ARM 56 Exam

Question 1

When forecasting losses, prior losses are adjusted to reflect inflation. The factor applied to data from previous years for this purpose is known as

A. A trend factor.
B. A loss limitation factor.
C. An increased limits factor.
D. A loss development factor.

Answer 1

A. A trend factor.

Question 2

In addition to covering expected losses, insurance premiums include several loadings. One loading is designed to compensate the insurer for taking the risk that losses may be higher than expected. This loading is called the

Answer 2

Risk charge

Question 3

What option gives the owner the right to sell stock at a specified price during a specified period?

Answer 3

Put option

Question 4

One component of the retrospective rating formula is the premium that covers the insurer’s acquisition expenses, administrative costs, overhead, profit, and the insurance charge. The component is called the

Answer 4

Basic premium

Question 5

Periodically, a primary insurer will provide its reinsurer with a detailed listing of the premiums and losses reinsured under the treaty. This listing is called a

Answer 5

Bordereau

Question 6

Percentages applied to past aggregate losses for each year in order to add an amount for the possibility of both late-reported claims and a future increase in the incurred amount for reported claims are called

Answer 6

Loss development factors

Question 7

A type of pro rata reinsurance in which the policies covered are those whose amt of insurance exceeds a stipulated dollar amt

Answer 7

Surplus share reinsurance

Question 8

The ceding commission is paid by

Answer 8

The reinsurer to the ceding company

Question 9

When a pool (an association of insurers) purchases reinsurance, the goals are often to obtain large-line capacity for the members and to stabilize underwriting results. What type of reinsurance is usually purchased by a pool to meet these goals?

A. Quota share reinsurance
B. Surplus share reinsurance
C. Excess of loss reinsurance
D. Portfolio reinsurance

Answer 9

C. Excess of loss reinsurance

Question 10

Under a per occurrence excess of loss treaty, the attachment point and the reinsurance limit apply to

Answer 10

The total losses arising from a single event affecting one or more policies

Question 11

A licensed insurer that issues an insurance policy and reinsures the loss exposures back to a captive insurer owned by the insured organization

Answer 11

Fronting company

Question 12

A group captive in which each participant pays premiums and receives reimbursement for its losses from, and credit for underwriting profits and investment income, protects a participant’s assets and surplus in the event other participants become insolvent

Answer 12

Protected Cell Captive

Question 13

A group captive formed under the US Liability Risk Retention Act of 1986 to provide liability coverage (except personal insurance, employer liability and workers comp)

Answer 13

Risk Retention Group

Question 14

Arrangement in which organization rents capital from a captive insurer, to which it pays premium and receives reimbursement for its losses

Answer 14

Rent-a-captive

Question 15

A person or organization that has promised to perform a duty in the event the party whose duty it was initially (the principal) fails to perform it is known as a

Answer 15

Guarantor

Question 16

A person or organization that has promised to perform an obligation to another party is the

Answer 16

Principal

Question 17

A contractual provision that relieves one party from liability resulting from a negligent or wrongful act.

Answer 17

Exculpatory clause

Question 18

Option gives the owner the right to sell stock at a specified price during a specified period

Answer 18

Put Option

Question 19

Option gives the owner the right to buy stock at a specified price during a specified period

Answer 19

Call Option

Question 20

The specific price at which the holder of an option can buy or sell the asset associated with the option

Answer 20

Strike price

Question 21

Incurred losses consist of

A. Paid losses, loss reserves, and loss adjustment expense reserves.
B. Estimates of incurred but not reported losses.
C. Losses, paid and reserved, less loss adjustment expenses.
D. Paid losses and estimates of incurred but not reported losses.

Answer 21

A. Paid losses, loss reserves, and loss adjustment expense reserves.

Question 22

For a company that has international operations, which one of the following is an advantage of using a controlled master program?

A. Premiums are lower because of the elimination of duplicate coverage and increased purchasing power.
B. Less information is generated that must be reviewed and analyzed under a controlled master program.
C. Only one insurance policy is purchased that provides all coverage in a single contract.
D. Local risk managers have greater control and responsibility for their foreign subsidiaries.

