PRACTICE FINAL EXAM
A. Summary of available coverage options
B. Relevant statutory terms and provisions
C. Completed application
D. Insurer’s bylaws
All of the answer choices are documents that can become part of a policy, except for summary of available coverage options, which generally does not become part of the policy.
A. Employee slacking.
B. Financial problems that need to be addressed.
D. Personnel problems that need to be addressed.
A company turnover rate well above company and industry averages could be a sign of personnel problems that need to be addressed.
A. Business risk.
B. Operational risk.
C. Pure risk.
D. Speculative risk.
Traditionally, the risk management professional’s role has been associated with loss exposures related to pure risk.
Earned premiums $4,000,000
Written premiums $5,000,000
Net investment income $1,000,000
Incurred losses $3,000,000
Incurred underwriting expenses $2,000,000
What is Hometown Insurer’s loss ratio?
Hometown Insurer’s loss ratio is its incurred losses ($3,000,000) divided by its earned premiums ($4,000,000), or 75 percent.
A. Owners are not necessarily insureds.
B. It seeks to generate a profit.
C. It is governed by a board of directors.
D. Owners have voting rights.
A stock insurer is distinguished from a mutual insurer by the fact that owners are not necessarily insureds.
A. Combined ratio
B. Expense ratio
C. Overall ratio
D. Loss ratio
A decrease in incurred losses would decrease the loss ratio, which is included in the combined ratio and the overall operating ratio. The expense ratio would not decrease.
A. The same thing as a peril.
B. Any condition that presents the possibility of a loss.
C. The same thing as a hazard.
D. Any condition that precludes the chance of loss.
A loss exposure is any condition or situation that presents the possibility of a loss.
A. A book of business.
B. A coverage pool.
C. A line of business.
D. A policy group.
A group of policies with a common characteristic, such as a territory or type of coverage, or all policies written by a particular insurer, producer, or agency is referred to as a book of business.
A. Albert does not tell the insurance agent he is about to file for bankruptcy.
B. Albert does not tell the insurance agent his building has a defective heating system that could explode at any time.
C. Albert tells the insurance agent he has owned the building for seventeen years, but he has actually owned it for eighteen years.
D. Albert tells the insurance agent the building is used to store steel, but it is actually used to store steel drums containing flammable liquids.
Albert tells the insurance agent the building is used to store steel, but it is actually used to store steel drums containing flammable liquids.
The earned premium is $200 because three months of coverage have been provided. 3/12 X $800 = $200
All commercial package policies begin with two components, namely, common policy conditions and common declarations. Adding the necessary forms to make up an individual coverage part that meets the insured’s specific needs completes the policy.
A. The statement basis.
B. The account current basis.
C. The item basis.
D. The direct bill basis.
An agency bill process in which the producer is usually not required to pay the insurer until the premium is collected from the policyholder is known as the item basis.
A. Insurance agents are not subject to licensing requirements in most states.
B. Licensing requirements for insurance brokers are standardized among all the states.
C. Some states require insurance consultants, who give advice or opinions about polices, to be licensed.
D. Public adjusters, who represent insureds for a fee, are not subject to licensing requirements.
Some states require insurance consultants, who give advice or opinions about polices, to be licensed.
A. Reduction in value
B. Lost income
C. Extra expense
D. Altered condition
The additional cost of printing the newspaper is an example of an extra expense.
A. $80 million gain
B. $80 million loss
C. $200 million gain
D. $200 million loss
XYZ’s overall gain or loss from operations is $500 million earned premium minus $400 million incurred losses minus $60 million underwriting expenses plus $40 million net investment gain, for an $80 million gain.
A. Controlling the loss.
B. Contacting the insured.
C. Determining policy terms and conditions
D. Notify underwriters of larger loss exposures than were originally contemplated.
Contacting the insured is a typical adjuster activity during the claim handling process.
A. Oversupply of insurance.
B. Excess regulation.
C. Insurance shortages.
D. Inadequate regulation.
Destructive competition in the insurance industry could result in insurance shortages.
A. Loss prevention
B. Loss reduction
Amy’s decision is an example of avoidance.
