24877280-Ins-21

Chapter 1 QUESTION 0

Within the realm of Risk Management, insurance is a technique that is often used. When insurance is used it is

primarily attempting to

a. Isolate the cost of losses.

b. Prevent the cost of losses.

c. Reduce the cost of losses.

d. Transfer the cost of losses.

ANSWER D

QUESTION

When insurance is used to transfer possible losses to the insurer, the vehicle that accomplishes this transfer is the

a. Policy.

b. Agent.

c. Letter of transfer.

d. Broker of record letter.

ANSWER A

QUESTION

An insurance policy is a contract that states the rights and duties of

a. The insured and insurer and agent.

b. The insured and the insurer.

c. The insured and the agent.

d. The insured and other third parties.

ANSWER B

QUESTION Transferring the costs of losses to an insurer would be unnecessary, if there were no

a. Exposures to loss.

b. Civil courts.

c. Agents.

d. Reinsurance.

ANSWER A

QUESTION

Making a profit for the insurance company is a major objective for which one of the following departments?

a. Underwriting department

b. Finance department

c. Marketing department

d. Claims department

ANSWER A

QUESTION

An insurance company pays for covered losses and, in effect, distributes the costs of losses among all

a. Insurers in a state.

b. Insureds.

c. Members of society.

d. Claimants.

ANSWER B

QUESTION

All of the following statements regarding loss exposures are true, EXCEPT:

a. There would be no need to transfer the costs of losses if there were no exposures to loss. b. For a loss exposure

to exist, there must be the possibility of a loss.

c. It is necessary for a loss to occur for a loss exposure to exist. d. Every home has a fire loss exposure.

ANSWER C

QUESTION

The law of large numbers is a mathematical principle that states that as the number of similar but independent

exposure units increases, the relative

a. Accuracy of predictions about future outcomes decreases.

b. Accuracy of predictions about future outcomes increases.

c. Frequency of predictions about future outcomes decreases.

d. Frequency of predictions about future outcomes increases.

ANSWER B

QUESTION

In order for the law of large numbers to operate, insurance companies need to insure

a. A large number of similar exposure units.

b. Exposure units that are widely dispersed.

c. Exposure units that have not had losses.

d. A large number of unique exposure units.

ANSWER A

QUESTION

What states that as the number of similar but independent units increases, the relative accuracy of predictions

about future outcomes based on these exposure units also increases?

a. The principle of indemnity

b. The principle of reciprocal pricing

c. Loss trending and forecasting

d. The law of large numbers

ANSWER D

QUESTION

John has worked for Alloto, Inc. for 25 years and is considering retiring within the next two years. John's

retirement is an example of

a. A personnel loss exposure for Alloto, Inc.

b. A human loss exposure for Alloto, Inc.

c. A liability loss exposure for Alloto, Inc.

d. A loss transfer loss exposure for Alloto, Inc.

ANSWER A

QUESTION

Pam operates a home business that requires her clients to come to her house. The possibility of one of Pam's

clients tripping on a step leading to Pam's house and injuring herself is a

a. Property loss exposure.

b. Liability loss exposure.

c. Personnel loss exposure.

d. Human loss exposure.

ANSWER B

QUESTION

The possibility of Chuck's house being damaged by fire is

a. A property loss exposure relating to real property.

b. A property loss exposure relating to personal property.

c. A noninsurable loss exposure.

d. A commercial loss exposure.

ANSWER A

OBJECTIVE 4

QUESTION

All of the following are characteristics of ideally insurable loss exposures, EXCEPT:

a. Losses that are definite and measurable

b. Losses that are accidental

c. Large number of similar exposure units

d. Large concentration of financial capacity

ANSWER D

QUESTION

Which one of the following is most likely to have the characteristics of an ideally insurable loss exposure?

a. Explosion of an industrial factory steam boiler

b. Sun damage to an exterior paint finish

c. Physical damage to a lunar land rover

d. Termite damage to a home

ANSWER A

QUESTION

One of the major reasons why government insurance programs exist is because the insurance may

a. Not be available from private insurers.

b. Be too complicated for private insurers to write.

c. Not be allowed to be written by private insurers.d. Be a significant source of revenue for the government.

ANSWER A

( pp. 1.11-1.12)

QUESTION

All of the following are types of insurance provided by the federal government, EXCEPT:

a. Flood insurance

b. Crop insurance

c. Tenants insurance

d. Social Security

ANSWER C

( p. 1.11)

QUESTION

Government insurance programs exist because

a. The government has expertise in handling insurance claims.

b. The government has the necessary financial resources.

c. The government has infrastructure and staff to provide insurance.

d. The government has legal representatives in every state of the union.

ANSWER B ( p. 1.11)

OBJECTIVE 6

QUESTION

The department in an insurance company that is primarily concerned with determining customer's needs and

then promoting products/services to meet those needs is the

a. Customer service department.

b. Underwriting department.

c. Public relations department.

d. Marketing department.

ANSWER D

( pp. 1.12-1.13)

QUESTION

What is the process by which insurers decide which potential customers to insure and what coverage to offer

them?

a. Reinsuring

b. Marketing

c. Prospecting

d. Underwriting

ANSWER D

( p. 1.13)

OBJECTIVE 7

QUESTION

The primary reason why insurance regulators monitor the financial condition of insurers is to prevent

a. Poor customer service.

b. Unfair competition.

c. Increased Premiums.

d. Insolvency.

ANSWER D

( p. 1.14)

QUESTION

All of the following are ways that state insurance departments regulate and protect consumers, EXCEPT:

a. Insurers must maintain a certain ratio of agents to residents in an area

b. Insurers must be licensed to write insurance policies in a given state

c. Insurers must meet certain tests of financial strength

d. Insurers must comply with laws on marketing, underwriting, and claims practices

ANSWER A

( p. 1.14)

OBJECTIVE 8

QUESTION

In insurance, the term that means restoring a party who has had a covered loss to the same financial position that

the party held before the loss occurred is

a. Subrogate.

b. Recoup.

c. Indemnify.

d. Rectify.

ANSWER C

( p. 1.15)

QUESTION

Joan Appleton has purchased a new car, and when registering her vehicle, she is told that she must provide

proof of liability insurance. Which one of the following benefits of insurance applies to Joan's situation?

a. Support for credit

b. Satisfaction of legal requirements

c. Efficient use of resources

d. Reduction of social burdens

ANSWER B

( p. 1.17)

OBJECTIVE 9

QUESTION One of the costs of insurance is said to be opportunity costs. This means that if capital and labor

were not being used in the insurance business, they could be used elsewhere and making other productive

contributions to

a. Society.

b. The insurance industry.

c. The agency system.

d. Government.

ANSWER A

( p. 1.18)

QUESTION

Sometimes the existence of insurance encourages losses. The result of this phenomenon is that it

a. Increases competition in the industry.

b. Reduces agents' commissions.

c. Increases the total cost of insurance.

d. Reduces the term of many policies.

ANSWER C

( pp. 1.18-1.19)

QUESTION

The direct and indirect costs of insurance include which of the following?

a. Premiums paid by insureds

b. Increased lawsuits

c. Operating costs of insurers

d. All of the above

ANSWER D

( p. 1.18)

OBJECTIVE 10

QUESTION

Another name for liability insurance is

a. First party insurance.

b. Second party insurance.

c. Third party insurance.

d. Multiple party insurance.

ANSWER C

( pp. 1.21-1.22)

QUESTION

All of the following are types of property insurance, EXCEPT:

a. Fire and allied lines

b. Crime

c. Business income

d. Directors and officers

ANSWER D

( p. 1.20)

QUESTION

Willie's floral shop was damaged by fire and the business was closed for six months. Willie had property

insurance to cover the fire damage, but which one of the following types of coverage did he need to cover his loss

of net income during the six-month restoration period?

a. Crime insurance

b. Fire and allied line insurance

c. Business income insurance

d. Leasehold insurance

ANSWER C

( p. 1.21)

OBJECTIVE 11

QUESTION

A small business owner concerned about something happening and not being able to work or earn a living for an

extended period of time should purchase

a. Personal liability insurance.

b. Medical insurance.

c. Disability insurance.

d. Universal life insurance.

ANSWER C

( pp. 1.23-1.24)

QUESTION

Term life insurance

a. Provides lifetime protection.

b. Accrues a cash value.

c. Provides maximum protection for the lowest cost.

d. Allows the policyholder to borrow against policy savings.

ANSWER C

( p. 1.23)

QUESTION

Whole life insurance

a. Provides coverage for a specified period such as 5 or 10 years.

b. Lapses when the policyholder reaches age 65.

c. Is primarily an investment vehicle.

d. Accrues a cash value.

ANSWER D ( p. 1.23)

OBJECTIVE 12

QUESTION

Any condition or situation that presents the possibility of a financial loss to an individual or a family by such

causes as death, sickness, or injury is referred to as a

a. Personal loss exposure.

b. Personnel loss exposure.

c. Liability loss exposure.

d. Medical loss exposure.

ANSWER A

( pp. 1.7)

QUESTION

To restore a party who has sustained a loss to the same financial position that party held before the loss occurred

is called

a. Reciprocity.

b. Reimbursement.

c. Insurance.

d. Indemnification.

ANSWER D

( p. 1.15)

QUESTION

Life insurance that provides coverage for a specified period with no cash value is called

a. Universal life.

b. Term insurance.

c. Whole life.

d. Long-term care insurance.

ANSWER B

( p. 1.23)

Chapter 2

QUESTION

All of the following are types of private insurers, EXCEPT:

a. Stock insurers

b. Mutual insurers

c. Participating insurance consortiums

d. Reciprocal insurance exchanges

ANSWER C

( p. 2.4)

QUESTION

A mutual insurance company is owned by

a. Independent investors.

b. Policyholders.

c. State insurance departments.

d. Mutual funds.

ANSWER B

( p. 2.6)

QUESTION

Which one of the following describes the characteristics of a mutual insurance company?

a. A corporation owned by stockholders that earns profits for the stockholders.

b. An unincorporated association that provides reciprocal coverage to subscribers.

c. A corporation owned by policyholders that provides insurance to its policyholders.

d. An unincorporated association that earns profits for its individual investors.

ANSWER C

( p. 2.6)

QUESTION

How does a stock insurance insurer differ from a reciprocal insurance exchange?

a. Stockholders own a stock company.

Subscribers own a reciprocal insurance exchange .

b. A stock company provides insurance to its policyholder-owners. A reciprocal insurance provides insurance to

investors.

c. Each is owned by stockholders; however, the reciprocal insurance exchange provides coverage to investors.

d. Each is formed to provide profit to investors; however, the stock insurer is managed through a board of

directors.

ANSWER A

( pp. 2.4-2.5)

QUESTION

A reinsurance company

a. Is formed to write all or part of the insurance for a parent company.

b. Provides insurance for loss exposures that private insurers are unwilling to provide.

c. Transfers losses to a primary insurer.

d. Accepts loss exposures from a primary insurer.

ANSWER D

( p. 2.9)

OBJECTIVE 1

QUESTION

One of the unique characteristics of the Social Security program is that it

a. Is free.

b. Requires mandatory participation.

c. Is administered by the state governments.

d. Is available to all regardless of eligibility.

ANSWER B

( p. 2.10)

QUESTION

The four types of benefits included in the federal Social Security program are

a. Retirement, portfolio protection, disability, and medical benefits.

b. Retirement, survivorship, unemployment, and medical benefits.

c. Retirement, unemployment, disability, and medical benefits.

d. Retirement, survivorship, disability, and medical benefits.

ANSWER D

( p. 2.10)

QUESTION

Mandatory participation in the Social Security program for those eligible eliminates the need for

a. Individual underwriting.

b. Premiums.

c. Scheduled benefits.

d. Occasional increases in benefits.

ANSWER A

( p. 2.10)

QUESTION

Some federal government insurance programs provide coverage for loss exposures that private insurers have

avoided largely because of the potential for catastrophic losses. An example of such a program is

a. Workers compensation insurance funds

b. Unemployment insurance programs

c. Automobile insurance plans

d. The National Flood Insurance Program

ANSWER D

( p. 2.10)

OBJECTIVE 2

QUESTION

One of the main reasons why private insurers have largely avoided writing such coverage as flood and crop

insurance is due to the potential for

a. Speculative losses.

b. Fraudulent losses.

c. Catastrophic losses.

d. Difficulty in valuing losses.

ANSWER C

( p. 2.10)

QUESTION

Private insurers are reluctant to provide coverage for flood and crop losses due to the

a. Concentration of exposure units.

b. Large number of exposure units.

c. Variety of exposure units.

d. Dispersion of exposure units.

ANSWER A

( p. 2.10)

OBJECTIVE 3

QUESTION

In some states the only source for workers' compensation insurance is through the state. This is an example of a

a. Residual state fund.

b. Unilateral state fund.

c. Monopolistic state fund.

d. Competitive state fund.

ANSWER C

( p. 2.11)

QUESTION

Unemployment insurance programs are operated by

a. Federal government.

b. Local governments.

c. State governments.

d. Private insurers.

ANSWER C

( p. 2.10)

QUESTION

Programs that make workers' compensation insurance available to those who cannot obtain voluntary coverage

through private insurers is called a

a. Residual market plan.

b. Rating bureau plan.

c. Revolving market plan.

d. Recessive market plan.

ANSWER A

( p. 2.11)

OBJECTIVE 4

QUESTION

The National Association of Insurance Commissioners (NAIC) has identified a problem that affects all states.