Answer 22

A. Premiums are lower because of the elimination of duplicate coverage and increased purchasing power.

Question 23

Counterparty risk is the risk that the

A. Other party will have less responsibility for a loss than the insured.
B. Insurer will have insufficient funds to pay incurred losses.
C. Other party to an agreement will default.
D. Insured will have no losses in a given policy year.

Answer 23

C. Other party to an agreement will default.

Question 24

Pooling changes the

A. Severity of accidents for the entire pool.
B. Total loss cost of accidents for the entire pool.
C. Probability distribution of losses for each organization.
D. Frequency of accidents for individuals within the pool.

Answer 24

C. Probability distribution of losses for each organization.

Question 25

An advantage of a large deductible plan is that it allows the insured organization to

A. Decrease its uncertainty about the cost of its retained losses.
B. Benefit from handling its own claims without insurer control.
C. Increase its cost of risk compared with other insurance plans.
D. Benefit from the cash flow available on the retained loss reserves.

Answer 25

D. Benefit from the cash flow available on the retained loss reserves.

Question 26

One disadvantage of a retrospectively rated insurance plan from the insurance purchaser’s perspective is that the insurer might set unrealistically high loss reserves for the retained portion of losses. What is the net effect upon the insured firm if unrealistically high loss reserves are set?

A. Large cash outflows required when losses are ultimately paid.
B. Higher premiums resulting in the loss of cash flow benefits.
C. Higher ultimate losses will be incurred.
D. Higher ultimate loss adjustment expenses will be incurred.

Answer 26

B. Higher premiums resulting in the loss of cash flow benefits.

Question 27

A captive insurer allows the insured(s) to benefit from the cash flow available on losses that are paid out over time because

A. Unlike a traditional insurer, the captive will hold loss reserves as long as possible.
B. The insured holds loss reserve funds for its own account until the captive needs them to pay losses.
C. Premiums under captive insurance plans are significantly lower than under guaranteed-cost plans.
D. Under a funded plan, the captive earns investment income on premium funds that have not yet been paid out for claims.

Answer 27

D. Under a funded plan, the captive earns investment income on premium funds that have not yet been paid out for claims.

Question 28

Statutes prohibiting particular wording in risk transfer agreements are generally

A. Not permitted.
B. Very narrow.
C. Considered unconscionable.
D. Very broad.

Answer 28

B. Very narrow.

Question 29

Insurer A has arranged to exchange a portion of its premium and losses arising from its tornado exposure in Kansas with Insurer B for a portion of its premium and losses arising from its hurricane exposure in North Carolina. This is an example of which one of the following risk transfer arrangements?

A. An insurance option
B. Uncorrelated pooling
C. A swap arrangement
D. A reinsurance arrangement

Answer 29

C. A swap arrangement

Question 30

The loss data required to accurately forecast accidental losses and risk financing needs includes

A. Profit and overhead.
B. Loss adjustment expense reserves.
C. Underwriting expenses.
D. Estimates of future investment income.

Answer 30

B. Loss adjustment expense reserves.

Question 31

Tables used by insurers to price layers of coverage in excess of the insurer’s base limit are

A. Trend limit factor tables.
B. Increased limit factor tables.
C. Loss development factor tables.
D. Exposure limit factor tables.

Answer 31

B. Increased limit factor tables.

Question 32

Which one of the following is an advantage of purchasing admitted coverage locally in an international insurance program for a U.S.-based company?

A. Administrative control of the insurance program is centralized.
B. The policy will be written in English, making it easier for the parent company to understand.
C. Premiums and claims are paid with local currency, eliminating exchange rate risk.
D. The financial strength of the insurer issuing the policy is more easily determined.