A. Increases competition in the industry.
B. Reduces agents’ commissions.
C. Increases the total cost of insurance.
D. Reduces the term of many policies.
Sometimes the existence of insurance encourages losses. The result of this phenomenon is that it increases the total cost of insurance.
A. Class rating.
B. Judgment rating.
C. Experience rating.
D. Retrospective rating.
Insureds must share enough characteristics with each other to be grouped together when using class rating.
A. That are less than that given to a third party claimant’s interests.
B. That are no less than the government-mandated threshold for the government in which the litigation occurs.
C. While remaining impartial to all aspects.
D. That are greater than that given to the insurer’s interests.
The insurer should give consideration to the insured’s interests while remaining impartial to all aspects.
A. Personal liability insurance.
B. Auto liability insurance.
C. Professional liability insurance.
D. Commercial general liability insurance.
Liability coverage to individuals and families from bodily injury and property damage arising from the insured’s personal premises or activities is typically provided by personal liability insurance.
B. Loss control
D. Noninsurance transfer
Chuck and Sally are implementing risk control procedures.
A. Hospital expenses
B. Lost wages
C. Prescription costs
D. Compensation for disfigurement
An example of general damages is compensation for disfigurement.
A. Comply with legal requirements
B. Efficient use of insured’s resources
C. Promote loss control activity
D. Reduce social burden
Premium savings provide an incentive for an insured to control losses.
A. A bailee.
B. A bailor.
C. A secured lender.
D. An agent.
A bailee is a person who holds property entrusted to them by others.
A. The name of the insurer issuing the policy.
B. A general agreement stating that the insurer is providing the coverage subject to payment of premium and to the terms of the policy.
C. The name and mailing address of the insured.
D. A general agreement stating the insurer’s duty to pay damages and defense costs subject to the terms of the policy.
An agreement includes a general agreement stating that the insurer is providing the coverage subject to payment of premium and to the terms of the policy.
A. The insured has no power to alter the written requirement to allow inspection.
B. The insurer may not be able to validate a covered loss and the actual value of the loss without inspection.
C. The insured must fulfill its duty to allow an inspection before a claim is paid.
D. The insurer may not be able to satisfy itself that the fire was not caused by arson without an inspection.
The concept of a contract of indemnity requires the insured only to pay an amount directly related to the amount of a loss. An insurance policy is a conditional contract because parties only have to perform under certain conditions. One of these conditions is that the insured must allow an inspection before a claim is paid.
Duplication is the risk management technique used in this example.
A goal of the claim function is to support the profit goal of the insurer.
A. A judgment rate.
B. An individual rate.
C. A class rate.
D. An experience rate.
A type of insurance rate that reflects the unique characteristics of an insured or the insured’s property is known as an individual rate.
A. Retain high-priced experts whenever possible.
B. Achieve the lowest settlements possible.
C. Establish appropriate spending policies.
D. Grant claim staff complete autonomy as to spending decisions.
One way for claim managers to help maintain an insurer’s underwriting profit is to establish appropriate spending policies.
A. Increasing their personal cash flows by retaining rather than insuring their property exposures
B. Continuing activities following an accident or other loss, and thus reducing inconvenience.
C. Stimulating economic growth because fewer losses mean that more funds are available for other uses
D. Creating a positive effect on an insurer’s underwriting results
Individuals and families benefit from effective risk management by continuing activities following an accident or other loss, and thus reducing inconvenience.
A. The reinsurer automatically assumes a portion of all of the primary insurer’s insurance that is eligible under the treaty.
B. The reinsurer delegates underwriting authority to the primary insurer, helping the primary insurer achieve consistent results.
C. The reinsurer monitors the results of the primary insurer’s underwriting guidelines to ensure compliance.
D. The reinsurer assumes a portion of the losses from all policies that have been specifically listed and insured under the treaty.
By assuming a portion of all of the primary insurer’s insurance, treaty reinsurance helps an insurer meet its obligations.
A. An insured’s funds that could be invested elsewhere if purchasing insurance were not necessary
B. Producers’ commissions
C. Increased property losses because people have insurance
D. Increased liability loss payments because people have insurance
Producers’ commissions are among the operating costs of insurers.
