1) 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
C) Stockholders bear any losses and share in any profits.
2) 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
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3) 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
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4) 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 c
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5) 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 discrim
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6) Which of the following statements about reciprocal exchanges is (are) true?
I. Reciprocal exchanges usually specialize in health insurance.
II. Reciprocal exchanges are unincorporated mutual insurance companies.
A) I only
B) II only
C) both I and II
D)
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7) 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)
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8) 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
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9) Which of the following statements about insurance brokers is (are) true?
I. They legally represent the insured rather than the insurance company.
II. They are prohibited from being licensed as agents.
A) I only
B) II only
C) both I and II
D) neither I
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10) 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
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11) 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) Independ
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12) Which of the following statements about personal producing general agents is (are) true?
I. They often have the option of recruiting and training sub-agents.
II. They are independent agents who produce substantial amounts of life insurance with one in
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13) Advantages of the direct response system for marketing life insurance include which of the following?
I. Advertising can be specifically directed to selected markets.
II. Complex products can be easily sold.
A) I only
B) II only
C) both I and II
D) ne
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14) 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 exc
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15) 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 rig
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16) 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
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17) Which of the following statements about the sale of property and liability insurance through the direct response system is (are) true?
I. Selling expenses are higher because market segmentation tends to be less precise than with other marketing method
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18) 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-in
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19) 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)
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20) 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 abl
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21) 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 a
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22) 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) hea
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23) 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 write
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24) 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
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25) 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 in
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26) 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
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27) ABC Term Life Insurance Company uses an interesting marketing system�it 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 In
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28) 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 f
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29) 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 t
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30) 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 s
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31) 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 me
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32) Which of the following statements about Blue Cross and Blue Shield plans is (are) true?
I. Blue Cross and Blue Shield plans can be organized on a nonprofit basis or on a for-profit basis.
II. Blue Cross provides coverage for hospital services; Blue Sh
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33) Which of the following statements about Lloyds of London (are) true?
I. The majority of the business underwritten by Lloyds of London is for unusual risks, such as valuable race horses and professional athletes.
II. Lloyds of London is a group of unde
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34) 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)
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35) 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
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36) 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
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37) Which of the following statements is (are) true about savings bank life insurance (SBLI)?
I. Each depositor at the savings bank receives life insurance equal to his or her savings account balance.
II. The goal of SBLI is to provide low-cost life insur
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38) 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 sam
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39) 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 insur
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40) 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 bro
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41) Which of the following statements is (are) true regarding insurance agents and insurance brokers?
I. A property and liability insurance agent has the authority to bind the insurer for certain types of coverage.
II. A licensed broker who is not a licen
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42) 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 ann
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43) 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 agai
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44) 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 commissio
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45) 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) reside
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46) 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
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1) 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
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2) 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
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3) Which of the following statements about underwriting policy is (are) true?
I. A company must establish an underwriting policy consistent with company objectives.
II. Underwriting policy is usually subjective and allows the underwriter considerable flex
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4) Which of the following statements about underwriting standards is (are) true?
I. One purpose of underwriting standards is to reduce adverse selection against the insurer.
II. Equitable rates should be charged so that each group of policyowners pays its
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5) The underwriting process begins with the
A) agent.
B) desk underwriter.
C) inspection report.
D) actuary.
Answer: A
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6) 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
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7) 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 repor
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8) 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 sha
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9) Factors that may result in more restrictive underwriting decisions include which of the following?
I. Inadequate rates.
II. 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
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10) 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
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11) Which of the following statements about claim settlement is (are) true?
I. The fair payment of claims requires an insurer to adopt a very liberal claims policy.
II. To prevent lawsuits, an insurer should provide no personal assistance to a claimant ot
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12) 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 adjust
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13) 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 cl
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14) 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 d
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15) 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
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16) 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
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17) 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 b
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18) 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.
Answ
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19) 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 ced
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20) 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 unear
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21) 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 $
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22) 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-shar
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23) 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 th
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24) Which of the following statements about the investments of property and liability insurers is (are) true?
I. Income from investments is important in offsetting any unfavorable underwriting experience.
II. Because premium income is continually being re
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25) Functions of an insurance company's legal department include which of the following?
I. Lobbying for legislation favorable to the insurance industry.
II. Drafting policy provisions.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
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26) 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) underw
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27) 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
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28) 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
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29) 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 cha
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30) 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 pr
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31) 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 per
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32) 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 cons
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33) 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
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34) 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
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35) 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
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36) 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
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37) Which of the following statements is (are) true with respect to catastrophe bonds?
