither I nor II

Answer: B

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.

Answer: A

Temporary evidence of insurance until a policy is actually issued is
provided by a(n)
A) binder. B) brokerage agreement. C)
pre-approval form. D) endorsement.

Answer: A

Which of the following statements about insurance brokers is (are) true?
They legally represent the insured rather than the insurance
company. They are prohibited from being licensed as
agents. A) I only B) II only C) both I and
II D) neither I nor II

Answer: A

Neil needs insurance that is unavailable in the state where he lives.
To obtain insurance from a nonadmitted insurer, Neil should contact a
A) surplus lines broker. B) nonadmitted agent.
C) general agency broker. D) direct writer.

Answer: A

Which of the following statements about life insurance marketing
systems is true?
A) Insurance brokers are not permitted to sell life
insurance. B) Some exclusive agents who market property and
liability insurance also sell life insurance. C)
Independent insurance agents are not permitted to market life
insurance. D) Financial institutions such as banks are not
permitted to market life insurance.

Answer: B

Which of the following statements about personal producing general
agents is (are) true?
They often have the option of recruiting and training
sub-agents. They are independent agents who produce
substantial amounts of life insurance with one insurer. A)
I only B) II only C) both I and II D)
neither I nor II

Answer: C

Advantages of the direct response system for marketing life insurance
include which of the following?
Advertising can be specifically directed to selected
markets. Complex products can be easily sold. A) I
only B) II only C) both I and II D) neither
I nor II

Answer: A

Which of the following statements about the exclusive agency system
for marketing property and liability insurance is true?
A) Exclusive agents typically have complete ownership of
policy expirations. B) A higher commission rate is usually
paid on exclusive agents' renewal business than on new
business. C) Exclusive agents represent several different
insurance companies. D) New exclusive agents may start as
employees and after a training period become independent
contractors.

Answer: D

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.

Answer: C

A property and casualty insurer in which the salesperson is an
employee of the insurer, not an independent contractor, is called a
A) fraternal insurance company. B) risk retention
group. C) direct writer. D) captive insurance
company.

Answer: C

Which of the following statements about the sale of property and
liability insurance through the direct response system is (are) true?
Selling expenses are higher because market segmentation tends
to be less precise than with other marketing methods. It is
the most appropriate system for selling complex products.
A) I only B) II only C) both I and II
D) neither I nor II

Answer: D

Under one life insurance marketing system, agents conduct sales
interviews at the workplace with the approval of the management of the
business. There are few direct costs to the employer, and this
marketing system is especially appropriate for low-income and
middle-income workers. This life insurance marketing system is called the
A) direct response system. B) worksite marketing
system. C) independent agency system. D) personal
producing general agency system.

Answer: B

Which of the following is a characteristic of a typical mass
merchandising plan?
A) higher commission scales for agents and higher
administrative expenses B) payment of premiums through
payroll deduction C) group rather than individual
underwriting D) contributions by the employer to the cost of
coverage

Answer: B

David is a successful independent insurance agent. Recently, one of
the life insurance companies with whom he places business offered him
a special financial arrangement. If David meets sales targets, he will
receive large bonuses. He will also be able to recruit and train
sub-agents and receive an over-riding commission based on the amount
of life insurance the sub-agents sell. Based on this description,
David is a(n)
A) insurance broker. B) personal-producing general
agent. C) direct writer. D) multiple life exclusive
agent.

Answer: B

Sarah owns a property and liability insurance agency. She is
authorized to represent several insurance companies and she is
compensated by commissions. Sarah's agency owns the expiration rights
to the business she sells. Sarah is a(n)
A) independent agent. B) exclusive agent. C)
direct writer. D) insurance broker.

Answer: A

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.

Answer: C

Scott works in property and liability insurance marketing. He legally
represents insurance purchasers, rather than insurance companies.
Scott is paid a commission on the insurance placed with insurers.
Scott is a(n)
A) exclusive agent. B) direct writer. C)
branch manager. D) insurance broker.

Answer: D

ABC Insurance has always used the exclusive agency system to market
coverages. ABC, however, cannot afford full-time agents in
sparsely-populated areas. To reach customers in these areas, ABC
enters into agreements with local independent agents. Using more than
one marketing system is called employing a
A) direct response system. B) general agency
system. C) multiple distribution system. D) branch
office system.

Answer: C

Cathy just started a job with XYZ Manufacturing Company. She attended
an orientation and was given a packet providing information about the
various employee benefits XYZ offers. One item in the packet was a
booklet and application form from an auto insurer. The insurer offers
lower premiums to XYZ employees. The insurer's plan for selling
individually-underwritten auto insurance to employees of XYZ
Manufacturing Company is called
A) direct response. B) mass merchandising.
C) financial institution distribution. D) multiple
marketing.

Answer: B

Brian buys and sells investment securities for his clients. Brian
also decided to become a licensed life insurance agent to better serve
his customers. While Brian's primary focus is buying and selling
financial securities for his clients in exchange for commissions, he
also earns commissions on his life insurance sales. Brian is a(n)
A) direct writer. B) stock broker. C)
insurance broker. D) personal-producing general agent.

Answer: B

ABC Term Life Insurance Company uses an interesting marketing
system´┐Żit has no agents. Instead, the company markets its coverages
through television and radio ads, newspaper inserts, and the Internet.
The type of marketing system that ABC Term Life Insurance Company uses
is called the
A) mass merchandising system. B) mixed marketing
system. C) direct response system. D) worksite
marketing system.

Answer: C

Big Mutual Insurance Company would like to take advantage of
financial services deregulation by acquiring a bank and a stock
brokerage firm. Big Mutual, however, would have trouble raising the
funds needed to make these acquisitions under the mutual form of
organization. Big Mutual is planning to switch from the mutual form of
organization to the stock form, and to issue shares of common stock to
raise capital. This change in organizational structure is called
A) mutualization. B) retrocession. C)
reinsurance. D) demutualization.

