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This document provides a comprehensive overview of the insurance industry, covering key topics such as insurance policies, costs, company structures, regulation, and industry metrics. It delves into the characteristics of various insurance products and explores the roles and responsibilities of different insurance entities. The financial aspects of insurance, including investment income, underwriting expenses, and performance indicators, are also discussed. This resource would be valuable for students studying insurance, finance, or risk management.
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From a risk management viewpoint, insurance is used to A. Prevent the cost of losses B. Reduce the cost of losses C. Transfer the cost of losses D. Isolate the cost of losses. - โโC. Transfer the cost of losses. A loss exposure is: A. Any condition that presents the possibility of a loss. B. Any condition that precludes the chance of loss. C. The same thing as a peril. D. The same thing as a hazard. - โโA. Any condition that present the possibility of a loss. Some loss exposures are not easy to retain, avoid, or control. What risk management technique is frequently used to treat such exposures? A. Reinsurance B. Prevention C. Transfer D. Reunderwriting - โโC. Transfer
Insurance is not the only risk management transfer technique. When circumstances are appropriate, transfer can be accomplished through A. Retention B. Noninsurance transfer techniques C. Avoidance D. Loss prevention - โโB. Noninsurance transfer techniques Another name for liability insurance is A. First-party insurance B. Second-party insurance C. Third-party insurance D. Multiple-party insurance - โโC. Third party insurance Sally is a recent college graduate who lives in the suburbs and drives to work daily in the city. She recognizes that owning a car creates both property damage and liability exposures for her and at the same time she has the burden of student loans. For someone in Sally's circumstances the most practical risk management technique for dealing with her auto-related loss exposures is A. Risk transfer B. Retention C. Loss control D. Avoidance - โโA. Risk transfer Retention is often used in combination with insurance as a way of treating loss exposures. One of the major downsides of individuals using retention alone is
A. The record keeping associated with the retained losses. B. Availability of insurer loss settlement services. C. The potential for financial ruin. D. The unavailability of insurer loss control services. - โโC. The potential for financial ruin. Life insurance that provides coverage for a specified period with no cash value is called A. Universal life B. Long-term care insurance C. Term life insurance D. Whole life - โโC. Term life insurance A small business owner concerned about something happening and not being able to work or earn a living for an extended period of time due to an accident should purchase A. Disability insurance B. Personal liability of insurance C. Universal life insurance D. Medical insurance - โโA. Disability insurance A policy that combines property, crime and liability coverage into one policy is referred to as: A. Commercial umbrella policy B. Commercial package policy C. Workers compensation policy
D. Employee dishonesty policy - โโB. Commercial package policy Coverage for money, securities, and other property from various causes of loss such as burglary, robbery, theft, and employee dishonesty typically is provided by A. Professional liability insurance. B. Inland marine insurance. C. Commercial crime insurance. D. Ocean marine insurance. - โโC. Commercial crime insurance. Term life insurance A. Allows the policyholder to borrow against policy savings. B. Provides protection for a specified period with no cash value. C. Accrues a cash value. D. Provides lifetime protection - โโB. Provides protection for a specified period with no cash value. The process of restoring an individual or organization to a pre-loss financial condition is the process of A. Subrogation. B. Indemnification. C. Loss mitigation. D. Premium rebating. - โโB. Indemnification.
Which one of the following statements is correct with respect to characteristics of insurable loss exposures? A. Private insurance is suitable for risks where the probability and timing of loss is known. B. If losses are not fortuitous, premiums could increase for all policyholders. C. If a loss is fortuitous, the chance of loss could increase as soon as a policy is issued. D. If the insured has control over whether or when a loss will occur, the risk is attractive to insure. - โโB. If losses are not fortuitous, premiums could increase for all policyholders. Adhering to the characteristics of an ideally insurable loss exposure in selling insurance help assure that A. The insurer is able to predict the amount and timing of each future loss. B. The losses associated with it typically involve small amounts. C. The insurer is able to charge a premium that the insured can afford to pay. D. The insurer can charge a high premium for the coverage. - โโC. The insurer is able to charge a premium that the insured can afford to pay. Private insurers are reluctant to provide windstorm insurance on coastal properties. This is because the loss exposures fail to meet the criterion that ideally insurable exposures must be A. Definite and measurable. B. Independent and not catastrophic. C. Fortuitous. D. A large number of similar exposure units. - โโB. Independent and not catastrophic.
