Ins 21

Chapter 1 QUESTION 0
Within the realm of Risk Management, insurance is a technique that is often used
. When insurance is used it is
primarily attempting to
a. Isolate the cost of losses.
b. Prevent the cost of losses.
c. Reduce the cost of losses.
d. Transfer the cost of losses.
ANSWER D
QUESTION
When insurance is used to transfer possible losses to the insurer, the vehicle t
hat accomplishes this transfer is the
a. Policy.
b. Agent.
c. Letter of transfer.
d. Broker of record letter.
ANSWER A
QUESTION
An insurance policy is a contract that states the rights and duties of
a. The insured and insurer and agent.
b. The insured and the insurer.
c. The insured and the agent.
d. The insured and other third parties.
ANSWER B
QUESTION Transferring the costs of losses to an insurer would be unnecessary, if
there were no
a. Exposures to loss.
b. Civil courts.
c. Agents.
d. Reinsurance.
ANSWER A
QUESTION
Making a profit for the insurance company is a major objective for which one of
the following departments?
a. Underwriting department
b. Finance department
c. Marketing department
d. Claims department
ANSWER A
QUESTION
An insurance company pays for covered losses and, in effect, distributes the cos
ts of losses among all
a. Insurers in a state.
b. Insureds.
c. Members of society.
d. Claimants.
ANSWER B
QUESTION
All of the following statements regarding loss exposures are true, EXCEPT:
a. There would be no need to transfer the costs of losses if there were no expos
ures to loss. b. For a loss exposure
to exist, there must be the possibility of a loss.
c. It is necessary for a loss to occur for a loss exposure to exist. d. Every ho
me has a fire loss exposure.
ANSWER C QUESTION
The law of large numbers is a mathematical principle that states that as the num
ber of similar but independent
exposure units increases, the relative
a. Accuracy of predictions about future outcomes decreases.
b. Accuracy of predictions about future outcomes increases.
c. Frequency of predictions about future outcomes decreases.
d. Frequency of predictions about future outcomes increases.
ANSWER B
QUESTION
In order for the law of large numbers to operate, insurance companies need to in
sure
a. A large number of similar exposure units.
b. Exposure units that are widely dispersed.
c. Exposure units that have not had losses.
d. A large number of unique exposure units.
ANSWER A
QUESTION
What states that as the number of similar but independent units increases, the r
elative accuracy of predictions
about future outcomes based on these exposure units also increases?
a. The principle of indemnity
b. The principle of reciprocal pricing
c. Loss trending and forecasting
d. The law of large numbers
ANSWER D
QUESTION
John has worked for Alloto, Inc. for 25 years and is considering retiring within
the next two years. John's
retirement is an example of
a. A personnel loss exposure for Alloto, Inc.
b. A human loss exposure for Alloto, Inc.
c. A liability loss exposure for Alloto, Inc.
d. A loss transfer loss exposure for Alloto, Inc.
ANSWER A
QUESTION
Pam operates a home business that requires her clients to come to her house. The
possibility of one of Pam's
clients tripping on a step leading to Pam's house and injuring herself is a
a. Property loss exposure.
b. Liability loss exposure.
c. Personnel loss exposure.
d. Human loss exposure.
ANSWER B
QUESTION
The possibility of Chuck's house being damaged by fire is
a. A property loss exposure relating to real property.
b. A property loss exposure relating to personal property.
c. A noninsurable loss exposure.
d. A commercial loss exposure. ANSWER A OBJECTIVE 4

QUESTION
All of the following are characteristics of ideally insurable loss exposures, EX
CEPT:
a. Losses that are definite and measurable
b. Losses that are accidental
c. Large number of similar exposure units
d. Large concentration of financial capacity
ANSWER D
QUESTION
Which one of the following is most likely to have the characteristics of an idea
lly insurable loss exposure?
a. Explosion of an industrial factory steam boiler
b. Sun damage to an exterior paint finish
c. Physical damage to a lunar land rover
d. Termite damage to a home
ANSWER A
QUESTION
One of the major reasons why government insurance programs exist is because the
insurance may
a. Not be available from private insurers.
b. Be too complicated for private insurers to write.
c. Not be allowed to be written by private insurers.d. Be a significant source o
f revenue for the government.
ANSWER A
( pp. 1.11-1.12) QUESTION
All of the following are types of insurance provided by the federal government,
EXCEPT:
a. Flood insurance
b. Crop insurance
c. Tenants insurance
d. Social Security
ANSWER C
( p. 1.11) QUESTION
Government insurance programs exist because
a. The government has expertise in handling insurance claims.
b. The government has the necessary financial resources.
c. The government has infrastructure and staff to provide insurance.
d. The government has legal representatives in every state of the union.
ANSWER B ( p. 1.11)
OBJECTIVE 6
QUESTION
The department in an insurance company that is primarily concerned with determin
ing customer's needs and
then promoting products/services to meet those needs is the
a. Customer service department.
b. Underwriting department.
c. Public relations department.
d. Marketing department.
ANSWER D

What is the process by which insurers decide which potential customers to insure
and what coverage to offer
them?
a. Reinsuring
b. Marketing
c. Prospecting
d. Underwriting
ANSWER D
( p. 1.13) OBJECTIVE 7
QUESTION
The primary reason why insurance regulators monitor the financial condition of i
nsurers is to prevent
a. Poor customer service.
b. Unfair competition.
c. Increased Premiums.
d. Insolvency.
ANSWER D
( p. 1.14) QUESTION
All of the following are ways that state insurance departments regulate and prot
ect consumers, EXCEPT:
a. Insurers must maintain a certain ratio of agents to residents in an area
b. Insurers must be licensed to write insurance policies in a given state
c. Insurers must meet certain tests of financial strength
d. Insurers must comply with laws on marketing, underwriting, and claims practic
es
ANSWER A
QUESTION
In insurance, the term that means restoring a party who has had a covered loss t
o the same financial position that
the party held before the loss occurred is
a. Subrogate.
b. Recoup.
c. Indemnify.
d. Rectify.
ANSWER C
( p. 1.15) QUESTION
Joan Appleton has purchased a new car, and when registering her vehicle, she is
told that she must provide
proof of liability insurance. Which one of the following benefits of insurance a
pplies to Joan's situation?
a. Support for credit
b. Satisfaction of legal requirements
c. Efficient use of resources
d. Reduction of social burdens
ANSWER B
( p. 1.17) OBJECTIVE 9 QUESTION One of the costs of insurance is said to be oppo
rtunity costs. This means that if capital and labor
were not being used in the insurance business, they could be used elsewhere and
making other productive
contributions to
a. Society.
b. The insurance industry.
c. The agency system.
d. Government.
ANSWER A
( p. 1.18) QUESTION
Sometimes the existence of insurance encourages losses. The result of this pheno
menon is that it
a. Increases competition in the industry.
b. Reduces agents' commissions.
c. Increases the total cost of insurance.
d. Reduces the term of many policies.
ANSWER C
The direct and indirect costs of insurance include which of the following?
a. Premiums paid by insureds
b. Increased lawsuits
c. Operating costs of insurers
d. All of the above
ANSWER D
QUESTION
Another name for liability insurance is
a. First party insurance.
b. Second party insurance.
c. Third party insurance.
d. Multiple party insurance.
ANSWER C
All of the following are types of property insurance, EXCEPT:
a. Fire and allied lines
b. Crime
c. Business income
d. Directors and officers
ANSWER D
( p. 1.20) QUESTION
Willie's floral shop was damaged by fire and the business was closed for six mon
ths. Willie had property
insurance to cover the fire damage, but which one of the following types of cove
rage did he need to cover his loss
of net income during the six-month restoration period?
a. Crime insurance
b. Fire and allied line insurance
c. Business income insurance
d. Leasehold insurance
ANSWER C ( p. 1.21) OBJECTIVE 11

QUESTION
A small business owner concerned about something happening and not being able to
work or earn a living for an
extended period of time should purchase
a. Personal liability insurance.
b. Medical insurance.
c. Disability insurance.
d. Universal life insurance.
ANSWER C
Term life insurance
a. Provides lifetime protection.
b. Accrues a cash value.
c. Provides maximum protection for the lowest cost.
d. Allows the policyholder to borrow against policy savings.
ANSWER C
( p. 1.23) QUESTION
Whole life insurance
a. Provides coverage for a specified period such as 5 or 10 years.
b. Lapses when the policyholder reaches age 65.
c. Is primarily an investment vehicle.
d. Accrues a cash value.
ANSWER D ( p. 1.23)
OBJECTIVE 12
QUESTION
Any condition or situation that presents the possibility of a financial loss to
an individual or a family by such
causes as death, sickness, or injury is referred to as a
a. Personal loss exposure.
b. Personnel loss exposure.
c. Liability loss exposure.
d. Medical loss exposure.
ANSWER A
( pp. 1.7) QUESTION
To restore a party who has sustained a loss to the same financial position that
party held before the loss occurred
is called
a. Reciprocity.
b. Reimbursement.
c. Insurance.
d. Indemnification.
ANSWER D
( p. 1.15) QUESTION Life insurance that provides coverage for a specified period
with no cash value is called
a. Universal life.
b. Term insurance.
c. Whole life.
d. Long-term care insurance.
ANSWER B
( p. 1.23) Chapter 2 QUESTION All of the following are types of private insurers
, EXCEPT: a. Stock insurers
b. Mutual insurers
c. Participating insurance consortiums
d. Reciprocal insurance exchanges
ANSWER C ( p. 2.4) QUESTION A mutual insurance company is owned by a. Independen
t investors.
b. Policyholders.
c. State insurance departments.
d. Mutual funds.
ANSWER B ( p. 2.6) QUESTION Which one of the following describes the characteris
tics of a mutual insurance company? a. A corporation owned by stockholders that
earns profits for the stockholders.
b. An unincorporated association that provides reciprocal coverage to subscriber
s.
c. A corporation owned by policyholders that provides insurance to its policyhol
ders.
d. An unincorporated association that earns profits for its individual investors
.
ANSWER C ( p. 2.6) QUESTION How does a stock insurance insurer differ from a rec
iprocal insurance exchange? a. Stockholders own a stock company.
Subscribers own a reciprocal insurance exchange .
b. A stock company provides insurance to its policyholder-owners. A reciprocal i
nsurance provides insurance to
investors.
c. Each is owned by stockholders; however, the reciprocal insurance exchange pro
vides coverage to investors.
d. Each is formed to provide profit to investors; however, the stock insurer is
managed through a board of
directors.
ANSWER A ( pp. 2.4-2.5) QUESTION A reinsurance company a. Is formed to write all

or part of the insurance for a parent company.
b. Provides insurance for loss exposures that private insurers are unwilling to
provide.
c. Transfers losses to a primary insurer.
d. Accepts loss exposures from a primary insurer.
ANSWER D ( p. 2.9) OBJECTIVE 1
QUESTION
One of the unique characteristics of the Social Security program is that it
a. Is free.
b. Requires mandatory participation.
c. Is administered by the state governments.
d. Is available to all regardless of eligibility.
ANSWER B ( p. 2.10) QUESTION The four types of benefits included in the federal
Social Security program are a. Retirement, portfolio protection, disability, and
medical benefits.
b. Retirement, survivorship, unemployment, and medical benefits.
c. Retirement, unemployment, disability, and medical benefits.
d. Retirement, survivorship, disability, and medical benefits.
ANSWER D ( p. 2.10) QUESTION Mandatory participation in the Social Security prog
ram for those eligible eliminates the need for a. Individual underwriting.
b. Premiums.
c. Scheduled benefits.
d. Occasional increases in benefits.
ANSWER A ( p. 2.10) QUESTION
Some federal government insurance programs provide coverage for loss exposures t
hat private insurers have
avoided largely because of the potential for catastrophic losses. An example of
such a program is
a. Workers compensation insurance funds

b. Unemployment insurance programs
c. Automobile insurance plans
d. The National Flood Insurance Program
QUESTION
One of the main reasons why private insurers have largely avoided writing such c
overage as flood and crop
insurance is due to the potential for
a. Speculative losses.
b. Fraudulent losses.
c. Catastrophic losses.
d. Difficulty in valuing losses.
ANSWER C ( p. 2.10) QUESTION Private insurers are reluctant to provide coverage
for flood and crop losses due to the a. Concentration of exposure units.
b. Large number of exposure units.
c. Variety of exposure units.
d. Dispersion of exposure units.
ANSWER A ( p. 2.10) OBJECTIVE 3
QUESTION
In some states the only source for workers' compensation insurance is through th
e state. This is an example of a
a. Residual state fund.
b. Unilateral state fund.
c. Monopolistic state fund.
d. Competitive state fund.
ANSWER C ( p. 2.11) QUESTION Unemployment insurance programs are operated by a.
Federal government.
b. Local governments.
c. State governments.
d. Private insurers.
ANSWER C ( p. 2.10) QUESTION

