General Insurance (2)

\Insurance CCP – Syllabus for Foundation Level

ELM -> Self Service -> All Learning -> Click on the CCP name -> Notes & Attachments

1. Insurance – Concepts

Q1. Insurance is a contract between1. Insured and State2. Insurer and State3. Insured and Insurer4. Insured and Agent

Q2. Insurance is not a:1. Business, including various operations that must be conducted in a way to

generate income.2. Contract, between the insured and the insurer3. Barter, between the insured and insurer 4. Transfer system, in which insured transfers the chance of financial loss to insurer

Q3. A loss exposure is any: 1. Condition or situation that presents the possibility of a loss2. Condition or situation that guarantees the loss3. Event for which insurance pays4. Condition for sharing the insurance payment between insureds

Q4. According to law of large numbers:1. As the number of similar but independent exposure units decreases, the relative

accuracy of predictions about future outcomes based on these exposure units increases.

2. As the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes based on these exposure units decreases.

3. As the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes based on these exposure units remains constant.

4. As the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes based on these exposure units also increases.

Q5. What are the historical terms for “Property” and “Liability” insurance?1. Damage Insurance and Responsibility Insurance2. Replacement insurance and III Party Insurance3. Fire Insurance and Casualty Insurance4. Physical Insurance and Legal Insurance

Q6. Which line of insurance is also known as “Third-party insurance”?1. Property Insurance2. Liability Insurance3. Life Insurance4. Health Insurance

Q7. All of the following are types of property insurance EXCEPT:1. Fire and allied lines2. Crime3. Business income4. Directors and officers

Q 8. All of the following are types of insurance provided by the federal government EXCEPT:1. Flood insurance

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2. Crop insurance3. Tenants insurance4. Social Security

Q9. Term life insurance:1. Provides lifetime protection2. Accrues a cash value3. Provides maximum protection for the lowest cost4. Allows the policyholder to borrow against policy savings

Q10. All of the following are ways in which state insurance departments regulate and protect consumers EXCEPT:1. Insurers must maintain a certain ratio of agents to residents in an area2. Insurers must be licensed to write insurance policies in a given state3. Insurers must meet certain tests of financial strength4. Insurers must comply with laws on marketing, underwriting, and claims practices

Q11. Which one of the following is a reason why government insurance programs exist?1. Because the government has expertise in handling insurance claims2. Because the government has the necessary financial resources3. Because the government has infrastructure and staff to provide insurance4. Because the government has legal representatives in every state of the union

Q12. All of the following are types of private insurers EXCEPT:1. Stock insurers2. Mutual insurers3. Participating insurance consortiums4. Reciprocal insurance exchanges

Q13. State insurance departments regulate insurance rates to protect consumers against rates that are all of the following EXCEPT:1. Excessive2. Inadequate3. Class specific4. Unfairly discriminatory

Q14. A mutual insurance company is owned by:1. Independent investors2. Policyholders3. State insurance departments4. Mutual funds

Q15. All of the following are characteristics of ideally insurable loss exposures EXCEPT:1. Losses that are definite and measurable2. Losses that are accidental3. Large number of similar exposure units4. Large concentration of financial capacity

Q16. Whole life insurance:1. Provides coverage for a specified period such as 5 or 10 years2. Lapses when the policyholder reaches age 653. Is primarily an investment vehicle4. Accrues a cash value

Q17. What is the process by which insurers decide which potential customers to insure and what coverage to offer them?1. Reinsuring2. Marketing

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3. Prospecting4. Underwriting

Q18. Which one of the following is most likely to have the characteristics of an ideally insurable loss exposure?1. Explosion of an industrial factory steam boiler2. Sun damage to an exterior paint finish3. Physical damage to a lunar land rover4. Termite damage to a home

Q19. 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:1. Subrogate2. Recoup3. Indemnify4. Rectify

Q20. 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:1. A personnel loss exposure for Alloto, Inc.2. A human loss exposure for Alloto, Inc.3. A liability loss exposure for Alloto, Inc.4. A loss transfer loss exposure for Alloto , Inc.

Q21. A Bond guaranteeing that a principal will carry out the obligation for which they are bonded for ' is-1. Surety Bond2. Fidelity Bond

Q23. Act of throwing overboard part of a vessel's cargo or hull in hopes of saving a ship from sinking is known as what?1. Replacement2. Jettison3. Abandonment

Q24. A class rating is a rate applied to those risks, which are different1. Serious2. Joking

Q25. Depreciation is decrease in the value of property due to deflation.1. Agree2. Disagree

Q26. Fraternal insurance is offered to a social organization for their members1. Agree2. Disagree

Q27. An amount returned to a policyholder by an insurance company out of its earnings is called…1. Claim2. Dividend

Q28. Retention is the amount of risk retained by which of the following?3

1. Insured2. Underwriter3. Insurance company

Q29. Fidelity Bond are written to cover the oblige, usually an employer against loss from…1. Dishonest Act2. Honest Act3. Accident

Q30. Which of these do not fall under the catastrophe category?1. Fire2. Hurricane3. Earthquake

Types of Insurers

Q1. Purpose of formation of Stock Insurance Company is:1. Returning a profit to its stockholders2. Providing insurance to its stockholders3. Returning a profit to its policyholders4. Providing insurance to its policyholders

Q2. Purpose of formation of Mutual Insurance Company is:1. Returning a profit to its stockholders2. Providing insurance to its stockholders3. Returning a profit to its policyholders4. Providing insurance to its policyholders

Q3. Demutualization refer to a process by which:1. Stock insurance company becomes a Mutual Insurance Company2. Mutual Insurance company stops investing in mutual funds for investment income3. Mutual insurance company becomes a stock insurance company4. Allows Mutual insurance company to charge its insured an additional premium

after the policy has gone into effect

Q4. A reciprocal insurance exchange is operated through:1. Board of directors elected by subscribers or members2. Chairperson elected by members or subscriber and board of director of an

licensed insurance company3. Attorney-in-fact, an authorized manager bound by contract with

subscribers or members4. Chief justice of state bound by state laws.

Q5. State Farm Insurance Companies is a type of:1. Stock insurance company2. Mutual insurance company3. Reciprocal insurance exchange4. Lloyds association

Q6. United State Automobile Association (USAA) is a type of:1. Stock insurance company2. Mutual insurance company3. Reciprocal insurance exchange4. Lloyds association

Q7. All factors have contributed to the growth of captive insurance companies except:1. Provides insurance coverage at a lower cost than other private insurance

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2. Eliminates unavailability of desired insurance coverage3. Chances of loss and claims are minimized4. Improves cash flow

Q8. Reinsurance is a type of insurance in which:1. Insured goes for a second insurance for the same loss exposure for same exposed

unit with a different insurer2. One insurer transfers some or all of the loss exposures from policies

written for its insured to another insurer3. Private insurance companies are forced to provide insurance through state laws4. Insurer is allow to charge extra premium to provide insurance for loss exposures

outside its business line

Q9. Social security program covers all the benefit except:1. Retirement benefits for the elderly2. Survivorship benefits for dependents of deceased workers3. Disability payments for disabled workers4. Liability lawsuits charges

Q10. A worker compensation insurance plan, which does not allow private insurance companies to write WC in that state, is known as:1. Competitive State fund2. Insurance guarantee fund3. Monopolistic state fund4. Residual market plan

Q11. Automobile owners with poor driving records can obtain auto liability insurance through:1. Fair access to insurance requirements plan (FAIR)2. Automobile insurance plan3. Insurance guarantee fund4. Monopolistic state fund

Q12. Insurance guarantee fund:1. Guarantees that every person obtains desired insurance2. Provides a system to pay the claims of insolvent insurers3. Guarantees insurance companies a fixed flow of premium in case a insured

default premium payment4. Reimburses legal cost borne by insured in liability suits

Q13. Which one of the following describes the characteristics of a mutual insurance company? 1. A Corporation owned by stockholders that earns profits for the stockholders. 2. An unincorporated association that provides reciprocal coverage to subscribers. 3. A Corporation owned by policyholders that provides insurance to its

policyholders. 4. An unincorporated association that earns profits for its individual investors.

Q14. 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 1. Workers compensation insurance funds 2. Unemployment insurance programs3. Automobile insurance plans4. The National Flood Insurance Program

Q15. Workers compensation insurance is offered through a residual market plan in some states, which means 1. It is a state insurance plan that competes with private insurers to provide the

insurance. 5

2. It is a state fund that provides a system to pay the claims of insolvent insurers. 3. It is a program that makes insurance available to those who cannot

obtain coverage because private insurers will not voluntarily provide it. 4. It is an insurance plan that is the only source of workers compensation insurance

allowed in the state.

Q16. How does a stock insurance insurer differ from a reciprocal insurance exchange? 1. A stock company is owned by stockholders. A reciprocal insurance

exchange is owned by subscribers. 2. A stock company provides insurance to its policyholder-owners. A reciprocal

insurance provides insurance to investors. 3. Each is owned by stockholders; however, the reciprocal insurance exchange

provides coverage to investors. 4. Each is formed to provide profit to investors; however, the stock insurer is

managed through a board of directors.

