Insurance CCP Syllabus for Foundation Level Insurance Concepts Insurance as a Transfer mechanism - Law of large numbers Types

pes of loss exposures - Characteristics of insurable risks Insurance operations Benefits and costs of insurance Brief history of insurance Q1E. Insurance is a contract between 1. Insured and State 2. Insurer and State 3. Insured and Insurer 4. Insured and Agent Q2E. 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 insurer 3. Barter, between the insured and insurer 4. Transfer system, in which insured transfers the chance of financial loss to insurer Q3M. A loss exposure is any: 1. Condition or situation that presents the possibility of a loss 2. Condition or situation that guarantees the loss 3. Event for which insurance pays 4. Condition for sharing the insurance payment between insureds Q4E. 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. Q5M. What are the historical terms for Property and Liability insurance? 1. Damage Insurance and Responsibility Insurance 2. Replacement insurance and III Party Insurance 3. Fire Insurance and Casualty Insurance 4. Physical Insurance and Legal Insurance Q6E. Which line of insurance is also known as Third-party insurance? 1. Property Insurance 2. Liability Insurance 3. Life Insurance 4. Health Insurance Q7M. All of the following are types of property insurance EXCEPT: 1. Fire and allied lines 2. Crime 3. Business income 4. Directors and officers Q 8M. All of the following are types of insurance provided by the federal government EXCEPT: 1. Flood insurance 2. Crop insurance

3. 4.

Tenants insurance Social Security

Q9H. Term life insurance: 1. Provides lifetime protection 2. Accrues a cash value 3. Provides maximum protection for the lowest cost 4. Allows the policyholder to borrow against policy savings Q10E. 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 area 2. Insurers must be licensed to write insurance policies in a given state 3. Insurers must meet certain tests of financial strength 4. Insurers must comply with laws on marketing, underwriting, and claims practices Q11E. Which one of the following is a reason why government insurance programs exist? 1. Because the government has expertise in handling insurance claims 2. Because the government has the necessary financial resources 3. Because the government has infrastructure and staff to provide insurance 4. Because the government has legal representatives in every state of the union Q12M. All of the following are types of private insurers EXCEPT: 1. Stock insurers 2. Mutual insurers 3. Participating insurance consortiums 4. Reciprocal insurance exchanges Q13E. State insurance departments regulate insurance rates to protect consumers against rates that are all of the following EXCEPT: 1. Excessive 2. Inadequate 3. Class specific 4. Unfairly discriminatory Q14E. A mutual insurance company is owned by: 1. Independent investors 2. Policyholders 3. State insurance departments 4. Mutual funds Q15M. All of the following are characteristics of ideally insurable loss exposures EXCEPT: 1. Losses that are definite and measurable 2. Losses that are accidental 3. Large number of similar exposure units 4. Large concentration of financial capacity Q16M. Whole life insurance: 1. Provides coverage for a specified period such as 5 or 10 years 2. Lapses when the policyholder reaches age 65 3. Is primarily an investment vehicle 4. Accrues a cash value Q17E. What is the process by which insurers decide which potential customers to insure and what coverage to offer them? 1. Reinsuring

2. 3. 4.

Marketing Prospecting Underwriting

Q18E. 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 boiler 2. Sun damage to an exterior paint finish 3. Physical damage to a lunar land rover 4. Termite damage to a home Q19E. 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. Subrogate 2. Recoup 3. Indemnify 4. Rectify Q20M. 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. Q21H. A Bond guaranteeing that a principal will carry out the obligation for which they are bonded for ' is1. Surety Bond 2. Fidelity Bond Q23H. 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. Replacement 2. Jettison 3. Abandonment Q24E. A class rating is a rate applied to those risks, which are different 1. Serious 2. Joking Q25E. Depreciation is decrease in the value of property due to deflation. 1. Agree 2. Disagree Q26E. Fraternal insurance is offered to a social organization for their members 1. Agree 2. Disagree Q27E. An amount returned to a policyholder by an insurance company out of its earnings is called 1. Claim 2. Dividend Q28E. Retention is the amount of risk retained by which of the following? 1. Insured 2. Underwriter 3. Insurance company

Q29E. Fidelity Bond are written to cover the obligee, usually an employer against loss from 1. Dishonest Act 2. Honest Act 3. Accident Q30M. Which of these do not fall under the catastrophe category? 1. Fire 2. Hurricane 3. Earthquake Types of Insurers Stock Insurance Companies Mutual Insurance Companies Reciprocal Insurance Exchanges Lloyds Associations Captive Insurers Reinsurance companies Federal Insurance Programs State Insurance Programs Excess and Surplus Lines Insurers Q1E. Purpose of formation of Stock Insurance Company is: 1. Returning a profit to its stockholders 2. Providing insurance to its stockholders 3. Returning a profit to its policyholders 4. Providing insurance to its policyholders Q2E. Purpose of formation of Mutual Insurance Company is: 1. Returning a profit to its stockholders 2. Providing insurance to its stockholders 3. Returning a profit to its policyholders 4. Providing insurance to its policyholders Q3E. Demutualization refer to a process by which: 1. Stock insurance company becomes a Mutual Insurance Company 2. Mutual Insurance company stops investing in mutual funds for investment income 3. Mutual insurance company becomes a stock insurance company 4. Allows Mutual insurance company to charge its insured an additional premium after the policy has gone into effect Q4E. A reciprocal insurance exchange is operated through: 1. Board of directors elected by subscribers or members 2. Chairperson elected by members or subscriber and board of director of an licensed insurance company 3. Attorney-in-fact, an authorized manager bound by contract with subscribers or members 4. Chief justice of state bound by state laws. Q5M. State Farm Insurance Companies is a type of: 1. Stock insurance company 2. Mutual insurance company 3. Reciprocal insurance exchange 4. Lloyds association Q6M. United State Automobile Association (USAA) is a type of: 1. Stock insurance company 2. Mutual insurance company 3. Reciprocal insurance exchange 4. Lloyds association Q7E. All factors have contributed to the growth of captive insurance companies except: 1. Provides insurance coverage at a lower cost than other private insurance 2. Eliminates unavailability of desired insurance coverage 3. Chances of loss and claims are minimized

4.