A. Decrease the deductible to $500
B. Increase the deductible to $2,000
C. Implement loss reduction programs
D. Implement loss prevention programs
The best management option for addressing the increased frequency of accidents is to implement a loss prevention program.
A. Criminal act.
B. Breach of contract.
In this situation, Sean committed a tort.
A. The extent of its operations.
B. The number of its employees.
C. The final premium audit.
D. The amount of its payroll.
The size of an employer’s loss exposure for workers compensation insurance is based on the amount of its payroll.
A. Insurers may use independent adjusters when special skills and expertise are needed, for example to investigate aircraft accidents.
B. In the case of a catastrophic loss such as a hurricane, an insurer may not have sufficient staff to manage the large number of claims, and may use independent adjusters.
C. In some areas it is not economically feasible to set up claim offices, and insurers may contract with independent adjusters to handle claims in these remote areas.
D. The insured may retain an independent adjuster if settlement negotiations with the insurer are not progressing satisfactorily.
The insured would not retain an independent adjuster if settlement negotiations with the insurer were not progressing satisfactorily. (Independent adjusters handle claims for insurers for a fee, not for insureds.)
A. Understanding how a household or organization operates.
B. Estimating how large the losses may be and how often they may occur.
C. A physical inspection of all locations, operations, and maintenance routines.
D. Interviews and the analysis of a flowchart.
Analyzing loss exposures requires estimating how large the losses may be and how often they may occur.
A. Agents are employees of the insurer.
B. Knowledge acquired by the insurer is knowledge acquired by the agent.
C. Knowledge acquired by the agent is knowledge acquired by the insurer.
D. All communications between the agent and the insurer will be in writing.
C. Completed operations.
D. Mobile equipment.
This is an example of a liability loss exposure arising out of completed operations.
A. Requiring loss control measures.
B. Using schedule rating modifications.
C. Amending policy terms and conditions.
D. Using facultative reinsurance.
This type of underwriting modification is known as amending policy limits and conditions.
A. The verification of risk
B. A cause of loss
C. The probability of a loss
D. The occurrence of a loss
A cause of loss is an element of a loss exposure.
A. Stock insurers
B. Mutual insurers
C. State workers compensation funds
D. Reciprocal insurance exchanges
A state workers compensation fund is not a private (nongovernmental) insurer.
A. Ownership in a close corporation is typically concentrated in just the few major shareholders, most of whom are also managers.
B. The death or disability of one of the shareholders generally results in payment of dividends to the remaining shareholders.
C. Key shareholders are paid high salaries and are difficult to replace.
D. Shareholders in a close corporation also serve on the board of directors resulting in a disparity of shareholder votes.
Ownership in a close corporation is typically concentrated in just the few major shareholders, most of whom are also managers.
A. Ideally, loss exposures should be spread across a large number of similar exposure units within the same period.
B. Intertemporal risk transfer, the spreading of risk through time, requires a large number of similar exposure units.
C. One requirement of the law of large numbers is that past events occur under different circumstances in the future.
D. Loss exposures such as homes and automobiles generally will not meet the ideally insurable requirement that the exposure be of a large number of similar exposure units.
Ideally, loss exposures should be spread across a large number of similar exposure units within the same period.
A. ERM is an approach to risk management that focuses primarily on loss exposures associated with pure risk.
B. In practice, implementation of ERM occurs at the departmental or business unit level.
C. Implementation of ERM is fairly consistent among organizations, regardless of their size, nature, or complexity.
D. ERM is an approach to managing all of an organization’s key risks and opportunities.
A. Total assets minus total liabilities.
B. Total revenue minus total expenses.
C. Total profit minus total expenses.
D. Total income minus indirect losses.
Net income is defined as total revenue minus total expenses.
A. Lists all of the rights that an insurer has under an insurance policy.
B. Advises the insurer that the insured has made a claim, but retains the right to withdraw the claim later.
C. Lists all of the rights that an insured has under an insurance policy.
D. Advises the insured that the insurer is investigating the claim but retains the right to deny coverage later.
A reservation of rights letter advises the insured that the insurer is investigating the claim, but retains the right to deny coverage later.
A. Claims handling
C. Risk management review
D. Customer service
C. Insuring agreements.
D. Miscellaneous provisions.
The Declarations indicates when or what is covered and when and where coverage applies.
