Download AINS 101 EXAM NEWEST PRACTICE EXAM 2024 ACTUAL EXAM QUESTIONS AND DETAILED CORRECT ANSWERS and more Exams Insurance Economics in PDF only on Docsity! AINS 101 EXAM NEWEST PRACTICE EXAM 2024 ACTUAL EXAM QUESTIONS AND DETAILED CORRECT ANSWERS | A+ GRADE STUDYGUIDE Pravalt Construction Company pays less than its competitors for workers compensation insurance because Pravalt has had substantially fewer employee injuries than other firms in its class. This illustrates which one of the following benefits of insurance? Select one: A. Promote risk control activity B. Enable efficient use of resources C. Meet legal requirements D. Reduce social burden Correct Answer A. Promote risk control activity Joel is the underwriter for Stanton Industries. He received a notice from the premium auditor on the account. After a recent visit to the insured's location, the auditor wanted to make Joel aware of a decline in the business and some questionable business practices. Which one of the following types of hazards is the auditor identifying? Select one: A. Legal hazards B. Physical hazards C. Moral hazards D. Morale hazards Correct Answer C. Moral hazards The two main sectors of the insurance industry are Select one: A. Personal insurance and commercial insurance. B. Homeowners insurance and auto insurance. C. Property-casualty insurance and life-health insurance. D. Property insurance and liability insurance. Correct Answer C. Property-casualty insurance and life-health insurance. Because the insurance company usually determines policy wording and the insured has little choice but to "take it or leave it," an insurance contract is a Select one: A. Contract of adhesion. B. Contract of indemnity. C. Nontransferable contract. D. Bilateral contract. Correct Answer A. Contract of adhesion. Which two of the four quadrants of risk are classified as pure risks? Select one: A. Operational risks and financial risks B. Hazard risks and strategic risks C. Hazard risks and operational risks D. Financial risks and strategic risks Correct Answer C. Hazard risks and operational risks James works very closely with producers on a daily basis. In addition to evaluating the applicants that the producers submit, James is involved in presenting policy quotations, to charge them a rate of $0.50 per $100 of building insurance, what premium must Sports, Inc. pay? Select one: A. $1,000 B. $2,000 C. $4,000 D. $8,000 Correct Answer B. $2,000 Erin has recently graduated from college and relocated to Chicago. She has purchased a car and rented an apartment and now needs to purchase insurance. She is comfortable buying from social media recommendations and recently was impressed with an insurer sending her coverage details online with a minimum of forms and salesperson interactions. Which one of the following is likely the best distribution channel to meet Erin's needs? Select one: A. Group marketing B. Financial institution C. Call center D. Direct response Correct Answer D. Direct response Rachel is considering investing in the stock of an insurance company. Which one of the following is likely to provide the best indication of the insurer's financial position at this point in time? Select one: A. Cash flow report B. Sales report C. Income statement D. Balance sheet Correct Answer D. Balance sheet Destructive competition in the insurance industry could result in Select one: A. Insurance shortages. B. Oversupply of insurance. C. Excess regulation. D. Inadequate regulation. Correct Answer A. Insurance shortages. Jennie recently purchased a personal auto policy from Westcox Insurers. Three weeks later, Jennie reported her car was stolen from her driveway during the middle of the day. Upon further investigation, claims representative Harry finds out the home address he has on file for Jennie does not match the location where the theft occurred. In light of this scenario, which one of the following would be particularly helpful for Harry to pursue concerning Jenny's claim? Select one: A. Harry can review any relevant statutory terms mentioned in the policy that would apply to Jennie's particular type of claim. B. Since Jennie purchased a modular policy, Harry will need to spend extra time reviewing the length and complexity of her contract. C. As Westcox is a mutual insurer owned by its policyholders, Harry will find it especially helpful to review the insured's associated rights and duties. D. Harry can verify Jennie's address Correct Answer D. Harry can verify Jennie's address and other possible helpful information by reviewing her policy which has her original application information attached. Windsor Insurance has sold more personal auto policies in the recent quarter than ever before in its history, thanks to new commission incentives for ambitious staff members. Even though Windsor is collecting more money upfront, it is actually making less per policy after remitting the higher commissions. Some claim payments are also now being delayed, resulting in many complaints against the company. Which one of the following objectives of insurance regulation is not being realized through this scenario? Select one: A. Maintaining insurer solvency B. Safeguarding