Deck 23: Functions and Organization of Insurers

Question 1

Agents help in the underwriting function of most insurers.

Answer 1

True

Question 2

The main objective of underwriting is to reject poor risks.

Answer 2

False

Question 3

Successful underwriting occurs when an insurer has few, if any, losses from a group of exposures it accepts for insurance.

Answer 3

False

Question 4

The conflict between production and underwriting is more apparent than real.

Question 5

Associations such as Industrial Risk Insurers are important in underwriting.

Question 6

The amount charged per unit of exposure is known as the premium.

Question 7

The cost of doing business in insurance is called loading.

Question 8

If the pure premium is $100 and the loading is 25 percent, the gross premium would be $133.33.

Question 9

Interest earned by insurers on premiums collected in advance is not considered in insurance rate making.

Question 10

Legislative supervision of insurers is generally concerned with preventing inadequate rates rather than with preventing excessive rates.

Question 11

A manual rate is a rate promulgated for a given class of risks rather than for an individual risk.

Question 12

The loss ratio method of rate making is a way to revise rates rather than make rates.

Question 13

A discount from a manual rate is called a deviation.

Question 14

Merit rating is aimed at adjusting an insurance rate for specific features deemed to affect expected loss experience.

Question 15

Experience rating looks to the past lost experience of an insured, but affects the rate to be charged in the future.

Question 16

A retrospective rating method affects the premium paid for a past time period.

Question 17

Credibility in rate making is used to make insured groups with few exposure units pay their full cost of poor loss experience.

Question 18

Failure to investigate a claim promptly is classed as an unfair claim settlement practice.

Question 19

Most assets of insurance companies are invested in real estate.

Question 20

If a firm has a good risk manager, there usually is no need to deal with an insurance agent who performs many of the same functions as a risk manager.

Question 21

An excess-of-loss treaty is a form of facultative reinsurance.

Question 22

The Insurance Services Office (ISO) is a loss adjustment office for insurance companies.

Question 23

Facultative reinsurance is the most complex form of reinsurance.

Question 24

The amount of risk retained by a ceding company for its own account is known as the cession.

Question 25

The most common types of pro-rata reinsurance treaties are surplus and quota share treaties.

Question 26

Match the descriptions with their terms:

-The function in insurance most closely related to the sales function is known as _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 27

Match the descriptions with their terms:

-The function in insurance in which an insurance contract is prepared and issued is called _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 28

Match the descriptions with their terms:

-That portion of an insurance premium designed to cover the insurer's expenses is known as the _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 29

Match the descriptions with their terms:

-The total premium charged for coverage is the _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 30

Match the descriptions with their terms:

-In insurance the function of pricing is called _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 31

Match the descriptions with their terms:

-An organization that helps individual insurers develop satisfactory rates is known as a/an _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 32

Match the descriptions with their terms:

-A method of rate-making recognizing individual hazards of a specific exposure is called _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 33

Match the descriptions with their terms:

-A rating method in which the rate applies uniformly to each member of a group is called _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 34

Match the descriptions with their terms:

-In life insurance a rate deviation is often granted for __________, while extra premiums may be charged for substandard risks.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 35

Match the descriptions with their terms:

-In property-liability insurance _______________ is employed to recognize specific features affecting probability severity of loss.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 36

Match the descriptions with their terms:

-The statistical formula for _________________ describes the degree to which a rate maker can rely on the accuracy of loss experience.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 37

Match the descriptions with their terms:

-In property-liability insurance, _________________ represent the insurer and public adjusters represent the insured.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 38

Match the descriptions with their terms:

-When an insurer seeks insurance itself it is said to be purchasing _________________, and the insurer accepting the risk is known as the reinsurer.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 39

Match the descriptions with their terms:

-The name given a primary insurer transferring part of the risk to the reinsurer is the _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 40

Match the descriptions with their terms:

-In reinsurance, that portion of a risk kept by a primary company is the line, or retention, and the portion transferred to the reinsurer is the _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 41

Match the descriptions with their terms:

-A type of pro-rata reinsurance treaty in which both premiums and losses are divided according to a given percentage for each participant is a/an _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 42

Match the descriptions with their terms:

-A reinsurance treaty in which losses are paid by the reinsurer only when losses exceed some predetermined deductible or retention is called a/an _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 43

Match the descriptions with their terms:

-When several insurers combine to accept reinsurance, this is called a/an _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 44

Match the descriptions with their terms:

-A/An _________________ is an independent report on an applicant prepared by an outside agency for the purpose of assisting the underwriter.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 45

Match the descriptions with their terms:

-Independent associations formed by insurers to assist in underwriting are often called _________________ and normally specialize in certain areas.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 46

Match the descriptions with their terms:

-The _________________ is the portion of an insurance premium designed to cover the expected loss.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 47

Match the descriptions with their terms:

-The ratio of the loss cost to the gross premium is called the _________________.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 48

Match the descriptions with their terms:

-The two factors that must be estimated to determine loss and that are subject to errors in forecasting are frequency of occurrence and _________________ of loss.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 49

Match the descriptions with their terms:

-A/An _________________, the simplest type of reinsurance, is a specific reinsurance on an optional basis.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 50

Match the descriptions with their terms:

-Under a/an _________________, the reinsurer is bound to take certain types of risks if offered by the ceding company, but the decision of whether or not to reinsure remains with the ceding company.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 51

Match the descriptions with their terms:

-The _________________ is an example of a surplus treaty.

