Exam 2

Which of the following statements is true about fraternal insurers?
1. They are legally organized as stock insurers.
2. They are taxed more heavily than other types of insurers because of discriminatory marketing practices.
3. They specialize in writing life and health insurance.
4. They account for the majority of life insurance in force in the United States.
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Terms in this set (90)
Which of the following statements is true about fraternal insurers?
1. They are legally organized as stock insurers.
2. They are taxed more heavily than other types of insurers because of discriminatory marketing practices.
3. They specialize in writing life and health insurance.
4. They account for the majority of life insurance in force in the United States.
3. They specialize in writing life and health insurance.
Temporary evidence of insurance until a policy is actually issued is provided by a(n)
1. binder.
2. endorsement.
3. brokerage agreement.
4. pre-approval form.
1. binder.
All of the following are reasons why mutual insurance companies convert to stock insurance companies EXCEPT
1. Stock companies offer greater flexibility to expand through acquisitions.
2. Stock companies can offer stock options to attract and retain key personnel.
3. Stock companies can raise new capital more easily.
4. Stock companies are exempt from state insurance regulation.
4. Stock companies are exempt from state insurance regulation.
Which of the following is a characteristic of a typical mass merchandising plan?
1. payment of premiums through payroll deduction
2. contributions by the employer to the cost of coverage
3. group rather than individual underwriting
4. higher commission scales for agents and higher administrative expenses
1. payment of premiums through payroll deduction
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)
1. exclusive agent.
2. insurance broker.
3. direct writer.
4. branch manager.
2. insurance broker.
Which of the following statements about mutual insurers is true?
1. They are legally organized as partnerships.
2. They may pay dividends to their policyholders.
3. They have a board of directors which is selected by state insurance departments.
4. They are owned by their stockholders.
2. They may pay dividends to their policyholders.
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
1. mass merchandising system.
2. worksite marketing system.
3. direct response system.
4. mixed marketing system.
3. direct response system.
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 form of organization. Big Mutual is planning to switch from the mutual form of organization to the stock form, and to issue shares of common stock to raise capital. This change in organizational structure is called
1. retrocession.
2. reinsurance.
3. demutualization.
4. mutualization.
3. demutualization.
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?
1. alien insurer
2. surplus lines broker
3. general agent
4. direct writer
2. surplus lines broker
Vincent is a specialized wholesale producer who had been vested with underwriting authority by an insurer. Vincent helps to write professional liability insurance, surplus lines, and some personal lines in a sparsely populated area in his territory. Vincent is a(n)
1. exclusive agent.
2. managing general agent.
3. independent agent.
4. direct writer.
2. managing general agent.
The primary function of an actuary is to 1. invest insurance company assets. 2. negotiate reinsurance treaties. 3. adjust claims. 4. determine premium rates.4. determine premium rates.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 1. preparing one set of records for the insurer's managers and another set for the policyholders. 2. preparing one set of records using statutory accounting and another set using GAAP accounting. 3. preparing one set of accounting statements considering investment income and another set of accounting statements not considering investment income. 4. preparing one set of books using dishonest values and another set using current market values.2. preparing one set of records using statutory accounting and another set using GAAP accounting.Which of the following statements about reinsurance is true? 1. A reinsurer may not purchase reinsurance. 2. The insurer transferring business to a reinsurer is called the ceding company. 3. The amount of insurance transferred to a reinsurer is called the net retention. 4. The reinsurer is the first insurer that provides claims services to the insured after a loss occurs.2. The insurer transferring business to a reinsurer is called the ceding company.All of the following are reasons for a primary insurer to use reinsurance EXCEPT 1. to increase underwriting capacity. 2. to stabilize profits. 3. to protect against catastrophic losses. 4. to increase the unearned premium reserve.4. to increase the unearned premium reserve.Beverly lives in a sparsely populated area in northern Idaho. Some insurance companies marketing coverage in northern Idaho cannot afford to have full-time adjusters 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) 1. adjustment bureau. 