Reasons for regulation of insurance include which of the following?
Maintaining insurer solvency Ensuring reasonable
rates A) I only B) II only C) both I and
II D) neither I nor II
Answer: C
The right of the states to regulate the business of insurance was
first established by
A) the South-Eastern Underwriters Association case.
B) the case of Paul v. Virginia. C) the
Financial Modernization Act. D) the Sherman Act.
Answer: B
The basis for current state regulation of insurance is
A) the McCarran-Ferguson Act. B) Paul v.
Virginia. C) the South-Eastern Underwriters Association
case. D) the National Association of Insurance
Commissioners.
Answer: A
All of the following statements about the methods of regulating
insurance are true EXCEPT
A) All states have insurance laws that regulate the operations
of insurers. B) Insurers are totally exempt from regulation
by federal agencies and laws. C) The courts regulate
insurance in many ways, including the interpretation of policy
clauses and provisions. D) State insurance commissioners,
through administrative rulings, have considerable power over
insurers doing business in their states.
Answer: B
Which of the following statements about the licensing of insurance
companies is (are) true?
A new capital stock insurer must meet minimum capital and
surplus requirements, which vary by state and line of
insurance. The licensing requirements for insurance companies
are less stringent than those imposed on most other types of
firms. A) I only B) II only C) both I and
II D) neither I nor II
Answer: A
An insurance company incorporated in another state has been licensed
to operate in your state. In your state, the insurer would be
considered a(n)
A) nonadmitted insurer. B) foreign insurer.
C) alien insurer. D) reciprocal insurer.
Answer: B
An insurance company chartered in another country has been licensed
to operate in your state. In your state, the insurer would be
considered a(n)
A) nonadmitted insurer. B) foreign insurer.
C) alien insurer. D) reciprocal insurer.
Answer: C
Which of the following is considered a nonadmitted asset for an insurer?
A) cash B) preferred stocks C) real
estate D) office furniture
Answer: D
The policyholders' surplus of an insurer is defined as the difference
between its
A) assets and its liabilities. B) premium income and
its expenses. C) reserves and its liabilities. D)
assets and its nonadmitted assets.
Answer: A
Which of the following statements about the use of risk-based capital
requirements is (are) true?
Insurers must have a certain amount of capital depending on
the riskiness of their investments and insurance operations.
Insurers may be required to take certain actions depending on
how much capital they have relative to their risk-based capital
requirements. A) I only B) II only C) both
I and II D) neither I nor II
Answer: C
Which of the following statements about the regulation of insurance
company investments is (are) true?
The purpose of regulating insurance company investments is to
prevent insurers from making unsound investments which could
threaten their solvency. Life insurers can invest an
unlimited amount of their assets in common stocks. 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 regulation of life
insurance companies is (are) true?
The percentage of assets a life insurance company may invest
in a specific type of asset (e.g., stocks or bonds) is generally
limited by law. The purpose of limiting the accumulation of
surplus is to prevent an insurer from increasing its surplus at the
expense of policyowner dividends. A) I only B) II
only C) both I and II D) neither I nor II
Answer: C
Which of the following statements about state insurance guaranty
funds is (are) true?
They limit the amount that policyholders can collect if an
insurer becomes insolvent. They are usually funded by
general revenues of the states. A) I only B) II
only C) both I and II D) neither I nor II
Answer: A
Under one type of rate regulation, insurers do not have to register
their rates with state regulatory authorities. However, insurers may
be required to furnish rate schedules and supporting data to state
officials. A fundamental assumption underlying this type of rating law
is that market forces will determine the price and availability of
insurance, rather than discretionary acts of regulators. This type of
rate regulation is called
A) a flex-rating law. B) a prior-approval law.
C) a file-and-use law. D) no filing required.
Answer: D
Under what type of rate regulation are insurers required to obtain
approval of rates before using them if the rate change exceeds a
specified predetermined range?
A) flex-rating law B) prior-approval law C)
file-and-use law D) use-and-file law
Answer: A
By misrepresenting the true facts, Gretchen was able to convince
someone to replace an existing life insurance policy with another
company and to purchase a new policy from the company that Gretchen
represents. Gretchen has engaged in an illegal sales practice called
A) bait and switch. B) rebating. C)
retaliating. D) twisting.
Answer: D
Which of the following statements about premium taxes is (are) true?
They are levied by the federal government as a result of the
McCarran-Ferguson Act. Their primary purpose is to provide
funds for insurance regulation. A) I only B) II
only C) both I and II D) neither I nor II
Answer: D
Which of the following is an advantage of federal regulation of
insurance over state regulation of insurance?
A) greater opportunity for innovation B) more
effective treatment of systemic risk C) greater
responsiveness to local needs D) more competent
regulators
Answer: B
Which of the following is an advantage of state regulation of
insurance over federal regulation of insurance?