A. Primary party.
B. First party.
C. Second party.
D. Third party.
In liability claims, the claimant is referred to as the third party.
A. If the insured has control over whether or when a loss will occur, the risk is attractive to insure.
B. If losses are not fortuitous, premiums could increase for all policyholders.
C. If a loss is fortuitous, the chance of loss could increase as soon as a policy is issued.
D. Private insurance is suitable for risks where the probability and timing of loss is known.
If losses are not fortuitous, premiums could increase for all policyholders.
A. Identifying loss exposures
B. Analyzing loss exposures
C. Monitoring results and revising the risk management program
D. Selecting the appropriate risk management techniques
Reviewing current insurance programs with an agent or broker each year is performed during Step 6:—Monitoring results and revising the risk management program.
A. If more causes of loss are covered, premiums will increase.
B. Insurers can lower premiums for better-than-average risks.
C. The more services provided, the more premiums will increase.
D. Reduced cash flow drives up premium interest charges.
Underwriting standards refer to selectivity in choosing who to insure. Insurers can lower premiums for better-than-average risks.
A. Surplus line insurers
B. Workers compensation insurers
C. Commercial property insurers
D. Health insurers
A. The named insured
B. The contact person
C. The first named insured
D. The authorized agent
The first named insured is responsible for paying premiums and has the right to receive any return premiums and to cancel the policy.
A. Exposure units.
D. Construction cost index.
Units, pounds, and exposure units are all multiplied by the rate to arrive at the cost (premium).
A. Of the store’s poor loss experience..
B. She needs high limits of coverage.
C. Her exposure is unique.
D. She needs unusually broad coverage.
Bonnie’s insurance needs are nonstandard because her poor loss experience makes her unattractive to the standard insurance market. An excess and surplus lines insurer may be willing to write her insurance with a substantially higher premium than a standard insurer would charge.
A. An insurance broker.
B. A managing general agency.
C. An exclusive agent.
D. A direct writer.
An independent business owner or firm that sells insurance by representing customers rather than insurers is an insurance broker.
A. Rate filings
B. Coverage form design
D. Financial reporting
Unfair trade practices acts involve the insurance company operations of sales, underwriting, and claim handling.
A. Identifying and training staff from non-claim areas to assist.
B. Establishing relationships with independent adjusters to help manage overflow.
C. Purchasing catastrophe reinsurance.
D. Bringing in catastrophe teams of claim representatives from other regions.
Purchasing reinsurance is not a means to meet staffing needs for catastrophe claims.
A. Auto insurance for high-risk drivers is profitable, and the program enables the state to share in the profits.
B. Auto insurance is compulsory, and the program makes it possible for all drivers to have reasonably priced insurance.
C. Private insurers face limited competition, and the state increases competitive pressures by operating this type of plan.
D. Private insurers overcharge for auto insurance, and the state provides a low-cost alternative.
Maryland is involved in insurance to facilitate compulsory insurance purchases.
A. Special damages.
B. General damages.
C. Defense costs.
D. Compensatory damages.
The insurer will still end up paying defense costs.
A. The amount of a loss in dispute is established if both appraisers agree on the amount.
B. Only the insured can demand an appraisal in the event of a disagreement.
C. The appraisal process determines whether coverage applies to a loss.
D. The insurer pays all expenses associated with the appraisal process.
A. $ 4,000
B. $ 6,000
The written premium was $24,000, the amount the insured was billed at the beginning of the policy period.
A. Yes, Amy will save $500 per year.
B. Yes, if Amy can afford to lose $3,000.
C. No, because the plan does not include loss control.
D. No, this type of coverage is required in most states.
Based on informal guidelines for selecting risk management techniques, is this a good decision? Yes, if Amy can afford to lose $3,000.
A. Changing environments have little effect on the quality of loss histories.
B. Changes in an organizations operations have little effect on the quality of loss histories.
C. Loss histories are not commonly used to identify loss exposures.
D. The quality of loss histories depends on whether they are organized and consistent.
A. Financial institution
B. Regional broker
C. Independent agent
D. Direct writer Internet search
A. Sale of insurance policies.
B. Return on invested premium reserves.
C. Sale of company stock.
D. Leveraging the difference from when a premium is paid in and when a claim is paid out.
The capital of a stock insurance company comes primarily from the sale of company stock.
