Final Exam Flashcards
What are the other names for insureds
Policy owner, policyholder, and insurance buyer
Burdens of risk on society
Expenditures to reduce risk Lost opportunities from avoiding risks Expense of financing potential losses Living with worry Cost of losses
Vehicle air bags, classroom overhead fire extinguishers, and video cameras in high crime areas are examples of which burden of risk on society
Expenditures to reduce risk
In risk management, uncertainty describes an event where
The probability of its outcome cannot be measured
If a risk can result in either a gain or a loss, the risk is
Speculative
Insurance is more widely and inexpensively available when risks are
Speculative, static, and objective
In general, the potential damage from a hurricane is a _____ risk
Static
If a risk ins’t particular it is _____
Fundamental
Two measures of objective risk are the
Degree of risk and standard deviation
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
The degree of risk that a 100 y/o man will die is low
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
All of the above
Risk managers at large organizations use something called RMIS . RMIS is _____ software
Risk management information systems
Which statement about evaluating the potential for loss in the risk management process is false
In general, estimates of frequency are more important than estimates of severity
The four basic risk management techniques - avoidance, loss control, retention, and transfer can be classified as either risk _____ techniques or risk ______ techniques
Control; financing
What happened in 2004 leading to a more uniform approach to enterprise risk management
The Treadway Commission’s ERP framework was released
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
The law of large numbers
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
Retention
Risk avoidance is a logical risk management technique only if
it is possible to avoid the risk and there are no over-riding adverse consequences of the avoidance
Unplanned risk retention occurs because
Risk managers may be unaware of the need for risk management and some risks are particular
When the probability of a loss is low, insurance will be the risk management technique of choice when
The severity is potentially high
If risks can be avoided w/o adverse consequences, what is the best risk management technique
Avoidance
Which of the following is least likely to be a method of risk transfer
Self-insurance
The main purpose of _____ damages is to pay medical bills and lost wages of those who are injured by another party’s negligence
Economic damages
An intentional tort is always _____
An area of civil law
In general, which of the following is least likely to be immune from the ORPMAN standard
Senile people
Which is the most likely to be a crime
An intentional tort
Victims of negligence and their insurance companies may be able to recover their losses through
Law suits and subrogation
Which is least likely to be a type of liability damages
Negligence
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
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
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
$90,000
The two basic types of comparative negligence laws are
Pure and modified
A person who signs a hold harmless agreement prior to bungee jumping provides the bungee operator with which defense if the jumper is injured
Assumption of risk
Property that is permanently attached to the ground is ______ property
Real property
Why is the distinction between real and personal property so important in insurance
Coverages vary based on property type
Monetary expenses incurred as a result of premature death may include
Funeral costs and probate costs
Rank the following causes of death in the US starting with the most frequent
Cancer
Accidents
Heart Disease
Homicide
Heart disease, cancer, accidents, homicide
The CSO mortality tables assume everyone will die by age
120
Which statement about unemployment insurance benefits is true
No federal income taxes apply to benefits received and the majority of unemployment insurance benefits are funded by payroll taxes
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
75%-85%
What percentage of workers wages are automatically withheld as social security taxes
12.50%
Insurance works best when the size of a potential loss is _____ and the likelihood of a loss is _____
High, low
The principle of indemnity is least likely to apply to ____ insurance
Life
Which is a potential exception to the principle of indemnity
Life insurance death benefits
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
Utmost good faith
The collateral source rule is an exception to
The indemnity principle
Which is the best example of a valued policy type of insurance
life insurance
In order for risks to be insurable, losses must be fortuitous . As a result
Intentional losses are excluded from insurance policies, insurers try to avoid adverse selection, and life insurance policies include suicide clauses
In general, how do insurance agents know whether insurance applicants have legal capacity to enter into an insurance contract
By the agent’s personal observations and questions during the application process
What is the defining characteristic of an aleatory contract
Each party’s exchange of consideration can be greatly unequal
In general, insurers can cancel their insurance at any time . That’s because insurance policies are
Unilateral contracts
Which of the following is a feature common to all commercial contracts, not just insurance contracts
Exchange of consideration
Which is the most likely to be a type of social insurane
Flood insurance
Which of the following is a benefit to society of insurance
A reduced likelihood of perils occuring and lower cost of capital
Generally, when does an insurance applicant make a valid offer
When the application is mailed to the insurer with an accompanying check for the first premium
Which of the following is a legal feature common to all commercial contracts, not just life insurance contracts
Legal purpose
Which is a characteristic describing the ISO
It sells copyrighted insurance policies to insurers
Which of the following types of insurance policies is the most likely to be a package policy