Programs that make workers' compensation insurance available to those who cannot
obtain voluntary coverage
through private insurers is called a
a. Residual market plan.
b. Rating bureau plan.
c. Revolving market plan.
d. Recessive market plan.
QUESTION
The National Association of Insurance Commissioners (NAIC) has identified a prob
lem that affects all states.
Unscrupulous auto body shops are:
Hiring thieves to steal cars, cross state lines, and deliver the stolen vehicles
to the shops
Insuring the vehicles and later claiming they are stolen
Changing the vehicle identification number (serial number)
Reselling the vehicles
The NAIC would like to address these issues uniformly across the United States b
y introducing tough laws to punish the body shops for claim fraud, but the NAIC
members recognize that there are significant differences from one state to the n
ext.
How can the NAIC address the problem? a. Develop a Model Bill for the proposed s
olution and distribute it to the states for possible enactment.
b. Require each state insurance commissioner to draft a proposed solution to the
problem tailored to his or her
state.
c. Draft a federal bill and lobby for legislative action to address the problem
uniformly.
d. Circulate a petition among all state legislators to join in a countrywide cam
paign to pass tough laws in each
state.
ANSWER A ( pp. 2.13-2.14) QUESTION
The National Association of Insurance Commissioners (NAIC) created a uniform fin
ancial statement for property
and liability insurance companies. The purpose of the uniform statement is to
a. Ensure that state insurance departments not mistake these companies for life
insurers.
b. Provide accounting expertise for those state insurance departments that do no
t have staff actuaries.
c. Simplify the state insurance department's task of comparing the financial rep
orts of many different insurers.
d. Capture the essential criteria required for rate regulation.
ANSWER C ( pp. 2.13-2.14) OBJECTIVE 5

QUESTION
The figure that is multiplied by the exposure unit(s) for insurance coverage is
called the
a. Premium base.
b. Expense factor.
c. Modifier.
d. Rate.
ANSWER D ( pp. 2.14-2.15) QUESTION The formula for determining an insurance prem
ium is a. Rate x Number of exposure units = Premium.
b. Rate % Number of exposure units = Premium.
c. Loss costs x Inflation factor = Premium.
d. Loss costs % Inflation factor = Premium.
ANSWER A ( pp. 2.14-2.15) QUESTION The individuals who are responsible for devel
oping insurance rates are called a. Raters.
b. Underwriters.
c. Actuaries.
d. Statisticians.
QUESTION
State insurance departments regulate insurance rates to protect consumers agains
t rates that are all of the
following, EXCEPT:
a. Excessive
b. Inadequate
c. Class specific
d. Unfairly discriminatory
ANSWER C ( p. 2.15)
QUESTION Why would insurance regulators have a goal of assuring that the premium
s charged by insurers are adequate? a. To maintain insurer solvency
b. To eliminate the potential of a monopoly
c. To protect consumers from high insurance rates
d. To promote equity among insurers
An automobile insurance policyholder has complained that her insurance premium i
s higher than her neighbor's
premium. Both the policyholder and her neighbor have insurance with the same com
pany, and they have
identical vehicles.
The policyholder feels that she is the subject of unfair discrimination. As the
policyholder's agent, you know the
policyholder has been responsible for several small auto accidents. The policyho
lder has mentioned that her
neighbor has had no accidents or violations in the last three years.
You must explain to the policyholder the objective of rate regulation ensuring t
hat rates are not unfairly discriminatory, as it applies in her case. Which one
of the following is an accurate explanation? a. Insureds with similar characteri
stics are usually placed in the same class and charged the same rate unless
social equity required modification in that rate structure. This has probably oc
curred in your situation.
b. Insureds with similar characteristics are placed in the same class and charge
d the same rate. However, your
accidents have probably placed you in a different classification. Your premium i
s based on the loss experience for
policyholders in your classification.
c. Your neighbor has probably received a credit based on the length of time he h
as had his policy with the
company. This is not unfairly discriminatory because it is available to all poli
cyholders over time.
d. Your neighbor has been placed in a preferred category of policyholders, which
gives him rights and privileges
that you do not have. Your neighbor has been given a rate reduction based on exc
ess profits that have been
returned to policyholders.
ANSWER B ( pp. 2.15-2.16) QUESTION
A ratemaking concept in which rates are based on calculated loss experience and
insureds with similar
characteristics are placed in the same rating class is called
a. Unfair discrimination.
b. Premium differential.
c. Actuarial equity.
d. Social equity.
The type of insurance rating law that requires rate approval by the state insura
nce department before the rates
can be used is
a. Flex rating law.

b. Open competition law.
c. File-and-use law.
d. Prior-approval law.
QUESTION
Most insurers would probably favor which one of the following rating laws?
a. Prior-approval
b. Flex
c. Use-and-file
d. Open competition
ANSWER D ( p. 2.17) QUESTION Under a flex rating law, prior approval is required
only if the new rates a. Are a specified percentage above or below previously f
iled rates.
b. Are a specified percentage above previously filed rates.
c. Are a specified percentage above or below competitors' rates.
d. Are a specified percentage above statewide average filed rates.
ANSWER A ( p. 2.17) QUESTION Sometimes the state insurance department establishe
s rates that all insurers must adhere to. This is referred to as a. Compulsory i
nsurance.
b. State-mandated rates.
c. Modified prior approval.
d. Closed competition.
ANSWER B ( p. 2.17) OBJECTIVE 8
QUESTION
One of the methods used by regulators to ensure insurance company solvency is th
rough the Insurance
Regulatory Information System (IRIS), which is
a. The licensing system required for insurance companies that transact business
in a state. b. The licensing process for alien insurers that are incorporated in
another country.
c. A periodic examination conducted by a team of state examiners, working at the
insurer's home office to review
activities including claims, underwriting, marketing, and accounting procedures.
d. A system that gathers data from insurers' financial statements and develops f
inancial ratios to determine an
insurer's overall financial condition.
QUESTION
Some communities in the United States celebrate holidays with firecrackers. Fire
cracker vendors erect stands in
the parking lot of shopping centers before the holidays. One shopping center own
er sponsoring a firecracker
vendor's booth found that his insurance did not cover the exposure. He found tha
t none of the insurers licensed
to do business in the state sold insurance coverage for the exposures.
How can the shopping center owner obtain appropriate coverage for the exposure f
rom the firecracker vendor's booth? a. By obtaining coverage through the excess
and surplus lines market.
b. By pooling the risk with other shopping center owners with similar exposures.
c. Through a proportionate sharing arrangement with multiple insurers.
d. From alien insurers in countries that also celebrate holidays with firecracke
rs.
ANSWER A ( pp. 2.21-2.22) QUESTION States regulate the excess and surplus lines
market by a. Establishing a monitoring board comprised of all insurers licensed
to do business in the state.
b. Examining the market conduct practices of the unlicensed insurers.
c. Licensing the excess and surplus lines brokers that transact business with th
e unlicensed insurers.
d. Approving the policy forms and rates used by the unlicensed insurers.
QUESTION
A contractual agreement that transfers all or some of the potential loss exposur
es from one insurer to another is
called
a. Coinsurance.
b. Reinsurance.
c. Third-party insurance.
d. Excess insurance.
ANSWER B ( p. 2.9)
QUESTION The National Association of Insurance Commissioners (NAIC) was establis
hed to encourage a. Coordination and cooperation.
b. Competition and cooperation.
c. Coordination and research.
d. Competition and uniformity.
Some classes of business present unusual or unique exposures or requires unusual
ly broad coverage. This
nontraditional market is known as
a. Excess and supplementary lines.
b. Primary and excess lines
c. Excess and surplus lines.
d. Primary and residual lines.
ANSWER C ( p. 2.21) Chapter 3 --------------------------------------------------
-------------------------- Please refer the following 'Case Study' with appropri
ate Questions and Answers: -----------------------------------------------------
-----------------------
CASE: Mammoth Insurance Co
Mid-State Painting Company owns vans, trucks, and cars that carry workers,
supplies, and equipment to worksites. On November 1, Mammoth Insurance
Company issued a business auto policy with a one-year period to Mid-State
Painting Company. The premium for the policy is $24,000.
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CASE: Hometown Insurer
The financial report for Hometown Insurer contains the following information:
Earned premiums $4,000,000
Written premiums $5,000,000
Investment income $1,000,000
Incurred Losses $3,000,000
Incurred underwriting expense $2,000,000
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OBJECTIVE 0
QUESTION
What was the written premium for Mid-State Painting Company's business auto poli
cy as of December 31?
a. $4,000
b. $6,000
c. $20,000
d. $24,000
ANSWER D ( pp. 3.3-3.4) QUESTION What was the unearned premium for Mid-State Pai
nting Company's business auto policy as of December 31? a. $4,000
b. $6,000
c. $20,000
d. $24,000
QUESTION
Brown Insurance Company has the following expenses:
Licenses, taxes, and fees $70,000
Claim staff salaries $100,000
Agents' commissions $200,000
Advertising costs $50,000
Rent and utilities $60,000
What is the amount of Brown Insurance Company's acquisition expenses? a. $250,00
0
b. $300,000
c. $350,000
d. $450,000
ANSWER A ( p. 3.8) QUESTION Amounts designated by insurers to pay claims for los
ses that have already occurred are called a. Acquisition expenses.
b. Loss adjustment expenses.
c. Loss reserves.
d. Unearned premium reserves.
Which one of the following types of financial statements shows the financial pos
ition of an insurance company at
any particular time?
a. Income statement
b. Balance sheet
c. Sales report
d. Cash flow report
QUESTION
The formula for determining an insurer's net underwriting gain or loss is
a. Earned premiums - (losses and underwriting expenses.)
b. Written premiums - (losses and underwriting expenses.)
c. Earned premiums % (losses and underwriting expenses.)
d. Written premiums % (losses and underwriting expenses.)
ANSWER A ( p. 3.9) QUESTION Compared to net underwriting gain, an insurer's over
all gain or loss from operations gives a a. Distorted picture of an insurer's pr
ofitability.
b. Less complete picture of an insurer's profitability.
c. More complete picture of an insurer's profitability.
d. More conservative picture of an insurer's profitability.
The owners of an insurance company are entitled to the net income after all expe
nses are paid. Sometimes this is
paid as a dividend. The amount that is left after all dividends are paid becomes
an addition to the insurer' s
a. Surplus.
b. Non-admitted assets.
c. Reinsurance recoverable account.
d. Dividend account.
ANSWER A ( p. 3.9) QUESTION The creation of two categories of assets, admitted a
nd nonadmitted-reflects the a. Creative nature of insurance accounting.
b. Conservative nature of insurance accounting.
c. Consistent nature of insurance accounting.
d. Collaborative nature of insurance accounting.

