Deck 7: Insurable Perils and Insuring Organizations

Question 1

If you were an underwriter of homeowners insurance coverage, asking which of the following underwriting questions would probably be socially unacceptable to the homeowner applicant?

A) What religious beliefs do you have?
B) Does anyone in your family smoke cigarettes in the house?
C) Do you have an alarm system installed and working?
D) Do you have a swimming pool?

Answer 1

A

Question 2

On average, women live longer than men. If an applicant's gender is ignored in determining life insurance prices:

A) men will subsidize women
B) women will subsidize men
C) no subsidization will occur because only group longevity results are valid
D) morale hazard will increase significantly

Answer 2

B

Question 3

Lloyd's of London:

A) is a large property-liability insurance company with head-quarters in London
B) sells stock
C) is a marketplace where separate syndicates accept exposures for their own accounts
D) sells insurance directly to the public

Answer 3

C

Question 4

"Subsidization" in an insurance pool means:

A) the bad risks pay more for insurance than good risks
B) the premiums collected by the insurers don't adequately cover the losses experienced by the pool
C) those who experience losses have their premiums raised
D) exposures that should be charged higher insurance rates are averaged in a pool so that the good as well as bad exposures pay the same rate

Question 5

Which of the following is not a type of mutual insurance organization?

A) Assessment
B) Advanced-premium
C) Perpetual
D) Reciprocal

Question 6

From the viewpoint of an insurer, the prerequisites of an ideally insurable risk include all the following except:

A) the loss must be capable of being determined and measured
B) there must be a large, homogeneous group of exposure units
C) the loss should not be subject to catastrophic hazard
D) the peril should be such that the probability of loss is high

Question 7

Which of the following statements about stock insurance companies is true?

A) Stockholders provide operating capital and receive dividends.
B) They are nonprofit organizations.
C) The insureds own the company.
D) They are more likely to provide lower-cost insurance than mutuals.

Question 8

The Norris and Manhart cases resulted in which of the following outcomes?

A) Made insurance intrastate commerce
B) Made it illegal to charge men and women different life insurance premiums
C) Equalization of pension payments between men and women
D) Made it illegal to use gender as an underwriting factor in any type of insurance

Question 9

In which of the following insurance pools would there be no subsidization?

A) Fire insurance
B) Life insurance
C) Automobile insurance
D) There would be subsidization in all of these pools.

Question 10

A reciprocal exchange is:

A) a nonprofit corporation
B) unincorporated
C) a mutual insurance company
D) a federal insurance company

Question 11

If you were a life insurance underwriter, asking which of the following underwriting questions would probably be socially unacceptable to an insurance applicant?

A) Have you ever tested positive for HIV?
B) Have you smoked any tobacco products within the last year?
C) Are you heterosexual, homosexual, or bisexual?
D) Have you traveled to a foreign country within the last ten years?

Question 12

All the following are true about fraternal insurers except:

A) they market their product to social organizations
B) they are nonprofit and have tax advantages
C) they specialize in life insurance
D) they typically sell coverage through commercial banks

Question 13

The use of an applicant's personal opinions by underwriters for rating criteria directly violates which guiding principle of underwriting?

A) Separation and class homogeneity
B) Reliability
C) Incentive value
D) Social acceptability

Question 14

The Gramm-Leach-Bliley (GLB) Act:

A) allows banks to acquire insurance companies
B) prohibits banks from acquiring insurance companies
C) allows banks to form insurance companies
D) both A and C

Question 15

A mutual insurer:

A) is not a corporation
B) is run by an attorney-in-fact
C) is legally a nonprofit organization
D) technically is a charitable organization

Question 16

The term "demutualization" refers to:

A) the process of a stock insurer converting its organizational structure to mutual
B) the board of directors' action in declaring dividends for the policy owners
C) the process of a mutual insurer converting its organizational structure to the stock form
D) the process of liquidating an insolvent mutual insurance company

Question 17

An assessment mutual:

A) provides primarily fire and windstorm insurance
B) is owned by stockholders who supply the capital
C) distribute all investment earnings to its policyholders in the form of a dividend
D) requires only assessments from each policyholder after the end of each year to cover losses

Question 18

All the following are necessary for an ideally insurable loss exposure except:

A) large number of homogeneous exposures
B) losses must be accidental and unintentional from the point of view of the insured
C) losses must be measurable
D) low probability of loss

Question 19

Mrs. Barker has a poodle that she loves very much. The poor little dog is killed in a house fire, and Mrs. Barker asks her homeowners insurance company to pay $100,000 for the loss of the dog. The insurer denies the claim. On what grounds would it be able to do this?

A) Too much moral hazard potential exists with the loss of pets.
B) It's impossible to measure, economically, the value of a beloved pet.
C) Animals are never insurable items.
D) The insurer could not legally deny the claim.

Question 20

Adverse selection results in which of the following?

A) No underwriting is necessary.
B) Applicants for insurance have a higher probability of loss than the average group of insureds.
C) The federal government must write the insurance.
D) Better insureds are attracted to the group.

Question 21

In general, all of the following statements about Lloyd's of London are true except:

A) members have unlimited personal liability
B) individual members ("names") cooperate in groups known as syndicates
C) if a syndicate is unable to pay its portion of a loss, the insured has the right to collect that unpaid portion from Lloyd's of London
D) Lloyd's is not as preeminent in the insurance marketplace today as it once was

Question 22

Stock insurers:

A) are unincorporated
B) only sell property and liability insurance
C) cannot sell automobile insurance
D) are organized as profit-making ventures

Question 23

Savings bank life insurance:

A) is sold only in a few Eastern states in the U.S.
B) is a form of group credit life and disability coverage
C) can only be purchased in amounts of $5,000 or less
D) is the same as industrial life insurance

Question 24

Private insurers are classified according to ownership arrangements. Distinct types mentioned in the text include all the following except:

A) stock companies
B) mutual companies
C) reciprocals
D) reinsurer

Question 25

Earthquake insurance:

A) is provided too cheaply by insurance companies
B) typically costs $1 per $20,000 protection
C) is sold in only a limited number of geographical markets
D) is bought by Californians only

Question 26

A mutual insurance company might be characterized by all of the following except:

A) policyholder ownership
B) non-profit operations
C) taxable dividends to owners
D) assessable policies

Question 27

Which of the following statements is false?

A) Assessment mutuals provide primarily fire and windstorm insurance.
B) A stock insurance company is a profit-making venture in both life and property insurance.
C) Dividends are paid to stockholders of stock companies.
D) In stock companies, non-insured stockholders bear none of the risk of loss.

Question 28

Assessment mutuals:

A) primarily provide fire and windstorm coverage for small towns and farmers
B) do a lot more business than advance premium mutuals
C) do about the same amount of business as advance premium mutuals
D) are shareholder owned

Question 29

To obtain a right of ownership in a stock insurance company, you should contact:

A) an independent agent
B) a direct writer
C) a securities dealer
D) the insurance commissioner

Question 30

All the following statements are true concerning mutual insurance companies except:

A) they may pay dividends
B) they are owned by their policyholders
C) they are legally organized as perpetual partnerships
D) they are nonprofit

Question 31

Buying insurance from a mutual may not always be desirable because:

A) the mutual is trying to make a profit for the stockholders
B) you may be paying for other insureds' losses
C) premiums may be greater than that of a stock company if the mutual is improperly managed
D) the officers of the company are not responsible to the policy holders

Question 32

Which of the following statements about the insurer death spiral is not correct?

A) The insurance pool is shrinking to those who really need insurance.
B) The remaining policyholders are not susceptible to the peril being insured.
C) The insurance pool is shrinking to those who are facing high risk.
D) The insurance premium that needs to be paid is very high.