Unscrupulous auto body shops are:

Hiring thieves to steal cars, cross state lines, and deliver the stolen vehicles to the shops

Insuring the vehicles and later claiming they are stolen

Changing the vehicle identification number (serial number)

Reselling the vehicles

The NAIC would like to address these issues uniformly across the United States by introducing tough laws to

punish the body shops for claim fraud, but the NAIC members recognize that there are significant differences

from one state to the next.

How can the NAIC address the problem?

a. Develop a Model Bill for the proposed solution and distribute it to the states for possible enactment.

b. Require each state insurance commissioner to draft a proposed solution to the problem tailored to his or her

state.

c. Draft a federal bill and lobby for legislative action to address the problem uniformly.

d. Circulate a petition among all state legislators to join in a countrywide campaign to pass tough laws in each

state.

ANSWER A

( pp. 2.13-2.14)

QUESTION

The National Association of Insurance Commissioners (NAIC) created a uniform financial statement for property

and liability insurance companies. The purpose of the uniform statement is to

a. Ensure that state insurance departments not mistake these companies for life insurers.

b. Provide accounting expertise for those state insurance departments that do not have staff actuaries.

c. Simplify the state insurance department's task of comparing the financial reports of many different insurers.

d. Capture the essential criteria required for rate regulation.

ANSWER C

( pp. 2.13-2.14)

OBJECTIVE 5

QUESTION

The figure that is multiplied by the exposure unit(s) for insurance coverage is called the

a. Premium base.

b. Expense factor.

c. Modifier.

d. Rate.

ANSWER D

( pp. 2.14-2.15)

QUESTION

The formula for determining an insurance premium is

a. Rate x Number of exposure units = Premium.

b. Rate % Number of exposure units = Premium.

c. Loss costs x Inflation factor = Premium.

d. Loss costs % Inflation factor = Premium.

ANSWER A

( pp. 2.14-2.15)

QUESTION

The individuals who are responsible for developing insurance rates are called

a. Raters.

b. Underwriters.

c. Actuaries.

d. Statisticians.

ANSWER C

( p. 2.15)

OBJECTIVE 6

QUESTION

State insurance departments regulate insurance rates to protect consumers against rates that are all of the

following, EXCEPT:

a. Excessive

b. Inadequate

c. Class specific

d. Unfairly discriminatory

ANSWER C

( p. 2.15)

QUESTION

Why would insurance regulators have a goal of assuring that the premiums charged by insurers are adequate?

a. To maintain insurer solvency

b. To eliminate the potential of a monopoly

c. To protect consumers from high insurance rates

d. To promote equity among insurers

ANSWER A

( pp. 2.15-2.16)

QUESTION

An automobile insurance policyholder has complained that her insurance premium is higher than her neighbor's

premium. Both the policyholder and her neighbor have insurance with the same company, and they have

identical vehicles.

The policyholder feels that she is the subject of unfair discrimination. As the policyholder's agent, you know the

policyholder has been responsible for several small auto accidents. The policyholder has mentioned that her

neighbor has had no accidents or violations in the last three years.

You must explain to the policyholder the objective of rate regulation ensuring that rates are not unfairly

discriminatory, as it applies in her case. Which one of the following is an accurate explanation?

a. Insureds with similar characteristics are usually placed in the same class and charged the same rate unless

social equity required modification in that rate structure. This has probably occurred in your situation.

b. Insureds with similar characteristics are placed in the same class and charged the same rate. However, your

accidents have probably placed you in a different classification. Your premium is based on the loss experience for

policyholders in your classification.

c. Your neighbor has probably received a credit based on the length of time he has had his policy with the

company. This is not unfairly discriminatory because it is available to all policyholders over time.

d. Your neighbor has been placed in a preferred category of policyholders, which gives him rights and privileges

that you do not have. Your neighbor has been given a rate reduction based on excess profits that have been

returned to policyholders.

ANSWER B

( pp. 2.15-2.16)

QUESTION

A ratemaking concept in which rates are based on calculated loss experience and insureds with similar

characteristics are placed in the same rating class is called

a. Unfair discrimination.

b. Premium differential.

c. Actuarial equity.

d. Social equity.

ANSWER C

( p. 2.16)

QUESTION

The type of insurance rating law that requires rate approval by the state insurance department before the rates

can be used is

a. Flex rating law.

b. Open competition law.

c. File-and-use law.

d. Prior-approval law.

ANSWER D

( p. 2.17)

OBJECTIVE 7

QUESTION

Most insurers would probably favor which one of the following rating laws?

a. Prior-approval

b. Flex

c. Use-and-file

d. Open competition

ANSWER D

( p. 2.17)

QUESTION

Under a flex rating law, prior approval is required only if the new rates

a. Are a specified percentage above or below previously filed rates.

b. Are a specified percentage above previously filed rates.

c. Are a specified percentage above or below competitors' rates.

d. Are a specified percentage above statewide average filed rates.

ANSWER A

( p. 2.17)

QUESTION

Sometimes the state insurance department establishes rates that all insurers must adhere to. This is referred to as

a. Compulsory insurance.

b. State-mandated rates.

c. Modified prior approval.

d. Closed competition.

ANSWER B

( p. 2.17)

OBJECTIVE 8

QUESTION

One of the methods used by regulators to ensure insurance company solvency is through the Insurance

Regulatory Information System (IRIS), which is

a. The licensing system required for insurance companies that transact business in a state.

b. The licensing process for alien insurers that are incorporated in another country.

c. A periodic examination conducted by a team of state examiners, working at the insurer's home office to review

activities including claims, underwriting, marketing, and accounting procedures.

d. A system that gathers data from insurers' financial statements and develops financial ratios to determine an

insurer's overall financial condition.

ANSWER D

( p. 2.19)

OBJECTIVE 9

QUESTION

Some communities in the United States celebrate holidays with firecrackers. Firecracker vendors erect stands in

the parking lot of shopping centers before the holidays. One shopping center owner sponsoring a firecracker

vendor's booth found that his insurance did not cover the exposure. He found that none of the insurers licensed

to do business in the state sold insurance coverage for the exposures.

How can the shopping center owner obtain appropriate coverage for the exposure from the firecracker vendor's

booth?

a. By obtaining coverage through the excess and surplus lines market.

b. By pooling the risk with other shopping center owners with similar exposures.

c. Through a proportionate sharing arrangement with multiple insurers.

d. From alien insurers in countries that also celebrate holidays with firecrackers.

ANSWER A

( pp. 2.21-2.22)

QUESTION

States regulate the excess and surplus lines market by

a. Establishing a monitoring board comprised of all insurers licensed to do business in the state.

b. Examining the market conduct practices of the unlicensed insurers.

c. Licensing the excess and surplus lines brokers that transact business with the unlicensed insurers.

d. Approving the policy forms and rates used by the unlicensed insurers.

ANSWER C

( p. 2.23)

OBJECTIVE 10

QUESTION

A contractual agreement that transfers all or some of the potential loss exposures from one insurer to another is

called

a. Coinsurance.

b. Reinsurance.

c. Third-party insurance.

d. Excess insurance.

ANSWER B

( p. 2.9)

QUESTION

The National Association of Insurance Commissioners (NAIC) was established to encourage

a. Coordination and cooperation.

b. Competition and cooperation.

c. Coordination and research.

d. Competition and uniformity.

ANSWER A

( p. 2.13)

QUESTION

Some classes of business present unusual or unique exposures or requires unusually broad coverage. This

nontraditional market is known as

a. Excess and supplementary lines.

b. Primary and excess lines

c. Excess and surplus lines.

d. Primary and residual lines.

ANSWER C

( p. 2.21)

Chapter 3

----------------------------------------------------------------------------

Please refer the following 'Case Study' with appropriate Questions and Answers:

----------------------------------------------------------------------------

CASE: Mammoth Insurance Co

Mid-State Painting Company owns vans, trucks, and cars that carry workers,

supplies, and equipment to worksites. On November 1, Mammoth Insurance

Company issued a business auto policy with a one-year period to Mid-State

Painting Company. The premium for the policy is $24,000.

----------------------------------------------------------------------------

CASE: Hometown Insurer

The financial report for Hometown Insurer contains the following information:

Earned premiums $4,000,000

Written premiums $5,000,000

Investment income $1,000,000

Incurred Losses $3,000,000

Incurred underwriting expense $2,000,000

----------------------------------------------------------------------------

OBJECTIVE 0

QUESTION

What was the written premium for Mid-State Painting Company's business auto policy as of December 31?

a. $4,000

b. $6,000

c. $20,000

d. $24,000

ANSWER D

( pp. 3.3-3.4)

QUESTION

What was the unearned premium for Mid-State Painting Company's business auto policy as of December 31?

a. $4,000

b. $6,000

c. $20,000

d. $24,000

ANSWER C

( pp. 3.3-3.4)

OBJECTIVE 1

QUESTION

Brown Insurance Company has the following expenses:

Licenses, taxes, and fees $70,000

Claim staff salaries $100,000

Agents' commissions $200,000

Advertising costs $50,000

Rent and utilities $60,000

What is the amount of Brown Insurance Company's acquisition expenses?

a. $250,000

b. $300,000

c. $350,000

d. $450,000

ANSWER A

( p. 3.8)

QUESTION

Amounts designated by insurers to pay claims for losses that have already occurred are called

a. Acquisition expenses.

b. Loss adjustment expenses.

c. Loss reserves.

d. Unearned premium reserves.

ANSWER C

( p. 3.7)

QUESTION

Which one of the following types of financial statements shows the financial position of an insurance company at

any particular time?

a. Income statement

b. Balance sheet

c. Sales report

d. Cash flow report

ANSWER B

( p. 3.14)

OBJECTIVE 2

QUESTION

The formula for determining an insurer's net underwriting gain or loss is

a. Earned premiums - (losses and underwriting expenses.)

b. Written premiums - (losses and underwriting expenses.)

c. Earned premiums % (losses and underwriting expenses.)

d. Written premiums % (losses and underwriting expenses.)

ANSWER A

( p. 3.9)

QUESTION

Compared to net underwriting gain, an insurer's overall gain or loss from operations gives a

a. Distorted picture of an insurer's profitability.

b. Less complete picture of an insurer's profitability.

c. More complete picture of an insurer's profitability.

d. More conservative picture of an insurer's profitability.

ANSWER C

( p. 3.9)

QUESTION

The owners of an insurance company are entitled to the net income after all expenses are paid. Sometimes this is

paid as a dividend. The amount that is left after all dividends are paid becomes an addition to the insurer' s

a. Surplus.

b. Non-admitted assets.

c. Reinsurance recoverable account.

d. Dividend account.

ANSWER A

( p. 3.9)

QUESTION

The creation of two categories of assets, admitted and nonadmitted-reflects the

a. Creative nature of insurance accounting.

b. Conservative nature of insurance accounting.

c. Consistent nature of insurance accounting.

d. Collaborative nature of insurance accounting.

ANSWER B

( p. 3.11)

OBJECTIVE 3

QUESTION

Admitted assets are types of property that regulators allow insurers to show as assets on their financial

statements because they are

a. Very stable in value.

b. Never subject to decreases in value.

c. Generally increasing in value.

d. Easily converted to cash.

ANSWER D

( p. 3.11)

QUESTION

World Insurance Company has the following assets:

Cash $ 50,000

Stocks $ 400,000

Bonds $ 200,000

Real Estate $ 500,000

Furniture and office equipment $ 70,000

Premium balance due in less than 90 days $ 20,000

Premium overdue more than 90 days $ 10,000

What is the amount of World's total admitted assets?

a. $450,000

b. $650,000

c. $1,170,000

d. $1,250,000

ANSWER C

( p. 3.11)

OBJECTIVE 4

QUESTION

Loss reserves are often the largest liability on an insurer's balance sheet. The loss reserve include

a. All loss amounts paid that year.

b. Claim expenses paid for that year.

c. Unpaid loss amounts for claims not yet settled.

d. All claims paid, excluding expenses not yet settled.

ANSWER C

( p. 3.12)

QUESTION

The financial report for Apex Insurers contains the following information:

Admitted assets $500,000

Unadmitted assets $400,000

Liabilities $300,000

What is the amount of Apex Insurers' policyholders surplus?

a. $100,000

b. $200,000

c. $400,000

d. $600,000

ANSWER B

( p. 3.12)

OBJECTIVE 5

QUESTION

The balance sheet shows an insurer's financial position

a. At a particular point in time.

b. For a particular period of time.

c. Based upon revenues versus expenses.

d. Based upon assets minus expenses.

ANSWER A

( p. 3.14)

QUESTION

A insurer's balance sheet can best be described as

a. A relationship between revenue and liabilities.

b. An estimate of its financial position.

c. A summary of premiums written.

d. A snapshot of its financial position.

ANSWER D

( p. 3.14)

QUESTION

An insurer's income statement shows amounts for all of the following for a particular period, EXCEPT:

a. Earned premiums

b. Policyholders surplus

c. Incurred losses

d. Underwriting expenses

ANSWER B

( p. 3.15)

OBJECTIVE 6

QUESTION

A insurer's income statement can best be described as a financial statement that shows

a. Relationship between revenue and liabilities.

b. Relationship between assets and income.

c. Relationship between revenues, expenses, and net income.

d. Relationship between revenues and incurred losses.

ANSWER C

( p. 3.15)

QUESTION

If an insurer's admitted assets stayed the same but its liabilities increased significantly, its policyholders' surplus

would

a. Stay the same.

b. Increase.

c. Decrease

d. Can' t determine.

