CH1
1
Traditionally, risk has been defined as
A) any situation in which the probability of loss is one.
B) any situation in which the probability of loss is zero.
C) uncertainty concerning the occurrence of loss.
D) the probability of a loss occurring.
Answer: C
2
Objective risk is defined as
A) the probability of loss.
B) the relative variation of actual loss from expected loss.
C) uncertainty based on a person's mental condition or state of mind.
D) the cause of loss.
Answer: B
3
An insurance company estimates its objective risk for 10,000 exposures to be 10
percent. Assuming the probability of loss remains the same, what would happen to
the objective risk if the number of exposures were to increase to 1 million?
A) It would decrease to 1 percent.
B) It would decrease to 5 percent.
C) It would remain the same.
D) It would increase to 20 percent.
Answer: A
4
Uncertainty based on a person's mental condition or state of mind is known as
A) objective risk.
B) subjective risk.
C) objective probability.
D) subjective probability.
Answer: B
5
The long-run relative frequency of an event based on the assumption of an
infinite number of observations with no change in the underlying conditions is
called
A) objective probability.
B) objective risk.
C) subjective probability.
D) subjective risk.
Answer: A
6
Which of the following statements about a priori probabilities is correct?
A) They are subjective probabilities based on ambiguity in the way probability is
perceived.
B) They are subjective probabilities that may vary among individuals because of
factors such as age, gender, education, and the use of alcohol.
C) They are objective probabilities that can be determined by deductive reasoning.
D) They are objective probabilities that can be determined by subjective reasoning.
Answer: C
7
An individual's personal estimate of the chance of loss is a(n)
A) objective probability.
B) objective risk.
C) subjective probability.
D) a priori
Answer: C
8
A peril is
A) a moral hazard.
B) the cause of a loss.
C) a condition that increases the chance of a loss.
D) the probability that a loss will occur.
Answer: B
9
An earthquake is an example of a(n)
A) moral hazard.
B) peril.
C) physical hazard.
D) objective risk.
Answer: B
10
Dense fog that increases the chance of an automobile accident is an example of a
A) speculative risk.
B) peril.
C) physical hazard.
D) moral hazard.
Answer: C
11
Faking an accident to collect insurance proceeds is an example of
A) physical hazard.
B) objective risk.
C) moral hazard.
D) attitudinal hazard.
Answer: C
12
Carelessness or indifference to a loss is an example of
A) physical hazard.
B) objective probability.
C) moral hazard.
D) attitudinal hazard.
Answer: D
13
Some characteristics of the judicial system and regulatory environment increase
the frequency and severity of loss. This hazard is called
A) moral hazard.
B) physical hazard.
C) attitudinal hazard.
D) legal hazard.
Answer: D
14
Taylor Tobacco Company is concerned that the company may be held liable in a
court of law and ordered to pay a large damage award to a smoker harmed by
the company’s cigarettes. The characteristics of the judicial system that increase
the frequency and severity of loss are known as
A) moral hazard.
B) particular risk.
C) speculative risk.
D) legal hazard.
Answer: D
15
A name that encompasses all of the major risks faced by a business firm is
A) financial risk.
B) speculative risk.
C) enterprise risk.
D) pure risk.
Answer: C
16
Which of the following statements about financial risk is (are) true?
Enterprise risk does not include financial risk.
Financial risk is easily addressed through the purchase of insurance.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
17
One of the speculative financial risks considered in an enterprise risk management
program is the risk of loss because of adverse changes in commodity prices,
interest rates, foreign exchange rates, and the value of money. This risk is called
A) property risk.
B) financial risk.
C) strategic risk.
D) operational risk.
Answer: B
18
Katelyn was just named Risk Manager of ABC Company. She has decided to create
a risk management program which considers all of the risks faced by ABC—pure,
speculative, operational, and strategic—in a single risk management program. Such
a program is called a(n)
A) financial risk management program.
B) enterprise risk management program.
C) fundamental risk management program.
D) consequential risk management program.
Answer: B
19
A pure risk is defined as a situation in which there is
A) only the possibility of loss or no loss.
B) only the possibility of profit.
C) a possibility of neither profit nor loss.
D) a possibility of either profit or loss.
Answer: A
20
The premature death of an individual is an example of a
A) pure risk.
B) speculative risk.
C) nondiversifiable risk.
D) physical hazard.
Answer: A
21
Which of the following statements about speculative risks is true?
A) They are almost always insurable by private insurers.
B) They are more easily predictable than pure risks.
C) They may benefit society even though a loss occurs.
D) They involve only a chance of loss.
Answer: C
22
An automobile that is a total loss as a result of a collision is an example of which
of the following types of risk?
Speculative risk
Diversifiable risk
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
23
All of the following are programs to insure fundamental risks EXCEPT
A) federally subsidized flood insurance.
B) auto physical damage insurance.
C) Social Security.
D) unemployment insurance.
Answer: B
24
All of the following are examples of personal risks EXCEPT
A) poor health.
B) unemployment.
C) premature death.
D) loss of business income.
Answer: D
25
Which of the following is a reason why premature death may result in economic
insecurity?
Additional expenses associated with death may be incurred.
The income of the deceased person's family may be inadequate to meet its basic
needs.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
26
Which of the following is (are) often consequences of long-term disability?
Continuing medical expenses
Loss or reduction of employee benefits
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
27
Which of the following is an example of consequential (indirect) loss?
A) the theft of a person's jewelry
B) the destruction of a firm's manufacturing plant by an earthquake
C) the cost of renting a substitute vehicle while a collision-damaged car is being
repaired
D) the vandalism of a person's automobile
Answer: C
28
The extra expense incurred by a business to stay in operation following a fire is
an example of a(n)
A) fundamental risk.
B) speculative risk.
C) direct loss.
D) indirect loss.
Answer: D
29
Which of the following statements about liability risks is (are) true?
Future income and assets can be attached to pay judgments if inadequate
insurance is carried.
There is an upper limit on the amount of loss.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
30
All of the following are burdens to society because of the presence of risk EXCEPT
A) The size of an emergency fund must be increased.
B) Risk provides an incentive for people to engage in loss control.
C) Society is deprived of certain goods and services.
D) Mental fear and worry are present.
Answer: B
31
Loss control includes which of the following?
Loss reduction
Loss prevention
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
32
Following good health habits can be categorized as
A) loss prevention.
B) risk retention.
C) noninsurance transfer.
D) personal insurance.
Answer: A
33
From the insured's perspective, the use of deductibles in insurance contracts is an
example of
A) risk transfer.
B) risk control.
C) risk avoidance.
D) risk retention.
Answer: D
34
The use of fire-resistive materials when constructing a building is an example of
A) risk transfer.
B) risk control.
C) risk avoidance.
D) risk retention.
Answer: B
35
All of the following statements about risk retention are true EXCEPT
A) It may be used intentionally if commercial insurance is unavailable.
B) It may be used passively because of ignorance.
C) Its use is most appropriate for low-frequency, high-severity types of risks.
D) Its use results in cost savings if losses are less than the cost of insurance.
Answer: C
36
Which of the following is an example of a noninsurance risk transfer?
A) not engaging in dangerous activities
B) entering into a hold-harmless agreement
C) installing smoke detectors in your home
D) using nonflammable building material when constructing a house
Answer: B
37
Curt borrowed money from a bank to purchase a fishing boat. He purchased
property insurance on the boat. Curt had difficulty making loan payments because
he did not catch many fish, and fish prices were low. Curt intentionally sunk the
boat, collected from his insurer, and paid off the loan balance. This scenario
illustrates the problem of
A) adverse selection.
B) moral hazard.
C) nondiversifiable risk.
D) attitudinal hazard.
Answer: B
38
Jenna opened a successful restaurant. One night, after the restaurant had closed,
a fire started when the electrical system malfunctioned. In addition to the physical
damage to the restaurant, Jenna lost profits that could have been earned while the
restaurant was closed for repairs. The lost profits are an example of
A) direct loss.
B) nondiversifiable risk.
C) speculative risk.
D) indirect loss.
Answer: D
39
Brad started a pest control business. To protect his personal assets against liability
arising out of the business, Brad incorporated the business. Brad's use of the
corporate form of organization to shield against personal liability claims illustrates
A) fundamental risk.
B) noninsurance transfer.
C) risk retention.
D) objective risk.
Answer: B
40
ABC Insurance Company plans to sell homeowners insurance in five Western
states. ABC expects that 8 homeowners out of every 100, on average, will report
claims each year. The variation between the rate of loss that ABC expects to occur
and the rate of loss that actually occurs is called
A) objective probability.
B) subjective probability.
C) objective risk.
D) subjective risk.
Answer: C
41
Williams
Company
installed
smoke
detectors,
a
sprinkler
system,
and
fire
extinguishers in its new manufacturing facility. These devices are all examples of
A) risk control.
B) noninsurance transfer.
C) risk avoidance.
D) risk retention.
Answer: A
42
Which of the following statements about hedging is (are) true?
Hedging is a form of risk transfer.
Hedging is used to address the risk of unfavorable price fluctuations.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
43
Cathy's car hit a patch of ice on the road. The car skidded off the road and hit a
tree. The presence of ice on the road is best described as a(n)
A) peril.
B) subjective risk.
C) physical hazard.
D) indirect loss.
Answer: C
44
Jim and Paula Franklin started a dry cleaning business. The business may be
successful or it may fail. The type of risk that is present when either a profit or
loss could occur is called
A) pure risk.
B) subjective risk.
C) nondiversifiable risk.
D) speculative risk.
Answer: D
45
Ben is concerned that if he injures someone or damages someone's property he
could be held legally responsible and required to pay damages. This type of risk is
called a
A) speculative risk.
B) liability risk.
C) nondiversifiable risk.
D) property risk.
Answer: B
46
MLX Drug Company would like to market a new hypertension drug. While the Food
and Drug Administration (FDA) was testing the drug, it discovered that the drug
produced a harmful side effect. When MLX learned of the FDA's test result, MLX
abandoned its plan to produce and distribute the drug. MLX's reaction illustrates
A) risk avoidance.
B) hedging.
C) risk transfer.
D) risk retention.
Answer: A
47
ABC Insurance Company sells auto insurance in one state. Recently, the state
legislature passed a law that limits the use of an individual’s credit history by
insurers when selecting applicants to insure. This change in law will increase the
possibility of unprofitable results for ABC. This type of hazard is an example of
A) physical hazard.
B) legal hazard.
C) moral hazard.
D) attitudinal hazard.
Answer: B
48
All of the following are characteristics of the liability risk that most people face
EXCEPT
A) a lien may be placed on your income and assets to satisfy a legal judgment.
B) substantial legal expenses may be incurred defending the claim.
C) there is no upper limit on the amount of the loss.
D) owning liability insurance eliminates the possibility of being held legally liable.
Answer: D
49
Which of the following statements about chance of loss and risk is (are) true?
If the chance of loss is identical for two groups, the objective risk must be the
same.
Two individuals may perceive differently the risk inherent in a given activity.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
50
A risk that affects only individuals or small groups and not the entire economy is
called a
A) diversifiable risk.
B) pure risk.
C) speculative risk.
D) nondiversifiable risk.
Answer: A
51
Which of the following is an example of a commercial risk?
A) the risk of insufficient retirement income
B) the loss of business income
C) the risk of premature death
D) the risk of being unemployed
Answer: B
52
A special form of planned retention by which part or all of a give loss exposure is
retained by the firm is called
A) hedging.
B) self-insurance.
C) passive retention.
D) noninsurance transfer.
Answer: B
53
The production facility for ABC Manufacturing is located in a flood plain. Although
the risk of flood is low, ABC's risk manager is concerned that a flood could
damage the plant and equipment. He received bids on flood insurance from two
insurance agents, but decided the cost of coverage was too high relative to the
risk. So he did not purchase flood insurance. Which risk management technique is
ABC using with respect to the risk of flood?
A) active retention
B) noninsurance transfer
C) passive retention
D) avoidance
Answer: A
54
A student who has skipped many classes and not studied the course material was
surprised to learn there was a test when he showed-up for class. The student's
mental uncertainty about whether or not he will pass the test is called
A) objective risk.
B) objective probability.
C) subjective probability.
D) subjective risk.
Answer: D
55
Rapid
inflation,
cyclical
examples of
A) diversifiable risks.
B) physical hazards.
C) nondiversifiable risks.
D) speculative risks.
Answer: C
56
unemployment,
war,
hurricanes,
and
floods
are
all
Five years ago, Shannon decided to start investing monthly in the common stock
of ABC Telecom Company. Her financial well-being will be harmed if the price of
ABC Telecom stock drops significantly. The risk of investment loss can be reduced
if she invests in other companies and other types of financial assets. The risk
Shannon faces with regard to her investments is a(n)
A) enterprise risk.
B) diversifiable risk.
C) pure risk.
D) nondiversifiable risk.
Answer: B
57
Frazier Electric keeps a paper copy of business records at the company’s
headquarters. The company also has two back-up copies of business records
stored in electronic files. The electronic files are kept in the event the paper
records are damaged or destroyed. The back-up files illustrate which of the
following risk control techniques?
A) loss prevention
B) loss reduction
C) diversification
D) duplication
Answer: D
58
Rather than storing all of its finished goods in a single location, Davis Company
divides the finished goods between two warehouses. This simple risk control
technique which is designed to limit losses should a warehouse fire occur is called
A) duplication.
B) risk transfer.
C) separation.
D) loss prevention.
Answer: C
59
Some members of Congress are concerned that if one or two large U.S. banks fail,
it could lead to the collapse of the entire U.S. financial sector. This risk is called
A) objective risk.
B) systemic risk.
C) enterprise risk.
D) subjective risk.
Answer: B
ch2
1
Which of the following is a basic characteristic of insurance?
A) pooling of losses
B) avoidance of risk
C) payment of intentional losses
D) certainty about specific losses that will occur
Answer: A
2
Which of the following is implied by the pooling of losses?
A) sharing of losses by an entire group
B) inability to predict losses with any degree of accuracy
C) substitution of actual loss for average loss
D) increase of objective risk
Answer: A
3
According to the law of large numbers, what happens as the number of exposure
units increases?
A) Actual results will increasingly differ from probable results.
B) Actual results will more closely approach probable results.
C) Nondiversifiable risk will decrease.
D) Objective risk will increase.
Answer: B
4
According to the law of large numbers, what should happen as an insurer
increases the number of units insured?
A) The amount the insurer expects to pay in claims should decrease.
B) Underwriting expenses should decrease.
C) Actual results will more closely approach expected results.
D) The insurer's profitability should become more variable.
Answer: C
5
Characteristics of a fortuitous loss include which of the following?
The loss is certain to occur.
The loss occurs as a result of chance.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
6
From the viewpoint of the insurer, all of the following are characteristics of an
ideally insurable risk EXCEPT
A) The loss must be accidental.
B) The loss should be catastrophic.
C) The premium must be economically feasible.
D) There must be a large number of exposure units.
Answer: B
7
From the standpoint of the insurer, which of the following is a characteristic of an
ideally insurable risk?
A) The loss must be intentional.
B) There must be a small number of unique loss exposures.
C) The chance of loss must be calculable.
D) The loss must be indeterminable.
Answer: C
8
Why is a large number of exposure units generally required before a pure risk is
insurable?
A) It prevents the insurer from losing money.
B) It eliminates intentional losses.
C) It minimizes moral hazard.
D) It enables the insurer to predict losses more accurately.
Answer: D
9
The requirement that losses should be accidental and unintentional in order to be
insurable results in which of the following?
Decrease in moral hazard
More accurate prediction of future losses
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
10
Which of the following is implied by the requirement that a loss should be
determinable and measurable to be insurable?
The loss must be definite as to place.
The loss must be definite as to amount.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
11
Methods by which insurers may minimize or avoid catastrophic losses include
which of the following?
The use of reinsurance
Concentrating coverage written in one geographic region
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
12
Which of the following types of risks best meets the requirements for being
insurable by private insurers?
A) most market risks
B) property risks
C) financial risks
D) political risks
Answer: B
13
Reasons why market, financial, and production risks are often uninsurable include
which of the following?
The potential to produce a catastrophic loss is great.
The chance of loss cannot be accurately estimated.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
14
Which of the following types of risks is normally uninsurable by private insurers?
A) personal risks
B) property risks
C) liability risks
D) political risks
Answer: D
15
Which of the following is a result of adverse selection?
A) The insurer's financial results will be substantially improved.
B) Persons most likely to have losses are also most likely to seek insurance at
standard rates.
C) It is unnecessary for the insurance company to use underwriting.
D) Insurance can be written only by the federal government.
Answer: B
16
The tendency for unhealthy people to seek life or health insurance at standard
rates is an example of
A) moral hazard.
B) fundamental risk.
C) attitudinal hazard.
D) adverse selection.
Answer: D
17
Which of the following statements regarding insurance and gambling is (are) true?
Insurance is used to handle existing pure risks, while gambling creates a new
speculative risk.
Insurance usually involves risk avoidance, while gambling typically involves only
risk reduction.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
18
In addition to marketing life insurance, life insurers typically sell which of the
following products?
Retirement annuities
Disability income insurance
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
19
Inland marine insurance provides coverage for
A) goods being shipped on land.
B) premature death of members of the armed forces.
C) goods being shipped on ocean-going vessels.
D) liability exposures of nonprofit organizations.
Answer: A
20
Which of the following is classified as casualty insurance?
A) workers compensation insurance
B) fire insurance
C) marine insurance
D) life insurance
Answer: A
21
Which of the following is a form of casualty insurance?
A) fire insurance
B) general liability insurance
C) inland marine insurance
D) ocean marine insurance
Answer: B
22
Which of the following statements regarding private insurance and government
insurance is (are) true?
Private insurance programs include life and health insurance and property and
liability insurance.
Social insurance programs are government insurance programs that are voluntary
and financed entirely by contributions from covered employers.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
23
All of the following are benefits to society that result from insurance EXCEPT
A) less worry and fear.
B) elimination of moral hazard.
C) indemnification for loss.
D) loss prevention.
Answer: B
24
Which of the following statements about the insurance industry as a source of
investment funds is (are) true?
These funds result in a lower cost of capital than would exist in the absence of
insurance.
These funds tend to promote economic growth and full employment.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
25
All of the following are social costs associated with insurance EXCEPT
A) insurance company operating expenses.
B) fraudulent claims.
C) inflated claims.
D) increased cost of capital.
Answer: D
26
A group of farmers agreed that if any farmer suffered a property loss, the loss
would be spread over the entire group. In this way, each farmer is responsible for
the average loss of the group rather than the actual loss that each farmer
sustained. Which characteristic of insurance is embodied in this agreement?
A) pooling of losses
B) fortuitous losses
C) risk avoidance
D) indemnification
Answer: A
27
XYZ Insurance Company writes coverage for most perils which can damage
property. XYZ, however, does not write flood insurance on property located in
flood plains. Which requirement of an ideally insurable risk might be violated if
XYZ wrote flood insurance on property located in flood plains?
A) There must be a large number of similar exposure units.
B) The loss should not be catastrophic.
C) The chance of loss must be calculable.
D) The losses must be determinable and measurable.
Answer: B
28
ABC Appliance offers a warranty requiring an annual fee. The warranty may be
purchased at the time of sale or at any time within the first year after the
appliance was purchased. The warranty fee after the date of purchase is twice the
time-of-purchase fee. When asked why the fee was higher after the date of
purchase, ABC's president said, "Buying a warranty is voluntary. We've noted that
those who buy the warranty after the purchase date have a greater need for
service." Charging the same rate or a lower rate after the date of purchase would
expose ABC to what problem that also impacts private insurers?
A) excessive premiums
B) reduced claims
C) bad investments
D) adverse selection
Answer: D
29
Insurance companies collect premiums in advance. Since the premiums collected
are not needed to pay losses and expenses immediately, the funds can be loaned
to business firms. Because of this fact, insurance benefits society by
A) enhancing credit.
B) providing a source of investment funds.
C) indemnifying losses.
D) providing an incentive for loss prevention.
Answer: B
30
LMN Insurance sells homeowners insurance. The LMN homeowners policy combines
property
and
casualty
insurance
in
the
same
contract.
Insurance
combining property and casualty coverage in the same contract are called
A) mono-line policies.
B) multi-year policies.
policies
C) multiple-line policies.
D) manuscript policies.
Answer: C
31
One branch of government insurance programs has a number of distinguishing
characteristics. These programs are compulsory, they are financed by mandatory
contributions rather than general tax revenues, and benefits are weighted in favor
of low-income groups. These government insurance programs are called
A) welfare programs.
B) social insurance programs.
C) casualty insurance programs.
D) private insurance programs.
Answer: B
32
Gina would like to buy a house. She will pay 10 percent of the cost of the house
as a down payment and borrow the other 90 percent from a mortgage lender. The
home will serve as collateral for the loan. The lender will not make the loan to
Gina unless the home is insured. Using insurance to secure the collateral for a
loan illustrates which of the following benefits of insurance to society?
A) enhancement of credit
B) reduction of fear and worry
C) source of investment funds
D) incentives for loss prevention
Answer: A
33
ABC Insurance Company calculated the amount that it expected to pay in claims
for each policy sold. Rather than selling the insurance for the amount it expected
to pay in claims, ABC added an allowance to cover the cost of doing business,
including commissions, taxes, and acquisition expenses. This allowance is called
a(n)
A) policyowner dividend.
B) premium.
C) expense loading.
D) rate credit.
Answer: C
34
JKL Insurance Company estimates that 14 out of every 100 homeowners it insures
will file a claim each year. Last year, JKL insured 200 homeowners. According to
the law of large numbers, what should happen if JKL insures 2,000 homeowners
this year?
A) The total number of claims filed by JKL policyowners should decrease.
B) The total dollar value of claims will decrease.
C) The average size of loss will decline in value.
D) The actual results will more closely approach the expected results.
Answer: D
35
Apex Insurance Company wrote a large number of property insurance policies in
an area where earthquake losses could occur. When the president of Apex was
asked if she feared that a severe earthquake might put the company out of
business, she responded, "Not a chance. We transferred most of that risk to other
insurance companies." An arrangement by which an insurer that initially writes
insurance transfers to another insurer part or all of the potential losses associated
with such insurance is called
A) hedging.
B) speculating.
C) reinsurance.
D) loss avoidance.
Answer: C
36
According to the law of large numbers, what should happen as an insurance
company increases the number of loss exposures that it insures?
A) Fewer losses should be expected to occur.
B) The amount of premiums needed to cover losses should decrease.
C) The volatility of the insurance company's underwriting results should increase.
D) The difference between actual and expected results should decrease.
Answer: D
37
Which of the following statements regarding insurance and hedging is (are) true?
Insurance involves the transfer of an insurable risk while hedging handles risk
that is typically uninsurable.
Insurance transactions can reduce objective risk, while hedging typically involves
only risk transfer and not risk reduction.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
38
Ashley opened an all-you-can-eat buffet restaurant. The price per-person was
based on what Ashley believed an average restaurant patron would consume. The
restaurant began to lose money. Ashley concluded that her patrons had "above
average" appetites, and were attracted to her restaurant because they could eat as
much as they wanted while being charged an average price. A similar phenomenon
exists in insurance markets. This problem is called
A) legal hazard.
B) adverse selection.
C) attitudinal hazard.
D) nondiversifiable risk.
Answer: B
39
Which of the following statements concerning social insurance benefits is (are)
correct?
Social insurance benefits are heavily weighted in favor of upper-income groups
because of their higher earnings.
Social
insurance
benefits
are
financed
entirely
or
in
part
by
mandatory
contributions by covered employers and employees, and not by general revenues
of the government.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
40
Adverse selection occurs
A) when an insurance company loses money on its investments.
B) when insurance purchasers buy insurance but do not have a loss.
C) when catastrophic losses occur as a result of a natural disaster.
D) when applicants with a higher-than-average chance of loss seek insurance at
standard rates.
Answer: D
41
Which of the following statements regarding insurance and hedging is true?
A) Both insurance and hedging deal only with pure risks.
B) Insurance reduces objective risk while hedging involves only risk transfer and
not risk reduction.
C) Hedging reduces objective risk while insurance involves only risk reduction and
not risk transfer.
D) Both insurance and hedging reduce objective risk but do not involve the
transfer of risk.
Answer: B
42
Which of the following is an example of private insurance?
A) unemployment insurance
B) Social Security
C) life insurance
D) federal deposit insurance
Answer: C
43
If insurers were to provide indemnification for losses that were deliberately caused,
which characteristic of ideally insurable risks would not be met?
A) The loss must be accidental and unintentional.
B) The loss must be determinable and measurable.
C) The loss should not be catastrophic.
D) There must be a large number of similar exposure units.
Answer: A
44
An
insurance
company
that
sells
earthquake
insurance
in
an
area
where
earthquakes are possible has subjected itself to the risk of insolvency if a severe
earthquake occurs. An insurer can safely sell earthquake insurance in this area if
it shifts the risk of catastrophic loss to another insurer. The shifting of insured
risk from one insurer to another insurer is called
A) underwriting.
B) casualty insurance.
C) coinsurance.
D) reinsurance.
Answer: D
45
The premium that insurance companies charge does not cover the cost of
expected losses only. The premium must also cover the cost of compensating
agents and other costs of doing business. The amount added to the pure premium
to cover these costs is called the
A) expense loading.
B) deductible.
C) dividend.
D) loss reserve.
Answer: A
46
A discount store chain is concerned that cashiers might steal money from cash
registers. To provide protection against theft by the cashiers, the discount store
chain can purchase a
A) fidelity bond.
B) liability insurance policy.