QUESTION
Admitted assets are types of property that regulators allow insurers to show as
assets on their financial
statements because they are
a. Very stable in value.
b. Never subject to decreases in value.
c. Generally increasing in value.
d. Easily converted to cash.
ANSWER D ( p. 3.11) QUESTION World Insurance Company has the following assets: C
ash $ 50,000
Stocks $ 400,000
Bonds $ 200,000
Real Estate $ 500,000
Furniture and office equipment $ 70,000
Premium balance due in less than 90 days $ 20,000
Premium overdue more than 90 days $ 10,000
What is the amount of World's total admitted assets? a. $450,000
b. $650,000
c. $1,170,000
d. $1,250,000
QUESTION
Loss reserves are often the largest liability on an insurer's balance sheet. The
loss reserve include
a. All loss amounts paid that year.
b. Claim expenses paid for that year.
c. Unpaid loss amounts for claims not yet settled.
d. All claims paid, excluding expenses not yet settled.
ANSWER C ( p. 3.12) QUESTION The financial report for Apex Insurers contains the
following information:
Admitted assets $500,000
Unadmitted assets $400,000
Liabilities $300,000
What is the amount of Apex Insurers' policyholders surplus? a. $100,000
b. $200,000
c. $400,000
d. $600,000
QUESTION
The balance sheet shows an insurer's financial position
a. At a particular point in time.
b. For a particular period of time.
c. Based upon revenues versus expenses.
d. Based upon assets minus expenses.
ANSWER A ( p. 3.14) QUESTION A insurer's balance sheet can best be described as
a. A relationship between revenue and liabilities.
b. An estimate of its financial position.
c. A summary of premiums written.
d. A snapshot of its financial position.
ANSWER D ( p. 3.14) QUESTION An insurer's income statement shows amounts for all
of the following for a particular period, EXCEPT: a. Earned premiums
b. Policyholders surplus
c. Incurred losses
d. Underwriting expenses
ANSWER B ( p. 3.15) OBJECTIVE 6 QUESTION
A insurer's income statement can best be described as a financial statement that
shows a. Relationship between revenue and liabilities.
b. Relationship between assets and income.
c. Relationship between revenues, expenses, and net income.
d. Relationship between revenues and incurred losses.
If an insurer's admitted assets stayed the same but its liabilities increased si
gnificantly, its policyholders' surplus
would
a. Stay the same.
b. Increase.
c. Decrease
d. Can' t determine.
INS Insurer's earned premiums are $1,800,000 for the year. Its losses and expens
es are $1,730,000. What type of
financial performance did INS Insurer experience for the year?
a. A net operating gain of $70,000
b. A net underwriting gain of $70,000
c. A net operating loss of $1,730,000
d. A net operating gain of $1,800,000
ANSWER B ( p. 3.15) QUESTION All of the following parties are likely to monitor
an insurer's financial performance, EXCEPT: a. Regulators
b. Agents
c. Claimants
d. Shareholders
QUESTION
What is Hometown Insurer's loss ratio?
a. 20%
b. 30%
c. 50%
d. 75%
ANSWER D ( p. 3.16) QUESTION What is Hometown Insurer's expense ratio? a. 20%
b. 40%
c. 50%
d. 75%
ANSWER B ( p. 3.16) QUESTION What is Hometown Insurer's combined ratio? a. 75% b
. 95%
c. 105%
d. 115%
ANSWER D ( p. 3.17) QUESTION What is Hometown Insurer's investment income ratio?
a. 10%
b. 20%
c. 25%
d. 50%
ANSWER C ( p. 3.18) QUESTION What is Hometown Insurer's overall operating ratio?
a. 75%
b. 90%
c. 105%
d. 115%
ANSWER B
( p. 3.18) QUESTION A decrease in incurred losses will generally cause a decreas
e in all of the following, EXCEPT: a. Combined ratio
b. Expense ratio
c. Overall ratio
d. Loss ratio
ANSWER B ( pp. 3.16-3.17) OBJECTIVE 8
QUESTION
The capacity ratio compares an insurer's written premiums to its
a. Total liabilities.
b. Admitted assets.
c. Policyholders' surplus.
d. Earned premiums.
Old Faithful Insurer has written premiums of $1,400,000 and policyholders' surpl
us of $400,000. What does the
capacity ratio indicate about Old Faithful Insurer?
a. Financial weakness
b. Financial strength
c. Operating strength
d. Operating weakness
QUESTION
The liability that represents insurance premiums that are prepaid for service th
at the insurer has not yet rendered
is the
a. Written premium reserve.
b. Estimated premium reserve.
c. Projected premium reserve.
d. Unearned premium reserve.
ANSWER D ( p. 3.12)
QUESTION Comparing an insurer's incurred losses to its earned premiums will dete
rmine its a. Loss ratio.
b. Expense ratio.
c. Operating ratio.
d. Combined ratio.
ANSWER A ( p. 3.16) INS 21 Questions Answers Materials Dumps Chapter 4 QUESTION
Principals often authorize another party to act on their behalf. This relationsh
ip is called a. Broker.
b. Fiduciary.
c. Agency.
d. Attorney in fact.
ANSWER C ( p. 4.3) QUESTION When an agency relationship is created between a pri
ncipal and the agent, it requires a high degree of a. Trust.
b. Patience.
c. Oversight.
d. Creativity.
ANSWER A ( p. 4.3) QUESTION When an insurer appoints an agent to act its behalf,
the agent's scope of authority is spelled out in the a. Broker of record letter
.
b. Insurance contract.
c. Agency contract.
d. Letter of intent.
ANSWER C ( p. 4.4) QUESTION All of the following are true about the insurance ag
ency relationship, EXCEPT: a. The agency agreement is a written agreement betwee
n the insurer and an agent
b. The agency agreement gives the agent the right to represent the insurer and s
ell insurance on the insurer's
behalf
c. The principal is the party the agent authorizes to bind coverage
d. The agent is the party authorized by the principal to act on the principal's
behalf
ANSWER C ( p. 4.3) QUESTION Which one of the following statements is true regard
ing the agency contract? a. The agent is the principal in the agency contract re
lationship.
b. An agency contract is also known as an agency endowment.
c. Insurance agency contracts usually have a fixed expiration date.
d. The agency contract states the scope of the agency's authority to conduct bus
iness for the insurer.
QUESTION
In an insurance agency relationship, the agent's fundamental responsibility is t
o act for the benefit of the
a. Insured.
b. Insurer.
c. Broker.
d. Policyholder.
ANSWER B ( p. 4.4) QUESTION The primary duty of a principal to its agent is to a
. Pay the agent for services performed.
b. Generate sales leads for the agent.
c. Hire and train sales people.
d. Be obedient.
ANSWER A ( p. 4.5) QUESTION From an insured's point of view, relative to the con
cept of agency, little distinction exists between the a. Broker and the claimant
.
b. Insurance agent and the insurance department.
c. Broker and the insurer.
d. Insurance agent and the insurer.
ANSWER D ( p. 4.5) QUESTION The laws of agency impose all of the following speci
fic duties on agents, EXCEPT: a. Profitability
b. Obedience
c. Loyalty
d. Accounting
ANSWER A ( pp. 4.4-4.5) QUESTION The laws of agency impose all of the following
specific duties on all agents, EXCEPT: a. Prudence
b. Accounting
c. Loyalty
d. Relaying information
ANSWER A ( pp. 4.4-4.5) QUESTION Which one of the following is the principal's p
rimary duty to the agent? a. To pay the agent for services performed
b. To act as the agent's legal representative
c. To educate and train the agent
d. To act on behalf of the agent in court proceedings
QUESTION
The authority that the principal specifically grants to the agent is contained i
n the agency contract. This authority
is known as
a. Implied authority.
b. Apparent authority.
c. Express authority
d. Contractual authority.
The scope of an agent's authority can go beyond the terms of the agency contract
and may include authority to
perform other tasks necessary to accomplish the purpose of the agency relationsh
ip. This authority is referred to
as a. Implied authority.
An agent may at times act on behalf of the principal in ways that the principal
did not intend, and a third party
reasonably believes that the agent has sufficient authority. This authority is k
nown as
a. Implied authority.
ANSWER B ( p. 4.7) QUESTION The authority that the principal specifically grants
the agent is called a. Implied authority.
b. Express authority.
c. Apparent authority.
d. Conditional authority
When an insurance company appoints an insurance agent to serve as its representa
tive, what specifies the scope
of authority given to the agent in this relationship?
a. Implied authority
b. Binding authority
c. A unilateral contract
d. An agency contract
ANSWER D ( pp. 4.6-4.7) QUESTION Authority that the insurance company specifical
ly grants to an agent is called a. Binding authority
b. Express authority
c. Implied authority
d. Apparent authority