ANSWER C

( p. 3.12)

QUESTION

INS Insurer's earned premiums are $1,800,000 for the year. Its losses and expenses are $1,730,000. What type of

financial performance did INS Insurer experience for the year?

a. A net operating gain of $70,000

b. A net underwriting gain of $70,000

c. A net operating loss of $1,730,000

d. A net operating gain of $1,800,000

ANSWER B

( p. 3.15)

QUESTION

All of the following parties are likely to monitor an insurer's financial performance, EXCEPT:

a. Regulators

b. Agents

c. Claimants

d. Shareholders

ANSWER C

( p. 3.13)

OBJECTIVE 7

QUESTION

What is Hometown Insurer's loss ratio?

a. 20%

b. 30%

c. 50%

d. 75%

ANSWER D

( p. 3.16)

QUESTION

What is Hometown Insurer's expense ratio?

a. 20%

b. 40%

c. 50%

d. 75%

ANSWER B

( p. 3.16)

QUESTION

What is Hometown Insurer's combined ratio?

a. 75%

b. 95%

c. 105%

d. 115%

ANSWER D

( p. 3.17)

QUESTION

What is Hometown Insurer's investment income ratio?

a. 10%

b. 20%

c. 25%

d. 50%

ANSWER C

( p. 3.18)

QUESTION

What is Hometown Insurer's overall operating ratio?

a. 75%

b. 90%

c. 105%

d. 115%

ANSWER B

( p. 3.18)

QUESTION

A decrease in incurred losses will generally cause a decrease in all of the following, EXCEPT:

a. Combined ratio

b. Expense ratio

c. Overall ratio

d. Loss ratio

ANSWER B

( pp. 3.16-3.17)

OBJECTIVE 8

QUESTION

The capacity ratio compares an insurer's written premiums to its

a. Total liabilities.

b. Admitted assets.

c. Policyholders' surplus.

d. Earned premiums.

ANSWER C

( p. 3.20)

QUESTION

Old Faithful Insurer has written premiums of $1,400,000 and policyholders' surplus of $400,000. What does the

capacity ratio indicate about Old Faithful Insurer?

a. Financial weakness

b. Financial strength

c. Operating strength

d. Operating weakness

ANSWER A

( p. 3.20)

OBJECTIVE 9

QUESTION

The liability that represents insurance premiums that are prepaid for service that the insurer has not yet rendered

is the

a. Written premium reserve.

b. Estimated premium reserve.

c. Projected premium reserve.

d. Unearned premium reserve.

ANSWER D

( p. 3.12)

QUESTION

Comparing an insurer's incurred losses to its earned premiums will determine its

a. Loss ratio.

b. Expense ratio.

c. Operating ratio.

d. Combined ratio.

ANSWER A

( p. 3.16)

INS 21 Questions Answers Materials Dumps Chapter 4

QUESTION

Principals often authorize another party to act on their behalf. This relationship is called

a. Broker.

b. Fiduciary.

c. Agency.

d. Attorney in fact.

ANSWER C

( p. 4.3)

QUESTION

When an agency relationship is created between a principal and the agent, it requires a high degree of

a. Trust.

b. Patience.

c. Oversight.

d. Creativity.

ANSWER A

( p. 4.3)

QUESTION

When an insurer appoints an agent to act its behalf, the agent's scope of authority is spelled out in the

a. Broker of record letter.

b. Insurance contract.

c. Agency contract.

d. Letter of intent.

ANSWER C

( p. 4.4)

QUESTION

All of the following are true about the insurance agency relationship, EXCEPT:

a. The agency agreement is a written agreement between the insurer and an agent

b. The agency agreement gives the agent the right to represent the insurer and sell insurance on the insurer's

behalf

c. The principal is the party the agent authorizes to bind coverage

d. The agent is the party authorized by the principal to act on the principal's behalf

ANSWER C

( p. 4.3)

QUESTION

Which one of the following statements is true regarding the agency contract?

a. The agent is the principal in the agency contract relationship.

b. An agency contract is also known as an agency endowment.

c. Insurance agency contracts usually have a fixed expiration date.

d. The agency contract states the scope of the agency's authority to conduct business for the insurer.

ANSWER D

( p. 4.4)

OBJECTIVE 1

QUESTION

In an insurance agency relationship, the agent's fundamental responsibility is to act for the benefit of the

a. Insured.

b. Insurer.

c. Broker.

d. Policyholder.

ANSWER B

( p. 4.4)

QUESTION

The primary duty of a principal to its agent is to

a. Pay the agent for services performed.

b. Generate sales leads for the agent.

c. Hire and train sales people.

d. Be obedient.

ANSWER A

( p. 4.5)

QUESTION

From an insured's point of view, relative to the concept of agency, little distinction exists between the

a. Broker and the claimant.

b. Insurance agent and the insurance department.

c. Broker and the insurer.

d. Insurance agent and the insurer.

ANSWER D

( p. 4.5)

QUESTION

The laws of agency impose all of the following specific duties on agents, EXCEPT:

a. Profitability

b. Obedience

c. Loyalty

d. Accounting

ANSWER A

( pp. 4.4-4.5)

QUESTION

The laws of agency impose all of the following specific duties on all agents, EXCEPT:

a. Prudence

b. Accounting

c. Loyalty

d. Relaying information

ANSWER A

( pp. 4.4-4.5)

QUESTION

Which one of the following is the principal's primary duty to the agent?

a. To pay the agent for services performed

b. To act as the agent's legal representative

c. To educate and train the agent

d. To act on behalf of the agent in court proceedings

ANSWER A

( p. 4.5)

OBJECTIVE 2

QUESTION

The authority that the principal specifically grants to the agent is contained in the agency contract. This authority

is known as

a. Implied authority.

b. Apparent authority.

c. Express authority

d. Contractual authority.

ANSWER C

( p. 4.6)

QUESTION

The scope of an agent's authority can go beyond the terms of the agency contract and may include authority to

perform other tasks necessary to accomplish the purpose of the agency relationship. This authority is referred to

as





ANSWER A

( p. 4.7)

QUESTION

An agent may at times act on behalf of the principal in ways that the principal did not intend, and a third party

reasonably believes that the agent has sufficient authority. This authority is known as





ANSWER B

( p. 4.7)

QUESTION

The authority that the principal specifically grants the agent is called


b. Express authority.

c. Apparent authority.

d. Conditional authority

ANSWER B

( pp. 4.6-4.7)

QUESTION

When an insurance company appoints an insurance agent to serve as its representative, what specifies the scope

of authority given to the agent in this relationship?

a. Implied authority

b. Binding authority

c. A unilateral contract

d. An agency contract

ANSWER D

( pp. 4.6-4.7)

QUESTION

Authority that the insurance company specifically grants to an agent is called

a. Binding authority

b. Express authority

c. Implied authority

d. Apparent authority

ANSWER B

( pp. 4.6-4.7)

OBJECTIVE 3

QUESTION

One of the main distinguishing features between independent agency systems and other marketing systems is

the ownership of

a. The company expiration list.

b. Insurance company stock.

c. The sales prospecting list.

d. The agency expiration list.

ANSWER D

( p. 4.9)

QUESTION

An independent business owner or firm that sells insurance by representing customers rather than insurers is

a. An insurance broker.

b. A managing general agency.

c. An exclusive agent.

d. A direct writer.

ANSWER A

( p. 4.10)

QUESTION

If a consumer or policyholder had a preference for dealing with sales representatives who are employees of the

insurer, which marketing system would they choose?

a. Insurance broker

b. Managing general agency

c. Exclusive agent

d. Direct writer

ANSWER D

( p. 4.11)

QUESTION

An independent business owner or firm that sells insurance by representing customers rather than insurance

companies is which one of the following?

a. An independent adjuster

b. An underwriter

c. An insurance broker

d. An insurance carrier

ANSWER C

( p. 4.10)

OBJECTIVE 4

QUESTION

Sometimes an agent may be eligible for a commission based on its premium volume and profitability. This type

of compensation is called

a. A contingent commission.

b. A sales commission.

c. An indirect commission.

d. An annual commission.

ANSWER A

( p. 4.15)

QUESTION

Sometimes a policy is cancelled or non-renewed even though the agent was paid its commission. In these

situations the agent will be requested to return the

a. Earned commission.

b. Unearned commission.

c. Contingent commission.

d. Estimated commission.

ANSWER B

( p. 4.14)

QUESTION

At the end of the year, agencies that have carefully selected business throughout the year can earn a sizeable

a. Contingent commission.

b. Sales commission.

c. Indirect commission.

d. Annual commission.

ANSWER A

( p. 4.15)

QUESTION

For an independent agency or an exclusive agency, the percentage of the premium that goes to the agency or to

the producer for new policies sold or existing policies renewed is the

a. Contingent commission

b. Profit sharing

c. Salary

d. Sales commission

ANSWER D

( pp. 4.14-4.15)

QUESTION

An independent agent received his monthly commissions for the new policies he has sold. Even though he wrote

twenty new policies that month, his commission was low. Which one of the following explains why this could

occur?

a. Commissions are not fully earned at the time of a sale. Other policies written by the agent might have been

cancelled with the unearned portion of the commission returned to the insurance company.

b. The agent failed to provide the level of service required by the insurance company. The insurance commission

was reduced as an incentive for better performance.

c. The agent did not meet the premium volume and profitability levels that were specified in his contract;

therefore, his commission was reduced.

d. The agent is a salaried employee of the insurance company and receives only contingent commissions.

ANSWER A

( pp. 4.14-4.15)

QUESTION

The managers of an independent agency are hoping to earn contingent commissions from several insurers at the

end of the year. What should the agency managers attempt to do to earn contingent commissions?

a. Reduce the number of homeowners policies written for houses in urban areas compared to the homeowners

policies written for houses in rural areas.

b. Reduce the number of employees required to acquire and service the policies in the agency.

c. Increase the premium volume and profitability level of the agency's business with those insurers.

d. Increase the level of customer service provided to policyholders and claimants.

ANSWER C

( pp. 4.15-4.16)

OBJECTIVE 5

QUESTION

With respect to advertising, programs that emphasize the names of both the insurer and the agent are typically

the

a. Agents' Trade Association.

b. Exclusive agency system.

c. Direct writing system.

d. Independent agency system.

ANSWER B

( p. 4.16)

QUESTION

Advertising by independent agencies promotes

a. Brand recognition of the companies represented.

b. The agency rather than the insurers it represents.

c. Symbols used to increase recognition of the insurers represented.

d. Attention to the prices of the policies offered.

ANSWER B

( pp. 4.15-4.16)

OBJECTIVE 6

QUESTION

An insurer using independent agents typically will employ which one of the following to supervise its

producers?

a. Marketing representative

b. Underwriter

c. Captive agent

d. Vice president of marketing

ANSWER A

( p. 4.17)

QUESTION

An insurer employee who works in the insurer's office in an underwriting position but also travels to visit agents

and sometimes clients is called a

a. Production underwriter.

b. Special underwriter.

c. Agency underwriter.

d. Underwriting manager.

ANSWER A

( p. 4.17)

QUESTION

Large insurers who conduct business nationally or over a widespread geographic area will often establish offices

close to producers' offices. Those larger offices that provide underwriting claims and support are usually called

a. Brokers' offices.

b. Branch offices.

c. Home offices.

d. Specialty offices.

ANSWER B

( p. 4.17)

QUESTION

Insurance companies attempt to motivate producers to sell the types of business the companies want to acquire.

Which one of the following would motivate producers to sell the desired type of business?

a. Reduce commissions if sales goals are not achieved.

b. Hold sales contests to encourage the type of sales activity.

c. Provide additional staff to help with the processing.

d. Offer subscriptions to educational services for the producers.

ANSWER B

( p. 4.18)

OBJECTIVE 7

QUESTION

To function legally as an insurance agent, a producer must

a. Be a college graduate.

b. Be licensed by the state.

c. Work for an insurance company.

d. Have a valid drivers' license.

ANSWER B

( p. 4.19)

QUESTION

Once a state agent's license has been issued, the agent must seek to be appointed by one or more

a. Insurers.

b. Brokers.

c. Trade associations.

d. Insurance departments.

ANSWER A

( p. 4.19)

QUESTION

Most states require that producers complete a specified number of hours of educational study related to

insurance in order to renew their license. This is called the

a. Annual education requirement.

b. State education requirement.

c. Insurance education requirement.

d. Continuing education requirement.

ANSWER D

( p. 4.19)

OBJECTIVE 8

QUESTION

Many states have adopted laws that specify certain prohibited business practices that apply to insurance agents.

These laws are known as

a. Unfair insurer practices act laws.

b. Unfair producers' practices act laws.

c. Unfair trade practices act laws.

d. Unfair agents practices act laws.

ANSWER C

( p. 4.19)

QUESTION

Offering a cash payment or something of value to an applicant as an inducement to buy or maintain insurance is

called

a. Rebating.

b. Misrepresentation.

c. Tie-in.

d. Twisting.

ANSWER A

( p. 4.20)

QUESTION

It is an unfair trade practice for a lender to require that a borrower purchase insurance from the lender or from

any insurance producer recommended by the lender. This practice is called

a. Misrepresentation.

b. Twisting.

c. A tie-in sale.

d. Rebating.

ANSWER C

( p. 4.20)

QUESTION

An insurance agent wrote insurance policies for a number of military service veterans who were satisfied with

the coverage they received and the price they paid for the coverage. Subsequently, the agent ran an ad in a local

newspaper stating that the insurance policies offered by his agency are "Veteran Approved Insurance."