C) surety bond.
D) business income insurance policy.
Answer: A
47
BBB Auto Club provides emergency road service and other services to its
members. BBB Auto Club charges a higher membership fee to new members than
it charges to members who are renewing their membership. When asked to explain
this pricing policy, the auto club president noted, “New members often sign-up
prior to taking a long road trip, so we have to charge more as first-year members
have higher service utilization rates.” A similar phenomenon observed in insurance
markets is called
A) attitudinal hazard.
B) adverse selection.
C) risk aversion.
D) moral hazard.
Answer: B
ch3
1
Risk management is concerned with
A) the identification and treatment of loss exposures.
B) the management of speculative risks only.
C) the management of pure risks that are uninsurable.
D) the purchase of insurance only.
Answer: A
2
A situation or circumstance in which a loss is possible, regardless of whether a
loss occurs, is called a
A) deductible.
B) loss exposure.
C) loss avoidance.
D) peril.
Answer: B
3
Which of the following is a post-loss risk management objective?
A) treating loss exposures in the most economical way
B) continuing operations
C) reduction of anxiety
D) meeting externally imposed legal obligations
Answer: B
4
Preloss objectives of risk management include which of the following?
Preparing for potential losses in the most economical way
Reduction of anxiety
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
5
A risk manager is concerned with which of the following?
Identifying potential losses
Selecting the appropriate techniques for treating loss exposures
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
6
Which of the following is a source of information a risk manager could use to
help identify pure loss exposures?
A) commodity prices
B) physical inspections
C) currency exchange rates
D) interest rate movements
Answer: B
7
Loss severity is defined as the
A) probable size of the losses which may occur during some period.
B) probable number of losses which may occur during some period.
C) probability that any particular piece of property may be totally destroyed.
D) probability that a liability judgment may exceed a firm's net worth.
Answer: A
8
Loss frequency is defined as the
A) probable size of the losses that may occur during some period.
B) probable number of losses that may occur during some period.
C) probability that any particular piece of property may be totally destroyed.
D) probability that a liability judgment may exceed a firm's net worth.
Answer: B
9
The worst loss that could ever happen to a firm is referred to as the
A) maximum possible loss.
B) probable maximum loss.
C) frequency of loss.
D) severity of loss.
Answer: A
10
The worst loss that is likely to happen is referred to as the
A) maximum possible loss.
B) probable maximum loss.
C) frequency of loss.
D) severity of loss.
Answer: B
11
All of the following statements about avoidance are true EXCEPT
A) Certain loss exposures are never acquired.
B) Certain loss exposures may be abandoned.
C) The chance of loss for certain loss exposures may be reduced to zero.
D) It can be used for any loss exposure facing a firm.
Answer: D
12
Abandoning an existing loss exposure is an example of
A) avoidance.
B) retention.
C) noninsurance transfer.
D) insurance transfer.
Answer: A
13
Which of the following conditions is (are) appropriate for using retention?
Losses are difficult to predict.
The worst possible loss is not serious.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
14
Which of the following statements regarding the use of retention is (are) true?
Retention is best used for loss exposures that have a low frequency and a high
severity.
A financially strong firm can have a higher retention level than a firm whose
financial position is weak.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
15
Which of the following statements about the use of a captive insurance company
by a parent firm is true?
A) The captive may not write outside, non-parent company, business.
B) Captives are not permitted to use reinsurance, so any business insured by the
captive stays with the captive.
C) The captive may be used to insure loss exposures that the parent firm finds it
difficult to insure with private insurers.
D) Business placed with the captive is always considered retained risk and is never
considered transferred risk.
Answer: C
16
Which of the following statements about self-insurance is (are) true?
It is a form of planned retention.
State law usually prohibits its use for workers compensation.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
17
All of the following are potential advantages of retention EXCEPT
A) lower expenses.
B) increased cash flow.
C) encouragement of loss prevention.
D) protection from catastrophic losses.
Answer: D
18
A restaurant owner leased a meeting room at the restaurant to a second party.
The lease specified that the second party, not the restaurant owner, would be
responsible for any liability arising out of the use of the meeting room, and that
the restaurant owner would be "held harmless" for any damages. The restaurant
owner's use of the hold-harmless agreement in the lease is an example of
A) retention.
B) self-insurance.
C) insurance.
D) noninsurance transfer.
Answer: D
19
All of the following are disadvantages of noninsurance transfers EXCEPT
A) The party to whom the potential loss is transferred may be unable to pay.
B) The transfer may fail because the contract language is ambiguous.
C) The only potential losses that can be transferred are those that are not
commercially insurable.
D) The noninsurance transfer may be costly.
Answer: C
20
ABC Insurance retains the first $1 million of each property damage loss and
purchases reinsurance for that part of any property loss that exceeds $1 million.
The insurance for property losses above $1 million is called
A) excess insurance.
B) liability insurance.
C) coinsurance.
D) primary insurance.
Answer: A
21
Which of the following statements about the use of deductibles is (are) true?
They represent risk retention by insurance purchasers.
They tend to increase the cost of adjusting small claims.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
22
Which of the following statements about an excess insurance plan is true?
A) The insurer does not participate in a loss until the loss exceeds the amount the
firm has decided to retain.
B) The insurer pays first up to some specified level; the insured then pays all
losses exceeding the insurer's retention level.
C) Losses in excess of a specified amount are not covered.
D) The insured and insurer share equally in any loss that occurs.
Answer: A
23
Factors a risk manager must consider in selecting an insurer include which of the
following?
The availability of risk management services
The financial strength of the insurer
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
24
An insurance policy specifically written and designed to meet the needs of an
insurance purchaser is called a(n)
A) manuscript policy.
B) bureau policy.
C) standard policy.
D) excess policy.
Answer: A
25
All of the following are disadvantages of using insurance in a commercial risk
management program EXCEPT
A) There is an opportunity cost because premiums must be paid in advance.
B) Considerable time and effort must be spent selecting and negotiating coverages.
C) It results in considerable fluctuations in earnings after losses occur.
D) Attitudes toward loss control may become lax when losses are insured.
Answer: C
26
Which of the following types of loss exposures may be appropriately handled
through the purchase of insurance?
High-frequency, low-severity loss exposures
Low-frequency, high-severity loss exposures
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
27
Which of the following types of loss exposures are best handled by the use of
avoidance?
A) low-frequency, low-severity loss exposures
B) low-frequency, high-severity loss exposures
C) high-frequency, low-severity loss exposures
D) high-frequency, high-severity loss exposures
Answer: D
28
Low-frequency, low-severity loss exposures are best handled by
A) avoidance.
B) retention.
C) insurance.
D) noninsurance transfer.
Answer: B
29
All of the following statements about the administration of a risk management
program are true EXCEPT
A) The risk manager is an important part of a firm's management team.
B) A risk management policy statement can be used to educate top executives
about the risk management process.
C) If a risk management program is properly designed, periodic review of the
program is unnecessary.
D) In order to properly identify loss exposures, the risk manager needs the
cooperation of other departments.
Answer: C
30
Cal was just hired as XYZ Company's first risk manager. Cal would like to employ
the risk management process. The first step in the process Cal should follow is to
A) evaluate potential losses faced by XYZ Company.
B) formulate a treatment plan for XYZ Company's loss exposures.
C) identify potential losses faced by XYZ Company.
D) implement and administer a risk management plan for XYZ Company.
Answer: C
31
Members
of
Mid-South
Petroleum
Distributors,
a
trade
group,
had
trouble
obtaining affordable pollution liability insurance. The members formed a group
captive that is exempt from many state laws that apply to other insurers. This
group captive is called a(n)
A) reinsurance pool.
B) Lloyd's association.
C) alien insurer.
D) risk retention group.
Answer: D
32
Acme Company has three identical manufacturing plants, one on the Texas Gulf
Coast, one in southern Alabama, and one in Florida. Each plant is valued at $200
million. Acme's risk manager is concerned about the damage which could be
caused by a single hurricane. The risk manager believes there is an extremely low
probability that a single hurricane could destroy two or all three plants because
they are located so far apart. What is the probable maximum loss associated with
a single hurricane?
A) $0 million
B) $200 million
C) $400 million
D) $600 million
Answer: B
33
Acme Company has three identical manufacturing plants, one on the Texas Gulf
Coast, one in southern Alabama, and one in Florida. Each plant is valued at $200
million. Acme's risk manager is concerned about the damage which could be
caused by a single hurricane. The risk manager believes there is an extremely low
probability that a single hurricane could destroy two or all three plants because
they are located so far apart. What is the maximum possible loss associated with a
single hurricane?
A) $0 million
B) $200 million
C) $400 million
D) $600 million
Answer: D
34
Laura Evans is risk manager of LMN Company. Laura decided to retain certain
property loss exposures. Which of the following is a method that Laura can use to
fund the retained property losses?
A) current net income
B) private insurance
C) noninsurance transfer
D) high deductibles
Answer: A
35
Parker Department Stores has been hurt in recent months by a large increase in
shoplifting losses. Parker's risk manager concluded that while the frequency of
shoplifting losses was high, the severity is still relatively low. What is (are) the
appropriate risk management technique(s) to apply to this problem?
A) retention
B) loss prevention
C) transfer through insurance
D) avoidance
Answer: B
36
Barb, who is self-employed, is the main breadwinner for her family. Barb does not
have disability income insurance because she has never stopped to consider the
impact of a long-term disability upon her family. Barb's treatment of the risk of
disability is best described as
A) risk transfer.
B) passive retention.
C) risk avoidance.
D) active retention.
Answer: B
37
Ryan decided to review his personal risk management program. His car is 10 years
old, and he would receive little money from his insurer if the car was damaged or
destroyed. Ryan decided to drop the physical damage insurance on the car. From
a risk management perspective, dropping the physical damage insurance on the
car is best described as
A) increasing the use of avoidance in the risk management program.
B) increasing the use of noninsurance transfer in the risk management program.
C) increasing the use of retention in the risk management program.
D) increasing the use of risk control in the risk management program.
Answer: C
38
To
better
understand
her
company's
operations,
a
risk
manager
asked
a
production manager to draw a diagram tracing the steps in the production and
distribution of the company's products. Such a diagram, which is useful in risk
identification, is called a
A) financial statement.
B) risk management matrix.
C) flowchart.
D) risk management audit.
Answer: C
39
In reviewing his company's operations, a risk manager noticed that all of the
company's finished goods were stored in a single warehouse. The risk manager
recommended that the finished goods be divided among three warehouses to
prevent all of the finished goods from being destroyed by the same peril. Dividing
the finished goods among three warehouses illustrates
A) duplication.
B) separation.
C) insurance.
D) noninsurance transfer.
Answer: B
40
Which of the following statements about a personal risk management program is
(are) true?
Insurance and retention are the only techniques used to handle potential losses.
The steps in a personal risk management process are the same steps used by
businesses.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
41
Bev lives in the suburbs and works downtown. She drives to work, and her most
direct route to work would require her to pass through an area where carjackings
and drive-by-shootings are common. Bev does not drive through this area.
Instead, she uses a route which adds 10 minutes to her commute. Which risk
management technique is Bev using with respect to the risk of injury while driving
through the dangerous area?
A) noninsurance transfer
B) avoidance
C) passive retention
D) loss reduction
Answer: B
42
Brenda identified all of the pure loss exposures her family faces. Then she
analyzed these loss exposures, developed a plan to treat these risks, and
implemented the plan. The process Brenda conducted is called
A) personal insurance programming.
B) personal estate planning.
C) personal financial planning.
D) personal risk management.
Answer: D
43
Which statement about a company's cost of risk is (are) true?
Cost of risk includes insurance premiums and retained losses.
Reducing the cost of risk increases profitability.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
44
A useful measure for an organization to monitor is the total expenditures for
treating loss exposures including retained losses, loss control expenses, insurance
premiums, and other related expenses. This measure is called the organization's
A) cost of capital.
B) cost of goods sold.
C) cost of risk.
D) cost of equity.
Answer: C
45
Mark owns a 2006 sedan. The last time Mark renewed his auto insurance, he
decided to drop the physical damage insurance on this vehicle. How is Mark
dealing with the auto physical damage exposure in his personal risk management
program?
A) risk transfer
B) passive retention
C) avoidance
D) active retention
Answer: D
46
Purchasing health insurance illustrates the use of which personal risk management
technique?
A) avoidance
B) risk transfer
C) risk control
D) risk retention
Answer: B
47
Which of the following statements about captive insurance companies is (are) true?
A captive insurance company established by a U.S. company must be domiciled in
the United States.
A captive insurance company may be owned by several parents.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
48
Which of the following is least likely to occur during a "hard" insurance market
period?
A) difficulty in obtaining insurance
B) tightening underwriting standards
C) higher insurer profits
D) increasing premiums
Answer: C
49
Which of the following statements concerning the selection of risk management
techniques and insurance market conditions is (are) true?
It's easier to purchase affordable insurance during a "soft " market than during a
"hard" market.
Retention is used more during a "soft" market than during a "hard" market.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
50
Discount Department Stores is a national retail chain. The company had one large,
central warehouse. At the suggestion of the risk manager, the company decided to
build four smaller regional warehouses so that a loss at the central warehouse
would not be a catastrophic blow to the company's distribution system. Splitting
the inventory between four regional warehouses illustrates which risk management
technique?
A) duplication
B) risk transfer
C) separation
D) risk avoidance
Answer: C
51
Each accounting period, Harris Company Department Store charges a bookkeeping
account for its estimated shoplifting losses. The method that Harris Company
Department Store uses to fund its retained shoplifting losses is a(n)
A) private insurance policy.
B) captive insurer.
C) credit line.
D) unfunded reserve.
Answer: D
52
Morris Company self-insures its workers compensation loss exposure. The risk
manager of Morris Company is concerned about the possible impact of a single
catastrophic claim. She decided to set a retention limit of $500,000 per-claim, and
to purchase insurance that will be begin to pay once Morris Company has paid
$500,000 on a single claim. The insurance the risk manager purchased is called
A) captive insurance.
B) excess insurance.
C) primary insurance.
D) umbrella insurance.
Answer: B
53
When Derrick became risk manager of Boller Company, he noticed that the
company
did
not
have
a
clear
set
of
risk
management
objectives
and
a
clearly-stated risk management philosophy. Derrick developed a written document
stating
the
company's
risk
management
objectives
and
risk
management
philosophy. This document is called a risk management
A) policy statement.
B) manuscript policy.
C) manual.
D) binder.
Answer: A
54
David never stopped to consider the possible consequences of a long-term,
permanent, disability. So David did not include disability income insurance in his
personal risk management program. David is dealing with the risk of disability
through
A) passive retention.
B) active retention.
C) risk control.
D) risk avoidance.
Answer: A
55
The
property
and
liability
insurance
industry
fluctuates
between
periods
of
increasing insurance rates and tight underwriting standards, and decreasing
insurance rates and loose underwriting standards. Profitability in the industry
follows these cyclical movements. What is this pattern of fluctuations called?
A) the claims cycle
B) the underwriting cycle
C) the business cycle
D) the accounting cycle
Answer: B
56
The U.S. government is concerned that terrorists might try to crash a vehicle
loaded with explosives into a U.S. embassy in a foreign country. Inside the gate to
the embassy, they installed steel and cement posts in the road. These posts can be
raised up from the ground to form a barrier against suicide bombers. The posts
can be lowered back into the ground to allow safe vehicles to pass. This physical
barrier system illustrates which risk management technique?
A) risk avoidance
B) insurance transfer
C) loss prevention
D) noninsurance transfer
Answer: C
57
A college professor stores class grading records on a spreadsheet on her office
computer. Each time she updates a grading file she makes a printout and a
backup copy of the grading file. The professor is using which risk management
method to address the risk of losing her class grading records?
A) risk avoidance
B) duplication
C) separation
D) noninsurance transfer
Answer: B
58
A risk manager was asked to review all the loss exposures his company faces. The
risk manager noted that the company obtained over 90 percent of its raw
materials from one supplier. He voiced concern about business interruption if that
supplier was closed for some reason. Acting on his recommendation, the company
began to purchase raw materials from two other suppliers. Using multiple suppliers
illustrates which risk control technique?
A) risk avoidance
B) duplication
C) separation
D) diversification
Answer: D
59
Melanie was just hired as the risk manager of JKL Company. The company
president asked her to make a thorough review of all of the company’s loss
exposures. Melanie noted that many employees were too heavily invested in stock
issued by the company in their 401-k plan. Melanie suggested that the employees
change some of their investment holdings to mutual funds that invest in stock
issued by different companies. The risk control method that Melanie suggested is
A) risk avoidance.
B) duplication.
C) diversification.
D) separation.
Answer: C
60
A U.S. athletic equipment company has production plants in several Pacific Rim
countries. Each plant is divided into separate production areas using six-foot thick
concrete walls. The construction method is designed to prevent fire from spreading
from one production area to another. Using thick concrete walls so that fire does
not spread to another production area illustrates which risk control method?
A) separation
B) duplication
C) risk avoidance
D) diversification
Answer: a
ch4
1
Which of the following is a financial risk that may be faced by a business
organization?
A) injuries suffered by employees at the workplace
B) lost income after a fire loss
C) product liability risk
D) currency exchange rate risk
Answer: D
2
Which of the following statements about the scope of risk management is (are)
true?
Traditionally, risk management was limited in scope to speculative loss exposures.
In the 1990s, some businesses began to expand the scope of risk management to
include financial risks.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
3
Mid-States Beef is a commercial feedlot business. Currently, the company has over
10,000 cattle in feedlots. Mid-States is concerned that the price of corn, the grain
fed to the cattle, will increase significantly. The risk that the price of corn may
increase and harm the profitability of Mid-States Beef's operations is a(n)
A) currency exchange rate risk.
B) property risk.
C) commodity price risk.
D) interest rate risk.
Answer: C
4
An integrated risk management program is a risk management program which
combines
A) pure and speculative risks.
B) property and liability risks.
C) personnel-related risk and property risk.
D) direct and indirect loss risk.
Answer: A
5
Regional Airline (RA) spends millions of dollars each year on jet fuel. The company
also has significant liability exposures. RA can retain a large portion of its liability
exposure if fuel costs are low. The company can pay high fuel costs if retained
liability losses are low. RA cannot, however, absorb both high fuel costs and high
retained liability claims. RA's insurer designed an insurance program where the
insurer pays only if both contingencies (high fuel costs and high retained liability
claims) occur. The contract the insurer designed is called a(n)
A) double indemnity rider.
B) double trigger option.
C) multiple protection policy.
D) other insurance provision.
Answer: B
6
Which
statement
is
(are)
true
with
respect
to
enterprise
risk
management
programs?
They address traditional property, liability, and personnel loss exposures.
They do not address financial risks.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
7
A comprehensive risk management program that addresses an organization's pure
risks, speculative risks, strategic risks, and operational risks is called a(n)
A) risk management information system.
B) financial risk management plan.
C) speculative risk management plan.
D) enterprise risk management plan.
Answer: D
8
The property and liability insurance industry is characterized by a repetitive
pattern of loose underwriting standards with low premiums followed by tight
underwriting standards with high premiums. This repetitive pattern is called the
A) underwriting by exception method.
B) business cycle.
C) underwriting cycle.
D) account underwriting method.
Answer: C
9
Which statement is (are) true regarding property and liability insurance market
conditions?
Premiums are high when the insurance market is "hard."
Underwriting standards are tight when the insurance market is "soft."
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
10
Which of the following statements is true regarding insurance market conditions
and underwriting results?
A) A combined ratio greater than one (or 100 percent) indicates profitable
underwriting.
B) In a "soft" insurance market, more retention is used than in a "hard" insurance
market.
C) Insurance rates are high and underwriting standards are tight when the
insurance market is "hard."
D) Property and liability insurance premiums and underwriting standards do not
fluctuate over time.
Answer: C
11
The relative level of surplus in the insurance industry is called the industry's
A) capacity.
B) liabilities.
C) reserves.
D) admitted assets.
Answer: A
12
Which of the following statements is (are) true regarding investment returns and
the underwriting cycle?
Investment returns have no impact upon the underwriting cycle.
Investment returns can lengthen the duration of a soft market by offsetting
underwriting losses.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
13
A large property and liability insurance company merged with a bank and then
acquired a stock brokerage company. This type of merger and acquisition activity
is categorized as
A) insurance company consolidation.
B) cross-industry consolidation.
C) financial risk management.
D) insurance brokerage consolidation.
Answer: B
14
A company has a fleet of 200 vehicles. On average, 50 vehicles per year
experience property damage. What is the probability that any vehicle will be
damaged in any given year?
A) 10 percent
B) 20 percent
C) 25 percent
D) 50 percent
Answer: C
15
RST Company has production facilities in Salt Lake City and Cleveland. The
probability that in any given year a fire will damage the production facility in Salt
Lake City is 5 percent. The probability that in any given year a fire will damage
the Cleveland production facility is 4 percent. What is the probability that BOTH
production facilities will be damaged by fire in any given year?
A) 0.20 percent
B) 2.00 percent
C) 4.50 percent
D) 9.00 percent
Answer: A
16
RST Company has production facilities in Salt Lake City and Cleveland. The
probability that in any given year a fire will damage the production facility in Salt
Lake City is 5 percent. The probability that in any given year a fire will damage
the Cleveland production facility is 4 percent. What is the probability that AT
LEAST ONE of the production facilities will be damaged by fire in any given year?
A) 0.20 percent
B) 2.00 percent
C) 8.80 percent
D) 9.00 percent
Answer: C
17
Some events cannot occur together because the occurrence of one event makes
the occurrence of the second event impossible. Such events are called
A) dependent events.
B) independent events.
C) conditional events.
D) mutually exclusive events.
Answer: D
18
Two buildings are located close together at a production facility. The probability
that either of these buildings will experience a fire loss is 4 percent. However, if
one building has a fire, the probability that the second building will have a fire is
60 percent. What is the probability that both buildings will have a fire?
A) 1.6 percent
B) 2.4 percent
C) 8.0 percent
D) 64.0 percent
Answer: B
19
Which of the following statements is (are) true with regard to probability analysis?
If two events are independent, the occurrence of one event does not affect the
occurrence of the second event.
If two events are dependent, the occurrence of one event affects the occurrence
of the second event.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
20
Jane is risk manager of ABC Manufacturing Company. She is trying to decide
whether to self-insure her company's workers compensation exposure or to
purchase insurance. Jane would like to use regression analysis to predict the
number of workers compensation claims that will occur next year. The number of
claims will be the dependent variable in the regression. All of the following would
be reasonable independent variables to use EXCEPT
A) number of employees.
B) number of hours worked.
C) total assets.
D) payroll.
Answer: C
21
A method of characterizing the relationship between two or more variables and
then using the characterization to make a prediction is called
A) loss analysis.
B) time value of money analysis.
C) regression analysis.
D) capital budgeting analysis.
Answer: C
22
A table showing losses that could occur and the corresponding chance that each
loss could occur is called a(n)
A) underwriting cycle.
B) capital budget.
C) loss distribution.
D) risk map.
Answer: C
23
Which of the following statements is (are) true with respect to the time value of
money?
Money received today is worth more than the same amount of money received in
the future.
The present value of a future amount is greater than the future amount.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
24
Calculating the present value of a future amount is called
A) interpolating.
B) discounting.
C) compounding.
D) regression analysis.
Answer: B
25
The process of determining which set of investments in plant and equipment to
undertake is called
A) regression analysis.
B) loss forecasting.
C) time value of money analysis
D) capital budgeting.
Answer: D
26
Which of the following statements is (are) true regarding the net present value of
a capital investment?
Net present value does not consider time value of money.
A positive net present value represents an increase in value to the firm.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
27
Millie is risk manager of JKL Company. She is considering an investment in a loss
control project. The project will cost $40,000. Assuming a 10 percent discount
rate, the present value of the future net cash flows that this project will generate
is $60,000. What is the net present value (NPV) of this project?
A) $20,000
B) $26,000
C) $60,000
D) $100,000
Answer: A
28
A computerized data base that permits risk managers to store and analyze risk
management data is called a
A) risk management information system.
B) risk management Intranet.
C) risk management web site.
D) risk map.
Answer: A
29
A grid charting the potential frequency and severity of losses is called a
A) risk management information system.
B) risk management Intranet.
C) risk management web site.
D) risk map.
Answer: D
30
Which of the following statements is (are) true with regard to the use of
technology in risk management programs?
Risk management Intranets are networks intended for an internal audience.
Risk management information systems can be used to store and track workers
compensation claims data.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
31
Terrorists attacked the World Trade Center on September 11, 2001. The attack
simultaneously created large losses for life insurers, property insurers, workers
compensation insurers, health insurers, and liability insurers. What name is given
to an event that simultaneously creates large losses in several lines of insurance?
A) speculative loss
B) clash loss
C) retroactive loss
D) consequential loss
Answer: B
32
Which
of
the
following
was
a
consequence
of
passage
of
the
Financial
Modernization Act (Gramm-Leach-Bliley)?
A) Formation of insurers was made easier because capital requirements were
reduced.
B) It became easier for insurers to conduct business as they were no longer
required to be licensed in each state where they operate, but only in the state
where they are domiciled.
C) Insurers were required to prepare financial statements using generally accepted
accounting principles (GAAP) instead of using statutory accounting.
D) Depression-era barriers between underwriting risk, depository functions, and
securities underwriting were eliminated.
Answer: D
33
The transfer of insurable risk to the capital markets through the creation of a
financial instrument is called
A) coefficient of risk.
B) securitization of risk.
C) financial risk management.
D) enterprise risk management.