Answer 32

C. Premiums and claims are paid with local currency, eliminating exchange rate risk.

Question 33

George is risk manager for JKL Company. He is considering switching how the company addresses risk from private insurance to self-insurance. He produced a table showing the “numbers” comparing private insurance to self-insurance. George’s colleague immediately noted that George considered tax savings under the private insurance plan, but did not consider tax savings under the self-insurance plan. Under a self-insurance plan, JKL is allowed

A. No tax deduction.
B. A tax deduction for losses as they are paid out.
C. A tax deduction for incurred losses.
D. A tax deduction for estimated losses.

Answer 33

B. A tax deduction for losses as they are paid out.

Question 34

A working cover is

A. A quota share treaty with a high percent of ceding.
B. A pro rata treaty with a variable attachment point.
C. A surplus share facultative reinsurance contract with a small line.
D. An excess of loss reinsurance agreement with a low attachment point.

Answer 34

D. An excess of loss reinsurance agreement with a low attachment point.

Question 35

Which one of the following statements concerning the selection of a captive insurance company domicile is true?

A. The extra-territorial provision of state insurance codes requires a captive insurer that is based in another state or country to adhere to the rules of the insurance code of the state in which the parent firm is domiciled.
B. By law, a captive insurer formed by a U.S. company must be domiciled outside the U.S.
C. The capital and surplus requirements for captive insurers vary by domicile.
D. Given the significant tax benefits that a parent company receives from establishing a captive, the choice of domicile is irrelevant.

Answer 35

C. The capital and surplus requirements for captive insurers vary by domicile.

Question 36

One type of noninsurance risk control transfer, a disclaimer of warranties, is used to

A. Recognize and validate the assumption of contractual liability.
B. Deny any express warranties made in conjunction with the sale of property.
C. Reinforce implied warranties of merchantability.
D. Deny an exculpatory clause.

Answer 36

B. Deny any express warranties made in conjunction with the sale of property.

Question 37

When determining a basis for allocating hazard risk management costs, once a department’s claim experience has been measured by severity, its future losses and related costs can be projected using

A. Changes in the experience period.
B. Industry indices and insurer data.
C. Future-value calculations.
D. Changes in payments plus loss reserves.

Answer 37

D. Changes in payments plus loss reserves.

Question 38

The purpose of applying increased limit factors when estimating hazard risk is to

A. Determine the degree of confidence for a given loss estimate.
B. Determine the optimal deductible level.
C. Assist with forecasting future large losses.
D. Calculate the cost per unit of insurance coverage.

Answer 38

C. Assist with forecasting future large losses.

Question 39

Loyal Insurer purchases 20% xs 90% loss ratio aggregate excess of loss reinsurance from Signe Reinsurer. Signe Reinsurer will be called on to pay losses when Loyal’s

A. Combined ratio reaches 90%.
B. Underwriting ratio reaches 90%.
C. Combined ratio reaches 110%.
D. Loss ratio reaches 90%.

Answer 39

D. Loss ratio reaches 90%.

Question 40

Violet Insurance Company has a surplus share treaty with White Reinsurer and retains a line of $50,000. The treaty contains five lines and provides for a maximum cession of $250,000. Violet Insurance issues a policy insuring a building for $150,000 for a premium of $1,900 with one loss of $60,000. What percentage of insurance, premiums, and losses is ceded to White Reinsurer?

A. 33.33%
B. 50%
C. 66.67%
D. 100%

Answer 40

C. 66.67%
100,000 (2 lines ceded) ÷ 150,000 = 66.67%; The percentage of insurance, premiums and losses ceded to White Reinsurer is 66.67%. (Or, 2 ceded lines ÷ 3 insured lines = 66.67%.)

Question 41

Reinsurance pools can be formed by

A. Groups of reinsurers whose retrocession needs have not been adequately met by existing reinsurers.
B. Regulators when they determine that the reinsurance market is inadequately competitive.
C. Reinsurance intermediaries to meet their clients’ needs.
D. Financial institutions for use as a bank funding mechanism.