I. The bonds are issued by the U.S. Government.
II. The bonds have relatively high interest (coupon) rates.
A) I only
B) II only
C) both I and II
D) neither I nor II
An
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38) 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.
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39) 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) compartmentalizati
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40) Which of the following statements is (are) true about life insurance company investments?
I. The majority of life insurance company general account assets are invested in bonds.
II. The majority of life insurance company separate account assets are in
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41) 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
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42) 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 i
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43) 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 insuran
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44) Which of the following statements is true regarding the information systems functional area of an insurance company?
I. Computers and information systems are able to perform some tasks that previously were performed directly by employees.
II. Informat
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45) The price per unit of insurance is called the
A) premium.
B) loss adjustment expense.
C) rate.
D) loss reserve.
Answer: C
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46) 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 gro
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47) 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 rati
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48) 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 r
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49) 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
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50) 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 r
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51) 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
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52) 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
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1) LMN Mutual Insurance Company has total liabilities of $300 million. The company has total assets of $380 million. What is LMN's policyholders' surplus?
A) $680 million
B) $340 million
C) $80 million
D) -$80 million
Answer: C
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2) Which of the following would not appear in the asset section of an insurance company's balance sheet?
A) loss reserves
B) bonds
C) common stock
D) real estate
Answer: A
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3) Under one method of estimating a loss reserve, the reserve is based on life expectancy, duration of disability, and similar factors. This method of estimating loss reserves is called the
A) judgment method.
B) tabular value method.
C) loss ratio method
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4) Reasons for the unearned premium reserve include which of the following?
I. To pay losses that occur during the policy period.
II. To pay premium refunds to policyholders in the event of cancellation.
A) I only
B) II only
C) both I and II
D) neither I
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5) A property and casualty insurer's loss reserve includes estimates for all of the following EXCEPT
A) claims anticipated but not yet incurred.
B) claims reported and adjusted but not yet paid.
C) claims reported and filed but not yet adjusted.
D) claims
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6) Which of the following statements about methods for estimating loss reserves for property and casualty insurers is (are) true?
I. The judgment method involves the use of a statutory formula to estimate the loss reserve.
II. The average value method is
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7) One item that appears on an insurance company's financial statements is a liability that represents an estimate of the claims reported and adjusted but not yet paid, claims reported and filed but not yet adjusted, and claims incurred but not yet report
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8) A loss reserve established for each individual claim when it is reported to a property and casualty insurance company is call a(n)
A) admitted asset.
B) incurred-but-not-reported (IBNR) reserve.
C) unearned premium reserve.
D) case reserve.
Answer: D
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9) Which of the following items would appear in the income section of an insurance company's income and expense statement?
A) underwriting expense
B) bonds
C) loss reserves
D) premiums
Answer: D
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10) JKL Insurance Company reported the following information on its accounting statements last year:
Premiums Written $90,000,000
Loss Adjustment Expenses $5,000,000
Underwriting Expenses $30,000,000
Premiums Earned $100,000,000
Incurred Losses $70,000,00
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11) JKL Insurance Company reported the following information on its accounting statements last year:
Premiums Written $90,000,000
Loss Adjustment Expenses $5,000,000
Underwriting Expenses $30,000,000
Premiums Earned $100,000,000
Incurred Losses $70,000,00
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12) JKL Insurance Company reported the following information on its accounting statements last year:
Premiums Written $90,000,000
Loss Adjustment Expenses $5,000,000
Underwriting Expenses 30,000,000
Premiums Earned $100,000,000
Incurred Losses $70,000,000
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13) Which of the following statements about property and casualty insurance company operating results is (are) true?
I. An insurance company can have a combined ratio greater than 1 (or 100 percent) and still be required to pay income taxes.
II. By all me
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14) Life insurance policyholders may borrow the cash value from their life insurance policies. Where are life insurance policy loans shown on a life insurance company's financial statements?
A) as an asset
B) as a liability
C) as income
D) as an expense
A
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15) MedProf Insurance markets medical malpractice insurance. The company's combined ratio in 2015 was 95.4. Its expense ratio was 25.4. What was the company's loss ratio?
A) 60.4
B) 70.0
C) 88.2
D) 120.8
Answer: B
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16) To protect policyholders, state laws place limitations on a life insurance company's investments. The assets backing interest-sensitive products, such as variable life insurance and variable annuities, are not subject to these restrictions. Assets bac
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17) Which of the following statements is (are) true concerning investments of property and casualty insurers and life insurers?