Answer: B
34
LMN Insurance Company is concerned about its exposure to hurricane losses for
property risks it insured on the Gulf Coast. LMN borrowed money from investors
by issuing financial securities. LMN promised to repay the money it borrowed with
interest if hurricane losses do not exceed a specified level. If hurricane losses
exceed the specified level, LMN will repay less than it borrowed and use the extra
money to fund hurricane losses. The securities that LMN issued are
A) call options.
B) futures contracts.
C) weather options.
D) catastrophe bonds.
Answer: D
35
Hedge Fund Company offers a mutual fund to investors. Fund managers are
concerned about fund volatility. They analyzed the fund to determine the worst
loss likely to occur in a calendar quarter, assuming a 90 percent level of
confidence. The worst probable loss is known as the fund's
A) unrealized capital gain.
B) value at risk.
C) beta coefficient.
D) surrender value.
Answer: B
36
Reasons to adopt an enterprise risk management plan include all of the following
EXCEPT
A) to increase earnings volatility.
B) to treat risks facing the business in a more holistic way.
C) to increase net income.
D) to gain an advantage over competitors.
Answer: A
37
Which of the following statements concerning the securitization of risk is (are)
true?
Securitization increases the capacity of the insurance industry.
Securitization can be used to protect against catastrophic loss.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
38
Insurance Brokerage Company uses a computer-based method of estimating the
losses its clients will suffer if a severe storm or earthquake occurs. This method
of estimating losses is called
A) capital budgeting.
B) securitization of risk.
C) risk mapping.
D) catastrophe modeling.
Answer: D
39
Uncertainty
pertaining
to
the
organization's
goals
and
objectives
organization's strengths, weaknesses, opportunities, and threats is called
A) operational risk.
B) strategic risk.
C) subjective risk.
and
the
D) pure risk.
Answer: B
40
Consolidation in the insurance industry is a continuing trend. One area where
mergers and acquisitions frequently occur is between marketing intermediaries who
represent insurance purchasers. These intermediaries are called
A) insurance adjusters.
B) insurance agents.
C) insurance underwriters.
D) insurance brokers.
Answer: D
41
Five Below Zero is a new ski resort in Colorado. Five Below Zero is concerned that
an abnormally warm winter will prevent the accumulation of snow needed to have
a profitable ski season. Five Below Zero purchased a contract that will pay a lump
sum if the daily high temperature exceeds 30 degrees for more than 12 days
between January 1st and March 31st. The contract Five Below Zero purchased is
called a(n)
A) catastrophe bond.
B) weather option.
C) interest rate swap.
D) convertible bond.
Answer: B
42
Which statement is (are) true concerning catastrophe models?
Businesses other than insurance companies use catastrophe models.
Catastrophe models are able to precisely predict disaster occurrences and loss
values.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
43
Which of the following is a financial derivative that derives value from specific
insurable losses or from an index of values?
A) commodity futures contract
B) corporate bond
C) catastrophe bond
D) insurance option
Answer: D
44
An emerging concern for risk managers is the greater volatility that has been
observed in weather patterns—higher high temperatures, lower low temperatures,
record rainfall, drought, etc. Collectively, this risk is called
A) seismic risk.
B) hurricane risk.
C) speculative risk.
D) climate change risk.
Answer: D
45
Which of the following statements regarding terrorism insurance is (are) true?
There is a federal backstop if terrorism claims are catastrophic.
Private insurers market terrorism insurance.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
46
The terrorism risk in the United States
A) is of no concern to private companies.
B) is limited to attacks by foreign nationals.
C) can be addressed through risk control and insurance.
D) is an uninsurable risk.
Answer: C
47
Which of the following is a demographic factor that has increased losses from
climate change in the United States?
A) The increasing life expectancy in the United States.
B) The increasing population in Southern states such as Florida, Texas, and South
Carolina.
C) The declining fertility rate (live births per women of child-bearing age) in the
United States.
D) The growth in the number of families living below the poverty line in the
United States.
Answer: B
48
Last year, XYZ Insurance Company had a combined ratio of 102.4 and lost $10.2
million on the insurance that it sold. The company, however, was required to pay
income taxes. The best explanation for this apparent contradiction is that XYZ
offset its underwriting loss with
A) increased loss reserves.
B) investment income.
C) increased loss adjustment expenses.
D) unearned premiums.
Answer: B
49
ABC Company in considering a loss control investment. The project will cost
$100,000. It will generate an after-tax net cash flow of $60,000 one year after
investment and an after-tax net cash flow of $60,000 two years after investment.
The present value of $1 received one year from today assuming a 6 percent rate
is .9434. The present value of $1 received two years from today assuming a 6
percent interest rate is .8900. Assuming a discount rate of 6 percent, what is the
net present value (NPV) of this project?
A) $10,004
B) $13,195
C) $16,604
D) $20,000
Answer: A
50
Which of the following statements about the risk of terrorism in the United States
is (are) true?
Congress created a federal backstop for terrorism claims.
Coverage for losses attributable to terrorism is not marketed by private insurers in
the U.S.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
51
When
announcing
that
an
enterprise
risk
management
program
would
be
implemented at XYZ Company, the president of the company observed, “We must
overcome the silo mentality for the program to be successful.” The “silo mentality”
refers to
A) over-emphasis on pure risks and ignoring speculative risks.
B) using too much of one risk treatment measure and ignoring other risk
treatment methods.
C) focusing narrowly on one area and not viewing risk holistically.
D) everyone assuming someone else is responsible for managing a risk and no one
taking leadership.
Answer: C
52
The first step in the enterprise risk management process is
A) risk analysis.
B) implementing and monitoring the program.
C) risk identification.
D) selection of risk treatment measures.
Answer: C
53
A bank stores depositor data electronically. The data include financial account
values, social security numbers, and other information. An outside party was able
to gain access to the bank’s customer data through unauthorized access to the
bank’s computer system. The outside party was able to steal money from the
accounts and to sell customer data, including social security numbers, to others.
This scenario illustrates
A) terrorism risk.
B) climate change risk.
C) speculative financial risk.
D) cyber-liability risk.
Answer: D
54
A risk manager analyzed fleet accident data to help determine which loss control
measures would provide the greatest safety incentives for drivers. Examining data
to generate information that will help make more informed decisions is called
A) predictive analytics.
B) catastrophe modeling.
C) sensitivity analysis.
D) data mining.
Answer: A
55
West Coast Insurance writes property and liability insurance in California, Oregon,
and Washington. These states are all susceptible to earthquakes. To help determine
how much reinsurance to purchase, West Coast Insurance hired an organization to
use a computer algorithm to estimate what its insured losses would be if a severe
earthquake occurred. West Coast Insurance based its purchase of reinsurance on
the loss estimates. This scenario illustrates using
A) value-at-risk analysis.
B) catastrophe modeling.
C) risk mapping.
D) a risk management information system.
Answer: B
56
Palmer Polymers is changing from a traditional risk management program to an
enterprise risk management program. As a first step, the risk manager determined
all the risks that the organization faces. Next, she created a grid with loss
frequency on the x-axis and loss severity on the y-axis. Then she plotted all of
the loss exposures based on frequency and severity. The grid and the plotted loss
exposures are called a
A) probability distribution.
B) catastrophe model.
C) risk map.
D) risk management information system.
Answer: C
ch5
1
Which of the following statements about stock insurers is true?
A) They issue assessable policies.
B) They are not permitted to write property and liability insurance.
C) Stockholders bear any losses and share in any profits.
D) They are owned by their policyholders.
Answer: C
2
Which of the following statements about mutual insurers is true?
A) They are legally organized as partnerships.
B)
They
have
a
board
of
directors
which
is
selected
by
state
insurance
departments.
C) They are owned by their stockholders.
D) They may pay dividends to their policyholders.
Answer: D
3
Why are some mutual insurers referred to as "assessment mutuals"?
A) They charge low premiums because the loss exposures of their insureds are
thoroughly assessed before a policy is written.
B) They are noted for being very thorough in their assessment of investment
opportunities.
C) They are assessed for state premium taxes only if they make a profit.
D) They can assess policyholders if premiums are insufficient to pay losses and
expenses.
Answer: D
4
The corporate structure of mutual insurers has changed in recent years. All of the
following are examples of significant changes EXCEPT
A) demutualization of some insurers.
B) sharp increase in the number of mutual insurance companies.
C) increase in company mergers.
D) formation of mutual holding companies.
Answer: B
5
Which of the following statements is true about fraternal insurers?
A) They are legally organized as stock insurers.
B) They specialize in writing life and health insurance.
C) They are taxed more heavily than other types of insurers because of
discriminatory marketing practices.
D) They account for the majority of life insurance in force in the United States.
Answer: B
6
Which of the following statements about reciprocal exchanges is (are) true?
Reciprocal exchanges usually specialize in health insurance.
Reciprocal exchanges are unincorporated mutual insurance companies.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
7
Which of the following statements about Lloyd's of London is true?
A) Coverage is actually written by syndicates who belong to Lloyd's of London.
B) New individual members or Names who belong to the various syndicates have
unlimited legal liability.
C) It operates as an admitted insurer throughout the United States.
D) It allows underwriters to write coverage without meeting stringent financial
requirements.
Answer: A
8
Temporary evidence of insurance until a policy is actually issued is provided by
a(n)
A) binder.
B) brokerage agreement.
C) pre-approval form.
D) endorsement.
Answer: A
9
Which of the following statements about insurance brokers is (are) true?
They legally represent the insured rather than the insurance company.
They are prohibited from being licensed as agents.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
10
Neil needs insurance that is unavailable in the state where he lives. To obtain
insurance from a nonadmitted insurer, Neil should contact a
A) surplus lines broker.
B) nonadmitted agent.
C) general agency broker.
D) direct writer.
Answer: A
11
Which of the following statements about life insurance marketing systems is true?
A) Insurance brokers are not permitted to sell life insurance.
B) Some exclusive agents who market property and liability insurance also sell life
insurance.
C) Independent insurance agents are not permitted to market life insurance.
D) Financial institutions such as banks are not permitted to market life insurance.
Answer: B
12
Which of the following statements about personal producing general agents is (are)
true?
They often have the option of recruiting and training sub-agents.
They are independent agents who produce substantial amounts of life insurance
with one insurer.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
13
Advantages of the direct response system for marketing life insurance include
which of the following?
Advertising can be specifically directed to selected markets.
Complex products can be easily sold.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
14
Which of the following statements about the exclusive agency system for marketing
property and liability insurance is true?
A) Exclusive agents typically have complete ownership of policy expirations.
B) A higher commission rate is usually paid on exclusive agents' renewal business
than on new business.
C) Exclusive agents represent several different insurance companies.
D) New exclusive agents may start as employees and after a training period
become independent contractors.
Answer: D
15
All of the following statements about the independent agency system are true
EXCEPT
A) Agents are often authorized to adjust small claims.
B) Agents are compensated on the basis of commissions.
C) The insurer rather than the agent owns the renewal rights to the business.
D) The agent is an independent business person who represents several insurers.
Answer: C
16
A property and casualty insurer in which the salesperson is an employee of the
insurer, not an independent contractor, is called a
A) fraternal insurance company.
B) risk retention group.
C) direct writer.
D) captive insurance company.
Answer: C
17
Which of the following statements about the sale of property and liability insurance
through the direct response system is (are) true?
Selling expenses are higher because market segmentation tends to be less precise
than with other marketing methods.
It is the most appropriate system for selling complex products.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
18
Under one life insurance marketing system, agents conduct sales interviews at the
workplace with the approval of the management of the business. There are few
direct costs to the employer, and this marketing system is especially appropriate
for low-income and middle-income workers. This life insurance marketing system
is called the
A) direct response system.
B) worksite marketing system.
C) independent agency system.
D) personal producing general agency system.
Answer: B
19
Which of the following is a characteristic of a typical mass merchandising plan?
A) higher commission scales for agents and higher administrative expenses
B) payment of premiums through payroll deduction
C) group rather than individual underwriting
D) contributions by the employer to the cost of coverage
Answer: B
20
David is a successful independent insurance agent. Recently, one of the life
insurance companies with whom he places business offered him a special financial
arrangement. If David meets sales targets, he will receive large bonuses. He will
also
be
able
to
recruit
and
train
sub-agents
and
receive
an
over-riding
commission based on the amount of life insurance the sub-agents sell. Based on
this description, David is a(n)
A) insurance broker.
B) personal-producing general agent.
C) direct writer.
D) multiple life exclusive agent.
Answer: B
21
Sarah owns a property and liability insurance agency. She is authorized to
represent several insurance companies and she is compensated by commissions.
Sarah's agency owns the expiration rights to the business she sells. Sarah is a(n)
A) independent agent.
B) exclusive agent.
C) direct writer.
D) insurance broker.
Answer: A
22
The leaders of a religious group decided to start a life insurance organization to
insure members of the religious group. The insurer will operate as a nonprofit
organization, thus receiving favorable tax treatment. The insurer formed will be a
A) health maintenance organization.
B) stock insurer.
C) fraternal insurer.
D) reciprocal exchange.
Answer: C
23
Scott works in property and liability insurance marketing. He legally represents
insurance
purchasers,
rather
than
insurance
companies.
Scott
is
paid
a
commission on the insurance placed with insurers. Scott is a(n)
A) exclusive agent.
B) direct writer.
C) branch manager.
D) insurance broker.
Answer: D
24
ABC Insurance has always used the exclusive agency system to market coverages.
ABC, however, cannot afford full-time agents in sparsely-populated areas. To
reach
customers
in
these
areas,
ABC
enters
into
agreements
with
local
independent agents. Using more than one marketing system is called employing a
A) direct response system.
B) general agency system.
C) multiple distribution system.
D) branch office system.
Answer: C
25
Cathy just started a job with XYZ Manufacturing Company. She attended an
orientation and was given a packet providing information about the various
employee benefits XYZ offers. One item in the packet was a booklet and
application form from an auto insurer. The insurer offers lower premiums to XYZ
employees. The insurer's plan for selling individually-underwritten auto insurance
to employees of XYZ Manufacturing Company is called
A) direct response.
B) mass merchandising.
C) financial institution distribution.
D) multiple marketing.
Answer: B
26
Brian buys and sells investment securities for his clients. Brian also decided to
become a licensed life insurance agent to better serve his customers. While Brian's
primary focus is buying and selling financial securities for his clients in exchange
for commissions, he also earns commissions on his life insurance sales. Brian is
a(n)
A) direct writer.
B) stock broker.
C) insurance broker.
D) personal-producing general agent.
Answer: B
27
ABC Term Life Insurance Company uses an interesting marketing system—it has no
agents. Instead, the company markets its coverages through television and radio
ads, newspaper inserts, and the Internet. The type of marketing system that ABC
Term Life Insurance Company uses is called the
A) mass merchandising system.
B) mixed marketing system.
C) direct response system.
D) worksite marketing system.
Answer: C
28
Big Mutual Insurance Company would like to take advantage of financial services
deregulation by acquiring a bank and a stock brokerage firm. Big Mutual, however,
would have trouble raising the funds needed to make these acquisitions under the
mutual form of organization. Big Mutual is planning to switch from the mutual
form of organization to the stock form, and to issue shares of common stock to
raise capital. This change in organizational structure is called
A) mutualization.
B) retrocession.
C) reinsurance.
D) demutualization.
Answer: D
29
Jim would like to start a business raising thoroughbred racehorses. Obtaining
insurance on the horses is a key concern, and he was dismayed to learn that
none of the insurers authorized to operate in his state offer this specialty
insurance. What is the name of the intermediary that Jim can use to place this
coverage with an insurer not admitted to his state?
A) alien insurer
B) general agent
C) surplus lines broker
D) direct writer
Answer: C
30
Some investors decided to start an insurance company. Each investor contributed
$50,000 to raise the capital required to charter a new company. Each investor
received an ownership interest in the company. The company will raise additional
capital
by
selling
ownership
rights
to
other
investors.
Under
this
type
of
organization, the customer and owner functions are separate. This type of insurer
is called a
A) stock company.
B) reciprocal exchange.
C) fraternal company.
D) mutual company.
Answer: A
31
RST Insurance Company does not have any agents. Instead, the company sells
insurance through radio ads, telemarketers, and newspaper and magazine inserts.
This distribution method is called
A) reciprocal exchange.
B) direct response system.
C) mass merchandising.
D) multiple distribution system.
Answer: B
32
Which of the following statements about Blue Cross and Blue Shield plans is (are)
true?
Blue Cross and Blue Shield plans can be organized on a nonprofit basis or on a
for-profit basis.
Blue Cross provides coverage for hospital services; Blue Shield provides coverage
for physicians' and surgeons' fees.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
33
Which of the following statements about Lloyds of London (are) true?
The majority of the business underwritten by Lloyds of London is for unusual
risks, such as valuable race horses and professional athletes.
Lloyds of London is a group of underwriters who underwrite insurance, not an
insurance company.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
34
As an alternative to demutualizing, Big Mutual Insurance Company reorganized
itself into a corporate form that can directly or indirectly own a stock insurance
company. This form of organization is called a(n)
A) holding company.
B) shell company.
C) upstream company.
D) downstream company.
Answer: A
35
All of the following are reasons why mutual insurance companies convert to stock
insurance companies EXCEPT
A) Stock companies can offer stock options to attract and retain key personnel.
B) Stock companies can raise new capital more easily.
C) Stock companies are exempt from state insurance regulation.
D) Stock companies offer greater flexibility to expand through acquisitions.
Answer: C
36
R.I.P. Company manufactures herbicide and pesticide. The company had difficulty
finding affordable liability insurance. R.I.P. established its own insurance company
based in Bermuda for the purpose of insuring R.I.P.'s loss exposures. The
company that R.I.P. formed is called a
A) captive insurer.
B) reciprocal insurer.
C) fraternal insurer.
D) holding company.
Answer: A
37
Which of the following statements is (are) true about savings bank life insurance
(SBLI)?
Each depositor at the savings bank receives life insurance equal to his or her
savings account balance.
The goal of SBLI is to provide low-cost life insurance to consumers.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
38
Which of the following statements is true with regard to career life insurance
agents?
A) They represent several different life insurance companies.
B) They are compensated largely through a salary and not through commissions.
C) They are paid the same commission rate on new and renewal business.
D) The insurer provides financing, training, supervision, and office facilities for
career agents.
Answer: D
39
Which of the following statements is true regarding independent insurance agents
in property and liability insurance?
A) The insurer owns the expiration rights, not the independent agent.
B) Independent agents are only permitted to represent one insurance company.
C) Independent agents are paid the same commission rate on new and renewal
business.
D) Independent agents are not permitted to sell life and health insurance.
Answer: C
40
Marcy advises her clients on investments, taxes, wealth management, estate issues,
budgeting, and insurance. Marcy is also a licensed life insurance agent. When
Marcy sells life insurance to a client, the distribution channel used is a(n)
A) stock broker.
B) financial planner.
C) insurance broker.
D) direct writer.
Answer: B
41
Which of the following statements is (are) true regarding insurance agents and
insurance brokers?
A property and liability insurance agent has the authority to bind the insurer for
certain types of coverage.
A licensed broker who is not a licensed agent has the legal authority to bind an
insurer.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
42
Big Life Insurance Company purchased Regional Bank. Regional Bank has 27
branches in four states. Big Life Insurance Company required one employee at
each bank branch to become a licensed life insurance agent and to sell Big Life
Insurance
Company
annuities
and
life
insurance
products.
This
distribution
channel is an example of the
A) career agent distribution system.
B) direct response distribution system.
C) financial institution distribution system.
D) worksite marketing distribution system.
Answer: C
43
The local franchise of a national bar and grill chain continued to serve a drunk
customer. The drunk customer tried to drive home. He hit and killed two people
who were riding bicycles. The representatives of those who were killed filed a
lawsuit against the national chain. As jury awards in the area where the incident
occurred are high, insurers selling liquor liability insurance refused to issue new
coverage until the case was resolved. Because no admitted insurers sell the
coverage, liquor liability insurance in this case is considered a(n)
A) residual line.
B) mandatory coverage.
C) orphan policy.
D) surplus line.
Answer: D
44
Peggy is an independent insurance agent who places substantial amounts of
business with XYZ Insurance Company. XYZ pays Peggy a bonus when she meets
a sales goal. XYZ also allows Peggy to recruit and train sub-agents. She receives
additional commissions based on the sales generated by the sub-agents. Based on
this description, we can conclude that Peggy is a
A) direct writer.
B) personal producing general agent.
C) multiple line exclusive agent.
D) broker.
Answer: B
45
A reciprocal exchange is managed by a corporation that is authorized to collect
premiums, pay losses, invest funds, seek new members, and perform other
functions. This corporate manager is called a(n)
A) holding company.
B) attorney-in-fact.
C) resident agent.
D) captive manager.
Answer: B
46
A plan for selling individually underwritten property and liability insurance to
members of a group is called
A) direct response.
B) multiple distribution.
C) niche marketing.
D) mass merchandising.
Answer: D
ch6
1
The primary function of an actuary is to
A) adjust claims.
B) determine premium rates.
C) negotiate reinsurance treaties.
D) invest insurance company assets.
Answer: B
2
Insurers obtain data that can be used to determine rates from
A) pricing pools.
B) insurance advisory organizations.
C) banks.
D) reciprocal exchanges.
Answer: B
3
Which of the following statements about underwriting policy is (are) true?
A
company
must
establish
an
underwriting
policy
consistent
with
company
objectives.
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
Answer: A
4
Which of the following statements about underwriting standards is (are) true?
One purpose of underwriting standards is to reduce adverse selection against the
insurer.
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) both I and II
D) neither I nor II
Answer: C
5
The underwriting process begins with the
A) agent.
B) desk underwriter.
C) inspection report.
D) actuary.
Answer: A
6
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: D
7
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.
Answer: A
8
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)
Answer: B
9
Factors that may result in more restrictive underwriting decisions include which of
the following?
Inadequate rates.
The unavailability of reinsurance at favorable terms.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
10
Which of the following is a function of the marketing department of an insurance
company?
A) to settle claims after a loss has been reported
B) to determine the cost of products the insurer sells
C) to make final underwriting decisions
D) to identify production goals
Answer: D
11
Which of the following statements about claim settlement is (are) true?
The fair payment of claims requires an insurer to adopt a very liberal claims
policy.
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
Answer: D
12
Which of the following statements about claims settlement is true?
A) Agents are never authorized 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) A public adjustor is a salaried employee who works for one insurer.
D) A staff claims representative is hired by a policyholder to represent him or her
if the policyholder does not agree with the claim settlement offered by the insurer.
Answer: B
13
Morgan was hired by an insurance company after she graduated from college.
Upon completion of a training program, Morgan was assigned to a territory where
she adjusts claims of the insurer’s policyowners. Morgan is a(n)
A) public adjustor.
B) staff claims representative.
C) agent.
D) independent adjustor.
Answer: B
14
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.
Answer: C
15
Which of the following statements about reinsurance is true?
A) A reinsurer may not purchase reinsurance.
B) The reinsurer is the first insurer that provides claims services to the insured
after a loss occurs.
C) The amount of insurance transferred to a reinsurer is called the net retention.
D) The insurer transferring business to a reinsurer is called the ceding company.
Answer: D
16
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.
Answer: A
17
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.
Answer: B
18
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.
Answer: D
19
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.
Answer: B
20
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.
Answer: D
21
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 by Delta
suffers an $800,000 loss?
A) $600,000
B) $700,000
C) $720,000
D) $800,000
Answer: B
22
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(n)
A) quota-share reinsurance treaty.
B) surplus-share reinsurance treaty.
C) excess-of-loss reinsurance treaty.
D) reinsurance pool.
Answer: C
23
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.
Answer: D
24
Which of the following statements about the investments of property and liability
insurers is (are) true?
Income from investments is important in offsetting any unfavorable underwriting
experience.
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
Answer: A
25
Functions of an insurance company's legal department include which of the
following?
Lobbying for legislation favorable to the insurance industry.
Drafting policy provisions.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
26
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.
Answer: A
27
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 hired an outside firm 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.
Answer: D
28
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.
Answer: C
29
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.
Answer: C
30
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
Answer: B
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.
Answer: C
32
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
Answer: B
33
Amy heads the legal staff of a large property and liability insurance company.
Amy's staff is likely involved in which of the following activities?
A) reviewing investment options for the insurer's assets
B) reviewing language and policy provisions in insurance contracts
C) calculating premiums to be charged for the insurer's products
D) reviewing applications to determine if the company should insure the risk
Answer: B
34
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.
Answer: A
35
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(n)
A) binder.
B) proof of loss.
C) inspection report.
D) notice of loss.
Answer: B
36
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.
Answer: B
37
Which of the following statements is (are) true with respect to catastrophe bonds?
The bonds are issued by the U.S. Government.
The bonds have relatively high interest (coupon) rates.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
38
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 full
amount borrowed or pay interest. The securities PCI issued are called
A) catastrophe futures contracts.
B) interest rate swaps.
C) catastrophe bonds.
D) contingent options contracts.
Answer: C
39
The process of transferring risk to the capital markets through the use of
financial instruments such as bonds, futures contracts, and options is known as
A) consolidation of risk.
B) avoidance of risk.
C) securitization of risk.
D) compartmentalization of risk.
Answer: C
40
Which of the following statements is (are) true about life insurance company
investments?
The majority of life insurance company general account assets are invested in
bonds.
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
Answer: C
41
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
arrangement is a(n)
A) quota-share treaty.
B) surplus-share treaty.
C) excess-of-loss treaty.
D) reinsurance pool
Answer: D
42
for
large
commercial
risks.
This
reinsurance
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.
Answer: B
43
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.
