Question 1

List some of the reasons why insurance companies engage in the reinsurance transaction.

Accepted Answer

Reasons for insurance companies engaging

Question 2

All the following are true about underwriting except:

Accepted Answer

A)  a major purpose of underwriting is to reduce adverse selection against the insurance company 
B)  fair rates should be charged so that each group of insureds is not subsidized by other groups 
C)  the underwriter should select only those insureds that are expected to have no losses 
D)  the underwriter makes decisions based on criteria established by the company management 
A)  a major purpose of underwriting is to reduce adverse selection against the insurance company 
B)  fair rates should be charged so that each group of insureds is not subsidized by other groups 
C)  the underwriter should select only those insureds that are expected to have no losses 
D)  the underwriter makes decisions based on criteria established by the company management

Question 3

ET Insurance Company cedes to MJ Insurance Company $60,000 of a $100,000 exposure on an excess of loss basis. A loss occurs for $60,000.

Accepted Answer

A)  MJ pays $36,000; ET pays $24,000. 
B)  MJ pays $20,000; ET pays $40,000. 
C)  MJ pays $40,000, ET pays $20,000. 
D)  MJ pays $30,000; ET pays $30,000. 
A)  MJ pays $36,000; ET pays $24,000. 
B)  MJ pays $20,000; ET pays $40,000. 
C)  MJ pays $40,000, ET pays $20,000. 
D)  MJ pays $30,000; ET pays $30,000.

Question 4

The insurance company accountant must apply what set of accounting principles when creating insurer financial statements for the state regulators?

Accepted Answer

A)  Generally Accepted Accounting Principles 
B)  Statutory Accounting Principles 
C)  International Accounting Standards Board Principles 
D)  Both A and B 
A)  Generally Accepted Accounting Principles 
B)  Statutory Accounting Principles 
C)  International Accounting Standards Board Principles 
D)  Both A and B

Question 5

An agency contract determines the rights and duties of both the agent and the insurer.

Accepted Answer

A) True 
 B)False

Question 6

In Jason's agency contract, the insurer authorizes him to sell insurance policies. What type of authority is this?

Accepted Answer

A)  Actual 
B)  Express 
C)  Incidental 
D)  Both A and B 
A)  Actual 
B)  Express 
C)  Incidental 
D)  Both A and B

Question 7

Direct writing:

Accepted Answer

A)  describes the distribution system used by independent agents and brokers in the property/liability area 
B)  is used only by life insurers 
C)  is an expensive way to distribute insurance to high income people 
D)  describes a system of insurance company distribution using employee/agents 
A)  describes the distribution system used by independent agents and brokers in the property/liability area 
B)  is used only by life insurers 
C)  is an expensive way to distribute insurance to high income people 
D)  describes a system of insurance company distribution using employee/agents

Question 8

Monah Lott is an agent for Mutual of Oregon Insurance. Monah has been strictly prohibited from accepting premium payments from his clients; they are instead supposed to remit payments directly to the insurer. Mutual of Oregon sends Venus Planet a renewal notice with a premium invoice, and nowhere on the invoice does it tell her that she cannot remit payment to her agent. To save herself a postage stamp, she drops the payment off at Monah's office. Monah accepts the payment, and puts it in her own account. When Mutual of Oregon does not receive Venus's premium, it sends her a cancellation notice. Before receiving her cancellation notice, she suffers a loss and expects Mutual of Oregon to pay her claim. What will likely happen in this scenario?

Accepted Answer

A)  Mutual of Oregon will likely have to pay the claim. 
B)  Mutual of Oregon will not have to pay the claim, but Monah Lott likely will. 
C)  Neither Mutual of Oregon, nor Monah Lott, will have to pay the claim. 
D)  The claim will be paid by the court, and it will then sue Mutual of Oregon. 
A)  Mutual of Oregon will likely have to pay the claim. 
B)  Mutual of Oregon will not have to pay the claim, but Monah Lott likely will. 
C)  Neither Mutual of Oregon, nor Monah Lott, will have to pay the claim. 
D)  The claim will be paid by the court, and it will then sue Mutual of Oregon.

Question 9

Pro-rata reinsurance:

Accepted Answer

A)  commits the reinsurer to pay part of a claim, but only after the primary insurer's coverage has been completely exhausted 
B)  is distinguished by very high retention amounts 
C)  means losses, premiums and expenses are divided proportionately by the primary insurer and the reinsurer 
D)  is only sold by alien reinsurers, and then only at very high rates 
A)  commits the reinsurer to pay part of a claim, but only after the primary insurer's coverage has been completely exhausted 
B)  is distinguished by very high retention amounts 
C)  means losses, premiums and expenses are divided proportionately by the primary insurer and the reinsurer 
D)  is only sold by alien reinsurers, and then only at very high rates

Question 10

Why is the power to bind life insurance contracts not given to agents?

Accepted Answer

A)  Agents are not capable of evaluating the risks they deal with 
B)  This restriction minimizes fraud and misunderstanding 
C)  Because the agents represent the insurance buyers and not the insurance companies 
D)  All of the above 
A)  Agents are not capable of evaluating the risks they deal with 
B)  This restriction minimizes fraud and misunderstanding 
C)  Because the agents represent the insurance buyers and not the insurance companies 
D)  All of the above

Question 11

Which of the following was not listed in the text as a duty of an agent?

