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FIN 331 > Final Exam > Flashcards

Final Exam Flashcards

1
Q

What are the other names for insureds

A

Policy owner, policyholder, and insurance buyer

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2
Q

Burdens of risk on society

A 
Expenditures to reduce risk
Lost opportunities from avoiding risks
Expense of financing potential losses
Living with worry
Cost of losses
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3
Q

Vehicle air bags, classroom overhead fire extinguishers, and video cameras in high crime areas are examples of which burden of risk on society

A

Expenditures to reduce risk

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4
Q

In risk management, uncertainty describes an event where

A

The probability of its outcome cannot be measured

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5
Q

If a risk can result in either a gain or a loss, the risk is

A

Speculative

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6
Q

Insurance is more widely and inexpensively available when risks are

A

Speculative, static, and objective

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7
Q

In general, the potential damage from a hurricane is a _____ risk

A

Static

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8
Q

If a risk ins’t particular it is _____

A

Fundamental

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9
Q

Two measures of objective risk are the

A

Degree of risk and standard deviation

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10
Q

Which is false?

If a loss cannot happen, the degree of risk is 0
The higher the chance of a loss, the higher degree of risk
If a loss is sure to happen, the degree of risk is 0
All else the same, the higher the expected loss, the lower the degree of risk
The degree of risk that a 100 y/o man will die is low

A

The degree of risk that a 100 y/o man will die is low

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11
Q

Which of the following is true about risk management

Its purpose is to reduce the frequency of losses
Its purpose is to reduce the size of losses
Both a and b describe the purpose of risk management
RIMS is a software program to keep track of claims
All of the above

A

All of the above

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12
Q

Risk managers at large organizations use something called RMIS . RMIS is _____ software

A

Risk management information systems

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13
Q

Which statement about evaluating the potential for loss in the risk management process is false

A

In general, estimates of frequency are more important than estimates of severity

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14
Q

The four basic risk management techniques - avoidance, loss control, retention, and transfer can be classified as either risk _____ techniques or risk ______ techniques

A

Control; financing

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15
Q

What happened in 2004 leading to a more uniform approach to enterprise risk management

A

The Treadway Commission’s ERP framework was released

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16
Q

This statement: The greater the number of risk exposure units, the more certain it becomes that the actual loss experience will equal the probable loss, describes what

A

The law of large numbers

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17
Q

The owner of an office building pays the cost of replacement whenever one of the building’s windows is damaged . Which risk management technique is the company using

A

Retention

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18
Q

Risk avoidance is a logical risk management technique only if

A

it is possible to avoid the risk and there are no over-riding adverse consequences of the avoidance

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19
Q

Unplanned risk retention occurs because

A

Risk managers may be unaware of the need for risk management and some risks are particular

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20
Q

When the probability of a loss is low, insurance will be the risk management technique of choice when

A

The severity is potentially high

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21
Q

If risks can be avoided w/o adverse consequences, what is the best risk management technique

A

Avoidance

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22
Q

Which of the following is least likely to be a method of risk transfer

A

Self-insurance

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23
Q

The main purpose of _____ damages is to pay medical bills and lost wages of those who are injured by another party’s negligence

A

Economic damages

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24
Q

An intentional tort is always _____

A

An area of civil law

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25
Q

In general, which of the following is least likely to be immune from the ORPMAN standard

A

Senile people

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26
Q

Which is the most likely to be a crime

A

An intentional tort

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27
Q

Victims of negligence and their insurance companies may be able to recover their losses through

A

Law suits and subrogation

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28
Q

Which is least likely to be a type of liability damages

A

Negligence

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29
Q

Which is true?

Generally, parents are liable for their chlidrens negligence until age 7
Negligence for professional acts is limited to malpractice by medical professionals
Generally, there is not an agency relationship between an independent business and its contractors

A

Generally, parents are liable for their chlidrens negligence until age 7
Generally, there is not an agency relationship between an independent business and its contractors

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30
Q

Mr. X was injured in an accident because of Mr. Y’s negligence . X’s total loss was $100,000. Suppose that Mr. X was 10% to blame for the accident and Mr. Y was 90% responsible . How much can X recover under comparative negligence

A

$90,000

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31
Q

The two basic types of comparative negligence laws are

A

Pure and modified

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32
Q

A person who signs a hold harmless agreement prior to bungee jumping provides the bungee operator with which defense if the jumper is injured

A

Assumption of risk

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33
Q

Property that is permanently attached to the ground is ______ property

A

Real property

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34
Q

Why is the distinction between real and personal property so important in insurance