QUESTION
One of the main distinguishing features between independent agency systems and o
ther marketing systems is
the ownership of
a. The company expiration list.
b. Insurance company stock.
c. The sales prospecting list.
d. The agency expiration list.
ANSWER D ( p. 4.9) QUESTION An independent business owner or firm that sells ins
urance by representing customers rather than insurers is a. An insurance broker.
b. A managing general agency.
c. An exclusive agent.
d. A direct writer.
If a consumer or policyholder had a preference for dealing with sales representa
tives who are employees of the
insurer, which marketing system would they choose?
a. Insurance broker
b. Managing general agency
c. Exclusive agent
d. Direct writer
ANSWER D ( p. 4.11) QUESTION
An independent business owner or firm that sells insurance by representing custo
mers rather than insurance
companies is which one of the following?
a. An independent adjuster
b. An underwriter
c. An insurance broker
d. An insurance carrier
ANSWER C ( p. 4.10)
OBJECTIVE 4
QUESTION
Sometimes an agent may be eligible for a commission based on its premium volume
and profitability. This type
of compensation is called
a. A contingent commission.
b. A sales commission.
c. An indirect commission.
d. An annual commission.
Sometimes a policy is cancelled or non-renewed even though the agent was paid it
s commission. In these
situations the agent will be requested to return the
a. Earned commission.
b. Unearned commission.
c. Contingent commission.
d. Estimated commission.
ANSWER B ( p. 4.14) QUESTION At the end of the year, agencies that have carefull
y selected business throughout the year can earn a sizeable a. Contingent commis
sion.
b. Sales commission.
c. Indirect commission.
d. Annual commission.
For an independent agency or an exclusive agency, the percentage of the premium
that goes to the agency or to
the producer for new policies sold or existing policies renewed is the
a. Contingent commission
b. Profit sharing
c. Salary
d. Sales commission
ANSWER D ( pp. 4.14-4.15) QUESTION An independent agent received his monthly com
missions for the new policies he has sold. Even though he wrote
twenty new policies that month, his commission was low. Which one of the followi
ng explains why this could occur? a. Commissions are not fully earned at the tim
e of a sale. Other policies written by the agent might have been
cancelled with the unearned portion of the commission returned to the insurance
company.
b. The agent failed to provide the level of service required by the insurance co
mpany. The insurance commission
was reduced as an incentive for better performance.
c. The agent did not meet the premium volume and profitability levels that were
specified in his contract;
therefore, his commission was reduced.
d. The agent is a salaried employee of the insurance company and receives only c
ontingent commissions.
The managers of an independent agency are hoping to earn contingent commissions
from several insurers at the
end of the year. What should the agency managers attempt to do to earn contingen
t commissions?
a. Reduce the number of homeowners policies written for houses in urban areas co
mpared to the homeowners
policies written for houses in rural areas.
b. Reduce the number of employees required to acquire and service the policies i
n the agency.
c. Increase the premium volume and profitability level of the agency's business
with those insurers.
d. Increase the level of customer service provided to policyholders and claimant
s.
QUESTION
With respect to advertising, programs that emphasize the names of both the insur
er and the agent are typically
the
a. Agents' Trade Association.
b. Exclusive agency system.
c. Direct writing system.
d. Independent agency system.
ANSWER B ( p. 4.16) QUESTION Advertising by independent agencies promotes a. Bra
nd recognition of the companies represented.
b. The agency rather than the insurers it represents.
c. Symbols used to increase recognition of the insurers represented.
d. Attention to the prices of the policies offered.
ANSWER B ( pp. 4.15-4.16)
OBJECTIVE 6
QUESTION
An insurer using independent agents typically will employ which one of the follo
wing to supervise its
producers?
a. Marketing representative
b. Underwriter
c. Captive agent
d. Vice president of marketing
An insurer employee who works in the insurer's office in an underwriting positio
n but also travels to visit agents
and sometimes clients is called a
a. Production underwriter.
b. Special underwriter.
c. Agency underwriter.
d. Underwriting manager.
Large insurers who conduct business nationally or over a widespread geographic a
rea will often establish offices
close to producers' offices. Those larger offices that provide underwriting clai
ms and support are usually called
a. Brokers' offices.
b. Branch offices.
c. Home offices.
d. Specialty offices.
ANSWER B ( p. 4.17) QUESTION
Insurance companies attempt to motivate producers to sell the types of business
the companies want to acquire.
Which one of the following would motivate producers to sell the desired type of
business?
a. Reduce commissions if sales goals are not achieved.
b. Hold sales contests to encourage the type of sales activity.
c. Provide additional staff to help with the processing.
d. Offer subscriptions to educational services for the producers.
ANSWER B ( p. 4.18) OBJECTIVE 7 QUESTION
To function legally as an insurance agent, a producer must a. Be a college gradu
ate.
b. Be licensed by the state.
c. Work for an insurance company.
d. Have a valid drivers' license.
ANSWER B ( p. 4.19) QUESTION Once a state agent's license has been issued, the a
gent must seek to be appointed by one or more a. Insurers.
b. Brokers.
c. Trade associations.
d. Insurance departments.
Most states require that producers complete a specified number of hours of educa
tional study related to
insurance in order to renew their license. This is called the
a. Annual education requirement.
b. State education requirement.
c. Insurance education requirement.
d. Continuing education requirement.
QUESTION
Many states have adopted laws that specify certain prohibited business practices
that apply to insurance agents.
These laws are known as
a. Unfair insurer practices act laws.
b. Unfair producers' practices act laws.
c. Unfair trade practices act laws.
d. Unfair agents practices act laws.
Offering a cash payment or something of value to an applicant as an inducement t
o buy or maintain insurance is
called
a. Rebating.
b. Misrepresentation.
c. Tie-in.
d. Twisting.
It is an unfair trade practice for a lender to require that a borrower purchase
insurance from the lender or from
any insurance producer recommended by the lender. This practice is called
a. Misrepresentation.
b. Twisting.
c. A tie-in sale.
d. Rebating.
An insurance agent wrote insurance policies for a number of military service vet
erans who were satisfied with
the coverage they received and the price they paid for the coverage. Subsequentl
y, the agent ran an ad in a local
newspaper stating that the insurance policies offered by his agency are "Veteran
Approved Insurance."
Why would this be considered misrepresentation or false advertising? a. The stat
ement misrepresents the benefits, conditions, or terms of the insurance policies
.
b. The statement uses a name or title for the insurance policies that misreprese
nts the true nature of the policies.
c. The statement indicates that sales are tied to other benefits.
d. The statement makes an illegal reference to a government entity in an insuran
ce sale.
RipTide Insurance Company has formed an alliance with Local Bank and U-Betcha Us
ed Car Sales. When U-
Betcha sells a car, the sales person directs
the customer to Local Bank for the loan and RipTide for insurance. If the custom
er transacts business with all
three organizations, the customer will receive reduced auto rates.
Would this be considered to be an unfair trade practice by RipTide? a. Yes, it i
s an unfair trade practice to tie the purchase of insurance to some other sale o
r financial arrangement.
b. Yes, offering a preferred rate to a customer as described is considered to be
rebating.
c. No, businesses interact in this way as a regular practice.
d. No, this is not deceptive or unfair to the applicants or insureds.
ANSWER A ( p. 4.20)
CASE STUDY 2 : GhostWriter Publish
GhostWriter Publishing Company publishes romance novels. They purchase manuscrip
ts from freelance
novelists, edit that material, print the texts, and bind the books.
GhostWriter owns the building where its employees perform all of its publication
operations. GhostWriter uses book-binding glue that is flammable and toxic, so
employees try to take care in opening windows when they are in the binding step
of the operation. GhostWriter has been unwilling to install a sprinkler system o
r appropriate ventilation system due to the associated costs. So far, opening th
e windows has been effective, and none of the employees has become ill from the
fumes.
GhostWriter's employees dump any unused book-binding glue in a 50-gallon drum be
hind the building. The
Environmental Protection Agency determined that the drum has been leaking for ye
ars, and the toxins in the
glue have run into the ground. They have ordered GhostWriter to perform a clean-
up. GhostWriter submitted a
claim to its insurer for the expenses associated with the clean-up. Recent court
decisions have eroded the original
exclusions in the insurer's policy language that would eliminate pollution losse
s. The insurer will be required to
pay for the pollution loss.
In the last year, profits have been down for GhostWriter. One evening, the fire
department responded to a fire
reported at GhostWriter's building. They were able to extinguish the three small
fires that started simultaneously
in the building. GhostWriter's owners said they had received anonymous threats t
hat someone would "burn
them down." GhostWriter's owners were suspected of involvement, but nothing coul
d be proven.
---------------------------------------------------------------------------- OBJ
ECTIVE 0
QUESTION
It has been argued that if insurance companies would simplify the selection proc
ess and accept almost all
applicants that costs would be dramatically reduced for the consumer. Insurance
companies say that this would
not be the case because there would be an increase in
a. Diverse selection.
b. Inverse selection.
c. Adverse selection.
d. Reverse selection.
Insurers screen applicants to determine which ones they desire to insure. If ins
urers do not properly select
policyholders
a. Their profits will be excessive in comparison to the premiums collected.
b. Some insureds might be allowed to purchase insurance at prices that do not ad
equately reflect their loss
exposures.
c. They will have an excessive number of new policies, and their expenses relate
d to writing the new policies will
be excessive.
d. The entire group of policyholders written will be substandard.
ANSWER B ( pp. 5.3-5.4) QUESTION As insurers select insureds they attempt to avo
id adverse selection. Adverse selection occurs when
a. Applicants purchase insurance with the intent of submitting fraudulent claims
.
b. An insurer does not select a cross-section of applicants that range from low
to high probability of loss.
c. Competitors select the better applications, leaving the remainder to the insu
rer.
d. People with the greatest probability of loss are the ones most likely to purc
hase insurance.
QUESTION
Maxfield is considering expanding its policy writings to other types of insuranc
e and different geographic areas.
How could this activity help Maxfield protect its available capacity?
a. By meeting regulatory requirements to provide coverage to a wide range of pol
icyholders, the insurer will be
less likely to engage in unfair discrimination.
b. By reducing the chances that the company's overall results will be affected b
y a large number of losses from
one loss event.
c. The insurer will reduce its reinsurance premiums by reducing its exposure to
any one catastrophic event.
d. Diversification will allow the insurer to create a more visible image in the
market, attracting more potential
applicants from which it can select.
Which one of the following is an example of how Maxfield can optimize its availa
ble resources in order to protect
its available capacity?
a. Maxfield chooses not to solicit applications for automobile insurance.
b. Maxfield shops its reinsurance contracts for better pricing and coverage.
c. Maxfield outsources its claims handling functions.
d. Maxfield's management staff takes classes to learn how to provide reasonable
accommodations for physically
challenged employees.
Maxfield Mutual's executive staff is considering lowering its standards in the s
election of policyholders. In this
way, Maxfield can maintain the same rate level, but add more policyholders that
have slightly higher exposures
to loss. What is the likely result of this decision?
a. Maxfield might be accused of unfair discrimination.
b. Maxfield must reduce the amount of reinsurance it purchases.
c. Maxfield must spread its risks at the same time to be profitable.
d. Maxfield's premiums will not be commensurate with the exposures.
ANSWER D ( pp. 5.4-5.6) QUESTION
The amount of business an insurer is able to write based on a comparison of the
insurer's written premium to the
size of its policyholders' surplus is
a. Capacity
b. Adverse selection
c. Risk selection
d. Combined ratio
ANSWER A ( pp. 5.4-5.6) OBJECTIVE 2
QUESTION
Which of the following types of insurance rates would be appropriate for the typ
e of insurance and loss
exposures that Maxfield Mutual writes?
a. Merit rates
b. Individual rates
c. Class rates
d. Judgement rates
ANSWER C ( pp. 5.7-5.8) QUESTION Which one of the following statements is true r
egarding types of rates used by insurers? a. Class rates apply to all insureds i
n the same rating category.
b. Merit rating plans are also called manual rating plans.
c. Class rates are not based on loss statistics.
d. Class rates reflect loss characteristics of a particular insured.
ANSWER A ( pp. 5.7-5.8) QUESTION In insurance terminology, which of the followin
g refers to a book of business? a. All policies sold by an insurance company or
agency
b. All policies in a particular territory
c. All policies providing a particular type of insurance
d. All the above
QUESTION
One of the responsibilities of underwriting management is to arrange reinsurance
. One type of reinsurance is
arranged to automatically reinsure a portion of all eligible risks of the primar
y insurer. This arrangement is called
a. Treaty reinsurance
b. Temporary reinsurance
c. Facultative reinsurance
d. Facilitative reinsurance
ANSWER A ( p. 5.10) QUESTION How do underwriting guidelines help an insurer achi

eve its objectives? a. By establishing the criteria required for treaty reinsura
nce to apply
b. By creating a channel for communication for the insurer's vision, mission, an
d objectives
c. By providing a uniform set of rules that guide underwriters toward consistent
decisions
d. By maintaining a consistently applied set of behavioral measurements against
which an individual's
performance will be measured
QUESTION
When the underwriter read the inspection report from his loss control department
about a risk that was recently
submitted, it indicates that the management team seemed to be indifferent about
the inspector's
recommendations. The underwriter's primary concern is probably the
a. Moral hazard.
b. Physical hazard.
c. Legal hazard.
d. Attitudinal hazard.
ANSWER D ( p. 5.15) QUESTION How does an expert system assist underwriters in th
e underwriting process? a. It automatically assembles the necessary information
to underwrite an application.
b. It helps ensure that no necessary information is overlooked.
c. It provides management reports to ensure underwriters' compliance with guidel
ines.
d. It monitors the results of the decisions made and suggests changes in underwr
iting guidelines
Some insurers now use expert systems in the underwriting process. The primary pu
rpose of these expert systems
is to
a. Reduce claim expenses and loss adjustment expenses.
b. Replace underwriting decision-making and enhance accuracy.
c. Emulate the underwriting decision-making process as it would be performed by
expert underwriters.
d. Modernize insurance company information systems.

QUESTION
An underwriter is reviewing an application for a start-up business that is plann
ing on opening in about one
month. Overall the underwriter is impressed with the account but would like to o
btain more information on the
owners of the business, especially their experience. Which one of the following
sources of underwriting
information would be most helpful to the underwriter in this situation?
a. Claim files
b. Premium audit reports
c. Consumer investigative report
d. Applicant or insured's records
An underwriter is reviewing an application for a business that is just being cre
ated. The business will
manufacture a product that the owner herself just invented. Which one of the fol
lowing sources of information
would probably be most helpful to the underwriter?
a. Claim files
b. Premium audit reports
d. Previous carrier
ANSWER C ( pp. 5.13-5.14) QUESTION
A new underwriter is reviewing an application for a business that is just being
created. He's not comfortable that
he fully understands the nature of the product and the business involved. Which
one of the following sources of
information should he use to increase his comfort level?
a. Claim files
b. Premium audit report
d. Producer
All of the following are sources of information underwriters use as they gather
information for underwriting,
EXCEPT:
a. Producers
b. Government records
c. Inspection reports
d. Educational records ANSWER D ( pp. 5.13-5.14) OBJECTIVE 6