Q17. The Social Security program can be simply described as 1. A federal program that provides retirement, survivorship, disability, and

medical benefits to eligible individuals. 2. A federal welfare benefits program that provides a minimum level of housing,

food, and income to eligible individuals and families. 3. A state unemployment insurance program that provides income for a limited

period of time to workers who become unemployed. 4. A state program that provides a base level of income for retirement based on the

level of income and duration of employment.

Q18. A ratemaking concept in which rates are based on calculated loss experience and insured with similar characteristics are placed in the same rating class is called 1. Unfair discrimination2. Premium differential3. Actuarial equity4. Social equity

Q19 A reinsurance company 1. Is formed to write all or part of the insurance for a parent company 2. Provides insurance for loss exposures that private insurers are unwilling to

provide 3. Transfers losses to a primary insurer 4. Accepts loss exposures from a primary insurer

Q20. 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? 1. By obtaining coverage through the excess and surplus lines market. 2. By pooling the risk with other shopping center owners with similar exposures. 3. Through a proportionate sharing arrangement with multiple insurers. 4. From alien insurers in countries that also celebrate holidays with firecrackers.

Q21. In a northeastern state, Old Stable Insurance, an old and established insurance company that writes homeowners insurance in the northeast experienced three unprofitable years in a row. Large winter storms resulted in damage to homes that Old Stable insured. The losses for the last three years have drained the company's financial resources.

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At the end of the third year of the losses, the Old Stable declared bankruptcy when it became insolvent. Old Stable was unable to pay for the claims that resulted from the last storm. Ted Van Wrinkle is a policyholder with Old Stable who filed a claim as a result of the last storm. Ted's house was damaged when the weight of snow and ice collapsed a portion of his roof. How will Ted be paid for his loss? 1. Ted must join as a creditor in Old Stable's bankruptcy and receive a portion of his

loss. 2. The guaranty fund in Ted's state will pay for Ted's losses. 3. Ted will not be paid because there is no system to cover insolvency caused by

underwriting losses. 4. The state government will provide compensation to Ted through the state's FAIR

plan.

3. Insurance Regulation

Q1. What is the legal doctrine which prevents a person from denying the truth of a previous representation of fact, especially when such representation has been relied on by the one to whom the statement was made called ?1. Tort2. Hazard 3. Estoppel

Q2. A bond is a contract, which involves at least how many parties?1. Two party contract2. Three party contract3. Four or more part contract

Q3. A document drafted by the NAIC reflecting the proposed solution to a given problem and provides a common basis to the states for drafting law that affects insurance industry is known as:1. Model law2. State statute3. Common law4. Insurance guideline

Q4. Price of insurance for each unit of exposure is known as:1. Premium2. Rate3. Coverage4. Limits

Q5. Person analyzing data on past losses and the expenses associated with the losses and, combining this with other information to develop insurance rates is known as:1. Adjuster2. Actuary3. Aggregator4. Underwriter

Q6. Actuarial Equity is:1. A rating concept that considers rates to be unfairly discriminatory if they penalize

an insured for characteristics that are beyond the insured’s control2. An underwriting concept, where underwriters select probable customers based on

actuarial guidelines3. A process by which insurer calculate rates that determine the premium to charge

for an insurance policy

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4. A rate making concept through which actuaries base rates on actuarially calculated loss experience and place insured with similar characteristics in the same rating class.

Q7. A insurance company “X” is incorporated in London, England and licensed to operate in New Hampshire, USA will be known as:1. Domestic Insurer2. Foreign Insurer3. Alien Insurer4. Nonadmitted Insurer

Q8. All the following are the reason for existence of excess and surplus lines of insurance except:1. Unusual or unique exposures2. Insured needing high limits3. Nonstandard business4. Not able to obtain standard license

Q9. The type of insurance rating law that requires rate approval by the state insurance department before the rates can be used is1. Flex rating law2. Open competition3. File-and-use law4. Prior-approval law

Q10. 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 1. Ensure that state insurance departments not mistake these companies for life

insurers. 2. Provide accounting expertise for those state insurance departments that do not

have staff actuaries. 3. Simplify the state insurance department's task of comparing the

financial reports of many different insurers. 4. Capture the essential criteria required for rate regulation.

Q11. States regulate the excess and surplus lines market by 1. Establishing a monitoring board comprised of all insurers licensed to do business

in the state. 2. Examining the market conduct practices of the unlicensed insurers. 3. Licensing the excess and surplus lines brokers that transact business

with the unlicensed insurers. 4. Approving the policy forms and rates used by the unlicensed insurers.

Q12. Which one of the following provides a step-by-step explanation of how insurance rates are developed? 1. An actuary

a. Analyzes the loss trends for each rating classification b. Recommends rate increases for each classification c. Provides recommendations through rating bureaus

2. An actuary a. Predicts future losses based on factors such as weather patterns and

litigation trends b. Determines required rate increases by classification

3. The insurer a. Analyzes past loss increases b. Determines the profit margin required c. Distributes the loss increases and required profit among all insureds

4. The insurer a. Develops each insurer's share of predicted losses

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b. Adds an amount sufficient to cover predicted expenses and a margin for error, profit, and catastrophes

Q13. All states require insurance agents to be licensed to transact insurance business in the state. Further, agents must meet continuing education requirements to maintain their licenses. All of these requirements have what purpose? 1. To control the number of agents that transact business in a state to reduce the

chance of over-aggressive competition. 2. To ensure that these insurance company representative have prescribed

minimum level of insurance knowledge. 3. To improve the image and public perception of the insurance profession. 4. To maintain a level of vigilance in protecting insurance companies against

fraudulent behavior by the public.

Q14. One of the methods used by regulators to ensure insurance company solvency is through the Insurance Regulatory Information System (IRIS), which is 1. The licensing system required for insurance companies that transact business in a

state. 2. The licensing process for alien insurers that are incorporated in another country. 3. 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.

4. Financial ratios developed from insurers' financial statements to determine an insurers' overall financial condition.

Q15. Why would insurance regulators have a goal of assuring that the premiums charged by insurers are adequate? 1. To maintain insurer solvency 2. To eliminate the potential of a monopoly3. To protect consumers from high insurance rates 4. To promote equity among insurers

Q16. The National Association of Insurance Commissions (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? 1. Develop a Model Bill for the proposed solution and distribute it to the

states for possible enactment. 2. Require each state insurance commissioner to draft a proposed solution to the

problem tailored to his or her state. 3. Draft a federal bill and lobby for legislative action to address the problem

uniformly. 4. Circulate a petition among all state legislators to join in a countrywide campaign

to pass tough laws in each state.

Q17. 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 violation in the last three years.

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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? 1. 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.

2. 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.

3. 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.

4. 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.

4. Financial Performance of Insurers

Q1. Loss Ratio is a ratio of claims to which of the following?1. Part of annuity payment2. Operating expenses3. Premiums

Q2. Which of the following is not a mode of premium payment?1. Quarterly2. Annually3. Fortnightly

Q3. Which of the following do not fall under liquidation?1. Selling of Assets for cash2. Paying off of part liability.3. Dissolving of a company

Q4. Which part of a policy is not covered by Net premium?1. Profits2. Benefits of policy3. Advantage

Q5. Rules of accounting allows insurer to recognize:1. Only unearned premiums as income for particular year2. Only earned premiums as income for particular year3. Only written premiums as income for particular year4. Both earned and unearned premiums as income for particular year

Q6. A policy is made effective on Sept 1, 2001 for $1000 for a period of 12 months. At the end of the year i.e. Dec. 31, 2001, company will record:1. Written premium: $400; Earned premium: $1000; Unearned premium: $8002. Written premium: $800; Earned premium: $400; Unearned premium: $10003. Written premium: $1000; Earned premium: $800; Unearned premium: $4004. Written premium: $1000; Earned premium: $400; Unearned premium:

$800

Q7. A policy is made effective on Sept 1, 2001 for $1000 for a period of 12 months. What will be the Written/Earned/Unearned premium amounts recorded by the company at the end of year i.e. Dec 31,2002. (Policy is not renewed)1. Written premium: $1000; Earned premium: $800; Unearned premium: $2002. Written premium: $0; Earned premium: $800; Unearned premium: $200

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3. Written premium: $1000; Earned premium: $1000; Unearned premium: $04. Written premium: $0; Earned premium: $800; Unearned premium: $05. Written premium: $0; Earned premium: $1000; Unearned premium: $0

Q8. Amounts designated by insurance companies to pay claims for losses that have already occurred but are not yet settled is known as:1. Policy holder surplus2. Loss reserve3. Incurred loss4. Paid loss

Q9. Overall gain/loss from operation is calculated by:1. Earned premium – Losses – Underwriting expenses + Net investment

gain/loss2. Written premium + Net investment gain/loss3. Net underwriting gain/loss –loss expense4. Written premium – Loss expense

Q10. (Total earned premium + Investment income) – (Total losses + Other expenses) + Adjustments is equivalent to:1. Net underwriting gain/loss2. Overall gain/loss from operation3. Net income before taxes4. Net operating income/loss

Q11. All of the following can be recorded as admitted assets except:1. Cash2. Real estate3. Certain data processing equipment4. More than 90 days overdue premium

