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FIN 360 Exam 3

Terms in this set (99)

Which of the following statements about stock insurers is true?
Stockholders bear any losses and share in any profits.
Why are some mutual insurers referred to as "assessment mutuals"?
They can assess policyholders if premiums are insufficient to pay losses and expenses.
Which of the following statements about reciprocal exchanges is (are) true?
Reciprocal exchanges usually specialize in health insurance.
Reciprocal exchanges are unincorporated mutual insurance companies.
II only
Which of the following statements about Lloyd's of London is true?
Coverage is actually written by syndicates who belong to Lloyd's of London.
Which of the following statements about insurance brokers is (are) true?
They legally represent the insured rather than the insurance company.
They are prohibited from being licensed as agents.
I only
Which of the following statements about personal producing general agents is (are) true?
They often have the option of recruiting and training sub-agents.
They are independent agents who produce substantial amounts of life insurance with one insurer.
both I and II
Which of the following statements about life insurance marketing systems is true?
Some exclusive agents who market property and liability insurance also sell life insurance.
Advantages of the direct response system for marketing life insurance include which of the following?
Advertising can be specifically directed to selected markets.
Complex products can be easily sold.
I only
A property and casualty insurer in which the salesperson is an employee of the insurer, not an independent contractor, is called a
direct writer.
Which of the following statements about the sale of property and liability insurance through the direct response system is (are) true?
Selling expenses are higher because market segmentation tends to be less precise than with other marketing methods.
It is the most appropriate system for selling complex products.
neither I nor II
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 able to recruit and train sub-agents and receive an over-riding commission based on the amount of life insurance the sub-agents sell. Based on this description, David is a(n)
personal-producing general agent.
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 more than one marketing system is called employing a
multiple distribution system.
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 insurer. The insurer offers lower premiums to XYZ employees. The insurer's plan for selling individually-underwritten auto insurance to employees of XYZ Manufacturing Company is called
mass merchandising
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 Insurance Company uses is called the
direct response system.
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 the name of the intermediary that Jim can use to place this coverage with an insurer not admitted to his state?
surplus lines broker
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
direct response system.
Which of the following statements about Blue Cross and Blue Shield plans is (are) true?
Blue Cross and Blue Shield plans can be organized on a nonprofit basis or on a for-profit basis.
Blue Cross provides coverage for hospital services; Blue Shield provides coverage for physicians' and surgeons' fees.
both I and II
Which of the following statements about Lloyds of London (are) true?
The majority of the business underwritten by Lloyds of London is for unusual risks, such as valuable race horses and professional athletes.
Lloyds of London is a group of underwriters who underwrite insurance, not an insurance company.
II only
All of the following are reasons why mutual insurance companies convert to stock insurance companies EXCEPT
Stock companies are exempt from state insurance regulation.
Which of the following statements is (are) true about savings bank life insurance (SBLI)?
Each depositor at the savings bank receives life insurance equal to his or her savings account balance.
The goal of SBLI is to provide low-cost life insurance to consumers.
II only
Which of the following statements is (are) true regarding insurance agents and insurance brokers?
A property and liability insurance agent has the authority to bind the insurer for certain types of coverage.
A licensed broker who is not a licensed agent has the legal authority to bind an insurer.
I only
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 against the national chain. As jury awards in the area where the incident occurred are high, insurers selling liquor liability insurance refused to issue new coverage until the case was resolved. Because no admitted insurers sell the coverage, liquor liability insurance in this case is considered a(n)
surplus line.
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 commissions based on the sales generated by the sub-agents. Based on this description, we can conclude that Peggy is a
personal producing general agent.
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)
attorney-in-fact.
A plan for selling individually underwritten property and liability insurance to members of a group is called
mass merchandising.
The primary function of an actuary is to
determine premium rates.
Insurers obtain data that can be used to determine rates from
insurance advisory organizations.
Which of the following statements about underwriting policy is (are) true?
A company must establish an underwriting policy consistent with company objectives.
Underwriting policy is usually subjective and allows the underwriter considerable flexibility with respect to lines written and forms used.
I only
Which of the following statements about underwriting standards is (are) true?
One purpose of underwriting standards is to reduce adverse selection against the insurer.
Equitable rates should be charged so that each group of policyowners pays its own way in terms of losses and expenses.
both I and II
One source of life and health insurance underwriting information is an organization that life and health insurance companies can join. As a member, life and health insurance companies report health impairments of applicants, and this information is shared with member companies. Although the information is shared, the underwriting decision of the member company is not disclosed. What is this organization called?
Medical Information Bureau (MIB)
Factors that may result in more restrictive underwriting decisions include which of the following?
Inadequate rates.
The unavailability of reinsurance at favorable terms.
both I and II
Which of the following statements about claim settlement is (are) true?
The fair payment of claims requires an insurer to adopt a very liberal claims policy.
To prevent lawsuits, an insurer should provide no personal assistance to a claimant other than that which is required by contractual obligations.
neither I nor II
All of the following statements about the settlement of a claim are true EXCEPT
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 are reasons for a primary insurer to use reinsurance EXCEPT
to increase the unearned premium reserve
Which of the following statements about treaty reinsurance is true?