2. independent adjuster. 3. company adjuster. 4. public adjuster.2. independent adjuster.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) 1. inspection report. 2. M.I.B. report. 3. agent's report. 4. application.1. inspection report.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 premiums received as income until some time has passed. Reinsurance is often used in such cases for which of the following purposes? 1. to withdraw from a line of business or territory 2. to provide protection against catastrophic losses 3. to stabilize profitability 4. to reduce the unearned premium reserve4. to reduce the unearned premium reserveThe price per unit of insurance is called the 1. rate. 2. premium. 3. loss adjustment expense. 4. loss reserve.1. rate.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 group began to drop out when they realized their premiums were subsidizing the older workers who had a higher chance of loss. Which important underwriting principle was violated in this case? 1. An underwriting profit should be attained. 2. There should be equity among policyholders. 3. Moral hazard should be avoided. 4. Insureds should be selected according to underwriting standards.2. There should be equity among policyholders.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 responsible for 50 percent of the losses. If Granite insures a $1.6 million risk, RSR is responsible for 75 percent of any losses. What type of reinsurance arrangement did Granite enter into with RSR? 1. reinsurance pool 2. surplus share reinsurance 3. excess of loss reinsurance 4. facultative reinsurance2. surplus share reinsuranceThe portion of an insurance premium allocated to expenses, profit, and a margin for contingencies is called the 1. pure premium. 2. gross premium. 3. loading. 4. experience rate.3. loading.Under one method of estimating a loss reserve in life insurance and disability insurance, the reserve is based on life expectancy, duration of disability, and similar factors. This method of estimating loss reserves is called the 1. judgment method. 2. tabular value method. 3. average value method. 4. loss ratio method.2. tabular value method.Which of the following items would appear in the revenue section of an insurance company's income and expense statement? 1. underwriting expense 2. bonds 3. premiums 4. loss reserves3. premiumsJKL 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 $65,000,000 What was JKL's loss ratio last year? 1. 75.0 percent 2. 83.3 percent 3. 90.0 percent 4. 70.0 percent4. 70.0 percentWhich of the following is an expense for a life insurance company? 1. death benefits paid to a beneficiary 2. loss reserves 3. unrealized capital gains 4. realized capital gains1. death benefits paid to a beneficiaryLMN Mutual Insurance Company has total liabilities of $300 million. The company has total assets of $380 million. What is LMN's policyholders' surplus? 1. $680 million 2. $80 million 3. -$80 million 4. $340 million2. $80 millionAll of the following statements about regulatory objectives of insurance rate making are true EXCEPT 1. Rates unfairly discriminate if loss exposures that are similar with respect to losses and expenses are charged substantially different rates. 2. Insurers know in advance if the coverages marketed will be profitable, so rate regulation is not needed. 3. One purpose of rate adequacy is to maintain the solvency of insurers. 4. Rates are excessive if policyholders are paying substantially more than the actual value of their protection.2. Insurers know in advance if the coverages marketed will be profitable, so rate regulation is not needed.Which of the following statements about judgment rating is true? 1. It is used when the loss exposures are so diverse that a class rate cannot be calculated. 2. It involves the manual rating of exposures. 3. It is a form of experience rating. 4. It is only used when credible loss statistics are available.1. It is used when the loss exposures are so diverse that a class rate cannot be calculated.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? 1. $69.99 2. $500.00 3. $350.00 4. $166.672. $500.00In 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 1. exposure. 2. housekeeping. 3. protection. 4. occupancy.3. protection.The basis for current state regulation of insurance is 1. the National Association of Insurance Commissioners. 2. Paul v. Virginia. 3. the South-Eastern Underwriters Association case. 4. the McCarran-Ferguson Act.4. the McCarran-Ferguson Act.The policyholders' surplus of an insurer is defined as the difference between its 1. assets and its nonadmitted assets. 2. reserves and its liabilities. 3. premium income and its expenses. 4. assets and its liabilities.4. assets and its liabilities.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) 1. foreign insurer. 2. nonadmitted insurer. 3. reciprocal insurer. 