Improves cash flow

Q8E. 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 insurer 2. One insurer transfers some or all of the loss exposures from policies written for its insured to another insurer 3. Private insurance companies are forced to provide insurance through state laws 4. Insurer is allow to charge extra premium to provide insurance for loss exposures outside its business line Q9M. Social security program covers all the benefit except: 1. Retirement benefits for the elderly 2. Survivorship benefits for dependents of deceased workers 3. Disability payments for disabled workers 4. Liability lawsuits charges Q10M. A worker compensation insurance plan, which does not allow private insurance companies to write WC in that state, is known as: 1. Competitive State fund 2. Insurance guarantee fund 3. Monopolistic state fund 4. Residual market plan Q11M. Automobile owners with poor driving records can obtain auto liability insurance through: 1. Fair access to insurance requirements plan (FAIR) 2. Automobile insurance plan 3. Insurance guarantee fund 4. Monopolistic state fund Q12E. Insurance guarantee fund: 1. Guarantees that every person obtains desired insurance 2. Provides a system to pay the claims of insolvent insurers 3. Guarantees insurance companies a fixed flow of premium in case a insured default premium payment 4. Reimburses legal cost borne by insured in liability suits Q13E. 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. Q14E. 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 programs 3. Automobile insurance plans 4. The National Flood Insurance Program Q15M. 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. 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.

Q16H. 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. Q17H. 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. Q18H. 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 discrimination 2. Premium differential 3. Actuarial equity 4. Social equity Q19E 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 Q20H. 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. Q21H. 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. 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. Insurance Regulation National Association of Insurance Commissioners (NAIC) Rate Regulation Monitoring Financial health of insurers Insurer licensing Agency licensing Policy forms Unfair trade practices Q1H. 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. Tort 2. Hazard 3. Estoppel Q2M. A bond is a contract, which involves at least how many parties? 1. Two party contract 2. Three party contract 3. Four or more part contract Q3E. 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 law 2. State statute 3. Common law 4. Insurance guideline Q4E. Price of insurance for each unit of exposure is known as: 1. Premium 2. Rate 3. Coverage 4. Limits Q5E. 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. Adjuster 2. Actuary 3. Aggregator 4. Underwriter Q6E. 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 insureds control 2. An underwriting concept, where underwriters select probable customers based on actuarial guidelines 3. A process by which insurer calculate rates that determine the premium to charge for an insurance policy 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. Q7M. A insurance company X is incorporated in London, England and licensed to operate in New Hampshire, USA will be known as: 1. Domestic Insurer 2. Foreign Insurer 3. Alien Insurer 4. Nonadmitted Insurer

Q8E. All the following are the reason for existence of excess and surplus lines of insurance except: 1. Unusual or unique exposures 2. Insured needing high limits 3. Nonstandard business 4. Not able to obtain standard license Q9E. The type of insurance rating law that requires rate approval by the state insurance department before the rates can be used is 1. Flex rating law 2. Open competition 3. File-and-use law 4. Prior-approval law Q10E. 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. Q11M. 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. Q12H. 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 b. Adds an amount sufficient to cover predicted expenses and a margin for error, profit, and catastrophes Q13E. 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 overaggressive 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.

Q14M. 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. Q15E. 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 monopoly 3. To protect consumers from high insurance rates 4. To promote equity among insurers Q16H. 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. Q17E. 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. 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.

Financial Performance of Insurers Premium Income (Earned and Written premium) Investment Income Loss Expenses Underwriter Expenses Investment Expenses Operational Gain/loss Assets Liabilities Policy Holders Surplus Financial Statements Profitability Ratios Capacity Q1E. Loss Ratio is a ratio of claims to which of the following? 1. Part of annuity payment 2. Operating expenses 3. Premiums Q2E. Which of the following is not a mode of premium payment? 1. Quarterly 2. Annually 3. Fortnightly Q3E. Which of the following do not fall under liquidation? 1. Selling of Assets for cash 2. Paying off of part liability. 3. Dissolving of a company Q4M. Which part of a policy is not covered by Net premium? 1. Profits 2. Benefits of policy 3. Advantage Q5M. Rules of accounting allows insurer to recognize: 1. Only unearned premiums as income for particular year 2. Only earned premiums as income for particular year 3. Only written premiums as income for particular year 4. Both earned and unearned premiums as income for particular year Q6H. 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: $800 2. Written premium: $800; Earned premium: $400; Unearned premium: $1000 3. Written premium: $1000; Earned premium: $800; Unearned premium: $400 4. Written premium: $1000; Earned premium: $400; Unearned premium: $800 Q7H. 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: $200 2. Written premium: $0; Earned premium: $800; Unearned premium: $200 3. Written premium: $1000; Earned premium: $1000; Unearned premium: $0 4. Written premium: $0; Earned premium: $800; Unearned premium: $0 Q8E. 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 surplus 2. Loss reserve 3. Incurred loss 4. Paid loss Q9M. Overall gain/loss from operation is calculated by: 1. Earned premium Losses Underwriting expenses + Net investment gain/loss 2. Written premium + Net investment gain/loss

3. 4.

