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Exam 1 Practice Questions

Terms in this set (25)

Which of the following is a result of adverse selection?

(a) The insurer's financial results will be substantially improved.
(b) Those persons who are most likely to have losses are also the most likely to seek insurance at standard rates.
(c) It is unnecessary for the insurance company to use underwriting.
(d) Insurance can be written only by the federal government.
B
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 insurance policies
A
All of the following statements about
retention are true EXCEPT

(a) It may be used deliberately if commercial insurance is unavailable.
(b) It may be used passively because of ignorance.
(c) Its use is most appropriate for low-frequency, high-severity types of risks.
(d) Its use results in cost savings if losses are less than the cost of insurance.
C
In the United States, a business
that satisfies state incorporation
laws is issued a document granting
the business legal existence as a
corporation. This document is
referred to as a
a. certificate of authority
b. disclosure statement
c. certificate of incorporation
d. constitution
C
A financial institution that
specializes in making short-
and medium-term loans to
businesses and people is a
a. Mutual fund company
b. Depository institution
c. Finance company
d. Securities firm
C
Solvency regulations are
designed to ensure that
insurance companies
a. conduct business fairly and
ethically
b. use standardized policy
forms
c. comply with federal
securities laws
d. are able to meet their debts
and pay policy benefits
when they come due
D
An insurance company's policy
reserves represent the amount
a. the company estimates it
will need to pay policy
benefits as they come due
b. by which the company's
assets exceed its
liabilities and capital
c. the state requires an
insurer to hold in the form
of assets, liabilities,
capital, and surplus
d. the company's owners have
invested in the company
A
If an insurance company
incorporated in State A becomes
financially unsound, State A's
insurance commissioner can
a. revoke or suspend the insurer's
license
b. require the insurer to undergo
periodic market conduct
examinations
c. take steps to rehabilitate or
liquidate the company
d. regulate the insurer's interstate
commerce activities
C
The SEC has determined
which of the following
insurance products are
investment products and are
therefore subject to federal
regulation.
a. Universal Life Insurance
b. Fixed Annuities
c. Equity Indexed Annuities
d. Variable Life Insurance
D
In order to ensure that insurance
producers conduct business fairly
and ethically, state insurance laws
require producers to be licensed by
a. the state in which the producer
resides only
b. the state in which the insurer is
located only
c. each state in which the insurer
operates
d. each state in which the
producer conducts business
D
Legal systems, based on the
legal system of England, in
which laws are contained in an
unwritten body of general
principles and rules developed
and followed by the courts.
a. Common law systems
b. Civil law systems
c. Islamic legal system
d. Customary laws
A
If only one of the parties to a
contract makes legally
enforceable promises when
the contract is formed, the
contract is considered
A. Conditional
B. Unilateral
C. Aleatory
D. Bilateral
B
Because insurance contracts
are contracts where the
values exchanged by the
parties may not be equal,
they are said to be
a. Unilateral
b. Personal
c. Aleatory
d. Contracts of Adhesion
C
Courts typically interpret
ambiguity in an insurance
contract against the insurer
because of which contract
characteristic?
a. Formal
b. Aleatory
c. Personal
d. Contract of Adhesion
D
The parties to an insurance
contract are the insurance
company that issues the policy
and the
a. Applicant
b. Insured
c. Owner
d. Beneficiary
C
A completed application and
payment of an insurance policy's
first premium, which an applicant
must provide in order to form an
insurance contract, are called
a. Aleatory
b. Consideration
c. Personal
d. Offer and Acceptance
B
The mutual assent
requirement for an insurance
contract typically is met
through

a. Offer and acceptance.
b. Consideration
c. Voidable contracts
d. Offer and counter offer
A
The presence of which of the
following satisfies the
requirement of lawful purpose in
Individual life and health
Insurance policies
a. Offer and Acceptance
b. Representations
c. Insurable interest
d. Consideration
C
The premium rate for a life
insurance policy is typically
expressed as a unit of
insurance coverage in what
increment?
a. 50
b. 100
c. 500
d. 1000
D
The longer a life insurance
policy is in force, which of the
following is true regarding the
affect investment earnings will
have on premium calculations?
a. Smaller
b. No affect
c. Will constantly fluctuate
d. Greater
D
Policy dividends are
considered which of the
following?
a. Investment earnings
b. Premium additions
c. Income
d. Premium refunds
D
An insurer's net amount at risk
for a particular life insurance
policy is equal to the policy's
a. face amount multiplied
by its policy reserve
b. face amount divided by
its policy reserve
c. face amount plus its
policy reserve
d. face amount minus its
policy reserve
D
The relationship between an
insurance policy's reserve and the
insurer's net amount at risk for the
policy is such that the net amount
at risk
a. decreases as the policy reserve
increases
b. decreases as the policy reserve
decreases
c. changes by a greater amount
than the change in the policy
reserve
d. changes by a smaller amount
than the change in the policy
reserve
A
Mortality experience refers
to which of the following?
a. The rate death occurs
among a specified group
b. A chart that depicts death
rates
c. The incidence of death
among a group
d. The number of deaths that
actually occur in a group
D
Major factors that must be considered
in determining the cost of life
insurance include all of the following
EXCEPT

(a) time value of money.
(b) premiums paid.
(c) settlement options.
(d) dividends.
C
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