Why would this be considered misrepresentation or false advertising?

a. The statement misrepresents the benefits, conditions, or terms of the insurance policies.

b. The statement uses a name or title for the insurance policies that misrepresents the true nature of the policies.

c. The statement indicates that sales are tied to other benefits.

d. The statement makes an illegal reference to a government entity in an insurance sale.

ANSWER B

( p. 4.20)

QUESTION

RipTide Insurance Company has formed an alliance with Local Bank and U-Betcha Used Car Sales. When U-

Betcha sells a car, the sales person directs

the customer to Local Bank for the loan and RipTide for insurance. If the customer transacts business with all

three organizations, the customer will receive reduced auto rates.

Would this be considered to be an unfair trade practice by RipTide?

a. Yes, it is an unfair trade practice to tie the purchase of insurance to some other sale or financial arrangement.

b. Yes, offering a preferred rate to a customer as described is considered to be rebating.

c. No, businesses interact in this way as a regular practice.

d. No, this is not deceptive or unfair to the applicants or insureds.

ANSWER A

( p. 4.20)

QUESTION

Producers are not allowed to pay a portion of the premiums for a policy or give any commission to a

policyholder. Actions of this type are called

a. Tie-in sales

b. Contingent commissions

c. Misrepresentation of dividends

d. Rebating

ANSWER D

( pp. 4.20-4.21)

OBJECTIVE 9QUESTION

A distribution channel that insurers use to market directly to customers is the

a. Independent agency system.

b. Direct response system.

c. Exclusive agency system.

d. Brokerage system.

ANSWER B

( p. 4.12)

QUESTION

An insurance agent's authority to effect coverage on behalf of the insurer is called

a. Express authority.

b. Binding authority.

c. Apparent authority.

d. Temporary authority.

ANSWER B

( p. 4.6)

Chapter 5

----------------------------------------------------------------------------


----------------------------------------------------------------------------

CASE STUDY 1 : Maxfield Insurance

The Maxfield Mutual Insurance Company writes only homeowners insurance for homes that range in value from

$100,000 to $200,000 in one state in the central plains of the United States. Maxfield has written insurance

profitably for 75 years. This long period of profitability has developed a considerable available capacity for

Maxfield Mutual.

However, in the last five years Maxfield's executive staff has become increasingly concerned about the increasing

number of tornado losses Maxfield's policyholders have experienced. Losses paid during these years have been

higher than any other period in Maxfield's history. In addition, competitors have aggressively marketed in the

state and Maxfield has lost policyholders to the competitors for lower premiums.

----------------------------------------------------------------------------

CASE STUDY 2 : GhostWriter Publish

GhostWriter Publishing Company publishes romance novels. They purchase manuscripts from freelance

novelists, edit that material, print the texts, and bind the books.

GhostWriter owns the building where its employees perform all of its publication operations. GhostWriter uses

book-binding glue that is flammable and toxic, so employees try to take care in opening windows when they are

in the binding step of the operation. GhostWriter has been unwilling to install a sprinkler system or appropriate

ventilation system due to the associated costs. So far, opening the windows has been effective, and none of the

employees has become ill from the fumes.

GhostWriter's employees dump any unused book-binding glue in a 50-gallon drum behind the building. The

Environmental Protection Agency determined that the drum has been leaking for years, and the toxins in the

glue have run into the ground. They have ordered GhostWriter to perform a clean-up. GhostWriter submitted a

claim to its insurer for the expenses associated with the clean-up. Recent court decisions have eroded the original

exclusions in the insurer's policy language that would eliminate pollution losses. The insurer will be required to

pay for the pollution loss.

In the last year, profits have been down for GhostWriter. One evening, the fire department responded to a fire

reported at GhostWriter's building. They were able to extinguish the three small fires that started simultaneously

in the building. GhostWriter's owners said they had received anonymous threats that someone would "burn

them down." GhostWriter's owners were suspected of involvement, but nothing could be proven.

----------------------------------------------------------------------------

OBJECTIVE 0

QUESTION

It has been argued that if insurance companies would simplify the selection process and accept almost all

applicants that costs would be dramatically reduced for the consumer. Insurance companies say that this would

not be the case because there would be an increase in

a. Diverse selection.

b. Inverse selection.

c. Adverse selection.

d. Reverse selection.

ANSWER C

( p. 5.4)

QUESTION

Insurers screen applicants to determine which ones they desire to insure. If insurers do not properly select

policyholders

a. Their profits will be excessive in comparison to the premiums collected.

b. Some insureds might be allowed to purchase insurance at prices that do not adequately reflect their loss

exposures.

c. They will have an excessive number of new policies, and their expenses related to writing the new policies will

be excessive.

d. The entire group of policyholders written will be substandard.

ANSWER B

( pp. 5.3-5.4)

QUESTION

As insurers select insureds they attempt to avoid adverse selection. Adverse selection occurs when

a. Applicants purchase insurance with the intent of submitting fraudulent claims.

b. An insurer does not select a cross-section of applicants that range from low to high probability of loss.

c. Competitors select the better applications, leaving the remainder to the insurer.

d. People with the greatest probability of loss are the ones most likely to purchase insurance.

ANSWER D

( p. 5.4)

OBJECTIVE 1

QUESTION

Maxfield is considering expanding its policy writings to other types of insurance and different geographic areas.

How could this activity help Maxfield protect its available capacity?

a. By meeting regulatory requirements to provide coverage to a wide range of policyholders, the insurer will be

less likely to engage in unfair discrimination.

b. By reducing the chances that the company's overall results will be affected by a large number of losses from

one loss event.

c. The insurer will reduce its reinsurance premiums by reducing its exposure to any one catastrophic event.

d. Diversification will allow the insurer to create a more visible image in the market, attracting more potential

applicants from which it can select.

ANSWER B

( pp. 5.4-5.6)

QUESTION

Which one of the following is an example of how Maxfield can optimize its available resources in order to protect

its available capacity?

a. Maxfield chooses not to solicit applications for automobile insurance.

b. Maxfield shops its reinsurance contracts for better pricing and coverage.

c. Maxfield outsources its claims handling functions.

d. Maxfield's management staff takes classes to learn how to provide reasonable accommodations for physically

challenged employees.

ANSWER A

( pp. 5.4-5.6)

QUESTION

Maxfield Mutual's executive staff is considering lowering its standards in the selection of policyholders. In this

way, Maxfield can maintain the same rate level, but add more policyholders that have slightly higher exposures

to loss. What is the likely result of this decision?

a. Maxfield might be accused of unfair discrimination.

b. Maxfield must reduce the amount of reinsurance it purchases.

c. Maxfield must spread its risks at the same time to be profitable.

d. Maxfield's premiums will not be commensurate with the exposures.

ANSWER D

( pp. 5.4-5.6)

QUESTION

The amount of business an insurer is able to write based on a comparison of the insurer's written premium to the

size of its policyholders' surplus is

a. Capacity

b. Adverse selection

c. Risk selection

d. Combined ratio

ANSWER A

( pp. 5.4-5.6)

OBJECTIVE 2

QUESTION

Which of the following types of insurance rates would be appropriate for the type of insurance and loss

exposures that Maxfield Mutual writes?

a. Merit rates

b. Individual rates

c. Class rates

d. Judgement rates

ANSWER C

( pp. 5.7-5.8)

QUESTION

Which one of the following statements is true regarding types of rates used by insurers?

a. Class rates apply to all insureds in the same rating category.

b. Merit rating plans are also called manual rating plans.

c. Class rates are not based on loss statistics.

d. Class rates reflect loss characteristics of a particular insured.

ANSWER A

( pp. 5.7-5.8)

QUESTION

In insurance terminology, which of the following refers to a book of business?

a. All policies sold by an insurance company or agency

b. All policies in a particular territory

c. All policies providing a particular type of insurance

d. All the above

ANSWER D

( p. 5.9)

OBJECTIVE 3

QUESTION

One of the responsibilities of underwriting management is to arrange reinsurance. One type of reinsurance is

arranged to automatically reinsure a portion of all eligible risks of the primary insurer. This arrangement is called

a. Treaty reinsurance

b. Temporary reinsurance

c. Facultative reinsurance

d. Facilitative reinsurance

ANSWER A

( p. 5.10)

QUESTION

How do underwriting guidelines help an insurer achieve its objectives?

a. By establishing the criteria required for treaty reinsurance to apply

b. By creating a channel for communication for the insurer's vision, mission, and objectives

c. By providing a uniform set of rules that guide underwriters toward consistent decisions

d. By maintaining a consistently applied set of behavioral measurements against which an individual's

performance will be measured

ANSWER C

( pp. 5.11-5.12)

OBJECTIVE 4

QUESTION

When the underwriter read the inspection report from his loss control department about a risk that was recently

submitted, it indicates that the management team seemed to be indifferent about the inspector's

recommendations. The underwriter's primary concern is probably the

a. Moral hazard.

b. Physical hazard.

c. Legal hazard.

d. Attitudinal hazard.

ANSWER D

( p. 5.15)

QUESTION

How does an expert system assist underwriters in the underwriting process?

a. It automatically assembles the necessary information to underwrite an application.

b. It helps ensure that no necessary information is overlooked.

c. It provides management reports to ensure underwriters' compliance with guidelines.

d. It monitors the results of the decisions made and suggests changes in underwriting guidelines

ANSWER B

( p. 5.13)

QUESTION

Some insurers now use expert systems in the underwriting process. The primary purpose of these expert systems

is to

a. Reduce claim expenses and loss adjustment expenses.

b. Replace underwriting decision-making and enhance accuracy.

c. Emulate the underwriting decision-making process as it would be performed by expert underwriters.

d. Modernize insurance company information systems.

ANSWER C

( p. 5.13)

OBJECTIVE 5

QUESTION

An underwriter is reviewing an application for a start-up business that is planning on opening in about one

month. Overall the underwriter is impressed with the account but would like to obtain more information on the

owners of the business, especially their experience. Which one of the following sources of underwriting

information would be most helpful to the underwriter in this situation?

a. Claim files

b. Premium audit reports

c. Consumer investigative report

d. Applicant or insured's records

ANSWER D

( pp. 5.13-5.14)

QUESTION

An underwriter is reviewing an application for a business that is just being created. The business will

manufacture a product that the owner herself just invented. Which one of the following sources of information

would probably be most helpful to the underwriter?

a. Claim files

b. Premium audit reports


d. Previous carrier

ANSWER C

( pp. 5.13-5.14)

QUESTION

A new underwriter is reviewing an application for a business that is just being created. He's not comfortable that

he fully understands the nature of the product and the business involved. Which one of the following sources of

information should he use to increase his comfort level?

a. Claim files

b. Premium audit report


d. Producer

ANSWER D

( pp. 5.13-5.14)

QUESTION

All of the following are sources of information underwriters use as they gather information for underwriting,

EXCEPT:

a. Producers

b. Government records

c. Inspection reports

d. Educational records

ANSWER D

( pp. 5.13-5.14)

OBJECTIVE 6

QUESTION

Which one of the following represents a physical hazard in the GhostWriter Publishing case?

a. The suspicious fire

b. The ownership of the building

c. The book-binding glue

d. The 50-gallon drum

ANSWER C

( pp. 5-15-5.16)

QUESTION

Which one of the following represents a morale hazard in the GhostWriter Publishing case?

a. Failure to install sprinklers and ventilation

b. Use of the glue

c. The suspicious fire

d. The lack of profits

ANSWER A

( pp. 5.15-5.16)

QUESTION

Which one of the following represents a legal hazard in the GhostWriter Publishing case?

a. The treatment of the employees

b. The toxic pollution

c. The inability to provide GhostWriter's involvement in the fire

d. The court interpretation of the policy language

ANSWER D

( pp. 5.15-5.16)

OBJECTIVE 7

QUESTION

In evaluating an application, an underwriter has three options: accept without modification, reject, and accept

with modification. Which one of the following is most correct?

a. Accepting with modification requires the greatest amount of creativity.

b. Rejecting the application requires the greatest amount of creativity.

c. Accepting without modification requires the greatest amount of creativity.

d. Accepting with modification requires the least amount of creativity.

ANSWER A

( pp. 5.16-5.17)

QUESTION

When courts mandate coverage broader than the insurers intended in its policies, this is referred to as a

a. Moral hazard.

b. Legal hazard.

c. Judicial hazard.

d. Regulatory hazard.

ANSWER B

( p. 5.16)

QUESTION

Why would an underwriter modify the rate charged for the coverage provided when evaluating an application

for insurance?

a. Because treaty reinsurance in unavailable for the exposures indicated

b. To address the moral hazards the underwriter identified during investigation

c. To better match the rate to the characteristics of the risk

d. Because the applicant is not acceptable for coverage

ANSWER C

( pp. 5.5.16-5.17)

QUESTION

Which one of the following underwriting options requires the greatest amount of underwriting creativity on the

part of the underwriter?

a. Accepting the application with modifications

b. Accepting the application without modifications

c. Processing the application without using an expert or knowledge-based system

d. Rejecting the application

ANSWER A

( pp. 5.16-5.17)

OBJECTIVE 8

QUESTION

In evaluating an application, an underwriter thinks that the class of business is not one that the company wishes

to write, but he would need to physically inspect it to be certain. He also realizes that the business is located in an

undesirable section of the city. Based on the location alone, the underwriter decides not to issue the policy.

According to many state insurance laws, this would be an example of

a. Diversification.

b. Unfair discrimination.

c. Fair discrimination.

d. Regulated discrimination.