A. Fiduciary rights.
B. Salvage rights.
C. Constructive rights.
D. Catastrophe rights.
Salvage rights allow the insurer to recover and sell or otherwise dispose of insured property on which the insurer has paid a total loss.
A. There might not be enough claim adjusters available in the event of a loss.
B. It is against public policy to cover losses from war and nuclear hazard.
C. Insurance industry funds might not be adequate to pay all losses caused by war or nuclear hazard.
D. It is illegal to cover losses from war and nuclear hazard.
Almost all property insurance policies exclude coverage for losses from war and nuclear hazard because the insurance industry funds might not be adequate to pay all losses caused by war or nuclear hazard.
A. Income statement
B. Balance sheet
C. Sales report
D. Cash flow report
The balance sheet shows an insurer’s financial position at a particular point in time.
A. Criminal law.
B. Constitutional law.
C. Common law.
D. Statutory law.
Agencies, such as the Federal Trade Commission, state public utility commissions, and local zoning boards, derive their authority from statutory law.
A. Stockholders own a stock insurer. Subscribers own a reciprocal insurance exchange.
B. A stock insurer provides insurance to its policyholder-owners. A reciprocal insurance exchange provides insurance to investors.
C. Both are owned by stockholders. However, the reciprocal insurance exchange provides coverage to investors.
D. Both are formed to provide profit to investors. However, the stock insurer is managed through a board of directors.
A. Managing the risk selection process.
B. Conducting education and training.
C. Evaluating new submissions and renewal underwriting.
D. Securing and maintaining treaty reinsurance.
The focus of line underwriter is evaluating new submissions and renewal underwriting.
A. Yes, because most of these laws generally prohibit failure to acknowledge and promptly respond to communications about a claim.
B. Yes, because most of these laws require that insurers contact the insured about a claim within one week of first receiving the claim report.
C. No, because Brad has not officially declined the claim or told the insured that the amount of the claim is less than the insured’s deductible and therefore is not subject to these laws.
D. Yes, because most of these laws prohibit claim representatives from making their own estimates as to the damage incurred and require that a licensed estimator make the estimate.
A. A public adjuster.
B. A third-party adjuster.
C. An independent adjuster.
D. A hurricane adjuster.
Jerry is an independent adjuster who handles claims for insurers for a fee.
B. Direct response
C. Group marketing
D. Independent agencies
A. Experience rating plan.
B. Financial rating plan.
C. Retrospective rating plan.
D. Schedule rating plan.
A rating plan available to commercial insurance applicants that awards debits and credits to a submission based on specific categories is known as a schedule rating plan.
A. Recover its claim payment from the responsible party.
B. Drop a claim in exchange for an agreed amount of money.
C. Estimate the value of the damaged property.
D. Transfer coverage to a third party.
Subrogation is the insurer’s right to recover its claim payment from the responsible party.
A. Claimants who are not eager to assert their rights.
B. Mortgagees that are eager to abbreviate their procedures.
C. News media eager to promote aggressive behavior.
D. Claimants who are aggressive in their pursuit of settlement.
Insurers handling catastrophe claims should be prepared for claimants who are aggressive in their pursuit of settlement.
A. Beach and Windstorm Plan
B. National Flood Insurance Program (NFIP)
C. Terrorism Risk Insurance Program (TRIP)
D. Residual Auto Plan
In the National Flood Insurance Program (NFIP), the government acts as a partner with a private insurer that sells insurance and pays the claims, and then reimburses the insurer for the portion of losses that exceeds premiums and investment income.
A. Most states require that insurers provide notification of cancellation or nonrenewal to the insured within a specified period.
B. Restrictions on cancellation and nonrenewal help insurance serve its purpose of providing protection for policyholders.
C. Most states require that insureds wait until the end of the policy period to cancel their policies.
D. Restrictions on cancellation and nonrenewal limit the speed with which underwriters can stop providing coverage for insureds who become undesirable.
State laws regarding cancellation and nonrenewal apply to insurers, not insureds.
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