Q12. Two major types of liabilities found on an insurer’s financial statements are:1. Policyholders’ Surplus and Loss Reserve2. Loss reserve and Unearned Premium Reserve3. Policyholders’ Surplus and Unearned Premium Reserve4. Policyholders’ Surplus and Account’s receivable

Q13. All of the following are profitability ratios except:1. Loss ratio2. Investment income ratio3. Premium to surplus ratio4. Expense ratio

Q14. Percent of earned premiums used to fund losses and their settlements is known as:1. Loss ratio2. Investment income ratio3. Combined ratio4. Expense ratio

Q15. Expense ratio is a comparison of:1. Incurred underwriting expense and earned premium2. Incurred losses and earned premium3. Incurred losses and written premium4. Incurred underwriting expense and written premium

Q16. Investment income ratio is calculated by dividing net investment income by:11

1. Written premium2. Earned premium3. Unearned Premium4. Total investment income

Q17. Overall operating ratio is calculated by:1. Loss ratio + Expense ratio - Investment Income ratio2. Loss ratio + Expense ratio + Investment Income ratio3. Loss ratio - Expense ratio + Investment Income ratio4. Loss ratio - Expense ratio - Investment Income ratio

Q18. For an insurance company “ABC” Earned Premiums = 5,000,000Written Premiums = 6,000,000Incurred Underwriting Expenses = 600,000Incurred Losses (including loss expense) = 3,000,000Net Investment Income = 1,000,000

Company’s Loss ratio/ Expense ratio/Combined ratio/Investment Income ratio/ Overall Operating ratio stands at (all ratios in %):1. 50/10/60/20/402. 50/10/40/20/703. 60/10/70/20/504. 60/10/50/20/70

Q19. An insurer has an overall operating gain when:1. Overall operating ratio is 100%2. Overall operating ratio is less than 100%3. Overall operating ratio is more than100%4. Overall operating ratio does not effect

Q20. Premium-to-surplus ratio is also known as”1. Loss ratio2. Capacity ratio3. Operating ratio4. Income ratio

Q21. Capacity ratio is calculated as”1. Written premiums/policyholders’ surplus2. Earned premiums/policyholder’s surplus3. Written premiums/Loss reserve4. Earned premiums/ Loss reserve

Q22. Which of the following is part of written premiums?1. Investment income2. Policyholders surplus3. Unearned premiums4. Underwriting expenses

Q23. An insurer's financial statement shows a loss reserve and an unearned premium reserve. These reserves are each part of the insurer's1. Policyholders' surplus2. Unadmitted assets3. Admitted assets4. Total liabilities

Q24. An insurer's income statement shows amounts for all of the following for a particular period, EXCEPT:1. Earned premiums2. Policyholders surplus

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3. Incurred losses4. Underwriting expenses

Q25 All of the following parties are likely to monitor an insurer's financial performance, EXCEPT:1. Regulators2. Agents3. Claimants4. Shareholders

Q26. Amounts designated by insurers to pay claims for losses that have already occurred are called1. Acquisition expenses2. Loss adjustment expenses3. Loss reserves4. Unearned premium reserves

Q27. A decrease in incurred losses will generally cause a decrease in all of the following, EXCEPT:1. Combined ratio2. Expense ratio3. Overall ratio4. Loss ratio

Q28. The financial report for Apex Insurers contains the following information:Admitted assets $500,000Unadmitted assets $400,000Liabilities $300,000

What is the amount of Apex Insurers' policyholders surplus?1. $100,0002. $200,0003. $400,0004. $600,000

Q29. Brown Insurance Company has the following expenses:Licenses, taxes, and fees $70,000Claim staff salaries $100,000Agents' commissions $200,000Advertising costs $50,000Rent and utilities $60,000

What is the amount of Brown Insurance Company's acquisition expenses?1. $250,0002. $300,0003. $350,0004. $450,000

Q30. World Insurance Company has the following assets:Cash $ 50,000Stocks $400,000Bonds $200,000Real Estate $500,000Furniture and office equipment $70,000Premium balance due in less than 90 days $20,000Premium overdue more than 90 days $10,000

What is the amount of World's total admitted assets?1. $450,0002. $650,0003. $1,170,000

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4. $1,250,000

Q31. 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?1. A net operating gain of $70,0002. A net underwriting gain of $70,0003. A net operating loss of $1,730,0004. A net operating gain of $1,800,000

Q32. 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?1. Financial weakness2. Financial strength3. Operating strength4. Operating weakness

5. Marketing

Q1. How is an independent agent paid?1. Commission basis2. Salary basis3. Profit basis

Q2. All the following are the responsibilities of an agent to the principal except:1. Loyalty2. Obedience3. Reasonable care4. Profitable

Q3. Authority based on third party’s reasonable belief that agent is authorized to act on behalf of the principal is known as:1. Express authority2. Implied authority3. Apparent authority4. Binding authority

Q4. Ownership of agency expiration list is the usual feature of:1. Independent Agency System2. Exclusive Agency system3. Direct Writing System4. Direct response System

Q5. A Broker is supposed to do all the following except:1. Collect premiums from insured and remit to insurer2. Find people with insurance needs and selling insurance appropriate to those

needs3. Commit the insurer by binding coverage4. Collect a fee or commission for their services

Q6. An independent business organization that functions almost as a branch office for one or more insurance companies is known as:1. Independent Agency2. Managing General Agency

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3. Broker4. Exclusive Agency

Q7. Tie-in-sales and rebating are:1. Producer supervision practices2. Producer motivation practices3. Sales promotion practices4. Unfair trade practices

Q8. Peter is a salaried producer who is an employee of ABC Insurance Company. In what distribution system does he operate?1. Exclusive agency2. Independent agency3. Direct writing4. Direct response

Q9. 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 1. Contingent commission2. Profit sharing3. Salary4. Sales commission

Q10. 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?1. 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.

2. 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.

3. The agent did not meet the premium volume and profitability levels that were specified in his contract; therefore, his commission was reduced.

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

Q11. The authority that the principal specifically grants the agent is called:1. Implied authority2. Express authority3. Apparent authority4. Conditional authority

Q12. All of the following are true about the insurance agency relationship EXCEPT:1. The agency agreement is a written agreement between the insurer and an agent2. The agency agreement gives the agent the right to represent the insurer and sell

insurance on the insurer's behalf3. The principal is the party the agent authorizes to bind coverage4. The agent is the party authorized by the principle to act on the principal's behalf

Q13.Advertising by independent agencies promotes1. Brand recognition of the companies represented2. The agency rather than the insurers it represents3. Symbols used to increase recognition of the insurers represented4. Attention to the prices of the policies offered

Q14. Insurers using direct response marketing attract new customers through all of the following methods, EXCEPT:

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1. Recognition of local agents2. Extensive advertisement3. Established customer bases4. Word-of-mouth advertising

Q15. 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?1. Implied authority2. Binding authority3. A unilateral contract4. An agency contract

Q16. Claire is a producer who is self-employed and represents a group of related insurers called the United Insurance Group. She has no right of ownership of the expiration list of insureds. In what distribution system does she operate?1. Exclusive agency2. Independent agency3. Direct writing4. Direct response

Q17. 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 called1. Tie-in sales2. Contingent commissions3. Misrepresentation of dividends4. Rebating

Q18. All of the following are true about the insurance distribution system EXCEPT:1. Managing general agencies appoint and supervise independent agents for

insurers that operate in the system2. Insurance brokers are independent business owners or firms that place insurance

by representing the customers, not insurers3. An agency expiration list is the record of policies that have lapsed or

been canceled due to overdue premiums4. The direct response system advertises to encourage the potential customers to

contact the insurer to purchase insurance

Q19. The president of an insurance company that markets through independent agents is concerned that agents in one geographic area are not motivated to seek profitable business. Other agents in this geographic area have a better reputation for producing profitable business. Within the insurance company, whose job is it to fix this problem?1. The production underwriter's2. The staff underwriter's3. The producer's4. The marketing representative's

Q20. Authority that the insurance company specifically grants to an agent is called1. Binding authority2. Express authority3. Implied authority4. Apparent authority

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Q21. Which one of the following individuals represents the insurance purchaser?1. An agent2. A solicitor3. A customer service agent4. A broker

Q22. To obtain a state agent's license, a person must meet several requirements that include which one of the following?1. Spend a specified amount of time as a customer service representative.2. Obtain an agency contract offered by an insurance company.3. Acquire a bond identifying the state as the principal.4. Pass an examination after completing classroom study

Q23. 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?1. Reduce commissions if sales goals are not achieved.2. Hold sales contests to encourage the type of sales activity.3. Provide additional staff to help with the processing.4. Offer subscriptions to educational services for the producers.

Q24. 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?1. Reduce the number of homeowners policies written for houses in urban areas

compared to the homeowners policies written for houses in rural areas.2. Reduce the number of employees required to acquire and service the policies in

the agency.3. Increase the premium volume and profitability level of the agency's

business with those insurers.4. Increase the level of customer service provided to policyholders and claimants.

Q25. 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?1. Yes, it is an unfair trade practice to tie the purchase of insurance to

some other sale or financial arrangement.2. Yes, offering a preferred rate to a customer as described is considered to be

rebating.3. No, businesses interact in this way as a regular practice.4. No, this is not deceptive or unfair to the applicants or insureds.