Net underwriting gain/loss loss expense Written premium Loss expense

Q10M. (Total earned premium + Investment income) (Total losses + Other expenses) + Adjustments is equivalent to: 1. Net underwriting gain/loss 2. Overall gain/loss from operation 3. Net income before taxes 4. Net operating income/loss Q11E. All of the following can be recorded as admitted assets except: 1. Cash 2. Real estate 3. Certain data processing equipment 4. More than 90 days overdue premium Q12M. Two major types of liabilities found on an insurers financial statements are: 1. Policyholders Surplus and Loss Reserve 2. Loss reserve and Unearned Premium Reserve 3. Policyholders Surplus and Unearned Premium Reserve 4. Policyholders Surplus and Accounts receivable Q13H. All of the following are profitability ratios except: 1. Loss ratio 2. Investment income ratio 3. Premium to surplus ratio 4. Expense ratio Q14E. Percent of earned premiums used to fund losses and their settlements is known as: 1. Loss ratio 2. Investment income ratio 3. Combined ratio 4. Expense ratio Q15E. Expense ratio is a comparison of: 1. Incurred underwriting expense and earned premium 2. Incurred losses and earned premium 3. Incurred losses and written premium 4. Incurred underwriting expense and written premium Q16E. Investment income ratio is calculated by dividing net investment income by: 1. Written premium 2. Earned premium 3. Unearned Premium 4. Total investment income Q17E. Overall operating ratio is calculated by: 1. Loss ratio + Expense ratio - Investment Income ratio 2. Loss ratio + Expense ratio + Investment Income ratio 3. Loss ratio - Expense ratio + Investment Income ratio 4. Loss ratio - Expense ratio - Investment Income ratio Q18H. For an insurance company ABC Earned Premiums = 5,000,000 Written Premiums = 6,000,000 Incurred Underwriting Expenses = 600,000

Incurred Losses (including loss expense) = 3,000,000 Net Investment Income = 1,000,000 Companys Loss ratio/ Expense ratio/Combined ratio/Investment Income ratio/ Overall Operating ratio stands at (all ratios in %): 1. 50/10/60/20/40 2. 50/10/40/20/70 3. 60/10/70/20/50 4. 60/10/50/20/70 Q19E. 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 Q20E. Premium-to-surplus ratio is also known as 1. Loss ratio 2. Capacity ratio 3. Operating ratio 4. Income ratio Q21E. Capacity ratio is calculated as 1. Written premiums/policyholders surplus 2. Earned premiums/policyholders surplus 3. Written premiums/Loss reserve 4. Earned premiums/ Loss reserve Q22E. Which of the following is part of written premiums? 1. Investment income 2. Policyholders surplus 3. Unearned premiums 4. Underwriting expenses Q23E. An insurer's financial statement shows a loss reserve and an unearned premium reserve. These reserves are each part of the insurer's 1. Policyholders' surplus 2. Unadmitted assets 3. Admitted assets 4. Total liabilities Q24M. An insurer's income statement shows amounts for all of the following for a particular period, EXCEPT: 1. Earned premiums 2. Policyholders surplus 3. Incurred losses 4. Underwriting expenses Q25E All of the following parties are likely to monitor an insurer's financial performance, EXCEPT: 1. Regulators 2. Agents 3. Claimants 4. Shareholders Q26E. Amounts designated by insurers to pay claims for losses that have already occurred are called 1. Acquisition expenses

2. 3. 4.

Loss adjustment expenses Loss reserves Unearned premium reserves

Q27H. A decrease in incurred losses will generally cause a decrease in all of the following, EXCEPT: 1. Combined ratio 2. Expense ratio 3. Overall ratio 4. Loss ratio Q28M. The financial report for Apex Insurers contains the following information: Admitted assets $500,000 Unadmitted assets $400,000 Liabilities $300,000 What is the amount of Apex Insurers' policyholders surplus? 1. $100,000 2. $200,000 3. $400,000 4. $600,000 Q29M. Brown Insurance Company has the following expenses: Licenses, taxes, and fees $70,000 Claim staff salaries $100,000 Agents' commissions $200,000 Advertising costs $50,000 Rent and utilities $60,000 What is the amount of Brown Insurance Company's acquisition expenses? 1. $250,000 2. $300,000 3. $350,000 4. $450,000 Q30H. World Insurance Company has the following assets: Cash $ 50,000 Stocks $400,000 Bonds $200,000 Real Estate $500,000 Furniture and office equipment Premium balance due in less than 90 days Premium overdue more than 90 days What is the amount of World's total admitted assets? 1. $450,000 2. $650,000 3. $1,170,000 4. $1,250,000

$70,000 $20,000 $10,000

Q31M. 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 $70,000 2. A net underwriting gain of $70,000 3. A net operating loss of $1,730,000 4. A net operating gain of $1,800,000 Q32M. 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 weakness

2. 3. 4.

Financial strength Operating strength Operating weakness

Marketing Independent Agency System Exclusive Agency System Direct Writing System Direct Response System Mixed Marketing System - Roles and Responsibilities of an agent Types of Authorities Types of Commissions Advertising Q1E. How is an independent agent paid? 1. Commission basis 2. Salary basis 3. Profit basis Q2E. All the following are the responsibilities of an agent to the principal except: 1. Loyalty 2. Obedience 3. Reasonable care 4. Profitable Q3E. Authority based on third partys reasonable belief that agent is authorized to act on behalf of the principal is known as: 1. Express authority 2. Implied authority 3. Apparent authority 4. Binding authority Q4E. Ownership of agency expiration list is the usual feature of: 1. Independent Agency System 2. Exclusive Agency system 3. Direct Writing System 4. Direct response System Q5M. A Broker is supposed to do all the following except: 1. Collect premiums from insured and remit to insurer 2. Find people with insurance needs and selling insurance appropriate to those needs 3. Commit the insurer by binding coverage 4. Collect a fee or commission for their services Q6M. An independent business organization that functions almost as a branch office for one or more insurance companies is known as: 1. Independent Agency 2. Managing General Agency 3. Broker 4. Exclusive Agency Q7M. Tie-in-sales and rebating are: 1. Producer supervision practices 2. Producer motivation practices 3. Sales promotion practices 4. Unfair trade practices Q8E. Peter is a salaried producer who is an employee of ABC Insurance Company. In what distribution system does he operate? 1. Exclusive agency 2. Independent agency

3. 4.