Question 33

Lloyd's of London:

A) is an unincorporated, not-for-profit insurer
B) is partly a mutual company and partly a stock company
C) sells mainly homeowners insurance to residents of London
D) operates in the surplus lines and marine insurance markets

Question 34

A stock insurer is managed by:

A) an attorney-in-fact
B) an agency supervisor
C) a fraternal representative
D) representatives chosen by shareholders

Question 35

The United States' Property-Liability insurance industry wrote how many billion worth of premiums in 2008?

A) 25.4
B) 97.4
C) 317
D) 439.8

Question 36

Which of the following is not an evaluation criterion to determine whether a risk classification is appropriate?

A) Separation
B) Reliability
C) Incentive Value
D) Simplicity

Question 37

The United States' Life-Health insurance industry wrote how many billion worth of premiums in 2008?

A) 96.5
B) 223.6
C) 518.1
D) 641.6

Question 38

Is the insurer death spiral applicable to Tornado Insurance?

A) Yes, only people in a limited number of states are susceptible to tornadoes.
B) Yes, Tornado Insurance premiums are extremely high.
C) No, the desire to purchase Tornado Insurance is not limited to a small group of consumers.
D) No, there is a definite loss capable of causing economic hardship.

Question 39

What is the effect when the most favorably situated exposures leave a (potential) insurance pool?

A) Premiums go down.
B) Nothing
C) The cost of insurance needs to be borne by more policyholders.
D) The cost of insurance needs to be borne by fewer policyholders.

Question 40

Which of the following statements about the insurer death spiral is correct?

A) The insurance pool is shrinking to those who really need insurance.
B) The government has enacted laws to prevent the death spiral.
C) The insurance pool is shrinking to those who are facing low risk.
D) The insurance premium that needs to be paid is minimized.

Question 41

The items in an insurance pool must be similar to reduce subsidization.

Question 42

Reciprocal exchanges provide a considerable amount of automobile insurance.

Question 43

In an insurer death spiral only people who do not really need insurance purchase it.

Question 44

What is demutualization? What are some reasons companies want to demutualize?

Question 45

Subsidization in insurance pools occurs if a 40-year-old male is charged the same life insurance premium as a 20-year-old male.

Question 46

Of all evaluation criteria to determine whether a risk classification is appropriate, simplicity is the most important one.

Question 47

The insurer's efficiency and underwriting practices are much more important to the consumer than the insurer's legal form of organization.

Question 48

Dividends from mutual insurers are a part of the contract, and minimum dividends are guaranteed.

Question 49

Both stock and mutual insurance companies are incorporated.

Question 50

Mutual insurance companies legally are nonprofit organizations.

Question 51

The Gramm-Leach-Bliley Act (1999) allows banks, security dealers, and insurance companies to combine together to form financial services holding companies.

Question 52

Dividends from mutual insurers are not subject to federal income tax.

Question 53

Lloyd's of London is the largest mutual insurance company in the world measured by total premiums written.

Question 54

In an insurer death spiral the insurance pool shrinks.

Question 55

To own a part of a stock insurance company, a person must purchase an insurance policy from that company.

Question 56

Which of the following statements is correct?

A) Net Premiums Written by Life-Health Insurers have decreased between 1998 and 2008.
B) Net Premiums Written by Property-Liability Insurers have stayed basically the same between 1998 and 2008.
C) Net Premiums Written by Life-Health Insurers were higher than those written by Property-Liability Insurers in 1998.
D) Net Premiums Written by Life-Health Insurers were lower than those written by Property-Liability Insurers in 2008.

Question 57

Reciprocal exchanges are operated by managers known as notary publics.

Question 58

How do a reciprocal exchange and a mutual insurance company differ?

Question 59

Competition would totally eliminate subsidization in insurance pools if there were no regulator restricting competition between insurance companies.

Question 60

Reciprocal exchanges are unincorporated.

Question 61

What are the basic differences between a stock and a mutual insurance company?

Question 62

Describe the changes that were brought about by the Gramm-Leach-Bliley Act, and, its overall impact on financial services today.

Question 63

Lloyd's of London is not an insurance company. What is it and how does it provide insurance?