1-4. Risk Management and the Insurance Industry

Question 1

1. Risk management is best conducted using a set process because it reduces the likelihood of being sidetracked and missing important points.

Answer 1

True

1.

Question 2

2. Before developing a risk management program for a client, the planner should define the objectives for the client to fully cover their risks.

Answer 2

False

2. Rationale: Objectives of any risk management program must come from the client (perhaps working with the planner), not just the planner.

Question 3

3. The planner should obtain all of the client’s risk management data through the use of data survey forms and insurance checklists.

Answer 3

False

3. Rationale: The planner should also refer to (and see) relevant documents such as tax returns, brokerage statements, insurance policies, wills, and trust documents and conversations with the client.

Question 4

4. After the planner has provided the client with a comprehensive risk management plan accepted by the client, the client is poorly served unless the plan is implemented.

Answer 4

True

4.

Question 5

5. In deciding whether to insure a potential loss, the planner needs to consider the likelihood of the loss occurring.

Answer 5

True

5.

Question 6

6. Actuaries perform risk analysis and determine premium amounts by ascertaining if the elements of an insurable risk are present and if adverse selection is controllable.

Answer 6

True

6.

Question 7

7. Insurance is used to transfer the risk of loss to a group, of which each member faces the same potential loss and none want the loss to happen.

Answer 7

True

7.

Question 8

8. Adverse selection is the process of picking only the best risks.

Answer 8

False

8. Rationale: Adverse selection is having a pool of insureds skewed toward those who represent higher risk.

Question 9

9. Postselection underwriting is when the insurer reviews the insured’s actions, risk factors, and claims history after the policy has been in effect for a period of time to determine whether to continue providing coverage or cancel it.

Answer 9

True

9.

Question 10

10. A variation of risk reduction is risk sharing that involves forming a business entity in which the potential loss is limited to the amount invested in the business.

Answer 10

True

10.

Question 11

11. In spite of the financial danger involved in absorbing unexpectedly large losses, firms that employ self-insurance usually do not retain commercial coverage to cover losses above a certain dollar amount.

Answer 11

False

11. Rationale: Such firms usually do retain some form of commercial coverage to cover losses above a certain dollar amount.

Question 12

12. A company using a self-insured plan can exclude certain benefits that may not be excluded from an insured plan.

Answer 12

True

12.

Question 13

13. Forming a purchasing group guarantees lower fees and increases the availability of insurance.

Answer 13

False

13. Rationale: Forming a purchasing group does not guarantee lower fees, but it may increase the availability of insurance.

Question 14

14. Torts are always intentional.

Answer 14

False

14. Rationale: A tort may be either intentional or unintentional.

Question 15

15. While acting irresponsibly may invite liability, acting responsibly will prevent it.

Answer 15

False

15. Rationale: Acting responsibly will not necessarily prevent liability.

Question 16

16. All risk treatment devices, including insurance, should be viewed as tools that are only appropriate or inappropriate in a particular situation.

Answer 16

True

16.

Question 17

17. In order to help a client with his or her risk management plan, a planner should know not only what kind of work a client does, but what the client does when not at work.

Answer 17

True

17.

Question 18

18. A contract in which one of the parties is incompetent may be voided by either party.

Answer 18

False

18. Rationale: If one of the parties is incompetent (such as a minor), the contract may be voided only by the incompetent party.

Question 19

19. An implied contract arises when a member of the public reasonably believes that a person has the authority or knowledge to act in a certain manner.

Answer 19

True

19.

Question 20

20. The doctrine of absolute liability holds an individual or company responsible only where there is fault or negligence.

Answer 20

False

20. Rationale: Under the doctrine of absolute liability, a party is held responsible even where there is no fault or negligence.

Question 21

21. When a planner fails to conduct himself or herself in a professional manner and causes harm to a client, one of the elements that must be present in order for the planner to be considered negligent is a causal connection between the action and the resulting harm.

Answer 21

True

21.

Question 22

22. Exercising due diligence or due care will help protect the planner from client accusations that he or she was negligent in recommending a particular product or plan of action.

Answer 22

True

22.

Question 23

23. The parol evidence rule applies to subsequent modifications after an agreement is in written form.

Answer 23

False

23. Rationale: The parol evidence rule states that evidence— whether oral or written—of prior understandings will not be admitted to contradict a final, complete, written agreement (in the absence of fraud, mutual mistake, duress, or the like).

Question 24

24. The doctrine of estoppel prevents a party from asserting a right to which he or she would otherwise be entitled where, because of his or her own actions or behavior, he or she misled someone (even though unintentionally) who relied on the understanding created thereby to his or her own detriment.

Answer 24

True

24.

Question 25

25. Rescission of a contract means that it is null from the point that it is rescinded.

Answer 25

False

25. Rationale: Rescission of a contract means that it is null from the beginning.

Question 26

26. Insurance policies are contracts of adhesion, which means that they are freely negotiated between the parties.

Answer 26

False

26. Rationale: A contract of adhesion is one in which one party writes the contract and the other party either accepts it as is or rejects it.

Question 27

27. An aleatory contract is one where the outcome is controlled by chance, and the dollars that change hands are generally of substantially unequal amounts.

Answer 27

True

27.

Question 28

28. Because there are two parties in an insurance contract (the insurer and the insured), insurance contracts are said to be bilateral contracts.

Answer 28

False

28. Rationale: An insurance contract is unilateral, not bilateral, because only one party, the policyowner, can enforce its terms. The insurer cannot force the policyowner to pay the premium.