Answer: D
44
Which of the following statements is true regarding the information systems
functional area of an insurance company?
Computers
and
information
systems
are
able
to
perform
some
previously were performed directly by employees.
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
Answer: C
45
The price per unit of insurance is called the
A) premium.
B) loss adjustment expense.
C) rate.
D) loss reserve.
tasks
that
Answer: C
46
When a fraternal insurer began operations, it asked each member, regardless of
age, to pay $20 per month to the fraternal's group life insurance plan. In
exchange, each member received the same amount of life insurance. Soon younger
members of the group began to drop out when they realized their premiums were
subsidizing a group with a higher chance of loss. Which important underwriting
principle was violated in this case?
A) An underwriting profit should be attained.
B) Moral hazard should be avoided.
C) Insureds should be selected according to underwriting standards.
D) There should be equity among policyholders.
Answer: D
47
ABC
Insurance
Company
entered
into
a
reinsurance
agreement
with
XYZ
Reinsurance. Under the contract, XYZ Re has no liability unless ABC's loss ratio
exceeds 85 percent for the year. XYZ Re agreed to pay all losses in excess of the
85 percent loss ratio. ABC Insurance Company is using reinsurance to
A) stabilize profits.
B) reduce the unearned premium reserve.
C) provide large risk capacity.
D) retire from a line or territory.
Answer: A
48
Granite Insurance Company entered into a treaty reinsurance agreement with Rock
Solid Reinsurance (RSR). Granite's retention limit is $400,000 and RSR agreed to
provide reinsurance for up to $2.0 million. If Granite writes an $800,000 policy,
RSR is responsible for 50 percent of the losses. If Granite insures a $1.6 million
risk, RSR is responsible for 25 percent of any losses. What type of reinsurance
arrangement did Granite enter into with RSR?
A) facultative reinsurance
B) surplus share reinsurance
C) quota share reinsurance
D) excess of loss reinsurance
Answer: B
49
State insurance regulators require LMN Life Insurance Company to maintain a
separate account. The assets in the separate account would support the liabilities
for which of the following products?
A) term life insurance
B) whole life insurance
C) fixed annuity
D) variable life insurance
Answer: D
50
Gwen is in charge of accounting at Integrity Insurance Company. Integrity is a
publicly-traded insurer. In describing her job, Gwen said, "There aren't too many
businesses where you are required to keep two sets of books." Gwen's comment
most likely refers to her company
A) preparing accounting statements using statutory and GAAP accounting.
B) preparing one set of records for the insurer's managers and another set for the
policyholders.
C) preparing one set of books using dishonest values and another set using
current market values.
D) preparing one set of accounting statements considering investment income and
another set of accounting statements not considering investment income.
Answer: A
51
In a reinsurance transaction, the ceding commission is paid by
A) the insured to the ceding company.
B) the reinsurer to the ceding company.
C) the ceding company to the insured.
D) the ceding company to the reinsurer.
Answer: B
52
A highly specialized technician who provides local agents in the field with technical
help and assistance with marketing problems is called a(n)
A) general agent.
B) actuary.
C) Certified Financial Planner.
D) special agent.
Answer: D
ch7
1
LMN Mutual Insurance Company has total liabilities of $300 million. The company
has total assets of $380 million. What is LMN's policyholders' surplus?
A) $680 million
B) $340 million
C) $80 million
D) -$80 million
Answer: C
2
Which of the following would not appear in the asset section of an insurance
company's balance sheet?
A) loss reserves
B) bonds
C) common stock
D) real estate
Answer: A
3
Under one method of estimating a loss reserve, the reserve is based on life
expectancy, duration of disability, and similar factors. This method of estimating
loss reserves is called the
A) judgment method.
B) tabular value method.
C) loss ratio method.
D) average value method.
Answer: B
4
Reasons for the unearned premium reserve include which of the following?
To pay losses that occur during the policy period.
To pay premium refunds to policyholders in the event of cancellation.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
5
A property and casualty insurer's loss reserve includes estimates for all of the
following EXCEPT
A) claims anticipated but not yet incurred.
B) claims reported and adjusted but not yet paid.
C) claims reported and filed but not yet adjusted.
D) claims incurred but not yet reported to the company.
Answer: A
6
Which of the following statements about methods for estimating loss reserves for
property and casualty insurers is (are) true?
The judgment method involves the use of a statutory formula to estimate the loss
reserve.
The average value method is used when the number of claims is large and the
claims are settled quickly.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
7
One item that appears on an insurance company's financial statements is a liability
that represents an estimate of the claims reported and adjusted but not yet paid,
claims reported and filed but not yet adjusted, and claims incurred but not yet
reported to the company. This liability is called the insurer's
A) net income.
B) loss reserves.
C) admitted assets.
D) unearned premium reserve.
Answer: B
8
A loss reserve established for each individual claim when it is reported to a
property and casualty insurance company is call a(n)
A) admitted asset.
B) incurred-but-not-reported (IBNR) reserve.
C) unearned premium reserve.
D) case reserve.
Answer: D
9
Which of the following items would appear in the income section of an insurance
company's income and expense statement?
A) underwriting expense
B) bonds
C) loss reserves
D) premiums
Answer: D
10
JKL Insurance Company reported the following information on its accounting
statements last year:
Premiums Written $90,000,000
Loss Adjustment Expenses $5,000,000
Underwriting Expenses $30,000,000
Premiums Earned $100,000,000
Incurred Losses $70,000,000
What was JKL's loss ratio last year?
A) 70.0 percent
B) 75.0 percent
C) 83.3 percent
D) 90.0 percent
Answer: B
11
JKL Insurance Company reported the following information on its accounting
statements last year:
Premiums Written $90,000,000
Loss Adjustment Expenses $5,000,000
Underwriting Expenses $30,000,000
Premiums Earned $100,000,000
Incurred Losses $70,000,000
What was JKL's expense ratio last year?
A) 5.0 percent
B) 30.0 percent
C) 33.3 percent
D) 50.0 percent
Answer: C
12
JKL Insurance Company reported the following information on its accounting
statements last year:
Premiums Written $90,000,000
Loss Adjustment Expenses $5,000,000
Underwriting Expenses 30,000,000
Premiums Earned $100,000,000
Incurred Losses $70,000,000
What was JKL's combined ratio last year?
A) 100.0
B) 103.3
C) 105.0
D) 108.3
Answer: D
13
Which of the following statements about property and casualty insurance company
operating results is (are) true?
An insurance company can have a combined ratio greater than 1 (or 100 percent)
and still be required to pay income taxes.
By all measures, the property and casualty insurance industry is highly profitable
when compared to other industries.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
14
Life insurance policyholders may borrow the cash value from their life insurance
policies.
Where are life
insurance
policy loans
shown
on
a life
insurance
insurance.
The
company's
company's financial statements?
A) as an asset
B) as a liability
C) as income
D) as an expense
Answer: A
15
MedProf
Insurance
markets
medical
malpractice
combined ratio in 2015 was 95.4. Its expense ratio was 25.4. What was the
company's loss ratio?
A) 60.4
B) 70.0
C) 88.2
D) 120.8
Answer: B
16
To protect policyholders, state laws place limitations on a life insurance company's
investments. The assets backing interest-sensitive products, such as variable life
insurance and variable annuities, are not subject to these restrictions. Assets
backing interest-sensitive products are placed in a special account called the life
insurer's
A) policy reserve account.
B) policy loan account.
C) separate account.
D) policyholders surplus.
Answer: C
17
Which of the following statements is (are) true concerning investments of property
and casualty insurers and life insurers?
Property and casualty insurance companies place greater emphasis on liquidity
than do life insurers.
Life insurance company investments are, on average, of longer duration than
property and casualty insurance company investments.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
18
Which of the following is an expense for a life insurance company?
A) loss reserves
B) death benefits paid to a beneficiary
C) unrealized capital gains
D) realized capital gains
Answer: B
19
All of the following statements about business objectives in designing a rating
system are true EXCEPT
A) The rating system should encourage loss control activities.
B) The rating system should be independent of long-run changes in economic
conditions.
C) The rating system should be simple to understand.
D) The rating system should be stable over short periods so that consumer
satisfaction can be maintained.
Answer: B
20
All of the following statements about regulatory objectives of insurance rate
making are true EXCEPT
A) One purpose of rate adequacy is to maintain the solvency of insurers.
B) Rates unfairly discriminate if loss exposures that are similar with respect to
losses and expenses are charged substantially different rates.
C) Insurers know in advance if the coverages marketed will be profitable, so rate
regulation is not needed.
D) Rates are excessive if policyholders are paying substantially more than the
actual value of their protection.
Answer: C
21
The unit of measurement used in property and casualty insurance pricing is called
the
A) unit rate.
B) premium.
C) exposure unit.
D) experience unit.
Answer: C
22
The portion of an insurance premium allocated to expenses, profit, and a margin
for contingencies is called the
A) loading.
B) pure premium.
C) gross premium.
D) experience rate.
Answer: A
23
Which of the following statements about judgment rating is true?
A) It involves the manual rating of exposures.
B) It is used when the loss exposures are so diverse that a class rate cannot be
calculated.
C) It is a form of experience rating.
D) It is only used when credible loss statistics are available.
Answer: B
24
Under one type of merit rating, the class or manual rate is adjusted upward or
downward based on past loss history. This type of merit rating is called
A) schedule rating.
B) judgment rating.
C) experience rating.
D) retrospective rating.
Answer: C
25
All of the following statements about class rating are true EXCEPT
A) Exposures with similar characteristics are placed in the same underwriting
class.
B) The rate charged for each class reflects the average loss experience for that
class.
C) The complexity of class rating makes it inappropriate for personal lines
coverages.
D) It is based on the assumption that future losses to insureds will be determined
by the same classification factors currently in use.
Answer: C
26
Ratemakers at ABC Insurance Company calculated the pure premium to be $280
for a risk they were considering insuring. What is the gross rate for this risk,
assuming a 30 percent expense ratio?
A) $364
B) $400
C) $430
D) $520
Answer: B
27
Which of the following statements is (are) true about the loss ratio method of class
rating?
The pure premium is calculated, and it is loaded to cover expenses, profit, and
contingencies.
The actual loss ratio is compared to the expected loss ratio, and the rate is
adjusted accordingly.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
28
Which of the following statements about schedule rating is (are) true?
It involves the determination of a basis rate for each exposure, which is then
modified by credits or debits.
It is based on the assumption that certain physical characteristics of the insured's
operations will influence the insured's future loss experience.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
29
Which of the following statements about experience rating is (are) true?
The insured's past loss experience is used to determine the premium for the next
policy period.
Its use is generally limited to small firms whose actual experience lacks credibility.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
30
Which of the following statements about retrospective rating is true?
A) The premium for the current period is determined by the loss experience in
prior periods.
B) The premium for the current period is determined by the loss experience
during the current period.
C) The premium for the current period is determined by predicted future loss
experience.
D) The premium for future periods is determined by the loss experience for the
current period.
Answer: B
31
Monopoly Insurance is the only company marketing a certain line of insurance in
a state. After complaints from several consumers, the State Insurance Department
investigated Monopoly's rates. The regulators determined that Monopoly was taking
advantage of being the only insurer offering the line by charging more than
double the actuarial cost of the coverage. Which regulatory rating objective was
Monopoly violating?
A) Rates must be adequate.
B) Rates should encourage loss control.
C) Rates must not be excessive.
D) Rates must not unfairly discriminate.
Answer: C
32
Small Town used to be just that—a small town 6 miles from Large City. Over the
years, the area between Small Town and Large City has developed, and now Small
Town is part of the suburbs surrounding Large City. An auto insurer that operated
in the area had a large increase in auto claims from Small Town insureds. The
insurer did not adjust its rates, and this year will lose money because of claims
attributable to higher population density. Which business rating objective did this
insurer fail to meet?
A) simplicity
B) stability
C) responsiveness
D) encouragement of loss control
Answer: C
33
Nathan was hired as an actuary with ABC Insurance. Nathan was asked to
calculate the annual premium for a new product and to explain his calculations to
ABC's director of ratemaking. Nathan calculated the pure premium and presented
this value as the final premium. After Nathan's presentation, the director of
ratemaking said, "You left out something very important. If we sell coverage at the
pure premium rate, we'll be out of business soon." What did Nathan overlook in
his calculations?
A) loading for expenses
B) the underwriting cycle
C) seasonality of claims
D) investment income
Answer: A
34
XYZ Insurance Company expects $500,000 in claims and loss adjustment expenses
for each 1,000 properties that it insures in a certain category of business
insurance. What pure premium should XYZ charge for each property insured?
A) $69.99
B) $166.67
C) $350.00
D) $500.00
Answer: D
35
XYZ Insurance Company uses class rating to determine the rate to charge for
insurance. For one type of insurance, the pure premium XYZ actuaries calculated
is $75 per unit. If XYZ's expense ratio is 25 percent, what is the gross rate for
this coverage?
A) $37.50
B) $55.25
C) $75.00
D) $100.00
Answer: D
36
A manufacturing company just hired a new risk manager, and she has instituted
several employee safety programs. She has persuaded the insurer writing the
company's
workers
compensation
insurance
to
base
the
premium
on
the
company's actual loss experience during the current coverage period rather than
on the company's historical performance. This type of plan is called a(n)
A) retrospectively rated plan.
B) class rated plan.
C) experience rated plan.
D) judgment rated plan.
Answer: A
37
An Econodeath Insurance Company actuary calculated the present value of the
expected death claim the company will pay if it sells whole life insurance to a
30-year-old woman. This value is called the
A) net level premium.
B) gross premium.
C) net single premium.
D) life insurance policy reserve.
Answer: C
38
Which of the following statements concerning regulatory objectives of rate making
is (are) true?
Rates must not be unfairly discriminatory.
Rates must be adequate.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
39
Which of the following statements about the combined ratio is true?
A) It is equal to the loss ratio minus the expense ratio.
B) A combined ratio greater than 1 (or 100 percent) means an underwriting loss
has occurred.
C) The combined ratio considers the company's investment income.
D) A combined ratio less than 1 (or 100 percent) indicates an underwriting loss
has occurred.
Answer: B
40
In schedule rating, each building is individually evaluated based on several rating
factors. One factor refers to the possibility that the building will be damaged or
destroyed by a fire that starts at an adjacent property and spreads to the building.
This rating factor is known as
A) occupancy.
B) protection.
C) maintenance.
D) exposure.
Answer: D
41
A strip-mall includes eight identical-sized retail units. All of the units were built at
the same time and each has an identical sprinkler system. Unit number two is a
dry cleaning business. Unit number three is a bar and grill. Unit number four is a
dress shop. The owners of these three units are all insured by the same insurance
company, but the property insurance premiums vary significantly. Which of the
following rating factors best explains the difference in premiums?
A) exposure
B) protection
C) construction
D) occupancy
Answer: D
42
A property and liability insurance company's loss reserve and unearned premium
reserve are
A) assets.
B) liabilities.
C) income.
D) expenses.
Answer: B
43
In schedule rating, each building is individually rated on several factors. One
factor refers to the quality of the city's water supply and fire department, and the
risk control devices installed in the building. This factor is called
A) exposure.
B) occupancy.
C) protection.
D) housekeeping.
Answer: C
44
A property and
liability insurance company's loss ratio and
expense ratio,
respectively, for 2013 – 2015 were:
2013: 74% 31%
2014: 68% 33%
2015: 66% 30%
Which of the following statements is true about the company's underwriting results
for this time period?
A) The insurer made money from its underwriting activities each year.
B) The insurer's profitability from underwriting has been deteriorating each year.
C) The insurer's profitability from underwriting has been improving each year.
D) The insurer lost money from its underwriting activities each year.
Answer: C
45
One liability on a property and liability insurance company's balance sheet is for
the costs associated with settling and paying reserved claims. This liability is the
A) pre-paid expense reserve.
B) loss reserve.
C) unearned premium reserve.
D) loss adjustment expense reserve.
Answer: D
46
The assets of a property and liability insurance company are primarily
A) investments such as stocks and bonds.
B) loss reserves.
C) plant and equipment.
D) premiums paid by policyholders.
Answer: A
47
ABC Insurance Company's investment income ratio last year was 4.2 percent. The
company's combined ratio last year was 102.6 percent. What was ABC's overall
operating ratio?
A) 96.8 percent
B) 98.4 percent
C) 103.2 percent
D) 106.8 percent
Answer: B
48
One life insurance company reserve is designed to smooth the company’s reported
surplus over time by absorbing fluctuations in security prices that are not
attributable to changing interest rates. This reserve is called the
A) asset write-off reserve.
B) reserve for amounts held on deposit.
C) unearned premium reserve.
D) asset valuation reserve.
Answer: D
ch8
1
Reasons for regulation of insurance include which of the following?
Maintaining insurer solvency
Ensuring reasonable rates
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
2
The right of the states to regulate the business of insurance was first established
by
A) the South-Eastern Underwriters Association case.
B) the case of Paul v. Virginia.
C) the Financial Modernization Act.
D) the Sherman Act.
Answer: B
3
The basis for current state regulation of insurance is
A) the McCarran-Ferguson Act.
B) Paul v. Virginia.
C) the South-Eastern Underwriters Association case.
D) the National Association of Insurance Commissioners.
Answer: A
4
All of the following statements about the methods of regulating insurance are true
EXCEPT
A) All states have insurance laws that regulate the operations of insurers.
B) Insurers are totally exempt from regulation by federal agencies and laws.
C) The courts regulate insurance in many ways, including the interpretation of
policy clauses and provisions.
D)
State
insurance
commissioners,
through
administrative
rulings,
have
considerable power over insurers doing business in their states.
Answer: B
5
Which of the following statements about the licensing of insurance companies is
(are) true?
A new capital stock insurer must meet minimum capital and surplus requirements,
which vary by state and line of insurance.
The licensing requirements for insurance companies are less stringent than those
imposed on most other types of firms.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
6
An insurance company incorporated in another state has been licensed to operate
in your state. In your state, the insurer would be considered a(n)
A) nonadmitted insurer.
B) foreign insurer.
C) alien insurer.
D) reciprocal insurer.
Answer: B
7
An insurance company chartered in another country has been licensed to operate
in your state. In your state, the insurer would be considered a(n)
A) nonadmitted insurer.
B) foreign insurer.
C) alien insurer.
D) reciprocal insurer.
Answer: C
8
Which of the following is considered a nonadmitted asset for an insurer?
A) cash
B) preferred stocks
C) real estate
D) office furniture
Answer: D
9
The policyholders' surplus of an insurer is defined as the difference between its
A) assets and its liabilities.
B) premium income and its expenses.
C) reserves and its liabilities.
D) assets and its nonadmitted assets.
Answer: A
10
Which of the following statements about the use of risk-based capital requirements
is (are) true?
Insurers must have a certain amount of capital depending on the riskiness of their
investments and insurance operations.
Insurers may be required to take certain actions depending on how much capital
they have relative to their risk-based capital requirements.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
11
Which of the following statements about the regulation of insurance company
investments is (are) true?
The purpose of regulating insurance company investments is to prevent insurers
from making unsound investments which could threaten their solvency.
Life insurers can invest an unlimited amount of their assets in common stocks.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
12
Which of the following statements about the regulation of life insurance companies
is (are) true?
The percentage of assets a life insurance company may invest in a specific type of
asset (e.g., stocks or bonds) is generally limited by law.
The purpose of limiting the accumulation of surplus is to prevent an insurer from
increasing its surplus at the expense of policyowner dividends.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
13
Which of the following statements about state insurance guaranty funds is (are)
true?
They limit the amount that policyholders can collect if an insurer becomes
insolvent.
They are usually funded by general revenues of the states.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
14
Under one type of rate regulation, insurers do not have to register their rates with
state regulatory authorities. However, insurers may be required to furnish rate
schedules and
supporting data to state officials. A fundamental assumption
underlying this type of rating law is that market forces will determine the price
and availability of insurance, rather than discretionary acts of regulators. This
type of rate regulation is called
A) a flex-rating law.
B) a prior-approval law.
C) a file-and-use law.
D) no filing required.
Answer: D
15
Under what type of rate regulation are insurers required to obtain approval of
rates before using them if the rate change exceeds a specified predetermined
range?
A) flex-rating law
B) prior-approval law
C) file-and-use law
D) use-and-file law
Answer: A
16
By misrepresenting the true facts, Gretchen was able to convince someone to
replace an existing life insurance policy with another company and to purchase a
new policy from the company that Gretchen represents. Gretchen has engaged in
an illegal sales practice called
A) bait and switch.
B) rebating.
C) retaliating.
D) twisting.
Answer: D
17
Which of the following statements about premium taxes is (are) true?
They are levied by the federal government as a result of the McCarran-Ferguson
Act.
Their primary purpose is to provide funds for insurance regulation.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
18
Which of the following is an advantage of federal regulation of insurance over
state regulation of insurance?
A) greater opportunity for innovation
B) more effective treatment of systemic risk
C) greater responsiveness to local needs
D) more competent regulators
Answer: B
19
Which of the following is an advantage of state regulation of insurance over
federal regulation of insurance?
A) uniformity of laws
B) greater efficiency
C) more effective in negotiating international agreements pertaining to insurance
D) quicker response to local insurance problems
Answer: D
20
A
shortcoming
of
state
regulation
of
insurance
according
to
Congressional
committees and the General Accounting Office is that state regulation
A) leads to decentralized governmental power.
B) provides opportunities for innovation.
C) provides inadequate consumer protection.
D) is more responsive to local needs.
Answer: C
21
The major reasons for insurer insolvency include which of the following?
Inadequate pricing and loss reserves
Rapid growth and inadequate surplus
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
22
Which of the following is a principal method of ensuring the solvency of insurers?
A) requiring submission of annual financial statements to state regulators
B) tracking and investigating market conduct complaints against insurers
C) disciplining agents of the insurer for illegal sales practices
D) regulating the forms (applications and policies) employed by the insurer
Answer: A
23
The number of title insurance companies operating in State Z is relatively low.
Recently, the largest of these companies (50 percent market share) acquired the
second
largest
acquisition,
the
company
insurer
(30
percent
raised
market
premiums
by
share).
75
Immediately
percent.
This
after
the
scenario
demonstrates which of the following rationales for the regulation of insurance?
A) maintain insurer solvency
B) prohibit unfair sales practices by agents
C) ensure reasonable rates
D) make insurance available
Answer: C
24
In which of the following did the Court decide that insurance was interstate
commerce when conducted across state lines, and therefore was subject to federal
regulation?
A) Paul v. Virginia
B) South-Eastern Underwriters Association case
C) McCarran-Ferguson Act
D) Financial Modernization Act
Answer: B
25
A
life
insurance
company
based
in
Canada
was
licensed
to
operate
in
Massachusetts. When operating in Massachusetts, the Canadian insurer would be
considered a(n)
A) domestic insurer.
B) captive insurer.
C) foreign insurer.
D) alien insurer.
Answer: D
26
XYZ Mutual Insurance Company has total assets of $10 million. The policyholders'
surplus is $2 million. What are XYZ Mutual's total liabilities?
A) $4.0 million
B) $8.0 million
C) $10.0 million
D) $12.0 million
Answer: B
27
Mutual Property Insurance Company has a surplus of $2 million. According to a
conservative rule, how much in new net premiums can Mutual Property Insurance
Company safely write?
A) $2 million
B) $8 million
C) $10 million
D) $20 million
Answer: A
28
Fly-By-Night Insurance Company had much larger losses than forecast. The
company did not charge adequate premiums nor did the company purchase
reinsurance. If Fly-By-Night becomes insolvent, which of the following will help pay
the unpaid claims of the insurer?
A) guaranty fund
B) premium rebates
C) risk-based capital
D) admitted assets
Answer: A
29
Grace is a life insurance agent. She is attempting to sell a large life insurance
policy, but the prospective purchaser is having second thoughts. To persuade the
prospective purchaser, Grace said, "I will earn a $1,000 commission if you buy this
policy. I'll give you $500 of my commission if you buy the policy." In most states,
what illegal sales practice will Grace be guilty of if she splits her commission with
the purchaser?
A) rebating
B) churning
C) twisting
D) backdating
Answer: A
30
State X's premium tax rate is 2 percent. State Y's premium tax rate is 3 percent.
State X insurers are required to pay the 3 percent rate on business written in
State Y. State X requires insurers from State Y to pay a 3 percent premium tax
on business written in State X, even though the premium tax rate is only 2
percent in State X. This practice is known as a
A) tax tariff.
B) guaranty fund assessment.
C) risk-based capital requirement.
D) retaliatory tax law.
Answer: D
31
ABC Insurance Company would like to purchase a bank. For many years, ABC was
not permitted under federal law to enter into banking operations. Which of the
following legislative acts eliminated the prohibition that prevented banks, insurers,
and investment firms from entering into one another's markets?
A) The McCarran-Ferguson Act
B) The Tax Reform Act
C) The Consolidated Omnibus Budget Reconciliation Act
D) The Financial Modernization Act (Gramm-Leach-Bliley Act)
Answer: D
32
Under one type of rating law, insurers are free to change rates and to use
modified rates immediately. However, the new rate must be filed with regulators
within a specified period, such as 60 days after the modified rate is employed.
This type of rating law is called
A) prior approval.
B) file-and-use.
C) use-and-file.
D) flex rating.
Answer: C
33
The regulation of insurers in areas that affect consumers, which include claims
handling, underwriting, complaints, advertising, sales practices, and other trade
practices is called
A) solvency surveillance.
B) market conduct regulation.
C) combined ratio analysis.
D) market share regulation.