Answer 41

C. Reinsurance intermediaries to meet their clients’ needs.

Question 42

“The contractor agrees to indemnify and hold harmless the owner against claims, damages, bodily injury, or property damage arising out of the contractor’s work and caused by any act of omission of the contractor, his agents, and his employees.” This is an example of which one of the following forms of a hold-harmless agreement?

A. Broad form
B. Intermediate form
C. Basic form
D. Limited form

Answer 42

D. Limited form

Question 43

One right that a surety has to protect it against loss from the principal passively relying on the surety is

A. Reciprocity.
B. Exoneration.
C. Assignment of rights.
D. Concealment.

Answer 43

B. Exoneration.

Question 44

A major benefit of involving a special purpose vehicle (SPV) in a securitization transaction is that investors can decide whether to invest in the securities based on the

A. Overall credit risk of the organization.
B. Risk presented by the income-producing assets held as collateral by the SPV.
C. Number of borrowers involved and their individual risk.
D. Organization’s balance sheets.

Answer 44

B. Risk presented by the income-producing assets held as collateral by the SPV.

Question 45

The role of a special purpose vehicle (SPV) in a securitization is to

A. Purchase income producing assets and issue securities backed by those assets.
B. Regulate all of the transactions to assure that customers and investors are treated fairly.
C. Purchase securities that are backed by a pool of income producing assets.
D. Enter into contracts with borrowers, credit card holders, and insurance purchasers.

Answer 45

A. Purchase income producing assets and issue securities backed by those assets.

Question 46

U.S. statutory accounting rules allow insurers to issue contingent surplus notes, which

A. Decrease an insurer’s assets on its balance sheet.
B. Allow the insurer to negotiate interest rates when funds are needed rather than at issuance.
C. Increase an insurer’s liabilities on its balance sheet.
D. Are counted as policyholders’ surplus rather than as a liability.

Answer 46

D. Are counted as policyholders’ surplus rather than as a liability.

Question 47

One way in which insurance securitizations differ from most other types of securitization is that

A. Investors are guaranteed that they will not suffer a loss from the transaction.
B. Insurers sell facilities and other income-producing assets to investors rather than to an SPV.
C. The Special Purpose Vehicle (SPV) sells income-producing assets to the insurer to cover losses.
D. Insurers pay cash to the SPV and receive reimbursement for losses that occur.

Answer 47

D. Insurers pay cash to the SPV and receive reimbursement for losses that occur.

Question 48

Adding insurance-linked securities to a portfolio can increase an investor’s return without increasing its risk because

A. The investor receives a premium rate of return.
B. The investor accepts the overall risks of an organization.
C. A secondary market exists for the securities.
D. Insurable risk does not correlate with other types of investment risk.

Answer 48

D. Insurable risk does not correlate with other types of investment risk.

Question 49

My Fair City is an average-size city that is concerned about equity. The city’s risk manager, Mr. Penny, must determine a new, equitable cost allocation system. In developing the new cost allocation system, primarily, Mr. Penny should design the system to promote

A. Risk control.
B. Risk-bearing.
C. Risk-sharing.
D. Easy manipulation.

Answer 49

A. Risk control.

Question 50

Which one of the following statements regarding the bases for hazard risk management cost allocation is true?

A. Due to uniformity of loss exposures, all companies use square footage as the basis for allocating general liability costs.
B. The number of vehicles used in a department, regardless of the type of vehicle, is a common basis for auto liability costs.
C. Sales is a common basis for workers compensation cost allocation.
D. The exposure basis for property losses must often be adjusted to reflect loss exposures for specific properties.

Answer 50

D. The exposure basis for property losses must often be adjusted to reflect loss exposures for specific properties.

Question 51

An organization of several similar employers that have formed a not-for-profit association or corporation to which they pay premiums to manage self-insurance of their workers’ compensation and healthcare benefits loss exposures is a

A. Group self-insurance plan.
B. Captive insurance plan.
C. Risk retention group.
D. Third-party administrator.

Answer 51

A. Group self-insurance plan.

Question 52

A significant disadvantage of self-insurance for liability loss exposures compared to property loss exposures is that

A. Administrative costs for liability loss exposures are higher.
B. Liability losses are more frequent than property losses.
C. An aggregate stop-loss is not available for liability loss exposures.
D. Tax deductions for liability losses are likely to be deferred for a longer time.