Which one of the following statements is correct with regard to risk and ideally insurable characteristics of loss exposures? A. An ideally insurable loss exposure should be associated with speculative risk. B. Indemnification is the process of restoring an insured to a pre-loss financial condition. C. One purpose of insurance is to enable the insured to profit from a loss. D. If a loss exposure includes the possibility of gain, it is a more desirable risk to insure. - โโB. Indemnification is the process of restoring an insured to a pre-loss financial condition. For insurers to utilize pooling most effectively and prevent catastrophic losses, the insured exposure units need to be A. Correlated. B. Different. C. Independent. D. Adjacent. - โโC. Independent. Oscar's custom-built vehicle looks like a sausage sandwich on wheels. He plans to drive it to special events at schools around the country where it will serve as a mobile billboard to promote his product. Oscar is surprised to learn that insurers are reluctant to insure his vehicle because it fails to meet one of the ideal characteristics of an insurable risk. Which characteristic is Oscar's vehicle least likely to meet? Choose one answer. A. Definite and measurable B. Independent and not catastrophic C. Large number of similar exposure units
D. Pure risk - โโC. Large number of similar exposure units Ideally insurable loss exposures are subject to losses that A. Result from unidentifiable causes. B. Are definite in time, cause, and location. C. Occur gradually over long periods of time. D. Are immeasurable in terms of frequency or severity. - โโB. Are definite in time, cause, and location. Commercial general liability insurance policies written on an occurrence basis apply to bodily injury and property damage that occurs during the policy period. This provision supports the principle that insurable loss exposures must ideally be A. Definite. B. Pure risks. C. Fortuitous. D. Independent. - โโA. Definite. For a loss exposure to be ideally insurable it must be definite in A. Duration, damage, and cost. B. Time, cause, and location. C. Value, extent, and consequences. D. Scope, origin, and coverage. - โโB. Time, cause, and location.
Which one of the following statements is correct? A. Insurance policies typically cannot be used to provide evidence of financial resources. B. One disadvantage of insurance is that it promotes inefficient use of policyholders' funds. C. Contractors must usually provide evidence of liability insurance before a construction contract is granted. D. Insurers generally do not provide incentives to organizations to implement risk control measures. - โโC. Contractors must usually provide evidence of liability insurance before a construction contract is granted. The primary role of insurance is to A. Make a profit for the insurance company's shareholders. B. Educate individuals and organizations about loss prevention. C. Sell insurance policies to individuals and organizations. D. Indemnify individuals and organizations for covered losses. - โโD. Indemnify individuals and organizations for covered losses. 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? A. Enable efficient use of resources B. Reduce social burden C. Meet legal requirements D. Promote risk control - โโD. Promote risk control
Which one 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. Insurance reduces the financial consequences of loss exposures but not the related uncertainty. D. The reduction in losses paid by insurers due to risk control measures benefits individual insureds but not society as a whole. - โโA. Insurance helps reduce the financial burden to society by compensating accident victims. Which one of the following statements is correct regarding the benefits that insurance provides? A. Investment income helps keep insurance premiums at a reasonable level. B. The premiums collected by insurers must be held in cash to be available to pay claims. C. Insurance provides a source of investment funds for insurers but not for insureds. D. Insurers are prohibited from investing in such things as research or technological advancements. - โโA. Investment income helps keep insurance premiums at a reasonable level. Sometimes the existence of insurance encourages losses. The result of this phenomenon is that it A. Increases competition in the industry. B. Reduces agents' commissions. C. Reduces the term of many policies. D. Increases the total cost of insurance. - โโD. Increases the total cost of insurance. Which one of the following is an opportunity cost of insurance?
A. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary B. The cost of claims payments that would not have been necessary if insureds' carelessness had not caused losses C. An insurer's loss on invested premiums D. The payment of commissions to agents - โโA. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary One of the costs of insurance is said to be opportunity costs. This means that if capital and labor were not being used in the insurance business, they could be used elsewhere and making other productive contributions to A. The agency system. B. Society. C. The insurance industry. D. Government. - โโB. Society. Which one of the following is an operating cost of insurers? A. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary B. Increased property losses because people have insurance C. Producers' commissions D. Increased liability loss payments because people have insurance - โโC. Producers' commissions
Though premiums are an obvious cost of insurance, many insureds believe they are too high because A. Premiums are not a regular cost of living. B. Insurers only use eighty cents from every premium dollar to pay losses. C. Benefits are intangible until a loss occurs. D. Insureds do not deliberately cause losses. - โโC. Benefits are intangible until a loss occurs. A type of insurer that has a board of directors elected by policyholders and that may pay dividends to policyholders as a return of a portion of premiums paid is a A. Stock insurer. B. Mutual insurer. C. Reciprocal insurance exchange. D. Captive insurer. - โโA. Mutual insurer. A mutual insurance company is owned by A. Policyholders. B. Mutual funds. C. Independent investors. D. State insurance departments. - โโA. Policyholders. All of the following are types of private insurers, EXCEPT: A. Stock insurers B. Reciprocal insurance exchanges
C. Mutual insurers D. State workers compensation funds - โโD. State workers compensation funds A stock insurer differs from a reciprocal insurance exchange in which one of the following ways? A. A stock insurer provides insurance to its policyholder-owners. A reciprocal insurance exchange provides insurance to investors. B. Both are owned by stockholders. However, the reciprocal insurance exchange provides coverage to investors. C. Stockholders own a stock insurer. Subscribers own a reciprocal insurance exchange. D. Both are formed to provide profit to investors. However, the stock insurer is managed through a board of directors. - โโC. Stockholders own a stock insurer. Subscribers own a reciprocal insurance exchange. all of the following describe Lloyd's, EXCEPT: A. Insurance underwritten by a Name B. Primarily insurers unusual exposures C. Operated by syndicates D. A marketplace - โโB. Primarily insurers unusual exposures A reciprocal insurance exchange A. Transfers potential costs of insured loss exposures from one insurer to another insurer. B. Is a stock corporation providing insurance for its policyholders. C. Is a subsidiary that provides all or part of the insurance for a parent company.
D. Is an unincorporated association providing insurance coverage to its subscribers. - โโD. Is an unincorporated association providing insurance coverage to its subscribers. Insurance Company wrote a commercial liability policy for a manufacturer of off-road motorcycles. The potential costs of the insured's loss exposure exceed Insurance Company's capacity. Insurance Company could consider which type of contractual transferring agreement to meet its needs? A. Reciprocal insurance B. Mutual insurance C. Reinsurance D. Interinsurance - โโC. Reinsurance Small U.S. unincorporated insurance associations, domiciled mainly in Texas, are known as A. American captives. B. American mutuals. C. American Lloyds. D. American reciprocals. - โโC. American Lloyds. An insurer that was formed for the purpose of earning a profit for its stockholders is a A. Captive insurer. B. Mutual insurer. C. Stock insurer. D. Reciprocal insurance exchange. - โโC. Stock insurer.
A company interested in improving cash flow should consider meeting its insurance needs through which one of the following types of insurance organizations? A. Captive insurers B. Stock insurers C. Reciprocal insurance exchanges D. Mutual insurers - โโA. Captive insurers Risk control is intended to prevent or reduce losses. When practicing sound risk control, an organization A. Will not be required to expend economic resources to insure those loss exposures. B. Is likely to see the same economic benefit as compared to insurance. C. Is likely to use insurance to treat those loss exposures. D. Will often be able to eliminate losses from those loss exposures. - โโC. Is likely to use insurance to treat those loss exposures. The size of an employer's loss exposure for workers compensation insurance is based on A. The amount of its payroll. B. The number of its employees. C. The extent of its operations. D. The final premium audit. - โโA. The amount of its payroll. The premium charged for an insurance policy should be
A. Equivalent to the exposure. B. Commensurate with the exposure. C. Concurrent with the exposure. D. Equal to the exposure. - โโB. Commensurate with the exposure. Which one of the following best describes what is determined by the insurer's staff review of applications from prospective insureds? A. Whether the account should be written as a personal insurance policy or a commercial insurance policy B. Whether claims will be paid or denied C. Whether the characteristics of the customer match the insurer's eligibility and selection guidelines D. Whether any loss control recommendations will be made - โโC. Whether the characteristics of the customer match the insurer's eligibility and selection guidelines Prompt and professional loss adjustment services are a responsibility of what part of an insurer's organization? A. The underwriting function B. The claims function C. The premium audit function D. The loss control function - โโB. The claims function Successful underwriting ensures selected applicants A. Can use the standard forms developed by insurance advisory organizations.