Direct writing Direct response

Q9E. 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 commission 2. Profit sharing 3. Salary 4. Sales commission Q10M. 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. Q11E. The authority that the principal specifically grants the agent is called: 1. Implied authority 2. Express authority 3. Apparent authority 4. Conditional authority Q12E. 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 agent 2. The agency agreement gives the agent the right to represent the insurer and sell insurance on the insurer's behalf 3. The principal is the party the agent authorizes to bind coverage 4. The agent is the party authorized by the principle to act on the principal's behalf Q13E.Advertising by independent agencies promotes 1. Brand recognition of the companies represented 2. The agency rather than the insurers it represents 3. Symbols used to increase recognition of the insurers represented 4. Attention to the prices of the policies offered Q14M. Insurers using direct response marketing attract new customers through all of the following methods, EXCEPT: 1. Recognition of local agents 2. Extensive advertisement 3. Established customer bases 4. Word-of-mouth advertising Q15E. 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 authority 2. Binding authority 3. A unilateral contract 4. An agency contract

Q16M. 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 agency 2. Independent agency 3. Direct writing 4. Direct response Q17E. Producers are not allowed to pay a portion of the premiums for a policy or give any commission to a policyholder. Actions of this type are called 1. Tie-in sales 2. Contingent commissions 3. Misrepresentation of dividends 4. Rebating Q18M. 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 system 2. Insurance brokers are independent business owners or firms that place insurance by representing the customers, not insurers 3. An agency expiration list is the record of policies that have lapsed or been canceled due to overdue premiums 4. The direct response system advertises to encourage the potential customers to contact the insurer to purchase insurance Q19E. 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's 2. The staff underwriter's 3. The producer's 4. The marketing representative's Q20E. Authority that the insurance company specifically grants to an agent is called 1. Binding authority 2. Express authority 3. Implied authority 4. Apparent authority Q21E. Which one of the following individuals represents the insurance purchaser? 1. An agent 2. A solicitor 3. A customer service agent 4. A broker Q22E. 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 Q23M. 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. 3. 4.

Hold sales contests to encourage the type of sales activity. Provide additional staff to help with the processing. Offer subscriptions to educational services for the producers.

Q24E. 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. Q25H. 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. Q26E. 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 system 2. Exclusive agency system 3. Direct writing system 4. Direct response system Q27M. 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. Underwriting Importance of Underwriting Line and Staff underwriters - Basic Underwriting Activities Risk selection - Pricing the coverage Types of rating Determining terms and conditions for policy - Reinsurance decision Steps in underwriting process Types of Hazards Legal considerations Monitoring Underwriting process Q1E. 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. Insurers ability to provide insurance is limited by its capacity to write new policies 3. Insurers do not provide insurance to specific class of people forming lower strata of the society

4.

Insurer try to use adverse selection to provide insurance

Q2M. Insurers attempt to protect their available capacity in following ways except: 1. Maintaining a spread of risks 2. Optimizing use of available resources 3. Using guarantee funds 4. Arranging reinsurance Q3E. The underwriting pricing objective is to charge a premium that is commensurate with the: 1. Exposure 2. Profitability 3. State laws 4. Insureds capacity Q4E. An insurance limit of $250,000 is charged at a rate of $0.40 per $100 of insurance will give a premium of: 1. 6250 2. 1000 3. 100000 4. 10000 Q5M. Merit Rating Plans are: 1. A type of class rates that gives discounts to educated people 2. A type of rate to develop a premium for a unique exposure for which there is no established rate 3. Modify class rates to reflect loss characteristics of a particular insured 4. Used to assign a specific insurance rate that reflects the unique characteristics of an insured or the insureds property Q6E. 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 rate 3. Modify class rates to reflect loss characteristics of a particular insured 4. Used to assign a specific insurance rate that reflects the unique characteristics of an insured or the insureds property Q7E. 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 rate 3. Modify class rates to reflect loss characteristics of a particular insured 4. Used to assign a specific insurance rate that reflects the unique characteristics of an insured or the insureds property Q8E. 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 rate 3. Modify class rates to reflect loss characteristics of a particular insured 4. Used to assign a specific insurance rate that reflects the unique characteristics of an insured or the insureds property Q9M. 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 insurers 2. Are known as rating bureaus and they calculate rates and prepare rate filings for their members 3. Are known as insurance advisory organization and they calculate rates and prepare rate filings for their members

4.

Are known as insurance advisory organization and they file loss cost that form the basis of rates developed by individual insurers

Q10M. 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 level 2. With some insurers underwriting authority is highly decentralized 3. 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 Q11M. All the following are true about evaluation of hazard except: 1. Insured has a weak financial condition and is susceptible to Moral hazard 2. Evidence of Morale hazard can be found in personality traits of insureds 3. 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 Q12E. 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 Q13E. Why do states require that insurers notify the insured before a policy is to be canceled or nonrenewed? 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 area 4. To reduce the opportunity for an insurer to red line Q14E. 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. Q15E. 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 decisions 4. By maintaining a consistently applied set of behavioral measurements against which an individual's performance will be measured Q16M. 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.