Using a reinsurance pool provides financial capacity to write large amounts of insurance.
Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance. Delta has a retention limit of $200,000, and nine lines of insurance are ceded to Eversafe. How much will Eversafe pay if a $1,600,000 building insured by Delta suffers an $800,000 loss?
$700,000
Which of the following statements about the investments of property and liability insurers is (are) true?
Income from investments is important in offsetting any unfavorable underwriting experience.
Because premium income is continually being received, the investment objective of liquidity is of little importance.
I only
Functions of an insurance company's legal department include which of the following?
Lobbying for legislation favorable to the insurance industry.
Drafting policy provisions.
both I and II
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
verify that a covered loss has occurred.
Beverly lives in a sparsely populated area in northern Idaho. Some insurance companies marketing coverage in northern Idaho cannot afford to have full-time adjustors there. Several insurers hire Beverly to adjust claims for their insureds. Beverly charges the insurers a fee for each claim that she settles. Beverly is a(n)
independent adjustor.
Liability Insurance Company (LIC) was approached by a regional airline to see if LIC would write the airline's liability coverage. LIC agreed to write the coverage and entered into an agreement with a reinsurer. Under the agreement, LIC retains 25 percent of the premium and pays 25 percent of the losses, and the reinsurer receives 75 percent of the premium and pays 75 percent of the losses. This reinsurance arrangement is best described as
quota-share reinsurance.
Sue double-majored in mathematics and statistics in college. She also enrolled in a number of finance courses. After graduation, she was hired by Econodeath Insurance Company. Her job is to calculate premium rates for life insurance coverages. Sue is a(n)
actuary.
All of the following are methods that a property and liability insurance company can use to protect against catastrophic losses EXCEPT
purchase of common stock.
Which of the following statements is (are) true with respect to catastrophe bonds?
The bonds are issued by the U.S. Government.
The bonds have relatively high interest (coupon) rates.
II only
Pac-Coast Insurance (PCI) concentrates its underwriting activities in California. The company is concerned that if a catastrophic earthquake occurs, it might threaten the solvency of the company. To address this risk, PCI issued some debt securities. If a catastrophic earthquake occurs, PCI does not have to repay the full amount borrowed or pay interest. The securities PCI issued are called
catastrophe bonds.
Which of the following statements is (are) true about life insurance company investments?
The majority of life insurance company general account assets are invested in bonds.
The majority of life insurance company separate account assets are invested in stocks.
both I and II
Most insurance companies require their marketing representatives to submit an evaluation of the prospective insured. This important source of underwriting information is called the
agent's report.
Which of the following statements is true regarding the information systems functional area of an insurance company?
Computers and information systems are able to perform some tasks that previously were performed directly by employees.
Information systems can speed the processing of policies by insurers.
both I and II
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?
variable life insurance
Gwen is in charge of accounting at Integrity Insurance Company. Integrity is a publicly-traded insurer. In describing her job, Gwen said, "There aren't too many businesses where you are required to keep two sets of books." Gwen's comment most likely refers to her company
preparing accounting statements using statutory and GAAP accounting.
LMN Mutual Insurance Company has total liabilities of $300 million. The company has total assets of $380 million. What is LMN's policyholders' surplus?
$80 million
Which of the following would not appear in the asset section of an insurance company's balance sheet?
loss reserves
Reasons for the unearned premium reserve include which of the following?
To pay losses that occur during the policy period.
To pay premium refunds to policyholders in the event of cancellation.
both I and II
A property and casualty insurer's loss reserve includes estimates for all of the following EXCEPT
claims anticipated but not yet incurred.
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 reported to the company. This liability is called the insurer's
loss reserves.
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
What was JKL's loss ratio last year?
75.0 percent
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
What was JKL's combined ratio last year?
108.3
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?
as an asset
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 backing interest-sensitive products are placed in a special account called the life insurer's
separate account.
Which of the following statements is (are) true concerning investments of property and casualty insurers and life insurers?
Property and casualty insurance companies place greater emphasis on liquidity than do life insurers.
Life insurance company investments are, on average, of longer duration than property and casualty insurance company investments.
both I and II
All of the following statements about regulatory objectives of insurance rate making are true EXCEPT
Insurers know in advance if the coverages marketed will be profitable, so rate regulation is not needed.
The portion of an insurance premium allocated to expenses, profit, and a margin for contingencies is called the
loading
Which of the following statements is (are) true about the loss ratio method of class rating?
The pure premium is calculated, and it is loaded to cover expenses, profit, and contingencies.
The actual loss ratio is compared to the expected loss ratio, and the rate is adjusted accordingly.
II only
Which of the following statements about retrospective rating is true?
The premium for the current period is determined by the loss experience during the current period.
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 had a large increase in auto claims from Small Town insureds. The insurer did not adjust its rates, and this year will lose money because of claims attributable to higher population density. Which business rating objective did this insurer fail to meet?
responsiveness
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?