A) uniformity of laws B) greater efficiency
C) more effective in negotiating international agreements
pertaining to insurance D) quicker response to local
insurance problems
Answer: D
A shortcoming of state regulation of insurance according to
Congressional committees and the General Accounting Office is that
state regulation
A) leads to decentralized governmental power. B)
provides opportunities for innovation. C) provides
inadequate consumer protection. D) is more responsive to
local needs.
Answer: C
The major reasons for insurer insolvency include which of the following?
Inadequate pricing and loss reserves Rapid growth and
inadequate surplus A) I only B) II only
C) both I and II D) neither I nor II
Answer: C
Which of the following is a principal method of ensuring the solvency
of insurers?
A) requiring submission of annual financial statements to
state regulators B) tracking and investigating market
conduct complaints against insurers C) disciplining agents
of the insurer for illegal sales practices D) regulating
the forms (applications and policies) employed by the insurer
Answer: A
The number of title insurance companies operating in State Z is
relatively low. Recently, the largest of these companies (50 percent
market share) acquired the second largest company (30 percent market
share). Immediately after the acquisition, the insurer raised premiums
by 75 percent. This scenario demonstrates which of the following
rationales for the regulation of insurance?
A) maintain insurer solvency B) prohibit unfair sales
practices by agents C) ensure reasonable rates D)
make insurance available
Answer: C
In which of the following did the Court decide that insurance was
interstate commerce when conducted across state lines, and therefore
was subject to federal regulation?
A) Paul v. Virginia B) South-Eastern
Underwriters Association case C) McCarran-Ferguson Act
D) Financial Modernization Act
Answer: B
A life insurance company based in Canada was licensed to operate in
Massachusetts. When operating in Massachusetts, the Canadian insurer
would be considered a(n)
A) domestic insurer. B) captive insurer. C)
foreign insurer. D) alien insurer.
Answer: D
XYZ Mutual Insurance Company has total assets of $10 million. The
policyholders' surplus is $2 million. What are XYZ Mutual's total liabilities?
A) $4.0 million B) $8.0 million C) $10.0
million D) $12.0 million
Answer: B
Mutual Property Insurance Company has a surplus of $2 million.
According to a conservative rule, how much in new net premiums can
Mutual Property Insurance Company safely write?
A) $2 million B) $8 million C) $10
million D) $20 million
Answer: A
Fly-By-Night Insurance Company had much larger losses than forecast.
The company did not charge adequate premiums nor did the company
purchase reinsurance. If Fly-By-Night becomes insolvent, which of the
following will help pay the unpaid claims of the insurer?
A) guaranty fund B) premium rebates C)
risk-based capital D) admitted assets
Answer: A
Grace is a life insurance agent. She is attempting to sell a large
life insurance policy, but the prospective purchaser is having second
thoughts. To persuade the prospective purchaser, Grace said, "I
will earn a $1,000 commission if you buy this policy. I'll give you
$500 of my commission if you buy the policy." In most states,
what illegal sales practice will Grace be guilty of if she splits her
commission with the purchaser?
A) rebating B) churning C) twisting
D) backdating
Answer: A
State X's premium tax rate is 2 percent. State Y's premium tax rate
is 3 percent. State X insurers are required to pay the 3 percent rate
on business written in State Y. State X requires insurers from State Y
to pay a 3 percent premium tax on business written in State X, even
though the premium tax rate is only 2 percent in State X. This
practice is known as a
A) tax tariff. B) guaranty fund assessment.
C) risk-based capital requirement. D) retaliatory tax
law.
Answer: D
ABC Insurance Company would like to purchase a bank. For many years,
ABC was not permitted under federal law to enter into banking
operations. Which of the following legislative acts eliminated the
prohibition that prevented banks, insurers, and investment firms from
entering into one another's markets?
A) The McCarran-Ferguson Act B) The Tax Reform
Act C) The Consolidated Omnibus Budget Reconciliation
Act D) The Financial Modernization Act (Gramm-Leach-Bliley
Act)
Answer: D
Under one type of rating law, insurers are free to change rates and
to use modified rates immediately. However, the new rate must be filed
with regulators within a specified period, such as 60 days after the
modified rate is employed. This type of rating law is called
A) prior approval. B) file-and-use. C)
use-and-file. D) flex rating.
Answer: C
The regulation of insurers in areas that affect consumers, which
include claims handling, underwriting, complaints, advertising, sales
practices, and other trade practices is called
A) solvency surveillance. B) market conduct
regulation. C) combined ratio analysis. D) market
share regulation.
Answer: B
The National Association of Insurance Commissioners (NAIC)
administers an "early warning system" to help ensure
insurance company solvency. This system uses data provided in the
annual statement to identify companies that may pose a solvency risk.
This early warning system is called
A) the risk-based capital requirements. B) an
insurance guaranty fund. C) the Insurance Regulatory
Information System (IRIS). D) the assessment method.
Answer: C
Which of the following statements is (are) true regarding the quality
of insurance regulation?