B. Never experience losses that exceed the amount the insurer anticipated when pricing coverage. C. Receive coverage that adequately reflect their loss exposure. D. Do not require monitoring for increases in hazards. - โโC. Receive coverage that adequately reflect their loss exposure. Which one of the following is true about the functions within an insurance organization? A. Insurers use common terminology to identify these functions. B. The essential functions are always performed by insurer personnel. C. These well defined functions operate with a high degree of independence. D. Each function contributes or detracts from the overall effectiveness of the insurer. - โโD. Each function contributes or detracts from the overall effectiveness of the insurer. What is the most common reason premium audits are conducted? A. The amount of actual losses are not known at the start of the policy period. B. Claim examiners have discovered unacceptable operations during the policy period. C. Loss control activities during the policy period may reduce the risk of loss. D. The amount of the loss exposure is unknown at the start of the policy period. - โโD. The amount of the loss exposure is unknown at the start of the policy period. Which one of the following is a typical adjuster activity during the claim handling process? A. Notify underwriters of larger loss exposures than were originally contemplated. B. Determining policy terms and conditions
C. Contacting the insured. D. Controlling the loss. - โโC. Contacting the insured. Risk control is intended to prevent or reduce losses. When practicing sound risk control, an organization A. Will often be able to eliminate losses from those loss exposures. B. Will not be required to expend economic resources to insure those loss exposures. C. Is likely to use insurance to treat those loss exposures. D. Is likely to see the same economic benefit as compared to insurance. - โโC. Is likely to use insurance to treat those loss exposures. Which one of the following statements concerning government insurance programs is true? A. The federal government provides workers compensation insurance to employers who cannot get it from private insurers. B. Businesses seeking flood insurance under the National Flood Insurance Program (NFIP) must purchase it at local federal government offices. C. Fair Access to Insurance Requirements (FAIR) plans make basic property insurance available to property owners who can't get it otherwise. D. Various state insurance programs provide crop insurance for perils such as drought, disease, excessive rain and hail. - โโC. Fair Access to Insurance Requirements (FAIR) plans make basic property insurance available to property owners who can't get it otherwise. Which one of the following is a federal insurance plan in which the government acts as a partner with a private insurer that sells insurance and pays the claims and then reimburses the insurer for the portion of losses that exceeds premiums and investment income?
A. Beach and Windstorm Plan B. National Flood Insurance Program (NFIP) C. Terrorism Risk Insurance Program (TRIP) D. Residual Auto Plan - โโB. National Flood Insurance Program (NFIP) Which one of the following statements is correct regarding government insurance programs? A. Government insurers cannot function as primary insurers for duties such as collecting premiums, providing coverage, or paying claims. B. Government programs can operate as reinsurers, reinsuring 100 percent of the risk or that part in excess of the private insurer's retention. C. Government partnerships with private insurers usually develop in especially desirable lines of business. D. Government insurance programs cannot operate in direct competition with private insurers. - โโB. Government programs can operate as reinsurers, reinsuring 100 percent of the risk or that part in excess of the private insurer's retention. Which one 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. - โโB. Government programs can meet legitimate public demands unmet by private insurers.
The state of Maryland operates a residual auto plan (the Maryland Auto Insurance FundโMAIF) that provides coverage for drivers who are unable to obtain coverage from private insurers. Which one of the following is the best rationale for the MAIF program? A. Private insurers overcharge for auto insurance, and the state provides a low-cost alternative. B. Private insurers face limited competition, and the state increases competitive pressures by operating this type of plan. C. Auto insurance is compulsory, and the program makes it possible for all drivers to have reasonably priced insurance. D. Auto insurance for high-risk drivers is profitable, and the program enables the state to share in the profits. - โโC. Auto insurance is compulsory, and the program makes it possible for all drivers to have reasonably priced insurance. Which one of the following statements is correct regarding government involvement in insurance? A. Federal and state government are involved in insurance to facilitate compulsory insurance purchases. B. Most organizations obtain workers compensation insurance through federal or state insurance programs. C. Government insurance plans typically incur significant costs in marketing and sales commissions. D. Legislators find it more straightforward to invite and analyze bids from private insurers than to establish government plans. - โโA. Federal and state government are involved in insurance to facilitate compulsory insurance purchases. Following the terrorist attacks on the United States, insurers became reluctant to provide property insurance on target properties until the federal Terrorism Risk Insurance Program
(TRIP) was introduced. Which one of the following social purposes did this government insurance program serve? A. Pooling of loss exposures B. Prevent economic disruption C. Reduced risk to society D. Incentive to purchase insurance - โโB. Prevent economic disruption State governments can be involved in insurance at various levels. Some states provide which one of the following types of insurance in competition with private insurers?: A. Flood B. Workers compensation C. Crop D. General liability - โโB. Workers compensation Why are insurance regulators concerned about the effects of large catastrophes? A. Insurance rates will rise. B. Insurers may become insolvent. C. Licensed insurers will be unable to handle demand. D. They could lead to destructive competition. - โโB. Insurers may become insolvent. Which one of the following is a key focus of states' insurance regulation? A. Product branding. B. Producer concentration.