ANSWER B

( pp. 5.16-5.17)

QUESTION

How do states prohibit unfair discrimination by insurers?

a. By reviewing each policy cancellation or nonrenewal and the justification for the insurer's action

b. By maintaining a channel for policyholder complaints

c. By identifying it as an unfair trade practice in state insurance laws

d. By examining insurers' mission statements and objectives

ANSWER C

( pp. 5.19-5.20)

QUESTION

Why do states require that insurers notify the insured before a policy is to be canceled or nonrenewed?

a. To provide the state an opportunity to investigate the reason for the cancellation or nonrenewal

b. To give the policyholder an opportunity to replace the coverage

c. To eliminate the possibility of an insurer canceling all policies covering a category of business or in a

geographic area

d. To reduce the opportunity for an insurer to red line

ANSWER B

( pp. 5.19-5.20)

OBJECTIVE 9

QUESTION

In evaluating an application, an underwriter realizes that the amount of insurance required is more than the

company is willing/able to provide. If the underwriter decides to issue the policy for the requested limits, she

will probably need to secure

a. Treaty reinsurance.

b. Increased surplus.

c. Facultative reinsurance.

d. Coinsurance.

ANSWER C

( p. 5.11)

QUESTION

If an insurance company's policyholders' surplus has decreased, this will adversely impact how much business

they are able to write. When this situation happens it results in a reduction in

a. Capacity.

b. Retention.

c. Adverse selection.

d. Profits.

ANSWER A

( p. 5.4)

Chapter 6

QUESTION

An insured suffers a serious loss, such as the destruction of his or her house, and hires someone to represent his

or her interests. The person hired is

a. A staff adjuster.

b. A producer.

c. A public adjuster.

d. An independent adjuster.

ANSWER C

( pp. 6.7-6.8)

QUESTION

Sometimes an insurer does not have enough policyholders in a given region to justify hiring its own claim

representatives. In these situations, the insurer is likely to use

a. An independent adjuster.

b. A third party administrator.


d. A regional adjuster.

ANSWER A

( pp. 6.6-6.7)

QUESTION

Sometimes an insurer will provide authority to some of its agents to settle and pay certain types of claims up to a

specified limit. When this occurs it is called

a. Binding authority.

b. Settlement authority.

c. Temporary authority.

d. Producer authority.

ANSWER B

( p. 6.7)

QUESTION

Generally, an inside claim representative

a. Meets with parties involved with the loss

b. Handles claims by phone or mail from the insurer's office

c. Visits the scene of the loss to investigate damages

d. Offers claim settlement service for a fee to insurers

ANSWER B

( p. 6.5)

QUESTION

Mary's car collides with two other cars, and several people are injured. The accident occurs near her insurer's

branch office location. What type claim representative will Mary's insurer generally use to handle this claim?

a. Independent adjuster

b. Public adjuster

c. Inside claim representative

d. Outside claim representative

ANSWER D

( p. 6.6)

QUESTION

All of the following describe an independent adjuster, EXCEPT:

a. Self-employed

b. Contracted by an insurer

c. Employee of an insurer

d. Employee of an adjusting firm

ANSWER C

( pp. 6.6-6.7)

QUESTION

Jim notifies ABC Insurer of an accident with an ABC insured in a state in which ABC does not do business. What

type of claim staff will ABC Insurer generally use to investigate this claim?

a. Inside claim representative

b. Outside claim representative

c. Independent adjuster

d. Independent agent

ANSWER C

( pp. 6.6-6.7)

QUESTION

ABC Widget Company pays for all its property losses up to $3 million and purchased insurance for losses over

$3 million. What is this plan called?

a. Coinsurance

b. Reinsurance

c. Self-insurance

d. Umbrella insurance

ANSWER C

( p. 6.8)

QUESTION

XYZ Company has established a self-insurance plan to treat its loss exposures. Other than its internal staff, what

resources would XYZ Company generally use to settle claims?

a. Independent adjusters

b. Public adjusters

c. Third party administrators

d. Outside claim representatives

ANSWER C

( pp. 6.8-6.9)

OBJECTIVE 1

QUESTION

Despite the unique challenges and variations from case to case, the last step in the claim handling process is

usually

a. Determine cause of loss.

b. Determine the amount of damages.

c. Verify coverages.

d. Negotiate and settle.

ANSWER D

( p. 6.9)

QUESTION

If an insured's house burns down to the ground due to lightening, the most difficult part of the claim handling

process will probably be

a. Determining the cause of loss.

b. Verifying coverage.

c. Determining the amount of damages.

d. Determining insurable interest.

ANSWER C

( p. 6.13)

QUESTION

In an auto accident where serious bodily injuries are involved, the most difficult part of the claim handling


a. Verifying coverage.

b. Determining cause of loss

c. Negotiating and settling the claim.


ANSWER C

( p. 6.9)

OBJECTIVE 2

QUESTION

In property insurance claims, there is sometimes a question of whether coverage exists or not. In these situations

the insurer will send a reservation of rights letter. The purpose of this letter is to advise the insured that

a. A coverage problem may exist.

b. The claim will be handled by an independent adjuster.

c. The policy may not be renewed due to loss frequency.

d. The claim is in excess of their deductible.

ANSWER A

( p. 6.10)

QUESTION

A person or entity that would suffer a financial loss if their property were damaged has

a. A contractual interest.

b. A discretionary interest.

c. A renewable interest.

d. An insurable interest.

ANSWER D

( p. 6.10)

QUESTION

If an insured submits a claim for a seven-year-old refrigerator that was damaged due to lightening, the adjuster

will probably factor in an allowance for wear and tear. This is called

a. Replacement cost.

b. Depreciation.

c. Stated amount.

d. Agreed amount.

ANSWER B

( p. 6.14)

QUESTION

If an insured wants to receive "new for old" in the event of a property loss, he or she would purchase

a. Actual Cash Value (ACV).

b. Replacement cost.

c. Agreed value.

d. Market value.

ANSWER B

( p. 6.14)

QUESTION

John has an unendorsed homeowner's policy. John's two-year-old bicycle is stolen. The bicycle's purchase price

was $800, and depreciation is estimated at $450. What is the bicycle's actual cash value?

a. $225

b. $350

c. $450

d. $800

ANSWER B

( p. 6.14)

QUESTION

Subrogation is the insurer's right to

a. Recover its claim payment from the party responsible

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

ANSWER A

( p. 6.17)

OBJECTIVE 3

QUESTION

In liability claims the claimant is referred to as the

a. Third party.

b. Second party.

c. First party.

d. Primary party.

ANSWER A

( p. 6.17)

QUESTION

With a liability claim, damages awarded for pain and suffering incurred by the claimant are referred to as

a. Punitive damages.

b. Special damages.

c. Secondary damages.

d. General damages.

ANSWER D

( p. 6.20)

QUESTION

What is an example of general damages?

a. Hospital expenses

b. Lost wages

c. Prescriptions

d. Disfigurement

ANSWER D

( p. 6.20)

QUESTION

A liability loss has the following damages:

Medical expenses $10,000

Damages for disfigurement $50,000

Damages for pain and suffering $100,000

What is the amount of special damages?

a. $10,000

b. $50,000

c. $100,000

d. $160,000

ANSWER A

( p. 6.20)

QUESTION





What is the amount of general damages?

a. $60,000

b. $110,000

c. $150,000

d. $160,000

ANSWER C

( p. 6.20)

OBJECTIVE 4

QUESTION

Property insurers are subject to the possibility of many claims occurring from a single event often straining their

resources. This is called

a. An accident.

b. An occurrence.

c. A catastrophe.

d. A simulation.

ANSWER C

( p. 6.21)

QUESTION

In order to expedite claim handling during a catastrophe, an insurer will consider modifying all of the following

procedures, EXCEPT:

a. Temporarily increasing claim handling authority for producers

b. Making advance payments to policyholders

c. Using abbreviated claim handling procedures

d. Suspending the use of independent adjusting firms

ANSWER D

( p. 6.23)

OBJECTIVE 5

QUESTION

One of the greatest challenges in dealing with a catastrophe is in the area of staffing. Which one of the following

is an unlikely response to this challenge?

a. Identify and train staff from other areas to assist.

b. Establish relationships with independent adjusters to help manage overflow.

c. Purchase catastrophe reinsurance.

d. Bring in catastrophe teams of claims representatives from other regions.

ANSWER C

( p. 6.22)

QUESTION

The person hired by an insured to represent the insured in handling a claim is called a

a. First party adjuster.

b. Outside claim adjuster.

c. Independent adjuster.

d. Public adjuster.

ANSWER D

( p. 6.6)

QUESTION

The insurer's right to recover and sell or otherwise dispose of insured property on which the insurer has paid a

total loss is called

a. Fiduciary rights.

b. Salvage rights.

c. Constructive rights.

d. Catastrophe rights.

ANSWER B

( pp. 6.3-6.27)

QUESTION

A loss reserve determined by the claim adjuster that is assigned to an individual claim is called a

a. Case reserve.

b. Bulk reserve.

c. Third party reserve.

d. Deferred reserve.

ANSWER A

( pp. 6.20-6.24)

Chapter 6

QUESTION

An insured suffers a serious loss, such as the destruction of his or her house, and hires someone to represent his

or her interests. The person hired is

a. A staff adjuster.

b. A producer.


d. An independent adjuster.

ANSWER C

( pp. 6.7-6.8)

QUESTION

Sometimes an insurer does not have enough policyholders in a given region to justify hiring its own claim

representatives. In these situations, the insurer is likely to use

a. An independent adjuster.

b. A third party administrator.


d. A regional adjuster.

ANSWER A

( pp. 6.6-6.7)

QUESTION

Sometimes an insurer will provide authority to some of its agents to settle and pay certain types of claims up to a

specified limit. When this occurs it is called

a. Binding authority.

b. Settlement authority.

c. Temporary authority.

d. Producer authority.

ANSWER B

( p. 6.7)

QUESTION

Generally, an inside claim representative

a. Meets with parties involved with the loss

b. Handles claims by phone or mail from the insurer's office

c. Visits the scene of the loss to investigate damages

d. Offers claim settlement service for a fee to insurers

ANSWER B

( p. 6.5)

QUESTION

Mary's car collides with two other cars, and several people are injured. The accident occurs near her insurer's

branch office location. What type claim representative will Mary's insurer generally use to handle this claim?

a. Independent adjuster

b. Public adjuster

c. Inside claim representative

d. Outside claim representative

ANSWER D

( p. 6.6)

QUESTION

All of the following describe an independent adjuster, EXCEPT:

a. Self-employed

b. Contracted by an insurer

c. Employee of an insurer

d. Employee of an adjusting firm

ANSWER C

( pp. 6.6-6.7)

QUESTION

Jim notifies ABC Insurer of an accident with an ABC insured in a state in which ABC does not do business. What

type of claim staff will ABC Insurer generally use to investigate this claim?

a. Inside claim representative

b. Outside claim representative

c. Independent adjuster

d. Independent agent

ANSWER C

( pp. 6.6-6.7)

QUESTION

ABC Widget Company pays for all its property losses up to $3 million and purchased insurance for losses over

$3 million. What is this plan called?

a. Coinsurance

b. Reinsurance

c. Self-insurance

d. Umbrella insurance

ANSWER C

( p. 6.8)

QUESTION

XYZ Company has established a self-insurance plan to treat its loss exposures. Other than its internal staff, what

resources would XYZ Company generally use to settle claims?

a. Independent adjusters

b. Public adjusters

c. Third party administrators

d. Outside claim representatives

ANSWER C

( pp. 6.8-6.9)

OBJECTIVE 1

QUESTION

Despite the unique challenges and variations from case to case, the last step in the claim handling process is

usually

a. Determine cause of loss.

b. Determine the amount of damages.

c. Verify coverages.

d. Negotiate and settle.

ANSWER D

( p. 6.9)

QUESTION

If an insured's house burns down to the ground due to lightening, the most difficult part of the claim handling


a. Determining the cause of loss.

b. Verifying coverage.

c. Determining the amount of damages.


ANSWER C

( p. 6.13)

QUESTION

In an auto accident where serious bodily injuries are involved, the most difficult part of the claim handling


a. Verifying coverage.

b. Determining cause of loss

c. Negotiating and settling the claim.


ANSWER C

( p. 6.9)

OBJECTIVE 2

QUESTION

In property insurance claims, there is sometimes a question of whether coverage exists or not. In these situations

the insurer will send a reservation of rights letter. The purpose of this letter is to advise the insured that

a. A coverage problem may exist.

b. The claim will be handled by an independent adjuster.

c. The policy may not be renewed due to loss frequency.

d. The claim is in excess of their deductible.

ANSWER A

( p. 6.10)

QUESTION

A person or entity that would suffer a financial loss if their property were damaged has

a. A contractual interest.

b. A discretionary interest.

c. A renewable interest.

d. An insurable interest.

ANSWER D

( p. 6.10)

QUESTION

If an insured submits a claim for a seven-year-old refrigerator that was damaged due to lightening, the adjuster

will probably factor in an allowance for wear and tear. This is called

a. Replacement cost.

b. Depreciation.

c. Stated amount.

d. Agreed amount.

ANSWER B

( p. 6.14)

QUESTION

If an insured wants to receive "new for old" in the event of a property loss, he or she would purchase

a. Actual Cash Value (ACV).

b. Replacement cost.

c. Agreed value.

d. Market value.

