Insurance Test 1

Which of the following is a fundamental purpose of the principle of indemnity?
(a) to reduce moral hazard
(b) to minimize physical hazards
(c) to settle property insurance losses on a replacement cost basis
(d) to require deductibles in all property insur

a) to reduce moral hazard

Sam's stereo was destroyed by a fire. The stereo cost $1200 when it was purchased, but a similar new stereo now costs $1800. Assuming the stereo was 50 percent depreciated, what is the actual cash value of Sam's loss?
(a) $600
(b) $900
(c) $1200
(d) $1800

(b) $900

All of the following are exceptions to the principle of indemnity EXCEPT
(a) life insurance.
(b) valued policies.
(c) replacement cost property insurance.
(d) actual cash value property insurance.

(d) actual cash value property insurance.

Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis?
(a) Losses are settled without the applicable deductible.
(b) Losses are settled without a deduction for deprecia

(b) Losses are settled without a deduction for depreciation.

Which of the following statements about the principle of insurable interest is (are) true?
I. It makes it difficult to measure the amount of an insured's loss.
II. It reduces moral hazard.
(a) I only
(b) II only
(c) both I and II
(d) neither I nor II

(b) II only

When must an insurable interest legally exist in life insurance?
(a) only at the time of the insured's death
(b) only at the inception of the policy
(c) only at the time the beneficiary is paid
(d) both at the time of the insured's death and at the incept

(b) only at the inception of the policy

Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for her loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of
(a) warranty.
(b) insurable interest.
(c) utmost good

(d) subrogation

All of the following are basic purposes of subrogation EXCEPT:
(a)to eliminate adverse selection.
(b)to hold down the cost of insurance.
(c)to prevent an insured from collecting twice for the same loss.
(d)to hold the negligent person responsible for a lo

(a) to eliminate adverse selection.

The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT
(a) representations.
(b) warranty.
(c) subrogation.
(d) concealment.

(c) subrogation.

A false statement made by an applicant for insurance is an example of a
(a) concealment
(b) breach of warranty.
(c) lack of offer and acceptance.
(d) misrepresentation.

(d) misrepresentation.

Which of the following statements about an insurance warranty is (are) true?
I.It is part of the insurance contract.
II.Statements made by an insurance applicant are considered warranties rather than representations.
(a) I only
(b) II only
(c) both I and

(a) I only

Which of the following statements about consideration in an insurance contract is (are) true?
I. The insured's total consideration is submission of a completed application.
II. The insurer's consideration is the promise to do those things
(a) I only
(b) I

(b) II only

A contract in which the values exchanged are not equal because chance is involved is called a(n)
(a) contract of adhesion.
(b) unilateral contract.
(c) conditional contract.
(d) aleatory contract.

(d) aleatory contract.

Why are insurance contracts said to be contracts of adhesion?
(a)The values exchanged are not equal.
(b)One party writes the contract, and the other party must accept the contract as written.
(c)Only one party makes a legally enforceable promise.
(d)Condi

(b) One party writes the contract, and the other party must accept the contract as written.

Which of the following types of insurance policies can usually be assigned without the insurer's consent?
I. Life insurance
II. Property insurance
(a) I only
(b) II only
(c) both I and II
(d) neither I nor II

(a) I only

What is the practical effect of an insurance policy being a conditional contract?
(a) The insurer can refuse to pay claims unless the insured has complied with all policy conditions.
(b)The insured can assign the only with the insurer's consent.
(c)The in

(a) The insurer can refuse to pay claims unless the insured has complied with all policy conditions.

What is the practical effect of an insurance policy being a contract of adhesion?
(a)The insurer can refuse to pay claims unless the insured has complied with all policy provisions.
(b)The insured can assign the policy only with the insurer's consent.
(c)

(d) The policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties

Risk management is concerned with
(a) the identification and treatment of loss exposures.
(b) the management of speculative risks only.
(c) the management of pure risks that are uninsurable.
(d) the purchase of insurance only.

(a) the identification and treatment of loss exposures

A situation or circumstance in which a loss is possible, regardless or whether a loss occurs, is called a
(a) deductible.
(b) loss exposure.
(c) loss avoidance.
(d) peril.

(b) loss exposure.

All of the following are risk management objectives prior to the occurrence of loss EXCEPT
(a) economy.
(b) continued operations.
(c) reduction of anxiety.
(d) meeting externally imposed obligations.

(b) continued operations.

Loss severity is defined as the
(a) probable size of the losses which may occur during some period.
(b) probable number of losses which may occur during some period.
(c) probability that any particular piece of property may be totally destroyed.
(d) proba

(a) probable size of the losses which may occur during some period.