Q26. Love, Stack, and Jones Insurance sells insurance coverage for small businesses. This office of insurance producers represents only one insurer, and the producers work on commission with bonuses. Love, Stack, and Jones Insurance does not own the expiration list for the policies it sells and services. What type of marketing (or distribution) system does Love, Stack, and Jones represent?1. Independent agency system2. Exclusive agency system3. Direct writing system4. Direct response system

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Q27. 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?1. The statement misrepresents the benefits, conditions, or terms of the insurance

policies.2. The statement uses a name or title for the insurance policies that

misrepresents the true nature of the policies.3. The statement indicates that sales are ties to other benefits.4. The statement makes an illegal reference to a government entity in an

insurance sale.

6. Underwriting

Q1. Which of the following reasons are true with respect to selection of insured by the insurance companies:1. State laws limit the companies in providing insurance above a fixed percentage of

population to avoid monopoly.2. Insurer’s ability to provide insurance is limited by its capacity to write

new policies3. Insurer’s do not provide insurance to specific class of people forming lower strata

of the society4. Insurer try to use adverse selection to provide insurance

Q2. Insurers attempt to protect their available capacity in following ways except:1. Maintaining a spread of risks2. Optimizing use of available resources3. Using guarantee funds4. Arranging reinsurance

Q3. The underwriting pricing objective is to charge a premium that is commensurate with the:1. Exposure 2. Profitability3. State laws4. Insured’s capacity

Q4. An insurance limit of $250,000 is charged at a rate of $0.40 per $100 of insurance will give a premium of:1. 62502. 10003. 1000004. 10000

Q5. Merit Rating Plans are:1. A type of class rates that gives discounts to educated people2. A type of rate to develop a premium for a unique exposure for which there is no

established rate3. Modify class rates to reflect loss characteristics of a particular insured4. Used to assign a specific insurance rate that reflects the unique characteristics of

an insured or the insured’s property

Q6. Class rates are:1. Apply to all insureds in the same rating category.2. A type of rate to develop a premium for a unique exposure for which there is no

established rate3. Modify class rates to reflect loss characteristics of a particular insured

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4. Used to assign a specific insurance rate that reflects the unique characteristics of an insured or the insured’s property

Q7. Individual rates are:1. Apply to all insureds in the same rating category.2. A type of rate to develop a premium for a unique exposure for which there is no

established rate3. Modify class rates to reflect loss characteristics of a particular insured4. Used to assign a specific insurance rate that reflects the unique

characteristics of an insured or the insured’s property

Q8. Judgement rates are:1. Apply to all insureds in the same rating category.2. A type of rate to develop a premium for a unique exposure for which

there is no established rate3. Modify class rates to reflect loss characteristics of a particular insured4. Used to assign a specific insurance rate that reflects the unique characteristics of

an insured or the insured’s property

Q9. Insurance Services Office (ISO) and American Association of Insurance Services (AAIS):1. Are known as rating bureaus and they calculate and file loss cost that form the

basis of rates developed by individual insurers2. Are known as rating bureaus and they calculate rates and prepare rate filings for

their members3. Are known as insurance advisory organization and they calculate rates and

prepare rate filings for their members4. Are known as insurance advisory organization and they file loss cost

that form the basis of rates developed by individual insurers

Q10. One of the responsibilities of underwriting management is delegating underwriting authority. All the following statements are true about delegating underwriting authority except:1. It limits the types of decisions an underwriter can make without receiving

approval from someone at higher level2. With some insurers underwriting authority is highly decentralized3. Agents are never given underwriting authorities.4. Some insurers have highly centralized authority with many or all final

underwriting decisions are made in home office

Q11. All the following are true about evaluation of hazard except:1. Insured has a weak financial condition and is susceptible to Moral hazard2. Evidence of Morale hazard can be found in personality traits of insureds3. Interpretation of policy language by courts in a way not intended by insurer is a

part of legal hazard]4. An office building located next to a restaurant without adequate fire

protection is a exposure to attitudinal hazard

Q12. Why would an underwriter modify the rate charged for the coverage provided when evaluating an application for insurance? 1. Because treaty reinsurance in unavailable for the exposures indicated 2. To address the moral hazards the underwriter identified during investigation 3. To better match the rate to the characteristics of the risk 4. Because the applicant is not acceptable for coverage

Q13. Why do states require that insurers notify the insured before a policy is to be canceled or nonrenewed?

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

2. To give the policyholder an opportunity to replace the coverage 3. To eliminate the possibility of an insurer canceling all policies covering a category

of business or in a geographic area4. To reduce the opportunity for an insurer to red line

Q14. As insurers select insureds they attempt to avoid adverse selection. Adverse selection occurs when 1. Applicants purchase insurance with the intent of submitting fraudulent claims. 2. An insurer does not select a cross-section of applicants that range from low

to high probability of loss. 3. Competitors select the better applications, leaving the remainder to the insurer. 4. People with the greatest probability of loss are the ones most likely to

purchase insurance.

Q15. How do underwriting guidelines help an insurer achieve its objectives? 1. By establishing the criteria required for treaty reinsurance to apply 2. By creating a channel for communication for the insurer's vision, mission, and

objectives 3. By providing a uniform set of rules that guide underwriters toward

consistent decisions4. By maintaining a consistently applied set of behavioral measurements against

which an individual's performance will be measured

Q16. Insurers screen applicants to determine which ones they desire to insure. If insurers do not properly select policyholders 1. Their profits will be excessive in comparison to the premiums collected. 2. Some insureds might be allowed to purchase insurance at prices that do

not adequately reflect their loss exposures. 3. They will have an excessive number of new policies, and their expenses related to

writing the new policies will be excessive. 4. The entire group of policyholders written will be substandard.

Q17. How do states prohibit unfair discrimination by insurers? 1.2. By reviewing each policy cancellation or nonrenewal and the justification for the

insurer's action3. By maintaining a channel for policyholder complaints 4. By identifying prohibited unfair trade practices in state insurance laws 5. By examining insurers' mission statements and objectives

Q18. How does an expert system assist underwriters in the underwriting process? 1. It automatically gathers the necessary information to underwrite an application. 2. It ensures that no necessary information is overlooked. 3. It provides management reports to ensure underwriters' compliance with

guidelines. 4. It monitors the results of the decisions made and suggests changes in

underwriting guidelines

Q19. 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 1. Capacity2. Adverse selection3. Risk selection4. Combined ratio

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Q20. One of the roles of underwriting management is arranging reinsurance. Explain how treaty reinsurance helps an insurer meet its objectives. 1. The reinsurer automatically assumes a portion of all of the primary

insurer's losses that are eligible under the treaty. 2. The reinsurer delegates underwriting authority to the primary insurer, helping the

primary insurer achieve consistent results. 3. The reinsurer monitors the results of the primary insurer's underwriting

guidelines to assure compliance. 4. The reinsurer assumes a portion of the losses from all policies that have been

specifically listed and insured under the treaty.

Q21. All of the following are sources of information underwriters use as they gather information for underwriting EXCEPT:1. Producers2. Government records3. Inspection reports4. Educational records

Q22. There are various types of modifications an underwriter might require to make an applicant acceptable, including coverage modification. Which one of the following is an example of a coverage modification?

A homeowners applicant has had three minor lightning losses. The underwriter accepts the application 1. But requires the applicant to increase the deductible 2. But requires the applicant to install lightning rods 3. But increases the premium by placing the coverage in a substandard rating class 4. But notes that the policy will be nonrenewed if the insured submits a claim in the

next year

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.

Q23. Which one of the following represents a physical hazard in the GhostWriter Publishing case?

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1. The suspicious fire2. The ownership of the building3. The book-binding glue4. The 50-gallon drum

Q24. Which one of the following represents a morale hazard in the GhostWriter Publishing case? 1. Failure to install sprinklers and ventilation 2. Use of the glue3. The suspicious fire4. The lack of profits

Q25. Which one of the following represents a legal hazard in the GhostWriter Publishing case? 1. The treatment of the employees2. The toxic pollution3. The inability to provide GhostWriter's involvement in the fire 4. The court interpretation of the policy language

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.

Q26. 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? 1. By meeting regulatory requirements to provide coverage to a wide range of

policyholders, the insurer will be less likely to engage in unfair discrimination. 2. By reducing the chances that the company's overall results will be

affected by a large number of losses from one loss event. 3. The insurer will reduce its reinsurance premiums by reducing its exposure to any

one catastrophic event. 4. Diversification will allow the insurer to create a more visible image in the market,

attracting more potential applicants from which it can select.

Q27. Which one of the following is an example of how Maxfield can optimize its available resources in order to protect its available capacity? 1. Maxfield chooses not to solicit applications for watercraft insurance. 2. Maxfield expands its policy writing in three new types of business. 3. Maxfield's underwriters take classes to expand their understanding of claim

adjustment. 4. Maxfield's management staff takes classes to learn how to provide reasonable

accommodations for physically challenged employees.

Q28. 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? 1. Maxfield might be accused of unfair discrimination. 2. Maxfield must reduce the amount of reinsurance it purchases. 3. Maxfield must spread its risks at the same time to be profitable.