A

Coverages vary based on property type

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35
Q

Monetary expenses incurred as a result of premature death may include

A

Funeral costs and probate costs

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36
Q

Rank the following causes of death in the US starting with the most frequent

Cancer
Accidents
Heart Disease
Homicide

A

Heart disease, cancer, accidents, homicide

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37
Q

The CSO mortality tables assume everyone will die by age

A

120

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38
Q

Which statement about unemployment insurance benefits is true

A

No federal income taxes apply to benefits received and the majority of unemployment insurance benefits are funded by payroll taxes

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39
Q

According to the bureau of labor statistics, ______ of a workers pre-retirement income will be needed at retirement to keep the same standard of living

A

75%-85%

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40
Q

What percentage of workers wages are automatically withheld as social security taxes

A

12.50%

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41
Q

Insurance works best when the size of a potential loss is _____ and the likelihood of a loss is _____

A

High, low

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42
Q

The principle of indemnity is least likely to apply to ____ insurance

A

Life

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43
Q

Which is a potential exception to the principle of indemnity

A

Life insurance death benefits

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44
Q

An insurance company selling homeowners insurance does not inspect houses or their contents prior to issuing policies . Instead, the insurer relies on insureds to make sure there are no unusual risks or hazards present, or to inform the insurer about them during the policy application process . What principle is demonstrated by this trust

A

Utmost good faith

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45
Q

The collateral source rule is an exception to

A

The indemnity principle

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46
Q

Which is the best example of a valued policy type of insurance

A

life insurance

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47
Q

In order for risks to be insurable, losses must be fortuitous . As a result

A

Intentional losses are excluded from insurance policies, insurers try to avoid adverse selection, and life insurance policies include suicide clauses

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48
Q

In general, how do insurance agents know whether insurance applicants have legal capacity to enter into an insurance contract

A

By the agent’s personal observations and questions during the application process

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49
Q

What is the defining characteristic of an aleatory contract

A

Each party’s exchange of consideration can be greatly unequal

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50
Q

In general, insurers can cancel their insurance at any time . That’s because insurance policies are

A

Unilateral contracts

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51
Q

Which of the following is a feature common to all commercial contracts, not just insurance contracts

A

Exchange of consideration

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52
Q

Which is the most likely to be a type of social insurane

A

Flood insurance

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53
Q

Which of the following is a benefit to society of insurance

A

A reduced likelihood of perils occuring and lower cost of capital

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54
Q

Generally, when does an insurance applicant make a valid offer

A

When the application is mailed to the insurer with an accompanying check for the first premium

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55
Q

Which of the following is a legal feature common to all commercial contracts, not just life insurance contracts

A

Legal purpose

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56
Q

Which is a characteristic describing the ISO

A

It sells copyrighted insurance policies to insurers

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57
Q

Which of the following types of insurance policies is the most likely to be a package policy

A

Auto

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58
Q

Which section of an insurance policy is a brief summary of information about the insured and the insurance policy

A

The dec page

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59
Q

An insurance policy’s definitions section is the most beneficial to

A

The insurers

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60
Q

Which of the following insurance policy sections contains a description of coverages

A

The insuring agreement

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61
Q

The section of an insurance policy describing conditions under which an insurer will pay claims is the ______ section

A

Insuring agreement

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62
Q

A written provision adding or removing coverage to or from an existing P&C insurance policy is called _____

A

An endorsement

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63
Q

A written provision adding or removing coverage to or from an existing life insurance policy is called _____

A

A rider

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64
Q

Which section of an insurance policy describes whether coverages are named-perils or open-perils

A

The insuring agreement

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65
Q

Certain perils are excluded from most insurance policies for many reasons . Which is not one of these reasons

A

Coverages creating morale hazards are excluded

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66
Q

In general, insurance policies won’t pay for intentional losses or damages due to warfare . These exclusions are examples of which form of exclusion

A

Excluded losses

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67
Q

If an insurance market is characterized by rising premiums and increased demand for coverage by customers, the market is most likely to be which kind of market

A

Hard market

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68
Q

Suppose an earthquake in Southern California causes several billions of dollars of insureds property losses . Which is the least likely short term response to these losses

A

The profitability of property insurers will rise

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69
Q

Approximately how many separate P&C insurers operate in the US

A

2,700

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70
Q

An insurer’s combined ration is composed of 4 components . Which is not one of them

A

Net written premium ratio

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71
Q

An insurance company’s after-tax net income is the sum of two major components . What are they