Loss frequency is defined as the
(a) probable size of the losses that may occur during some period.
(b) probable number of losses that may occur during some period.
(c) probability that any particular piece of property may be totally destroyed.
(d) probab

(b) probable number of losses that may occur during some period.

All of the following statements about avoidance are true EXCEPT
(a) Certain loss exposures are never acquired.
(b) Certain loss exposures may be abandoned.
(c) The chance of loss for certain loss exposures may be reduced to zero.
(d) It can be used for an

(d) It can be used for any loss exposure facing a firm.

Which of the following conditions is (are) appropriate for using retention?
I. Losses are difficult to predict.
II. The worst possible loss is not serious.
(a) I only
(b) II only
(c) both I and II
(d) neither I nor II

(b) II only

All of the following statements about captive insurers are true EXCEPT
(a) They may act as a profit center by insuring parties other than the parent company.
(b) They are a method for obtaining types of insurance that may be unavailable from commercial in

(c) They increase the volatility of a firm's earnings.

ABC Insurance retains the first $1 MIL of each property damage loss and purchases insurance for that part of any property loss that exceeds $1MIL. The insurance for losses above $1 million is called
(a) excess insurance.
(b) liability insurance.
(c) coins

(a) excess insurance.

Which of the following statements about the use of deductibles is (are) true?
I. They represent risk retention by insurance purchasers.
II. They tend to increase the cost of adjusting small claims.
(a) I only
(b) II only
(c) both I and II
(d) neither I no

(a) I only

All of the following are disadvantages of using insurance EXCEPT
(a) There is an opportunity cost because premiums must be paid in advance.
(b) Considerable time and effort must be spent selecting and negotiating coverages.
(c) It results in considerable

(c) It results in considerable fluctuations in earnings after a loss occurs.

Which of the following types of losses may be best handled through the purchase of insurance?
I. High-frequency, low-severity
II. Low-frequency, high-severity
(a) I only
(b) II only
(c) both I and II
(d) neither I nor II

(b) II only

Which of the following types of loss exposures are best met by the use of avoidance?
(a) low-frequency, low-severity
(b) low-frequency, high-severity
(c) high-frequency, low-severity
(d) high-frequency, high-severity

(d) high-frequency, high-severity

Low-frequency, low-severity loss exposures are best handled by
(a) avoidance.
(b) retention.
(c) insurance.
(d) loss control.

(b) retention.

All of the following about administration of a risk management program are true EXCEPT
(a) The risk manager is an important part of a firm's management team.
(b) A risk management policy statement can be used to educate top executives about the risk manag

(c) If a risk management program is properly designed, periodic review

The function of an actuary is to
(a) adjust claims.
(b) determine premium rates.
(c) negotiate reinsurance treaties.
(d) invest insurance company assets.

(b) determine premium rates.

All of the following statements about underwriting standards are true EXCEPT
(a) The purpose of underwriting standards is to reduce adverse selection against the insurer.
(b) The underwriter should select only those insureds who are expected to have no lo

(b) The underwriter should select only those insureds who are expected to have no losses.

The underwriting process begins with the
(a) agent.
(b) desk underwriter.
(c) inspection report.
(d) acceptance of the application.

(a) agent.

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 insured's income tax return.

(d) the insured's income tax return.

Factors that may result in more restrictive underwriting decisions include which of the following?
I. Inadequate rates.
II. The unavailability of reinsurance on favorable terms.
(a) I only
(b) II only
(c) both I and II
(d) neither I nor II

(c) both I and II

All of the following statements about claims settlement are true EXCEPT
(a) Agents may have the authority 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 a

(d) A public adjustor is usually paid a flat fee that is independent of the size of a claim.

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 det

(c) The adjustor must file the proof of loss, which is a sworn statement supporting his or her decision regarding a claim.

All of the following statements about reinsurance are true EXCEPT
(a) A reinsurer may also purchase reinsurance.
(b) Reinsurance involves the shifting of all or part of the insurance originally written by one insurer to another insurer.
(c) The insurer tr

(d) The amount of insurance transferred to a reinsurer is called the net retention.

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.

(a) to increase the unearned premium reserve.

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 be

(b) a liability representing the unearned portion of gross premiums on outstanding policies

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) underwrit

(a) underwriter.

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.
(

(c) verify that a covered loss has occurred.

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 construc

(b) loss control

Amy heads the legal staff of a large property and liability insurance company. Amy's staff is most likely involved in all of the following activities EXCEPT
(a) reviewing policy wording before policies are adopted and marketed.
(b) recouping subrogation r

(d) reviewing applications to determine if the company should insure the risk.