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

Q29. Which of the following types of insurance rates would be appropriate for the type of insurance and loss exposures that Maxfield Mutual writes? 1. Merit rates2. Individual rates3. Class rates4. Judgement rates

7. Claims

Q1. In case of liability claims, the claimant is1. First party2. Second party3. Third Party4. Adjuster

Q2. A third party refers to1. Insured2. Insurer3. Person or business that is not a party to the insurance contract but who

might assert a claim against the insured4. Person responsible for investigating, evaluating and settling claims

Q3. Insurance professional generally use term “Claimant” to refer to 1. I party – Insured2. II party – Insurer3. III party4. Claim representative

Q4. All the following are responsibilities of the claim representative except:1. Respond promptly to submitted claims2. Properly evaluate the claims3. Treat the parties fairly4. Pay the claim

Q5. Reservation of rights letter is a1. Notice sent by the insurer to an insured that the insurer is proceeding

with the investigation of a claim but that the insurer retain the right to deny coverage later

2. Notice sent by the insured to an insurer that the insured is willing to help insurer in proceeding with the investigation of a claim but that the insured retains the right to deny this support later

3. Notice sent by the insurer to an insured that the insurer is not proceeding with the investigation of a claim is denying the coverage

4. Notice sent by the insurer to an insured that the insurer is proceeding with the investigation of a claim but that the court retains the right to deny coverage later

Q6. All of the following are reasons of using an independent adjusters by an insurer except1. Number of policyholders in a particular area is very less2. Claim involves an unique or complex situation3. Staff claim representative does not have sufficient expertise4. Law mandate an independent adjuster to be included in claims process

Q7. Draft authority is authority expressively given by the insurer to1. Independent adjuster to collect claim information and provide it to insurer

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2. Agents to settle and pay certain of claims by writing a claim draft up to certain limit

3. Staff claim representative4. Field claim representative

Q8. A claim representative representing an insured is called as1. Agent2. Independent adjuster3. Public adjuster4. TPA

Q9. A claim for the property of some one other than insured damaged due to insured’s alleged negligence is a type of 1. Property Insurance Claim2. Liability Claim3. Medical Claim4. Indemnity Claim

Q10. A house which was under mortgage (50%) paid was damaged due to fire. Mortgagee 1. Has no right to claim as he is not an insured on insurance policy2. Has a right to collect total, amount from the insurer3. Has a right to collect amount to the extent of outstanding mortgage

since he has an insurable interest in real property

Q11. Burden of proof for the perils covered under policy lies1. In some cases with insureds and other times at insurer2. Always with insured3. Always with insurer4. Neither with insurer nor with insured

Q12. Cost to replace the property minus an allowance for the property’s depreciation is known as 1. Replacement Cost2. ACV3. Agreed Value4. Depreciation Cost Method

Q13. Property such as fine arts, antiques and collection are commonly valued by1. Replacement Cost2. ACV3. Agreed Value4. Depreciation Cost Method

Q14. An auto was damaged while driving on an icy road in night due to fault of driver. Its ACV at the time of accident was calculated as $10000 and anticipated salvage value as $2000. Repair cost is anticipated as $7000. What will be the action of insurer:1. Pay insured the repair cost2. Pay insured the ACV and use salvage rights3. Pay insured the ACV and use the subrogation rights4. Pay insured the repair cost and use salvage rights

Q15. Damage awarded by court for the purpose of punishing the wrongdoer and to deter others from committing similar wrongs is known as:1. General Damages2. Special Damages3. Punitive Damages4. Legal Damages

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Q16. What is the major purpose of claim handling?1. To determine whether coverage exists2. To obtain adequate information3. To satisfy the insurance company's obligation under the policy4. To respond promptly to claimant requests

Q17. What is the purpose of Unfair Claim Practices laws?1. To justify legal claim practices2. To determine the value of the loss3. To punish insurers4. To specify illegal claim practices

Q18. Subrogation is the insurer's right to 1. Recover its claim payment from the party responsible2. Drop a claim in exchange for an agreed amount of money3. Estimate the value of the damaged property4. Transfer coverage to a third party

Q19. Granting draft authority to agents will generally increase1. Claim settlement expenses2. Time to settle claims3. Cost of insurance4. Customer satisfaction

Q20. What is the largest and most important liability of property and liability insurers?1. Acquisition costs2. Administration costs3. Loss reserves4. Unearned premium reserves

Q21. What is an example of general damages?1. Hospital expenses2. Lost wages3. Prescriptions4. Disfigurement

Q22. All of the following can describe an independent adjuster, EXCEPT:1. Self-employed2. Contracted by an insurer3. Employee of an insurer4. Employee of an adjusting firm

Q23. Generally, an inside claim representative1. Meets with parties involved with the loss2. Handles claims by phone or mail from the insurer's office3. Visits the scene of the loss to investigate damages4. Offers claim settlement service for a fee to insurers

Q24. ABC Company pays for all its property losses up to $3 million and insures losses over $3 million. What is this arrangement called?1. Coinsurance 2. Reinsurance 3. Self-insurance 4. Umbrella insurance

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Q25. Sue's homeowner's policy covers her camera against theft. While on vacation, Sue's camera is stolen. In which step in the claim settlement process would the claim representative determine the camera's replacement cost?1. Valuation2. Settlement3. Negotiation4. Investigation

Q26. A collision damages Sue's car. The car's actual cash value is $2,000. Repair costs are estimated at $1,800. Salvage value is estimated at $500. What is the insurer's loss payment?1. $1,5002. $1,8003. $2,0004. $2,300

Q27. 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?1. $2252. $3503. $4504. $800

Q28. 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?1. Independent adjuster2. Public adjuster3. Inside claim representative4. Outside claim representative

29. 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? 1. Inside claim representative2. Outside claim representative3. Independent adjuster4. Independent agent

Q30. A 50,000 square foot building of standard construction is totally destroyed by fire. The construction cost for medium quality in that location is $70 per square foot. What is the best estimate of the building's replacement cost?1. $2,000,0002. $3,500,0003. $4,000,0004. $5,500,000

Q31. A liability loss has the following damages:

Medical expenses $10,000Damages for disfigurement $50,000Damages for pain and suffering $100,000

What is the amount of general damages?1. $60,0002. $110,0003. $150,000

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4. $160,000

Q32. A liability loss has the following damages:

Medical expenses $10,000Damages for disfigurement $50,000Damages for pain and suffering $100,000

What is the amount of special damages?1. $10,0002. $50,0003. $100,0004. $160,000

Q33. 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?1. Independent adjusters 2. Public adjusters3. Third party administrators4. Outside claim representatives

8. Insurance Contracts

Q1. Business personal property is known as what?1. Estate2. Fund3. Contents

Q2. Endorsement when attached to the original insurance policy becomes what of the following?1. An illegal part of the contract2. A legal part of the contract3. A duplicate contract

Q3. What is the process called by which an insurance company seeks reimbursement from another company or person for a claim it has already paid?1. Copay2. Noncontributory3. Subrogation

Q4. A policy differs from a binder as1. Policy is a incomplete oral contract of insurance while binder is a complete

contract of insurance and can be either oral or written2. Policy is a complete written contract of insurance while binder is a

temporary contract of insurance and can be either oral or written3. Policy is a complete written or oral contract of insurance while binder is a

temporary written contract of insurance 4. Policy is a complete oral contract of insurance while binder is a temporary

contract of insurance and can be either oral or written

Q5. In some states for auto insurance purposes, following individual is considered as a legally competent party1. Insane or otherwise mentally incompetent2. Under the influence of drugs or alcohol3. Minors (persons not of legal age)

Q6. An intentional failure to disclose a material fact is known as:1. Misrepresentation

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2. Concealment3. Consideration4. Principal of Indemnity

Q7. A false statement of a material fact is known as1. Misrepresentation2. Concealment3. Consideration4. Principal of Indemnity

Q8. Insurance policies are considered to be contracts of adhesion because1. Both the insured and insurer are supposed to adhere to contract once policy is

issued2. Insured must adhere to the agreement as written by the insurer3. Insurer must adhere to the agreement as written by the insured4. Court has to adhere to contract while giving judgements

Q9. An accident insurance policy specifies to pay $5000 in case of person loosing hearing ability of one ear. Suppose the insured gets hurt in an accident and his total expenses amount to $2000 and he loses his hearing capability from left ear, insurance company will pay1. $2000 as the insurance contract is an contract of indemnity2. $2000 as the insurance contract was as valued policy3. $5000 as the insurance contract is an contract of indemnity4. $5000 as the insurance contract was as valued policy

Q10. Where will you find the name, location and addresses of the insured and insurer in a policy?1. Definition Page2. Insuring Agreement3. Declaration Page4. Conditions

Q11. Inception and Expiration date of the policy will appear in 1. Definition Page2. Insuring Agreement3. Declaration Page4. Miscellaneous Provisions

Q12. Policy limits and premium amounts are generally shown in1. Definition Page2. Insuring Agreement3. Declaration Page4. Conditions

Q13. A mutual insurance company is likely to describe the right of each insured to vote in the election of the board of directors in the following section1. Definition Page2. Insuring Agreement3. Declaration Page4. Miscellaneous Provisions

Q14. Termination of a policy by either the insurer or the insured during the policy period is known as1. Changes2. Endorsement3. Cancellation4. Renewal

Q15. Short rate refund is used to pay back the premium to insured when28

1. Insurer cancels the policy with an advance notice2. Insured cancels the policy3. Court orders to cancel the policy4. Insurer cancels the policy without an advance notice

Q16. A liberalization clause is a policy condition that provides that 1. If a policy form is broadened at accepted additional premium by majority of

insured, the broadened coverage automatically applies to all existing policies of the same type.