Question 29

29. The declarations section of an insurance policy includes information provided by the applicant.

Answer 29

True

29.

Question 30

30. General agents are independent businesspeople empowered by the life insurance company they represent to sell the products of the company in specified territories and to appoint agents to do business under their supervision.

Answer 30

True

30.

Question 31

31. The independent agent usually affiliates himself or herself with only one particular company.

Answer 31

False

31. Rationale: The independent agent usually does not affiliate himself or herself with only one particular company,although it is not uncommon for the agent to favor one company.

Question 32

32. Career agents must earn a minimum level of commissions to maintain their career agent contracts.

Answer 32

True

32.

Question 33

33. An insurance broker is the agent of the insurance company.

Answer 33

False

33. Rationale: An insurance broker is the agent of the insurance buyer.

Question 34

34. Generally, an insurance broker cannot bind the insurer and, therefore, a premium payment made to a broker is not payment to the insurer.

Answer 34

True

34.

Question 35

35. Insurers are not legally liable for the acts of their agents performing their duties, even if agents make fraudulent statements unknown to or unauthorized by the insurers.

Answer 35

False

35. Rationale: Insurers are legally liable for the acts of their agents performing their duties, even if agents make fraudulent statements unknown to or unauthorized by the insurers.

Question 36

36. Even though an insurance agent has only apparent authority, any acts by the agent would bind the insurer.

Answer 36

True

36.

Question 37

37. An insurance producer is different than an insurance agent or broker.

Answer 37

False

37. Rationale: In those states that have producers’ licenses, there is no difference between any of the producers. All insurance salespeople are considered to be agents.

Question 38

38. The initial notice of loss that is required when there is an insurance claim must always be in writing.

Answer 38

False

38. Rationale: The initial notice of loss for most property claims is often done with a phone call.

Question 39

39. Once an individual has submitted the required proof of loss statement, he or she does not have to do anything else the insurance company requests.

Answer 39

False

39. Rationale: The insured is required to assist and cooperate with the insurance company during the adjustment process.

Question 40

40. Although both processes are similar, there are differences in the duties of the insured and insurer when a loss arises.

Answer 40

True

40.

Question 41

41. If an insured loses one of a pair of expensive diamond earrings, the insurance company may choose to replace that one earring rather than pay for a new pair.

Answer 41

True

41.

Question 42

42. Under a commercial property insurance coinsurance provision, the insurer will pay the greater of (1) the replacement cost of the damaged part of the property or (2) the amount determined by use of a coinsurance formula.

Answer 42

False

42. Rationale: The insurer will pay the greater of (1) the actual cash value of the damaged part of the property or (2) the amount determined by use of a coinsurance formula.

Question 43

43. The concept of insurance requires that every insured share the burden of the few who suffer losses.

Answer 43

True

43.

Question 44

44. The term “coinsurance” is applied uniformly in all types of insurance.

Answer 44

False

44. Rationale: The term “coinsurance” has an entirely different meaning when it is used in property insurance than when it is used in indemnity-type health insurance.

Question 45

45. Subrogation permits the insured to collect twice for the same loss if he or she is fortunate enough to have duplicate insurance coverage.

Answer 45

False

45. Rationale: Subrogation precludes the insured from collecting twice for the same loss.

Question 46

46. If a financial planner is involved in the process of insurance needs analysis, there is seldom a need to involve an insurance agent when choosing the type of insurance to be purchased or the company from which it should be purchased.

Answer 46

False

46. Rationale: If insurance is not an area of specialization for a planner, it makes sense to seek the opinion of an expert insurance agent.

Question 47

47. If a consumer employs a competent insurance agent, it is not necessary to read and understand the insurance contract, which is often very complex.

Answer 47

False

47. Rationale: An insurance consumer should read and understand the insurance contract.

Question 48

48. If an insurance company has any of the NAIC’s 12 financial ratios outside the “usual range,” it is put on the NAIC’s Watchlist.

Answer 48

False

48. Rationale: If an insurance company has four of the 12ratios outside the “usual ranges,” it is put on the NAIC’s Watchlist.

Question 49

49. The “RBC Ratios” adjust an insurance company’s assets to reflect the risk associated with the various assets.

Answer 49

True

49.

Question 50

50. The two primary forms of ownership of insurance companies are mutual companies and stock companies.

Answer 50

True

50.

Question 51

51. The purpose of the Life Insurance Policy Illustration Model Law is to give guidance to graphic illustrators in preparing graphic illustrations of life insurance policies.

Answer 51

False

51. Rationale: The purpose of this model law is to define and limit how an insurance company may illustrate life insurance policy values to potential insureds.

Question 52

52. The McCarran Ferguson Act provides primarily for federal regulation of the insurance industry.

Answer 52

False

52. Rationale: The McCarran Ferguson Act provides primarily for state regulation of the insurance industry.

Question 53

53. The regulatory authority of the Securities and Exchange Commission extends to variable life insurance products.

Answer 53

True

53.

Question 54

54. Under HIPAA, a medical condition cannot be excluded as a preexisting condition.

Answer 54

False

54. Rationale: HIPAA regulates the application of preexisting conditions, but it does not eliminate them. The Affordable Care Act eliminated them if an individual signs up on one of the exchanges during open enrollment.

Question 55

55. The National Association of Insurance Commissioners (NAIC) passes laws that are imposed on the states.

Answer 55

False

55. Rationale: The NAIC creates model laws that it encourages the states to adopt.