Easy Pay Insurance Company requires 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
(a) binder.
(b) proof of loss.
(

(b) proof of loss.

When purchasing life insurance you should consider agents that have all of the following qualifications EXCEPT
a. CLU
b. Chfc
c. CFP
d. CPCU

d. CPCU

The portion of a property and liability insurance contract that contains information about the property or activity to be insured is called the
(a) declarations.
(b) insuring agreement.
(c) exclusions.
(d) conditions.

(a) declarations.

What information is contained in the insuring agreement of an insurance policy?
(a) a description of the property or life to be insured
(b) a summary of the major promises of the insurer
(c) a summary of the obligations of the insured
(d) a list of the pr

(b) a summary of the major promises of the insurer

Which of the following statements about "all-risks" coverage is (are) true?
I. All losses are covered except those losses specifically excluded.
II. The burden of proof is on the insured to prove that a loss is covered.
(a) I only
(b) II only
(c) both I a

(a) I only

The policy provision requiring the filing of proof of loss with the insurer is an example of a(n)
(a) declaration.
(b) condition.
(c) insuring agreement.
(d) miscellaneous provision.

(a) declaration.

Which of the following statements about the definition of the insured is (are) true?
I. Under some circumstances, a person who is not specifically named may be classified as an insured.
II. Under no circumstances can more than one person be named as an in

(a) I only

All of the following statements about endorsements and riders are true EXCEPT
(a) They are usually written.
(b) They can be used to add or delete policy provisions.
(c) They normally take precedence over other conflicting policy provisions.
(d) They are p

(d) They are primarily used to circumvent the purpose of legislation requiring specific policy provisions.

Deductibles are used in all of the following types of insurance EXCEPT
(a) life insurance.
(b) health insurance.
(c) property insurance.
(d) automobile insurance.

(a) life insurance.

All of the following are purposes of deductibles EXCEPT
(a) to eliminate small claims.
(b) to reduce premiums.
(c) to reduce morale hazard.
(d) to exclude uninsurable perils.

(d) to exclude uninsurable perils

The deductible for auto collision losses is an example of a(n)
(a) corridor deductible.
(b) elimination period.
(c) straight deductible.
(d) aggregate deductible.

(c) straight deductible.

The primary purpose of coinsurance in property insurance is to
(a) reduce moral hazard.
(b) achieve equity in rating.
(c) minimize problems in settling claims.
(d) eliminate small losses.

(b) achieve equity in rating.

Which of the following statements about problems arising from the use of a coinsurance clause is (are) true?
I. The amount of insurance should be periodically evaluated to avoid a coinsurance penalty because of inflation.
II. An agreed value coverage opti

(c) both I & II

The purpose of other- insurance provisions is to
(a) eliminate the need for deductibles.
(b) penalize those insured's who carry inadequate amounts of insurance.
(c) specify who will pay losses if the insurer is bankrupt.
(d) preserve the principle of inde

(d) preserve the principle of indemnity.

Helen and John both own automobiles on which they carry liability insurance. If Helen is negligent and has an accident while driving John's car, how will each insurer respond to any liability judgment against Helen?
(a) The insurers will pay judgment on p

(c) Helen's insurance will pay on excess basis if John's insurance is insufficient to cover the judgment.

Eric's property was damaged in an accident. He phoned his agent to see if the loss was covered under his property insurance policy. The agent said, "As long as the loss is not specifically excluded in the policy, the loss is covered." Based on the agent's

(d) "all-risks" coverage

Janet hit a wall causing a large dent in her fender. She was busy at work and delayed reporting the damage to her insurer for 9 months. The insurer denied the claim, stating, "Although such a loss is usually covered, you are required to provide prompt not

(d) condition.

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 thei

(c) Stockholders bear any losses and share in any profits.

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 pa

(d) They may pay policy dividends or give rate reductions in advance.

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

(d) They can assess policyowners if premiums are insufficient to pay losses and
expenses.

Which of the following statements about a reciprocal exchange is (are) true?
I. It usually specializes in health insurance.
II. It is managed by an attorney- in-fact authorized to perform various management functions.
(a) I only
(b) II only
(c) both I and

(b) II only

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) Its underwriters specialize in writing life and health insurance.
(c) It operates as an admitted insurer

(a) Coverage is actually written by syndicates who belong to Lloyd's of London.

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.

(a) binder.

