The primary function of an actuary is to
A) adjust claims. B) determine premium rates.
C) negotiate reinsurance treaties. D) invest insurance
company assets.
Answer: B
Insurers obtain data that can be used to determine rates from
A) pricing pools. B) insurance advisory
organizations. C) banks. D) reciprocal
exchanges.
Answer: B
Which of the following statements about underwriting policy is (are) true?
A company must establish an underwriting policy consistent
with company objectives. 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) both I and II D) neither I nor
II
Answer: A
Which of the following statements about underwriting standards is
(are) true?
One purpose of underwriting standards is to reduce adverse
selection against the insurer. 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) both I and II D) neither I nor II
Answer: C
The underwriting process begins with the
A) agent. B) desk underwriter. C) inspection
report. D) actuary.
Answer: A
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.
Answer: D
If an underwriter suspects moral hazard, the underwriter may ask an
outside firm to investigate the applicant and make a detailed report
to the insurer. This report is called a(n)
A) inspection report. B) application. C)
M.I.B. report. D) agent's report.
Answer: A
One source of life and health insurance underwriting information is
an organization that life and health insurance companies can join. As
a member, life and health insurance companies report health
impairments of applicants, and this information is shared with member
companies. Although the information is shared, the underwriting
decision of the member company is not disclosed. What is this
organization called?
A) Fair Isaac Corporation (FICO) B) Medical
Information Bureau (MIB) C) National Association of
Insurance Commissioners (NAIC) D) National Association of
Mutual Insurance Companies (NAMIC)
Answer: B
Factors that may result in more restrictive underwriting decisions
include which of the following?
Inadequate rates. The unavailability of reinsurance
at favorable terms. A) I only B) II only
C) both I and II D) neither I nor II
Answer: C
Which of the following is a function of the marketing department of
an insurance company?
A) to settle claims after a loss has been reported B)
to determine the cost of products the insurer sells C) to
make final underwriting decisions D) to identify production
goals
Answer: D
Which of the following statements about claim settlement is (are) true?
The fair payment of claims requires an insurer to adopt a very
liberal claims policy. 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
Answer: D
Which of the following statements about claims settlement is true?
A) Agents are never authorized to settle claims. B)
Independent adjustors may be used in a geographic area where the
volume of business is too low for an insurer to have its own
adjustors. C) A public adjustor is a salaried employee who
works for one insurer. D) A staff claims representative is
hired by a policyholder to represent him or her if the policyholder
does not agree with the claim settlement offered by the
insurer.
Answer: B
Morgan was hired by an insurance company after she graduated from
college. Upon completion of a training program, Morgan was assigned to
a territory where she adjusts claims of the insurer�s policyowners.
Morgan is a(n)
A) public adjustor. B) staff claims
representative. C) agent. D) independent
adjustor.
Answer: B
All of the following statements about the settlement of a claim are
true EXCEPT
A) The insurance policy usually has a provision specifying how
a notice of loss is to be made to the insurance company. B)
One step in the investigation of a claim is to determine whether the
policy was in force when the loss occurred. C) The adjustor
must file the proof of loss, which is a sworn statement supporting
his or her decision regarding a claim. D) A policy
provision may determine how disputes over claim settlements are
resolved.
Answer: C
Which of the following statements about reinsurance is true?
A) A reinsurer may not purchase reinsurance. B) The
reinsurer is the first insurer that provides 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.
Answer: D
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.
Answer: A
The unearned premium reserve of an insurer is
A) an asset representing the investments made with premium
income. B) a liability representing the unearned portion of
gross premiums on outstanding policies. C) a liability
representing claims that have been filed, but not yet paid.
D) the portion of the insurer's net worth belonging to
policyowners.
Answer: B
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.
Answer: D
Which of the following statements about treaty reinsurance is true?
A) The reinsurer is required to underwrite each individual
applicant that is reinsured. B) The reinsurer must accept
all business that falls within the scope of the treaty. C)
The ceding insurer can choose which business falling within the
scope of the treaty it wishes to reinsure. D) It protects
the reinsurer by requiring the ceding insurer to charge adequate
premiums.
Answer: B
Which of the following statements about treaty reinsurance is true?
A) Under a surplus-share treaty, 100 percent of the ceding
insurer's liability must be transferred to the reinsurer.
B) Using a quota-share treaty increases the ceding insurer's
unearned premium reserve. C) Under an excess-of-loss
treaty, the reinsurer pays losses in full only if they are less than
the ceding insurer's retention limit. D) Using a
reinsurance pool provides financial capacity to write large amounts
of insurance.
Answer: D
Delta Insurance Company has a surplus-share treaty with Eversafe
Reinsurance. Delta has a retention limit of $200,000, and nine lines
of insurance are ceded to Eversafe. How much will Eversafe pay if a
$1,600,000 building insured by Delta suffers an $800,000 loss?
A) $600,000 B) $700,000 C) $720,000
D) $800,000
Answer: B
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.