policy language C. Restricting cancellations or renewals D. Preventing destructive competition Correct Answer A. Maintaining insurer solvency Why are insurance regulators concerned about the effects of large catastrophes? Select one: A. They could lead to destructive competition. B. Insurers may become insolvent. C. Insurance rates will rise. D. Licensed insurers will be unable to handle demand. Correct Answer B. Insurers may become insolvent. For a loss exposure to be ideally insurable it must be definite in B. Riley will concentrate on new risk management techniques rather than changes in loss exposures. C. Besides risk management goals being attainable, they should also pose a challenge. D. The four step-by-step risk consultation process is considered the most effective method to use. Correct Answer C. Besides risk management goals being attainable, they should also pose a challenge. Martina, a premium auditor for Cintriell Insurance Company is conducting a premium audit for Carolina's Cookies. Carolina mentioned to Martina that she is opening a coffee shop at another location. By sharing this information, Martina would provide a contribution to which one of the following insurer functions? Select one: A. Underwriting B. Accounting C. Risk Control D. Claims Correct Answer A. Underwriting Sean was driving and caused an injury to a pedestrian named Wilbur. In the context of the resulting claim made to Sean's insurance company and assigned to Andrea in the claims department, Sean and Wilbur and Andrea are, respectively, Select one: A. Claimant and insured and claims representative B. Claimant and claims representative and insured C. Claims representative and insured and claimant D. Insured and claimant and claims representative Correct Answer D. Insured and claimant and claims representative James West is a claims rep with Hatters Insurance. As he learns how to handle a claim from start to finish, which one of the following best describes the correct order for him to follow during this process? Select one: A. Receiving a claim from a manager, denying the claim, contacting the insured's representative, setting a claim reserve B. Identifying the policy, calculating a loss reserve, determining the cause of loss, preparing a loss statement C. Identifying the policy, issuing the claim payment, investigating the medical claim, closing the file D. Receiving a claim from a manager, calculating a loss reserve, contacting the insured's lawyer, verifying coverage Correct Answer B. Identifying the policy, calculating a loss reserve, determining the cause of loss, preparing a loss statement Rachel is a new employee of Westley Insurance, and has been asked to review some existing policies to become familiar with the types of policies she will be working with. Which one of the following will Rachel find is true as she conducts her review? Select one: A. Rachel finds the policy begins with a coverage overview and then goes into more coverage details. B. Policy provisions state what is covered, but not what is not covered, in that particular policy. C. The definitions personalize the policy and are usually found on the policy's first page. D. The insuring agreement clarifies the insured's duties throughout the life of the policy. Correct Answer A. Rachel finds the policy begins with a coverage overview and then goes into more coverage details. Joe and Helene are married with two teenage children and two dogs. They own three cars and a large house with a swimming pool in the back yard. Their insurance agent advised them that the pool, teenage drivers, and dogs put them at risk for large liability losses. Which one of the following personal property-casualty insurance policies would provide them with protection for their high potential for large liability losses? Select one: A. Health insurance B. Personal auto C. Personal umbrella D. Homeowners Correct Answer C. Personal umbrella At Greenfield Insurance Company, Bernadette and Rachel are corporate underwriters, and Tomas and Jose are field underwriters. All of the following are underwriting activities typically performed by corporate (or staff) underwriters like Bernadette and Rachel, EXCEPT: Select one: A. Conduct underwriting audits B. Formulate underwriting policy C. Research the market A. Underwriting guidelines B. Book of business C. Capacity D. Policyholders' surplus Correct Answer C. Capacity The difference between an independent agency and an exclusive agency is that an Select one: A. Exclusive agency employs direct writer agents, who are employees of the insurer. B. Independent agency employs direct writer agents, who are employees of the insurer. C. Independent agency is contracted to sell insurance for one insurer or group of insurers. D. Exclusive agency is contracted to sell insurance for one insurer or group of insurers. Correct Answer D. Exclusive agency is contracted to sell insurance for one insurer or group of insurers. Bill is an insurance producer for and employed by ABC Insurance Company (ABC). He represents only ABC when marketing insurance products, and uses an administrative staff also employed by ABC. Bill is a producer in the Select one: A. Captive agency