Answer 52

D. Tax deductions for liability losses are likely to be deferred for a longer time.

Question 53

The loss conversion factor in the retrospective rating premium formula is applied to incurred losses to reflect

A. Loss of the cash flow benefit that an insurer usually enjoys under a guaranteed cost insurance program.
B. Unallocated loss adjustment expenses the insurer will incur.
C. The level at which an individual loss is limited for the purpose of calculating the premium.
D. The risk for the insurer that an individual loss will exceed the loss limit.

Answer 53

B. Unallocated loss adjustment expenses the insurer will incur.

Question 54

The party to a surety bond that receives the surety’s guarantee that the principal will fulfill an obligation or perform as promised is the

A. Obligor.
B. Principal.
C. Surety.
D. Obligee.

Answer 54

D. Obligee.

Question 55

GBB Insurance Company is a publicly-traded stock company. Financial managers at GBB are concerned that if a large loss occurs, the company could be devastated. The company purchased some reinsurance. In addition, the company sold a put option to a pension fund. The option gives GBB the right to issue 500,000 shares of stock at $50 per share if a catastrophic loss occurs. This right to issue shares at a specified price if a large loss occurs is called

A. A contingent capital arrangement.
B. A collateralized agreement.
C. An insurance derivative.
D. An insurance securitzation.

Answer 55

A. A contingent capital arrangement.

Question 56

One department in an organization is unduly exposed to excessive fluctuations in their cost of risk. Which purpose of an effective hazard risk management cost allocation system that is implemented throughout all departments is not being fulfilled in this organization?

A. Prioritize risk management expenditures
B. Facilitate risk retention
C. Reduce costs
D. Promote risk control

Answer 56

B. Facilitate risk retention

Question 57

Lilac Flower Company obtains all of its flowers from one grower in coastal North Carolina. If the grower’s fields were damaged, Lilac Flower Company would be out of business. What risk financing technique would be most appropriate for Lilac’s loss exposure?

A. A funded retention plan
B. Hedging
C. A transfer plan
D. A hold-harmless agreement with the grower

Answer 57

C. A transfer plan

Question 58

Which one of the following statements is true regarding loss development factors?

A. Loss development factors reflect changes that occur over time, such as inflation and legal rulings.
B. Loss development factors are most useful for property losses because those losses are generally reported and paid quickly.
C. Loss development factors create a challenge because past loss data are subject to change long after the end of the accident year.
D. Loss development factors increase as the age of each accident year increases.

Answer 58

C. Loss development factors create a challenge because past loss data are subject to change long after the end of the accident year.

Question 59

The need for excess or umbrella liability insurance is closely related to three basic issues involved in the use of liability insurance. Which one of the following is one of the three basic issues?

A. Required underlying coverages
B. Difficulty in estimating minimum possible losses for liability loss exposures
C. Effect of aggregate limits
D. Accuracy in estimating liability loss exposures

Answer 59

C. Effect of aggregate limits

Question 60

If an excess liability policy states that it is a following-form policy, the excess policy

A. Has separate coverage limits for different liability exposures proportional to the limits in the underlying policies.
B. Will provide drop-down coverage for losses excluded by the underlying policies subject to the self-insured retention.
C. Can be assumed to be as broad as the underlying policies.
D. Must be compared with the underlying policies to discover ways in which its coverage is more restrictive than coverage in the underlying policies.

Answer 60

D. Must be compared with the underlying policies to discover ways in which its coverage is more restrictive than coverage in the underlying policies.