Answer: B
34
The National Association of Insurance Commissioners (NAIC) administers an "early
warning system" to help ensure insurance company solvency. This system uses
data provided in the annual statement to identify companies that may pose a
solvency risk. This early warning system is called
A) the risk-based capital requirements.
B) an insurance guaranty fund.
C) the Insurance Regulatory Information System (IRIS).
D) the assessment method.
Answer: C
35
Which of the following statements is (are) true regarding the quality of insurance
regulation?
The quality of insurance regulation is uniform from state to state.
All evidence suggests federal regulation of insurance would improve the quality of
regulation.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
36
Which of the following statements concerning the proposed optional federal charter
for life insurers is (are) true?
Large insurers operating in many states would more likely prefer a state charter
while smaller, regional, insurers would more likely choose a federal charter.
Proponents of the federal charter argue that it would speed the development and
approval of new products.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
37
Which of the following is a method used to help ensure the solvency of insurers?
A) commercial lines deregulation
B) risk-based capital standards
C) use of credit-based insurance scores
D) use of no filing required rating laws
Answer: B
38
A score derived from an individual's credit history and other factors that is used
by many auto and homeowners insurers for underwriting and rating purposes is
called a(n)
A) CLUE score.
B) insurance score.
C) expense ratio score.
D) combined ratio score.
Answer: B
39
All of the following are arguments in favor of using an applicant's credit record in
personal lines underwriting EXCEPT
A) Most consumers have good credit records and benefit when credit history is
used as a rating factor.
B) Use of credit data in underwriting and rating eliminates price discrimination
against minority groups when they purchase insurance.
C) Underwriting and rating may be more consistent if applicants' credit histories
are considered.
D) There is high correlation between an applicant's credit record and future claims
experience.
Answer: B
40
All of the following statements about insurance regulation are true EXCEPT
A) Insurance commissioners are appointed in some states and elected in some
states.
B) Insurers are subject to regulation by certain federal agencies and laws.
C) The National Association of Insurance Commissioners (NAIC) can force states to
adopt the model laws that it drafts.
D) An insurance commissioner can revoke or suspend an insurer's license to do
business in his or her state.
Answer: C
41
A systemic risk is a risk that
A) can be eliminated through diversification.
B) can be the cause of the collapse of an entire system.
C) can be insured privately.
D) can be easily contained so that it does not spread.
Answer: B
42
The purpose of the Financial Analysis Solvency Tracking (FAST) system employed
by the NAIC is to
A) prioritize insurance companies for additional regulatory action.
B) quicken the approval of rates in prior approval states.
C) speed-up the claims settlement process for insurers charged with delaying
claims payments.
D) quickly address market conduct complaints by consumers.
Answer: A
43
To correct abuses in the financial services industry, Congress passed an Act in
2010 that included numerous provisions to reform the financial services industry.
This Act was the
A) Financial Modernization Act.
B) McCarran-Ferguson Act.
C) Dodd-Frank Act.
D) Biggert-Waters Act.
Answer: C
44
One provision of the Dodd-Frank Act was creation of the Financial Stability
Oversight Council. This council is charged with identifying nonbank financial
companies that could increase the risk of collapse of the entire financial system.
This risk is called
A) market risk.
B) systemic risk.
C) diversifiable risk.
D) enterprise risk.
Answer: B
45
The Dodd-Frank Act created a federal body with some limited regulatory authority.
For
example,
the
organization
can
represent
the
federal
government
in
international negotiations regarding insurance and it can preempt state law where
it conflicts with negotiated international agreements. This body is called the
A) National Insurance Bureau.
B) Federal Office of Insurance.
C) Department of International Insurance.
D) International Insurance Bureau.
Answer: B
46
Which of the following is authority given to the Federal Insurance Office created
by the Dodd-Frank Act?
A) to represent the federal government in international discussions of insurance
regulation
B) to license and charter new insurance companies that plan to operate nationally
C) to be the primary monitor of insurance company solvency
D) to be the primary regulator of all aspects of insurance
Answer: A
47
One method of ensuring the solvency of insurers is a periodic review, every three
to five years, of insurers that operate on a multistate basis. This review is
coordinated by the NAIC. This review is called a(n)
A) annual report.
B) early warning system.
C) field examination.
D) inspection report.
Answer: C
48
The major argument in favor of an optional federal charter for insurers is that
A) small insurers need a national charter to be competitive with large insurers.
B) a federal charter will prevent insurer insolvencies.
C) a federal charter will provide greater oversight of insurer market practices.
D) national insurers are at a competitive disadvantage under the present system.
Answer: D
49
The risk-based capital requirements for life insurers are based on a formula that
considers four types of risk. One risk reflects whether the insurer will have
enough surplus if claims are higher than expected. This risk is called
A) asset risk.
B) insurance risk.
C) interest rate risk.
D) business risk.
Answer: B
50
The risk-based capital requirements for life insurers are based on a formula that
considers four types of risk. One risk reflects a range of uncertainties that life
insurers face including such things as bad management decisions and guaranty
fund assessments. This risk is called
A) asset risk.
B) insurance risk.
C) interest rate risk.
D) business risk.
Answer: D
51
Liability items on an insurer’s balance sheet that reflect obligations that must be
met in the future are called
A) pre-paid expenses.
B) reserves.
C) surplus.
D) nonadmitted assets.
Answer: B
ch9
1
Fundamental purposes of the principle of indemnity include which of the following?
To reduce physical hazards
To prevent the insured from profiting from insurance
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
2
Which of the following is a fundamental purpose of the principle of indemnity?
A) to reduce moral hazard
B) to minimize physical hazards
C) to settle property insurance losses on a replacement cost basis
D) to require deductibles in all property insurance policies
Answer: A
3
Sam's furniture was destroyed by a fire. The furniture cost $1200 when it was
purchased, but similar new furniture now costs $1800. Assuming the furniture was
50 percent depreciated, what is the actual cash value of Sam's loss?
A) $600
B) $900
C) $1200
D) $1800
Answer: B
4
The loss settlement under which of the following supports the principle of
indemnity?
A) life insurance
B) valued policies
C) replacement cost property insurance
D) actual cash value property insurance
Answer: D
5
Under which of the following rules is actual cash value determined by taking into
consideration all relevant factors an expert would use to determine the value of
the property?
A) the circumstantial evidence rule
B) the broad evidence rule
C) the property indemnity rule
D) the objective value rule
Answer: B
6
A total loss under a valued policy is settled on the basis of the
A) market value of the loss.
B) actual cash value of the loss.
C) replacement value of the loss.
D) amount of insurance covering the loss.
Answer: D
7
Which of the following statements describes how losses will be settled if a property
insurance policy is written on a replacement cost basis?
A) Losses are settled without the applicable deductible.
B) Losses are settled without a deduction for depreciation.
C) The insurer must replace the damaged or destroyed property in lieu of a cash
settlement.
D) The policy is converted to a valued policy.
Answer: B
8
Which of the following statements about the principle of insurable interest is (are)
true?
It makes it difficult to measure the amount of an insured's loss.
It reduces moral hazard.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
9
All of the following will support an insurable interest for purposes of purchasing
property and liability insurance EXCEPT
A) former ownership of property.
B) potential legal liability.
C) secured creditors.
D) contractual right.
Answer: A
10
Which of the following statements about an insurable interest in life insurance is
(are) true?
It is required of any person named as beneficiary.
It may result from a pecuniary (financial) interest.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
11
When must an insurable interest legally exist in life insurance?
A) only at the time of the insured's death
B) only at the inception of the policy
C) only at the time the beneficiary is paid
D) both at the time of the insured's death and at the inception of the policy
Answer: B
12
When must an insurable interest legally exist in property insurance for an insured
to receive payment for a loss from the insurer?
A) only at the time of the loss
B) only at the inception of the policy
C) only at the time the loss settlement takes place
D) both at the time of the loss and at the inception of the policy
Answer: A
13
Sue's office building was damaged by a fire caused by a careless tenant. After
paying Sue for the loss, the insurance company sued the tenant to recover its
loss. This suit is based on the principle of
A) warranty.
B) insurable interest.
C) utmost good faith.
D) subrogation.
Answer: D
14
Which of the following statements about subrogation is true?
A) Subrogation eliminates adverse selection.
B) Subrogation helps to hold down the cost of insurance.
C) Subrogation results in violation of the principle of indemnity.
D) Subrogation permits a party who caused a loss to avoid responsibility for the
loss.
Answer: B
15
Which of the following statements about subrogation is true?
A) It is used primarily for losses paid under life insurance policies.
B) It allows the insurer to sue its own insured who is negligent.
C) The insured's right to collect benefits may be forfeited if the insured interferes
with the insurer's subrogation rights after a loss occurs.
D) The insurer is required to exercise its subrogation rights.
Answer: C
16
The principle of utmost good faith is supported by all of the following legal
doctrines EXCEPT
A) representations.
B) warranty.
C) subrogation.
D) concealment.
Answer: C
17
What
is the legal
significance of a material concealment by an insurance
applicant?
A) The contract is automatically voided from its inception.
B) The contract is voidable at the insurer's option.
C) Loss payments are reduced by the degree of the concealment.
D) The insurer is immediately entitled to a higher premium.
Answer: B
18
What is the legal significance of a material misrepresentation in an insurance
application?
A) The contract is automatically voided from its inception.
B) The contract is voidable at the insurer's option.
C) Loss payments are reduced by the degree of the misrepresentation.
D) The insurer is immediately entitled to a higher premium.
Answer: B
19
A false material statement made by an applicant for insurance is an example of
A) concealment.
B) breach of warranty.
C) lack of offer and acceptance.
D) misrepresentation.
Answer: D
20
Which of the following statements about a warranty in an insurance contract is
(are) true?
It is part of the insurance contract.
Statements made by an insurance applicant are considered warranties rather than
representations.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
21
David owns a liquor store in a high-crime area. In order to obtain a reduced
insurance premium, David promised to have a burglar alarm operating at the store
when the store was closed. This agreement, which was incorporated into the
insurance contract, is an example of a
A) representation.
B) binder.
C) rider.
D) warranty.
Answer: D
22
Which of the following statements about offer and acceptance for insurance
contracts is true?
A) In property and liability insurance, agents typically do not have the authority to
bind coverage.
B) In life insurance, the agent can usually accept an offer by immediately binding
coverage.
C) In property insurance, the offer and acceptance are usually in writing but may
be oral.
D) In life insurance, completing the application and paying the first premium
constitute acceptance of the offer from the insurer.
Answer: C
23
Chris applied for life insurance and paid the first premium on Monday. She was
given an insurability premium receipt which specified that coverage was effective
on the date of the application or the date of the medical exam, whichever is later.
She took the medical exam the following Thursday. She was found to be in perfect
health. On which day was her coverage effective?
A) on Monday, when she completed the application and paid the first premium
B) on Wednesday, two days after completing the application and paying the first
premium
C) on Thursday when she passed the medical exam
D) on Saturday, two days after passing the medical exam
Answer: C
24
Which of the following statements about consideration in an insurance contract is
(are) true?
The insured's total consideration is submission of a completed application.
The insurer's consideration is the promise to do those things specified in the
policy.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
25
A contract in which the values exchanged are not equal because chance is
involved is called a(n)
A) contract of adhesion.
B) unilateral contract.
C) conditional contract.
D) aleatory contract.
Answer: D
26
Why are insurance contracts said to be contracts of adhesion?
A) The values exchanged by the parties to the contract are not equal.
B) One party writes the contract, and the other party must accept the entire
contract as written.
C) Only one party makes a legally enforceable promise.
D) Conditions are placed on the insurer's promise to perform.
Answer: B
27
Why does the insured get the benefit of the doubt if an insurance policy contains
any ambiguities or uncertainties?
A) because insurance contracts are aleatory
B) because insurance contracts are unilateral
C) because insurance contracts are conditional
D) because insurance contracts are contracts of adhesion
Answer: D
28
Why can an insurer refuse to pay a claim if an insured fails to abide by the
policy provisions?
A) because insurance contracts are aleatory
B) because insurance contracts are unilateral
C) because insurance contracts are conditional
D) because insurance contracts are contracts of adhesion
Answer: C
29
Which of the following types of insurance policies can usually be assigned without
the insurer's consent?
Life insurance
Property insurance
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
30
What is the practical effect of an insurance policy being a conditional contract?
A) The insurer can refuse to a pay claim if the insured has not complied with all
policy provisions.
B) The insured can assign the policy only with the insurer's consent.
C) The insurer can sue the insured for failure to pay any premiums.
D) The insured gets the benefit of the doubt if a policy contains any ambiguities
or uncertainties.
Answer: A
31
What is the practical effect of an insurance contract being a contract of adhesion?
A) The insurer can refuse to pay claims if the insured has not complied with all
policy provisions.
B) The insured can assign the policy only with the insurer's consent.
C) The insurer can sue the insured for failure to pay any premiums.
D) The policy is interpreted in the insured's favor if the policy contains any
ambiguities or uncertainties.
Answer: D
32
All of the following statements about the rules governing agency relationships are
true EXCEPT
A) An agent must be authorized to act on behalf of a principal.
B) An agency agreement may grant certain powers to the agent as well as denying
the agent other powers.
C) The principal is responsible for the acts of agents only if the acts are criminal.
D) Knowledge of the agent is presumed to be knowledge of the principal with
respect to matters within the scope of the agency relationship.
Answer: C
33
The voluntary relinquishment of a legal right is called
A) subrogation.
B) adhesion.
C) estoppel.
D) waiver.
Answer: D
34
Frank asked his company's employee benefits director if his group health coverage
could be converted to individual coverage. The benefits director said, "Yes, you
can convert to an individual policy, and the coverage is identical to your group
coverage." Frank quit his job and converted to an individual policy. Six months
later he filed a claim. He was dismayed to learn the conversion policy was more
limited compared to the group coverage, and his claim was denied. What legal
doctrine will allow Frank to bring a successful legal action against his former
employer because he was financially harmed due to his reasonable reliance upon a
representation of fact?
A) adhesion
B) waiver
C) estoppel
D) subrogation
Answer: C
35
Janice purchased a living room set for $1,000 and insured this furniture on an
actual cash value basis. Two years later the living room set was destroyed by a
covered peril. At the time of loss, the property had depreciated in value by 25
percent. The replacement cost of the furniture at the time of loss was $1,200.
Assuming no deductible, how much will Janice receive from her insurer?
A) $900
B) $950
C) $1,000
D) $1,200
Answer: A
36
Jacob sold his house to Shelia for $140,000 in cash. Jacob "threw in" insurance on
the house as part of the deal and did not bother telling the insurer that there was
a new owner. Four months after Shelia purchased the home, a windstorm damaged
the roof. Which of the following legal characteristics of insurance contracts could
the insurer use to legally deny payment for the damage to the roof?
A) Insurance contracts are unilateral contracts.
B) Insurance contacts are contracts of adhesion.
C) Insurance contracts are aleatory contracts.
D) Insurance contracts are personal contracts.
Answer: D
37
Melody's car was damaged when another driver ran a stop sign and hit her car.
Melody decided to collect from her own insurer and to let her insurer recoup the
loss payment from the negligent driver who hit her. What fundamental legal
principle is illustrated in this scenario?
A) the principle of utmost good faith
B) the principle of insurable interest
C) the principle of subrogation
D) the principle of reasonable expectations
Answer: C
38
When Ben applied for life insurance, he was asked on the application if he smoked
or used tobacco products. Ben answered "No." In reality, Ben smokes two packs of
cigarettes a day. The policy was issued at the "preferred, nonsmoker rate." If Ben
dies 6 months after the policy is issued, upon what grounds will the insurer be
able to legally deny the claim?
A) warranty
B) misrepresentation
C) waiver
D) concealment
Answer: B
39
Robin plans to open a bar in a high-crime area. She had difficulty obtaining
insurance for the business. She found an insurer willing to write the coverage, but
only if Robin agreed to have a security alarm system in operation at all times
when the business is closed. Robin's promise to have a security alarm system
operational as a condition of having the insurance coverage in force is a
A) binder.
B) warranty.
C) waiver.
D) deductible.
Answer: B
40
Dave is an agent for Easy Pay Insurance. Easy Pay insures only high-quality
applicants. Dave wanted to earn more commissions, so he sold some policies to
applicants he knew were below-average risks. When these policyowners started
filing claims, Easy Pay tried to deny the claims stating that Dave had not acted
appropriately. Which general rule of agency makes Easy Pay responsible for the
claims of the higher-than-average risk policyowners?
A) There is no presumption of an agency relationship.
B) Agents should be compensated based on the quality of the business they
generate.
C) A principal is responsible for the acts of its agents who are acting within the
scope of their authority.
D) An agent must have authority to represent the principal.
Answer: C
41
Ted's insurance claim was denied by XYZ Insurance Company. When Ted inquired
why the claim was denied, he was told to, "Read the exclusion on page 5 of the
policy." Ted read the exclusion. In his opinion, the exclusion was poorly worded
and vague. If a court of law agrees with Ted's assessment of the exclusion, Ted
may still be able to have his claim paid by the insurer because insurance
contracts are
A) personal contracts.
B) unilateral contracts.
C) aleatory contracts.
D) contracts of adhesion.
Answer: D
42
Mark owns a bar. The bar has a back room where Mark has some slot machines.
Mark lets some of his patrons play the machines, and Mark keeps any profits.
This type of gambling is illegal where Mark lives. Mark wanted to purchase
insurance in case his slot machines were confiscated by the police. Such an
insurance contract would not be enforceable. Which requirement needed to form a
valid insurance contract is missing?
A) consideration
B) offer and acceptance
C) legal purpose
D) competent parties
Answer: C
43
Which distinct legal characteristic of insurance contracts states that only the
insurer's promise to perform is legally enforceable?
A) contracts of adhesion
B) unilateral contracts
C) aleatory contracts
D) personal contracts
Answer: B
44
Some courts have ruled that an alternative to "replacement cost less depreciation"
should be used to determine the actual cash value of a property loss. Under this
alternative, the value of property lost is determined by the price a willing buyer
would pay a willing seller for the property in a free market. This method of
determining actual cash value is called the
A) intrinsic value method.
B) valued policy method.
C) fair market value method.
D) forensic cost method.
Answer: C
45
Some states have a law that requires payment of the face amount of insurance to
the insured if a total loss to real property occurs from a peril specified in the law.
These laws are called
A) agreed amount laws.
B) replacement cost laws.
C) homestead laws.
D) valued policy laws.
Answer: D
46
The general rule that ambiguity in insurance contracts is construed against the
insurer is reinforced by an important legal principle. This principle states the
insured is entitled to coverage under a policy that he or she would assume the
policy would provide, and exclusions must be conspicuous, plain, and clear. This
principle is known as
A) the principle of utmost good faith.
B) the principle of reasonable expectations.
C) the principle of subrogation.
D) the principle of indemnity.
Answer: B
47
Dave and Meagan Philips borrowed $150,000 from Fifth National Bank to help fund
the purchase of a new home. The home serves as collateral for the loan. Fifth
National has an insurable interest in the home based on
A) potential responsibility for legal liability.
B) being a secured creditor.
C) expectation of ownership.
D) having a contractual right.
Answer: B
48
All of the following statements about subrogation are true EXCEPT
A) The general rule allows the insurer to recover up to the amount paid to its
insured under the policy.
B) Subrogation does not apply in life insurance.
C) Interfering with the insurer's subrogation rights can jeopardize indemnification
of the insured.
D) The insurer reserves the right to subrogate against its own insureds.
Answer: D
49
Powers specifically conferred on an agent to act on behalf of a principal are
A) incidental authority.
B) apparent authority.
C) implied authority.
D) express authority.
Answer: D
50
If a third party is led to reasonably believe that an agent is acting within the
scope of his/her authority, even though the agent is exceeding his/her authority,
the principal may still be bound by the agent's actions. In this case, the agent has
bound the principal by
A) implied authority.
B) apparent authority.
C) incidental authority.
D) express authority.
Answer: B
51
The authority of an agent to perform all incidental acts necessary to fulfill the
purposes of the agency agreement is called
A) implied authority.
B) declared authority.
C) apparent authority.
D) express authority.
Answer: A
52
ABC Life Insurance Company insures both smokers and nonsmokers. Beth lied on
her life insurance application, checking the box for "no" in response to the
question of whether she smokes cigarettes or uses other tobacco products. Even
though Beth smokes 10 to 15 cigarettes each day, the policy was issued at the
"preferred nonsmoker rate." Beth's lie is materiel in this case because
A) it was in writing on the application.
B) it was given with the intent to deceive.
C) the policy would have been issued on different terms if the insurer knew the
true facts.
D) the policy would have been issued for a lower face value if the insurer knew
the true facts.
Answer: C
53
Bob purchased insurance on his home with an insurer that was not licensed to do
business in the state. In this case, which requirement to form a binding insurance
contract is lacking?
A) exchange of consideration
B) offer and acceptance
C) legal purpose
D) competent parties
Answer: D
54
A pharmaceutical company employs a young chemist who is responsible for three
new patents last year and for the development of the company's two best-selling
drugs. The company purchased a large life insurance policy on the chemist. In
this case, the insurable interest requirement was met because of a(n)
A) ownership interest.
B) close family relationship.
C) pecuniary interest.
D) economic family relationship.
Answer: C
55
Hank bought a farm that had an old barn. He noticed one day that the roof of the
barn was swaying in the wind. Hank went to see his insurance agent and he
insured the barn for $20,000. The agent didn't ask if the roof might collapse, and
Hank didn't say anything about it. One week later there was a strong wind and the
roof collapsed. Assuming the insurer can prove it, under what legal grounds could
the insurer deny payment of the claim?
A) estoppel
B) concealment
C) warranty
D) misrepresentation
Answer: B
56
Kim purchased a one-year property insurance policy. She agreed to pay half the
premium when she bought the coverage, and the other half six months later. If
Kim fails to pay the second premium, the insurer cannot sue her for the premium
because insurance contracts are
A) unilateral contracts.
B) contracts of adhesion.
C) personal contracts.
D) aleatory contracts.
Answer: A
57
Charles Blake told Wendy that he was an agent for Easy Pay Life Insurance
Company. He presented no credentials. He asked Wendy some questions about her
health and activities, and recorded the answers on scrap paper. He collected a
$250 cash premium from Wendy. When Wendy did not receive a policy from Easy
Pay, she contacted the company. Easy Pay said they do not have an agent named
Charles Blake. Easy Pay is not responsible for Wendy’s loss of $250 because
A) the principal is never responsible for the acts of its agents.
B) there is no presumption of an agency relationship.
C) limitations can be placed on the powers of agents.
D) knowledge of the agent is assumed to be knowledge of the principal.
Answer: B
Chapter 10
1
That part of a property and liability insurance contract that contains information
about the property or activity to be insured is called the
A) declarations.
B) insuring agreement.
C) exclusions.
D) conditions.
Answer: A
2
What information is contained in the insuring agreement of an insurance policy?
A) a description of the property or life to be insured
B) a summary of the major promises of the insurer
C) a summary of the obligations of the insured
D) a list of the property, losses, and perils that are not covered
Answer: B
3
Which of the following statements about "open-perils" coverage is (are) true?
All losses are covered except those losses specifically excluded.
The burden of proof is on the insured to prove that a loss is covered.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
4
The exclusion of flood in a homeowners policy is an example of an
A) excluded activity.
B) excluded condition.
C) excluded property.
D) excluded peril.
Answer: D
5
Exclusions are used in insurance policies for all of the following reasons EXCEPT
A) to reduce moral hazard.
B) to waive policy conditions.
C) to eliminate coverage for uninsurable perils.
D) to eliminate coverage not needed by typical insureds.
Answer: B
6
Reasons why a peril may be considered uninsurable and therefore excluded from
insurance contracts include which of the following?
The losses from the occurrence of the peril may be due to a predictable decline in
value.
The losses from the occurrence of the peril may be incalculable and catastrophic.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
7
The policy provision requiring the filing of proof of loss with the insurer is an
example of a(n)
A) declaration.
B) condition.
C) insuring agreement.
D) miscellaneous provision.
Answer: B
8
Which of the following statements about the definition of the insured is (are) true?
In some cases, a person who is not specifically named may be classified as an
insured.
Under no circumstances can more than one person be named as an insured.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
9
All of the following statements about endorsements and riders are true EXCEPT
A) They are usually written.
B) They can be used to add or delete policy provisions.
C) They normally take precedence over other conflicting policy provisions.
D) They are primarily used to circumvent legislation requiring specific policy
provisions.
Answer: D
10
Deductibles are not used in which of the following type of insurance?
A) life insurance
B) health insurance
C) property insurance
D) disability income insurance
Answer: A
11
One of the reasons that deductible are used in insurance policies is to
A) eliminate coverage for small claims.
B) place restrictions or limits on the insurer's promise to perform.
C) provide broader coverage by increasing the number of perils covered.
D) exclude perils that are not insurable.
Answer: A
12
The deductible used for automobile collision losses is an example of a(n)
A) calendar year deductible.
B) elimination period.
C) straight deductible.
D) aggregate deductible.
Answer: C
13
Which of the following statements about a calendar-year deductible is (are) true?
It requires the insured to pay a specified amount of each claim regardless of when
the claim occurs during the year and regardless of any previous claims during the
year.
It is used only in policies which cover direct property losses.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
Answer: D
14
A provision in a disability income insurance policy that requires a person to be
disabled for 60 days before receiving benefits is an example of a(n)
A) calendar year deductible.
B) grace period.
C) elimination period.
D) probationary period.
Answer: C
15
At what point in time must an insured meet the coinsurance requirement in a
property insurance policy in order to avoid having to pay a portion of the loss?