marketing system. B. Direct writer marketing system. C. Exclusive agency marketing system. D. Independent agency marketing system. Correct Answer B. Direct writer marketing system. Uncertainty about outcomes that can be negative or positive? A. Pooling B. Risk C. Loss Exposure D. Transfer Correct Answer B. Risk As a single mother on a very tight budget, Ciara is tempted to skip on her insurance. However, her friend Mehmet tells her not to skimp on insurance, because it will help manager her cash flows. Which one of the following examples best illustrates Mehmet's point? A. Ciara finds it difficult to come up with a $787 auto insurance premium every six months. B. Ciara needs her car to get to her job to make car payments and pay for her car insurance. C. When her car's windshield breaks, Ciara only has to pay $100 of the $600 cost of replacing it. D. When her car's transmission goes out a month after the warranty expires, Ciara is faced with a $1,100 repair bill. Correct Answer C. When her car's windshield breaks, Ciara only has to pay $100 of the $600 cost of replacing it. Coverage for money and other business property from various causes of loss such as burglary, robbery, theft, and employee dishonesty typically is provided by: A. Ocean marine insurance B. Professional liability insurance C. Inland marine insurance D. Commercial crime insurance Correct Answer D. Commercial crime insurance Shelton industries experienced a fire in its manufacturing plant. Several employees suffered burns and smoke inhalation injuries as they tried to escape the building. Which one of their commercial property-casualty policies would pay for the employees' injuries and illnesses? A. Workers Compensation Insurance B. Commercial general liability insurance C. Commercial property insurance D. Commercial umbrella insurance Correct Answer A. Workers Compensation Insurance A reinsurance company: A. Assumes loss exposures from a primary insurer B. Is formed to write all or part of the insurance for a parent company C. Transfers losses to a primary insurer D. Provides primary insurance for loss exposures that private insurers are unwilling to provide Correct Answer A. Assumes loss exposures from a primary insurer The state of Maryland operates a residual auto plan (t he Maryland Auto Insurance Fund - MAIF) that provides coverage for drivers who are unable to obtain coverage from private insurers. Which of the following is the best rationale for the MAIF program? A. Private insurers face limited competition, and the state increases competitive pressures by operating this type of plan. Which of the following statements is correct regarding the benefits provided by insurance? A. Insurance helps reduce the financial burden to society by compensating accident victims B. The primary role of insurance is to meet mandatory insurance requirements C. The reduction in losses paid by insurers due to risk control measures benefits individuals insureds but not society as a whole D. Insurance reduces the financial consequences of loss exposures but not the related uncertainty. Correct Answer A. Insurance helps reduce the financial burden to society by compensating accident victims Which one of the following best explains why producers should be alert to changes in clients' loss exposures? A. Implemented risk management techniques may prove to be ineffective or become obsolete. B. Knowledge of such changes will inform their efforts to create a list of experts that can be called to assist. C. Producers can aid clients in developing risk management cost allocation plans. D. Producers have expertise about risk financing through insurance. Correct Answer A. Implemented risk management techniques may prove to be ineffective or become obsolete. The processing of almost every claim involves which one of the following activities? A. Engaging an accident scene reconstruction specialist B. Determining the amount of damages or extent of loss C. Subrogating D. Salvaging Correct Answer B. Determining the amount of damages or extent of loss Maria is a new producer who wears many hats when forming relationships and then serving her established customers. In this capacity, which one of the following scenarios most accurately describes her ongoing work wearing the hat of "claims handler"? A. Customer Roland directly contacts Maria and she assumes full responsibility for his claim as she was the first insurance employee to receive the claims information. B. Juanita directly contacts Maria who sold her a policy to adjust her homeowners claim; Maria nicely explains she has no further responsibilities after making the sale. C. Alex directly contacts Maria after a hailstorm damages his new car the day after he bought a policy from her, and she handles the claim as he is a brand new customer. D. Veronica directly contacts Maria for guidance on how to report a stolen car, Maria provides that, and claims rep Sean takes over after an introduction from Maria. Correct Answer D. Veronica directly contacts Maria for guidance on how to report a stolen car, Maria provides that, and claims rep Sean takes over after an introduction from Maria. Jessie is a new customer service representative (CSR) at