ANSWER B

( p. 6.14)

QUESTION

John has an unendorsed homeowner's policy. John's two-year-old bicycle is stolen. The bicycle's purchase price

was $800, and depreciation is estimated at $450. What is the bicycle's actual cash value?

a. $225

b. $350

c. $450

d. $800

ANSWER B

( p. 6.14)

QUESTION

Subrogation is the insurer's right to

a. Recover its claim payment from the party responsible

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

ANSWER A

( p. 6.17)

OBJECTIVE 3

QUESTION

In liability claims the claimant is referred to as the

a. Third party.

b. Second party.

c. First party.

d. Primary party.

ANSWER A

( p. 6.17)

QUESTION

With a liability claim, damages awarded for pain and suffering incurred by the claimant are referred to as

a. Punitive damages.

b. Special damages.

c. Secondary damages.

d. General damages.

ANSWER D

( p. 6.20)

QUESTION

What is an example of general damages?

a. Hospital expenses

b. Lost wages

c. Prescriptions

d. Disfigurement

ANSWER D

( p. 6.20)

QUESTION





What is the amount of special damages?

a. $10,000

b. $50,000

c. $100,000

d. $160,000

ANSWER A

( p. 6.20)

QUESTION





What is the amount of general damages?

a. $60,000

b. $110,000

c. $150,000

d. $160,000

ANSWER C

( p. 6.20)

OBJECTIVE 4

QUESTION

Property insurers are subject to the possibility of many claims occurring from a single event often straining their

resources. This is called

a. An accident.

b. An occurrence.

c. A catastrophe.

d. A simulation.

ANSWER C

( p. 6.21)

QUESTION

In order to expedite claim handling during a catastrophe, an insurer will consider modifying all of the following

procedures, EXCEPT:

a. Temporarily increasing claim handling authority for producers

b. Making advance payments to policyholders

c. Using abbreviated claim handling procedures

d. Suspending the use of independent adjusting firms

ANSWER D

( p. 6.23)

OBJECTIVE 5

QUESTION

One of the greatest challenges in dealing with a catastrophe is in the area of staffing. Which one of the following

is an unlikely response to this challenge?

a. Identify and train staff from other areas to assist.

b. Establish relationships with independent adjusters to help manage overflow.

c. Purchase catastrophe reinsurance.

d. Bring in catastrophe teams of claims representatives from other regions.

ANSWER C

( p. 6.22)

QUESTION

The person hired by an insured to represent the insured in handling a claim is called a

a. First party adjuster.

b. Outside claim adjuster.

c. Independent adjuster.

d. Public adjuster.

ANSWER D

( p. 6.6)

QUESTION

The insurer's right to recover and sell or otherwise dispose of insured property on which the insurer has paid a

total loss is called

a. Fiduciary rights.

b. Salvage rights.

c. Constructive rights.

d. Catastrophe rights.

ANSWER B

( pp. 6.3-6.27)

QUESTION

A loss reserve determined by the claim adjuster that is assigned to an individual claim is called a

a. Case reserve.

b. Bulk reserve.

c. Third party reserve.

d. Deferred reserve.

ANSWER A

( pp. 6.20-6.24)

Chapter 8

----------------------------------------------------------------------------


----------------------------------------------------------------------------

CASE: Printer's Thumb

The Printer's Thumb is a store specializing in printing and photocopying for local businesses. The Printer's

Thumb's customers depend on fast and accurate service for their printing needs. The Printer's Thumb has

developed a positive reputation by providing that service. The Printer's Thumb occupies a building it owns;

Ultimate Lender holds the mortgage to the building. All of the equipment used for printing and photocopying

was purchased with cash and is located in the building. The building and its contents are covered by a property

insurance "special form coverage" policy.

One evening after working hours, lightning struck the building resulting in a fire in the electrical wiring. Papers

that had accumulated in the trash ignited and substantial fire damage resulted. Damage resulted to the building,

contents, and a customer's original documents and files that were waiting to be copied.

Until repairs could be made, the Printer's Thumb rented a temporary office in an available space in a local mall.

The manager of The Printer's Thumb did not want to lose the customers that he had worked so hard to develop

by shutting down servicing while repairs were made. All of The Printer's Thumb's customers have agreed to

continue business at the new location.

----------------------------------------------------------------------------

OBJECTIVE 0

QUESTION

There are two basic types of property: real property and personal property. Wall-to-wall carpeting is typically

considered to be an example of real property because it

a. Tends to depreciate in value.

b. Is permanently installed.

c. Is readily visible.

d. Is easy to value.

ANSWER B

( p. 8.5)

QUESTION

Property insurance policies use the term "personal property" to refer to the

a. Contents of a building.

b. Equipment used to maintain the building.

c. Company's copyrights and trademarks.

d. Buildings not attached to the main building.

ANSWER A

( p. 8.5)

QUESTION

Many businesses have refrigeration equipment, production equipment, steam boilers, and air conditioning

systems. These are all examples of

a. Property in transit.

b. Personal property.

c. Mobile equipment.

d. Boilers and machinery.

ANSWER D

( p. 8.7)

OBJECTIVE 1

QUESTION

How will the claim representative assigned to The Printer's Thumb loss determine whether the peril is covered

by the property policy?

a. If the peril is not specifically excluded by the policy, coverage is provided.

b. If the peril is listed and described in the policy, coverage is provided.

c. If the manager of The Printer's Thumb can prove that the loss was caused by a covered peril, coverage is

provided.

d. If the manager of The Printer's Thumb can prove that he was not responsible for the loss, coverage is provided.

ANSWER A

( pp. 8.7-8.8)

QUESTION

Many property insurance policies list the covered causes of loss they intend to cover. These policies are

commonly known as

a. Special form.

b. Open perils.

c. Named perils.

d. Broad form.

ANSWER C

( p. 8.7)

QUESTION

An important difference between named perils and special form coverage involves the burden of proof. In a

special form policy, if a loss occurs to covered property it is initially assumed that coverage applies. If there is a

question regarding coverage, the burden of proof will be on the

a. Insured.

b. Mortgagee.

c. Insurer.

d. Claimant.

ANSWER C

( p. 8.8)

QUESTION

With a named perils policy, for coverage to apply, it must be proven that the loss was caused by a covered cause

of loss. The burden to prove this is on the

a. Insured.

b. Mortgagee.

c. Insurer.

d. Claimant.

ANSWER A

( p. 8.8)

OBJECTIVE 2

QUESTION

When property is lost or damaged, the value of the property is decreased. In addition to direct damage to the

property there could be additional loss to the business known as

a. Lost income.

b. Deferred income.

c. Historical income.

d. Residual income.

ANSWER A

( p. 8.9)

QUESTION

In order to determine the potential lost income to a business after a fire, an analysis must be conducted to

determine projected income compared to post-lost income. This is referred to as a

a. "What for" analysis.

b. "If only" analysis.

c. "What if" analysis.

d. "Why me" analysis.

ANSWER C

( p. 8.9)

OBJECTIVE 3

QUESTION

What was the Printer's Thumb's relationship to the customer whose original documents and files were destroyed

in the fire as they were waiting to be copied?

a. The customer was an unsecured lender.

b. The Printer's Thumb was a user of property.

c. The Printer's Thumb was a bailee.

d. The customer was a bailee.

ANSWER C

( p. 8.11)

QUESTION

The party most affected when property is lost, damaged, or destroyed is usually the

a. User of the property.

b. Secured lender.

c. Owner of the property.

d. Holder of the property.

ANSWER C

( p. 8.11)

QUESTION

Jim's Computer Repair will often take customers' computers into the shop for repairs and service. While Jim has

the customer's computer in his possession he is in the role of

a. A bailee.

b. A bailor.

c. A secured lender.

d. An agent.

ANSWER A

( p. 8.11)

QUESTION

In addition to protecting the owner, property insurance policies generally protect the secured lender's interest in

the financed property by

a. Issuing a mortgagee interest only policy.

b. Sending them a letter of intent.

c. Issuing a separate policy.

d. Naming them on the owner's policy.

ANSWER D

( p. 8.11)

OBJECTIVE 4

QUESTION

Sometimes property is not in a fixed location, but rather moves from location to location. In order to protect this

type of property one would need to purchase a

a. Dwelling policy.

b. Floater policy.

c. Flex policy.

d. Consequential policy.

ANSWER B

( p. 8.12)

QUESTION

Because personal property can be moved more easily than buildings, it is usually

a. Exposed to more perils.

b. Exposed to fewer perils.

c. Not Exposed to many perils.

d. Not exposed to insurable perils.

ANSWER A

( p. 8.14)

OBJECTIVE 5

QUESTION

For the loss that occurred at The Printer's Thumb building, what was the proximate cause of loss?

a. The lightning

b. The fire

c. The electrical wiring

d. The trash accumulation

ANSWER A

( pp. 8.16-8.17)

QUESTION

Water damage to a building following a windstorm is often not covered by a property policy unless

a. The windstorm is confirmed by the weather service.

b. The policy is written with named perils.

c. The policy is written with special coverage.

d. Wind caused an opening in the structure through which water entered.

ANSWER D

( p. 8.17)

QUESTION

The taking of property from a person by someone who has caused or threatened to cause personal harm is

a. Burglary.

b. Robbery.

c. Theft.

d. Dishonesty.

ANSWER B

( pp. 8.21-8.22)

QUESTION

If you were a property owner and wanted the broadest coverage available to protect your building you would

purchase

a. Basic form coverage.

b. Broader form coverage.

c. Broad form coverage.

d. Special form coverage.

ANSWER D

( p. 8.16)

QUESTION

It was a cool fall night and Jean decided to get a fire going in the fireplace. It took a while, but she soon had a

roaring blaze going. The next day when she was cleaning out the ashes she realized that a log with unique hand

carvings was inadvertently placed in the fireplace and was destroyed. If Jean submitted a claim to her insurer for

the value of this special log, the insurer would more than likely discuss with her the concept of a

a. Fireplace fire.

b. Fortuitous fire.

c. Friendly fire.

d. Foreseeable fire.

ANSWER C

( p. 8.16)

QUESTION

The event that sets in motion an uninterrupted chain of events contributing to a loss is called

a. Preventable cause.

b. Proximate cause.

c. Projected cause.

d. Preliminary cause.

ANSWER B

( p. 8.17)

OBJECTIVE 6

QUESTION

Catastrophe perils, such as war, are generally excluded from property insurance policies because the risk is

considered to be uninsurable since

a. The losses could be prevented.

b. The premiums required to cover the exposure would be unaffordable by most families and businesses.

c. Most families and businesses do not face the loss exposure.

d. The funds of the entire insurance industry might be inadequate to pay for all the claims

ANSWER D

( pp. 8.22-8.23)

QUESTION

Property insurance policies typically exclude loss from maintenance perils. Such losses are generally uninsurable

because

a. Covering such losses would result in a moral hazard.

b. They are either certain to occur, over time, or are avoidable.

c. Maintenance policies are written only through excess and surplus lines.

d. It is difficult (if not impossible) to identify the date of loss and therefore the policy or insurer providing

coverage.

ANSWER B

( p. 8.23)

QUESTION

Almost all property insurance policies exclude coverage for losses from catastrophes, such as war and nuclear

hazard, because

a. There might not be enough claim adjusters.

b. It is against public policy to cover these events.

c. Funds might not be adequate to pay all claims.

d. It is illegal to cover these events.

ANSWER C

( pp. 8.22-8.23)

QUESTION

Wear and tear, rust, marring, and scratching are examples of maintenance perils which are usually excluded in

property insurance policies. They are excluded because

a. There might not be enough claim adjusters.

b. It is against public policy to cover these events.

c. They are certain to occur.

d. It is illegal to cover these events.

ANSWER C

( p. 8.23)

QUESTION

Insurance is primarily designed for definite and accidental losses. Because of this, most policies will exclude

coverage for what is known as

a. Named perils.

b. Maintenance perils.

c. Broad perils.

d. Specified perils.

ANSWER B

( p. 8.23)

OBJECTIVE 7

QUESTION

The financial expenses incurred by The Printer's Thumb to rent the office space at the mall is which form of

financial consequence that might be covered by their property insurance policy?

a. A direct loss

b. Lost income

c. Extra expense

d. Optional rental reimbursement

ANSWER C

( pp. 8.24-8.25)

QUESTION

Bea's Restaurant suffered a very serious fire due to a lightening strike, and the structure had to be torn down.

The damage to the building is an example of a

a. Indirect loss.

b. Direct loss.

c. Time element loss.

d. Consequential loss.

ANSWER B

( p. 8.24)

QUESTION

Expenses that a business incurs to reduce the length of a business interruption or to enable a business to continue

some operations after the property has been damaged are called

a. Deferred expenses.

b. Extra expenses.

c. Supplementary expenses.

d. Emergency expenses.

ANSWER B

( p. 8.24)

QUESTION

Lost income and extra expenses resulting from direct loss to property can be insured. Such losses are often called

a. Potential element losses.

b. Future element losses.

c. Additional element losses.

d. Time element losses.

ANSWER D

( p. 8.24)

OBJECTIVE 8

QUESTION

Which one of the following describes the rights granted to a mortgagee versus the rights granted to a loss payee

under a property insurance policy?

a. A mortgagee and a loss payee have the same rights. The two clauses simply differentiate loans for real and

personal property.

b. In the event of a loss, the mortgagee is paid first, the named insured second, and any loss payee is third.

c. The terms are used interchangeably depending on the insurance contract.

d. A mortgagee is granted some rights that are greater than those granted to the named insured; however, the

loss payee has the same rights as the named insured.