Accepted Answer

A)  Loyalty to the principal 
B)  Carefully handling all money and keeping proper records 
C)  Carefully conveying all relevant information 
D)  Duty to select profitable business for carriers 
A)  Loyalty to the principal 
B)  Carefully handling all money and keeping proper records 
C)  Carefully conveying all relevant information 
D)  Duty to select profitable business for carriers

Question 12

The independent agency system:

Accepted Answer

A)  is doomed because agent's commissions are too high relative to direct writers 
B)  means the agent rather than the insurance company "owns" the business 
C)  is not a good career path for most college graduates because the system is doomed to extinction 
D)  is growing rapidly to the point of eliminating the direct writers 
A)  is doomed because agent's commissions are too high relative to direct writers 
B)  means the agent rather than the insurance company "owns" the business 
C)  is not a good career path for most college graduates because the system is doomed to extinction 
D)  is growing rapidly to the point of eliminating the direct writers

Question 13

Pro-rata reinsurance determines the reinsurer's share of losses in a different manner than excess of loss reinsurance.

Accepted Answer

A) True 
 B)False

Question 14

Many insurers sometimes use loss adjusters who are not employees of the company.

Accepted Answer

A) True 
 B)False

Question 15

In 2004, the attorney general of New York accused insurance brokers of:

Accepted Answer

A)  poor financial condition that could lead to insolvency 
B)  bid rigging 
C)  covering up investments in illegal securities 
D)  all of the above 
A)  poor financial condition that could lead to insolvency 
B)  bid rigging 
C)  covering up investments in illegal securities 
D)  all of the above

Question 16

Which of the following is not a duty of an insurance agent?

Accepted Answer

A)  Duty to make a profit in the long run for the insurance agency and the insurer 
B)  Carefully handling all money and keeping proper records 
C)  Carefully conveying all relevant information 
D)  Duty not to enrich himself by self-dealing at the principal's expense 
A)  Duty to make a profit in the long run for the insurance agency and the insurer 
B)  Carefully handling all money and keeping proper records 
C)  Carefully conveying all relevant information 
D)  Duty not to enrich himself by self-dealing at the principal's expense

Question 17

Consumers are not allowed to inspect their personal Medical Information Bureau files.

Accepted Answer

A) True 
 B)False

Question 18

Facultative reinsurance is:

Accepted Answer

A)  automatic, on a treaty basis 
B)  always revocable for first 30 days 
C)  arranged separately for each new exposure 
D)  placed with an alien insurer 
A)  automatic, on a treaty basis 
B)  always revocable for first 30 days 
C)  arranged separately for each new exposure 
D)  placed with an alien insurer

Question 19

Catastrophe reinsurance can be described as a form of excess of loss reinsurance.

Accepted Answer

A) True 
 B)False

Question 20

Insurance brokers are:

Accepted Answer

A)  compensated by a flat salary 
B)  legally, agents of the insurance company 
C)  only used in life insurance 
D)  legally, agents of the insurance consumer 
A)  compensated by a flat salary 
B)  legally, agents of the insurance company 
C)  only used in life insurance 
D)  legally, agents of the insurance consumer

Exam 8: Insurance Functions

List some of the reasons why insurance companies engage in the reinsurance transaction.

All the following are true about underwriting except:

ET Insurance Company cedes to MJ Insurance Company $60,000 of a $100,000 exposure on an excess of loss basis. A loss occurs for $60,000.

The insurance company accountant must apply what set of accounting principles when creating insurer financial statements for the state regulators?

An agency contract determines the rights and duties of both the agent and the insurer.

In Jason's agency contract, the insurer authorizes him to sell insurance policies. What type of authority is this?

Direct writing:

Pro-rata reinsurance:

Why is the power to bind life insurance contracts not given to agents?

Which of the following was not listed in the text as a duty of an agent?

The independent agency system:

Pro-rata reinsurance determines the reinsurer's share of losses in a different manner than excess of loss reinsurance.

Many insurers sometimes use loss adjusters who are not employees of the company.

In 2004, the attorney general of New York accused insurance brokers of:

Which of the following is not a duty of an insurance agent?

Consumers are not allowed to inspect their personal Medical Information Bureau files.

Facultative reinsurance is:

Catastrophe reinsurance can be described as a form of excess of loss reinsurance.

Insurance brokers are:

Introduction to Enterprise Risk Management and Insurance

Risk Identification

Risk Assessment and Pooling

Risk-Handling Techniques: Loss Control, Risk Transfer, and Loss Financing

Risk-Handling Techniques: Diversification and Hedging

Fundamentals of Insurance

Insurable Perils and Insuring Organizations

Insurance Markets: Economics and Issues

Insurance Regulation

Insurance Contracts

The Personal Auto Policy

Homeowners Insurance

Professional Financial Planning

Life Insurance Policies

Standard Life Insurance Contract Provisions and Options

Annuities

Health Insurance and Disability Income

Employee Benefits

Social Security

Unemployment and Workers Compensation Insurance

Commercial Property Insurance

Commercial Liability Insurance

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