4. alien insurer.1. foreign insurer.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 practice called 1. rebating. 2. twisting. 3. retaliating. 4. bait and switch.2. twisting.A shortcoming of state regulation of insurance according to Congressional committees and the General Accounting Office is that state regulation 1. provides opportunities for innovation. 2. provides inadequate consumer protection. 3. leads to decentralized governmental power. 4. is more responsive to local needs.2. provides inadequate consumer protection.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? 1. McCarran-Ferguson Act 2. Financial Modernization Act 3. Paul v. Virginia 4. South-Eastern Underwriters Association case4. South-Eastern Underwriters Association caseThe 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. This early warning system is called 1. the assessment method. 2. the risk-based capital requirements. 3. the Insurance Regulatory Information System (IRIS). 4. an insurance guaranty fund.3. the Insurance Regulatory Information System (IRIS).All of the following are arguments in favor of using an applicant's credit record in personal lines underwriting EXCEPT 1. Underwriting and rating may be more consistent if applicants' credit histories are considered. 2. There is high correlation between an applicant's credit record and future claims experience. 3. Most consumers have good credit records and benefit when credit history is used as a rating factor. 4. Use of credit data in underwriting and rating eliminates price discrimination against minority groups when they purchase insurance.4. Use of credit data in underwriting and rating eliminates price discrimination against minority groups when they purchase insurance.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? 1. $2 million 2. $10 million 3. $20 million 4. $8 million1. $2 millionBlue Sky Insurance Company sells life annuities to sick elderly people, routinely denies legitimate claims, and cancels insureds after they submit a claim. What type of insurance regulation would sanction Blue Sky for such wrongful behavior? 1. risk classification regulation 2. solvency regulation 3. market conduct regulation 4. rate regulation3. market conduct regulationWhich of the following is NOT a form of cooperative insurer: 1. Stock insurer 2. Mutual Insurer 3. Fraternal Insurer1. Stock insurerAn insurance marketing system that bypasses the agent is called: 1. Direct Response 2. Independent System 3. Mass merchandising 4. Exclusive agency1. Direct ResponseInsurance comapnies formed with capital from investores expecting a return are called: 1. Stock insurers 2. Cooperative Insureres1. Stock insurersWhich in NOT a characteristic of a mass merchansiding plan? 1. Employees evaluated as a group 2. Individually underwritten 3. Discounted premiums 4. May offer payroll deduction1. Employees evaluated as a groupWhich type of agent owns their ecpiration list (renewal rights)? 1. Independent 2. Exclusive 3. Fraternal 4. Direct writer1. IndependentInsurance companies formed to return profits in the form of premium savings are called: 1. Cooperative Insurers 2. Stock Insurers1. Cooperative InsurersWhere can coverage be placed for a high exposure that can't be placed with an admitted carrier? 1. Exclusive agency 2. Brokerage 3. Surplus lines policy 4. Alien Insurer3. Surplus lines policyIndependent agents earn compensation in the form of: 1. Commission 2. Salary1. CommissionWhich of the following would NOT be considered a producer? 1. Underwriter 2. Agent 3. Broker 4. Financial planner1. UnderwriterWhen efficient, a company may self insure it's risk by forming a subsidiary called a: 1. Exclusive 2. Holding comapy 3. Captive 4. Cooperation3. CaptiveInstead of demutalizing mutal insurers can add stock operations to the company through: 1. Merger 2. Holding company 3. Takeover 4. Becoming acquired2. Holding companyWhich of the following entities are not involved in the sale of insurance to the end user? 1. Financial planner 2. Underwriter 3. Broker 4. Producer2. UnderwriterWhich type of agent works more like an independent contractor, representing several carriers? 1. Direct writer 2. Independent 3. Fraternal 4. Exclusive2. IndependentWhich of the following would NOT be included in settling small claims? 1. Agent 2. Adjuster 3. Feild adjuster 4. Underwriter4. UnderwriterReinsurance that pays for loss on a shared basis with the primary insurer is called: 1. Facultative 2. Pro Rata 3. Excess of loss 4. Treaty2. Pro RataIf an application seems off, an underwriter may order an inspection report to evaluate: 1. Accurate values of property 2. Moral hazard 3. Actual company operations 4. Number of employees2. Moral hazardReinsurance that pays only after loss exceeds a dollar amount of other threshold is called: 1. Pro rate 2. Faculative 3. Excess of loss 4. Treaty3. Excess of lossBecause actuaries put a price tage on risk, these people must be well versed in: 1. Math and stats 2. Evaluating risk 3. Safety protocol 4. Understanding the policy1. Math and statsBefore a submitted claim can go any farther in the process, what must be true? 1. The loss must be covered 2. A case reserve is set up 3. Amount of loss is substanitated 4. The agent must be notified1. The loss must be coveredReinsurance that covers an entire line of business (like homeowners) of a primary insurer is called: 1. Treaty 2. Pro rate 3. Excess of loss 4. Facultative1. TreatyAgents are the first underwriters on an account because they understand the companies appetite: 1. True 2. False1. TrueQuota share and surplus share are two forms of what type of reinsurance? 