Of the following statements about the general agency system, all are true EXCEPT
(a) A general agent is responsible for hiring, training, and motivating new agents.
(b) A general agent is a salaried employee whose responsibilities are limited to selling l

(b) A general agent is a salaried employee whose responsibilities are limited to selling life insurance.

Which of the following statements about the managerial system (are) true?
I. It uses branch offices run by independent agents who represent several companies.
II. The branch manager is an employee of the insurer who hires & trains new agents.
(a) I only
(

(b) II only

Advantages of the direct response system include which of the following?
I. Advertising can be aimed at selected markets.
II. Complex products can be easily sold.
(a) I only
(b) II only
(c) both I & II
(d) neither I nor II

(a) I only

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

(a) independent agent.

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) factor

(c) fraternal insurer.

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

(d) insurance broker.

RST Ins. Co. doesn't have any agents! The Co. sells insurance through radio & newspaper ads, and telemarketers. This distribution method is called
(a) reciprocal exchange.
(b) direct response system.
(c) mass merchandising.
(d) multiple distribution syste

(b) direct response system.

The financial services field is experiencing consolidations and mergers. If both these trends continue, in the future we should observe
(a) fewer financial institutions offering a narrower range of financial services products.
(b) fewer financial institut

(b) fewer financial institutions offering a wider range of financial services products.

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 more easily raise capital.
(c) Stock companies

(c) Stock companies are exempt from state insurance regulation.

1. 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 condition

The rating system should be independent of long-run changes in economic conditions.

The unit of measurement used in insurance pricing is called the
(a) unit rate.
(b) premium.
(c) exposure unit.
(d) experience unit.

(c) exposure unit.

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.

(a) loading.

Which of the following statements about experience rating 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 credibilit

(a) I only

All of these statements about the net single premium for a life insurance policy are true EXCEPT
(a) It can be defined as the present value of future death benefits.
(b) It takes into account insurer's mortality experience & investment income but not expe

It is based on the assumption that premiums are paid uniformly throughout the policy year.

Some life insurance policies use a loading in premium calculations. This loading allowance includes all the following EXCEPT
(a) margin for dividends.
(b) provision for expenses.
(c) margin for contingencies.
(d) provision for death claims.

(d) provision for death claims.

A terminal reserve is defined as the
(a) policy reserve at the beginning of any policy year.
(b) policy reserve at the end of any given policy year.
(c) unearned premium reserve necessary to refund the current year's premiums on any policies that are term

(b) policy reserve at the end of any given policy year.

An XYZ Ins. CO actuary calculated the present value of the expected death claims the company will pay if it sells whole life to a 30-yr-old woman. This value is called the
(a) net level premium.
(b) gross premium.
(c) net single premium.
(d) life insuranc

(c) net single premium.

All of the statements about the combined ratio are true EXCEPT
(a) It is equal to the loss ratio plus the expense ratio.
(b) A combined ratio >100 means an underwriting loss has occurred.
(c) The combined ratio does not consider investment income.
(d) A c

(b) A combined ratio >100 means an underwriting loss has occurred.

Any applicant who lives in a certain zip code is quoted a premium 3 times higher than applicants from other zip codes, Which regulatory objective is not being met?
(a) Rates must be adequate.
(b) Rates must not unfairly discriminate.
(c) Rates must be res

(b) Rates must not unfairly discriminate.

Reasons for state 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

(c) both I and II

The right of the states to regulate the business of insurance was first established by
(a) the South-Eastern Underwriters Association case.
(b) Paul v. Virginia.
(c) the McCarran-Ferguson Act.
(d) the Sherman Act.

(b) Paul v. Virginia.

The basis for current state regulation of insurance is
(a) McCarran-Ferguson Act.
(b) Paul v. Virginia.
(c) South-Eastern Underwriters Assoc. case
(d) NAIC

(a) McCarran-Ferguson Act.

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.

(b) foreign insurer.

Which of the following types of rate regulation is based on the assumption that competition in the marketplace will ensure the rates are reasonable and insurance is available?
(a) flex-rating law
(b) prior-approval law
(c) file-and-use law
(d) open compet

(d) open competition law

Under what type of rate regulation are insurers required to obtain prior approval of rates only if the rate change exceeds a specified predetermined range?
(a) flex-rating law
(b) prior-approval law
(c) file-and-use law
(d) open competition law

(a) flex-rating law

By misrepresenting the facts, Gretchen was able to convince a client to purchase a policy from the company she represents. Gretchen has engaged in
(a) bait and switch.
(b) rebating.
(c) retaliating.
(d) twisting.

(d) twisting.

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 providing funds for insurance regulation.
(a) I only
(b) II only
(c) b

(d) neither I nor II