A) only at the time of loss
B) only at the time when the policy is issued
C) only at the time of policy application
D) both at the time when the policy is issued and at the time of loss
Answer: A
16
David owns a commercial building with a replacement cost of $4 million. The
building is insured on a replacement cost basis for $2.4 million under a fire
insurance policy that has an 80 percent coinsurance clause. How much will David
collect if the building sustains a covered fire loss with a replacement cost of
$80,000?
A) $50,000
B) $60,000
C) $66,667
D) $80,000
Answer: B
17
The primary purpose of coinsurance in property insurance is to
A) reduce moral hazard.
B) achieve equity in rating.
C) minimize problems in settling claims.
D) eliminate small losses.
Answer: B
18
Which of the following statements about problems arising from the use of a
coinsurance clause is (are) true?
The amount of insurance should be periodically evaluated to avoid a coinsurance
penalty because of inflation.
An agreed value coverage option is one method used to solve the problem of
values that fluctuate throughout the policy term.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
19
Connie has an individual medical expense policy with a $1,000 deductible. She is
required to pay 20 percent of covered expenses in excess of the deductible. The
insurer will pay 80 percent of expenses in excess of the deductible. If Connie has
eligible medical expenses of $26,000, how much will be paid by her insurer?
A) $10,000
B) $11,000
C) $20,000
D) $21,000
Answer: C
20
Purposes of the coinsurance clause in health insurance contracts include which of
the following?
To reduce premiums.
To exclude coverage for certain medical procedures.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
21
The purpose of other-insurance provisions is to
A) eliminate the need for deductibles.
B) penalize those insureds who carry inadequate amounts of insurance.
C) specify who will pay losses if the insurer is bankrupt.
D) preserve the principle of indemnity.
Answer: D
22
Lisa has three fire insurance policies on her office building. The policy from
company A is for $400,000, and the policies from companies B and C are for
$100,000 each. If Lisa has a $360,000 loss, how much of the loss will be covered
by each policy if the loss is settled on a pro rata basis by the insurers?
A) each policy: $120,000
B) policy A: $160,000; policies B and C: $100,000 each
C) policy A: $240,000; policies B and C: $60,000 each
D) policy A: $360,000; policies B and C: nothing
Answer: C
23
Kevin has three liability policies which provide for contribution by equal shares if
other insurance applies to a loss. How much will each policy pay for a $3,000,000
liability judgment if policy A provides $500,000 of coverage, policy B provides
$1,000,000 of coverage, and policy C provides $3,000,000 of coverage?
A) Each policy will pay $500,000, and Kevin must pay the remaining $1,500,000.
B) Policy A will pay $500,000, policies B and C will each pay $1,000,000, and Kevin
must pay the remaining $500,000.
C) Policy A will pay nothing, policy B will pay $1,000,000, and policy C will pay
$2,000,000.
D) Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay
$1,500,000.
Answer: D
24
Helen and John both own automobiles on which they carry liability insurance. If
Helen is negligent and has an accident while driving John's car with his
permission, how will each insurer respond to any liability judgment against Helen?
A) The insurers will pay the judgment on a pro rata basis.
B) John's insurer will pay on an excess basis if Helen's insurance is insufficient to
cover the judgment.
C) Helen's insurance will pay on an excess basis if John's insurance is insufficient
to cover the judgment.
D) The policies will pay the judgment on the basis of contribution by equal shares.
Answer: C
25
Kate is covered under her employer's group health plan. She is also covered as a
dependent under her husband's group health plan. Under the usual
coordination-of-benefits provision, how will each company respond to a claim filed
by Kate?
A) Kate's plan is primary, and her husband's plan is excess.
B) Her husband's plan is primary, and Kate's plan is excess.
C) The plan of the person with the birthday earliest in the year pays first, and the
other plan is excess.
D) Each plan will pay 50 percent of the claim.
Answer: A
26
Eric's property was damaged in an accident. He phoned his agent to see if the
loss was covered under his property insurance policy. The agent said, "As long as
the cause of loss is not specifically excluded in the policy, the loss is covered."
Based on the agent's answer, what type of insuring agreement appears in the
policy?
A) unconditional coverage
B) named-perils coverage
C) extended-perils coverage
D) "open-perils" coverage
Answer: D
27
Janet hit a wall causing a large dent in the fender of her car. She was busy at
work and delayed reporting the damage to her insurer for 9 months. When she
finally reported the claim, her insurer denied payment, stating, "Although such a
loss is usually covered, you are required under the terms of the contract to
provide prompt notification in case of loss." The prompt notification requirement is
an example of a(n)
A) declaration.
B) definition.
C) insuring agreement.
D) condition.
Answer: D
28
Mark reviewed his homeowners policy. He learned that his personal property was
insured on an actual cash value basis. He would like replacement cost coverage
on his personal property. He contacted his agent who said, "I'll simply add an
amendment to your contract that changes the basis of recovery to replacement
cost." The written provision the agent was referring to is called a(n)
A) endorsement.
B) coinsurance clause.
C) binder.
D) deductible.
Answer: A
29
Under the terms of Jenny's auto insurance policy, she must pay the first $500 of
any physical damage loss to her vehicle before her insurer will pay anything. What
type of deductible is included in Jenny's auto insurance policy?
A) calendar-year deductible
B) waiting period
C) straight deductible
D) aggregate deductible
Answer: C
30
Shauna hurt her back and was unable to work. She filed a claim under her
disability income insurance policy. Under terms of the policy, a period of time
must pass between when the injury occurred and when the insurer begins to
replace lost earnings. This time period is called a(n)
A) grace period.
B) enrollment period.
C) probationary period.
D) elimination (waiting) period.
Answer: D
31
ABC Company insured its building on a replacement cost basis for $700,000 under
a property insurance policy that included an 80 percent coinsurance clause. The
building had a replacement cost of $1 million when it sustained a $40,000 loss.
How much will ABC Company receive from its insurer, assuming no deductible
applies?
A) $33,333
B) $35,000
C) $36,000
D) $40,000
Answer: B
32
XYZ Company insured its building on a replacement cost basis for $450,000 under
a property insurance policy that included an 80 percent coinsurance clause. The
building had a replacement cost of $500,000 when it sustained a $50,000 loss. How
much will XYZ Company receive from its insurer, assuming no deductible applies?
A) $42,500
B) $45,000
C) $50,000
D) $56,250
Answer: C
33
Laura's medical insurance policy includes a $500 deductible. Laura is required to
pay 20 percent of covered expenses in excess of the deductible, and her insurer
will pay 80 percent of covered expenses in excess of the deductible. Laura was
hospitalized and her covered medical expenses were $10,500. How much of the
$10,500 will be paid by the insurer?
A) $7,500
B) $7,900
C) $8,000
D) $10,000
Answer: C
34
James purchased liability insurance with a $100,000 limit from Insurer A. When
Insurer A denied a claim that James thought should be covered, he bought a
second liability insurance policy with a $150,000 limit from Insurer B. Before he
cancelled the policy with Insurer A, a $60,000 loss occurred. If this loss is settled
on a pro rata basis, how much must each insurer pay?
A) Insurer A will pay $10,000 and Insurer B will pay $50,000.
B) Insurer A will pay $20,000 and Insurer B will pay $40,000.
C) Insurer A will pay $24,000 and Insurer B will pay $36,000.
D) Insurer A will pay $40,000 and Insurer B will pay $20,000.
Answer: C
35
Jane purchased a $50,000 liability insurance policy from Insurer A. Fearing that
she did not have enough liability insurance, she purchased an additional $100,000
of liability coverage from Insurer B. As a result of a negligent act, Jane was
ordered to pay $75,000 in damages. Assuming the coverage from Insurer A is
primary and the coverage from Insurer B is excess, how will this claim be settled?
A) Insurer A will pay $50,000 and Insurer B will pay $25,000.
B) Insurer A will pay $37,500 and Insurer B will pay $37,500.
C) Insurer A will pay $25,000 and Insurer B will pay $50,000.
D) Insurer A will pay nothing and Insurer B will pay $75,000.
Answer: A
36
The purpose of a coordination-of-benefits provision in group health insurance
plans is to
A) determine which plan pays first if more than one plan covers a loss.
B) determine which health care provider an insured may use for his or her care.
C) determine if the calendar-year deductible has been satisfied by the insured.
D) determine if the employee is eligible for coverage under the group health plan.
Answer: A
37
As an alternative to coinsurance, rate discounts can be given as the amount of
insurance to value increases. This alternative is called
A) graded rates.
B) agreed value coverage.
C) retrospective rating.
D) manual rating.
Answer: A
38
Mark owns a building that he insured for $90,000. The replacement cost of the
building is $100,000. Mark's property insurance policy has an 80 percent
coinsurance clause. Ignoring any deductible, if Mark's building is destroyed by a
covered peril, how much will Mark receive from his insurer?
A) $80,000
B) $90,000
C) $101,250
D) $112,500
Answer: B
39
A special coverage policy is a policy that
A) has no exclusions.
B) provides open-perils coverage.
C) provides coverage under special conditions.
D) has coverage for multiple lines of insurance.
Answer: B
40
The section of the insurance policy that includes provisions that qualify or limit
the insurer's promise to perform is the
A) definitions.
B) insuring agreement.
C) exclusions.
D) conditions.
Answer: D
41
An elimination (waiting) period is an example of a(n)
A) exclusion.
B) deductible.
C) other-insurance provision.
D) coinsurance provision.
Answer: B
42
Roger owns some farmland that he rents to a tenant. The tenant lives in an old
farmhouse on the property and raises crops on the land. Roger is concerned
about possible legal liability if the tenant injures someone. Roger requires the
tenant to have liability insurance and to add himself to the liability coverage
through an endorsement. Under the tenant's liability insurance, Roger is a(n)
A) additional insured.
B) first-named insured.
C) second-named insured.
D) other insured.
Answer: A
43
Maria's home was damaged by an earthquake. As Maria has open-perils coverage
on her home, she was surprised to learn that her loss was not covered. Which
section of a property insurance policy specifies which perils, property, and types
of losses are not covered?
A) the declarations
B) the exclusions
C) the conditions
D) the insuring agreement
Answer: B
44
In determining insurance limits and deductibles, an important concept is that
insurance should be used to pay big losses rather than small losses. The objective
is to insure big losses that could cause financial ruin and to exclude small losses
that can be budgeted out of current income. This concept is called the
A) law of large numbers.
B) efficient loss-cost concept.
C) large-loss principle.
D) retention-transfer tradeoff.
Answer: C
45
An insurance policy provision that specifies how a property loss will be settled if
more than one property insurance policy covers the loss is the
A) insuring agreement provision.
B) loss settlement provision.
C) other insurance provision.
D) coinsurance provision.
Answer: C
46
Property insurance policies contain declarations, conditions, definitions, exclusions,
and an insuring agreement. However, some policy terms, such as subrogation,
cancellation, other insurance, and assignment do not fall into these categories. The
part of an insurance contract in which these provisions can be found is the
A) endorsements.
B) binders.
C) conditions.
D) miscellaneous provisions.
Answer: D
47
Ann Parks and Robert Evans jointly own a grocery store. Ann and Robert are both
named insureds on the property insurance covering the store, but Ann is the first
named insured. Which of the following statements is true with regard to Ann’s
status as the first named insured?
A) Any loss settlement is paid to Ann only.
B) Ann is responsible for making sure that the premium has been paid.
C) Ann can assign the policy without the consent of the insurer.
D) Ann can waive policy conditions.
Answer: B
48
Maggie purchased a life insurance policy. She was concerned that if she became
disabled, she would no longer be able to pay the premiums. Her agent added an
amendment of the policy stating that if she became disabled, future premium
payments would be waived. Such an amendment to a life insurance policy is called
a(n)
A) binder.
B) rider.
C) warranty.
D) schedule.
Answer: B
49
Homeowners insurance policies usually cover resident relatives of the named
insured who are under age 24 and who are full-time students away from home.
Under the homeowners policy, these full-time students are considered
A) first named insureds.
B) second named insureds.
C) other insureds.
D) additional insureds.
Answer: C
Chapter 11
1
Which of the following types of families is likely to have the least need for a large
amount of life insurance?
A) a blended family
B) a traditional family
C) a single person family
D) a sandwiched family
Answer: C
2
The human life value is defined as the
A) present value of a deceased breadwinner's future gross income.
B) future value of a deceased breadwinner's past earnings.
C) present value of the family's share of a deceased breadwinner's future
earnings.
D) future value of the family's share of a deceased breadwinner's future earnings.
Answer: C
3
Which of the following pieces of information is needed to calculate a person's
human life value?
A) the marital status of the person.
B) the person's estimated annual Social Security benefits after retirement.
C) the person's cost of self-maintenance.
D) current outstanding debts, including mortgage debt.
Answer: C
4
To calculate a human life value, it is necessary to deduct certain costs from a
person's average annual earnings. These costs include
A) funeral costs.
B) income taxes.
C) investment income.
D) pension benefits after retirement.
Answer: B
5
All of the following are defects which limit the usefulness of the human life value
approach in determining the correct amount of life insurance to purchase EXCEPT
A) The effects of inflation are ignored.
B) Other sources of income for survivors are ignored.
C) Earnings are assumed to remain constant.
D) Earnings during the individual's productive lifetime are ignored.
Answer: D
6
Which of the following statements about the needs approach for estimating the
amount of life insurance to purchase is (are) true?
It involves an analysis of various family needs which must be met if a family
breadwinner dies.
Its use is appropriate only if a person currently has no life insurance protection.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
7
Which of the following is a cost/expense that an estate clearance fund is designed
to pay?
A) burial expenses
B) retiring the mortgage
C) education costs
D) income for the widow(er) during the readjustment period
Answer: A
8
What is the length of the readjustment period which is considered when the needs
approach is used to determine the amount of life insurance to own?
A) 3 to 6 months
B) 1 to 2 years
C) until the youngest child reaches age 18
D) until the surviving spouse reaches age 65
Answer: B
9
Under the needs approach, when is the dependency period of a surviving spouse
assumed to end?
A) 1 or 2 years after the breadwinner's death
B) when the youngest child reaches age 18
C) when the surviving spouse reaches age 65
D) when the surviving spouse dies
Answer: B
10
The period during which a surviving spouse is ineligible for Social Security
benefits is referred to as the
A) emergency period.
B) readjustment period.
C) dependency period.
D) blackout period.
Answer: D
11
Which of the following statements about premature death is (are) true?
From an economic standpoint, premature means death before a specified age,
such as 65.
The economic problem of problem of premature death in the U.S. has declined
substantially over time.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
12
Which of the following statements about re-entry term insurance is true?
A) It permits the coverage to be renewed an unlimited number of times as long as
insurability is demonstrated.
B) It permits a refund of premiums paid if the term insurance is renewed a
specified number of times.
C) It permits a lower renewal premium if the insured demonstrates insurability.
D) It permits a lapsed whole life policy to be reinstated as term insurance.
Answer: C
13
Which of the following is a noneconomic cost associated with premature death?
A) reduction in the standard of living
B) loss of a parental role model
C) additional expenses, such as uninsured medical bills
D) loss of the deceased breadwinner’s future earnings
Answer: B
14
Tom and Nancy Boyle provide financial support for their two children. In addition,
they provide financial support for Tom's aged father and Nancy's aged mother.
The Boyle family can be described as a
A) blended family.
B) single-parent family.
C) two-income earner family.
D) sandwiched family.
Answer: D
15
Julian, age 45, would like to determine how much life insurance to purchase using
the human life value approach. He assumes his average annual earnings over the
next 20 years will be $40,000. Of this amount, $20,000 is available annually for the
support of his family. Julian will generate this income for 20 more years and he
believes that 5 percent is the appropriate interest (discount) rate. The present
value of one dollar payable for 20 years at a discount rate of 5 percent is $12.46.
What is Julian's human life value?
A) $184,600
B) $249,200
C) $360,800
D) $400,000
Answer: B
16
Jessica is an agent for LMN Life Insurance Company. She met with Brad, who was
interested in purchasing life insurance. Jessica explained the various uses of life
insurance, including income for Brad's wife during the 1- or 2-year period
following Brad's death. This period is known as the
A) dependency period.
B) estate clearance period.
C) blackout period.
D) readjustment period.
Answer: D
17
Sarah is using the needs approach to determine how much life insurance to buy.
Her cash needs are $30,000; her income needs are $140,000; and special needs are
$100,000. Sarah has the following assets: $20,000 in bank accounts, $30,000 in
retirement plans, and $40,000 in investment accounts. Sarah owns no individual
life insurance. She is covered by a $50,000 group life insurance policy through her
employer. Based on this information, how much additional life insurance should
Sarah purchase?
A) $80,000
B) $130,000
C) $150,000
D) $160,000
Answer: B
18
Which of the following statements regarding convertible term insurance is true?
A) Evidence of insurability must be provided to convert the policy.
B) More term policies are converted using the original-age method than using the
attained-age method.
C) The converted coverage has a lower face amount than the term coverage.
D) The annual premium for the cash value coverage is lower if an original-age
conversion is used than if an attained-age conversion is used.
Answer: D
19
Bill is attempting to determine how much life insurance to purchase. He has two
dependent children and his wife does not work outside of the home. An advisor
suggested that Bill should consider Social Security benefits when doing his life
insurance planning. One concern in this regard is the period after Social Security
benefits to a widow terminate until they resume again. This period is called the
A) blackout period.
B) dependency period.
C) emergency period.
D) readjustment period.
Answer: A
20
When using the needs approach, several "special needs" should be considered. One
special need is money to cover unexpected events, such as major car repairs,
dental bills, or home repairs. Money set aside for this purpose is called a(n)
A) estate clearance fund.
B) emergency fund.
C) readjustment period fund.
D) mortgage redemption fund.
Answer: B
21
Most family heads need substantial amounts of life insurance. However, with
limited income, money spent on life insurance reduces the amount of discretionary
income available for other high-priority needs. What an insured person gives up
when he or she purchases life insurance instead of using the premium dollars for
other purposes is called the
A) estimated cost of life insurance.
B) net cost of life insurance.
C) real (inflation-adjusted) cost of life insurance.
D) opportunity cost of buying life insurance.
Answer: D
22
Which of the following statements about yearly renewable term insurance is (are)
true?
It requires evidence of insurability for renewal.
It is most appropriate when an insured needs lifetime protection.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
23
What happens to the premiums for yearly renewable term insurance as an insured
gets older?
A) They increase at an increasing rate.
B) They increase at a decreasing rate.
C) They decrease at a constant rate.
D) They remain level.
Answer: A
24
Which of the following statements about term insurance is true?
A) The coverage is appropriate if the goal is permanent lifetime protection.
B) Most policies can be renewed for additional periods without evidence of
insurability.
C) Premiums increase at a constant rate each time the policy is renewed.
D) Most policies have a cash value that is refunded when coverage ceases.
Answer: B
25
All of the following statements about the conversion of a term policy are true
EXCEPT
A) Under an attained age conversion, the premium is based on the insured's
attained age at the time of conversion.
B) Under an original age conversion, the policyowner must pay a financial
adjustment in addition to the premium for the new policy.
C) Most insurers require original age conversion to take place within a specified
period (5 years, for example) of the issue of the term policy.
D) Evidence of insurability is required before a conversion is permitted.
Answer: D
26
Which of the following statements about a decreasing term insurance policy is
true?
A) The face amount of the policy decreases during the policy period, and the
premium increases.
B) The face amount of the policy decreases during the policy period, but the
premium remains level.
C) The premium decreases during the policy period, but the face amount remains
constant.
D) Both the premium and the face amount of the policy decrease gradually over
the policy period.
Answer: B
27
The purchase of term insurance is justified by which of the following
circumstances?
The insured wants to save money through the policy for a specific need.
The insured has a temporary need for life insurance protection.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
28
A legal reserve in life insurance is a result of
A) premium taxes payable by life insurance companies being postponed during the
early policy years.
B) dividends being paid to policyholders.
C) inadequate premiums in the early policy years being subsidized by investment
earnings.
D) excess premiums in the early policy years being invested at compound interest.
Answer: D
29
The net amount at risk for an ordinary life insurance policy is the difference
between the
A) present value of future benefits and the present value of future premiums.
B) face amount of the policy and the total premiums that have been paid.
C) face amount of the policy and the legal reserve.
D) annual premium and the annual policyholder dividend.
Answer: C
30
Which of the following statements about life insurance cash values is (are) true?
Cash values are a result of the level premium method of purchasing life
insurance.
The cash value of a policy must always exceed the policy's legal reserve.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
31
All of the following statements about ordinary life insurance are true EXCEPT
A) Premiums are level throughout the policy period.
B) The face amount of the policy is paid if the insured lives to age 65.
C) There is a build-up of cash value that can be borrowed by the policyholder.
D) It offers the policyholder the flexibility to meet a wide variety of financial
objectives.
Answer: B
32
Which of the following statements about limited-payment life insurance is true?
A) It is a form of term insurance.
B) It matures at the end of the premium-payment period.
C) The premium decreases each year during the premium-payment period.
D) Its use may be appropriate if a person wants paid-up life insurance during
retirement.
Answer: D
33
Which of the following statements about endowment insurance policies is (are)
true?
The face amount is paid if the insured dies during the policy period or at the end
of the policy period if the insured is still alive.
The use of endowment insurance has increased in recent years because of its
favorable tax treatment.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
34
Which of the following statements about variable life insurance is true?
A) Premium payments are flexible.
B) The death benefit cannot be higher or lower than a guaranteed, specified,
value.
C) The policyowner has the option of investing the cash value in several
investment accounts.
D) The cash surrender value of the policy is guaranteed.
Answer: C
35
All of the following statements about universal life insurance are true EXCEPT
A) Interest is credited to the policy's cash value each month.
B) Any withdrawal of a policy's cash value reduces the amount of the death
benefit.
C) Interest credited to a policy's cash value is taxable for the policyowner in the
year credited.
D) The policyowner can add to a policy's cash value at any time subject to policy
guidelines.
Answer: C
36
Which of the following statements about universal life insurance is (are) true?
The current interest rate credited to the cash value at the time the policy is
issued remains fixed for the life of the policy.
A monthly deduction is made from the policy's cash value for the cost of
insurance protection.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
37
All of the following statements describe the flexibility available to the owner of a
universal life insurance policy EXCEPT
A) Policy loans are permitted on an interest-free basis.
B) The frequency of premium payments can be varied.
C) The death benefit can be increased with evidence of insurability.
D) Premium payments can be any amount provided there is sufficient cash value
to keep the policy in force.
Answer: A
38
Which of the following statements about a variable universal life insurance policy
is (are) true?
There is a minimum guaranteed interest rate for the cash value.
The policyowner has a variety of investment options for the savings component of
the policy.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
39
All of the following statements about current assumption whole life insurance are
true EXCEPT
A) It is a form of participating whole life insurance that pays annual dividends.
B) An accumulation account is credited with an interest rate based on present
market conditions and company experience.
C) Under the low-premium version, the premium is subject to change after an
initial guaranteed period.
D) Under the high-premium version, the premium may be discontinued after a
period of time.
Answer: A
40
A whole life insurance policy in which premiums are reduced for an initial period
(e.g. 3 years) and are higher thereafter is an example of a
A) level-term policy.
B) modified life policy.
C) limited-payment whole life policy.
D) variable life policy.
Answer: B
41
Which of the following statements about policies sold to preferred risks is (are)
true?
Preferred risks are people whose mortality experience (deaths per thousand at a
given age) is expected to be more favorable than average.
Insurers require preferred risks to purchase at least a minimum amount of life
insurance, such as $250,000.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
42
Which of the following statements about second-to-die life insurance is (are) true?
The insurance is a form of endowment coverage.
The premium is lower than the combined cost of purchasing a life insurance
policy on each insured.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
43
Which of the following statements about savings bank life insurance is true?
A) The maximum amount that a depositor can purchase is $50,000.
B) The maximum amount of insurance that a depositor can purchase is limited to
the amount of money on deposit in his or her savings account with the savings
bank.
C) The objective of savings bank life insurance is to provide protection to the
bank in case a borrower dies before a loan is repaid.
D) The objective of savings bank life insurance is to provide low-cost insurance to
consumers by holding down expenses.
Answer: D
44
Which of the following statements about home service life insurance, which
evolved over time from a type of life insurance called industrial life insurance, is
true?
A) Most policies have a face value exceeding $100,000.
B) Premiums are usually not collected at the insured’s home and are remitted
directly to the agent or the insurer.
C) Industrial life insurance is group term insurance coverage marketed to
employees at the work site.
D) This popular product accounts for over 40 percent of the life insurance sold
today.
Answer: B
45
Michael wants to make sure that life insurance proceeds are available to pay his
outstanding mortgage balance if he dies. He purchased a type of life insurance in
which the amount of coverage gradually declines, just as his outstanding mortgage
balance gradually declines. This type of life insurance is called
A) modified life insurance.
B) decreasing term insurance.
C) re-entry term insurance.
D) current assumption whole life.
Answer: B
46
Carl would like to purchase life insurance. He would also like to invest in a
mutual fund. An agent told Carl about a form of life insurance in which Carl
could select where the saving component is invested. This form of life insurance
has fixed premiums and the cash value is not guaranteed. This type of life
insurance is called
A) universal life insurance.
B) whole life insurance.
C) variable life insurance.
D) current assumption whole life.
Answer: C
47
Tamara purchased a term insurance policy when she had high life insurance
needs and limited income. Now Tamara can afford whole life insurance. What term
life insurance provision will permit Tamara to switch her term insurance to whole
life insurance without having to show that she is still insurable?