ANSWER D

( pp. 8.26-8.27)

QUESTION

The person whose name(s) appear on the declarations page of an insurance policy and has the broadest coverage

is referred to as the

a. Insured.

b. Named insured.

c. Additional insured.

d. Other insured.

ANSWER B

( p. 8.25)

QUESTION

When a policy provides coverage for personal property and there is a secured lender, the secured lender will be

listed on the policy as a

a. Loss payee.

b. Mortgagee.

c. Bailee.

d. Named insured.

ANSWER A

( p. 8.27)

OBJECTIVE 9

QUESTION

A lender has an insurable interest in property until the

a. Policy is cancelled.

b. Loan is paid in full.

c. Loan is partially paid.

d. Policy is paid in full.

ANSWER B

( p. 8.26)

QUESTION

When an insured borrows money to purchase a car, the insured is required to add the bank to the auto policy as

a

a. Lessee.

b. Mortgagee.

c. Loss Payee.

d. Named insured.

ANSWER C

( p. 8.27)

OBJECTIVE 10

QUESTION

What purpose do insurance-to-value provisions serve in property insurance policies?

a. They discourage insurance fraud by ensuring that the property is worth the value requested in the policy

limits.

b. They encourage insureds to purchase an amount of insurance that is equal to, or close to, the value of the

covered property.

c. They establish the maximum amount the insurance company will pay for any loss.

d. They establish the options available to the insurance company in settling the loss.

ANSWER B

( pp. 8.29-8.30)

QUESTION

An insurance-to-value provision in property insurance policies that reduces the amount the insurer will pay for a

covered loss that occurs to property that is underinsured is

a. A coinsurance clause.

b. A deductible.

c. A policy limit.

d. The replacement value.

ANSWER A

( p. 8.30)

QUESTION

Insurers generally have the option to repair, replace, or pay the value of lost or damaged property. They will

usually go with the option that will

a. Reduce their costs.

b. Increase the insured's recovery.

c. Reduce the insured's costs.

d. Be the quickest.

ANSWER A

( p. 8.29)

QUESTION

A portion of a covered property loss that is subtracted from the amount the insurer would otherwise be obligated

to pay is the

a. Amount of the loan still outstanding.

b. Pro-rata premium.

c. Reinsurance.

d. Deductible.

ANSWER D

( p. 8.29)

QUESTION

Many property insurance policies impose a penalty if the property is underinsured. This provision is known as

a. Reinsurance.

b. Coinsurance.

c. The deductible.

d. Other insurance clause.

ANSWER B

( p. 8.30)

OBJECTIVE 11

QUESTION

Under a property insurance policy, a fire that leaves its intended place is known as a(n)

a. Hostile fire.

b. Angry fire.

c. Uncontrolled fire.

d. Wild fire.

ANSWER A

( p. 8.16)

QUESTION

Willful and malicious damage to or destruction of property is known as

a. War.

b. Vandalism.

c. Burglary.

d. Robbery.

ANSWER B

( p. 8.19)


QUESTION

The law that consists of the body of principles and rules established over time by courts on a case-by-case basis is

called

a. Administrative law.

b. Constitutional law.

c. Common law.

d. Regulatory law.

ANSWER C

( p. 9.5)

QUESTION

Laws made by formal enactments of legislative bodies are referred to as

a. Statutory law.

b. Common law.

c. Case law.

d. Constitutional law.

ANSWER A

( p. 9.5)

QUESTION

The source of all of our fundamental rights, such as freedom of speech, freedom of religion, etc., is found in

a. Common law.

b. Constitutional law.

c. Statutory law.

d. Court decisions.

ANSWER B

( p. 9.4)

QUESTION

The body of principles and rules established over time by courts on a case-by-case basis is known as

a. Statutory law.

b. Informal law.

c. Common law.

d. State law.

ANSWER C

( p. 9.5)

QUESTION

If an insurance company were presented with a very serious auto accident, what type of law would determine

who was at fault?

a. Criminal law

b. Constitutional law

c. Common law

d. Statutory law

ANSWER C

( p. 9.5)

OBJECTIVE 1

QUESTION

Wrongful acts that society deems harmful to the public welfare are addressed by

a. Criminal law.

b. Common law.

c. Contract law.


ANSWER A

( p. 9.6)

QUESTION

Contract law deals with contracts and settles contract disputes and is a branch of

a. Common law.

b. Civil law

c. Criminal law


ANSWER B

( p. 9.6)

QUESTION

John was involved in a serious accident that included injuries to the other party, and charged with driving while

intoxicated. The actions that are likely to be brought against John are

a. Statutory and common.

b. Civil and common.

c. Constitutional and criminal.

d. Civil and criminal.

ANSWER D

( p. 9.7)

OBJECTIVE 2

QUESTION

When John was driving his car, he was inattentive and was unable to stop in time to avoid hitting a car stopped

at a traffic light. He damaged the stopped car he collided with. What is the basis for John's liability?

a. Negligence

b. Absolute liability

c. Statutory liability

d. No-fault statutes

ANSWER A

( pp. 9.8-9.9)

QUESTION

A tort is

a. The legal right of recovery for damage or injury.

b. A failure to act in a reasonably prudent manner.

c. Any wrongful act other than a crime or breach of contract.

d. An unbroken chain of events that causes injury or damage.

ANSWER C

( p. 9.8)

QUESTION

Sean drove his vehicle even though his doctor advised him not to drive because the medication he was taking

caused drowsiness. Unfortunately, Sean was involved in an accident causing serious injury to himself and others.

In this situation, Sean committed a

a. Criminal act.

b. Breach of contract.

c. Tort.

d. Intentional tort.

ANSWER C

( p. 9.8)

QUESTION

Although largely modified or restated in statues, tort law is still based mainly on

a. Constitutional law.

b. Common law.

c. Contract law.

d. Statutory law.

ANSWER B

( p. 9.8)

QUESTION

Many states have enacted automobile "no-fault" laws. This ensures adequate compensation for injuries without

lengthy disputes over who's at fault. These laws are an example of

a. Statutory liability.

b. Common Law.

c. Tort law.

d. Contract law.

ANSWER A

( p. 9.12)

OBJECTIVE 3

QUESTION

All of the following are the elements of negligence, EXCEPT:

a. Duty owed to another

b. Breach of duty owed

c. Injury or damage

d. Minimum threshold of loss

ANSWER D

( pp. 9.8-9.9)

QUESTION

A man told a pedestrian that he would break her arm if she did not give him her purse. This is an example of

a. False arrest.

b. Invasion of privacy.

c. Assault.

d. Battery.

ANSWER C

( p. 9.10)

QUESTION

In speaking with John, Mark said that Peter embezzled $500,000 from their employer. If this statement is false, it

is an example of

a. Slander.

b. Libel.

c. Breach of warranty.

d. Misdemeanor.

ANSWER A

( p. 9.10)

QUESTION

The liability that someone could incur because of an inherently dangerous activity like building demolition is

called

a. Nonretractable liability.

b. Nontransferable.

c. Strict liability.

c. Compulsory liability.

ANSWER C

( p. 9.11)

QUESTION

In order to determine if someone was negligent there are four elements that needs to be considered. Negligence

will be proven if

a. Any of the four elements exist.

b. All of the elements exist.

c. Most of the elements exist.

d. Some of the elements exist.

ANSWER B

( pp. 9.8-9.8)

QUESTION

A building owner is responsible for keeping the premises safe and free of any situation that may cause injury to a

customer. Which one of the following elements of negligence does this address?

a. Duty owed

b. Breach of duty

c. Damages

d. Unbroken chain of events

ANSWER A

( pp. 9.8-9.9)

QUESTION

With regard to negligence, no recovery can be made unless someone

a. Has a witness.

b. Suffers injury or damage.

c. Has a contract.

d. Breaks the chain of events.

ANSWER B

( p. 9.9)

OBJECTIVE 4

QUESTION

In the event that a lawsuit against an insured is found to be groundless, the insurer will still end up paying

a. Special damages.

b. General damages.

c. Defense costs.

d. Compensatory damages.

ANSWER C

( p. 9.14)

QUESTION

An award of compensatory damages is the amount of money that has been judged to equal

a. All of the damages incurred.

b. Punitive damages only.

c. Special damages only.

d. Special and general damages.

ANSWER D

( p. 9.13)

OBJECTIVE 5

QUESTION

Anyone who owns or occupies property has a

a. Products liability loss exposure.

b. Professional liability loss exposure.

c. Premises liability loss exposure.

d. Pollution liability loss exposure.

ANSWER C

( p. 9.15)

QUESTION

A licensed electrician completes the job of rewiring a house and returns to his shop. With regard to the

completed work, the electrician has a

a. Completed operations loss exposure.

b. Premises liability loss exposure.

c. Business operations loss exposure.

d. Professional liability loss exposure.

ANSWER A

( p. 9.15)

QUESTION

County Janitorial Service is contracted local bars and taverns to clean their restrooms on a daily basis. County's

greatest liability exposure is probably

a. Liquor liability.

b. Professional liability.

c. Advertising liability.

d. Completed operations.

ANSWER D

( p. 9.15)

OBJECTIVE 6

QUESTION

Iron Works, Inc. is insured under a commercial liability policy listing several names on the declarations page.

The declarations lists Bart Danner, Paul Binder, and Iron Works, Inc. A policy provision would generally identify

which of the following as the insured(s) with whom the insurer has legal contact?

a. Bart Danner

b. Paul Binder

c. Iron Works, Inc.

d. All of the above

ANSWER A

( p. 9.18)

QUESTION

A liability policy generally gives the broadest protection to the

a. Mortgagee.

b. Loss payee.

c. Additional insured.

d. Named insured.

ANSWER D

( p. 9.18)

QUESTION

Many liability policies provide the spouse of the named insured with the same coverage that is provided to the

named insured if both

a. Have been married more than five years.

b. Live in the same household.

c. Have not been married before.

d. Do not have children under the age of 21.

ANSWER B

( p. 9.18)

OBJECTIVE 7

QUESTION

Pup's Pet Shop advertised and sold homemade dog treats that caused a customer's dog to have a serious allergic

reaction and die. This is an example of

a. Bodily injury.

b. Advertising injury.

c. Property damage.

d. Personal injury.

ANSWER C

( p. 9.20)

QUESTION

An injury arising from an intentional tort such as libel, slander, or invasion of privacy is called

a. Individual injury.

b. Bodily injury.

c. Property damage.

d. Personal injury.

ANSWER D

( p. 9.20)

QUESTION

Within the context of a CGL policy, claims for injury, sickness, disease, and resulting death are usually

considered to be

a. Bodily injury.

b. Personal injury.

c. Professional injury.

d. Individual injury.

ANSWER A

( pp. 9.19-9.20)

OBJECTIVE 8

QUESTION

Broad pollution coverage is not typically included in liability policies primarily as an attempt to

a. Eliminate duplicate coverage.

b. Avoid covering uninsurable losses.

c. Keep premiums reasonable.

d. Avoid insuring losses that could be prevented.

ANSWER C

( p. 9.22)

OBJECTIVE 9

QUESTION

Many liability policies cover medical payments for injured persons, regardless of

a. Where the incident took place.

b. When the injuries occurred.

c. The amount of damages.

d. Fault.

ANSWER D

( p. 9.25)

QUESTION

Hospital bills, physician's fees, lost income, and rehabilitation expenses are all examples of

a. Statutory damages.

b. Special damages.

c. General damages.

d. Punitive damages.

ANSWER B

( pp. 9.22-9.23)

OBJECTIVE 10

QUESTION

Assuming the retroactive date is the same as the policy inception date of a claims-made liability policy, which

one of the following is true for coverage to apply?

a. Coverage will never apply when the retroactive date is the same as the policy inception date.

b. Bodily injury or property damage must occur during the policy period or anytime before policy inception.

c. Claims must be submitted during the policy period.

d. Claims can be submitted anytime during or after the policy period.

ANSWER C

( pp. 9.26-9.27)

QUESTION

Liability coverage that covers an accident that occurs during the policy period, regardless of when the claim is

submitted to the insurer is which one of the following types of coverages?

a. Claims made coverage

b. Occurrence basis coverage

c. Retroactive coverage

d. Perpetual coverage

ANSWER B

( p. 9.26)

QUESTION

Under a liability policy that provides occurrence basis coverage, if a covered accident occurs during the policy

period, the claim will be covered, regardless of when the claim is

a. Submitted.

b. Settled.

c. Paid.

d. Closed.

ANSWER A

( p. 9.26)

QUESTION

From the insurer's perspective occurrence basis coverage means that liability claims may surface long after

a. An insured has died.

b. A policy has expired.

c. A policy was written.

d. A claim is made.

ANSWER B

( p. 9.26)

QUESTION

The date in a claims-made policy on or after injury or damage must occur in order to be covered is known as the

a. Retroactive date.

b. Reoccurrence date.

c. Expiration date.

d. Elapsed date.

ANSWER A

( p. 9.27)

OBJECTIVE 11

QUESTION

The aggregate limit in a liability policy is the maximum amount an insurer will pay for all covered losses during

the

a. Calendar year.

b. Policy period.

c. Retroactive period.

d. Fiscal year.

ANSWER B

( p. 9.27)

QUESTION

Under a liability policy, the maximum amount an insurer will pay for both bodily injury and property damage

arising from a single occurrence is known as the

a. Aggregate limit.

b. Split limit.

c. Occurrence limit.

d. Defined limit.

