Question 1

All of the following are reasons for a primary insurer to use reinsurance EXCEPT

Accepted Answer

A) to increase the unearned premium reserve. 
B) to increase underwriting capacity. 
C) to protect against catastrophic losses. 
D) to stabilize profits. 
A) to increase the unearned premium reserve. 
B) to increase underwriting capacity. 
C) to protect against catastrophic losses. 
D) to stabilize profits.

Question 2

Which of the following statements is (are)true with respect to catastrophe bonds?
I.The bonds are issued by the U.S.Government.
II.The bonds have relatively high interest (coupon)rates.

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II 
A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Question 3

Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance.Delta has a retention limit of $200,000,and nine lines of insurance are ceded to Eversafe.How much will Eversafe pay if a $1,600,000 building insured by Delta suffers an $800,000 loss?

Accepted Answer

A) $600,000 
B) $700,000 
C) $720,000 
D) $800,000 
A) $600,000 
B) $700,000 
C) $720,000 
D) $800,000

Question 4

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

Accepted Answer

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. 
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.

Question 5

New Liability Insurance Company began operations last year and has been very successful.The company's ability to grow is being restricted by an accounting rule that requires insurers to realize acquisition expenses immediately,while not realizing premiums received as income until some time has passed.Reinsurance is often used in such cases for which of the following purposes?

Accepted Answer

A) to stabilize profitability 
B) to reduce the unearned premium reserve 
C) to provide protection against catastrophic losses 
D) to withdraw from a line of business or territory 
A) to stabilize profitability 
B) to reduce the unearned premium reserve 
C) to provide protection against catastrophic losses 
D) to withdraw from a line of business or territory

Question 6

Which of the following statements about the investments of property and liability insurers is (are)true?
I.Income from investments is important in offsetting any unfavorable underwriting experience.
II.Because premium income is continually being received,the investment objective of liquidity is of little importance.

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II 
A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Question 7

The unearned premium reserve of an insurer is

Accepted Answer

A) an asset representing the investments made with premium income. 
B) a liability representing the unearned portion of gross premiums on outstanding policies. 
C) a liability representing claims that have been filed,but not yet paid. 
D) the portion of the insurer's net worth belonging to policyowners. 
A) an asset representing the investments made with premium income. 
B) a liability representing the unearned portion of gross premiums on outstanding policies. 
C) a liability representing claims that have been filed,but not yet paid. 
D) the portion of the insurer's net worth belonging to policyowners.

Question 8

One method through which reinsurance is provided is through an organization of insurers that underwrites insurance on a joint basis.Through the organization,financial capacity is available for large commercial risks.This reinsurance arrangement is a(n)

Accepted Answer

A) quota-share treaty. 
B) surplus-share treaty. 
C) excess-of-loss treaty. 
D) reinsurance pool. 
A) quota-share treaty. 
B) surplus-share treaty. 
C) excess-of-loss treaty. 
D) reinsurance pool.

Question 9

Which of the following statements about claims settlement is true?

Accepted Answer

A) Agents are never authorized to settle claims. 
B) Independent adjustors may be used in a geographic area where the volume of business is too low for an insurer to have its own adjustors. 
C) A public adjustor is a salaried employee who works for one insurer. 
D) A company adjustor is hired by a policyholder to represent him or her if the policyholder does not agree with the claim settlement offered by the insurer. 
A) Agents are never authorized to settle claims. 
B) Independent adjustors may be used in a geographic area where the volume of business is too low for an insurer to have its own adjustors. 
C) A public adjustor is a salaried employee who works for one insurer. 
D) A company adjustor is hired by a policyholder to represent him or her if the policyholder does not agree with the claim settlement offered by the insurer.

Question 10

Which of the following statements about adjustment bureaus is (are)true?
I.They are frequently used to settle claims when a large number of losses occur in a given geographic location as a result of a catastrophic event.
II.Their major advantage is low cost because of the use of part-time adjustors.

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II 
A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Question 11

Pac-Coast Insurance (PCI)concentrates its underwriting activities in California.The company is concerned that if a catastrophic earthquake occurs,it might threaten the solvency of the company.To address this risk,PCI issued some debt securities.If a catastrophic earthquake occurs,PCI does not have to repay the full amount borrowed or pay interest.The securities PCI issued are called

Accepted Answer

A) catastrophe futures contracts. 
B) interest rate swaps. 
C) catastrophe bonds. 
D) contingent options contracts. 
A) catastrophe futures contracts. 
B) interest rate swaps. 
C) catastrophe bonds. 
D) contingent options contracts.

Question 12

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.

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II 
A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Question 13

Amy heads the legal staff of a large property and liability insurance company.Amy's staff is likely involved in which of the following activities?