I. Property and casualty insurance companies place greater emphasis on liquidity than do life insurers.
II. Life insurance comp
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18) Which of the following is an expense for a life insurance company?
A) loss reserves
B) death benefits paid to a beneficiary
C) unrealized capital gains
D) realized capital gains
Answer: B
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19) All of the following statements about business objectives in designing a rating system are true EXCEPT
A) The rating system should encourage loss control activities.
B) The rating system should be independent of long-run changes in economic conditions
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20) All of the following statements about regulatory objectives of insurance rate making are true EXCEPT
A) One purpose of rate adequacy is to maintain the solvency of insurers.
B) Rates unfairly discriminate if loss exposures that are similar with respec
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21) The unit of measurement used in property and casualty insurance pricing is called the
A) unit rate.
B) premium.
C) exposure unit.
D) experience unit.
Answer: C
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22) The portion of an insurance premium allocated to expenses, profit, and a margin for contingencies is called the
A) loading.
B) pure premium.
C) gross premium.
D) experience rate.
Answer: A
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23) Which of the following statements about judgment rating is true?
A) It involves the manual rating of exposures.
B) It is used when the loss exposures are so diverse that a class rate cannot be calculated.
C) It is a form of experience rating.
D) It is
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24) Under one type of merit rating, the class or manual rate is adjusted upward or downward based on past loss history. This type of merit rating is called
A) schedule rating.
B) judgment rating.
C) experience rating.
D) retrospective rating.
Answer: C
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25) All of the following statements about class rating are true EXCEPT
A) Exposures with similar characteristics are placed in the same underwriting class.
B) The rate charged for each class reflects the average loss experience for that class.
C) The comp
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26) Ratemakers at ABC Insurance Company calculated the pure premium to be $280 for a risk they were considering insuring. What is the gross rate for this risk, assuming a 30 percent expense ratio?
A) $364
B) $400
C) $430
D) $520
Answer: B
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27) Which of the following statements is (are) true about the loss ratio method of class rating?
I. The pure premium is calculated, and it is loaded to cover expenses, profit, and contingencies.
II. The actual loss ratio is compared to the expected loss r
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28) Which of the following statements about schedule rating is (are) true?
I. It involves the determination of a basis rate for each exposure, which is then modified by credits or debits.
II. It is based on the assumption that certain physical characteris
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29) Which of the following statements about experience rating is (are) true?
I. The insured's past loss experience is used to determine the premium for the next policy period.
II. Its use is generally limited to small firms whose actual experience lacks c
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30) Which of the following statements about retrospective rating is true?
A) The premium for the current period is determined by the loss experience in prior periods.
B) The premium for the current period is determined by the loss experience during the cu
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31) Monopoly Insurance is the only company marketing a certain line of insurance in a state. After complaints from several consumers, the State Insurance Department investigated Monopoly's rates. The regulators determined that Monopoly was taking advantag
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32) Small Town used to be just that�a small town 6 miles from Large City. Over the years, the area between Small Town and Large City has developed, and now Small Town is part of the suburbs surrounding Large City. An auto insurer that operated in the area
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33) Nathan was hired as an actuary with ABC Insurance. Nathan was asked to calculate the annual premium for a new product and to explain his calculations to ABC's director of ratemaking. Nathan calculated the pure premium and presented this value as the f
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34) XYZ Insurance Company expects $500,000 in claims and loss adjustment expenses for each 1,000 properties that it insures in a certain category of business insurance. What pure premium should XYZ charge for each property insured?
A) $69.99
B) $166.67
C)
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35) XYZ Insurance Company uses class rating to determine the rate to charge for insurance. For one type of insurance, the pure premium XYZ actuaries calculated is $75 per unit. If XYZ's expense ratio is 25 percent, what is the gross rate for this coverage
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36) A manufacturing company just hired a new risk manager, and she has instituted several employee safety programs. She has persuaded the insurer writing the company's workers compensation insurance to base the premium on the company's actual loss experie
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37) An Econodeath Insurance Company actuary calculated the present value of the expected death claim the company will pay if it sells whole life insurance to a 30-year-old woman. This value is called the
A) net level premium.
B) gross premium.
C) net sing
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38) Which of the following statements concerning regulatory objectives of rate making is (are) true?
I. Rates must not be unfairly discriminatory.
II. Rates must be adequate.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
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39) Which of the following statements about the combined ratio is true?
A) It is equal to the loss ratio minus the expense ratio.