Question 61

Foster Family Restaurants has over 300 restaurants with locations in 38 states. Foster has numerous profitable investment opportunities. Some of the worst options available to the company at this time have expected rates of return of over 50%. The company is having trouble, however, raising funds. For many years, Foster Company has purchased property insurance on its restaurants. A review of the loss ratio on this property insurance shows the long-term loss ratio is less than 60% annually. The property insurance premium notice just arrived. The cost of the insurance will be $1.2 million for the coming year. Which one of the following advantages is the most compelling reason, based on the information provided above, for Foster to switch to a self-insurance program?

A. Control over claims
B. Risk control
C. Long-term cost savings
D. Cash flow benefits

Answer 61

D. Cash flow benefits

Question 62

One disadvantage of an incurred loss retrospective rating plan is that

A. Such plans are rarely offered by insurers.
B. The insured organization must provide security such as a letter of credit.
C. Administration of the plan is more complex than a paid loss retrospective rating plan.
D. The insured organization does not receive the cash flow available on its loss reserves.

Answer 62

D. The insured organization does not receive the cash flow available on its loss reserves.

Question 63

Which one of the following factors contributes to loss development?

A. Inflation and increased costs
B. Claims that close quickly
C. Increases in the values assigned to reported claims
D. Overreserving by the claims representative

Answer 63

C. Increases in the values assigned to reported claims

Question 64

Which one of the following best describes the differences between a following-form excess liability policy and a self-contained excess liability policy?

A. A self-contained excess liability policy is broader than a following-form excess liability policy.
B. A self-contained excess liability policy requires a self-insured retention.
C. A combination excess liability policy follows the provisions of the underlying policies then adds additional conditions or exclusions.
D. A self-contained excess liability policy is subject only to its own provisions.

Answer 64

D. A self-contained excess liability policy is subject only to its own provisions.

Question 65

In an excess policy, an aggregate limit that applies to all coverages is called the

A. Sum aggregate.
B. Annual aggregate.
C. Total aggregate.
D. Basket aggregate.

Answer 65

D. Basket aggregate.

Question 66

One reason that primary insurers purchase reinsurance for catastrophes is to

A. Satisfy regulatory requirements for reinsurance.
B. Stabilize insurer earnings.
C. Increase large-line capacity.
D. Reduce policyholders’ surplus to acceptable levels.

Answer 66

B. Stabilize insurer earnings.

Question 67

Cryogenetics formed an off-shore captive insurance company to insure its workers compensation exposures. The state where Cryogenetics is based requires these coverages to be written by a U.S-licensed insurer. Cryogenetics insured the exposures with a U.S-licensed insurer, and the insurer reinsured the business with the captive insurer. In this arrangement, the U.S-licensed insurer is called a

A. Retrocessionaire.
B. Protected cell company.
C. Risk retention group.
D. Fronting company.

Answer 67

D. Fronting company.

Question 68

Hold-harmless agreements are

A. Enforceable without legal consideration.
B. Standardized.
C. Highly regulated.
D. Comprised of two parties—the indemnitor and the indemnitee.

Answer 68

D. Comprised of two parties—the indemnitor and the indemnitee.

Question 69

Which one of the following statements is true regarding the value of an insurance option?

A. The value of an insurance option increases as the underlying insurable losses increase up to the value of the deductible.
B. The value of an insurance option increases as the underlying insurable losses increase beyond the value of the strike price.
C. The value of an insurance option decreases as the underlying insurable losses increase.
D. The value of an insurance option increases as the underlying insurable losses increase up to the value of the self-insured retention.

Answer 69

B. The value of an insurance option increases as the underlying insurable losses increase beyond the value of the strike price.

Question 70

After an organization determines the types and amounts of its costs of hazard risk, which it may approach prospectively or retrospectively, it must determine

A. Whether to allocate costs at the beginning or end of the accounting period.
B. The bases on which it will allocate the costs among its departments.
C. Whether to adjust or reallocate costs.
D. How to calculate the values and loss costs.