The quality of insurance regulation is uniform from state to
state. All evidence suggests federal regulation of insurance
would improve the quality of regulation. A) I only
B) II only C) both I and II D) neither I nor
II
Answer: D
Which of the following statements concerning the proposed optional
federal charter for life insurers is (are) true?
Large insurers operating in many states would more likely
prefer a state charter while smaller, regional, insurers would more
likely choose a federal charter. Proponents of the federal
charter argue that it would speed the development and approval of
new products. A) I only B) II only C)
both I and II D) neither I nor II
Answer: B
Which of the following is a method used to help ensure the solvency
of insurers?
A) commercial lines deregulation B) risk-based
capital standards C) use of credit-based insurance
scores D) use of no filing required rating laws
Answer: B
A score derived from an individual's credit history and other factors
that is used by many auto and homeowners insurers for underwriting and
rating purposes is called a(n)
A) CLUE score. B) insurance score. C)
expense ratio score. D) combined ratio score.
Answer: B
All of the following are arguments in favor of using an applicant's
credit record in personal lines underwriting EXCEPT
A) Most consumers have good credit records and benefit when
credit history is used as a rating factor. B) Use of credit
data in underwriting and rating eliminates price discrimination
against minority groups when they purchase insurance. C)
Underwriting and rating may be more consistent if applicants' credit
histories are considered. D) There is high correlation
between an applicant's credit record and future claims
experience.
Answer: B
All of the following statements about insurance regulation are true EXCEPT
A) Insurance commissioners are appointed in some states and
elected in some states. B) Insurers are subject to
regulation by certain federal agencies and laws. C) The
National Association of Insurance Commissioners (NAIC) can force
states to adopt the model laws that it drafts. D) An
insurance commissioner can revoke or suspend an insurer's license to
do business in his or her state.
Answer: C
A systemic risk is a risk that
A) can be eliminated through diversification. B) can
be the cause of the collapse of an entire system. C) can be
insured privately. D) can be easily contained so that it
does not spread.
Answer: B
The purpose of the Financial Analysis Solvency Tracking (FAST) system
employed by the NAIC is to
A) prioritize insurance companies for additional regulatory
action. B) quicken the approval of rates in prior approval
states. C) speed-up the claims settlement process for
insurers charged with delaying claims payments. D) quickly
address market conduct complaints by consumers.
Answer: A
To correct abuses in the financial services industry, Congress passed
an Act in 2010 that included numerous provisions to reform the
financial services industry. This Act was the
A) Financial Modernization Act. B) McCarran-Ferguson
Act. C) Dodd-Frank Act. D) Biggert-Waters Act.
Answer: C
One provision of the Dodd-Frank Act was creation of the Financial
Stability Oversight Council. This council is charged with identifying
nonbank financial companies that could increase the risk of collapse
of the entire financial system. This risk is called
A) market risk. B) systemic risk. C)
diversifiable risk. D) enterprise risk.
Answer: B
The Dodd-Frank Act created a federal body with some limited
regulatory authority. For example, the organization can represent the
federal government in international negotiations regarding insurance
and it can preempt state law where it conflicts with negotiated
international agreements. This body is called the
A) National Insurance Bureau. B) Federal Office of
Insurance. C) Department of International Insurance.
D) International Insurance Bureau.
Answer: B
Which of the following is authority given to the Federal Insurance
Office created by the Dodd-Frank Act?
A) to represent the federal government in international
discussions of insurance regulation B) to license and
charter new insurance companies that plan to operate nationally
C) to be the primary monitor of insurance company solvency
D) to be the primary regulator of all aspects of insurance
Answer: A
One method of ensuring the solvency of insurers is a periodic review,
every three to five years, of insurers that operate on a multistate
basis. This review is coordinated by the NAIC. This review is called a(n)
A) annual report. B) early warning system.
C) field examination. D) inspection report.
Answer: C
The major argument in favor of an optional federal charter for
insurers is that
A) small insurers need a national charter to be competitive
with large insurers. B) a federal charter will prevent
insurer insolvencies. C) a federal charter will provide
greater oversight of insurer market practices. D) national
insurers are at a competitive disadvantage under the present
system.
Answer: D
The risk-based capital requirements for life insurers are based on a
formula that considers four types of risk. One risk reflects whether
the insurer will have enough surplus if claims are higher than
expected. This risk is called
A) asset risk. B) insurance risk. C)
interest rate risk. D) business risk.
Answer: B
The risk-based capital requirements for life insurers are based on a
formula that considers four types of risk. One risk reflects a range
of uncertainties that life insurers face including such things as bad
management decisions and guaranty fund assessments. This risk is called
A) asset risk. B) insurance risk. C)
interest rate risk. D) business risk.
Answer: D
Liability items on an insurer�s balance sheet that reflect
obligations that must be met in the future are called
A) pre-paid expenses. B) reserves. C)
surplus. D) nonadmitted assets.
Answer: B