B) A combined ratio greater than 1 (or 100 percent) means an underwriting loss has occurred.
C) The combined ratio considers
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40) In schedule rating, each building is individually evaluated based on several rating factors. One factor refers to the possibility that the building will be damaged or destroyed by a fire that starts at an adjacent property and spreads to the building.
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41) A strip-mall includes eight identical-sized retail units. All of the units were built at the same time and each has an identical sprinkler system. Unit number two is a dry cleaning business. Unit number three is a bar and grill. Unit number four is a
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42) A property and liability insurance company's loss reserve and unearned premium reserve are
A) assets.
B) liabilities.
C) income.
D) expenses.
Answer: B
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43) In schedule rating, each building is individually rated on several factors. One factor refers to the quality of the city's water supply and fire department, and the risk control devices installed in the building. This factor is called
A) exposure.
B)
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44) A property and liability insurance company's loss ratio and expense ratio, respectively, for 2013 - 2015 were:
2013: 74% 31%
2014: 68% 33%
2015: 66% 30%
Which of the following statements is true about the company's underwriting results for this time p
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45) One liability on a property and liability insurance company's balance sheet is for the costs associated with settling and paying reserved claims. This liability is the
A) pre-paid expense reserve.
B) loss reserve.
C) unearned premium reserve.
D) loss
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46) The assets of a property and liability insurance company are primarily
A) investments such as stocks and bonds.
B) loss reserves.
C) plant and equipment.
D) premiums paid by policyholders.
Answer: A
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47) ABC Insurance Company's investment income ratio last year was 4.2 percent. The company's combined ratio last year was 102.6 percent. What was ABC's overall operating ratio?
A) 96.8 percent
B) 98.4 percent
C) 103.2 percent
D) 106.8 percent
Answer: B
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47) One life insurance company reserve is designed to smooth the company's reported surplus over time by absorbing fluctuations in security prices that are not attributable to changing interest rates. This reserve is called the
A) asset write-off reserve.
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1) Reasons for regulation of insurance include which of the following?
I. Maintaining insurer solvency
II. Ensuring reasonable rates
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
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2) 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
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3) 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
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4) 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 co
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5) Which of the following statements about the licensing of insurance companies is (are) true?
I. A new capital stock insurer must meet minimum capital and surplus requirements, which vary by state and line of insurance.
II. The licensing requirements for
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6) 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
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7) 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
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8) 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
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9) 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
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10) Which of the following statements about the use of risk-based capital requirements is (are) true?
I. Insurers must have a certain amount of capital depending on the riskiness of their investments and insurance operations.
II. Insurers may be required
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11) Which of the following statements about the regulation of insurance company investments is (are) true?
I. The purpose of regulating insurance company investments is to prevent insurers from making unsound investments which could threaten their solvenc
...
12) Which of the following statements about the regulation of life insurance companies is (are) true?
I. 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.
II. The
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13) Which of the following statements about state insurance guaranty funds is (are) true?
I. They limit the amount that policyholders can collect if an insurer becomes insolvent.
II. They are usually funded by general revenues of the states.
A) I only
B)
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14) 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
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15) 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:
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16) 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
...
17) Which of the following statements about premium taxes is (are) true?
I. They are levied by the federal government as a result of the McCarran-Ferguson Act.
II. Their primary purpose is to provide funds for insurance regulation.
A) I only
B) II only
C)
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18) 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
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19) 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 resp
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20) 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 inadequ
...
21) The major reasons for insurer insolvency include which of the following?
I. Inadequate pricing and loss reserves
II. Rapid growth and inadequate surplus
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
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22) 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 agen
...
23) 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 in
...
24) 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-Fe
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25) 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
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26) 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
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27) 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
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28) 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 th
...
29) 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 poli
...
30) 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
...
31) 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 inves
...
32) 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 rat
...
33) 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 r
...
34) 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. Thi
...
35) Which of the following statements is (are) true regarding the quality of insurance regulation?
I. The quality of insurance regulation is uniform from state to state.
II. All evidence suggests federal regulation of insurance would improve the quality o
...
36) Which of the following statements concerning the proposed optional federal charter for life insurers is (are) true?
I. Large insurers operating in many states would more likely prefer a state charter while smaller, regional, insurers would more likely
...
37) 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
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38) 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 sc
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39) 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 und
...
40) 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
...
41) 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
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42) 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 sett
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43) 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
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44) 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 c
...
45) 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
...
46) 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
...
47) 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 syst
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48) 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
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49) 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) in
...
50) 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 asse
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51) 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
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