Q17E. How do states prohibit unfair discrimination by insurers? 1. By reviewing each policy cancellation or nonrenewal and the justification for the insurer's action 2. By maintaining a channel for policyholder complaints 3. By identifying prohibited unfair trade practices in state insurance laws 4. By examining insurers' mission statements and objectives Q18M. 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 Q19E. 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. Capacity 2. Adverse selection 3. Risk selection 4. Combined ratio Q20M. 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. Q21E. All of the following are sources of information underwriters use as they gather information for underwriting EXCEPT: 1. Producers 2. Government records 3. Inspection reports 4. Educational records Q22M. 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. Q23M. Which one of the following represents a physical hazard in the GhostWriter Publishing case? 1. The suspicious fire 2. The ownership of the building 3. The book-binding glue 4. The 50-gallon drum Q24M. 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 glue 3. The suspicious fire 4. The lack of profits Q25M. Which one of the following represents a legal hazard in the GhostWriter Publishing case? 1. The treatment of the employees 2. The toxic pollution 3. 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. Q26M. 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. Q27M. 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. 4.

Maxfield's underwriters take classes to expand their understanding of claim adjustment. Maxfield's management staff takes classes to learn how to provide reasonable accommodations for physically challenged employees.

Q28M. 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. 4. Maxfield's premiums will not be commensurate with the exposures. Q29M. 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 rates 2. Individual rates 3. Class rates 4. Judgement rates Claims Parties involved in a claim - Types of claims Notice of loss - Types of claims representatives Roles and responsibilities Steps in claim handling General damages special damages punitive damages Factors affecting settlement amount - Actual cash value Replacement cost Agreed value Subrogation Salvage Loss Reserves Unfair claim practices Q1E. In case of liability claims, the claimant is 1. First party 2. Second party 3. Third Party 4. Adjuster Q2E. A third party refers to 1. Insured 2. Insureer 3. Person or business that is not a party to the insurance contract but who might assert a claim against the insured 4. Person responsible for investigating, evaluating and settling claims Q3E. Insurance professional generally use term Claimant to refer to 1. I party Insured 2. II party Insurer 3. III party 4. Claim representative Q4E. All the following are responsibilities of the claim representative except: 1. Respond promptly to submitted claims 2. Properly evaluate the claims 3. Treat the parties fairly 4. Pay the claim Q5M. Reservation of rights letter is a 1. Notice sent by the insurer to an insured that the insurer is proceeding with the investigation of a claim but that the insurer retains 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. 4.

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

Q6E. All of the following are reasons of using an independent adjusters by an insurer except 1. Number of policyholders in a particular area is very less 2. Claim involves an unique or complex situation 3. Staff claim representative does not have sufficient expertise 4. Law mandate an independent adjuster to be included in claims process Q7E. Draft authority is authority expressively given by the insurer to 1. Independent adjuster to collect claim information and provide it to insurer 2. Agents to settle and pay certain of claims by writing a claim draft up to certain limit 3. Staff claim representative 4. Field claim representative Q8E. A claim representative representing an insured is called as 1. Agent 2. Independent adjuster 3. Public adjuster 4. TPA Q9E. A claim for the property of some one other than insured damaged due to insureds alleged negligence is a type of 1. Property Insurance Claim 2. Liability Claim 3. Medical Claim 4. Indemnity Claim Q10E. 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 policy 2. Has a right to collect total, amount from the insurer 3. Has a right to collect amount to the extent of outstanding mortgage since he has an insurable interest in real property Q11M. Burden of proof for the perils covered under policy lies 1. In some cases with insureds and other times at insurer 2. Always with insured 3. Always with insurer 4. Neither with insurer nor with insured Q12E. Cost to replace the property minus an allowance for the propertys depreciation is known as 1. Replacement Cost 2. ACV 3. Agreed Value 4. Depreciation Cost Method Q13M. Property such as fine arts, antiques and collection are commonly valued by 1. Replacement Cost 2. ACV 3. Agreed Value 4. Depreciation Cost Method

Q14M. 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 cost 2. Pay insured the ACV and use salvage rights 3. Pay insured the ACV and use the subrogation rights 4. Pay insured the repair cost and use salvage rights Q15E. Damage awarded by court for the purpose of punishing the wrongdoer and to deter others from committing similar wrongs is known as: 1. General Damages 2. Special Damages 3. Punitive Damages 4. Legal Damages Q16E. What is the major purpose of claim handling? 1. To determine whether coverage exists 2. To obtain adequate information 3. To satisfy the insurance company's obligation under the policy 4. To respond promptly to claimant requests Q17E. What is the purpose of Unfair Claim Practices laws? 1. To justify legal claim practices 2. To determine the value of the loss 3. To punish insurers 4. To specify illegal claim practices Q18E. Subrogation is the insurer's right to 1. Recover its claim payment from the party responsible 2. Drop a claim in exchange for an agreed amount of money 3. Estimate the value of the damaged property 4. Transfer coverage to a third party Q19E. Granting draft authority to agents will generally increase 1. Claim settlement expenses 2. Time to settle claims 3. Cost of insurance 4. Customer satisfaction Q20M. What is the largest and most important liability of property and liability insurers? 1. Acquisition costs 2. Administration costs 3. Loss reserves 4. Unearned premium reserves Q21M. What is an example of general damages? 1. Hospital expenses 2. Lost wages 3. Prescriptions 4. Disfigurement Q22E. All of the following can describe an independent adjuster, EXCEPT: 1. Self-employed 2. Contracted by an insurer 3. Employee of an insurer 4. Employee of an adjusting firm

Q23E. Generally, an inside claim representative 1. Meets with parties involved with the loss 2. Handles claims by phone or mail from the insurer's office 3. Visits the scene of the loss to investigate damages 4. Offers claim settlement service for a fee to insurers Q24M. 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 Q25E. 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. Valuation 2. Settlement 3. Negotiation 4. Investigation Q26M. 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. $1,500 2. $1,800 3. $2,000 4. $2,300 Q27E. 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. $225 2. $350 3. $450 4. $800 Q28M. 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 adjuster 2. Public adjuster 3. Inside claim representative 4. Outside claim representative 29H. 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 representative 2. Outside claim representative 3. Independent adjuster 4. Independent agent Q30E. 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. $2,000,000 2. $3,500,000

3. 4.