Accepted Answer

A) reviewing investment options for the insurer's assets 
B) reviewing language and policy provisions in insurance contracts 
C) calculating premiums to be charged for the insurer's products 
D) reviewing applications to determine if the company should insure the risk 
A) reviewing investment options for the insurer's assets 
B) reviewing language and policy provisions in insurance contracts 
C) calculating premiums to be charged for the insurer's products 
D) reviewing applications to determine if the company should insure the risk

Question 14

If an underwriter suspects moral hazard,the underwriter may ask an outside firm to investigate the applicant and make a detailed report to the insurer.This report is called a(n)

Accepted Answer

A) inspection report. 
B) application. 
C) M)I.B.report. 
D) agent's report. 
A) inspection report. 
B) application. 
C) M)I.B.report. 
D) agent's report.

Question 15

Which of the following statements is true regarding the information systems functional area of an insurance company?
I.Computers and information systems are able to perform some tasks that previously were performed directly by employees.
II.Information systems can speed the processing of policies by insurers.

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II 
A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Question 16

All of the following are methods that a property and liability insurance company can use to protect against catastrophic losses EXCEPT

Accepted Answer

A) sale of catastrophe bonds. 
B) purchase of common stock. 
C) purchase of excess-of-loss reinsurance. 
D) quota share reinsurance with a low retention percentage. 
A) sale of catastrophe bonds. 
B) purchase of common stock. 
C) purchase of excess-of-loss reinsurance. 
D) quota share reinsurance with a low retention percentage.

Question 17

One source of life and health insurance underwriting information is an organization that life and health insurance companies can join.As a member,life and health insurance companies report health impairments of applicants,and this information is shared with member companies.Although the information is shared,the underwriting decision of the member company is not disclosed.What is this organization called?

Accepted Answer

A) Fair Isaac Corporation (FICO) 
B) Medical Information Bureau (MI
B)  
C) National Association of Insurance Commissioners (NAI
C)  
D) National Association of Mutual Insurance Companies (NAMI
C)  
A) Fair Isaac Corporation (FICO) 
B) Medical Information Bureau (MI
B)  
C) National Association of Insurance Commissioners (NAI
C)  
D) National Association of Mutual Insurance Companies (NAMI
C)

Question 18

Huge Insurance Company is a property insurer that is interested in protecting itself against cumulative losses that exceed $200 million during the year.This protection can best be obtained using a(n)

Accepted Answer

A) quota-share reinsurance treaty. 
B) surplus-share reinsurance treaty. 
C) excess-of-loss reinsurance treaty. 
D) reinsurance pool. 
A) quota-share reinsurance treaty. 
B) surplus-share reinsurance treaty. 
C) excess-of-loss reinsurance treaty. 
D) reinsurance pool.

Question 19

Gwen is in charge of accounting at Integrity Insurance Company.Integrity is a publicly-traded insurer.In describing her job,Gwen said,"There aren't too many businesses where you are required to keep two sets of book." Gwen's comment most likely refers to her company

Accepted Answer

A) preparing accounting statements using statutory and GAAP accounting. 
B) preparing one set of records for the insurer's managers and another set for the policyholders. 
C) preparing one set of books using dishonest values and another set using current market values. 
D) preparing one set of accounting statements considering investment income and another set of accounting statements not considering investment income. 
A) preparing accounting statements using statutory and GAAP accounting. 
B) preparing one set of records for the insurer's managers and another set for the policyholders. 
C) preparing one set of books using dishonest values and another set using current market values. 
D) preparing one set of accounting statements considering investment income and another set of accounting statements not considering investment income.

Question 20

Which of the following statements about underwriting policy is (are)true?
I.A company must establish an underwriting policy consistent with company objectives.
II.Underwriting policy is usually subjective and allows the underwriter considerable flexibility with respect to lines written and forms used.

Accepted Answer

A) I only 
B) II only 
C) both I and II 
D) neither I nor II 
A) I only 
B) II only 
C) both I and II 
D) neither I nor II

Exam 6: Insurance Company Operations

All of the following are reasons for a primary insurer to use reinsurance EXCEPT

Which of the following statements is (are)true with respect to catastrophe bonds? I.The bonds are issued by the U.S.Government. II.The bonds have relatively high interest (coupon)rates.

Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance.Delta has a retention limit of $200,000,and nine lines of insurance are ceded to Eversafe.How much will Eversafe pay if a $1,600,000 building insured by Delta suffers an $800,000 loss?

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

The unearned premium reserve of an insurer is

One method through which reinsurance is provided is through an organization of insurers that underwrites insurance on a joint basis.Through the organization,financial capacity is available for large commercial risks.This reinsurance arrangement is a(n)

Which of the following statements about claims settlement is true?

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.

Amy heads the legal staff of a large property and liability insurance company.Amy's staff is likely involved in which of the following activities?

If an underwriter suspects moral hazard,the underwriter may ask an outside firm to investigate the applicant and make a detailed report to the insurer.This report is called a(n)

All of the following are methods that a property and liability insurance company can use to protect against catastrophic losses EXCEPT

Huge Insurance Company is a property insurer that is interested in protecting itself against cumulative losses that exceed $200 million during the year.This protection can best be obtained using a(n)

Gwen is in charge of accounting at Integrity Insurance Company.Integrity is a publicly-traded insurer.In describing her job,Gwen said,"There aren't too many businesses where you are required to keep two sets of book." Gwen's comment most likely refers to her company

Risk and Its Treatment

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