A) renewal provision
B) tax-free exchange provision
C) conversion provision
D) free look provision
Answer: C
48
Alex, age 26, purchased a 20-payment whole life insurance policy. After Alex has
made 20 premium payments, his life insurance policy is considered
A) matured.
B) reduced.
C) expired.
D) paid-up.
Answer: D
49
Ann is considering the purchase of a life insurance policy with these
characteristics: flexible premium payments, the insurance and savings components
are separate, the interest rate credited to the cash value is tied to a changing
market interest rate but a minimum interest rate is guaranteed, and a monthly
administrative fee is charged. Ann is considering buying
A) whole life insurance.
B) variable life insurance.
C) universal life insurance.
D) current assumption whole life.
Answer: C
50
Dave purchased a life insurance policy. The policy is nonparticipating and the
cash values are based on the insurer's present mortality, investment, and expense
experience. After 2 years, the insurer will recalculate the premium based on the
mortality, investment, and expense experience at that time. Dave purchased
A) current assumption whole life.
B) variable life insurance.
C) universal life insurance.
D) variable universal life insurance.
Answer: A
51
Which of the following $100,000 whole life insurance policies, issued by the same
company to a man age 32, would require the highest first-year premium?
A) continuous premium (ordinary) life
B) whole life paid-up at 65
C) 10-payment whole life
D) 20-payment whole life
Answer: C
52
Which of the following statements about variable universal life insurance is (are)
true?
I Variable universal life insurance has fixed premium payments.
Variable universal life insurance allows the policyowner to decide where the
premiums are invested.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
53
Which statement is true concerning the economic problem of premature death in
the United States?
The economic impact of premature death of the breadwinner varies for different
types of families.
Increased life expectancy has increased the economic problem of premature death
over time.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
54
Which of the following statements is (are) true regarding the results of the 2014
study by the Life Insurance Market Research Association (LIMRA) on the adequacy
of life insurance owned by households in the United States?
The average household is adequately insured against the risk of premature death.
The average household is significantly underinsured against the risk of premature
death.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
55
Which of the following statements is true regarding return of premium term
insurance?
A) The insurance is free because premiums are refunded at the end of the
coverage period.
B) Life insurers charge less for this coverage than for regular term insurance that
does not include a refund provision.
C) The return of premium is only offered on one-year term insurance policies.
D) The coverage is expensive and is not free when time value of money is
considered.
Answer: D
56
The difference between the legal reserve of a whole life policy and the face
amount of insurance is the
A) cash value.
B) net amount at risk.
C) premium.
D) dividend accumulations.
Answer: B
57
Gwen purchased an interesting life insurance policy. A minimum interest rate is
guaranteed on the cash value, but additional interest may be credited based on
the investment performance of a group of common stocks. There is also a cap on
the additional interest credited to the policy. Based on this information, what type
of life insurance did Gwen purchase?
A) variable life insurance
B) indexed universal life insurance
C) current assumption whole life insurance
D) variable universal life insurance
Answer: B
58
A common use of second-to-die life insurance is
A) insuring children.
B) insuring "double income with kids" families.
C) estate planning.
D) insuring key employees of a business.
Answer: C
59
Which of the following statements about indexed universal life insurance is true?
A) It is another name for variable life insurance.
B) Although a minimum interest rate is guaranteed, the rate credited can be
higher if a specified stock index performs well.
C) The cash value is usually credited with 100 percent of the return on the equity
index, including dividends paid on the stocks in the index.
D) The formula used to determine the additional interest credited to the policy
places no limit on the additional interest that can be credited.
Answer: B
60
All of the following statements about employer-provided group life insurance are
true EXCEPT
A) Individual evidence of insurability, through a medical exam, is usually required.
B) Group life insurance is a common employee benefit.
C) A single contact between the employer and the insurer is issued.
D) Employees are given certificates of insurance as evidence of the coverage.
Answer: A
Principles of Risk Management and Insurance - Chapter 12
1.
Which of the following statements about the ownership of a life
insurance policyis (are) true?
Under the ownership clause, the policyholder and beneficiary equally
shareall contractual rights in the policy while the insured is living.
The policyholder can designate a new owner by filing an appropriate
formwith the insurance company.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
2.
Which of the following statements about the entire contract clause is
true?
A) It allows the insurer to change the policy terms without the
insured'sconsent.
B) It specifies that all statements in the application are
consideredwarranties.
C) It specifies that the life insurance policy and the attached
applicationconstitute the complete agreement between the parties.
D) It prevents the insurance company from contesting a policy after it
hasbeen in force for two years during the lifetime of the insured.
Answer: C
3.
Which of the following would be a valid reason for an insurer to
contest a policyafter the contestable period has ended?
A) The policyholder made a material misrepresentation in the
applicationprocess.
B) The insurer's loss ratio is running higher than the insurer
anticipated.
C) The applicant had someone else take the medical examination
requiredfor policy approval for her.
D) The policyholder concealed a material fact at the time of
application.
Answer: C
4.
Amy purchased a life insurance policy with the intent of committing
suicide topay all the debts that were burdening her family. If she
commits suicide 9months after the policy is purchased, and the insurer is
able to prove that herdeath was a suicide, how much will be paid by the
insurance company?
A) nothing, because the policy is void
B) the premiums paid for the policy
C) the policy's cash value
D) the face value of the policy
Answer: B
5.
Which of the following statements about the grace period in a whole
lifeinsurance contract is (are) true?2021. 3. 29. Print Principles of Risk Management and
Insurance - Chapter 12 flashcards | Easy Notecards https://www.easynotecards.com/print_list/70581 2/13
The purpose of the grace period is to prevent the policy from lapsing
bygiving the policyowner additional time to pay an overdue premium.
If the insured dies during the grace period, the death benefit is
reduced by50 percent.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
6.
All of the following statements about the requirements to reinstate a
lapsed lifeinsurance policy are true EXCEPT
A) Evidence of insurability is required.
B) The lapse must have resulted from other than the surrender of
thepolicy for its cash value.
C) All overdue premiums must be paid along with interest from
thepremium due dates.
D) There is no time limit on when the policy may be reinstated.
Answer: D
7.
Bert purchased a life insurance policy 4 years ago. He inadvertently
stated thathe was 1 year younger than his actual age. If Bert dies today,
how much will theinsurance company pay?
A) nothing
B) less than the policy face value
C) the policy face value
D) more than the policy face value
Answer: B
8.
Which of the following statements about beneficiary designations is
(are) true?
The primary beneficiary is entitled to the death proceeds of a life
insurancepolicy only if the contingent beneficiary dies before the insured.
If a revocable beneficiary designation is used, the insured must obtain
thebeneficiary's permission of exercise most policy rights.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
9.
A contingent beneficiary in a life insurance policy has the right to
A) receive the policy proceeds if the primary beneficiary dies before
theinsured.
B) share the policy proceeds with the primary beneficiary.
C) change the beneficiary designation under specified circumstances.
D) exercise policy rights if the insured is incapacitated.
Answer: A2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 12
flashcards | Easy Notecards https://www.easynotecards.com/print_list/70581 3/13
10.
Which of the following statements about the change of plan provision in
a lifeinsurance contract is (are) true?
A change to a lower premium policy results in a refund of the
difference inthe cash values of the two policies.
A change to a higher premium policy requires evidence of insurability.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
11.
Which of the following statements about the assignment of a life
insurance policyis true?
A) The insurer must be notified of any assignment or the death
proceedswill be paid to the named beneficiary.
B) Under an absolute assignment, the only right transferred to a
newowner is the right to change the beneficiary designation.
C) As long as a collateral assignment exists, a creditor will receive
theentire death benefit even if the loan has been repaid.
D) Assignment may be made only with the permission of the insurer
andthe beneficiary.
Answer: A
12.
Which of the following statements about the assignment of a life
insurance policyis (are) true?
Under a collateral assignment, the policyowner assigns a life
insurancepolicy to secure a loan.
Under an absolute assignment, only limited ownership rights in a policy
aretransferred.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
13.
The transfer of all ownership rights in a life insurance policy can
beaccomplished through a(n)
A) absolute assignment.
B) irrevocable beneficiary designation.
C) incontestable clause.
D) participating-policy provision.
Answer: A
14.
Which of the following statements about life insurance policy loans is
true?
A) Loans are only permitted for specific reasons listed in the policy.
B) They are forgiven if the insured dies before the loans are repaid.
C) The policyholder must pay interest on a life insurance policy loan.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 12 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/70581 4/13
D) They must be repaid on the basis of a schedule determined at the
timeof the loan.
Answer: C
15.
Which of the following statements is true regarding an automatic
premium loanprovision?
A) Its purpose is to prevent a policy from lapsing because of
nonpaymentof premium.
B) Interest does not have to be paid on an automatic premium loan.
C) If the provision is used, the insured must show evidence of
insurabilityto resume regular premium payments.
D) An automatic premium loan, unlike a regular policy loan, is forgiven
ifthe insured dies before the loan is repaid.
Answer: A
16.
What major feature distinguishes a participating policy from a
nonparticipatingpolicy?
A) the availability of a waiver-of-premium provision
B) the existence of settlement options
C) the payment of dividends
D) the method by which beneficiaries can be named
Answer: C
17.
Sources of life insurance dividends include which of the following?
Excess interest earned on the assets necessary to maintain legal
reserves
Favorable mortality experience
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
18.
Which of the following is a common dividend option found in a
participating lifeinsurance policy?
A) reduced paid-up insurance
B) fixed period
C) paid-up additions
D) life income
Answer: C
19.
Which of the following statements about dividend options is (are) true?
The interest on dividends left to accumulate with the insurer is
notconsidered to be taxable income.
Paid-up additions are additional units of whole life insurance.
A) I only
B) II only
C) both I and II
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 12 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/70581 5/13
D) neither I nor II
Answer: B
20.
Advantages of selecting the paid-up additions dividend option in a life
insurancepolicy include which of the following?
Evidence of insurability is not required to purchase additional
insurance.
The additions are purchased at net rates without a loading for
expenses.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
21.
Which of the following dividend options, sometimes called the “fifth
dividendoption,” is not offered by all insurers that sell participating life
insurancecoverage?
A) paid-up additions
B) reduction of premiums
C) accumulation of dividends at interest
D) term insurance
Answer: D
22.
All of the following are nonforfeiture options found in cash value life
insurancepolicies EXCEPT
A) cash value.
B) reduction of premiums.
C) reduced paid-up insurance.
D) extended term insurance.
Answer: B
23.
Which of the following statements about nonforfeiture options found in
lifeinsurance policies is true?
A) Under the reduced paid-up option, the paid-up policy is term
insurance.
B) Under the extended term option, the amount of term insurance is
lessthan the face value of the surrendered cash value policy.
C) Under the reduced paid-up option, no additional premiums must
bepaid.
D) Unless the policyowner has selected another nonforfeiture option,
thecash value option goes into effect automatically.
Answer: C
24.
All of the following statements about the interest settlement option are
trueEXCEPT
A) The minimum guaranteed interest rate is usually equal to the prime
rate.
B) The interest can be paid monthly, quarterly, semiannually, or
annually.
C) The beneficiary may be allowed to withdraw part or all of the
proceeds.
D) The beneficiary may be allowed to change to another settlement
option.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 12 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/70581 6/13
Answer: A
25.
Which of the following statements about life insurance settlement options
istrue?
A) Under the fixed period option, the beneficiary normally has the
right tomake partial withdrawals in case of emergency.
B) Under the fixed period option, any remaining proceeds revert to
theinsurer if the beneficiary dies before the end of the fixed period.
C) Under the fixed amount option, the beneficiary can be given the
right toincrease or decrease the fixed amount.
D) Under the fixed amount option, any interest credited in excess of
theguaranteed rate increases the amount of each periodic payment.
Answer: C
26.
Which of the following statements about life income settlement options
is (are)true?
Under a joint-and-survivor life income option, payments cease at
thedeath of the first annuitant.
Under a life income with guaranteed period, a contingent beneficiary
isguaranteed a minimum number of payments regardless of when the
primarybeneficiary dies.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
27.
Disadvantages of life insurance settlement options include which of
thefollowing?
Higher yields can often be obtained elsewhere.
Life income options have limited usefulness at younger ages.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
28.
Which of the following statements about the waiver-of-premium
provision in lifeinsurance is true?
A) Because the probability of becoming disabled exceeds the
probability ofpremature death, the cost to include this provision is
usually prohibitive atyounger ages.
B) Premiums are usually waived if the insured becomes partially
disabled.
C) Life insurance protection continues in force during a period
ofdisability, but dividends cease and cash values are reduced.
D) The disability must occur before a stated age, such as 65, for
premiumsto be waived.
Answer: D2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 12
flashcards | Easy Notecards https://www.easynotecards.com/print_list/70581 7/13
29.
All of the following are requirements that must be satisfied before
premiums arewaived under a waiver-of-premium provision EXCEPT
A) The insured must furnish proof of disability to the insurer.
B) The insured must be disabled before some specified age, such as
age 60or 65.
C) The insured must satisfy the definition of disability.
D) The insured must satisfy a 2-year waiting period.
Answer: D
30.
Which of the following statements about the guaranteed purchase
option is true?
A) An insured usually has 24 months to exercise an option.
B) The option cannot be exercised until the insured reaches age 40.
C) The amount of life insurance that can be purchased at each option
islimited to 10 percent of the face amount of the basic policy.
D) The additional coverage can be purchased without
demonstratinginsurability.
Answer: D
31.
Which of the following statements about the guaranteed purchase
option is true?
A) It is usually available with term insurance policies.
B) The premium when an option is exercised is based on the insured's
ageat the time the original policy was issued.
C) The option permits the insured to purchase specified amounts of
lifeinsurance in the future even if the insured has become uninsurable.
D) If a guaranteed purchase option expires without being used, it can
beexercised at a later date.
Answer: C
32.
Which of the following statements about a typical accidental death
benefit rider is(are) true?
Accidental injury must be the cause of death for the increased benefit
to bepaid.
The accidental death must occur prior to some specified age for
theincreased benefit to be paid.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
33.
Reasons for NOT purchasing an accidental death benefit rider include
which ofthe following?
Most people die as a result of a disease rather than from an accident.
The economic value of a human life is not increased if death
occursbecause of an accident.
A) I only
B) II only
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 12 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/70581 8/13
C) both I and II
D) neither I nor II
Answer: C
34.
The cost-of-living rider typically bases increases in the policy face
value onchanges in the
A) gross national product.
B) interest rate for short-term U.S. government securities.
C) consumer price index.
D) national wage level.
Answer: C
35.
Which of the following statements about accelerated death benefits
riders is (are)true?
The benefit paid is usually less than the full face amount.
Several different medical conditions may trigger the payment of
benefits.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
36.
The practice of buying the life insurance policy of a terminally ill
insured at adiscount is referred to as a
A) collateral assignment.
B) viatical settlement.
C) catastrophic illness conversion.
D) grace period transaction.
Answer: B
37.
Al was named the beneficiary in his mother's life insurance policy. His
motherdied during the contestable period. The insurer denied payment,
citing a materialmisrepresentation on the application. Al believes the
insurer should pay the claimbecause the misrepresentation occurred on
the application, and the application isnot part of the formal agreement
between the insurer and the policyholder.Which provision protects the
insurer by making the application part of the formalagreement between
the parties to the contract?
A) incontestable clause
B) entire contract clause
C) ownership clause
D) reinstatement clause
Answer: B
38.
Cal purchased a whole life policy 6 years ago. The policy requires
annualpremium payments. Cal forgot to pay the premium that was due 2
weeks ago. Hewonders if his life insurance is still in force. Which life
insurance policy provisionis designed to keep the policy in force for a
short time even if the premiumpayment is late?2021. 3. 29. Print Principles of Risk
Management and Insurance - Chapter 12 flashcards | Easy Notecards
https://www.easynotecards.com/print_list/70581 9/13
A) waiting period
B) grace period
C) guaranteed purchase option
D) reinstatement clause
Answer: B
39.
Bruce lied about his health history when he purchased a life insurance
policy. Hedied 3 years after the policy was issued. Which life insurance
policy provision willrequire the life insurer to pay the beneficiary even
though Bruce lied on theapplication?
A) incontestable clause
B) entire contract clause
C) ownership clause
D) change-of-plan provision
Answer: A
40.
Which life insurance policy provision specifies that it is the
policyholder, and notthe insured or beneficiary, who possesses all
contractual rights while the policyis in force?
A) nonforfeiture options
B) entire contract clause
C) incontestable clause
D) ownership clause
Answer: D
41.
Becky is considering the purchase of a whole life policy on her own
life. She isconcerned that if she becomes disabled, paying premiums will
become a burden.Which provision can Becky attach to her life insurance
policy to address thisconcern?
A) guaranteed purchase option
B) waiver-of-premium provision
C) accidental death benefit rider
D) accelerated death benefits rider
Answer: B
42.
Tim purchased a 10-payment whole life insurance policy 15 years ago.
Tim wouldlike to donate this paid-up policy to a charity. Under which
policy provision canTim transfer all ownership rights in the policy to the
charity?
A) absolute assignment
B) extended term nonforfeiture option
C) reinstatement
D) collateral assignment
Answer: A
43.
Beth purchased a participating life insurance policy 6 years ago. Her
lifeinsurance needs have increased, but she has developed a medical
condition thatmakes it impossible for her to purchase more life insurance
at affordable2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 12
flashcards | Easy Notecards https://www.easynotecards.com/print_list/70581 10/13
premiums. Which dividend option makes sense for Beth to use given her
medicalcondition?
A) cash
B) apply to premium
C) dividend accumulations
D) paid-up additions
Answer: D
44.
Lionel purchased a $200,000 ordinary life insurance policy when he
was 25 yearsold and had significant life insurance needs. Now Lionel is
50. His mortgage isalmost paid-off and his children have left home and
are financially independent.Lionel no longer wants to pay premiums, but
he would like to have somepermanent life insurance in force. Which
nonforfeiture option could Lionelemploy to meet these objectives?
A) cash value
B) reduced paid-up insurance
C) paid-up additions
D) extended term insurance
Answer: B
45.
Jane purchased a life insurance policy on her own life and named her
daughter,Cheryl, as beneficiary. Cheryl has a history of not managing
money well. Janewants the death benefit paid to Cheryl in monthly
installments over 20 years.Which settlement option should Jane
pre-select for Cheryl?
A) lump sum
B) fixed amount
C) fixed period
D) interest option
Answer: C
46.
Malcolm would like to purchase life insurance. He is concerned that he
mightneed additional life insurance in the future and that he might be
uninsurable atthat time. What provision can Malcolm add to his life
insurance policy that willpermit him to purchase additional life insurance
at specified times in the futurewithout providing evidence of insurability?
A) double indemnity rider
B) guaranteed purchase option
C) waiver-of-premium provision
D) accelerated death benefits rider
Answer: B
47.
Which of the following statements is (are) true concerning settlement
options?
A straight life annuity provides the lowest amount of periodic income
of allthe life income options.
Fixed-period and fixed-amount are life income options.
A) I only
B) II only
C) both I and II
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 12 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/70581 11/13
D) neither I nor II
Answer: D
48.
Which of the following statements is (are) true concerning the
automaticpremium loan provision?
Unlike other policy loans, interest is not charged on automatic
premiumloans.
The basic purpose of an automatic premium loan is to prevent a
lifeinsurance policy from lapsing.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
49.
Life insurance policy proceeds can be paid to a trustee upon the death
of theinsured. All of the following statements concerning payment of
proceeds to atrustee are true EXCEPT
A) Use of a trustee provides flexibility with regard to the timing
andamount of the payments.
B) Trustees are often used when the beneficiary is a minor child or an
adultwith diminished mental capacity.
C) The trustee is not permitted to accept a fee for rendering services.
D) The trustee does not guarantee investment results.
Answer: C
50.
Which of the following statements is (are) true regarding exclusions in
lifeinsurance contracts?
Life insurance policies are remarkably restrictive, including
numerousexclusions.
A life insurer may exclude death attributable to certain activities
orhobbies disclosed on the application.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
51.
A life insurance policyholder may no longer need life insurance. Such
apolicyholder may sell the policy to a third party for more than its cash
value.The purchaser becomes the new beneficiary and is responsible for
subsequentpremium payments. Such a financial transaction is called a(n)
A) collateral assignment.
B) accelerated death benefits rider.
C) absolute assignment.
D) life settlement.
Answer: D2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 12
flashcards | Easy Notecards https://www.easynotecards.com/print_list/70581 12/13
52.
A life insurance contractual provision protects the beneficiary by not
permittingthe insurer to introduce outside information to deny payment of
the claim. Suchoutside information might be notes that the agent took
while the insuredcompleted the application. This contractual provision is
the
A) entire contract clause.
B) incontestable clause.
C) reinstatement clause.
D) change-of-plan provision.
Answer: A
53.
Which of the following is a standard nonforfeiture option?
A) paid-up additions
B) life income
C) extended term insurance
D) reduction of premiums
Answer: C
54.
Which of the following statements about life insurance policy loans is
(are) true?
Interest is not required on a life insurance policy loan, as the
policyholderis borrowing his or her own money.
If there is an outstanding loan when the insured dies, payment to
thebeneficiary is reduced by the amount of the loan.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
55.
If a life insurance policy lapses for nonpayment of premiums, and
thepolicyholder has not elected another option, which nonforfeiture option
usuallygoes into effect in most policies?
A) reduced paid-up insurance
B) one-year term insurance
C) extended term insurance
D) payment of cash value
Answer: C
56.
Which of the following statements regarding the accidental death
benefit rider(also known as double indemnity) is true?
A) Adding the accidental death benefit rider doubles the premium for
thepolicy.
B) Financial planners agree that adding the accidental death benefit
rider isa wise purchase.
C) The economic value of a human life is doubled or tripled if death
iscaused by an accident, justifying the purchase of the rider.
D) The death benefit is doubled only if an accidental injury is the
directcause of death and death occurs prior to a specified age.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 12 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/70581 13/13
Answer: D
57.
Easy Pay Life Insurance Company allows a term insurance rider to be
added toits whole life policies. The result is a policy that offers an
increased deathbenefit with an affordable premium. The general name for
such a policy is a(n)
A) blended policy.
B) indexed policy.
C) joint life policy.
D) endowment policy.
Answer: A
58.
Which statement about the incontestable clause is true?
It protects the beneficiary if the insurer tries to deny a claim years
afterthe policy is issued.
If protects the insurer from having to pay a claim during the first
twoyears if the insured made a material misrepresentation or
concealedmaterial information in the application.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
59.
Marcus is concerned that inflation will erode the purchasing power of
the facevalue of his life insurance policy. His agent suggested that
Marcus add aprovision that allows him to purchase one-year term
insurance equal to thepercentage change in the consumer price index
without having to demonstrateinsurability. This provision is called a(n)
A) cost-of-living rider.
B) guaranteed purchase option.
C) accelerated death benefit rider.
D) waiver-of-premium rider.
Answer: A
60.
Janet is the beneficiary of her uncle’s $200,000 life insurance policy.
When heruncle died, Janet selected a settlement option that pays monthly
benefits for aslong as she lives. If Janet dies before receiving $200,000,
payments will continueto a contingent beneficiary until a total of
$200,000 has been paid. Whatsettlement option did Janet select?
A) joint-and-survivor annuity
B) life income with guaranteed total amount
C) life income with guaranteed period
D) fixed amount option
Answer: B
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 13 flashcards | Easy Notecards
https://www.easynotecards.com/print_list/71102 1/11
Principles of Risk Management and Insurance - Chapter 13
1.
A factor that can be ignored when determining the cost of life insurance
is
A) time value of money.
B) premiums paid.
C) settlement options.
D) dividends.
Answer: C
2.
Under the traditional net cost method, the net cost of life insurance for
a givenperiod (e.g., 20 years) is determined by which of the following
formulas?
A) the total premiums for the period less the policy reserve at the end
ofthe period
B) the total premiums for the period less the sum of the total
dividendsreceived during the period and the cash value at the end of the
period
C) the sum of the total premiums and dividends for the period less
thecash value at the end of the period
D) the sum of the total dividends received during the period and the
cashvalue at the beginning of the period less the total premiums paid for
theperiod
Answer: B
3.
Which of the following statements about the traditional net cost method
ofmeasuring the cost of life insurance is (are) true?
The traditional net cost method does not consider the time value of
money.
The traditional net cost method can show that life insurance has a
negativecost.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
4.
Which of the following statements about the surrender cost index for
measuringthe cost of life insurance is true?
A) It is based on the assumption that the policy will be in force
indefinitely.
B) It takes into account the settlement options available in the policy.
C) It does not consider the cash value in the policy.
D) It takes the amount and timing of each dividend into consideration.
Answer: D
5.
Which of the following statements describes how the net payment cost
indexdiffers from the surrender cost index?
A) Dividends are ignored.
B) The cash value is ignored.
C) Premiums are not accumulated at a specified interest rate.
D) Dividends are not accumulated at a specified interest rate.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 13 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71102 2/11
Answer: B
6.
David purchased a $100,000 participating whole life policy. The annual
premiumis $2,280. Projected dividends for the first 20 years are $15,624.
The cash valueafter 20 years will be $35,260. If the premiums were
invested at 5 percentinterest for 20 years, the premiums would grow to
$79,156. If the dividends wereaccumulated at 5 percent interest for 20
years, they would grow to be $24,400.The amount to which $1 deposited
annually will accumulate in 20 years at 5percent interest is $34.719.
Based on this information, what is the traditional netcost per thousand
per year of David's policy over the 20-year period?
