Midterm 2 Review Flashcards
Ch 5, 6, 8-12, 13A
Which of the following statements about stock insurers is true?
A. They issue assessable policies
B. They are not permitted to write property and liability insurance
C. Stockholders bear any losses and share in any profits
D. They are owned by their policyholders
C
Which of the following statements about mutual insurers is true?
A. They are legally organized as partnerships
B. They have a board of directors which is selected by state insurance departments
C. They are owned by their stockholders
D. They may pay dividends to their policyholders
D
The corporate structure of mutual insurers had changed in recent years. All of the following are examples of significant changes except…
A. Demutualization of some insurers
B. Sharp increase in the number of mutual insurance companies
C. Increase in company mergers
D. Formation of mutual holding companies
B
RIP Company manufactures herbicide and pesticide. The company had difficulty finding affordable liability insurance. RIP established its own insurance company based in Bermuda for the purpose of insuring RIP’s loss exposures. The company that RIP formed is called a…
A. Captive insurer
B. Reciprocal insurer
C. Fraternal insurer
D. Holding company
A
An unincorporated organization in which insurance is exchanged among the members with each member insuring the other members and, in turn, being insured by the other members, is called a…
A. Reciprocal exchange
B. Stock insurer
C. Health maintenance organization
D. Fraternal insurer
A
What are the 2 main types of private insurers?
- Life and Health insurers
- Property and Casualty insurers
A stock insurer is a corporation owned by…
the stockholders
What is the objective of a stock insurer?
Earn profit for the stockholders by increasing the value of stock and paying dividends
In a ___, the stockholders elect the board of directors and bear all losses. The insurer cannot issue an assessable policy.
Stock insurer
A mutual insurer is a corporation owned by…
the policyholders
In a ___, the policyowners elect the board of directors, who have effective management. The policyholders may also receive dividends or rate reductions.
mutual insurer
Which of the following statements about the exclusive agency system for marketing property and liability insurance is true?
A. Exclusive agents typically have complete ownership of policy expirations
B. A higher commission rate is usually paid on exclusive agents’ renewal business than on new business
C. Exclusive agents represent several different insurance companies
D. New exclusive agents may start as employees and after a training period
D
Scott works in property and liability insurance marketing. He legally represents insurance purchasers, rather than insurance companies. Scott is paid a commission on the insurance placed with insurers. Scott is a(n)…
A. Exclusive agent
B. Direct writer
C. Branch manager
D. Insurance broker
D
Which of the following statements about underwriting standards is/are true?
I. One purpose of underwriting standards is to reduce adverse selection against the insurer.
II. Equitable rates should be charged so that each group of policyowners pays its own way in terms of losses and expenses.
Both I and II
Common sources of underwriting information for life and health insurance include all of the following except…
A. The application
B. A physical examination
C. The Medical Information Bureau
D. The applicant’s income tax return
D
Under a(n) ___ agency system, agents are paid commission based on the amount of business produced, the agency owns expirations or renewal rights to the business, and agents may be authorized to adjust small claims and may provide loss control services to their insurers.
Independent
Under a(n) ___ agency system, agents don’t usually own expirations or renewal rights to policies, agents are generally paid a lower commission rate on a renewal business than on new business, and insurers provide strong support services to new agents.
Exclusive
What are the 3 objectives of claim settlements?
- Verification of a covered loss
- Fair and prompt payment of claims
- Provide personal assistance to the insured
Name the 3 unfair claim practices that are prohibited by law.
- Refusing to pay claims without conducting a reasonable investigation
- Not attempting to provide prompt, fair, and equitable settlements
- Offering lower settlements to compel the insureds to institute lawsuits to recover the amounts due
Antonio is a claims adjustor for LMN Insurance Company. After the insurer is notified that there has been a loss, Antonio meets with the insured. The first step in the claims process that Antonio should follow is to…
A. Determine the amount of the loss
B. Attempt to deny the claim regardless of whether he believes the claim is covered.
C. Verify that a covered loss has occurred.
D. Delay paying the claim if the claim is covered.
C
Morgan was hired by an insurance company after she graduated from college. Upon completion of a training program, Morgan was assigned to a territory where she adjusts claims of the insurer’s policyowners. Morgan is a(n)
A. Public adjustor
B. Staff claims representative
C. Agent
D. Independent adjustor
B
A(n) ___ often has the authority to settle small first-party claims up to some limit.
Insurance Agent
A(n) ___ is usually a salaried employee who will investigate a claim, determine the amount of the loss, and arrange for payment.
Staff Claims Representative
A(n) ___ is an organization or individual that adjusts claims for a fee.
Independent Adjustor
A(n) ___ represents the insured and is paid a fee based on the amount of the claim settlement.
Public Adjustor
What are the 4 steps in claim settlement?
- Notice of loss ASAP
- An adjustor investigates the loss
- The adjustor may require proof of loss before payment
- The adjustor decides if the claim should be paid or denied
Under a ___, the ceding insurer and the reinsurer agree to share premiums and losses based on some proportion.
Quota-Share Treaty
Under a quota-share treaty, the reinsurer pays a ___ to the primary company to help compensate for the first-year acquisition expense in writing the business.
Ceding commission
A reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer is called…
A. A reinsurance pool
B. Automatic treaty reinsurance
C. Retrocession
D. Facultative reinsurance
D
Liability Insurance Company was approached by a regional airline to see if LIC would write the airline’s liability coverage. LIC agreed to write the coverage and entered into an agreement with a reinsurer. Under the agreement, LIC retains 25% of the premium and pays 25% of the losses, and the reinsurer receives 75% of the premium and pays 75% of the losses. This reinsurance arrangement is best described as…
A. Excess-of-loss reinsurance
B. Surplus-share reinsurance
C. Quota-share reinsurance
D. Pool reinsurance
C
Which of the following statements regarding reinsurance is/are true?
