Deck 6: Insurance Company Operations

Question 1

The underwriting process begins with the

A)agent.
B)desk underwriter.
C)inspection report.
D)acceptance of the application.

Answer 1

A

Question 2

Common sources of underwriting information for life and health insurance include all of the following EXCEPT

A)the application.
B)a physical examination.
C)the Medical Information Bureau.
D)the applicant's income tax return.

Answer 2

D

Question 3

All of the following statements about reinsurance are true EXCEPT

A)A reinsurer may also purchase reinsurance.
B)Reinsurance is an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance.
C)The insurer transferring business to a reinsurer is called the ceding insurer.
D)The amount of insurance transferred to a reinsurer is called the net retention.

Answer 3

D

Question 4

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

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

Question 5

Which of the following statements about treaty reinsurance is true?

A)Under a surplus-share treaty,100 percent of the ceding insurer's liability must be transferred to the reinsurer.
B)Using a quota-share treaty increases the ceding insurer's unearned premium reserve.
C)Under an excess-of-loss treaty,the reinsurer pays losses in full only if they are less than the ceding insurer's retention limit.
D)Using a reinsurance pool provides financial capacity to write large amounts of insurance.

Question 6

The unearned premium reserve of an insurer is

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

Question 7

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

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

Question 8

Factors that may result in more restrictive underwriting decisions include which of the following?
I.Inadequate rates.
II.The unavailability of reinsurance at favorable terms.

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

Question 9

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

A)Fair Isaac Corporation (FICO)
B)Medical Information Bureau (MIB)
C)National Association of Insurance Commissioners (NAIC)
D)National Association of Mutual Insurance Companies (NAMIC)

Question 10

All of the following statements about the settlement of a claim are true EXCEPT

A)The insurance policy usually has a provision specifying how a notice of loss is to be made to the insurance company.
B)One step in the investigation of a claim is to determine whether the policy was in force when the loss occurred.
C)The adjustor must file the proof of loss,which is a sworn statement supporting his or her decision regarding a claim.
D)A policy provision may determine how disputes over claim settlements are resolved.

Question 11

Which of the following statements about underwriting standards is (are)true?
I.One purpose of underwriting standards is to reduce adverse selection against the insurer.
II.Equitable rates should be charged so that each group of policyowners pays its own way in terms of losses and expenses.

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

Question 12

All of the following are functions of the marketing department of an insurance company EXCEPT

A)to advertise the insurer's products.
B)to develop new products.
C)to identify production goals.
D)to make final underwriting decisions.

Question 13

A reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer is called

A)a reinsurance pool.
B)automatic treaty reinsurance.
C)retrocession.
D)facultative reinsurance.

Question 14

Which of the following statements about claim settlement is (are)true?
I.The fair payment of claims requires an insurer to adopt a very liberal claims policy.
II.To prevent lawsuits,an insurer should provide no personal assistance to a claimant other than that which is required by contractual obligations.

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

Question 15

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

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

Question 16

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

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

Question 17

The function of an actuary is to

A)adjust claims.
B)determine premium rates.
C)negotiate reinsurance treaties.
D)invest insurance company assets.

Question 18

Which of the following statements about treaty reinsurance is true?

A)The reinsurer is required to underwrite each individual applicant that is reinsured.
B)The reinsurer must accept all business that falls within the scope of the treaty.
C)The ceding insurer can choose which business falling within the scope of the treaty it wishes to reinsure.
D)It protects the reinsurer by requiring the ceding insurer to charge adequate premiums.

Question 19

All of the following statements about claims settlement are true EXCEPT

A)Agents may have the authority to settle claims.
B)Independent adjustors may be used in a geographic area where the volume of business is too low for an insurer to have its own adjustors.
C)Company adjustors are salaried employees who work for one insurer.
D)A public adjustor is usually paid a flat fee regardless of the size of a claim.

Question 20

Insurers obtain data which can be used to determine rates from

A)pricing pools.
B)insurance advisory organizations.
C)banks.
D)reciprocal exchanges.

Question 21

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

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

Question 22

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

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

Question 23

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

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

Question 24

Ross studied engineering in college.After graduation,he went to work for an insurance company.Ross visits properties insured by his company.He conducts inspections and makes recommendations about alarm systems,sprinkler systems,and building construction.In what functional area does Ross work?