$4,000,000 $5,500,000

Q31M. A liability loss has the following damages: Medical expenses $10,000 Damages for disfigurement $50,000 Damages for pain and suffering $100,000 What is the amount of general damages? 1. $60,000 2. $110,000 3. $150,000 4. $160,000 Q32M. A liability loss has the following damages: Medical expenses Damages for disfigurement Damages for pain and suffering What is the amount of special damages? 1. $10,000 2. $50,000 3. $100,000 4. $160,000 Q33M. 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 adjusters 3. Third party administrators 4. Outside claim representatives Insurance Contracts Elements of a contract Characteristics of insurance contract Sections in policy document Selfcontained policies Modular policies Standard forms Vs Manuscript policies Q1M. Business personal property is known as what? 1. Estate 2. Fund 3. Contents Q2E. Endorsement when attached to the original insurance policy becomes what of the following? 1. An illegal part of the contract 2. A legal part of the contract 3. A duplicate contract Q3E. 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. Copay 2. Noncontributory 3. Subrogation Q4M. A policy differs from a binder as $10,000 $50,000 $100,000

1. 2. 3. 4.

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

Q5E. In some states for auto insurance purposes, following individual is considered as a legally competent party 1. Insane or otherwise mentally incompetent 2. Under the influence of drugs or alcohol 3. Minors (persons not of legal age) Q6E. An intentional failure to disclose a material fact is known as: 1. Misrepresentation 2. Concealment 3. Consideration 4. Principal of Indemnity Q7E. A false statement of a material fact is known as 1. Misrepresentation 2. Concealment 3. Consideration 4. Principal of Indemnity Q8M. Insurance policies are considered to be contracts of adhesion because 1. Both the insured and insurer are supposed to adhere to contract once policy is issued 2. Insured must adhere to the agreement as written by the insurer 3. Insurer must adhere to the agreement as written by the insured 4. Court has to adhere to contract while giving judgements Q9M. 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 pay 1. $2000 as the insurance contract is an contract of indemnity 2. $2000 as the insurance contract was as valued policy 3. $5000 as the insurance contract is an contract of indemnity 4. $5000 as the insurance contract was as valued policy Q10E. Where will you find the name, location and addresses of the insured and insurer in a policy? 1. Definition Page 2. Insuring Agreement 3. Declaration Page 4. Conditions Q11E. Inception and Expiration date of the policy will appear in 1. Definition Page 2. Insuring Agreement 3. Declaration Page 4. Miscellaneous Provisions Q12E. Policy limits and premium amounts are generally shown in 1. Definition Page 2. Insuring Agreement

3. 4.

Declaration Page Conditions

Q13M. 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 section 1. Definition Page 2. Insuring Agreement 3. Declaration Page 4. Miscellaneous Provisions Q14E. Termination of a policy by either the insurer or the insured during the policy period is known as 1. Changes 2. Endorsement 3. Cancellation 4. Renewal Q15E. Short rate refund is used to pay back the premium to insured when 1. Insurer cancels the policy with an advance notice 2. Insured cancels the policy 3. Court orders to cancel the policy 4. Insurer cancels the policy without an advance notice Q16M. 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. Q17E. Other than common policy declarations, a modular Commercial Package Policy (CPP) must contain 1. Common policy exclusions 2. Common policy conditions 3. Commercial property conditions 4. Commercial liability declarations Q18E. In an insurance policy, what is the purpose of the insuring agreement? 1. Establishes procedures for carrying out the terms of the contract 2. Makes a broad promise to provide coverage 3. Explains the specific meanings of terms with respect to the coverages 4. Eliminates coverage for specified exposures Q19E. 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. Q20E. To reinforce the principle of indemnity, what provision is required in insurance policies? 1. Coinsurance 2. Cancellation 3. Proof of loss 4. Other insurance

Q21E. When an insured transfers his or her rights in a policy to a third party, this is called 1. Settlement 2. Liberalization 3. Assignment 4. Subrogation Q22M. 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 provision 2. Liberalization clause 3. Pro rata refund 4. Short rate refund Q23M. All of the following items are generally located on the declarations page of an insurance policy, EXCEPT: 1. Deductibles 2. Premiums 3. Exclusions 4. Endorsements Q24E. An insurance policy is a contract of adhesion written by the 1. NAIC 2. IRIS 3. Insurer 4. Actuary Q25E. With standard forms, the insurer can generally expect all of the following, EXCEPT: 1. Consistent company operations 2. Increased expense for policy issuance 3. Consistent court interpretations 4. Decreased claim settlement disputes Q26M. 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 a 1. Contract of adhesion 2. Contract of indemnity 3. Conditional contract 4. Personal contract Q27E. 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 costs 2. Debris removal 3. Additional perils 4. Additional coverages Q28E. 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. Q29M. 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. 2. 3. 4.