I. Under treaty reinsurance, the primary insurer must shop for a reinsurer each time the primary company needs reinsurance
II. One purpose of reinsurance is to help the primary insurer increase its underwriting capacity
II only
Granite Insurance Company entered into a treaty reinsurance agreement with Rock Solid Reinsurance (RSR). Granite’s retention limit is $400,000 and RSR agreed to provide reinsurance for up to $2.0 million. If Granite writes an $800,000 policy, RSR is responsible for 50 percent of the losses. If Granite insures a $1.6 million risk, RSR is responsible for 75 percent of any losses. What type of reinsurance arrangement did Granite enter into with RSR?
A. Facultative reinsurance
B. Surplus share reinsurance
C. Reinsurance pool
D. Excess of loss reinsurance
B
Under a(n) ___, the reinsurer agrees to accept insurance in excess of the ceding insurer’s retention limit, up to some maximum amount.
Surplus-Share Treaty
A(n) ___ treaty is designed for protection against catastrophic loss. It can be written to cover a single exposure, a single occurrence, or excess losses.
Excess-of-Loss
What are the 4 reasons for insurance regulation?
- Maintain insurer solvency
- Compensate for inadequate consumer knowledge
- Ensure reasonable rates
- Make insurance available
What are the 4 nonbank SIFIs that have been identified by the FSOC?
- American International Group (AIG)
- Prudential Financial
- MetLife
- GE Capital Corporation
___ = Admitted Assets - Liabilities
Surplus
___ are assets that are not liquid or that are not readily able to be converted to cash to pay policyholder benefits
Nonadmitted assets
Name 4 examples of nonadmitted assets.
- Furniture & equipment
- Premiums over 90 days
- Prepaid expenses (acquisition expenses)
- Certain investment types or investment amounts that exceed statutory limits
Reasons for regulation of insurance include which of the following?
I. Maintaining insurer solvency
II. Ensuring reasonable rates
Both I and II
The right of the states to regulate the business of insurance was first established by…
A. The South-Eastern Underwriters Associations case
B. The case of Paul v. Virginia
C. The Financial Modernization Act
D. The McCarran-Ferguson Act
B
An insurance company incorporated into another state has been licensed to operate in your state. In your state, the insurer would be considered a(n)…
A. Nonadmitted insurer
B. Foreign insurer
C. Alien insurer
D. Reciprocal insurer
B
Cathy is a life insurance agent. She was trying to sell a policy to Frank. In an effort to “close the deal,” Cathy offered to give Frank a share of her commissions if he purchased the policy. This practice, which is illegal in almost all states is called:
A. Collateral estoppel
B. Twisting
C. Rebating
D. Churning
C
From which section of an insurance contract could the following excerpt have been taken?
“The property is a wood frame building located at 852 Pine Street in Metro City. It was constructed in 1979 and is currently valued at $6,000. The building has smoke detectors and a sprinkler system.”
Declarations
From which section of an insurance contract could the following excerpt have been taken?
“If there has been a material increase in hazard or if the building is left vacant or unoccupied beyond 30 days, this coverage is suspended.”
Condition
From which section of an insurance contract could the following excerpt have been taken?
“We will not be responsible for losses that are intentionally caused….Nor will we be responsible for loss of money, stocks or bonds.”
Insuring Agreement
From which section of an insurance contract could the following excerpt have been taken?
“The policy covers direct physical damage to your property that is not specifically excluded.”
Exclusion
From which section of an insurance contract could the following excerpt have been taken?
“In this policy, an “occurrence” will mean a loss that develops over time as well as sudden and accidental losses”
Definition
From which section of an insurance contract could the following excerpt have been taken?
“If the insurer and the insured cannot agree on the value of the insured loss, each party will name an appraiser and the two appraisers will jointly name an umpire. A decision by any two of the three (appraisers and umpire) is binding upon the insured and the insurer.”
Miscellaneous Provision
What information is contained in the insuring agreement of an insurance policy?
A. A description of the property or life to be insured
B. A summary of the major promises of the insurer
C. A summary of the obligations of the insured
D. A list of the property, losses, and perils that are not covered
B
The exclusion of flood in a homeowner policy is an example of an…
A. Excluded activity
B. Excluded condition
C. Excluded property
D. Excluded peril
D
Which of the following statements about a calendar-year deductible is/are true?
I. It requires the insured to pay a specified amount of each claim regardless of when the claim occurs during the year and regardless of any previous claims during the year.
II. It is used only in policies which cover direct property losses
Neither I nor II
David owns a commercial building with a replacement cost of $4 million. The building is insured on a replacement cost basis for $2.4 million under a fire insurance policy that has an 80 percent coinsurance clause. How much will David collect if the building sustains a covered fire loss with a replacement cost of $80,000?
A. $50,000
B. $60,000
C. $66,667
D. $80,000
B
Which of the following types of families is likely to have the least need for a large amount of life insurance?
A. A blended family
B. A traditional family
C. A single person family
D. A sandwiched family
C
The human life value is defined as the
A. Present value of a deceased breadwinner’s future gross income.
B. Future value of a deceased breadwinner’s past earnings.
C. Present value of the family’s share of a deceased breadwinner’s future earnings.
D. Future value of the family’s share of a deceased breadwinner’s future earnings.
C