2. If a policy form is broadened at no additional premium, the broadened coverage automatically applies to all existing policies of the same type.

3. Even if a policy form is broadened at no additional premium, the broadened coverage does not automatically applies to all existing policies of the same type.

4. If a policy form is broadened at no additional premium, the broadened coverage automatically applies to all future policies of the same type.

Q17. Other than common policy declarations, a modular Commercial Package Policy (CPP) must contain1. Common policy exclusions2. Common policy conditions3. Commercial property conditions4. Commercial liability declarations

Q18. In an insurance policy, what is the purpose of the insuring agreement?1. Establishes procedures for carrying out the terms of the contract2. Makes a broad promise to provide coverage3. Explains the specific meanings of terms with respect to the coverages4. Eliminates coverage for specified exposures

Q19. What statement best illustrates a violation of utmost good faith? 1. The insurer makes a loss payment less than the amount of a claim.2. The insurer correctly denies coverage for a loss.3. The insured does not report a covered loss to the insurer.4. The insured intentionally conceals material facts from the insurer.

Q20. To reinforce the principle of indemnity, what provision is required in insurance policies? 1. Coinsurance2. Cancellation3. Proof of loss4. Other insurance

Q21. When an insured transfers his or her rights in a policy to a third party, this is called1. Settlement2. Liberalization3. Assignment4. Subrogation

Q22. What policy condition does the insurer use to recover some of its expenses and to discourage insurance buyers from canceling their insurance before the end of the policy period?1. Cancellation provision2. Liberalization clause3. Pro rata refund4. Short rate refund

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Q23. All of the following items are generally located on the declarations page of an insurance policy, EXCEPT:1. Deductibles2. Premiums3. Exclusions4. Endorsements

Q24. An insurance policy is a contract of adhesion written by the1. NAIC2. IRIS3. Insurer4. Actuary

Q25. With standard forms, the insurer can generally expect all of the following, EXCEPT:1. Consistent company operations2. Increased expense for policy issuance3. Consistent court interpretations4. Decreased claim settlement disputes

Q26. An insurer will make a loss payment if an insured loss occurs and if the insured performs certain duties. This illustrates that an insurance policy is a1. Contract of adhesion 2. Contract of indemnity3. Conditional contract4. Personal contract

Q27. In some cases, the ultimate loss payment can exceed the policy limit shown in the declarations because the loss payment can include costs for all of the following, EXCEPT:1. Defense costs2. Debris removal 3. Additional perils4. Additional coverages

Q28. What statement best describes subrogation in an insurance policy?1. The insurer agrees, in the event of a covered loss, to pay an amount directly

related to the amount of the loss.2. The insurer takes over the insured's right to collect damages from a

third party.3. The insured adheres to the agreement as written by the insurer.4. The insured transfers its rights or interest in a policy to a third party.

Q29. Mark's car collides with Pat's car. Pat believes that she will "make out great" because both her insurance and Mark's insurance will pay Pat for her car's damage. If both insurers made this loss payment, what principle of insurance would this violate?1. Adhesion2. Utmost good faith3. Indemnity4. Assignment

Q30. Joe owns a building covered by a property insurance policy. Joe intentionally sets fire to this building, and it is destroyed. Using only this information, what statement best describes why Joe's property insurance policy is unenforceable for this loss?1. Joe acted under emotional duress.

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2. Joe acted irrationally.3. Joe acted in violation of public policy.4. Joe acted under the influence of alcohol.

Q31. Jim canceled his auto policy 315 days after the inception date. The one year premium is $1,095. Assuming that a year is 365 days, what is Jim's pro rata premium refund?1. $502. $1503. $7804. $945

Q32. Bill drives through a stop sign and collides with Jeff's car. The collision caused physical damage to both cars but no injuries. Bill and Jeff report the accident to their insurers. Each receives a loss payment from his respective insurer, and they have their cars repaired. What is the next step in the claim settlement process?1. Bill's insurer will attempt to recover for the loss from Jeff's insurer. 2. Jeff's insurer will attempt to recover for the loss from Bill's insurer.3. Bill's insurer will bring a lawsuit against Jeff's insurer. 4. Jeff's insurer will bring a lawsuit against Bill's insurer.

Q33. Green Company has commercial property insurance with ABC Insurer. The policy term is 1/1 to 12/31. ABC Insurer has notified Green that it will stop the coverage on 6/30. What policy condition does ABC's notification represent?1. Changes2. Cancellation3. Assignment4. Subrogation

Q34. Brown Company's Policy includes a liberalization clause. Brown's insurer introduces a policy change that broadens coverage at no additional premium. How will this change apply to Brown's existing policy?1. The broadened coverage does not apply to Brown Company's policy.2. The broadened coverage automatically applies to Brown Company's

policy.3. The broadened coverage will apply to Brown Company's policy with an

endorsement.4. The broadened coverage will apply to Brown Company's new policies as

they are issued.

Q35. Beth has auto physical damage coverage with a $500 deductible. A collision causes $1,800 damage to Beth's car. How much is the loss payment from Beth's insurer?1. $5002. $1,3003. $1,8004. $2,300

9. Property Loss Exposures

Q1. For insurance purposes, personal property includes1. Buildings2. Motor vehicles and trailers3. Furniture and fixtures4. Boiler and machinery

Q2. Bulldozers, road graders and forklift fall under which of the following category of motor vehicles1. Auto

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2. Mobile Equipment3. Recreational Vehicles4. Transport Vehicle

Q3. Paint cans and oiled rugs can be 1. Called as perils or hazards2. Called as perils because it can be a cause of loss but not hazard3. Called as hazard as they increase the likelihood of a loss by fire peril but

are not perils by themselves4. Neither a peril nor a hazard

Q4. An antique painting insured under special form coverage (excluding flood loss) was lost during a flood. Either flood or theft during flood can be the reason for missing painting.1. Insurer will not pay for painting until insured proves that painting was stolen2. Insurer will have to pay until insurer proves that painting was swept

away by flood3. Insurer will not pay for painting since flood loss is excluded4. Insurer will have to pay without any party proving the peril

Q5. All the following are terms used by the insurance professionals to describe the coverage provided by “all-risks” policies except:1. Accidental direct physical loss2. Named perils3. Open perils4. Special form coverage

Q6. Person or business that holds the property of others for some specific purpose is known as1. Bailee2. Mortgagee3. Mortgagor4. Secured creditor

Q7. Floaters are policies1. That do not have a fixed coverage limits and very on monthly basis2. That are designed to cover property that moves from location to

location3. That allow change in covered property on periodical basis if the total dollar value

remains same4. That allow premium to be deferred for a specific period of time

Q8. Regarding coverage provision for “money”1. Commercial property insurance usually contain limitation on amount while

homeowners policies usually have a exclusion2. Commercial property insurance usually contain exclusions while

homeowners policies usually have a limitation on amount3. Both type of policies usually have exclusion4. Both type of policies usually have limitation on amount

Q9. Personal and commercial property insurance policies on buildings and personal property that provides coverage for approximately a dozen named perils is known as1. Basic form coverage2. Broad form coverage3. Special form coverage4. Common form coverage

Q10. Personal and commercial property insurance policies on buildings and personal property that covers all causes of loss that are not specifically excluded is known as

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1. Basic form coverage2. Broad form coverage3. Special form coverage4. Common form coverage

Q11. A property covered only for fire peril was damaged by the firefighters while spraying water to control a fire. Insurer will 1. Not pay for the damage as water is not a covered peril2. Pay for the damage though water is not a covered peril but fire was the

proximate cause3. Not pay for the damage as firefighters negligence caused the damage

Q12. If the insurance company decides to cancel a commercial insurance policy, it will send the notice of cancellation to all the below except:1. Additional insured2. First named insured3. Mortgagee4. Loss payee

Q13. Mortgage clause provides more level of protection than a loss payable clause as:1. Insurer promises to notify mortgagee about cancellation and non renewal but not

to loss payee2. Insurer promises to pay mortgagee the covered claims to the extent of its

insurable interest but not to loss payee3. If insured fails to pay the premium, mortgagee has the right to pay the premium

to the insurer but loss payee does not4. If a claim is denied because the insured did not comply with the terms of

the policy, the mortgagee may still collect under the policy but loss payee can not

Q14. An insurance to value provision in many property insurance policies which reduces the amount that an insurer will pay for a covered loss is known as 1. Valuation Provision2. Settlement Options3. Co-insurance4. Deductibles

Q15. All of the following are property that might be exposed to losses and that can be covered by property insurance, EXCEPT:1. Motor vehicles and trailers 2. Money and securities3. Ships and their cargo4. Sentimental value of heirlooms

Q16. A fire that leaves its intended place is 1. A hostile fire2. A friendly fire 3. A proximate cause of loss4. An ensuing loss

Q17. 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?1. A mortgagee and a loss payee have the same rights. The two clauses simply

differentiate loans for real and personal property.33

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

3. The terms are used interchangeably depending on the insurance contract.4. 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.