Auto
Which section of an insurance policy is a brief summary of information about the insured and the insurance policy
The dec page
An insurance policy’s definitions section is the most beneficial to
The insurers
Which of the following insurance policy sections contains a description of coverages
The insuring agreement
The section of an insurance policy describing conditions under which an insurer will pay claims is the ______ section
Insuring agreement
A written provision adding or removing coverage to or from an existing P&C insurance policy is called _____
An endorsement
A written provision adding or removing coverage to or from an existing life insurance policy is called _____
A rider
Which section of an insurance policy describes whether coverages are named-perils or open-perils
The insuring agreement
Certain perils are excluded from most insurance policies for many reasons . Which is not one of these reasons
Coverages creating morale hazards are excluded
In general, insurance policies won’t pay for intentional losses or damages due to warfare . These exclusions are examples of which form of exclusion
Excluded losses
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
Hard market
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
The profitability of property insurers will rise
Approximately how many separate P&C insurers operate in the US
2,700
An insurer’s combined ration is composed of 4 components . Which is not one of them
Net written premium ratio
An insurance company’s after-tax net income is the sum of two major components . What are they
Operating gain (or loss) plus investment gain
An insurance company breaking income with an operating income of $0 will have a combined ratio equal to
100
Which of the following statements about mutual insurance companies is true
Most pay policy dividends
If a corporate insurer loses money, who bears those losses
Shareholders
Most reciprocals operate in _____ insurance
Auto
In which state are American Lloyds most active
Texas
Banks, brokerage firms, and insurance companies were permitted to affiliate with each other by the 1999 federal law known as
The financial services modernization act
Regulation of the insurance industry is
Based on both the public interest rationale and the destructive competition rationale
The insurance industry is unique compared with other financial institutions because
It is regulated by the states
When insurance agents try to convince applicants to buy policies by offering to share their commissions, the agents are using which illegal action
Rebating
When insurance agents convince insureds to replace their policies only to generate more commission for themselves, the practice is called
Twisting
Which of the following statements about insurance regulation is true
Samuel Paul lost the Paul v. Virginia case
Which of the following had the greatest impact in standardizing insurance regulations across the US
The Appleton Rule
The armstrong investigation focused on which type of insurance
Life
Can an insurance company own a brokerage firm
Yes
Regulation XXX addresses which type of insurance
Term life
A business total package of insurance coverages is referred to as its
Commercial lines coverage
A non-standard commercial property insurance policy is referred to as a _____ policy
Manuscripted
Which type of commercial property insurance policy is most likely to cover a small mom and pop shop
BOP
Although there are exceptions, in general, commercial property insurance policies are
Open perils
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
Common policy conditions
The letters CPP denote
Commercial package policy
Fidelity bonds cover losses from
The dishonest acts of employees
Under the old legal doctrine of privity of contract, the buyer of a defective product could sue
The business selling the defective product to the buyer
Which statement about commercial liability insurance is true
Builders risk insurance coverage is contained in completed operations insurance policies and completed operations insurance coverage is contained in products completed operations insurance policies
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
Builders risk
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
Completed operations
In general, a company is liable for harm to
Its employees and its customers
What is the usual order in which the following common commercial liability insurance policy sections are found, listed first to last
Dec page, definition of the insured, insuring agreement, and notice
Which of the following is least likely to be an exclusion, and most likely to be covered in commercial liability insurance policies
Liability arising from employee negiligence
A tail coverage endorsement is associated with which limit of liability in commercial liability policies
Claims made
Which statement about CGL insurance policies is false
It must be written as a stand alone policy
As long as losses aren’t intentional, which of the following is most likely to be excluded by CGL policies
Pollution
CGL insurance policies typically cover claims from which of the following
Damage to the insureds own property
Which statement about business auto policies is false
Businesses choose several of the 9 basic coverages as they are appropriate
Which statement about workers comp insurance is true
A majority of total US workers comp benefits is spent on medical benefits, not lost income
Workers comp insurance benefit limits for injured workers are established by
Each state
Workers comp insurance wage benefit are typically set at ____ percent of pre injury income
66.6%
Prior to modern workers comp laws, in order for a worker to receive benefits for on the job injuries they had to
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
Which is non a pre req for self insuring workers comp risk exposures
A firms workers must be older and experienced
Which statement about self insuring workers com risk exposures is false
Self insuring employers retain every dollar of risk exposure
What does part b of the ISO workers comp insurance policy cover
Legal expenses insureds employers incur form workers comp claims
Companies self insuring their workers comp risk exposures get a federal income tax deduction when
