Question 1

Which of the following factors is not considered when an insurance rate or premium is calculated?

Accepted Answer

A) the cost of the actual losses 
B) the cost of the insurance salesman and other company expenses 
C) investment earnings on prepaid premiums 
D) McCarran-Ferguson Act 
A) the cost of the actual losses 
B) the cost of the insurance salesman and other company expenses 
C) investment earnings on prepaid premiums 
D) McCarran-Ferguson Act D

Question 2

The combined ratio is:

Accepted Answer

A) the loss ratio plus the expense ratio 
B) a measure of underwriting losses 
C) the loss ratio divided by the expense ratio 
D) a measure of capital gains and dividend returns 
A) the loss ratio plus the expense ratio 
B) a measure of underwriting losses 
C) the loss ratio divided by the expense ratio 
D) a measure of capital gains and dividend returns A

Question 3

Explain briefly the law of large numbers.

Accepted Answer

The law of large numbers is a mathematical rule that explains how insurance companies operate and are able to predict aggregate losses. The law says that the larger the sample size (the more exposures pooled together),the more closely the predicted result will equal the actual result.

Question 4

Which of the following is not a hazard?

Accepted Answer

A) storing one ton of dynamite in a garage 
B) bad diet (eating lots of junk food) 
C) skating on thin ice 
D) getting shot accidentally while deer hunting 
A) storing one ton of dynamite in a garage 
B) bad diet (eating lots of junk food) 
C) skating on thin ice 
D) getting shot accidentally while deer hunting

Question 5

Billy is driving to the beach for spring break. Before leaving on his trip,he takes some cold medicine that makes him sleepy. He falls asleep at the wheel and collides with another car on the highway and breaks his leg. In this context,which of the following is the hazard?

Accepted Answer

A) spring break 
B) knowing how to drive 
C) taking the medicine 
D) broken leg 
A) spring break 
B) knowing how to drive 
C) taking the medicine 
D) broken leg

Question 6

All the following are direct losses except:

Accepted Answer

A) a house is burglarized 
B) a store loses $200,000 in sales because a fire closes it down for two weeks 
C) a corporation must pay $1 million in ransom when its CEO is kidnapped 
D) an delivery truck needs $15,000 in repairs after a collision 
A) a house is burglarized 
B) a store loses $200,000 in sales because a fire closes it down for two weeks 
C) a corporation must pay $1 million in ransom when its CEO is kidnapped 
D) an delivery truck needs $15,000 in repairs after a collision

Question 7

The law of large numbers states that as the number of exposure units increases:

Accepted Answer

A) accuracy of predictions should improve 
B) the chance of loss declines 
C) objective risk increases 
D) the number of perils increases 
A) accuracy of predictions should improve 
B) the chance of loss declines 
C) objective risk increases 
D) the number of perils increases

Question 8

In banking,"pure risk" is referred to as

Accepted Answer

A) operational risk 
B) speculative risk 
C) subjective risk 
D) pure risk 
A) operational risk 
B) speculative risk 
C) subjective risk 
D) pure risk

Question 9

If an individual causes a loss intentionally,we would say that person is a:

Accepted Answer

A) physical hazard 
B) moral hazard 
C) morale hazard 
D) politician 
A) physical hazard 
B) moral hazard 
C) morale hazard 
D) politician

Question 10

A burglar enters Marcia's home and steals $10,000 worth of appliances. Marcia tells the insurance company that the appliances were worth $20,000. This overstatement of the loss is an example of:

Accepted Answer

A) a morale hazard 
B) a peril 
C) insurance fraud 
D) carelessness 
A) a morale hazard 
B) a peril 
C) insurance fraud 
D) carelessness

Question 11

Bodacious D,a famous singer,is performing at a concert. He does not have his body guards and security team present for the concert. A crazed fan runs up on stage,declares her love for Bodacious D,and throws herself at him. Bodacious D lands on the floor,and breaks his back. Which of these is the HAZARD(S),and which is the PERIL?

Accepted Answer

A) The peril is not having a body guard present; the hazard is the crazed fan 
B) The peril is being attacked by the fan, and the hazard is not having a body guard present 
C) The peril is not having a body guard present, and the hazard is being pushed to the floor 
D) The peril is both the crazed fan and the lack of security; there is no hazard in this case 
A) The peril is not having a body guard present; the hazard is the crazed fan 
B) The peril is being attacked by the fan, and the hazard is not having a body guard present 
C) The peril is not having a body guard present, and the hazard is being pushed to the floor 
D) The peril is both the crazed fan and the lack of security; there is no hazard in this case

Question 12

A difference between a contract issued on a "named peril" basis versus an "open peril" or "all-risk" basis is:

Accepted Answer

A) the "named peril" contract usually covers more perils 
B) the "named peril" contract is usually more expensive than the "open peril" contract 
C) in the "named peril" contract the insured must prove the peril is covered where in the "open peril" contract the burden of proof is on the insurer to show no coverage 
D) in the "open peril" or "all risk" contract there are no exclusions to loss 
A) the "named peril" contract usually covers more perils 
B) the "named peril" contract is usually more expensive than the "open peril" contract 
C) in the "named peril" contract the insured must prove the peril is covered where in the "open peril" contract the burden of proof is on the insurer to show no coverage 
D) in the "open peril" or "all risk" contract there are no exclusions to loss

Question 13

What is the fundamental function of the insurance company - in other words,what is it the insurance company does that makes the insurance mechanism work?