the Winfield Agency. Jessie usually engages in all the following activities, EXCEPT: Select one: A. Answering billing inquiries B. Explaining coverage C. Reporting new claims D. Determining coverage quotes Correct Answer D. Determining coverage quotes Michael is a commercial lines underwriter. He received a risk control report on a new business that he had recently written with Laura, one of his producers. After reviewing the report, Michael contacted Laura to let her know that they needed to process a policy change request adding a new classification and some exposures to the general liability policy. These activities are occurring during which one of the following steps of the underwriting process? Select one: A. Determine an appropriate premium B. Issue required documents C. Monitor the underwriting decision D. Evaluate the application Correct Answer C. Monitor the underwriting decision Earned premiums are the portion of written premiums that Select one: A. Apply to the part of the policy period that has already occurred. B. Apply to the part of the policy period that follows a loss. C. Are billed at the beginning of the policy period. D. Are available to generate investment income. Correct Answer A. Apply to the part of the policy period that has already occurred a single claim in over 10 years. Joe is looking to partner with an insurance company that will share its profits and maybe return a portion of his premium if the results are good. Which one of the following types of insurer is the right fit for Joe? Select one: A. Reinsurer B. Mutual insurer C. Stock insurer D. Surplus lines insurer Correct Answer B. Mutual insurer A stock insurer differs from a reciprocal insurance exchange in which one of the following ways? Select one: A. Stockholders own a stock insurer. Members own a reciprocal insurance exchange. B. Both are owned by stockholders. However, the reciprocal insurance exchange provides coverage to investors. C. Both are formed to provide profit to investors. However, the stock insurer is managed through a board of directors. D. A stock insurer provides insurance to its policyholder- owners. A reciprocal insurance exchange provides insurance to investors. Correct Answer A. Stockholders own a stock insurer. Members own a reciprocal insurance exchange. Earned premiums are shown on an insurer's income statement because they are Select one: A. Revenues. B. Admitted assets. C. Expenses. D. Equal to net income. Correct Answer A. Revenues. A homeowners policy is a type of: A. Life insurance policy B. Personal umbrella policy C. Personal property-casualty insurance policy D. Commercial insurance policy Correct Answer C. Personal property-casualty insurance policy The insurance agent suggested that Sally's Snack Shop buy a policy that combines property, crime, and liability coverages into one policy. This is referred to as a(n): A. Commercial package policy (CPP) B. Employee dishonesty policy C. Commercial umbrella policy D. Workers compensation policy Correct Answer A. Commercial package policy (CPP) Which of the following correctly describes a reason for government involvement in property-casualty insurance? A. Selling insurance provides the government with a non- tax source of revenues and profits B. Government programs can meet legitimate public demands unmet by private insurers C. Competition from government plans keeps private insurer's premiums competitive D. Preventing high-risk individuals or activities from being insured is in the public interest. Correct Answer B. Government programs can meet legitimate public demands unmet by private insurers A type of insurer that is owned by policyholders and may pay dividends to policyholders as a return of a portion of premiums paid is a: A. Stock insurer B. Reciprocal insurance exchange C. Mutual insurer D. Captive insurer Correct Answer C. Mutual insurer Jimmy decided to buy a house in his neighborhood that had been foreclosed on by the bank that held the mortgage. He is hoping to do some renovation and repair work on the house, and then sell it for a quick profit. Which one of the following types of risk is this for Jimmy? A. Pure risk B. Speculative risk C. Legal risk D. Hazard Risk Correct Answer B. Speculative risk Autonomous Vehicle Applications (AVA) is a start-up company that develops safety technologies that can be sold to companies that are producing autonomous vehicles. One technology AVA is developing allows an autonomous vehicle to detect, extract, and analyze images; and then to respond to the images. For example, the technology would detect a presence in a crosswalk, extract the image, and a computer would analyze the image. When the image was determined to be a human being, the vehicle would slow down or stop until the so that its insureds will purchase its products without asking a lot of questions. C. West Insurance has had three straight years of record- setting low claims and has accumulated more than expected profits; it plans on the trend continuing and overspends on new long-term investments. D. East Insurance comes up with a new rate structure allowing "preferred customers" discounted policies when they continually renew year after