Answer 70

B. The bases on which it will allocate the costs among its departments.

Question 71

When allocating hazard risk management costs, a common basis for measuring an organization’s dominant general liability exposure is

A. Sales.
B. Departmental budget.
C. Property replacement cost.
D. Number of vehicles.

Answer 71

A. Sales.

Question 72

To project the value of future accidental losses, risk managers obtain data on past losses, limit individual large losses, and then

A. Add the losses in prior years together and divide by the number of years to estimate next year’s losses.
B. Discount the past loss values back to the base year.
C. Assume future experience will be identical to past experience.
D. Apply trend and development factors to the data.

Answer 72

D. Apply trend and development factors to the data.

Question 73

Which one of the following statements is true regarding the purpose and operation of self-insurance plans?

A. Self-insurance best applies to losses that are somewhat predictable in total over a defined time period.
B. Self-insurance plans have low administrative costs because no recordkeeping or formal payment systems are required.
C. Losses that are both low frequency and low severity are the best candidates for self-insurance plans.
D. Informal retention is another term for self-insurance.

Answer 73

A. Self-insurance best applies to losses that are somewhat predictable in total over a defined time period.

Question 74

All of the following are requirements of a general liability self-insurance plan, EXCEPT:

A. Funding
B. Keeping records of claims
C. Financial reporting to state insurance departments
D. Adjusting claims

Answer 74

C. Financial reporting to state insurance departments

Question 75

A loss limit in the retrospective rating plan formula

A. Is the most an insured organization will pay during the policy term.
B. Is the maximum amount of losses that will be included in the formula.
C. Is applied on an individual loss basis to limit losses included in the formula.
D. Is always used in the retrospective rating plan formula.

Answer 75

C. Is applied on an individual loss basis to limit losses included in the formula.

Question 76

Surplus share reinsurance

A. Covers policies with amounts of insurance less than the line.
B. Requires primary insurers to share loss exposures that they could safely retain.
C. Is designed to split losses according to a set percentage.
D. Is typically used only with property insurance.

Answer 76

D. Is typically used only with property insurance.

Question 77

Surplus share reinsurance is useful when the primary insurer

A. Wants to withdraw from a market segment.
B. Has a significant liability catastrophe exposure.
C. Needs surplus relief.
D. Needs to increase its large-line capacity.

Answer 77

D. Needs to increase its large-line capacity.

Question 78

Which one of the following is true about hold-harmless agreements?

A. A broad array of indemnity clauses are found in hold-harmless agreements.
B. Most hold-harmless agreements indicate whether the transferee/indemnitor is obligated to pay punitive damages.
C. The provisions and practices of hold-harmless agreements are generally standardized.
D. Hold harmless agreements generally indicate that bankruptcy of the transferee/indemnitor relieves the transferee/indemnitor of any further liability.

Answer 78

A. A broad array of indemnity clauses are found in hold-harmless agreements.

Question 79

The payment to the seller in an option compensates the seller for

A. The value of the income-producing asset transferred to the investor in exchange for cash.
B. The future-value of the present income-producing asset for which the set strike price has been reduced.
C. Accepting the risk that it will have to pay cash to the buyer if the value of the underlying asset exceeds the strike price on an exercised option.
D. Accepting the risk that the buyer will not exercise the option at a future date.

Answer 79

C. Accepting the risk that it will have to pay cash to the buyer if the value of the underlying asset exceeds the strike price on an exercised option.

Question 80

Mutual Fund Company operates a family of funds. In one fund, the company is able to use a variety of financial instruments to earn higher returns. One asset in the fund is 10,000 shares of XYZ common stock. XYZ currently sells for $70 per share. The fund manager does not think the price of XYZ will increase much in the next three months. She sold a financial instrument that gives the buyer the right to purchase 10,000 shares of XYZ from Mutual Fund Company at the price of $74 per share in the next three months. If the price does not increase to $74, the financial instrument will not be exercised, and Mutual Fund Company pockets the premium (price) for which it sold the financial instrument. If the price does rise, to say $76 per share, Mutual Fund Company will be obliged to sell the stock to the financial instrument owner at a price of $74 per share. The financial instrument that Mutual Fund Company sold is called a

A. Put option
B. Futures contract.
C. Call option.
D. Forward contract.

Answer 80

C. Call option.

Question 81

One example of a cost of administering risk management activities that would likely be allocated by department is

A. An actuarial evaluation of a risk retention proposal.
B. The operating budget of the risk management department.
C. A consultant’s audit of the entire risk management program.
D. Management services for the organization’s captive insurer.