A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Question 52

Which of the following generalizations is most accurate concerning underwriting?

A) A rate can be found for almost any risk, no matter how poor,
B) The underwriter depends only on statements by the applicant as a guide for acceptance or rejection,
C) Underwriting judgment is of only moderate importance in the successful operation of the insurance enterprise,
D) An underwriter has very little discretion since most of his or her decisions are already incorporated into set rules and regulations,
E) The main objective is to see that applicants accepted will have the loss experience anticipated when the rates were formulated.

Question 53

Claims management in insurance is characterized by all but one of the following:

A) Overly liberal claims-settlement procedures may be as bad as stingy claims-settlement procedures,
B) Claims-settlement problems are generally more complex in life insurance than in property and liability insurance,
C) An independent adjuster generally serves the small insurer,
D) Often negotiations with the claims department is the only contact that the insurance buyer has with the insurer.

Question 54

Insurance Company XYZ has an agreement to bear 15 percent of all losses and to retain 15 percent of all premiums in a certain type of insurance. Apparently, XYZ has reinsurance of which type?

A) formal facultative,
B) informal facultative,
C) excess of loss,
D) spread of loss,
E) quota share.

Question 55

Supervision of advertising programs of insurers is most likely to be under

A) underwriting,
B) rate making,
C) production,
D) claims management,
E) investment and finance.

Question 56

The pure premium is

A) the same as the gross premium,
B) the gross premium increased for loading,
C) the gross premium less the allowance for loading,
D) the insurance rate multiplied by the number of exposure units,
E) another name for a credible premium.

Question 57

The main difference between pricing insurance and pricing other commodities is

A) in insurance, the future loss is unknown and must be estimated,
B) in insurance, prices are strictly regulated,
C) in insurance, pricing is done scientifically,
D) all three are correct,
E) none of these are correct.

Question 58

An insurance rate must by law in most states meet all but one of the following requirements:

A) must be adequate to meet future losses,
B) must not be excessive,
C) must be fair,
D) must encourage loss control efforts by the insured,
E) all of these conditions must be met.

Question 59

The concept of "fairness" in insurance rate making is best described by which of the following?

A) The rate should reflect all individual differences that may affect future loss experience,
B) The rate should reflect the loss experience of the class into which an insured is placed,
C) The rate should be higher for those age groups having the most losses, and less for other age groups,
D) The rate should be high enough to cover all losses of the insurer,
E) The rate should be low enough for all insureds needing insurance to afford coverage.

Question 60

A rate-making method designed to adjust a premium to reflect the actual loss experience of an insured in a given time period is known as

A) retrospective rating,
B) experience rating,
C) manual, or class, rating,
D) schedule rating,
E) preferred risk rating.

Question 61

In the loss ratio method of rate making, if the actual loss ratio is 50 percent, but the expected loss ratio is 60 percent, the future rate charged would be

A) increased 10 percent,
B) decreased 10 percent,
C) increased 20 percent,
D) decreased 16.66 percent,
E) decreased 20 percent.

Question 62

When the number of exposure units in an insured group is larger, the degree of credibility of resulting loss experience will be

A) increased,
B) decreased,
C) changed only slightly,
D) credibility is unaffected by the number of exposure units.

Question 63

If an insured group develops loss experience deemed to be 50 percent credible, for rate-making purposes the future pure premium for that group

A) will not be affected,
B) will be based on a formula that gives 50 percent weight to its own loss ratio,
C) will be based on a loss ratio that is 50 percent less than that of the larger group to which it belongs,
D) will be reduced by 50 percent of its former level,
E) none of these is correct.

Question 64

The proportion of general account assets of life insurers invested in bonds is most closely approximated by

A) 17 percent,
B) 9 percent,
C) 20 percent,
D) 55 percent,
E) 73 percent.

Question 65

To an insurer, the advantages of reinsurance include all but one of the following:

A) directly increasing profits,
B) stabilizing profits,
C) reducing unearned premium reserve requirements,
D) enabling an insurer to retire from underwriting a given segment of its business,
E) enlarging financial capacity to accept risk.

Question 66

A type of reinsurance treaty in which an insurer accepts a given amount of loss before the reinsurers must pay anything is a feature of all but one of the following:

A) formal facultative,
B) first surplus,
C) excess of loss,
D) spread of loss,
E) excess line.