A)underwriting
B)loss control
C)information systems
D)claims adjusting

Question 25

Easy Pay Insurance Company may require insureds who suffer a loss to submit a sworn statement to substantiate that a loss occurred and to describe the conditions under which the loss occurred.This sworn statement is called a

A)binder.
B)proof of loss.
C)inspection report.
D)notice of loss.

Question 26

The process of transferring risk to the capital markets through the use of financial instruments such as bonds,futures contracts,and options is knows as

A)consolidation of risk.
B)avoidance of risk.
C)securitization of risk.
D)compartmentalization of risk.

Question 27

Sue double-majored in mathematics and statistics in college.She also enrolled in a number of finance courses.After graduation,she was hired by Econodeath Insurance Company.Her job is to calculate premium rates for life insurance coverages.Sue is a(n)

A)actuary.
B)underwriter.
C)claims adjustor.
D)producer.

Question 28

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

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

Question 29

Which of the following statements is (are)true about life insurance company investments?
I.The majority of life insurance company general account assets are invested in bonds.
II.The majority of life insurance company separate account assets are invested in stocks.

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

Question 30

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

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

Question 31

Liability Insurance Company (LIC)was approached by a regional airline to see if LIC would write the airline's liability coverage.LIC agreed to write the coverage and entered into an agreement with a reinsurer.Under the agreement,LIC retains 25 percent of the premium and pays 25 percent of the losses,and the reinsurer receives 75 percent of the premium and pays 75 percent of the losses.This reinsurance arrangement is best described as

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

Question 32

Functions of an insurance company's legal department include which of the following?
I.Lobbying for legislation favorable to the insurance industry.
II.Drafting policy provisions.

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

Question 33

Antonio is a claims adjustor for LMN Insurance Company.After the insurer is notified that there has been a loss,Antonio meets with the insured.The first step in the claims process that Antonio should follow is to

A)determine the amount of the loss.
B)attempt to deny the claim regardless of whether he believes the claim is covered.
C)verify that a covered loss has occurred.
D)delay paying the claim if the claim is covered.

Question 34

Mark has been an underwriter for 20 years.An application he recently reviewed looked odd to him.The building value in the application seemed far too high,and Mark suspected the applicant might be planning to destroy the property after it is insured.Mark contacted an outside firm and hired someone to investigate the applicant and to prepare a report about the applicant.This report is called a(n)

A)agent's report.
B)binder.
C)physical inspection.
D)inspection report.

Question 35

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

A)reviewing policy wording before policies are adopted and marketed.
B)recouping subrogation recoveries from third parties who injured individuals insured by Amy's company.
C)providing legal advice about marketing,taxation,and insurance law.
D)reviewing applications to determine if the company should insure the risk.

Question 36

Beverly lives in a sparsely populated area in northern Idaho.Some insurance companies marketing coverage in northern Idaho cannot afford to have full-time adjustors there.Several insurers hire Beverly to adjust claims for their insureds.Beverly charges the insurers a fee for each claim that she settles.Beverly is a(n)

A)public adjustor.
B)adjustment bureau.
C)independent adjustor.
D)company adjustor.

Question 37

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

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

Question 38

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

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

Question 39

Jan is employed by an insurance company.She reviews applications to determine whether her company should insure the applicant.If insurable,Jan assigns the applicant to a rating category based on the applicant's degree of risk.Jan is a(n)

A)underwriter.
B)actuary.
C)loss control engineer.
D)claims adjustor.

Question 40

All of the following statements about life insurance company investments are true EXCEPT

A)Funds for these investments are derived primarily from premium income,investment earnings,and maturing investments that must be reinvested.
B)Income from these investments reduces the cost of insurance.
C)A primary objective in making these investments is safety of principal.
D)The majority of these investments are short-term investments.

Question 41

Most insurance companies require their marketing representatives to submit an evaluation of the prospective insured.This important source of underwriting information is called the

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

Question 42

Catastrophe bonds are made available to institutional investors in the capital markets through an entity that is specially created for that purpose.This is entity is called a

A)risk retention group.
B)fraternal insurance company.
C)captive insurance company.
D)special purpose reinsurance vehicle.

Question 43

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

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

Question 44

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

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