QUESTION
Which one of the following represents a physical hazard in the GhostWriter Publi
shing case?
a. The suspicious fire
b. The ownership of the building
c. The book-binding glue
d. The 50-gallon drum
ANSWER C ( pp. 5-15-5.16) QUESTION Which one of the following represents a moral
e hazard in the GhostWriter Publishing case? a. Failure to install sprinklers an
d ventilation
b. Use of the glue
c. The suspicious fire
d. The lack of profits
ANSWER A ( pp. 5.15-5.16) QUESTION Which one of the following represents a legal
hazard in the GhostWriter Publishing case? a. The treatment of the employees
b. The toxic pollution
c. The inability to provide GhostWriter's involvement in the fire
d. The court interpretation of the policy language
ANSWER D ( pp. 5.15-5.16) OBJECTIVE 7
QUESTION
In evaluating an application, an underwriter has three options: accept without m
odification, reject, and accept
with modification. Which one of the following is most correct?
a. Accepting with modification requires the greatest amount of creativity.
b. Rejecting the application requires the greatest amount of creativity.
c. Accepting without modification requires the greatest amount of creativity.
d. Accepting with modification requires the least amount of creativity.
When courts mandate coverage broader than the insurers intended in its policies,
this is referred to as a a. Moral hazard.
b. Legal hazard.
c. Judicial hazard.
d. Regulatory hazard.
Why would an underwriter modify the rate charged for the coverage provided when
evaluating an application
for insurance?
a. Because treaty reinsurance in unavailable for the exposures indicated
b. To address the moral hazards the underwriter identified during investigation
c. To better match the rate to the characteristics of the risk
d. Because the applicant is not acceptable for coverage
ANSWER C ( pp. 5.5.16-5.17) QUESTION
Which one of the following underwriting options requires the greatest amount of
underwriting creativity on the
part of the underwriter?
a. Accepting the application with modifications
b. Accepting the application without modifications
c. Processing the application without using an expert or knowledge-based system
d. Rejecting the application
QUESTION
In evaluating an application, an underwriter thinks that the class of business i
s not one that the company wishes
to write, but he would need to physically inspect it to be certain. He also real
izes that the business is located in an
undesirable section of the city. Based on the location alone, the underwriter de
cides not to issue the policy.
According to many state insurance laws, this would be an example of
a. Diversification.
b. Unfair discrimination.
c. Fair discrimination.
d. Regulated discrimination.
How do states prohibit unfair discrimination by insurers? a. By reviewing each p
olicy cancellation or nonrenewal and the justification for the insurer's action
b. By maintaining a channel for policyholder complaints
c. By identifying it as an unfair trade practice in state insurance laws
d. By examining insurers' mission statements and objectives
ANSWER C ( pp. 5.19-5.20) QUESTION Why do states require that insurers notify th
e insured before a policy is to be canceled or nonrenewed? a. To provide the sta
te an opportunity to investigate the reason for the cancellation or nonrenewal
b. To give the policyholder an opportunity to replace the coverage
c. To eliminate the possibility of an insurer canceling all policies covering a
category of business or in a
geographic area
d. To reduce the opportunity for an insurer to red line
QUESTION
In evaluating an application, an underwriter realizes that the amount of insuran
ce required is more than the
company is willing/able to provide. If the underwriter decides to issue the poli
cy for the requested limits, she
will probably need to secure
a. Treaty reinsurance.
b. Increased surplus.
c. Facultative reinsurance.
d. Coinsurance.
If an insurance company's policyholders' surplus has decreased, this will advers
ely impact how much business
they are able to write. When this situation happens it results in a reduction in
a. Capacity.
b. Retention.
c. Adverse selection.
d. Profits.
ANSWER A ( p. 5.4)
Chapter 6 QUESTION
An insured suffers a serious loss, such as the destruction of his or her house,
and hires someone to represent his
or her interests. The person hired is
a. A staff adjuster.
b. A producer.
c. A public adjuster.
d. An independent adjuster.
Sometimes an insurer does not have enough policyholders in a given region to jus
tify hiring its own claim
representatives. In these situations, the insurer is likely to use
a. An independent adjuster.
b. A third party administrator.
d. A regional adjuster.
Sometimes an insurer will provide authority to some of its agents to settle and
pay certain types of claims up to a
specified limit. When this occurs it is called
a. Binding authority.
b. Settlement authority.
c. Temporary authority.
d. Producer authority.
ANSWER B ( p. 6.7) QUESTION Generally, an inside claim representative a. Meets w
ith parties involved with the loss
b. Handles claims by phone or mail from the insurer's office
c. Visits the scene of the loss to investigate damages
d. Offers claim settlement service for a fee to insurers
Mary's car collides with two other cars, and several people are injured. The acc
ident occurs near her insurer's branch office location. What type claim represen
tative will Mary's insurer generally use to handle this claim? a. Independent ad
juster
b. Public adjuster
c. Inside claim representative
d. Outside claim representative
ANSWER D ( p. 6.6) QUESTION All of the following describe an independent adjuste
r, EXCEPT: a. Self-employed
b. Contracted by an insurer
c. Employee of an insurer
d. Employee of an adjusting firm
Jim notifies ABC Insurer of an accident with an ABC insured in a state in which
ABC does not do business. What
type of claim staff will ABC Insurer generally use to investigate this claim?
a. Inside claim representative
b. Outside claim representative
c. Independent adjuster
d. Independent agent
ABC Widget Company pays for all its property losses up to $3 million and purchas
ed insurance for losses over
$3 million. What is this plan called?
a. Coinsurance
b. Reinsurance
c. Self-insurance
d. Umbrella insurance
XYZ Company has established a self-insurance plan to treat its loss exposures. O
ther than its internal staff, what
resources would XYZ Company generally use to settle claims?
a. Independent adjusters
b. Public adjusters
c. Third party administrators
d. Outside claim representatives
QUESTION
Despite the unique challenges and variations from case to case, the last step in
the claim handling process is
usually
a. Determine cause of loss.
b. Determine the amount of damages.
c. Verify coverages.
d. Negotiate and settle.
If an insured's house burns down to the ground due to lightening, the most diffi
cult part of the claim handling
process will probably be
a. Determining the cause of loss.
b. Verifying coverage.
c. Determining the amount of damages.
d. Determining insurable interest.
In an auto accident where serious bodily injuries are involved, the most difficu
lt part of the claim handling
a. Verifying coverage.
b. Determining cause of loss
c. Negotiating and settling the claim.
QUESTION
In property insurance claims, there is sometimes a question of whether coverage
exists or not. In these situations
the insurer will send a reservation of rights letter. The purpose of this letter
is to advise the insured that
a. A coverage problem may exist.
b. The claim will be handled by an independent adjuster. c. The policy may not b
e renewed due to loss frequency. d. The claim is in excess of their deductible.
ANSWER A ( p. 6.10) QUESTION A person or entity that would suffer a financial lo
ss if their property were damaged has a. A contractual interest.
b. A discretionary interest.
c. A renewable interest.
d. An insurable interest.
If an insured submits a claim for a seven-year-old refrigerator that was damaged
due to lightening, the adjuster
will probably factor in an allowance for wear and tear. This is called
a. Replacement cost.
b. Depreciation.
c. Stated amount.
d. Agreed amount.
ANSWER B ( p. 6.14) QUESTION If an insured wants to receive "new for old" in the
event of a property loss, he or she would purchase a. Actual Cash Value (ACV).
b. Replacement cost.
c. Agreed value.
d. Market value.
John has an unendorsed homeowner's policy. John's two-year-old bicycle is stolen
. The bicycle's purchase price
was $800, and depreciation is estimated at $450. What is the bicycle's actual ca
sh value?
a. $225
b. $350
c. $450
d. $800
ANSWER B ( p. 6.14) QUESTION Subrogation is the insurer's right to a. Recover it

s claim payment from the party responsible
b. Drop a claim in exchange for an agreed amount of money
c. Estimate the value of the damaged property
d. Transfer coverage to a third party
QUESTION
In liability claims the claimant is referred to as the
a. Third party.
b. Second party.
c. First party.
d. Primary party.
ANSWER A ( p. 6.17) QUESTION With a liability claim, damages awarded for pain an
d suffering incurred by the claimant are referred to as a. Punitive damages.
b. Special damages.
c. Secondary damages.
d. General damages.
ANSWER D ( p. 6.20) QUESTION What is an example of general damages? a. Hospital
expenses
b. Lost wages
c. Prescriptions
d. Disfigurement
ANSWER D ( p. 6.20) QUESTION A liability loss has the following damages:
Medical expenses $10,000
Damages for disfigurement $50,000
Damages for pain and suffering $100,000
What is the amount of special damages? a. $10,000
b. $50,000
c. $100,000
d. $160,000
ANSWER A ( p. 6.20) QUESTION A liability loss has the following damages: Medical
expenses $10,000
What is the amount of general damages? a. $60,000
b. $110,000
c. $150,000
d. $160,000
QUESTION
Property insurers are subject to the possibility of many claims occurring from a
single event often straining their
resources. This is called
a. An accident.
b. An occurrence.
c. A catastrophe.
d. A simulation.
In order to expedite claim handling during a catastrophe, an insurer will consid
er modifying all of the following
procedures, EXCEPT:
a. Temporarily increasing claim handling authority for producers b. Making advan
ce payments to policyholders
c. Using abbreviated claim handling procedures d. Suspending the use of independ
ent adjusting firms ANSWER D ( p. 6.23) OBJECTIVE 5
QUESTION
One of the greatest challenges in dealing with a catastrophe is in the area of s
taffing. Which one of the following
is an unlikely response to this challenge?
a. Identify and train staff from other areas to assist.
b. Establish relationships with independent adjusters to help manage overflow.
c. Purchase catastrophe reinsurance.
d. Bring in catastrophe teams of claims representatives from other regions.
ANSWER C ( p. 6.22) QUESTION The person hired by an insured to represent the ins
ured in handling a claim is called a a. First party adjuster.
b. Outside claim adjuster.
c. Independent adjuster.
d. Public adjuster.
The insurer's right to recover and sell or otherwise dispose of insured property
on which the insurer has paid a
total loss is called
a. Fiduciary rights.
b. Salvage rights.
c. Constructive rights.
d. Catastrophe rights.
ANSWER B ( pp. 6.3-6.27) QUESTION A loss reserve determined by the claim adjuste
r that is assigned to an individual claim is called a a. Case reserve.
b. Bulk reserve.
c. Third party reserve.
d. Deferred reserve.
ANSWER A ( pp. 6.20-6.24) Chapter 6 QUESTION

An insured suffers a serious loss, such as the destruction of his or her house,
and hires someone to represent his
or her interests. The person hired is
a. A staff adjuster.
b. A producer.
d. An independent adjuster.
Sometimes an insurer does not have enough policyholders in a given region to jus
tify hiring its own claim
representatives. In these situations, the insurer is likely to use
a. An independent adjuster.
b. A third party administrator.
d. A regional adjuster.
Sometimes an insurer will provide authority to some of its agents to settle and
pay certain types of claims up to a
specified limit. When this occurs it is called
a. Binding authority.
b. Settlement authority.
c. Temporary authority.
d. Producer authority.
ANSWER B ( p. 6.7) QUESTION Generally, an inside claim representative a. Meets w
ith parties involved with the loss
b. Handles claims by phone or mail from the insurer's office
c. Visits the scene of the loss to investigate damages
d. Offers claim settlement service for a fee to insurers

Mary's car collides with two other cars, and several people are injured. The acc
ident occurs near her insurer's
branch office location. What type claim representative will Mary's insurer gener
ally use to handle this claim?
a. Independent adjuster
b. Public adjuster
c. Inside claim representative
d. Outside claim representative
ANSWER D ( p. 6.6) QUESTION All of the following describe an independent adjuste
r, EXCEPT: a. Self-employed
b. Contracted by an insurer
c. Employee of an insurer
d. Employee of an adjusting firm
Jim notifies ABC Insurer of an accident with an ABC insured in a state in which
ABC does not do business. What
type of claim staff will ABC Insurer generally use to investigate this claim?
a. Inside claim representative
b. Outside claim representative
c. Independent adjuster
d. Independent agent
ABC Widget Company pays for all its property losses up to $3 million and purchas
ed insurance for losses over
$3 million. What is this plan called?
a. Coinsurance
b. Reinsurance
c. Self-insurance
d. Umbrella insurance
ANSWER C ( p. 6.8)
QUESTION
XYZ Company has established a self-insurance plan to treat its loss exposures. O
ther than its internal staff, what
resources would XYZ Company generally use to settle claims?
a. Independent adjusters
b. Public adjusters
c. Third party administrators
d. Outside claim representatives
QUESTION
Despite the unique challenges and variations from case to case, the last step in
the claim handling process is
usually
a. Determine cause of loss.
b. Determine the amount of damages.
c. Verify coverages.
d. Negotiate and settle.
If an insured's house burns down to the ground due to lightening, the most diffi
cult part of the claim handling
a. Determining the cause of loss.
b. Verifying coverage.
c. Determining the amount of damages.
In an auto accident where serious bodily injuries are involved, the most difficu
lt part of the claim handling
a. Verifying coverage.
b. Determining cause of loss
c. Negotiating and settling the claim.
QUESTION
In property insurance claims, there is sometimes a question of whether coverage
exists or not. In these situations
the insurer will send a reservation of rights letter. The purpose of this letter
is to advise the insured that
a. A coverage problem may exist.
b. The claim will be handled by an independent adjuster.
c. The policy may not be renewed due to loss frequency.
d. The claim is in excess of their deductible.
ANSWER A ( p. 6.10) QUESTION A person or entity that would suffer a financial lo
ss if their property were damaged has a. A contractual interest.
b. A discretionary interest.
c. A renewable interest.
d. An insurable interest.
If an insured submits a claim for a seven-year-old refrigerator that was damaged
due to lightening, the adjuster
will probably factor in an allowance for wear and tear. This is called
a. Replacement cost.
b. Depreciation.
c. Stated amount.
d. Agreed amount.
ANSWER B ( p. 6.14) QUESTION If an insured wants to receive "new for old" in the
event of a property loss, he or she would purchase a. Actual Cash Value (ACV).
b. Replacement cost.
c. Agreed value.
d. Market value.
John has an unendorsed homeowner's policy. John's two-year-old bicycle is stolen
. The bicycle's purchase price
was $800, and depreciation is estimated at $450. What is the bicycle's actual ca
sh value?
a. $225
b. $350
c. $450
d. $800
ANSWER B ( p. 6.14) QUESTION Subrogation is the insurer's right to a. Recover it
s claim payment from the party responsible
b. Drop a claim in exchange for an agreed amount of money
c. Estimate the value of the damaged property
d. Transfer coverage to a third party
QUESTION
In liability claims the claimant is referred to as the
a. Third party.
b. Second party.
c. First party.
d. Primary party.
ANSWER A ( p. 6.17) QUESTION With a liability claim, damages awarded for pain an
d suffering incurred by the claimant are referred to as a. Punitive damages.
b. Special damages.
c. Secondary damages.
d. General damages.
ANSWER D ( p. 6.20) QUESTION What is an example of general damages? a. Hospital
expenses
b. Lost wages
c. Prescriptions
d. Disfigurement
ANSWER D ( p. 6.20) QUESTION A liability loss has the following damages: Medical
expenses $10,000
What is the amount of special damages? a. $10,000
b. $50,000
c. $100,000
d. $160,000
ANSWER A ( p. 6.20) QUESTION A liability loss has the following damages: Medical
expenses $10,000
What is the amount of general damages? a. $60,000
b. $110,000
c. $150,000
d. $160,000
QUESTION
Property insurers are subject to the possibility of many claims occurring from a
single event often straining their
resources. This is called
a. An accident.
b. An occurrence.
c. A catastrophe.
d. A simulation.
In order to expedite claim handling during a catastrophe, an insurer will consid
er modifying all of the following procedures, EXCEPT: a. Temporarily increasing
claim handling authority for producers
b. Making advance payments to policyholders
c. Using abbreviated claim handling procedures
d. Suspending the use of independent adjusting firms
QUESTION
One of the greatest challenges in dealing with a catastrophe is in the area of s
taffing. Which one of the following
is an unlikely response to this challenge?
a. Identify and train staff from other areas to assist.
b. Establish relationships with independent adjusters to help manage overflow.
c. Purchase catastrophe reinsurance.
d. Bring in catastrophe teams of claims representatives from other regions.
ANSWER C ( p. 6.22) QUESTION The person hired by an insured to represent the ins
ured in handling a claim is called a a. First party adjuster.
b. Outside claim adjuster.
c. Independent adjuster.
d. Public adjuster.
The insurer's right to recover and sell or otherwise dispose of insured property
on which the insurer has paid a
total loss is called
a. Fiduciary rights.
b. Salvage rights.
c. Constructive rights.
d. Catastrophe rights.
ANSWER B ( pp. 6.3-6.27) QUESTION A loss reserve determined by the claim adjuste
r that is assigned to an individual claim is called a a. Case reserve.
b. Bulk reserve.
c. Third party reserve.
d. Deferred reserve.
ANSWER A ( pp. 6.20-6.24) Chapter 8 --------------------------------------------
-------------------------------- Please refer the following 'Case Study' with ap
propriate Questions and Answers: -----------------------------------------------
-----------------------------
CASE: Printer's Thumb
The Printer's Thumb is a store specializing in printing and photocopying for loc
al businesses. The Printer's
Thumb's customers depend on fast and accurate service for their printing needs.
The Printer's Thumb has
developed a positive reputation by providing that service. The Printer's Thumb o
ccupies a building it owns;
Ultimate Lender holds the mortgage to the building. All of the equipment used fo
r printing and photocopying
was purchased with cash and is located in the building. The building and its con
tents are covered by a property
insurance "special form coverage" policy.
One evening after working hours, lightning struck the building resulting in a fi
re in the electrical wiring. Papers that had accumulated in the trash ignited an
d substantial fire damage resulted. Damage resulted to the building, contents, a
nd a customer's original documents and files that were waiting to be copied.
Until repairs could be made, the Printer's Thumb rented a temporary office in an
available space in a local mall. The manager of The Printer's Thumb did not wan
t to lose the customers that he had worked so hard to develop by shutting down s
ervicing while repairs were made. All of The Printer's Thumb's customers have ag
reed to continue business at the new location.
---------------------------------------------------------------------------- OBJ
ECTIVE 0
QUESTION
There are two basic types of property: real property and personal property. Wall
-to-wall carpeting is typically
considered to be an example of real property because it
a. Tends to depreciate in value.
b. Is permanently installed.
c. Is readily visible.
d. Is easy to value.
ANSWER B ( p. 8.5) QUESTION Property insurance policies use the term "personal p
roperty" to refer to the a. Contents of a building.
b. Equipment used to maintain the building.
c. Company's copyrights and trademarks.
d. Buildings not attached to the main building. ANSWER A ( p. 8.5) QUESTION