Q18. 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 1. A coinsurance clause 2. A deductible3. A policy limit4. The replacement value

Q19. Catastrophe perils, such as war, are generally excluded from property insurance policies because the risk is considered to be uninsurable since1. The losses could be prevented.2. The premiums required to cover the exposure would be unaffordable by most

families and businesses.3. Most families and businesses do not face the loss exposure.4. The funds of the entire insurance industry might be inadequate to pay

for all the claims

Q20. In property insurance, a named insured1. Is the secured lender(s) as identified on the declarations page.2. Can be many parties based on the contract language and the situation.3. Is the policyholder whose name appears on the declarations page.4. Is the first name appearing on the declarations page.

Q21. Water damage to a building following a windstorm is often not covered by a property policy unless1. The windstorm is confirmed by the weather service.2. The policy is written with named perils.3. The policy is written with special coverage.4. Wind caused an opening in the structure through which water entered.

Q22. Property insurance policies typically exclude loss from maintenance perils. Such losses are generally uninsurable because1. Covering such losses would result in a moral hazard.2. They are either certain to occur, over time, or are avoidable.3. Maintenance policies are written only through excess and surplus lines.4. It is difficult (if not impossible) to identify the date of loss and therefore the policy

or insurer providing coverage.

Q23. What purpose do insurance-to-value provisions serve in property insurance policies?1. They discourage insurance fraud by ensuring that the property is worth the value

requested in the policy limits.2. They encourage insureds to purchase an amount of insurance that is

equal to, or close to, the value of the covered property.3. They establish the maximum amount the insurance company will pay for any loss.4. They establish the options available to the insurance company in settling the loss.

Q24. The taking of property from a person by someone who has caused or threatened to cause personal harm is

1. Burglary34

2. Robbery3. Theft4. Dishonesty

10.Liability Loss Exposures

Q1. Laws consisting of a body of principles and rules established overtime by courts on a case-by-case basis is known as:1. Statutory Law2. Common Law3. Constitutional Law4. Civil law

Q2. Under tort law, an individual or organisation can face a claim for legal liability on the basis of any of the following except:1. Breach of Warranty2. Negligence3. Intentional Torts4. Absolute Liability

Q3. An employee drives a customer to a meeting and negligently causes an accident in which the customer is injured. In this case1. Employer is a tortfeasor and employee’s responsibility will shift from employee to

employer2. Employee is a tortfeasor but employee’s responsibility will shift from employee to

employer3. Employee is a tortfeasor and employer has vicarious liability and

responsibility extends to include employer4. Employer is a tortfeasor and employee has vicarious liability and responsibility

extends to include employer

Q4. A written or printed untrue statement that damages a person’s reputation is an intentional tort of following type:1. Assault2. Battery3. Libel4. Slander

Q5. An oral untrue statement that damages a person’s reputation is an intentional tort of following type:1. Assault2. Battery3. Libel4. Slander

Q6. The intentional threat of bodily harm is an intentional tort of following type:1. Assault2. Battery3. Libel4. Slander

Q7. The unlawful physical contact with another person is an intentional tort of following type:1. Assault2. Battery3. Libel4. Slander

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Q8. A contractual provision that obligates one party to assume the legal liability of another party is known as1. Warranty2. Absolute Liability3. Statutory Liability4. Hold Harmless Agreement

Q9. If Janiffer buys a hairconditioner recommended and sold by her beautician and the conditioner ruins the hair instead, the beautician could be held liable for a1. Statutory liability2. Intentional tort3. Absolute liability4. Breach of contract

Q10. In a liability policy that provides claims-made coverage1. Insurer agrees to pay all claims submitted during the policy period if the covered

event occurs before a retroactive date2. Insurer will not pay any claims submitted during the policy period if the covered

event occurs on or after a retroactive date3. Insurer agrees to pay some fixed percentage of all claims submitted during the

policy period if the covered event occurs on or after a retroactive date4. Insurer agrees to pay all claims submitted during the policy period if the

covered event occurs on or after a retroactive date

Q11. Jessica’s personal auto policy carries a BI-PD limit as 100/300/50. In an accident case Jessica was asked to pay claimant $200,000 toward bodily injury, $20000 towards property damage and $100,000 towards bodily injury of a passenger of claimant. As per the policy coverage1. Insurer will pay $200,000 to claimant, $100,000 to passenger and $10,000

towards property damage2. Insurer will pay $200,000 to claimant, nothing to passenger and $10,000 towards

property damage. Jessica will have to pay $100,000 to passenger from her own pocket

3. Insurer will pay $100,000 to claimant, $100,000 to passenger and $10,000 towards property damage. Jessica will have to pay $100,000 to claimant from her own pocket

4. Insurer will pay $200,000 to claimant, $100,000 to passenger and Jessica will have to pay $10,000 towards property damage from her pockets

Q12. Under a liability policy, damages awarded for pain and suffering are called:1. Special damages2. General damages3. Indirect damages4. Consequential damages

Q13. In speaking with John, Mark said that Peter embezzled $500,000 from their employer. If this statement is false, it is an example of:1. Slander2. Libel3. Breach of warranty4. Misdemeanor

Q14. A man told a pedestrian that he would break her arm if she did not give him her purse. This is an example of:1. False arrest2. Invasion of privacy3. Assault4. Battery

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Q15. The event that sets in motion an uninterrupted chain of events contributing to the loss is called:1. Absolute liability2. Proximate cause3. International tort4. Negligence

Q16. The law that consists of the body of principles and rules established over time by courts on a case-by-case basis is called:1. Administrative law2. Constitutional law3. Common law4. Regulatory law

Q17. The damages awarded for pain and suffering due to an injury are part of:1. Judicial damages2. Punitive damages3. Special damages4. General damages

Q18. Among the elements of a negligence are all of the following, EXCEPT:1. Duty owed to another2. Breach of duty owed3. Injury or damage4. Minimum threshold of loss

Q19. In a liability insurance policy, personal injury means injury arising from all of the following, EXCEPT:1. Invasion of privacy2. Libel3. Slander4. Battery

Q20. 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?1. Negligence2. Absolute liability3. Statutory liability4. No-fault statutes

Q21. The liability that someone could incur because of an inherently dangerous activity like building demolition is called:1. Nonretractable liability2. Nontransferable3. Absolute liability4. Compulsory liability

Q22. The intentional and unlawful threat of bodily harm is:1. Statutory injury2. Encroachment3. Battery4. Assault

Q23. Under tort law, an individual can face a claim for legal liability on the basis of any of the following, EXCEPT:1. Negligence2. Contracts3. International torts4. Absolute liability

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Q24. All of the following are true, EXCEPT:1. Liability insurance claims involve three parties2. Property insurance claims involve one party3. Liability insurance pays claims on behalf of the insured4. Property insurance pays claims to an insured

Q25. A tort is:1. The legal right of recovery for damage or injury2. A failure to act in a reasonably prudent manner3. Any wrongful act other than a crime or breach of contract4. An unbroken chain of events that causes injury or damage

Q26. The legal right of recovery can be based on all of the following, EXCEPT:1. Torts2. Contracts3. Statutes4. Exposures

Q27. 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?1. Coverage will never apply when the retroactive date is the same as the policy

inception date.2. Bodily injury or property damage must occur during the policy period or anytime

before policy inception.3. Claims must be submitted during the policy period.4. Claims can be submitted anytime during or after the policy period.

11.Risk management

Q1. All of the following are risk management techniques except:1. Avoidance2. Loss control3. Retention4. Loss exposure

Q2. Physical inspection of locations, operations etc is a part of 1. Examining risk management techniques2. Identifying and analyzing loss exposures3. Implementing chosen techniques4. Monitoring and modifying the risk management program

Q3. A risk manager was seen asking questions and filling up a questionnaire. He was 1. Identifying loss exposure through physical inspection2. Identifying loss exposure through loss exposure survey3. Examining risk management techniques4. Implementing risk management technique

Q4. A risk management technique that eliminates a loss exposure and reduces the chance of loss to zero is known as1. Avoidance2. Loss Control3. Retention4. Noninsurance Transfer

Q5. A risk management technique that attempts to decrease the frequency or severity of losses is known as

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1. Avoidance2. Loss Control3. Retention4. Noninsurance Transfer

Q6. A risk management technique that involves retaining all or part of a particular loss exposure is known as1. Avoidance2. Loss Control3. Retention4. Noninsurance Transfer

Q7. A restaurant not identifying its liability exposure for serving too much alcohol to a customer and therefore failing to purchase liquor liability insurance is actually using following risk management technique1. Intentional retention2. Unintentional Retention3. Noninsurance transfer4. Avoidance

Q8. A risk management technique in which one party transfers the potential financial consequence of a particular loss exposure to another party that is not an insurance company is known as1. Avoidance2. Loss Control3. Retention4. Noninsurance Transfer

Q9. Why is it easier to gauge the potential severity of property losses than of liability losses? 1. Property loss exposures are confined to the building and contents. Liability losses

can encompass the surrounding grounds of the business. 2. 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 determine with this level of accuracy.