Adhesion Utmost good faith Indemnity Assignment

Q30E. 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. 2. Joe acted irrationally. 3. Joe acted in violation of public policy. 4. Joe acted under the influence of alcohol. Q31M. 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. $50 2. $150 3. $780 4. $945 Q32M. 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. Q33E. 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. Changes 2. Cancellation 3. Assignment 4. Subrogation Q34E. 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. Q35E. 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. $500 2. $1,300 3. $1,800 4. $2,300 Property Loss Exposures Types of property Consequence of Property Losses Peril - Named perils Vs Open perils Hazards Parties affected by Property Loss - Basic Form Broad form Special Form

Q1E. For insurance purposes, personal property includes 1. Buildings 2. Motor vehicles and trailers 3. Furniture and fixtures 4. Boiler and machinery Q2M. Bulldozers, road graders and forklift fall under which of the following category of motor vehicles 1. Auto 2. Mobile Equipment 3. Recreational Vehicles 4. Transport Vehicle Q3M. Paint cans and oiled rugs can be 1. Called as perils or hazards 2. Called as perils because it can be a cause of loss but not hazard 3. Called as hazard as they increase the likelihood of a loss by fire peril but are not perils by themselves 4. Neither a peril nor a hazard Q4M. An antique painting inured 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 stolen 2. Insurer will have to pay until insurer proves that painting was swept away by flood 3. Insurer will not pay for painting since flood loss is excluded 4. Insurer will have to pay without any party proving the peril Q5E. All the following are terms used by the insurance professionals to describe the coverage provided by all-risks policies except: 1. Accidental direct physical loss 2. Named perils 3. Open perils 4. Special form coverage Q6M. Person or business that holds the property of others for some specific purpose is known as 1. Bailee 2. Mortgagee 3. Mortgagor 4. Secured creditor Q7E. Floaters are policies 1. That do not have a fixed coverage limits and very on monthly basis 2. That are designed to cover property that moves from location to location 3. That allow change in covered property on periodical basis if the total dollar value remains same 4. That allow premium to be deferred for a specific period of time Q8E. Regarding coverage provision for money 1. Commercial property insurance usually contain limitation on amount while homeowners policies usually have a exclusion 2. Commercial property insurance usually contain exclusions while homeowners policies usually have a limitation on amount 3. Both type of policies usually have exclusion 4. Both type of policies usually have limitation on amount Q9E. Personal and commercial property insurance policies on buildings and personal property that provides coverage for approximately a dozen named perils is known as 1. Basic form coverage

2. 3. 4.

Broad form coverage Special form coverage Common form coverage

Q10E. 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 1. Basic form coverage 2. Broad form coverage 3. Special form coverage 4. Common form coverage Q11M. 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 peril 2. Pay for the damage though water is not a covered peril but fire was the proximate cause 3. Not pay for the damage as firefighters negligence caused the damage Q12M. 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 insured 2. First named insured 3. Mortgagee 4. Loss payee Q13H. 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 payee 2. Insurer promises to pay mortgagee the covered claims to the extent of its insurable interest but not to loss payee 3. If insured fails to pay the premium, mortgagee has the right to pay the premium to the insurer but loss payee does not 4. 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 Q14M. 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 Provision 2. Settlement Options 3. Co-insurance 4. Deductibles Q15E. 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 securities 3. Ships and their cargo 4. Sentimental value of heirlooms Q16M. A fire that leaves its intended place is 1. A hostile fire 2. A friendly fire 3. A proximate cause of loss 4. An ensuing loss Q17M. 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. 2. 3. 4.

A mortgagee and a loss payee have the same rights. The two clauses simply differentiate loans for real and personal property. In the event of a loss, the mortgagee is paid first, the named insured second, and any loss payee is third. The terms are used interchangeably depending on the insurance contract. 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.

Q18E. 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 deductible 3. A policy limit 4. The replacement value Q19E. Catastrophe perils, such as war, are generally excluded from property insurance policies because the risk is considered to be uninsurable since 1. 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 Q20E. In property insurance, a named insured 1. 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. Q21M. Water damage to a building following a windstorm is often not covered by a property policy unless 1. 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. Q22M. Property insurance policies typically exclude loss from maintenance perils. Such losses are generally uninsurable because 1. 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. Q23E. 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. Q24E. The taking of property from a person by someone who has caused or threatened to cause personal harm is 1. 2. 3. Burglary Robbery Theft

4.

Dishonesty

Liability Loss Exposures Legal Liability Activities leading to liability loss - Parties affected by Liability loss - Torts Contracts Statutes Types of injuries and damages Types of payments - Constitutional law- Statutory lawCommon law - Criminal law Civil law Q1M. Laws consisting of a body of principles and rules established overtime by courts on a case-by-case basis is known as: 1. Statutory Law 2. Common Law 3. Constitutional Law 4. Civil law Q2M. 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 Warranty 2. Negligence 3. Intentional Torts 4. Absolute Liability Q3M. An employee drives a customer to a meeting and negligently causes an accident in which the customer is injured. In this case 1. Employer is a tortfeasor and employees responsibility will shift from employee to employer 2. Employee is a tortfeasor but employees responsibility will shift from employee to employer 3. Employee is a tortfeasor and employer has vicarious liability and responsibility extends to include employer 4. Employer is a tortfeasor and employee has vicarious liability and responsibility extends to include employer Q4M. A written or printed untrue statement that damages a persons reputation is an intentional tort of following type: 1. Assault 2. Battery 3. Libel 4. Slander Q5M. An oral untrue statement that damages a persons reputation is an intentional tort of following type: 1. Assault 2. Battery 3. Libel 4. Slander Q6M. The intentional threat of bodily harm is an intentional tort of following type: 1. Assault 2. Battery 3. Libel 4. Slander Q7M. The unlawful physical contact with another person is an intentional tort of following type: 1. Assault 2. Battery 3. Libel 4. Slander

Q8M. A contractual provision that obligates one party to assume the legal liability of another party is known as 1. Warranty 2. Absolute Liability 3. Statutory Liability 4. Hold Harmless Agreement Q9M. 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 a 1. Statutory liability 2. Intentional tort 3. Absolute liability 4. Breach of contract Q10M. In a liability policy that provides claims-made coverage 1. Insurer agrees to pay all claims submitted during the policy period if the covered event occurs before a retroactive date 2. Insurer will not pay any claims submitted during the policy period if the covered event occurs on or after a retroactive date 3. 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 date 4. Insurer agrees to pay all claims submitted during the policy period if the covered event occurs on or after a retroactive date Q11M. Jessicas 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 coverage 1. Insurer will pay $200,000 to claimant, $100,000 to passenger and $10,000 towards property damage 2. 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 Q12M. Under a liability policy, damages awarded for pain and suffering are called: 1. Special damages 2. General damages 3. Indirect damages 4. Consequential damages Q13M. 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. Slander 2. Libel 3. Breach of warranty 4. Misdemeanor Q14M. 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. 2. 3. 4. False arrest Invasion of privacy Assault Battery