Answer: D

Jim would like to start a business raising thoroughbred racehorses.
Obtaining insurance on the horses is a key concern, and he was
dismayed to learn that none of the insurers authorized to operate in
his state offer this specialty insurance. What is the name of the
intermediary that Jim can use to place this coverage with an insurer
not admitted to his state?
A) alien insurer
B) general agent
C) surplus lines broker
D) direct writer

Answer: C

Some investors decided to start an insurance company. Each investor
contributed $50,000 to raise the capital required to charter a new
company. Each investor received an ownership interest in the company.
The company will raise additional capital by selling ownership rights
to other investors. Under this type of organization, the customer and
owner functions are separate. This type of insurer is called a
A) stock company. B) reciprocal exchange. C)
fraternal company. D) mutual company.

Answer: A

RST Insurance Company does not have any agents. Instead, the company
sells insurance through radio ads, telemarketers, and newspaper and
magazine inserts. This distribution method is called
A) reciprocal exchange. B) direct response
system. C) mass merchandising. D) multiple
distribution system.

Answer: B

Which of the following statements about Blue Cross and Blue Shield
plans is (are) true?
Blue Cross and Blue Shield plans can be organized on a
nonprofit basis or on a for-profit basis. Blue Cross
provides coverage for hospital services; Blue Shield provides
coverage for physicians' and surgeons' fees. A) I only
B) II only C) both I and II D) neither I nor
II

Answer: C

Which of the following statements about Lloyds of London (are) true?
The majority of the business underwritten by Lloyds of London
is for unusual risks, such as valuable race horses and professional
athletes. Lloyds of London is a group of underwriters who
underwrite insurance, not an insurance company. A) I
only B) II only C) both I and II D) neither
I nor II

Answer: B

As an alternative to demutualizing, Big Mutual Insurance Company
reorganized itself into a corporate form that can directly or
indirectly own a stock insurance company. This form of organization is
called a(n)
A) holding company. B) shell company. C)
upstream company. D) downstream company.

Answer: A

All of the following are reasons why mutual insurance companies
convert to stock insurance companies EXCEPT
A) Stock companies can offer stock options to attract and
retain key personnel. B) Stock companies can raise new
capital more easily. C) Stock companies are exempt from
state insurance regulation. D) Stock companies offer
greater flexibility to expand through acquisitions.

Answer: C

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.

Answer: A

Which of the following statements is (are) true about savings bank
life insurance (SBLI)?
Each depositor at the savings bank receives life insurance
equal to his or her savings account balance. The goal of
SBLI is to provide low-cost life insurance to consumers. A)
I only B) II only C) both I and II D)
neither I nor II

Answer: B

Which of the following statements is true with regard to career life
insurance agents?
A) They represent several different life insurance
companies. B) They are compensated largely through a salary
and not through commissions. C) They are paid the same
commission rate on new and renewal business. D) The insurer
provides financing, training, supervision, and office facilities for
career agents.

Answer: D

Which of the following statements is true regarding independent
insurance agents in property and liability insurance?
A) The insurer owns the expiration rights, not the independent
agent. B) Independent agents are only permitted to represent
one insurance company. C) Independent agents are paid the
same commission rate on new and renewal business. D)
Independent agents are not permitted to sell life and health
insurance.

Answer: C

Marcy advises her clients on investments, taxes, wealth management,
estate issues, budgeting, and insurance. Marcy is also a licensed life
insurance agent. When Marcy sells life insurance to a client, the
distribution channel used is a(n)
A) stock broker. B) financial planner. C)
insurance broker. D) direct writer.

Answer: B

Which of the following statements is (are) true regarding insurance
agents and insurance brokers?
A property and liability insurance agent has the authority to
bind the insurer for certain types of coverage. 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

Answer: A

Big Life Insurance Company purchased Regional Bank. Regional Bank has
27 branches in four states. Big Life Insurance Company required one
employee at each bank branch to become a licensed life insurance agent
and to sell Big Life Insurance Company annuities and life insurance
products. This distribution channel is an example of the
A) career agent distribution system. B) direct
response distribution system. C) financial institution
distribution system. D) worksite marketing distribution
system.

Answer: C

The local franchise of a national bar and grill chain continued to
serve a drunk customer. The drunk customer tried to drive home. He hit
and killed two people who were riding bicycles. The representatives of
those who were killed filed a lawsuit against the national chain. As
jury awards in the area where the incident occurred are high, insurers
selling liquor liability insurance refused to issue new coverage until
the case was resolved. Because no admitted insurers sell the coverage,
liquor liability insurance in this case is considered a(n)
A) residual line. B) mandatory coverage. C)
orphan policy. D) surplus line.

Answer: D

Peggy is an independent insurance agent who places substantial
amounts of business with XYZ Insurance Company. XYZ pays Peggy a bonus
when she meets a sales goal. XYZ also allows Peggy to recruit and
train sub-agents. She receives additional commissions based on the
sales generated by the sub-agents. Based on this description, we can
conclude that Peggy is a
A) direct writer. B) personal producing general
agent. C) multiple line exclusive agent. D)
broker.

Answer: B

A reciprocal exchange is managed by a corporation that is authorized
to collect premiums, pay losses, invest funds, seek new members, and
perform other functions. This corporate manager is called a(n)
A) holding company. B) attorney-in-fact. C)
resident agent. D) captive manager.

Answer: B

A plan for selling individually underwritten property and liability
insurance to members of a group is called
A) direct response. B) multiple distribution.
C) niche marketing. D) mass merchandising.

Answer: D