Many businesses have refrigeration equipment, production equipment, steam boiler
s, and air conditioning
systems. These are all examples of
a. Property in transit.
b. Personal property.
c. Mobile equipment.
d. Boilers and machinery.
QUESTION
How will the claim representative assigned to The Printer's Thumb loss determine
whether the peril is covered
by the property policy?
a. If the peril is not specifically excluded by the policy, coverage is provided
.
b. If the peril is listed and described in the policy, coverage is provided.
c. If the manager of The Printer's Thumb can prove that the loss was caused by a
covered peril, coverage is
provided.
d. If the manager of The Printer's Thumb can prove that he was not responsible f
or the loss, coverage is provided.
Many property insurance policies list the covered causes of loss they intend to
cover. These policies are
commonly known as
a. Special form.
b. Open perils.
c. Named perils.
d. Broad form.
An important difference between named perils and special form coverage involves
the burden of proof. In a
special form policy, if a loss occurs to covered property it is initially assume
d that coverage applies. If there is a
question regarding coverage, the burden of proof will be on the
a. Insured.
b. Mortgagee.
c. Insurer.
d. Claimant.
With a named perils policy, for coverage to apply, it must be proven that the lo
ss was caused by a covered cause
of loss. The burden to prove this is on the
a. Insured.
b. Mortgagee.
c. Insurer.
d. Claimant.
QUESTION
When property is lost or damaged, the value of the property is decreased. In add
ition to direct damage to the
property there could be additional loss to the business known as
a. Lost income.
b. Deferred income.
c. Historical income.
d. Residual income.
In order to determine the potential lost income to a business after a fire, an a
nalysis must be conducted to
determine projected income compared to post-lost income. This is referred to as
a
a. "What for" analysis.
b. "If only" analysis.
c. "What if" analysis.
d. "Why me" analysis.
ANSWER C ( p. 8.9)
OBJECTIVE 3
QUESTION
What was the Printer's Thumb's relationship to the customer whose original docum
ents and files were destroyed
in the fire as they were waiting to be copied?
a. The customer was an unsecured lender.
b. The Printer's Thumb was a user of property.
c. The Printer's Thumb was a bailee.
d. The customer was a bailee.
ANSWER C ( p. 8.11) QUESTION The party most affected when property is lost, dama
ged, or destroyed is usually the a. User of the property.
b. Secured lender.
c. Owner of the property.
d. Holder of the property.
Jim's Computer Repair will often take customers' computers into the shop for rep
airs and service. While Jim has
the customer's computer in his possession he is in the role of
a. A bailee.
b. A bailor.
c. A secured lender.
d. An agent.
In addition to protecting the owner, property insurance policies generally prote
ct the secured lender's interest in
the financed property by
a. Issuing a mortgagee interest only policy.
b. Sending them a letter of intent.
c. Issuing a separate policy.
d. Naming them on the owner's policy.
ANSWER D ( p. 8.11)
OBJECTIVE 4
QUESTION
Sometimes property is not in a fixed location, but rather moves from location to
location. In order to protect this
type of property one would need to purchase a
a. Dwelling policy.
b. Floater policy.
c. Flex policy.
d. Consequential policy.
ANSWER B ( p. 8.12) QUESTION Because personal property can be moved more easily
than buildings, it is usually a. Exposed to more perils.
b. Exposed to fewer perils.
c. Not Exposed to many perils.
d. Not exposed to insurable perils.
QUESTION
For the loss that occurred at The Printer's Thumb building, what was the proxima
te cause of loss?
a. The lightning
b. The fire
c. The electrical wiring
d. The trash accumulation
ANSWER A ( pp. 8.16-8.17) QUESTION Water damage to a building following a windst
orm is often not covered by a property policy unless a. The windstorm is confirm
ed by the weather service.
b. The policy is written with named perils.
c. The policy is written with special coverage.
d. Wind caused an opening in the structure through which water entered.
ANSWER D ( p. 8.17)
QUESTION The taking of property from a person by someone who has caused or threa
tened to cause personal harm is a. Burglary.
b. Robbery.
c. Theft.
d. Dishonesty.
If you were a property owner and wanted the broadest coverage available to prote
ct your building you would
purchase
a. Basic form coverage.
b. Broader form coverage.
c. Broad form coverage.
d. Special form coverage.
It was a cool fall night and Jean decided to get a fire going in the fireplace.
It took a while, but she soon had a
roaring blaze going. The next day when she was cleaning out the ashes she realiz
ed that a log with unique hand
carvings was inadvertently placed in the fireplace and was destroyed. If Jean su
bmitted a claim to her insurer for
the value of this special log, the insurer would more than likely discuss with h
er the concept of a
a. Fireplace fire.
b. Fortuitous fire.
c. Friendly fire.
d. Foreseeable fire.
ANSWER C ( p. 8.16) QUESTION The event that sets in motion an uninterrupted chai
n of events contributing to a loss is called a. Preventable cause.
b. Proximate cause.
c. Projected cause.
d. Preliminary cause.
ANSWER B ( p. 8.17)
OBJECTIVE 6
QUESTION
Catastrophe perils, such as war, are generally excluded from property insurance
policies because the risk is
considered to be uninsurable since
a. The losses could be prevented.
b. The premiums required to cover the exposure would be unaffordable by most fam
ilies and businesses.
c. Most families and businesses do not face the loss exposure.
d. The funds of the entire insurance industry might be inadequate to pay for all
the claims
Property insurance policies typically exclude loss from maintenance perils. Such
losses are generally uninsurable
because
a. Covering such losses would result in a moral hazard.
b. They are either certain to occur, over time, or are avoidable.
c. Maintenance policies are written only through excess and surplus lines.
d. It is difficult (if not impossible) to identify the date of loss and therefor
e the policy or insurer providing
coverage.
Almost all property insurance policies exclude coverage for losses from catastro
phes, such as war and nuclear
hazard, because
a. There might not be enough claim adjusters.
b. It is against public policy to cover these events.
c. Funds might not be adequate to pay all claims.
d. It is illegal to cover these events.
Wear and tear, rust, marring, and scratching are examples of maintenance perils
which are usually excluded in
property insurance policies. They are excluded because
a. There might not be enough claim adjusters.
b. It is against public policy to cover these events.
c. They are certain to occur.
d. It is illegal to cover these events.
ANSWER C ( p. 8.23)
QUESTION
Insurance is primarily designed for definite and accidental losses. Because of t
his, most policies will exclude
coverage for what is known as
a. Named perils.
b. Maintenance perils.
c. Broad perils.
d. Specified perils.
QUESTION
The financial expenses incurred by The Printer's Thumb to rent the office space
at the mall is which form of
financial consequence that might be covered by their property insurance policy?
a. A direct loss
b. Lost income
c. Extra expense
d. Optional rental reimbursement
Bea's Restaurant suffered a very serious fire due to a lightening strike, and th
e structure had to be torn down.
The damage to the building is an example of a
a. Indirect loss.
b. Direct loss.
c. Time element loss.
d. Consequential loss.
Expenses that a business incurs to reduce the length of a business interruption
or to enable a business to continue
some operations after the property has been damaged are called
a. Deferred expenses.
b. Extra expenses.
c. Supplementary expenses.
d. Emergency expenses.
ANSWER B ( p. 8.24) QUESTION Lost income and extra expenses resulting from direc
t loss to property can be insured. Such losses are often called a. Potential ele
ment losses.
b. Future element losses.
c. Additional element losses.
d. Time element losses.
QUESTION
Which one of the following describes the rights granted to a mortgagee versus th
e rights granted to a loss payee
under a property insurance policy?
a. A mortgagee and a loss payee have the same rights. The two clauses simply dif
ferentiate loans for real and
personal property.
b. In the event of a loss, the mortgagee is paid first, the named insured second
, and any loss payee is third.
c. The terms are used interchangeably depending on the insurance contract.
d. A mortgagee is granted some rights that are greater than those granted to the
named insured; however, the
loss payee has the same rights as the named insured.
The person whose name(s) appear on the declarations page of an insurance policy
and has the broadest coverage
is referred to as the
a. Insured.
b. Named insured.
c. Additional insured.
d. Other insured.
When a policy provides coverage for personal property and there is a secured len
der, the secured lender will be
listed on the policy as a
a. Loss payee. b. Mortgagee. c. Bailee.
d. Named insured. ANSWER A ( p. 8.27) OBJECTIVE 9
QUESTION
A lender has an insurable interest in property until the
a. Policy is cancelled.
b. Loan is paid in full.
c. Loan is partially paid.
d. Policy is paid in full.
When an insured borrows money to purchase a car, the insured is required to add
the bank to the auto policy as
aa. Lessee.
b. Mortgagee.
c. Loss Payee.
d. Named insured.
QUESTION
What purpose do insurance-to-value provisions serve in property insurance polici
es?
a. They discourage insurance fraud by ensuring that the property is worth the va
lue requested in the policy
limits.
b. They encourage insureds to purchase an amount of insurance that is equal to,
or close to, the value of the
covered property.
c. They establish the maximum amount the insurance company will pay for any loss
.
d. They establish the options available to the insurance company in settling the
loss.
An insurance-to-value provision in property insurance policies that reduces the
amount the insurer will pay for a
covered loss that occurs to property that is underinsured is
a. A coinsurance clause.
b. A deductible.
c. A policy limit.
d. The replacement value.
Insurers generally have the option to repair, replace, or pay the value of lost
or damaged property. They will
usually go with the option that will
a. Reduce their costs.
b. Increase the insured's recovery.
c. Reduce the insured's costs.
d. Be the quickest.
A portion of a covered property loss that is subtracted from the amount the insu
rer would otherwise be obligated
to pay is the
a. Amount of the loan still outstanding.
b. Pro-rata premium.
c. Reinsurance.
d. Deductible.
ANSWER D ( p. 8.29) QUESTION Many property insurance policies impose a penalty i
f the property is underinsured. This provision is known as a. Reinsurance.
b. Coinsurance.
c. The deductible.
d. Other insurance clause.
QUESTION
Under a property insurance policy, a fire that leaves its intended place is know
n as a(n)
a. Hostile fire.
b. Angry fire.
c. Uncontrolled fire.
d. Wild fire.
ANSWER A ( p. 8.16) QUESTION Willful and malicious damage to or destruction of p
roperty is known as a. War.
b. Vandalism.
c. Burglary.
d. Robbery.
ANSWER B ( p. 8.19) INS 21 Questions Answers Materials Dumps Chapter 9 QUESTION
The law that consists of the body of principles and rules established over time
by courts on a case-by-case basis is
called
a. Administrative law.
b. Constitutional law.
c. Common law.
d. Regulatory law.
ANSWER C ( p. 9.5) QUESTION Laws made by formal enactments of legislative bodies
are referred to as a. Statutory law.
b. Common law.
c. Case law.
d. Constitutional law.
ANSWER A ( p. 9.5) QUESTION The source of all of our fundamental rights, such as
freedom of speech, freedom of religion, etc., is found in a. Common law.
b. Constitutional law.
c. Statutory law.
d. Court decisions. ANSWER B ( p. 9.4) QUESTION The body of principles and rules
established over time by courts on a case-by-case basis is known as a. Statutor
y law.
b. Informal law.
c. Common law.
d. State law.
If an insurance company were presented with a very serious auto accident, what t
ype of law would determine
who was at fault?
a. Criminal law
b. Constitutional law
c. Common law
d. Statutory law
QUESTION
Wrongful acts that society deems harmful to the public welfare are addressed by
a. Criminal law.
b. Common law.
c. Contract law.
d. Constitutional law.
ANSWER A ( p. 9.6) QUESTION Contract law deals with contracts and settles contra
ct disputes and is a branch of a. Common law.
b. Civil law
c. Criminal law
d. Constitutional law. ANSWER B ( p. 9.6) QUESTION