year; East eventually loses needed revenue but is rewarded by its competitors leaving the market. Correct Answer D. East Insurance comes up with a new rate structure allowing "preferred customers" discounted policies when they continually renew year after year; East eventually loses needed revenue but is rewarded by its competitors leaving the market. Carlos is new to the insurance business and is learning about insurance regulation and what he, now working with Grady Insurance, will need to be aware of regarding the subject of compliance. Which one of the following will Carlos find is accurate as he better understands why insurance is regulated? B. Insurance regulation prevents insurers from covering catastrophic occurrences so insurers can remain solvent. C. The U.S. insurance industry is governed by federal laws that protect citizens by leveling the playing field for insurers and policyholders. Incorrect. Insurance regulation protects customers by guaranteeing insurance is available and accessible to everyone who needs it. D. Insurance regulation protects customers by guaranteeing insurance is available and accessible to everyone who needs it. Correct Answer D. Insurance regulation protects customers by guaranteeing insurance is available and accessible to everyone who needs it. All of the following appear on an insurer's balance sheet, EXCEPT: A. Policyholders' surplus B. Net income C. Liabilities D. Assets Correct Answer B. Net income Which one of the following is shown on the balance sheet of an insurer? A. Net investment income B. Incurred losses C. Acquisition expenses D. Cash and short-term investments Correct Answer D. Cash and short-term investments An insurer's income statement shows amounts for all of the following, EXCEPT: A. Incurred losses B. Underwriting expenses C. Policyholders' surplus D. Earned premiums Correct Answer C. Policyholders' surplus The financial report for Hometown Insurer contains the following information: Earned premiums $4,000,000 Written premiums $5,000,000 Net investment income $1,000,000 Incurred Losses $3,000,000 Incurred underwriting expense $2,000,000 What is Hometown Insurer's expense ratio? A. 20% B. 40% C. 50% D. 75% Correct Answer B. 40% Which one of the following statements is true regarding an insurer's profitability? A. A combined ratio of more than 100 means the insurer in making an underwriting profit. B. The combined ratio equals the loss ratio minus the expense ratio. C. An insurer's combined ratio of 85 means it is earning 15 cents of profit from underwriting on every dollar of premium. D. A combined ratio of 50 indicates a loss ratio and expense ratio that are identical. Correct Answer C. An insurer's combined ratio of 85 means it is earning 15 cents of profit from underwriting on every dollar of premium. Spencer Insurance Associates is an independent agency selling primarily homeowners policies. This agency A. Is free to work with as many different insurers as it wants. B. Cannot commit an insurer to write a policy, unlike a broker, who usually can.Incorrect. Spencer Insurance B. Increase. C. Either stay the same or decrease. D. Either stay the same or increase. Correct Answer A. Decrease. Which one of the following types of financial statements shows the financial position of an insurance company at any particular point in time? A. Income statement B. Cash flow report C. Sales report D. Balance sheet Correct Answer D. Balance sheet Insurance Company J has a loss ratio of 72 and an expense ratio of 25. What is Company J's combined ratio? A. The combined ratio is 96 which means the company has an underwriting gain. B. The combined ratio is 99 which means the company has an underwriting loss. C. The combined ratio is 97 which means the company has an underwriting gain. D. The combined ratio is 98 which means the company has an underwriting loss. Correct Answer C. The combined ratio is 97 which means the company has an underwriting gain. The financial report for Hometown Insurer contains the following information: Earned premiums$4,000,000Written premiums$5,000,000Net investment income$1,000,000Incurred losses$3,000,000Incurred underwriting expenses$2,000,000 What was the Hometown Insurer's combined ratio? A. 75% B. 95% C. 105% D. 115% Correct Answer D. 115% All of the following are categories of liabilities found on an insurer's balance sheet, EXCEPT: A. Loss and loss expense reserves B. Other liabilities C. Policyholders' surplus D. Unearned premium reserves Correct Answer C. Policyholders' surplus Admitted assets are types of property that regulators allow insurers to show as assets on their financial statements because they are A. Generally increasing in value. B. Very stable in value. C. Never subject to decreases in value. D. Easily converted to cash. Correct Answer D. Easily converted to cash. An insurer's income statement can best be described as a financial statement that shows the A. Relationship between revenues, expenses, and net income. B. Relationship between assets and income. C. Relationship between revenues and incurred losses. D. Relationship between revenue and liabilities. Correct Answer A. Relationship between revenues, expenses, and net income.