Answer: C
All of the following statements about life insurance company
investments are true EXCEPT
A) Funds for these investments are derived primarily from
premium income, investment earnings, and maturing investments that
must be reinvested. B) Income from these investments
reduces the cost of insurance. C) A primary objective in
making these investments is safety of principal. D) The
majority of these investments are short-term investments.
Answer: D
Which of the following statements about the investments of property
and liability insurers is (are) true?
Income from investments is important in offsetting any
unfavorable underwriting experience. Because premium income
is continually being received, the investment objective of liquidity
is of little importance. A) I only B) II only
C) both I and II D) neither I nor II
Answer: A
Functions of an insurance company's legal department include which of
the following?
Lobbying for legislation favorable to the insurance
industry. Drafting policy provisions. A) I only
B) II only C) both I and II D) neither I nor
II
Answer: C
Jan is employed by an insurance company. She reviews applications to
determine whether her company should insure the applicant. If
insurable, Jan assigns the applicant to a rating category based on the
applicant's degree of risk. Jan is a(n)
A) underwriter. B) actuary. C) loss control
engineer. D) claims adjustor.
Answer: A
Mark has been an underwriter for 20 years. An application he recently
reviewed looked odd to him. The building value in the application
seemed far too high, and Mark suspected the applicant might be
planning to destroy the property after it is insured. Mark hired an
outside firm to investigate the applicant and to prepare a report
about the applicant. This report is called a(n)
A) agent's report. B) binder. C) physical
inspection. D) inspection report.
Answer: D
Antonio is a claims adjustor for LMN Insurance Company. After the
insurer is notified that there has been a loss, Antonio meets with the
insured. The first step in the claims process that Antonio should
follow is to
A) determine the amount of the loss. B) attempt to
deny the claim regardless of whether he believes the claim is
covered. C) verify that a covered loss has occurred.
D) delay paying the claim if the claim is covered.
Answer: C
Beverly lives in a sparsely populated area in northern Idaho. Some
insurance companies marketing coverage in northern Idaho cannot afford
to have full-time adjustors there. Several insurers hire Beverly to
adjust claims for their insureds. Beverly charges the insurers a fee
for each claim that she settles. Beverly is a(n)
A) public adjustor. B) adjustment bureau. C)
independent adjustor. D) company adjustor.
Answer: C
New Liability Insurance Company began operations last year and has
been very successful. The company's ability to grow is being
restricted by an accounting rule that requires insurers to realize
acquisition expenses immediately, while not realizing premiums
received as income until some time has passed. Reinsurance is often
used in such cases for which of the following purposes?
A) to stabilize profitability B) to reduce the
unearned premium reserve C) to provide protection against
catastrophic losses D) to withdraw from a line of business
or territory
Answer: B
Liability Insurance Company (LIC) was approached by a regional
airline to see if LIC would write the airline's liability coverage.
LIC agreed to write the coverage and entered into an agreement with a
reinsurer. Under the agreement, LIC retains 25 percent of the premium
and pays 25 percent of the losses, and the reinsurer receives 75
percent of the premium and pays 75 percent of the losses. This
reinsurance arrangement is best described as
A) excess-of-loss reinsurance. B) surplus-share
reinsurance. C) quota-share reinsurance. D) pool
reinsurance.
Answer: C
Ross studied engineering in college. After graduation, he went to
work for an insurance company. Ross visits properties insured by his
company. He conducts inspections and makes recommendations about alarm
systems, sprinkler systems, and building construction. In what
functional area does Ross work?
A) underwriting B) loss control C)
information systems D) claims adjusting
Answer: B
Amy heads the legal staff of a large property and liability insurance
company. Amy's staff is likely involved in which of the following activities?
A) reviewing investment options for the insurer's assets
B) reviewing language and policy provisions in insurance
contracts C) calculating premiums to be charged for the
insurer's products D) reviewing applications to determine
if the company should insure the risk
Answer: B
Sue double-majored in mathematics and statistics in college. She also
enrolled in a number of finance courses. After graduation, she was
hired by Econodeath Insurance Company. Her job is to calculate premium
rates for life insurance coverages. Sue is a(n)
A) actuary. B) underwriter. C) claims
adjustor. D) producer.
Answer: A
Easy Pay Insurance Company may require insureds who suffer a loss to
submit a sworn statement to substantiate that a loss occurred and to
describe the conditions under which the loss occurred. This sworn
statement is called a(n)
A) binder. B) proof of loss. C) inspection
report. D) notice of loss.
Answer: B
All of the following are methods that a property and liability
insurance company can use to protect against catastrophic losses EXCEPT
A) sale of catastrophe bonds. B) purchase of common
stock. C) purchase of excess-of-loss reinsurance. D)
quota share reinsurance with a low retention percentage.
Answer: B
Which of the following statements is (are) true with respect to
catastrophe bonds?