Accepted Answer

A) It pools those insureds having similar risks, and predicts the losses that those in the pool will suffer 
B) It pools any insureds who wish to purchase insurance, and attempts to predict the losses that those in the pool will suffer 
C) It redistributes government subsidies to those who have suffered catastrophes 
D) It eliminates the process of underwriting in order to sell insurance to as many people as possible, thus providing insureds with a huge quantity discount 
A) It pools those insureds having similar risks, and predicts the losses that those in the pool will suffer 
B) It pools any insureds who wish to purchase insurance, and attempts to predict the losses that those in the pool will suffer 
C) It redistributes government subsidies to those who have suffered catastrophes 
D) It eliminates the process of underwriting in order to sell insurance to as many people as possible, thus providing insureds with a huge quantity discount

Question 14

There are four basic components of an insurance premium. Which of the following is not one of those components?

Accepted Answer

A) losses suffered by the members of the insurance pool 
B) law of large numbers 
C) an allowance for unexpected losses 
D) earnings on investments 
A) losses suffered by the members of the insurance pool 
B) law of large numbers 
C) an allowance for unexpected losses 
D) earnings on investments

Question 15

Arthur is driving home from work when he runs off the road and hits a telephone pole. These are the losses he suffers: $12,000 to repair the damage to his car,and,$800 to rent a car while his car is being repaired. What is the correct name for each of these losses?

Accepted Answer

A) The $12,000 is an indirect loss, and the $800 is a direct loss 
B) The $12,000 is a direct loss, and the $800 is also a direct loss 
C) The $12,000 is a direct loss, and the $800 is an indirect loss 
D) The total loss of $12,800 is a direct loss 
A) The $12,000 is an indirect loss, and the $800 is a direct loss 
B) The $12,000 is a direct loss, and the $800 is also a direct loss 
C) The $12,000 is a direct loss, and the $800 is an indirect loss 
D) The total loss of $12,800 is a direct loss

Question 16

Morale hazards exist because of the presence of insurance.

Accepted Answer

A) True 
 B)False

Question 17

For the U.S.insurance industry,2001 was an unprofitable year in terms of underwriting,but not investments.

Accepted Answer

A) True 
 B)False

Question 18

The expense ratio equals:

Accepted Answer

A) total underwriting expenses divided by insured losses 
B) net income divided by total expenses 
C) total expenses divided by net income 
D) total expenses divided by premiums written 
A) total underwriting expenses divided by insured losses 
B) net income divided by total expenses 
C) total expenses divided by net income 
D) total expenses divided by premiums written

Question 19

Explain the financial definition and the legal definition of "insurance."

Accepted Answer

Financially,insurance is an arrangement

Question 20

From the insurance company's perspective,what is the difference between written premium and earned premium?

Accepted Answer

A) There is no difference; they are effectively the same thing 
B) Written premiums are those that belong to the insurer; earned premiums do not belong to the insurer 
C) Written premiums are the total premiums collected by the insurer; earned premiums are those that belong to the insurer. 
D) Written premiums reflect the total amount of coverage provided to insureds; earned premiums reflect the net profit of the insurer. 
A) There is no difference; they are effectively the same thing 
B) Written premiums are those that belong to the insurer; earned premiums do not belong to the insurer 
C) Written premiums are the total premiums collected by the insurer; earned premiums are those that belong to the insurer. 
D) Written premiums reflect the total amount of coverage provided to insureds; earned premiums reflect the net profit of the insurer.

Exam 1: Fundamentals and Terminology

Which of the following factors is not considered when an insurance rate or premium is calculated?

The combined ratio is:

Explain briefly the law of large numbers.

Which of the following is not a hazard?

Billy is driving to the beach for spring break. Before leaving on his trip,he takes some cold medicine that makes him sleepy. He falls asleep at the wheel and collides with another car on the highway and breaks his leg. In this context,which of the following is the hazard?

All the following are direct losses except:

The law of large numbers states that as the number of exposure units increases:

In banking,"pure risk" is referred to as

If an individual causes a loss intentionally,we would say that person is a:

A burglar enters Marcia's home and steals $10,000 worth of appliances. Marcia tells the insurance company that the appliances were worth $20,000. This overstatement of the loss is an example of:

A difference between a contract issued on a "named peril" basis versus an "open peril" or "all-risk" basis is:

What is the fundamental function of the insurance company - in other words,what is it the insurance company does that makes the insurance mechanism work?

There are four basic components of an insurance premium. Which of the following is not one of those components?

Arthur is driving home from work when he runs off the road and hits a telephone pole. These are the losses he suffers: $12,000 to repair the damage to his car,and,$800 to rent a car while his car is being repaired. What is the correct name for each of these losses?

Morale hazards exist because of the presence of insurance.

For the U.S.insurance industry,2001 was an unprofitable year in terms of underwriting,but not investments.

The expense ratio equals:

Explain the financial definition and the legal definition of "insurance."

From the insurance company's perspective,what is the difference between written premium and earned premium?

Defining the Insurable Event

Risk Management

Financial Services Companies

Insurance Occupations

the Insurance Market: the Economic Problem

Insurance Regulation

Insurance Contracts

Basic Property and Liability Insurance Contracts

Homeowners Insurance

the Personal Auto Policy

Professional Financial Planning

Life Insurance Policies

Standard Life Insurance Contract Provisions And Options

Annuities

Medical Expense and Disability Insurance

Advanced Topics in Risk Management

Commercial Property Insurance

Commercial Liability Insurance

Bonding,Crime Insurance and Reinsurance

Employee Benefits

Social Security

Unemployment and Workers Compensation Insurance

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