C. Premium taxation. D. Insurer licensing. - โโD. Insurer licensing. Which one of the following statements is true? A. Insurance policies are private contracts, the language of which is largely unregulated. B. Insurance regulators review policies to determine if they benefit consumers. C. Regulators set coverage standards, but allow insurers to determine policy language. D. Insurers must be free to create policies that are in their best interest. - โโB. Insurance regulators review policies to determine if they benefit consumers. Solvency - โโThe ability of an insurer to meet its obligations as they become due The capital of a stock insurance company comes primarily from A. Sale of company stock. B. Leveraging the difference from when a premium is paid in and when a claim is paid out. C. Return on invested premium reserves. D. Sale of insurance policies. - โโA. Sale of company stock. An Ohio insurer that is licensed to sell insurance in Michigan is known as what in Michigan? A. A foreign insurer B. A captive insurer C. A domestic insurer
D. An alien insurer - โโA. A foreign insurer A stock insurer is distinguished from a mutual insurer by the fact that A. It is governed by a board of directors. B. Owners are not necessarily insureds. C. Owners have voting rights. D. It seeks to generate a profit. - โโB. Owners are not necessarily insureds. Which one of the following statements is true? A. Mutual insurers are exclusively regional or local insurers. B. Mutual insurers are usually large national insurers. C. Mutual insurance companies include some large national insurers. D. Mutual insurers include few regional insurers. - โโC. Mutual insurance companies include some large national insurers. Generally, how often must a foreign insurer's license be renewed? - โโAnnually A flex rating law is A. An insurance rating law in which the rates and supporting rules must be filed with and approved by the state insurance department before they can be used. B. A state law under which insurance rates are set by a state agency or rating bureau and all licensed insurers are required to use those rates.
C. An insurance rating law that allows insurers to develop and use rates without having to file with or get approval from the state insurance department. D. An insurance rating law under which prior approval is required only if the new rates exceed a certain percentage above (and sometimes below) the rates previously file. - โโD. An insurance rating law under which prior approval is required only if the new rates exceed a certain percentage above (and sometimes below) the rates previously file. Some insurance rating laws allow rates to be put into use immediately but require insurers to files the rates with the state within a specific period of time. These types of laws are known as A. Prior-approval laws. B. File-and-use laws. C. Use-and-file laws. D. Flex rating laws. - โโC. Use-and-file laws. The two objectives of insurance policy form regulation are to ensure that policies are clear and readable and to A. Detect and address any policy provisions that are unfair. B. Limit policies' length and complexity. C. Ensure that the insurers rights are protected. D. Ensure policies are negotiable between an insurer and insured. - โโA. Detect and address any policy provisions that are unfair. In developing insurance rates, a state mandatory rate law requires the insurer to: A. Establish and file rates for all admitted lines of insurance.
B. Use rates developed by the National Association of Insurance Commissioners (NAIC). C. Use state developed rates. D. Maintain rates equal to policyholder surplus. - โโC. Use state developed rates. When deciding to approve or disapprove an insurer's request for a rate, a state insurance commissioner must determine if the rates are adequate. Adequate means that the rates should be A. Sufficient to pay all claims and the expenses related to those claims. B. Able to generate a fair return for the insurer but no to excessive or unrealistic profit. C. Similar to the rates charged by other insurers operating in the state. D. Similar for insureds with similar loss exposures. - โโA. Sufficient to pay all claims and the expenses related to those claims. Riko's insurance agent was caught embezzling several insureds' premiums, which involves what area of insurance company operations and what punishment by state regulators? A. Sales; agent license revoked B. Underwriting; agent license revoked C. Claim handling; operating license revoked D. Claim handling; operating license suspended - โโA. Sales; agent license revoked Market conduct regulation focuses on insurers' treatment of applicants for insurance, insureds, and others who present claims for coverage. Market conduct regulation affects which one of the following areas of operation? A. Annual statements B. Financial requirements
C. Field examinations D. Sales - โโD. Sales Unfair trade practice acts involve which one of the following insurance company operations? A. Financial reporting B. Underwriting C. Rate filings D. Coverage form design - โโB. Underwriting Which one of the following is true regarding the administration of the Insurance Regulatory Information System (IRIS)? A. Under a special provision in state licensing laws, state regulators are empowered to completely take over an insurer at any time. B. If the insurer has financial ratios that are inside predetermined norms, IRIS identifies the company for regulatory attention. C. If regulators determine that an insurer is insolvent, the state insurance department places it in receivership. D. If an insurer cannot be rehabilitated, the state's guaranty fund may be available to increase the effects of the insurer insolvency. - โโC. If regulators determine that an insurer is insolvent, the state insurance department places it in receivership. For an insurer to be considered solvent, states require it to have financial reserves A. Well in excess of its ordinary expenses. B. As a fraction of its ordinary expenses.