$500.00
Which of the following statements about the combined ratio is true?
A combined ratio greater than 1 (or 100 percent) means an underwriting loss has occurred.
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. This rating factor is known as
exposure
A property and liability insurance company's loss reserve and unearned premium reserve are
liabilities
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 period?
The insurer's profitability from underwriting has been improving each year
The assets of a property and liability insurance company are primarily
investments such as stocks and bonds.
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?
98.4 percent
Fundamental purposes of the principle of indemnity include which of the following?
To reduce physical hazards
To prevent the insured from profiting from insurance
II only
Which of the following is a fundamental purpose of the principle of indemnity?
to reduce moral hazard
Sam's furniture was destroyed by a fire. The furniture cost $1200 when it was purchased, but similar new furniture now costs $1800. Assuming the furniture was 50 percent depreciated, what is the actual cash value of Sam's loss?
$900
The loss settlement under which of the following supports the principle of indemnity?
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?
Losses are settled without a deduction for depreciation.
All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT
former ownership of property.
When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?
only at the time of the loss
Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of
subrogation
Which of the following statements about subrogation is true?
Subrogation helps to hold down the cost of insurance.
What is the legal significance of a material misrepresentation in an insurance application?
The contract is voidable at the insurer's option.
Which of the following statements about a warranty in an insurance contract is (are) true?
It is part of the insurance contract.
Statements made by an insurance applicant are considered warranties rather than representations.
I only
Which of the following statements about offer and acceptance for insurance contracts is true?
In property insurance, the offer and acceptance are usually in writing but may be oral.
Which of the following statements about consideration in an insurance contract is (are) true?
The insured's total consideration is submission of a completed application.
The insurer's consideration is the promise to do those things specified in the policy.
II only
A contract in which the values exchanged are not equal because chance is involved is called a(n)
aleatory contract.
Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions?
because insurance contracts are conditional
Which of the following types of insurance policies can usually be assigned without the insurer's consent?
Life insurance
Property insurance
I only
All of the following statements about the rules governing agency relationships are true EXCEPT
The principal is responsible for the acts of agents only if the acts are criminal.
Frank asked his company's employee benefits director if his group health coverage could be converted to individual coverage. The benefits director said, "Yes, you can convert to an individual policy, and the coverage is identical to your group coverage." Frank quit his job and converted to an individual policy. Six months later he filed a claim. He was dismayed to learn the conversion policy was more limited compared to the group coverage, and his claim was denied. What legal doctrine will allow Frank to bring a successful legal action against his former employer because he was financially harmed due to his reasonable reliance upon a representation of fact?
estoppel
Melody's car was damaged when another driver ran a stop sign and hit her car. Melody decided to collect from her own insurer and to let her insurer recoup the loss payment from the negligent driver who hit her. What fundamental legal principle is illustrated in this scenario?
the principle of subrogation
Dave is an agent for Easy Pay Insurance. Easy Pay insures only high-quality applicants. Dave wanted to earn more commissions, so he sold some policies to applicants he knew were below-average risks. When these policyowners started filing claims, Easy Pay tried to deny the claims stating that Dave had not acted appropriately. Which general rule of agency makes Easy Pay responsible for the claims of the higher-than-average risk policyowners?
A principal is responsible for the acts of its agents who are acting within the scope of their authority.
Some courts have ruled that an alternative to "replacement cost less depreciation" should be used to determine the actual cash value of a property loss. Under this alternative, the value of property lost is determined by the price a willing buyer would pay a willing seller for the property in a free market. This method of determining actual cash value is called the
fair market value method.
The general rule that ambiguity in insurance contracts is construed against the insurer is reinforced by an important legal principle. This principle states the insured is entitled to coverage under a policy that he or she would assume the policy would provide, and exclusions must be conspicuous, plain, and clear. This principle is known as
the principle of reasonable expectations.
Dave and Meagan Philips borrowed $150,000 from Fifth National Bank to help fund the purchase of a new home. The home serves as collateral for the loan. Fifth National has an insurable interest in the home based on
being a secured creditor.
The authority of an agent to perform all incidental acts necessary to fulfill the purposes of the agency agreement is called
implied authority.
Bob purchased insurance on his home with an insurer that was not licensed to do business in the state. In this case, which requirement to form a binding insurance contract is lacking?
competent parties
A pharmaceutical company employs a young chemist who is responsible for three new patents last year and for the development of the company's two best-selling drugs. The company purchased a large life insurance policy on the chemist. In this case, the insurable interest requirement was met because of a(n)
pecuniary interest.
Charles Blake told Wendy that he was an agent for Easy Pay Life Insurance Company. He presented no credentials. He asked Wendy some questions about her health and activities, and recorded the answers on scrap paper. He collected a $250 cash premium from Wendy. When Wendy did not receive a policy from Easy Pay, she contacted the company. Easy Pay said they do not have an agent named Charles Blake. Easy Pay is not responsible for Wendy's loss of $250 because
there is no presumption of an agency relationship.
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