Answer 81

B. The operating budget of the risk management department.

Question 82

Which statement is true concerning the tax treatment of retrospectively rated insurance programs?

A. A paid loss retrospectively rated plan permits an organization to immediately take a tax deduction for funds set aside to pay retained losses.
B. Retrospectively rated plans permit an organization to deduct the premium for insured losses but not the cost of any retained losses.
C. An incurred loss retrospectively rated plan permits an organization to take a tax deduction on premiums when they are paid.
D. Retrospectively rated plans permit an organization to take a tax deduction equal to the maximum premium regardless of the actual level of losses.

Answer 82

C. An incurred loss retrospectively rated plan permits an organization to take a tax deduction on premiums when they are paid.

Question 83

Which one of the following statements concerning the reinsurance concerns of risk management professionals is true?

A. Cut through endorsements assist primary insurers trying to collect from insolvent reinsurers.
B. As risk management professionals deal with primary insurers, risk managers have no reason to interact with reinsurers.
C. A portfolio reinsurance arrangement legally substitutes one insurer in place of another.
D. An organization’s captive insurance company can operate as a reinsurer for the commercial insurer that provides the organization’s primary insurance.

Answer 83

D. An organization’s captive insurance company can operate as a reinsurer for the commercial insurer that provides the organization’s primary insurance.

Question 84

Crimson Casualty Company began insurance operations last year. The company experienced phenomenal success and wrote far more premiums than expected. A representative from the state insurance department contacted Crimson Casualty and warned the company that it was growing too fast and risking insolvency. The insurance regulator added, “Of course you can use reinsurance to help remedy your situation.” The regulator was referring to which one of the following functions of reinsurance?

A. Using reinsurance to provide surplus relief
B. Using reinsurance to protect against catastrophic losses
C. Using reinsurance to stabilize loss experience
D. Using reinsurance to provide large-line capacity

Answer 84

A. Using reinsurance to provide surplus relief

Question 85

A captive insurer allows the insured(s) to benefit from the cash flow available on losses that are paid out over time because

A. Unlike a traditional insurer, the captive will hold loss reserves as long as possible.
B. The insured holds loss reserve funds for its own account until the captive needs them to pay losses.
C. Premiums under captive insurance plans are significantly lower than under guaranteed-cost plans.
D. Under a funded plan, the captive earns investment income on premium funds that have not yet been paid out for claims.

Answer 85

D. Under a funded plan, the captive earns investment income on premium funds that have not yet been paid out for claims.

Question 86

When allocating the costs of accidental losses not reimbursed by insurance or other outside sources, a hazard risk management cost allocation system should consider

A. Risk management departmental overhead.
B. Insurance premiums for the loss had it been covered.
C. Unallocated loss adjustment expenses.
D. Underwriting expenses.

Answer 86

C. Unallocated loss adjustment expenses.

Question 87

What excess loss reinsurance covers property insurance and applies separately to each loss occurring to each risk?

Answer 87

Per risk excess of loss

Question 88

What excess loss reinsurance protects primary insurer from an accumulation of retained losses that arise from a single catastrophic event?

Answer 88

Catastrophe excess of loss

Question 89

What excess loss reinsurance typically applies to liability insurance, applies attachment point and reinsurance limit separately to each insurance policy issued by the primary regardless of the number of losses occurring under each policy?

Answer 89

Per policy excess of loss

Question 90

What excess loss reinsurance applies the attachment point and reinsurance limit to the total losses arising from a single event affecting one or more of the primary policy?

Answer 90

Per occurrence excess of loss