A

Operating gain (or loss) plus investment gain

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72
Q

An insurance company breaking income with an operating income of $0 will have a combined ratio equal to

A

100

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73
Q

Which of the following statements about mutual insurance companies is true

A

Most pay policy dividends

74
Q

If a corporate insurer loses money, who bears those losses

A

Shareholders

75
Q

Most reciprocals operate in _____ insurance

A

Auto

76
Q

In which state are American Lloyds most active

A

Texas

77
Q

Banks, brokerage firms, and insurance companies were permitted to affiliate with each other by the 1999 federal law known as

A

The financial services modernization act

78
Q

Regulation of the insurance industry is

A

Based on both the public interest rationale and the destructive competition rationale

79
Q

The insurance industry is unique compared with other financial institutions because

A

It is regulated by the states

80
Q

When insurance agents try to convince applicants to buy policies by offering to share their commissions, the agents are using which illegal action

A

Rebating

81
Q

When insurance agents convince insureds to replace their policies only to generate more commission for themselves, the practice is called

A

Twisting

82
Q

Which of the following statements about insurance regulation is true

A

Samuel Paul lost the Paul v. Virginia case

83
Q

Which of the following had the greatest impact in standardizing insurance regulations across the US

A

The Appleton Rule

84
Q

The armstrong investigation focused on which type of insurance

A

Life

85
Q

Can an insurance company own a brokerage firm

A

Yes

86
Q

Regulation XXX addresses which type of insurance

A

Term life

87
Q

A business total package of insurance coverages is referred to as its

A

Commercial lines coverage

88
Q

A non-standard commercial property insurance policy is referred to as a _____ policy

A

Manuscripted

89
Q

Which type of commercial property insurance policy is most likely to cover a small mom and pop shop

A

BOP

90
Q

Although there are exceptions, in general, commercial property insurance policies are

A

Open perils

91
Q

Which section of a commercial insurance policy contains information about cancellation, making changes, the party responsible for paying premiums, and information about prohibiting transfer of the insureds rights and duties

A

Common policy conditions

92
Q

The letters CPP denote

A

Commercial package policy

93
Q

Fidelity bonds cover losses from

A

The dishonest acts of employees

94
Q

Under the old legal doctrine of privity of contract, the buyer of a defective product could sue

A

The business selling the defective product to the buyer

95
Q

Which statement about commercial liability insurance is true

A

Builders risk insurance coverage is contained in completed operations insurance policies and completed operations insurance coverage is contained in products completed operations insurance policies

96
Q

Suppose a contractor is constructing a new building for a client . During construction, if one of the contractors employees accidentally starts a fire that damages part of the building, which commercial insurance policy will cover the damages

A

Builders risk

97
Q

A building contractor installed a light fixture in a shopping mall. Shortly afterward, the fixture fell, injuring a shopper. Which commercial insurance coverage will cover the inuries

A

Completed operations

98
Q

In general, a company is liable for harm to

A

Its employees and its customers

99
Q

What is the usual order in which the following common commercial liability insurance policy sections are found, listed first to last

A

Dec page, definition of the insured, insuring agreement, and notice

100
Q

Which of the following is least likely to be an exclusion, and most likely to be covered in commercial liability insurance policies

A

Liability arising from employee negiligence

101
Q

A tail coverage endorsement is associated with which limit of liability in commercial liability policies

A

Claims made

102
Q

Which statement about CGL insurance policies is false

A

It must be written as a stand alone policy

103
Q

As long as losses aren’t intentional, which of the following is most likely to be excluded by CGL policies

A

Pollution

104
Q

CGL insurance policies typically cover claims from which of the following

A

Damage to the insureds own property

105
Q

Which statement about business auto policies is false

A

Businesses choose several of the 9 basic coverages as they are appropriate

106
Q

Which statement about workers comp insurance is true

A

A majority of total US workers comp benefits is spent on medical benefits, not lost income

107
Q

Workers comp insurance benefit limits for injured workers are established by

A

Each state

108
Q

Workers comp insurance wage benefit are typically set at ____ percent of pre injury income

A

66.6%

109
Q

Prior to modern workers comp laws, in order for a worker to receive benefits for on the job injuries they had to

A

Sue their employer, employers could use the fellow service doctrine to defend themselves against lawsuits, and employees had to prove their employers violated at least one of the five common law obligations they owe to their workers

110
Q

Which is non a pre req for self insuring workers comp risk exposures

A

A firms workers must be older and experienced

111
Q

Which statement about self insuring workers com risk exposures is false

A

Self insuring employers retain every dollar of risk exposure

112
Q

What does part b of the ISO workers comp insurance policy cover

A

Legal expenses insureds employers incur form workers comp claims

113
Q

Companies self insuring their workers comp risk exposures get a federal income tax deduction when