Q15M. The event that sets in motion an uninterrupted chain of events contributing to the loss is called: 1. Absolute liability 2. Proximate cause 3. International tort 4. Negligence Q16M. The law that consists of the body of principles and rules established over time by courts on a caseby-case basis is called: 1. Administrative law 2. Constitutional law 3. Common law 4. Regulatory law Q17M. The damages awarded for pain and suffering due to an injury are part of: 1. Judicial damages 2. Punitive damages 3. Special damages 4. General damages Q18M. Among the elements of a negligence are all of the following, EXCEPT: 1. Duty owed to another 2. Breach of duty owed 3. Injury or damage 4. Minimum threshold of loss Q19M. In a liability insurance policy, personal injury means injury arising from all of the following, EXCEPT: 1. Invasion of privacy 2. Libel 3. Slander 4. Battery Q20M. 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. Negligence 2. Absolute liability 3. Statutory liability 4. No-fault statutes Q21M. The liability that someone could incur because of an inherently dangerous activity like building demolition is called: 1. Nonretractable liability 2. Nontransferable 3. Absolute liability 4. Compulsory liability Q22M. The intentional and unlawful threat of bodily harm is: 1. Statutory injury 2. Encroachment 3. Battery 4. Assault Q23M. Under tort law, an individual can face a claim for legal liability on the basis of any of the following, EXCEPT: 1. Negligence

2. 3. 4.

Contracts International torts Absolute liability

Q24M. All of the following are true, EXCEPT: 1. Liability insurance claims involve three parties 2. Property insurance claims involve one party 3. Liability insurance pays claims on behalf of the insured 4. Property insurance pays claims to an insured Q25M. A tort is: 1. The legal right of recovery for damage or injury 2. A failure to act in a reasonably prudent manner 3. Any wrongful act other than a crime or breach of contract 4. An unbroken chain of events that causes injury or damage Q26M. The legal right of recovery can be based on all of the following, EXCEPT: 1. Torts 2. Contracts 3. Statutes 4. Exposures Q27M. 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. Risk management Importance of Risk Management Steps in risk management Avoiding risk Controlling risk Accepting risk Transferring risk Q1E. All of the following are risk management techniques except: 1. Avoidance 2. Loss control 3. Retention 4. Loss exposure Q2E. Physical inspection of locations, operations etc is a part of 1. Examining risk management techniques 2. Identifying and analyzing loss exposures 3. Implementing chosen techniques 4. Monitoring and modifying the risk management program Q3E. A risk manager was seen asking questions and filling up a questionnaire. He was 1. Identifying loss exposure through physical inspection 2. Identifying loss exposure through loss exposure survey 3. Examining risk management techniques 4. Implementing risk management technique Q4E. A risk management technique that eliminates a loss exposure and reduces the chance of loss to zero is known as 1. Avoidance 2. Loss Control

3. 4.

Retention Noninsurance Transfer

Q5E. A risk management technique that attempts to decrease the frequency or severity of losses is known as 1. Avoidance 2. Loss Control 3. Retention 4. Noninsurance Transfer Q6E. A risk management technique that involves retaining all or part of a particular loss expoaure is known as 1. Avoidance 2. Loss Control 3. Retention 4. Noninsurance Transfer Q7M. 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 technique 1. Intentional retention 2. Unintentional Retention 3. Noninsurance transfer 4. Avoidance Q8E. 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 as 1. Avoidance 2. Loss Control 3. Retention 4. Noninsurance Transfer Q9M. 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. Q10E. 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. Q11E. The dollar amount of damage that results or might result from a loss exposure is the 1. Loss severity 2. Loss frequency 3. Loss prevention 4. Loss reduction

Q12E. A risk manager in an industrial plant is trying to determine where she needs to spend most of her time in reducing the number of accidents. The plant has a history of work-related injuries, and she wants to make sure that is reduced. What should the risk manager measure to determine where she should expend her efforts? 1. The number of workers in each area 2. The flow chart bottlenecks 3. The loss frequency 4. The loss severity Q13M. What information can a risk manager gather from a flowchart to identify loss exposures? 1. Bottlenecks that can stop production 2. Critical areas with unskilled workers 3. Competition that can reach the market before the client 4. Inefficiencies that can be corrected through automation Q14M. 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 exposures 3. 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. 2. 3. 4. 1 2 3 4

Q15E. 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 Q16E. 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. Q17E. 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 exposures 2. Determining which exposures can be retained 3. Communicating the risk management information 4. Monitoring the results Q18E. The risk management technique that eliminates a loss exposure and reduces the chance of loss to zero is 1. Retention 2. Loss control 3. Noninsurance transfer 4. Avoidance

Q19M. Frank and Jan are each twenty-five years old, and they have purchased their first home together. It required all of their savings and some money from their parents to make their down payment. The house needs repairs that they will do themselves and with the help of friends. The first project will be to seal the lead paint that is on the interior of the house and remove flaking lead paint that is on the exterior of the house. 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 Q20M. 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. Avoidance 2. Loss control 3. Retention 4. Noninsurance transfer Q21M. 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. Q22M. 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. Avoidance 2. Loss control

3. 4.

Noninsurance transfer Retention

Q23M. 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. Avoidance 2. Loss prevention 3. Loss reduction 4. Noninsurance transfer Q24M. 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. Avoidance 2. Loss prevention 3. Noninsurance transfer 4. Retention Q25M. 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.