3. Property loss exposures have a calculable frequency. The frequency of liability loss exposures cannot be determined with accuracy.

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

Q10. How might the monitoring and modifying step in the risk management process be simply described? 1. Check to make sure the decisions made are still valid, and make

changes as needed. 2. Create a new workflow and identify new bottlenecks that have occurred. 3. Make sure insurance is not being used as a substitute for loss control. 4. Identify noninsurance transfers through hold harmless agreements.

Q11. The dollar amount of damage that results or might result from a loss exposure is the 1. Loss severity2. Loss frequency3. Loss prevention4. Loss reduction

Q12. 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.

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What should the risk manager measure to determine where she should expend her efforts? 1. The number of workers in each area2. The flow chart bottlenecks3. The loss frequency4. The loss severity

Q13. What information can a risk manager gather from a flowchart to identify loss exposures? 1. Bottlenecks that can stop production2. Critical areas with unskilled workers3. Competition that can reach the market before the client4. Inefficiencies that can be corrected through automation

Q14. The following list of the steps in the risk management process is correct with one exception. Which one of the steps shown is inaccurate? 1. Identifying and analyzing loss exposures 2. Gathering information to support assumptions about the loss exposures3. Selecting the most appropriate risk management techniques 4. Implementing the chosen techniques in a risk management program 5. Monitoring and modifying the risk management program

1. 12. 23. 34. 4

Q15. Businesses, individuals, and families that practice sound risk management can benefit society by doing all of the following, EXCEPT: 1. Increasing interest in leisure activities 2. Reducing the overall number of losses 3. Controlling medical expenses through reduced injuries 4. Stimulating economic growth

Q16. What is a benefit that a business can receive by applying sound risk management? 1. It will meet state and federal safety regulations. 2. It will have a better opportunity to achieve business goals. 3. It will not have to worry about losses. 4. It will be able to attract and retain talented employees and managers.

Q17. Pete Morrow is implementing a set of risk management techniques at his company to help reduce the frequency of products liability claims that his company has experienced. Which of the following is an important step for Pete to include in this implementation process? 1. Identifying exposures2. Determining which exposures can be retained 3. Communicating the risk management information 4. Monitoring the results

Q18. The risk management technique that eliminates a loss exposure and reduces the chance of loss to zero is 1. Retention2. Loss control3. Noninsurance transfer4. Avoidance

Q19. 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

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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.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.

What is an effective way for Frank and Jan to begin identifying the liability loss exposures associated with their new home? 1. Hire a professional risk manager 2. Determine the value of the home and contents 3. Purchase a homeowners insurance policy 4. Inspect the home to look for items and activities that might cause injury

or damage

Q20. 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? 1. Avoidance2. Loss control 3. Retention4. Noninsurance transfer

Q21. 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? 1. Yes, they should do this indefinitely and not replace the tank. 2. Yes, they are exchanging a large exposure for a little premium. 3. No, they are spending a lot of money for little protection. 4. No, each neighbor will have insurance to cover any damage to their wells.

Q22. 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 obtaining 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 obtains his own vehicle or begins driving his own, she knows that her expenses and her concerns will increase.

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

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? 1. Avoidance2. Loss control

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3. Noninsurance transfer4. Retention

Q23. 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? 1. Avoidance2. Loss prevention3. Loss reduction4. Noninsurance transfer

Q24. 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? 1. Avoidance2. Loss prevention3. Noninsurance transfer 4. Retention

Q25. 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? 1. Yes, Jane will save $500 per year. 2. Yes, if Jane can afford to lose $3,000. 3. No, because the plan does not include loss control. 4. No, this type of coverage is required in most states.

Other Questions

1. A policy limit plays which of the following roles?

a. The policy limit tells the insured the maximum amount of money that can be recovered from the insurance company after a covered loss b. The policy limit tells the insurer the maximum amount it may have to pay for a covered loss. c. The policy limit is related to the insurance premium charged.d. All of the above

2. 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 coverage’s?

a. Claims made coverage b. Occurrence basis coverage c. Retroactive coverage d. Perpetual coverage

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

a. Prudence b. Accounting c. Loyalty

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d. Relaying information

4. In what specific type of marketing system do insurance companies advertise directly by mail, radio, television, Internet, or with the communications of an association, a credit card company, or a bank?

a. A direct writing system b. A direct approach system c. A direct brokerage system d. A direct response system

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

a. Premiums paid by insured’s b. Increased lawsuits c. Operating costs of insurers d. All of the above

6. 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

7. An insurer's financial statement shows a loss reserve and an unearned premium reserve. These reserves are each part of the insurer's

a. Policyholders' surplus.b. Un admitted assets.c. Admitted assets.d. Total liabilities.

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

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

a. Class rates apply to all insured’s 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.

10. 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

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11. Liability insurance policies typically include supplementary payments consisting of all of the following, EXCEPT:

a. Damage payments b. All expenses incurred by the insurer c. The cost of bail bonds or other required bonds d. Expenses incurred by the insured at the insurer's request

12. 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

13. In some cases, the ultimate loss payment can exceed the policy limit shown in the declarations because the loss payment can include costs for all of the following, EXCEPT:

a. Defense costsb. Debris removalc. Additional perilsd. Additional coverage’s

14. 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 no insurable loss exposure.d. A commercial loss exposure.

15. Which one of the following is part of written premiums?

a. Investment incomeb. Policyholders surplusc. Unearned premiumsd. Underwriting expenses

16. 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 weaknessb. Financial strengthc. Operating strengthd. Operating weakness

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

a. Insurers in a state. b. Insured’s. c. Members of society. d. Claimants.

18. Beth has auto physical damage coverage with a $500 deductible. A collision causes $1,800 damage to Beth's car. How much is the loss payment from Beth's insurer?

a. $500b. $1,300

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c. $1,800d. $2,300

19. 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 adjusterb. Public adjusterc. Inside claim representatived. Outside claim representative

20. 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.

21. The possibility of Amanda's Bakery being sued by the injured customers is the

a. Loss exposure.b. Proximate cause.c. Hazard.d. Accident.

22. All states require insurance agents to be licensed to transact insurance business in the state. Further, agents must meet continuing education requirements to maintain their licenses. All of these requirements have what purpose?

a. To control the number of agents that transact business in a state to reduce the chance of over-aggressive competition. b. To ensure that these insurance company representatives have a prescribed minimum level of insurance knowledge. c. To improve the image and public perception of the insurance profession. d. To maintain a level of vigilance in protecting insurance companies against fraudulent behavior by the public.

23. Under a liability policy, damages awarded for out-of-pocket expenses are called:

a. Special damagesb. General damagesc. Indirect damagesd. Consequential damages

24. 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.

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25. 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.

26. The validity of a contract depends on all of the following essential elements, EXCEPT:

a. Adhesion b. Legal purpose c. Consideration d. Agreement

27.Advertising injury, which is covered by most commercial general liability policies, typically includes which of the following types of offenses?

a. Pain and suffering b. Libel and slander c. Battery and assault d. All of the above

28. The amount of the insurer's claim payment depends on all of the following types of policy provisions, EXCEPT:

a. Policy limits b. Defense cost provisions c. Loss mitigation provisions d. "Other Insurance" provisions

29. 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.

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.

30. 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.

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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.

31.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.

The claim representative assigned to The Printer's Thumb loss is trying to identify the coverage limits in the property insurance policy that apply to the photocopiers that were destroyed. Under what category of covered property should the claim representative find coverage for the photocopiers?

a. Floater coverageb. Building equipmentc. Business personal propertyd. Nonowned property

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

a. The lightningb. The firec. The electrical wiringd. The trash accumulation

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 expensed. Optional rental reimbursement

Insurance policies contain exclusions for which of the following reasons?

a. To eliminate coverage that most insureds do not need b. To avoid covering losses that exceed limits c. To provide coverage for exposures that require special handling by the insurer d. All of the above

Liability insurance differs from property insurance in all of the following ways, EXCEPT:

a. Property insurance covers losses resulting from property damage to others, but liability insurance involves bodily injury to an insured. b. Property insurance claims usually involve only two parties, but liability insurance claims involve three parties. c.In property insurance insurers pay claims to insureds, but in liability insurance insurers pay a third party on behalf of insureds against whom a claim has been made. d. Property insurance policies clarify which property and cause of loss the policy covers, but liability insurance policies indicate the activities and types of injury or damage that are covered.

The financial report for Hometown Insurer contains the following information:

Earned premiums $4,000,000Written premiums $5,000,000Investment income $1,000,000

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Incurred Losses $3,000,000Incurred underwriting expense $2,000,000

What is Hometown Insurer's loss ratio?

a. 20%b. 30%c. 50%d. 75%

What is Hometown Insurer's combined ratio?

a. 75%b. 95%c. 105%d. 115%

What is Hometown Insurer's investment income ratio?

a. 10%b. 20%c. 25%d. 50%

What is Hometown Insurer's expense ratio?

a. 20%b. 40%c. 50%d. 75%

What is Hometown Insurer's overall operating ratio?

a. 75%b. 90%c. 105%d. 115%

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