1. Treaty 2. Facultative 3. Pro Rata 4. Excess of loss3. Pro RataA loss control representative or risk manager is most concerned with? 1. A profitable book of business 2. Safety of insured operations 3. Fairly settling claims 4. Preventing twisting or rebating2. Safety of insured operationsWhich of the following is a signed, sworn statement regarding the details of the loss? 1. Proof of loss 2. Claim report 3. Notice of loss 4. Case reserve1. Proof of lossAll of these parties can adjust claims; which is a trained employee of the company? 1. Staff adjuster 2. Agent 3. Public adjuster 4. Independent adjuster1. Staff adjusterReinsurance enabling a primary insuer to write an account exceeding underwriting guidelines is called: 1. Facultative 2. Pro rate 3. Excess of loss 4. Treaty1. FacultativeA reserve represents the insurer's unpaid obligations due: 1. In the future 2. Currently 3. In the past 4. For future expansion1. In the futureHow is the overall opperating ratio calculated?Loss ratio + expense ratio - investment incomeCombined Ratioloss ratio + expense ratioWhat rating factor considers the risk of the type of business being conducted by the insurer? 1. Occupancy 2. Protection 3. External exposure 4. Construction1. OccupancyWhat rating factor considers other property and businesses surrounding the insured's business? 1. Protection 2. External exposure 3. Occupancy 4. Construction2. External exposureWhich of the following is NOT one of the key factors in state insurance rate regulation? 1. Rates must be adequate 2. Rates may not be unfairly discriminatory 3. Rates may no be fairly discriminatory 4. Rates must not be excessive3. Rates may no be fairly discriminatoryWe won't be in business long if rates don't facotr in what along with the cost of out losses? 1. Expected investment income 2. Loss reserves 3. Exposure units 4. Expense loading4. Expense loadingMaking rate into a premium requires a unit of measurement showing magnitude, which is called: 1. Classification factor 2. Exposure unit 3. Expense loading 3. Loss cost2. Exposure unitWhich of the following is not encluded in the estimate of the loss reserves? 1. Claims reported/adjusted but not paid 2. Paid loss 3. Claims reported but not adjusted 4. Claims not yet reported.2. Paid lossWhat is the formula used to develop the gross rate?Pure premium/(1-expense ratio)Reserves are set up for bulk claims and for individual claims; the latter is called a/an: 1. Case reserve 2. Loss reserve 3. Unearned premium reserve 4. INBR reserve1. Case reserveThe financial information in the annual statment allows regulators to accomplish what key goal? 1. Shows claims are fairly paid 2. Unearned premium is accounted for 3. Solvency regulation 4. Ensure fair market practices3. Solvency regulationState insurance commissioners have much power related to insurance carriers in their state. 1. True 2. False1. TrueUnder statutory account principles, what is the standard accounting equation?Assets = liabilities + surplusInsurers must comply with state insurance laws and also with federal regulations: 1. True 2. False1. TrueIt's illegal for agents to split account commisions with their insureds, which is called: 1. Backdating 2. Rebating 3. Reserving 4. Twisting2. RebatingInsurance commissioners can revoke an insurer's license to operate in their state. 1. True 2. False1. TrueCourts also regulate insurers, especially when it comes to ambiguous wording: 1. True 2. False1. TrueMarket conduct regulation does NOT affect which of these key insuer operations? 1. Claims 2. Marketing 3. Underwriting 4. Investments4. InvestmentsConvinving an insured to chane their policy when there is no clear benefit to do so is called: 1. Rebating 2. Reserving 3. Twisting 4. Backdating3. TwistingThe key benefit to insurance regulation at a state level is that insuers 1. Feel that it's more efficient 2. all states have the same regulations 3. Respond more quickly to local issues 4. Have to file programs in every state3. Respond more quickly to local issuesinsurance commissioners enforce model laws developed by the NAIC in their respective states. 1. True 2. False2. FalseWhich of the following is NOT considered a nonadmitted asset 1. IT infrastructed 2. Real estate 3. Phone/data systems 4. Office equipment2. Real estate (It is an admitted asset)State insurance regulators are always elected by citized of that state: 1. True 2. False2. False