A

The company pays each claim

114
Q

When a firms workers comp claims rapidly increase, which method of providing coverage will result in the fastest increase in a firm’s cost or premiums

A

Self insurance

115
Q

Generally workers comp coverages for medical benefits are

A

Unlimited

116
Q

Which of the following is not a typical workers comp benefit

A

Workers have complete freedom of choice when choosing physicians

117
Q

Workers comp insurance base rates are the combined average of all workers in

A

A specific industry

118
Q

A firms workers comp insurance premium is calculated by adding to the projected premium and adjustment for the difference between the prior years actual and projected claims . This method is known as the ______ method

A

Retrospective

119
Q

Which of the following is a reason why the rate of auto fatalities has fallen drastically since 1950

A

Both roads and autos are safer, and drivers licensing requirements are tougher

120
Q

When managin their auto risk exposures, individuals most often use which combo of techniques

A

Transfer and retention

121
Q

About how many people die each year as a result of traffic accidents

A

35,000

122
Q

Which coverage does the PAP always exclude

A

Vehicles owned by businesses

123
Q

The PAP covers which of the following

A

None of the above

124
Q

Which of the following is not one of the six major sections of the ISO PAP

A

Exclusions

125
Q

A driver has a 20/40/10 PL/PD limits . What is the max dollar amount an insurance company will pay for an accident when both bodily injury and property damage occur

A

50,000

126
Q

An insured has 20/40/10 PL/PD limits. Suppose the insured causes an accident, injuring two people: the driver of the other vehicle and a passenger in the other vehicle . The driver incurs medical expenses of $10,000 while the passenger incurs $50,000 . What is the total dollar amount the insureds PL/PD limits will pay

A

$30,000

127
Q

Cheryl lives with her mother, and both have PL/PD coverage . Because Cheryl’s car is unreliable, she regularly borrows her mothers car when driving on long trips or at night, an average of 3-4 times/week . Both women insure their vehicles in their own names . If Cheryl has a PL/PD claim while driving her mothers car, whose policy will pay the claim

A

Cheryl’s

128
Q

PAP’s rental car coverage

A

Is an optional endorsement

129
Q

In the event of an auto accident, which is the following info is not required

A

The other driver’s soc

130
Q

Funds established by states to compensate victims of auto accident s after they have run out of ways to collect their losses are called

A

Unsatisfied judgement funds

131
Q

Of the following , in which state would you expect to find the highest rate of uninsured drivers

A

Mississippi

132
Q

Which factor is the least likely to affect the size of an auto premium

A

Width of the vehicles tires

133
Q

Which org developed the model act regarding use of credit information in personal insurance

A

NCOIL

134
Q

On average which of these components of auto insurance premiums is the smallest

A

Comprehensive

135
Q

In the past decade, the single largest component of premium increases has been

A

Fraud

136
Q

Auto insurance premiums are the lowest for which of the following states

A

Iowa

137
Q

Auto insurance premiums are the highest for which of the following states

A

New Jersey

138
Q

What are the two most important reasons auto insurance premiums are rising so rapidly

A

The cost of medical claims and fraud

139
Q

In the following list, the most significant factor contributing to variations in auto insurance premiums from state to state

A

Population density

140
Q

The average cost for annual auto insurance premiums to closest to which dollar amount

A

$793

141
Q

What is the largest component of auto insurance company loading expenses

A

Commissions

142
Q

Which combined ratio would be most preferred by auto insurers

A

90%

143
Q

What is the term auto insurers use to describe the situation when risks are unknown by the insurer because insureds don’t report complete information, making premiums smaller than they would be otherwise

A

Premium leakage

144
Q

According to estimates, about what percentage of auto insurance claims are fraudulent

A

10-15%

145
Q

Which of the following is least likely to be a successful loss control and prevention activity used to contain auto insurance costs

A

Reducing profit gouging by auto insurers

146
Q

About how many states have some form of no-fault auto insurance

A

12

147
Q

Which state has the purest form of no-fault auto insurance

A

Michigan

148
Q

In which decade were most no-fault state laws enacted

A

1970’s

149
Q

Agents of state farm, allstate, and geico are most likely ______ agents

A

Captive

150
Q

Which drivers would pay higher premiums under the PAYD system

A

Drivers who drive more than average miles

151
Q

A homeowner is not eligible for HO insurance if

A

The owner rents the dwelling to another family

152
Q

The HO-5 policy corm

A

Changes the HO-3 form to include personal property

153
Q

Which of the following is the most likely HO form a renter would use

A

HO-4

154
Q

A homeowners house, unattached garage, and auto parked in the garage were totally destroyed by a fire . Which of the following types of destroyed property will not be covered by the homeowners standard HO policy