John was involved in a serious accident that included injuries to the other part
y, and charged with driving while
intoxicated. The actions that are likely to be brought against John are
a. Statutory and common.
b. Civil and common.
c. Constitutional and criminal.
d. Civil and criminal.
QUESTION
When John was driving his car, he was inattentive and was unable to stop in time
to avoid hitting a car stopped
at a traffic light. He damaged the stopped car he collided with. What is the bas
is for John's liability?
a. Negligence
b. Absolute liability
c. Statutory liability
d. No-fault statutes
ANSWER A ( pp. 9.8-9.9) QUESTION A tort is a. The legal right of recovery for da
mage or injury.
b. A failure to act in a reasonably prudent manner.
c. Any wrongful act other than a crime or breach of contract.
d. An unbroken chain of events that causes injury or damage.
Sean drove his vehicle even though his doctor advised him not to drive because t
he medication he was taking
caused drowsiness. Unfortunately, Sean was involved in an accident causing serio
us injury to himself and others.
In this situation, Sean committed a
a. Criminal act. b. Breach of contract.
c. Tort. d. Intentional tort. ANSWER C ( p. 9.8) QUESTION Although largely modif
ied or restated in statues, tort law is still based mainly on a. Constitutional
law.
b. Common law.
c. Contract law.
d. Statutory law.
Many states have enacted automobile "no-fault" laws. This ensures adequate compe
nsation for injuries without
lengthy disputes over who's at fault. These laws are an example of
a. Statutory liability.
b. Common Law.
c. Tort law.
d. Contract law.
QUESTION
All of the following are the elements of negligence, EXCEPT:
a. Duty owed to another
b. Breach of duty owed
c. Injury or damage
d. Minimum threshold of loss
ANSWER D ( pp. 9.8-9.9) QUESTION A man told a pedestrian that he would break her
arm if she did not give him her purse. This is an example of a. False arrest.
b. Invasion of privacy.
c. Assault.
d. Battery. ANSWER C ( p. 9.10) QUESTION

In speaking with John, Mark said that Peter embezzled $500,000 from their employ
er. If this statement is false, it
is an example of
a. Slander.
b. Libel.
c. Breach of warranty.
d. Misdemeanor.
The liability that someone could incur because of an inherently dangerous activi
ty like building demolition is
called
a. Nonretractable liability.
b. Nontransferable.
c. Strict liability.
c. Compulsory liability.
In order to determine if someone was negligent there are four elements that need
s to be considered. Negligence
will be proven if
a. Any of the four elements exist.
b. All of the elements exist.
c. Most of the elements exist.
d. Some of the elements exist.
A building owner is responsible for keeping the premises safe and free of any si
tuation that may cause injury to a
customer. Which one of the following elements of negligence does this address?
a. Duty owed
b. Breach of duty
c. Damages
d. Unbroken chain of events
ANSWER A ( pp. 9.8-9.9) QUESTION With regard to negligence, no recovery can be m

ade unless someone a. Has a witness.
b. Suffers injury or damage.
c. Has a contract.
d. Breaks the chain of events.
QUESTION
In the event that a lawsuit against an insured is found to be groundless, the in
surer will still end up paying
a. Special damages.
b. General damages.
c. Defense costs.
d. Compensatory damages.
ANSWER C ( p. 9.14) QUESTION An award of compensatory damages is the amount of m
oney that has been judged to equal a. All of the damages incurred.
b. Punitive damages only.
c. Special damages only.
d. Special and general damages.
QUESTION
Anyone who owns or occupies property has a
a. Products liability loss exposure.
b. Professional liability loss exposure.
c. Premises liability loss exposure.
d. Pollution liability loss exposure. ANSWER C ( p. 9.15) QUESTION

A licensed electrician completes the job of rewiring a house and returns to his
shop. With regard to the
completed work, the electrician has a
a. Completed operations loss exposure.
b. Premises liability loss exposure.
c. Business operations loss exposure.
d. Professional liability loss exposure.
County Janitorial Service is contracted local bars and taverns to clean their re
strooms on a daily basis. County's
greatest liability exposure is probably
a. Liquor liability.
b. Professional liability.
c. Advertising liability.
d. Completed operations.
QUESTION
Iron Works, Inc. is insured under a commercial liability policy listing several
names on the declarations page.
The declarations lists Bart Danner, Paul Binder, and Iron Works, Inc. A policy p
rovision would generally identify
which of the following as the insured(s) with whom the insurer has legal contact
?
a. Bart Danner
b. Paul Binder
c. Iron Works, Inc.
d. All of the above
ANSWER A ( p. 9.18) QUESTION A liability policy generally gives the broadest pro
tection to the a. Mortgagee. b. Loss payee.
c. Additional insured. d. Named insured. ANSWER D ( p. 9.18) QUESTION
Many liability policies provide the spouse of the named insured with the same co
verage that is provided to the
named insured if both
a. Have been married more than five years.
b. Live in the same household.
c. Have not been married before.
d. Do not have children under the age of 21.
QUESTION
Pup's Pet Shop advertised and sold homemade dog treats that caused a customer's
dog to have a serious allergic
reaction and die. This is an example of
a. Bodily injury.
b. Advertising injury.
c. Property damage.
d. Personal injury.
ANSWER C ( p. 9.20) QUESTION An injury arising from an intentional tort such as
libel, slander, or invasion of privacy is called a. Individual injury.
b. Bodily injury.
c. Property damage.
d. Personal injury.
ANSWER D ( p. 9.20) QUESTION Within the context of a CGL policy, claims for inju
ry, sickness, disease, and resulting death are usually
considered to be a. Bodily injury.
b. Personal injury.
c. Professional injury.
d. Individual injury.
QUESTION
Broad pollution coverage is not typically included in liability policies primari
ly as an attempt to
a. Eliminate duplicate coverage.
b. Avoid covering uninsurable losses.
c. Keep premiums reasonable.
d. Avoid insuring losses that could be prevented.
QUESTION
Many liability policies cover medical payments for injured persons, regardless o
f
a. Where the incident took place.
b. When the injuries occurred.
c. The amount of damages.
d. Fault.
ANSWER D ( p. 9.25) QUESTION Hospital bills, physician's fees, lost income, and
rehabilitation expenses are all examples of a. Statutory damages.
b. Special damages.
c. General damages.
d. Punitive damages.
QUESTION
Assuming the retroactive date is the same as the policy inception date of a clai
ms-made liability policy, which
one of the following is true for coverage to apply?
a. Coverage will never apply when the retroactive date is the same as the policy
inception date.
b. Bodily injury or property damage must occur during the policy period or anyti
me before policy inception.
c. Claims must be submitted during the policy period.
d. Claims can be submitted anytime during or after the policy period.
Liability coverage that covers an accident that occurs during the policy period,
regardless of when the claim is
submitted to the insurer is which one of the following types of coverages?
a. Claims made coverage
b. Occurrence basis coverage
c. Retroactive coverage
d. Perpetual coverage
Under a liability policy that provides occurrence basis coverage, if a covered a
ccident occurs during the policy
period, the claim will be covered, regardless of when the claim is
a. Submitted.
b. Settled.
c. Paid.
d. Closed.
ANSWER A ( p. 9.26) QUESTION From the insurer's perspective occurrence basis cov
erage means that liability claims may surface long after a. An insured has died.
b. A policy has expired. c. A policy was written. d. A claim is made.
ANSWER B ( p. 9.26) QUESTION The date in a claims-made policy on or after injury
or damage must occur in order to be covered is known as the
a. Retroactive date.
b. Reoccurrence date.
c. Expiration date.
d. Elapsed date.
QUESTION
The aggregate limit in a liability policy is the maximum amount an insurer will
pay for all covered losses during
the
a. Calendar year.
b. Policy period.
c. Retroactive period.
d. Fiscal year.
Under a liability policy, the maximum amount an insurer will pay for both bodily
injury and property damage
arising from a single occurrence is known as the
a. Aggregate limit.
b. Split limit.
c. Occurrence limit.
d. Defined limit.
ANSWER C ( p. 9.27) QUESTION Defense costs in a liability policy are usually pay
able a. In addition to the policy limits.
b. In addition to the premiums paid.
c. If there is money left after compensatory damages are paid.
d. If there is money left after punitive damages are paid.
QUESTION A wrongful act, other than a crime, committed by one party against anot
her is a a. Contract.
b. Tort.
c. Breach.
d. Civil crime.
A contractual provision that obligates one party to assume the financial consequ
ences of legal liability for
another party is
a. A statute.
b. A hold-harmless agreement.
c. An example of strict liability.
d. A warranty.
ANSWER B ( p. 9.11) QUESTION Interest that may accrue on damages before a judgme
nt has been rendered is a. Retroactive interest.
b. Collateral interest.
c. Postjudgment interest.
d. Prejudgment interest.
ANSWER D ( p. 9.25) INS 21 Questions Answers Materials Dumps Chapter 10 --------
-------------------------------------------------------------------- Please refe
r the following 'Case Study' with appropriate Questions and Answers: -----------
-----------------------------------------------------------------
CASE STUDY 1 : Jane Docker
Jane owns a ten-year-old compact car that she uses to drive to work each day. Ja
ne drives 20 miles into the city
and parks her car on a street near her office.
Jane's son, Joe, is 15-years-old, and he will obtain his driver's license this s
ummer when he becomes 16. Joe has already expressed an interest in buying his ow
n vehicle or driving Jane's compact car. Jane is concerned about the cost of own
ing a vehicle, buying the insurance, and the risk of parking the vehicle on
the street. If Joe buys his own vehicle, she knows that her expenses and her con
cerns will increase. Jane is considering risk management alternatives to help he
r reduce expenses and risks. ---------------------------------------------------
-------------------------
CASE STUDY 2 : Frank & Jan
Frank and Jan are each twenty-five years old, and they have purchased their firs
t home together. It required all of
their savings and some money from their parents to make their down payment. The
house needs repairs that
they will do themselves and with the help of friends. The first project will be
to seal the lead paint that is on the
interior of the house and remove flaking lead paint that is on the exterior of t
he house.
d Frank and Jan are also aware that a buried heating-oil tank in the yard is lea
king slowly, but they have decided that replacing that tank must wait until they
have the funds in a year or two. ----------------------------------------------
------------------------------ OBJECTIVE 0
QUESTION
Risk management concepts in one form or another apply
a. Only to large companies.
b. Only to international companies.
c. To all companies but not families.
d. To all companies and families.
ANSWER D ( pp. 10.3-10.4) QUESTION The first step in the risk management process
is to a. Implement the selected technique.
b. Select the appropriate technique.
c. Identify loss exposures.
d. Monitor results.
ANSWER C ( p. 10.4) QUESTION The last step in the risk management process is to
a. Implement the selected technique.
b. Select the appropriate technique.
c. Identify loss exposures.
d. Monitor results.
ANSWER D
QUESTION
Grocers' Warehouse is a newly created business that will open next month. It wil
l include a retail operation as
well as 500,000 square feet of warehouse space, loading docks, etc. Which one of
the following methods of
identifying loss exposures would be least applicable in this situation?
a. Physical inspection
b. Loss exposure survey
c. Loss histories
d. Interviews with management
Loss exposure surveys or checklists are comprehensive and apply to almost any or
ganization. The survey's major
weakness is that
a. They are expensive.
b. They may omit an important exposure.
c. They have to be custom designed for each business.
d. They take too long to complete.
Loss histories can offer great insight into an organization's loss exposures. Th
e problem with depending too
heavily on this one source is that some past events might
a. Not have been recorded.
b. Have been insured.
c. Still be unresolved.
d. Not have been insured.
QUESTION
A risk manager in an industrial plant is trying to determine where she needs to
spend most of her time in
reducing the number of accidents. The plant has a history of work-related injuri
es, and she wants to make sure
that is reduced. What should the risk manager measure to determine where she sho
uld expend her efforts?
a. The number of workers in each area
b. The flow chart bottlenecks
c. The loss frequency
d. The loss severity
ANSWER C ( p. 10.7) QUESTION Why is it easier to gauge the potential severity of
property losses than of liability losses? a. Property loss exposures are confin
ed to the building and contents. Liability losses can encompass the
surrounding grounds of the business.
b. Property loss exposures have a documented annual frequency and severity that
can be determined as an
average according to the type of business. Liability loss exposures cannot be de
termined with this level of
accuracy.
c. Property loss exposures have a calculable frequency. The frequency of liabili
ty loss exposures cannot be
determined with accuracy.
d. Property loss exposures have a calculable severity. The severity of liability
loss exposures is much harder to
determine.
ANSWER D ( p. 10.7) QUESTION The dollar amount of damage that results or might r
esult from a loss exposure is the a. Loss severity.
b. Loss frequency.
c. Loss prevention.
d. Loss reduction.
ANSWER A ( p. 10.7) QUESTION Analyzing the potential frequency and severity of a
loss exposure enables the risk manager to a. Retain loss exposures.
b. Avoid loss exposures.
c. Prioritize loss exposures.
d. Transfer loss exposures.
ANSWER C ( p. 10.7) QUESTION The monetary amount of damage that results from a l
oss is known as a. The deductible.
b. Loss severity.
c. Loss Frequency.
d. The retention. ANSWER B ( p. 10.7) QUESTION