The company pays each claim
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
Self insurance
Generally workers comp coverages for medical benefits are
Unlimited
Which of the following is not a typical workers comp benefit
Workers have complete freedom of choice when choosing physicians
Workers comp insurance base rates are the combined average of all workers in
A specific industry
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
Retrospective
Which of the following is a reason why the rate of auto fatalities has fallen drastically since 1950
Both roads and autos are safer, and drivers licensing requirements are tougher
When managin their auto risk exposures, individuals most often use which combo of techniques
Transfer and retention
About how many people die each year as a result of traffic accidents
35,000
Which coverage does the PAP always exclude
Vehicles owned by businesses
The PAP covers which of the following
None of the above
Which of the following is not one of the six major sections of the ISO PAP
Exclusions
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
50,000
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
$30,000
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
Cheryl’s
PAP’s rental car coverage
Is an optional endorsement
In the event of an auto accident, which is the following info is not required
The other driver’s soc
Funds established by states to compensate victims of auto accident s after they have run out of ways to collect their losses are called
Unsatisfied judgement funds
Of the following , in which state would you expect to find the highest rate of uninsured drivers
Mississippi
Which factor is the least likely to affect the size of an auto premium
Width of the vehicles tires
Which org developed the model act regarding use of credit information in personal insurance
NCOIL
On average which of these components of auto insurance premiums is the smallest
Comprehensive
In the past decade, the single largest component of premium increases has been
Fraud
Auto insurance premiums are the lowest for which of the following states
Iowa
Auto insurance premiums are the highest for which of the following states
New Jersey
What are the two most important reasons auto insurance premiums are rising so rapidly
The cost of medical claims and fraud
In the following list, the most significant factor contributing to variations in auto insurance premiums from state to state
Population density
The average cost for annual auto insurance premiums to closest to which dollar amount
$793
What is the largest component of auto insurance company loading expenses
Commissions
Which combined ratio would be most preferred by auto insurers
90%
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
Premium leakage
According to estimates, about what percentage of auto insurance claims are fraudulent
10-15%
Which of the following is least likely to be a successful loss control and prevention activity used to contain auto insurance costs
Reducing profit gouging by auto insurers
About how many states have some form of no-fault auto insurance
12
Which state has the purest form of no-fault auto insurance
Michigan
In which decade were most no-fault state laws enacted
1970’s
Agents of state farm, allstate, and geico are most likely ______ agents
Captive
Which drivers would pay higher premiums under the PAYD system
Drivers who drive more than average miles
A homeowner is not eligible for HO insurance if
The owner rents the dwelling to another family
The HO-5 policy corm
Changes the HO-3 form to include personal property
Which of the following is the most likely HO form a renter would use
HO-4
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
The auto
Losses from which peril is covered by HO-3 policies
Hail
- When did the number of life insurance companies peak in the US
2,343 companies in 1988
- Market shares of various types of life insurance organizations
75% stock companies (Met Life and Prudential)
26% - Mutuals (NW, NY life)
~1% - Fraternal
- Reasons for purchasing life insurance
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
- DIME
Death, Income, Mortgage, and Education
- Term insurance
Coverage only lasts for a designated number of years
Much cheaper than whole life
Permanent insurance
- AKA whole life policy
- In place for the entirety of the insureds life as long as premiums are paid
Types of term insurance
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)
Traditional whole life
Promises increases in guaranteed cash values
Traditional universal life
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
When is term insurance best
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
When is permanent best
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
- Maturities of life insurance policies
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.
Convertible term insurance
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
Insurance policy provisions
Insuring clause Free look Consideration clause Grace period Reinstatement Accelerated benefits
Insuring clause
Describes the insurer’s promise to pay benefits
Free look
Gives applicants 10-30 days after the policy delivery to cancel the policy . If cancelled within that time, they will be completely refunded
Consideration clause
Both parties must give up something to the other
Grace period
Gives the policy owners 30 or 31 days beyond the due date to pay premiums
Reinstatement
Allows policy owners to reinstate lapsed policies
Accelerated benefits
Allows owners to collect a portion of death benefits while they are living should they become terminally ill
Naming and changing beneficiaries
Beneficiaries must have insurable interest in a policy owner’s life when a policy is purchased
When does coverage for life insurance begin
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.
- How can life insurance owners change the policy
By adding policy riders
Entire contract clause
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
Loan provisions
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
Lapsing of life insurance
A life insurance policy will lapse when premium payments are missed and cash surrender value is exhausted on a life insurance policy