ANSWER C

( p. 9.27)

QUESTION

Defense costs in a liability policy are usually payable

a. In addition to the policy limits.

b. In addition to the premiums paid.

c. If there is money left after compensatory damages are paid.

d. If there is money left after punitive damages are paid.

ANSWER A

( p. 9.29)

OBJECTIVE 12

QUESTION

A wrongful act, other than a crime, committed by one party against another is a

a. Contract.

b. Tort.

c. Breach.

d. Civil crime.

ANSWER B

( p. 9.8)

QUESTION

A contractual provision that obligates one party to assume the financial consequences of legal liability for

another party is

a. A statute.

b. A hold-harmless agreement.

c. An example of strict liability.

d. A warranty.

ANSWER B

( p. 9.11)

QUESTION

Interest that may accrue on damages before a judgment has been rendered is

a. Retroactive interest.

b. Collateral interest.

c. Postjudgment interest.

d. Prejudgment interest.

ANSWER D

( p. 9.25)


----------------------------------------------------------------------------


----------------------------------------------------------------------------

CASE STUDY 1 : Jane Docker

Jane owns a ten-year-old compact car that she uses to drive to work each day. Jane drives 20 miles into the city

and parks her car on a street near her office.

Jane's son, Joe, is 15-years-old, and he will obtain his driver's license this summer when he becomes 16. Joe has

already expressed an interest in buying his own vehicle or driving Jane's compact car.

Jane is concerned about the cost of owning a vehicle, buying the insurance, and the risk of parking the vehicle on

the street. If Joe buys his own vehicle, she knows that her expenses and her concerns will increase.

Jane is considering risk management alternatives to help her reduce expenses and risks.

----------------------------------------------------------------------------

CASE STUDY 2 : Frank & Jan

Frank and Jan are each twenty-five years old, and they have purchased their first home together. It required all of

their savings and some money from their parents to make their down payment. The house needs repairs that

they will do themselves and with the help of friends. The first project will be to seal the lead paint that is on the

interior of the house and remove flaking lead paint that is on the exterior of the house.

d Frank and Jan are also aware that a buried heating-oil tank in the yard is leaking slowly, but they have decided

that replacing that tank must wait until they have the funds in a year or two.

----------------------------------------------------------------------------

OBJECTIVE 0

QUESTION

Risk management concepts in one form or another apply

a. Only to large companies.

b. Only to international companies.

c. To all companies but not families.

d. To all companies and families.

ANSWER D

( pp. 10.3-10.4)

QUESTION

The first step in the risk management process is to

a. Implement the selected technique.

b. Select the appropriate technique.

c. Identify loss exposures.

d. Monitor results.

ANSWER C

( p. 10.4)

QUESTION

The last step in the risk management process is to

a. Implement the selected technique.

b. Select the appropriate technique.

c. Identify loss exposures.

d. Monitor results.

ANSWER D

( p. 10.4)

OBJECTIVE 1

QUESTION

Grocers' Warehouse is a newly created business that will open next month. It will include a retail operation as

well as 500,000 square feet of warehouse space, loading docks, etc. Which one of the following methods of

identifying loss exposures would be least applicable in this situation?

a. Physical inspection

b. Loss exposure survey

c. Loss histories

d. Interviews with management

ANSWER C

( pp. 10.6-10.7)

QUESTION

Loss exposure surveys or checklists are comprehensive and apply to almost any organization. The survey's major

weakness is that

a. They are expensive.

b. They may omit an important exposure.

c. They have to be custom designed for each business.

d. They take too long to complete.

ANSWER B

( p. 10.5)

QUESTION

Loss histories can offer great insight into an organization's loss exposures. The problem with depending too

heavily on this one source is that some past events might

a. Not have been recorded.

b. Have been insured.

c. Still be unresolved.

d. Not have been insured.

ANSWER A

( pp. 10.6-10.7)

OBJECTIVE 2

QUESTION

A risk manager in an industrial plant is trying to determine where she needs to spend most of her time in

reducing the number of accidents. The plant has a history of work-related injuries, and she wants to make sure

that is reduced. What should the risk manager measure to determine where she should expend her efforts?

a. The number of workers in each area

b. The flow chart bottlenecks

c. The loss frequency

d. The loss severity

ANSWER C

( p. 10.7)

QUESTION

Why is it easier to gauge the potential severity of property losses than of liability losses?

a. Property loss exposures are confined to the building and contents. Liability losses can encompass the

surrounding grounds of the business.

b. Property loss exposures have a documented annual frequency and severity that can be determined as an

average according to the type of business. Liability loss exposures cannot be determined with this level of

accuracy.

c. Property loss exposures have a calculable frequency. The frequency of liability loss exposures cannot be

determined with accuracy.

d. Property loss exposures have a calculable severity. The severity of liability loss exposures is much harder to

determine.

ANSWER D

( p. 10.7)

QUESTION

The dollar amount of damage that results or might result from a loss exposure is the

a. Loss severity.

b. Loss frequency.

c. Loss prevention.

d. Loss reduction.

ANSWER A

( p. 10.7)

QUESTION

Analyzing the potential frequency and severity of a loss exposure enables the risk manager to

a. Retain loss exposures.

b. Avoid loss exposures.

c. Prioritize loss exposures.

d. Transfer loss exposures.

ANSWER C

( p. 10.7)

QUESTION

The monetary amount of damage that results from a loss is known as

a. The deductible.

b. Loss severity.

c. Loss Frequency.

d. The retention.

ANSWER B

( p. 10.7)

QUESTION

Gauging the severity of property losses is easier than gauging the severity of liability losses because property

losses

a. Tend to be insured.

b. Have an infinite value

c. Tend to happen more frequently.

d. Are easier to calculate.

ANSWER D

( p. 10.7)

OBJECTIVE 3

QUESTION

If Jane sells her vehicle and begins using public transportation, which one of the following risk management

techniques will she be applying to her situation?

a. Avoidance

b. Loss control

c. Noninsurance transfer

d. Retention

ANSWER A

( p. 10.8)

QUESTION

Jane is concerned that Joe might be hurt in her compact car if he is involved in an accident. She has read

consumer reports indicating that people occupying trucks and sports utility vehicles suffer less injuries when

their vehicles are involved in accidents. If Jane trades her compact car in for a sports utility vehicle, which one of

the following risk management techniques will she be applying?

a. Avoidance

b. Loss prevention

c. Loss reduction

d. Noninsurance transfer

ANSWER C

( p. 10.9)

QUESTION

While she is at work, Jane has begun parking in a lot that has an attendant to reduce the chance of her vehicle

being damaged while it is parked on the street. Which one of the following risk management techniques is Jane

applying?

a. Avoidance

b. Loss prevention

c. Noninsurance transfer

d. Retention

ANSWER B

( p. 10.9)

QUESTION

The technique that is used to decrease the frequency and/or severity of losses is

a. Risk control.

b. Risk financing.

c. Retention.

d. Transfer.

ANSWER A

( p. 10.8)

QUESTION

Some businesses require key executives to fly on different flights. In case there would be an accident this would

avoid wiping out the entire management team. This is an example of which one of the following risk control

techniques?

a. Avoidance

b. Loss prevention

c. Separation

d. Duplication

ANSWER C

( p. 10.9)

QUESTION

Waking up on a cold February morning, Amy discovers the roads are icy and snow covered. Concerned about

driving to work and possibly having an accident she decides to take the day off. Amy's decision is an example of

which one of the following risk management techniques?

a. Loss prevention

b. Loss reduction

c. Avoidance

d. Separation

ANSWER C

( p. 10.8)

OBJECTIVE 4

QUESTION

Jane has decided to apply a retention risk management technique to reduce her insurance premium. She is

deleting the physical damage coverage (collision and other-than-collision) on her car. Her car is currently worth

$3,000. She will be able to save $250 every six months.

Based on informal guidelines for selecting risk management techniques, is this a good decision?

a. Yes, Jane will save $500 per year.

b. Yes, if Jane 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.

ANSWER B

( pp. 10.10-10.11)

QUESTION

Alan Peachtree owns a hobby shop, which he runs from a small garage-like structure that is not attached to his

home. Alan, in deciding not to purchase property coverage on the building, has set aside funds to pay for

possible property damage losses. What risk management technique, if any, is Alan using?

a. Avoidance

b. Non-Insurance transfer

c. Retention

d. Loss control

ANSWER C

( p. 10.10)

QUESTION

For loss exposures with high frequency and low severity, the two best risk management alternatives are retention

and

a. Loss control.

b. Insurance.

c. Avoidance.

d. Transfer.

ANSWER A

( p. 10.14)

QUESTION

Exposures with the potential of low frequency but high severity should generally be insured because they are

a. Highly predictable.

b. Less expensive.

c. Highly unpredictable.

d. More expensive.

ANSWER C

( p. 10.13)

OBJECTIVE 5

QUESTION

In smaller organizations and in households, the person making risk management decisions is often the person

a. Least qualified.

b. Settling the claims.

c. Implementing the program.

d. Causing the losses.

ANSWER C

( p. 10.15)

QUESTION

Larger organizations often have a written risk management statement outlining procedures and authority for

a. Implementing risk management techniques.

b. Eliminating risk management techniques.

c. Excluding risk management techniques.

d. Identifying risk management techniques.

ANSWER A

( p. 10.15)

OBJECTIVE 6

QUESTION

How might the monitoring and revising step in the risk management process be simply described?

a. Check to make sure the decisions made are still valid, and make changes as needed.

b. Create a new workflow and identify new bottlenecks that have occurred.

c. Make sure insurance is not being used as a substitute for loss control.

d. Identify noninsurance transfers through hold harmless agreements.

ANSWER A

( p. 10.16)

QUESTION

Monitoring a risk management program is an

a. Occasional activity.

b. Annual activity.

c. Ongoing activity.

d. Once and done activity.

ANSWER C

( p. 10.16)

QUESTION

In order to monitor and modify the risk management program, the risk manager must periodically

a. Identify and analyze new and existing loss exposures.

b. Purchase insurance.

c. Rewrite the risk management mission.

d. Change insurance companies.

ANSWER A

( p. 10.16)

OBJECTIVE 7

QUESTION

What is a benefit that a business can receive by applying sound risk management?

a. It will meet state and federal safety regulations.

b. It will have a better opportunity to achieve business goals.

c. It will not have to worry about losses.

d. It will be able to attract and retain talented employees and managers.

ANSWER B

( pp. 10.17-10.18)

QUESTION

What will Jane be able to gain as a benefit by applying sound risk management to her transportation situation?

a. No future increases in her insurance premium.

b. A loss free future

c. Economic growth

d. Greater peace of mind

ANSWER D

( pp. 10.17-10.18)

QUESTION

Businesses, individuals, and families that practice sound risk management can benefit society by doing all of the

following, EXCEPT:

a. Increasing interest in leisure activities

b. Reducing the overall number of losses

c. Controlling medical expenses through reduced injuries

d. Stimulating economic growth

ANSWER A

( p. 10.18)

QUESTION

One of the benefits to a business of retaining a loss exposure instead of insuring it is

a. A reduction in expenses.

b. A greater peace of mind.

c. Access to the insurer's loss control services.

d. Increase in expenses.

ANSWER A

( p. 10.17)

OBJECTIVE 8

QUESTION

What is an effective way for Frank and Jan to begin identifying the liability loss exposures associated with their

new home?

a. Hire a professional risk manager

b. Determine the value of the home and contents

c. Purchase a homeowners insurance policy

d. Inspect the home to look for items and activities that might cause injury or damage

ANSWER D

( pp. 10.19-10.21)

QUESTION

Frank and Jan researched lead paint hazards and abatement techniques on the Internet. They discovered that the

best action they can take inside the house is to remove loose paint chips and dust, replace the windows, and seal

the walls with a paint designed for that purpose.

What risk management technique does this activity involve?

a. Avoidance

b. Loss control

c. Retention

d. Noninsurance transfer

ANSWER B

( pp. 10.19-10.21)

QUESTION

Frank and Jan have discovered that the pollution that is resulting from the fuel oil leaking into the soil is not

covered by their homeowners insurance policy. They fear that the oil might seep into the water table and

contaminate their neighbors' well water. Illness and damage that might result would be very expensive. Frank

and Jan can purchase an endorsement that will provide coverage for this pollution exposure. The endorsement

would cost $50 per year.

Is this an effective risk management selection for Frank and Jan until they can replace the tank?

a. Yes, they should do this indefinitely and not replace the tank.

b. Yes, they are exchanging a large exposure for a little premium.

c. No, they are spending a lot of money for little protection.

d. No, each neighbor will have insurance to cover any damage to their wells.

ANSWER B

( pp. 10.19-10.21)

QUESTION

Jeff recently started a consulting business. One of his concerns is that he will be sued for giving erroneous advice

to a client. What would be the best risk management technique for Jeff's use in this situation?

a. Retention

b. Avoidance

c. Insurance

d. Duplication

ANSWER C

( pp. 10.19-10.20)

OBJECTIVE 9

QUESTION

The process of managing exposures to accidental losses is known as

a. Insurance.

b. Risk management.

c. Retention.

d. Avoidance.

ANSWER B

( p. 10.3)

QUESTION

The risk control technique that seeks to lower the severity of losses is

a. Loss prevention.

b. Risk financing.

c. Loss reduction.

d. Duplication.

ANSWER C

( p. 10.9)

QUESTION

When a household or organization decides to keep all or part of a loss exposure this is known as

a. Insurance.

b. Retention.

c. Reduction.

d. Separation.

ANSWER B

( p. 10.10)

24877280-Ins-21

Documents

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