A

The auto

155
Q

Losses from which peril is covered by HO-3 policies

A

Hail

156
Q
  1. When did the number of life insurance companies peak in the US
A

2,343 companies in 1988

157
Q
  1. Market shares of various types of life insurance organizations
A

75% stock companies (Met Life and Prudential)
26% - Mutuals (NW, NY life)
~1% - Fraternal

158
Q
  1. Reasons for purchasing life insurance
A 
To cover funeral/burial expenses
Paying off outstanding loans
Providing estate liquidity
Financial security of those left behind
Income replacement
Pay off mortgages
Pay for education
159
Q
  1. DIME
A

Death, Income, Mortgage, and Education

160
Q
  1. Term insurance
A

Coverage only lasts for a designated number of years

Much cheaper than whole life

161
Q

Permanent insurance

A
  • AKA whole life policy

- In place for the entirety of the insureds life as long as premiums are paid

162
Q

Types of term insurance

A

Death benefit options

  • Level death benefit
  • decreasing death benefit
  • increasing death benefit

Premium options

  • Level premium term
  • Premium adjustable term (raise rates each year as mortality increases)
  • Scheduled premium term (cross between premium adjustable and level term)
163
Q

Traditional whole life

A

Promises increases in guaranteed cash values

164
Q

Traditional universal life

A

a. Flexible premium adjustable life - Allows insureds to take advantage of tax deferred growth by sending in extra money on top of premiums
b. Option A: Dominant form - Death benefit equals a specified amount until the cash value exceeds that amount
c. Option B: Equals the purchased death benefit plus the accumulated cash value

165
Q

When is term insurance best

A

Coverage is only needed for a specific period of time
Credit protection
Insureds cannot afford whole life
Insureds are in their 20’s or 30’s
Group life insurance is offered as a fringe benefit to employees

166
Q

When is permanent best

A

Estate planning
Funding business buy/sell agreements
When insureds want permanent coverage
Wealthier insureds who want tax-free returns
Insureds want policy cash values invested in the stock market
COLI and BOLI plans

167
Q
  1. Maturities of life insurance policies
A

When the cash value or the amount you have paid into your whole life policy matches the death benefit, it has reached its maturity date.

168
Q

Convertible term insurance

A

Many term policies are convertible to permanent life insurance (usually only certain policies)

Conversion credit - a reduction of 20-50% in the base premium of the new policy

Very important for workers who are changing employers or are retiring

169
Q

Insurance policy provisions

A 
Insuring clause
Free look
Consideration clause
Grace period
Reinstatement
Accelerated benefits
170
Q

Insuring clause

A

Describes the insurer’s promise to pay benefits

171
Q

Free look

A

Gives applicants 10-30 days after the policy delivery to cancel the policy . If cancelled within that time, they will be completely refunded

172
Q

Consideration clause

A

Both parties must give up something to the other

173
Q

Grace period

A

Gives the policy owners 30 or 31 days beyond the due date to pay premiums

174
Q

Reinstatement

A

Allows policy owners to reinstate lapsed policies

175
Q

Accelerated benefits

A

Allows owners to collect a portion of death benefits while they are living should they become terminally ill

176
Q

Naming and changing beneficiaries

A

Beneficiaries must have insurable interest in a policy owner’s life when a policy is purchased

177
Q

When does coverage for life insurance begin

A

when the insurance company has received and approved the application for coverage, a policy has been issued, all additional documents have been signed and the first premium payment has been paid to the insurance company.

178
Q
  1. How can life insurance owners change the policy
A

By adding policy riders

179
Q

Entire contract clause

A

A life insurance contract consists of the policy, the application, and all attached riders

All statements in the application are treated as representations

That puts burden of proof on insurance companies to prove applicants made false statements

180
Q

Loan provisions

A

Owners may borrow cash from the insurer up to 80-90% of a policy’s cash value for any reason

Insurers can charge loan interest as high as 8.5%

The policy’s cash value is assigned as collateral, but remains invested and continues to earn a return for the policy holder

Most loans are never repaod

181
Q

Lapsing of life insurance

A

A life insurance policy will lapse when premium payments are missed and cash surrender value is exhausted on a life insurance policy

FIN 331 (4 decks)

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