Gauging the severity of property losses is easier than gauging the severity of l
iability losses because property
losses
a. Tend to be insured.
b. Have an infinite value
c. Tend to happen more frequently.
d. Are easier to calculate.
QUESTION
If Jane sells her vehicle and begins using public transportation, which one of t
he following risk management
techniques will she be applying to her situation?
a. Avoidance
b. Loss control
c. Noninsurance transfer
d. Retention
Jane is concerned that Joe might be hurt in her compact car if he is involved in
an accident. She has read
consumer reports indicating that people occupying trucks and sports utility vehi
cles suffer less injuries when
their vehicles are involved in accidents. If Jane trades her compact car in for
a sports utility vehicle, which one of
the following risk management techniques will she be applying?
a. Avoidance
b. Loss prevention
c. Loss reduction
d. Noninsurance transfer
While she is at work, Jane has begun parking in a lot that has an attendant to r
educe the chance of her vehicle
being damaged while it is parked on the street. Which one of the following risk
management techniques is Jane
applying?
a. Avoidance
b. Loss prevention
c. Noninsurance transfer
d. Retention
ANSWER B ( p. 10.9) QUESTION The technique that is used to decrease the frequenc
y and/or severity of losses is a. Risk control.
b. Risk financing.
c. Retention.
d. Transfer.
Some businesses require key executives to fly on different flights. In case ther
e would be an accident this would
avoid wiping out the entire management team. This is an example of which one of
the following risk control
techniques?
a. Avoidance
b. Loss prevention
c. Separation
d. Duplication
Waking up on a cold February morning, Amy discovers the roads are icy and snow c
overed. Concerned about
driving to work and possibly having an accident she decides to take the day off.
Amy's decision is an example of
which one of the following risk management techniques?
a. Loss prevention
b. Loss reduction
c. Avoidance
d. Separation
QUESTION
Jane has decided to apply a retention risk management technique to reduce her in
surance premium. She is
deleting the physical damage coverage (collision and other-than-collision) on he
r car. Her car is currently worth
$3,000. She will be able to save $250 every six months. Based on informal guidel
ines for selecting risk management techniques, is this a good decision? a. Yes,
Jane will save $500 per year.
b. Yes, if Jane can afford to lose $3,000.
c. No, because the plan does not include loss control.
d. No, this type of coverage is required in most states.
Alan Peachtree owns a hobby shop, which he runs from a small garage-like structu
re that is not attached to his
home. Alan, in deciding not to purchase property coverage on the building, has s
et aside funds to pay for
possible property damage losses. What risk management technique, if any, is Alan
using?
a. Avoidance
b. Non-Insurance transfer
c. Retention
d. Loss control
ANSWER C ( p. 10.10) QUESTION For loss exposures with high frequency and low sev
erity, the two best risk management alternatives are retention and a. Loss contr
ol.
b. Insurance.
c. Avoidance.
d. Transfer.
ANSWER A ( p. 10.14) QUESTION Exposures with the potential of low frequency but
high severity should generally be insured because they are a. Highly predictable
.
b. Less expensive.
c. Highly unpredictable.
d. More expensive.
ANSWER C ( p. 10.13) OBJECTIVE 5 QUESTION
In smaller organizations and in households, the person making risk management de
cisions is often the person a. Least qualified.
b. Settling the claims.
c. Implementing the program.
d. Causing the losses.
ANSWER C ( p. 10.15) QUESTION Larger organizations often have a written risk man
agement statement outlining procedures and authority for a. Implementing risk ma
nagement techniques.
b. Eliminating risk management techniques.
c. Excluding risk management techniques.
d. Identifying risk management techniques.
QUESTION
How might the monitoring and revising step in the risk management process be sim
ply described?
a. Check to make sure the decisions made are still valid, and make changes as ne
eded.
b. Create a new workflow and identify new bottlenecks that have occurred.
c. Make sure insurance is not being used as a substitute for loss control.
d. Identify noninsurance transfers through hold harmless agreements.
ANSWER A ( p. 10.16) QUESTION Monitoring a risk management program is an a. Occa
sional activity.
b. Annual activity.
c. Ongoing activity.
d. Once and done activity.
ANSWER C ( p. 10.16) QUESTION In order to monitor and modify the risk management
program, the risk manager must periodically
a. Identify and analyze new and existing loss exposures.
b. Purchase insurance.
c. Rewrite the risk management mission.
d. Change insurance companies.
QUESTION
What is a benefit that a business can receive by applying sound risk management?
a. It will meet state and federal safety regulations.
b. It will have a better opportunity to achieve business goals.
c. It will not have to worry about losses.
d. It will be able to attract and retain talented employees and managers.
ANSWER B ( pp. 10.17-10.18) QUESTION What will Jane be able to gain as a benefit
by applying sound risk management to her transportation situation? a. No future
increases in her insurance premium.
b. A loss free future
c. Economic growth
d. Greater peace of mind
Businesses, individuals, and families that practice sound risk management can be
nefit society by doing all of the
following, EXCEPT:
a. Increasing interest in leisure activities
b. Reducing the overall number of losses
c. Controlling medical expenses through reduced injuries
d. Stimulating economic growth
ANSWER A ( p. 10.18) QUESTION One of the benefits to a business of retaining a l
oss exposure instead of insuring it is a. A reduction in expenses.
b. A greater peace of mind.
c. Access to the insurer's loss control services.
d. Increase in expenses.
QUESTION
What is an effective way for Frank and Jan to begin identifying the liability lo
ss exposures associated with their
new home?
a. Hire a professional risk manager
b. Determine the value of the home and contents
c. Purchase a homeowners insurance policy
d. Inspect the home to look for items and activities that might cause injury or
damage
Frank and Jan researched lead paint hazards and abatement techniques on the Inte
rnet. They discovered that the
best action they can take inside the house is to remove loose paint chips and du
st, replace the windows, and seal
the walls with a paint designed for that purpose.
What risk management technique does this activity involve? a. Avoidance
b. Loss control
c. Retention
d. Noninsurance transfer
Frank and Jan have discovered that the pollution that is resulting from the fuel
oil leaking into the soil is not
covered by their homeowners insurance policy. They fear that the oil might seep
into the water table and
contaminate their neighbors' well water. Illness and damage that might result wo
uld be very expensive. Frank
and Jan can purchase an endorsement that will provide coverage for this pollutio
n exposure. The endorsement
would cost $50 per year.
Is this an effective risk management selection for Frank and Jan until they can
replace the tank? a. Yes, they should do this indefinitely and not replace the t
ank.
b. Yes, they are exchanging a large exposure for a little premium.
c. No, they are spending a lot of money for little protection.
d. No, each neighbor will have insurance to cover any damage to their wells.
Jeff recently started a consulting business. One of his concerns is that he will
be sued for giving erroneous advice
to a client. What would be the best risk management technique for Jeff's use in
this situation?
a. Retention
b. Avoidance
c. Insurance
d. Duplication
QUESTION
The process of managing exposures to accidental losses is known as
a. Insurance.
b. Risk management.
c. Retention.
d. Avoidance.
ANSWER B ( p. 10.3) QUESTION The risk control technique that seeks to lower the
severity of losses is a. Loss prevention.
b. Risk financing.
c. Loss reduction.
d. Duplication.
ANSWER C ( p. 10.9) QUESTION When a household or organization decides to keep al
l or part of a loss exposure this is known as a. Insurance.
b. Retention.
c. Reduction.
d. Separation.
ANSWER B ( p. 10.10) Ads by Google
.

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Chapter 1 QUESTION 0

d. A commercial loss exposure. ANSWER A OBJECTIVE 4

( pp. 1.12-1.13) QUESTION

ANSWER C ( p. 1.21) OBJECTIVE 11

ANSWER A ( pp. 2.4-2.5) QUESTION A reinsurance company a. Is formed to write all

a. Workers compensation insurance funds

ANSWER C ( p. 2.10) QUESTION

ANSWER C ( pp. 2.13-2.14) OBJECTIVE 5

a. Flex rating law.

ANSWER B ( p. 3.11) OBJECTIVE 3

ANSWER B ( pp. 4.6-4.7) OBJECTIVE 3

ANSWER A ( p. 5.10) QUESTION How do underwriting guidelines help an insurer achi

ANSWER C ( p. 5.13) OBJECTIVE 5

d. Educational records ANSWER D ( pp. 5.13-5.14) OBJECTIVE 6

ANSWER B ( p. 6.14) QUESTION Subrogation is the insurer's right to a. Recover it

ANSWER A ( pp. 6.20-6.24) Chapter 6 QUESTION

ANSWER B ( p. 6.5) QUESTION

d. Buildings not attached to the main building. ANSWER A ( p. 8.5) QUESTION

d. Constitutional law. ANSWER B ( p. 9.6) QUESTION

d. Battery. ANSWER C ( p. 9.10) QUESTION

ANSWER A ( pp. 9.8-9.9) QUESTION With regard to negligence, no recovery can be m

d. Pollution liability loss exposure. ANSWER C ( p. 9.15) QUESTION

d. The retention. ANSWER B ( p. 10.7) QUESTION

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