The bonds are issued by the U.S. Government. The
bonds have relatively high interest (coupon) rates. A) I
only B) II only C) both I and II D) neither
I nor II
Answer: B
Pac-Coast Insurance (PCI) concentrates its underwriting activities in
California. The company is concerned that if a catastrophic earthquake
occurs, it might threaten the solvency of the company. To address this
risk, PCI issued some debt securities. If a catastrophic earthquake
occurs, PCI does not have to repay the full amount borrowed or pay
interest. The securities PCI issued are called
A) catastrophe futures contracts. B) interest rate
swaps. C) catastrophe bonds. D) contingent options
contracts.
Answer: C
The process of transferring risk to the capital markets through the
use of financial instruments such as bonds, futures contracts, and
options is known as
A) consolidation of risk. B) avoidance of risk.
C) securitization of risk. D) compartmentalization of
risk.
Answer: C
Which of the following statements is (are) true about life insurance
company investments?
The majority of life insurance company general account assets
are invested in bonds. The majority of life insurance
company separate account assets are invested in stocks. A)
I only B) II only C) both I and II D)
neither I nor II
Answer: C
One method through which reinsurance is provided is through an
organization of insurers that underwrites insurance on a joint basis.
Through the organization, financial capacity is available for large
commercial risks. This reinsurance arrangement is a(n)
A) quota-share treaty. B) surplus-share treaty.
C) excess-of-loss treaty.
D) reinsurance pool
Answer: D
Most insurance companies require their marketing representatives to
submit an evaluation of the prospective insured. This important source
of underwriting information is called the
A) application. B) agent's report. C)
inspection report. D) physical inspection.
Answer: B
Catastrophe bonds are made available to institutional investors in
the capital markets through an entity that is specially created for
that purpose. This is entity is called a
A) risk retention group. B) fraternal insurance
company. C) captive insurance company. D) special
purpose reinsurance vehicle.
Answer: D
Which of the following statements is true regarding the information
systems functional area of an insurance company?
Computers and information systems are able to perform some
tasks that previously were performed directly by employees.
Information systems can speed the processing of policies by
insurers. A) I only B) II only C) both I
and II D) neither I nor II
Answer: C
The price per unit of insurance is called the
A) premium. B) loss adjustment expense. C)
rate. D) loss reserve.
Answer: C
When a fraternal insurer began operations, it asked each member,
regardless of age, to pay $20 per month to the fraternal's group life
insurance plan. In exchange, each member received the same amount of
life insurance. Soon younger members of the group began to drop out
when they realized their premiums were subsidizing a group with a
higher chance of loss. Which important underwriting principle was
violated in this case?
A) An underwriting profit should be attained. B)
Moral hazard should be avoided. C) Insureds should be
selected according to underwriting standards. D) There
should be equity among policyholders.
Answer: D
ABC Insurance Company entered into a reinsurance agreement with XYZ
Reinsurance. Under the contract, XYZ Re has no liability unless ABC's
loss ratio exceeds 85 percent for the year. XYZ Re agreed to pay all
losses in excess of the 85 percent loss ratio. ABC Insurance Company
is using reinsurance to
A) stabilize profits. B) reduce the unearned premium
reserve. C) provide large risk capacity. D) retire
from a line or territory.
Answer: A
Granite Insurance Company entered into a treaty reinsurance agreement
with Rock Solid Reinsurance (RSR). Granite's retention limit is
$400,000 and RSR agreed to provide reinsurance for up to $2.0 million.
If Granite writes an $800,000 policy, RSR is responsible for 50
percent of the losses. If Granite insures a $1.6 million risk, RSR is
responsible for 25 percent of any losses. What type of reinsurance
arrangement did Granite enter into with RSR?
A) facultative reinsurance B) surplus share
reinsurance C) quota share reinsurance D) excess of
loss reinsurance
Answer: B
State insurance regulators require LMN Life Insurance Company to
maintain a separate account. The assets in the separate account would
support the liabilities for which of the following products?
A) term life insurance B) whole life insurance
C) fixed annuity D) variable life insurance
Answer: D
Gwen is in charge of accounting at Integrity Insurance Company.
Integrity is a publicly-traded insurer. In describing her job, Gwen
said, "There aren't too many businesses where you are required to
keep two sets of books." Gwen's comment most likely refers to her company
A) preparing accounting statements using statutory and GAAP
accounting. B) preparing one set of records for the insurer's
managers and another set for the policyholders. C)
preparing one set of books using dishonest values and another set
using current market values. D) preparing one set of
accounting statements considering investment income and another set
of accounting statements not considering investment income.
Answer: A
In a reinsurance transaction, the ceding commission is paid by
A) the insured to the ceding company. B) the
reinsurer to the ceding company. C) the ceding company to
the insured. D) the ceding company to the reinsurer.
Answer: B
A highly specialized technician who provides local agents in the
field with technical help and assistance with marketing problems is
called a(n)
A) general agent. B) actuary. C) Certified
Financial Planner. D) special agent.
Answer: D