A) -$1.52
B) -$2.64
C) $5.17
D) $9.75
Answer: B
7.
David purchased a $100,000 participating whole life policy. The annual
premiumis $2,280. Projected dividends for the first 20 years are $15,624.
The cash valueafter 20 years will be $35,260. If the premiums were
invested at 5 percentinterest for 20 years, the premiums would grow to
$79,156. If the dividends wereaccumulated at 5 percent interest for 20
years, they would grow to be $24,400.The amount to which $1 deposited
annually will accumulate in 20 years at 5percent interest is $34.719.
Based on this information, what is the surrendercost per thousand per
year of David's policy over the 20-year period?
A) $5.62
B) $13.75
C) $15.77
D) $27.38
Answer: A
8.
David purchased a $100,000 participating whole life policy. The annual
premiumis $2,280. Projected dividends for the first 20 years are $15,624.
The cash valueafter 20 years will be $35,260. If the premiums were
invested at 5 percentinterest for 20 years, the premiums would grow to
$79,156. If the dividends wereaccumulated at 5 percent interest for 20
years, they would grow to be $24,400.The amount to which $1 deposited
annually will accumulate in 20 years at 5percent interest is $34.719.
Based on this information, what is the net paymentcost per thousand per
year of David's policy over the 20-year period?
A) $5.62
B) $13.75
C) $15.77
D) $27.38
Answer: C
9.
Which of the following statements about the use of interest-adjusted
cost datafor comparing life insurance policies is (are) true?
Using interest-adjusted cost data provides a more accurate measure of
thecost of life insurance than is provided if the time value of money
isignored.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 13 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71102 3/11
Its use is most appropriate in deciding between policies when the
costvariation is very small.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
10.
Which of the following statements about the Linton yield is (are) true?
It is based on the assumption that a cash-value policy can be viewed
as acombination of insurance protection and a savings fund.
It is the average compound annual rate of return required to make
thesavings deposits in a life insurance policy equal to the policy's
guaranteedcash value at the end of a specified period.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
11.
Which of the following statements about the yearly-rate-of-return
method (alsoknown as the Belth method) of calculating the yearly rate of
return for a lifeinsurance policy is (are) true?
The formula requires the use of benchmark prices per $1,000
ofprotection.
The main drawback of the formula is its complexity, necessitating the
useof a computer to calculate the rate of return.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
12.
Consumer experts typically recommend all of the following rules when
buying lifeinsurance EXCEPT
A) Consider the financial strength of the insurer.
B) Deal with a competent agent.
C) Ignore all factors other than cost.
D) Shop around for a low-cost policy.
Answer: C
13.
Consumer experts typically recommend which of the following rules
whenpurchasing life insurance?
Avoid policies which pay dividends.
Purchase life insurance equal to ten times your annual salary.
A) I only
B) II only
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 13 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71102 4/11
C) both I and II
D) neither I nor II
Answer: D
14.
Why might the use of "grades" assigned by a life insurance company
ratingorganization not be a reliable guide for consumers?
There may be variations in grades given by different rating
organizations.
They ignore factors such as profitability and quality of investments.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
15.
Marshall is interested in determining the cost per thousand of his life
insurancepolicy. Which of the following will provide Marshall the most
meaningful measureof the cost per thousand dollars per year of his life
insurance?
A) the needs approach
B) the traditional net cost method
C) the human life value approach
D) the surrender cost index
Answer: D
16.
Lynn calculated the future value of the first twenty premiums she will
pay underher nonparticipating whole life insurance policy. Then she
subtracted the cashvalue after 20 years. Next, she divided this value by
the future value annuity duefactor for 20 years to arrive at an annual
cost of insurance. Finally, she dividedthe annual cost by the number of
thousands of dollars of life insurancepurchased to arrive at the cost per
thousand per year. Lynn calculated the
A) traditional net cost per thousand per year.
B) the Linton Yield.
C) the surrender cost per thousand per year.
D) the net payment cost per thousand per year.
Answer: C
17.
Which method of analyzing the cost of life insurance does not consider
the cashvalue of the policy in the analysis?
A) traditional net cost method
B) net payment cost index
C) the Linton Yield
D) the surrender cost index
Answer: B
18.
Mary is interested in comparing life insurance policies. Rather than
looking atthe cost per thousand, she would like to compare the rate of
return earned onthe savings portion of the policy. Which of the following
would be of the mostinterest to Mary?
A) the policy's Linton Yield
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 13 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71102 5/11
B) the policy's surrender cost
C) the policy's traditional net cost
D) the policy's net payment cost
Answer: A
19.
Which of the following statements is (are) true regarding taxation of
lifeinsurance?
Life insurance proceeds paid in a lump-sum to a designated
beneficiary arereceived free of federal income taxes.
The policyowner must pay taxes annually on the amount by which the
cashvalue of his or her life insurance policy has increased.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
20.
The first step in "shopping for life insurance" is to
A) estimate the amount of life insurance to purchase.
B) decide whether you want a policy which pays dividends.
C) determine if you need life insurance.
D) decide on the best type of life insurance for you.
Answer: C
21.
Lisa does not want her life insurance policy included in her gross
estate when shedies. Lisa can remove the life insurance policy from her
estate if she does whichof the following more than 3 years before she
dies?
A) borrow the cash value of the policy
B) make an absolute assignment of the policy to someone else
C) change the beneficiary to someone who does not have insurable
interest
D) select a lump sum settlement option and name her estate the
beneficiary
Answer: B
22.
Brad owns a cash value life insurance policy. Last year, the cash value
increasedby $300. Brad received $100 in policyowner dividends on the
policy last year.Brad was the beneficiary named in his grandmother's
$50,000 life insurancepolicy. When she died this past year, Brad
received $50,000. How much taxableincome relating to life insurance
must Brad report for federal income taxpurposes?
A) $0
B) $100
C) $400
D) $50,400
Answer: A
23.
Carl and Carol Williams, a married couple, are doing some estate
planning. Uponhis death, Carl plans to leave $1,000,000 in property to
his wife. This amount2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter
13 flashcards | Easy Notecards https://www.easynotecards.com/print_list/71102 6/11
will reduce the value of Carl's gross estate and will be taxed later when
Caroldies. This reduction of the gross estate is called the
A) unified tax credit.
B) taxable estate.
C) capital gains deduction.
D) marital deduction.
Answer: D
24.
Paul is shopping for a life insurance policy. An agent asked Paul if he
would liketo purchase a participating policy. What is a "participating"
policy?
A) a policy which has a cash value
B) a policy which pays dividends
C) a policy which invests in common stock
D) a policy which provides for an increasing death benefit
Answer: B
25.
Each of the following helps to reduce federal estate taxes EXCEPT
A) the marital deduction.
B) the applicable unified tax credit amount.
C) life insurance policies in which the deceased had an incidents
ofownership at the time of death.
D) expenses such as the cost of the funeral, estate settlement costs,
andprobate costs.
Answer: C
26.
Which of the following statements is (are) true with regard to using
interest-adjusted cost data when shopping for life insurance?
Cost indexes apply to new policies and should not be used to
determinewhether to replace a policy.
Cost indexes should only be used to compare similar plans of
insurance.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
27.
All of the following statements about the income tax treatment of
individually-purchased life insurance are true EXCEPT
A) policyowner dividends are received tax-free.
B) the annual increase in cash value is not taxable while the policy
remainsin force.
C) premiums paid for individual life insurance are a tax deductible
expense.
D) life insurance proceeds paid to a beneficiary in a lump-sum are
receivedtax-free.
Answer: C
28.
Which of the following statements is (are) true about the federal estate
tax?2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 13 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71102 7/11
The gross estate can be reduced by a number of deductions.
If the person who died had any ownership interest in a life insurance
policyat the time of death, the proceeds are included in the gross estate
forfederal estate tax purposes.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
29.
Life insurance policy reserves
A) are always equal to the policy's cash surrender value.
B) are a major asset of life insurance companies.
C) are paid to the beneficiary when the insured dies.
D) are a major liability of life insurance companies.
Answer: D
30.
Purposes of life insurance policy reserves include which of the
following?
Legal test of the insurer's solvency
Formal recognition of the obligation to pay future claims
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
31.
The difference between the present value of future benefits payable
under a lifeinsurance policy and the present value of net premiums for
the policy is thepolicy's
A) retrospective reserve.
B) policyholders surplus.
C) prospective reserve.
D) admitted assets.
Answer: C
32.
The policy reserve at the end of any given policy year is called the
A) terminal reserve.
B) unearned premium reserve.
C) mean reserve.
D) initial reserve.
Answer: A
33.
To level a net single premium (NSP), the NSP is divided by
A) the maximum number of years the premium could be paid.
B) the ordinary life annuity factor for the premium payment period.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 13 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71102 8/11
C) the present value of a life annuity due of $1 for the premium
paymentperiod.
D) the deferred life annuity factor for the premium payment period.
Answer: C
34.
The gross premium is defined as
A) the net premium plus the loading allowance.
B) the terminal reserve plus the commission.
C) the net premium minus expenses.
D) the sum of all acquisition expenses.
Answer: A
35.
The National Association of Insurance Commissioners (NAIC) has
drafted a "LifeInsurance Policy Illustration" model law that most states
have adopted. Which ofthe following statements concerning this model
law is (are) true?
The policy illustration must include a narrative summary describing
thebasic characteristics of the policy.
The policy illustration must include a numeric summary showing
thepremium outlay, the value of the accumulation account, the cash
surrendervalue, and the death benefit.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
36.
Beth purchased a $50,000 nonparticipating whole life insurance policy.
Theannual premium was $1,278. The cash value of the policy after 10
years will be$13,740. The future value of $1 deposited at the start of
the year for 10 years,assuming 5 percent interest, is $13.207. What is
the traditional net cost of thispolicy, per thousand per year, over the
first 10 years the policy is in force?
A) -$2.86
B) -$2.14
C) -$1.92
D) -$0.88
Answer: C
37.
Beth purchased a $50,000 nonparticipating whole life insurance policy.
Theannual premium was $1,278. The cash value of the policy after 10
years will be$13,740. The future value of $1 deposited at the start of
the year for 10 years,assuming 5 percent interest, is $13.207. If the
premiums were invested at 5percent interest for 10 years, the premiums
would grow to $16,878.55.Assuming 5 percent interest, what is the
surrender cost of this policy, perthousand per year, over the first 10
years the policy is in force?
A) $4.48
B) $4.75
C) $4.92
D) $5.16
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 13 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71102 9/11
Answer: B
38.
Beth purchased a $50,000 nonparticipating whole life insurance policy.
Theannual premium was $1,278. The cash value of the policy after 10
years will be$13,740. The future value of $1 deposited at the start of
the year for 10 years,assuming 5 percent interest, is $13.207. If the
premiums were invested at 5percent interest for 10 years, the premiums
would grow to $16,878.55.Assuming 5 percent interest, what is the net
payment cost of this policy, perthousand per year, over the first 10
years the policy is in force?
A) $12.71
B) $14.82
C) $17.24
D) $25.56
Answer: D
39.
Actuaries at Term Life Insurance Company calculated the net single
premium perthousand for a five-year term policy for a man age 32 to be
$5.04. To calculatethe net level premium for this policy, the net single
premium should be
A) divided by 5.
B) divided by the future value life annuity due factor for $1 for five
years.
C) divided by the present value life annuity due factor for $1 for
fiveyears.
D) divided by the present value ordinary life annuity factor for $1 for
fiveyears.
Answer: C
40.
Which statement is true regarding using interest-adjusted cost data
andpurchasing life insurance?
A) Cost indices can help to determine whether a policy should be
replaced.
B) The type of policy you purchase should he based solely on a cost
index.
C) Small variations in cost indices should be ignored.
D) Cost indices should be used to select an insurer, not an
individualpolicy.
Answer: C
41.
The net single premium for a life insurance policy is
A) the premium the insurer charges to cover the death benefit and
theinsurer's expenses.
B) the future value of the future death benefit.
C) the present value of the future death benefit.
D) the face value of the policy discounted back for the number of year
thepolicy will be in force.
Answer: C
42.
According the 2001 CSO mortality table, the yearly probability of dying
for a 40year-old man is .00165. The present value of $1 one year from
today, assuminga 5.5 percent interest rate, is .9479. What is the net
single premium per $1,000for a one-year term insurance policy sold to a
man at age 40 assuming a 5.5percent interest rate? Assume the premium
is paid at the start of the year andthe death benefit is paid at the end of
the year.2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 13 flashcards |
Easy Notecards https://www.easynotecards.com/print_list/71102 10/11
A) $1.56
B) $2.45
C) $7.18
D) $952.81
Answer: A
43.
ABC Life Insurance Company is offering a new product. The product is
a two-year term insurance policy funded by a single premium at the
start of the firstyear. Death claims are paid at the end of the year in
which death occurs. Aportion of the appropriate mortality table is shown
below. The first number isage, the second is the number alive at the
start of the year, and the last numberis the number dying during the
year.
39 9,693,539 14,928
40 9,678,611 15,970
Using a 5.5 percent interest rate, the present value of $1 one year
from today is.9479, and the present value of $1 two years from today is
.8985. Assuming a5.5 percent interest rate, what is the net single
premium for a $1,000 two-yearterm policy issued at age 39?
A) $1.49
B) $2.94
C) $5.67
D) $12.83
Answer: B
44.
Charles, age 65, owns a paid-up $250,000 whole life policy on his own
life.Charles is doing some estate planning and would not like this policy
to beincluded in his gross estate for federal estate tax purposes. Which
of thefollowing statements is (are) true regarding the tax treatment of
this policy?
Charles can avoid having the policy proceeds included in his gross
estateby naming his estate the beneficiary.
If Charles makes an absolute assignment of the policy and dies more
thanthree years later, the policy is not counted as part of his gross
estate.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
45.
The gross premium for life insurance is equal to
A) the present value of the future death claim plus an expense loading.
B) the present value of the future death claim less the sum of
thepremiums paid when death occurs.
C) the present value of the future death claim less the present value
of theexpected dividends.
D) the net premium less the expense loading.
Answer: A2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 13
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71102 11/11
46.
The average annual rate of return on a cash-value policy if it is held a
specifiednumber of years is called the policy’s
A) net present value.
B) interest-adjusted cost.
C) benchmark cost.
D) Linton yield.
Answer: D
47.
All of the following statements about the tax treatment of life
insurancepurchased by an individual are true EXCEPT
A) The annual increase in the cash value is currently taxable.
B) Premium payments are not tax deductible.
C) Death benefits received in a lump sum are not taxable income.
D) Policyowner dividends are not considered taxable income.
Answer: A
48.
The net premiums collected by a life insurer for a particular block of
policies,plus interest income at an assumed rate, less assumed death
benefits paid iscalled the
A) cash value.
B) retrospective reserve.
C) net amount at risk.
D) prospective reserve.
Answer: B
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 14 flashcards | Easy Notecards
https://www.easynotecards.com/print_list/71103 1/11
Principles of Risk Management and Insurance - Chapter 14
1.
Which of the following statements is (are) true with respect to annuities?
Annuities are the opposite of life insurance.
The fundamental purpose of annuities is to replace lost income in case
ofpremature death.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
2.
When selling life annuities, what risk is the insurer pooling?
A) bad investment performance
B) premature death
C) bad expense experience
D) excessive longevity
Answer: D
3.
Life annuity payments are made up of all of the following EXCEPT
A) return of premiums.
B) interest earnings.
C) unliquidated principal of annuitants who live too long.
D) unliquidated principal of annuitants who die early.
Answer: C
4.
Stan paid an insurance company $50,000 for a fixed annuity when he
was 50years old. At age 62, Stan plans to begin to receive payments
from the insurer.There are no guarantees on the number of payments he
will receive. Based onthe description provided, this annuity can be
described as a(n)
A) deferred annuity.
B) life annuity with guaranteed payments.
C) immediate annuity.
D) variable annuity.
Answer: A
5.
Cassie, age 62, paid a life insurer $100,000 in exchange for a life
annuity. IfCassie dies before receiving 120 monthly payments from the
insurer, theremaining payments will be made to a beneficiary. If Cassie
dies after receiving120 payments, no additional payments are made by
the insurer. The annuityoption Cassie selected it
A) life annuity, no refund.
B) life annuity with period certain.
C) installment refund annuity.
D) cash refund annuity.
Answer: B2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 14
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71103 2/11
6.
Which of the following statements is (are) true with respect to a
joint-and-survivor annuity?
Some joint-and-survivor annuities reduce the income payment after
thefirst annuitant dies.
No payments are made after the first annuitant dies.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
7.
During the funding period, the premiums paid for a variable annuity are
used topurchase
A) annuity units.
B) immediate participation shares.
C) mutual fund shares.
D) accumulation units.
Answer: D
8.
Brad funded a life annuity through installment payments. At age 60, he
decidedto elect an annuity settlement option and to begin to receive
payments. Which ofthe following annuity payout options will provide Brad
with the highest monthlyincome?
A) life annuity (no refund)
B) life income with payments guaranteed for 5 years
C) life income with payments guaranteed for 10 years
D) installment refund annuity
Answer: A
9.
Which of the following statements is (are) true with respect to the
cash annuitysettlement option?
The taxable portion of the distribution is subject to federal and
stateincome taxes.
The option results in adverse selection against the insurer as those in
poorhealth are more likely to take cash than to annuitize the funds.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
10.
Which of the following statements is (are) true with respect to variable
annuities?
The price at which accumulation units can be purchased fluctuates
duringthe funding period.
The value of annuity units fluctuates over time.
A) I only
B) II only
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 14 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71103 3/11
C) both I and II
D) neither I nor II
Answer: C
11.
Bridget started to fund a variable annuity. Three years later, she
experiencedfinancial difficulty. She called her agent and cancelled the
contract. The insurerreturned all but 4 percent of the account balance.
The 4 percent kept by theinsurer is a(n)
A) account administration fee.
B) investment management fee.
C) front-end load.
D) surrender charge.
Answer: D
12.
Insurers offering variable annuities charge a number of expenses. One
categoryof expenses is to pay the fund manager and to pay brokerage
fees. This expenseis the
A) investment management charge.
B) administrative charge.
C) surrender charge.
D) front-end load.
Answer: A
13.
Insurers offering variable annuities charge a number of fees and
expenses. Onecategory of fees and expenses is charged to cover the
cost of record keeping,paperwork, and periodic reports to annuity
owners. This expense is the
A) investment management charge.
B) surrender charge.
C) administrative charge.
D) front-end load.
Answer: C
14.
Which of the following statements about variable annuities is true?
A) The periodic payments received by the annuitant are fixed.
B) Variable annuities typically provide a guaranteed death benefit
payableto a beneficiary if the annuitant dies prior to retirement.
C) Insurers offering variable annuities are not permitted to
chargeadministrative fees.
D) Although the value of annuity units fluctuates, accumulation units
havea fixed value.
Answer: B
15.
Which of the following statements is (are) true with respect to an
equity-indexedannuity?
The maximum percentage gain is usually capped.
There is no downside protection against loss of principal if the annuity
isheld to term.
A) I only
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 14 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71103 4/11
B) II only
C) both I and II
D) neither I nor II
Answer: A
16.
With an equity-indexed annuity, what name is given to the method of
creditingexcess interest to the annuity?
A) the capitation method
B) the indexing method
C) the distribution method
D) the earnings method
Answer: B
17.
Under an equity-indexed annuity, what name is given to the
percentage increasein the stock index that is credited to the contract?
A) the expense rate
B) the exclusion ratio
C) the indexing method
D) the participation rate
Answer: D
18.
Which of the following statements regarding the taxation of individual
annuitiesis (are) true?
The exclusion ratio is the percentage of the annuity income that is
taxable.
After the net cost of the annuity has been paid to the annuitant, the
totalannuity payment is taxable.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
19.
Juanita paid a life insurer $45,000 in exchange for an immediate life
annuity.Juanita will receive $500 per month from the insurer, and her life
expectancy is15 years (180 months). What is the exclusion ratio in this
case?
A) 33.33 percent
B) 40.00 percent
C) 50.00 percent
D) 66.67 percent
Answer: C
20.
Juanita paid a life insurer $45,000 in exchange for an immediate life
annuity.Juanita will receive $500 per month from the insurer, and her life
expectancy is15 years (180 months). Assume that Juanita receives 12
monthly payments of$500 the first year. How much taxable income must
she report?
A) $3,000
B) $4,000
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 14 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71103 5/11
C) $4,500
D) $6,000
Answer: A
21.
Juanita paid a life insurer $45,000 in exchange for an immediate life
annuity.Juanita will receive $500 per month from the insurer, and her life
expectancy is15 years (180 months). If Juanita is alive 20 years later,
how much of the $6,000received during the year is taxable?
A) nothing
B) $3,000
C) $4,500
D) $6,000
Answer: D
22.
Which of the following statements is (are) true regarding the taxation
ofdistributions from individual annuities?
Individual annuity distributions are never taxable.
Once the annuitant has recovered the premiums he or she paid for
theannuity, the entire annuity distribution is taxable.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
23.
Which of the following is a permissible IRA investment alternative?
A) mutual funds
B) fine art
C) antiques
D) life insurance
Answer: A
24.
Which of the following statements is (are) true regarding the Roth IRA?
Roth IRA contributions are tax deductible.
Roth IRA investment income accumulates income-tax free.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
25.
Rita is 66 years old. She earned $20,000 this year working part-time
at a storeand her modified adjusted gross income was $28,000. Rita is
considering makinga $3,000 contribution to her traditional IRA. Which of
the following statements istrue regarding this contribution?
A) Rita cannot contribute to her traditional IRA because she is over
age 65.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 14 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71103 6/11
B) Rita can make a $3,000 contribution to her traditional IRA, but it is
nottax deductible.
C) Rita can make a $3,000 contribution to her traditional IRA, but it is
onlypartially tax deductible.
D) Rita can make a $3,000 contribution to her traditional IRA, and it
isfully tax deductible.
Answer: D
26.
Daryl, age 42, quit his job. His employer offered a defined contribution
pensionplan, and the balance in the account was $30,000 when Daryl
quit. He can avoidimmediate taxation of these funds by
A) taking a lump-sum distribution.
B) using an IRA rollover account.
C) receiving the money through four equal installments.
D) using the funds to purchase common stock issued by the
formeremployer.
Answer: B
27.
Which of the following statements is (are) true with regard to Roth
IRAs?
The portion of a Roth IRA distribution that is attributable to
investmentincome is taxable.
There is a maximum income level above which Roth IRA contributions
arenot allowed.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
28.
All of the following statements about traditional and Roth IRAs are true
EXCEPT
A) Traditional IRA contributions may be fully, partially, or not income
taxdeductible.
B) Qualified distributions from Roth IRAs are received income tax free.
C) Contributions to Roth IRAs are made with after-tax dollars.
D) Traditional IRAs are exempt from the penalty tax on
prematuredistributions.
Answer: D
29.
Which of the following persons can establish a traditional IRA?
A person whose only income received is from investments.
A 75 year-old man who has earned taxable income.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 14
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71103 7/11
30.
Donna, age 50, is single and earns $40,000 annually. She is covered
under heremployer's retirement plan. Donna would like to start a
traditional IRA andcontribute $4,000 this year. Which of the following
describes her ability toestablish a traditional IRA and the tax treatment
of her contribution?
A) Her contribution is fully tax deductible.
B) Her contribution is partially tax deductible.
C) No portion of the contribution is tax deductible.
D) Donna is not eligible to establish a traditional IRA, so no
contributioncan be made.
Answer: A
31.
Which of the following statements about the withdrawal of funds from
atraditional IRA is true?
A) Withdrawals of deductible contributions between the ages of 59.5
and 65are subject to a tax penalty unless they are withdrawn because of
specifiedcircumstances such as death or long-term disability.
B) Amounts attributable to nondeductible contributions are fully taxable
asordinary income when received.
C) Withdrawals must begin no later than April 1 of the year following
thecalendar year in which an individual attains age 70.5.
D) Withdrawals must be taken in the form of an annuity.
Answer: C
32.
All of the following are circumstances under which withdrawals from a
traditionalIRA may be made prior to age 59.5 without incurring a
substantial penaltyEXCEPT
A) The withdrawal is in substantially equal installments paid over
theindividual's life expectancy.
B) The withdrawal is used to pay living expenses after
unemploymentinsurance benefits cease.
C) The distribution is to the beneficiary of a deceased IRA owner.
D) The withdrawal is because of income needed due to the
individual'sdisability.
Answer: B
33.
Which of the following statements regarding individual retirement
accounts(IRAs) is (are) true?
If an individual's only income during the year is from investments, he
orshe cannot make an IRA contribution.
The funds in the IRA can be used to purchase life insurance on the
owner.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
34.
Which of the following statements is (are) true with regard to IRAs?
Contribution limits are higher for workers aged 50 and older.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 14 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71103 8/11
The minimum distribution rules after attainment of age 70.5 do not
applyto Roth IRAs.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
35.
The fundamental purpose of a variable annuity is to
A) provide funding flexibility to the purchaser.
B) provide a hedge against inflation.
C) fund the purchase of cash value life insurance.
D) guarantee a fixed-dollar benefit throughout retirement.
Answer: B
36.
An immediate life annuity offers all of the following benefits EXCEPT
A) Immediate annuity payments are entirely exempt from federal
incometax.
B) Simplicity for the purchaser as he or she does not have to
manageinvestment funds.
C) Security for the purchaser as stable lifetime income that cannot
beoutlived is provided.
D) The principal is safe as the funds are guaranteed by the assets of
theinsurer.
Answer: A
37.
Which of the following statements is (are) true with regard to the
inflationannuity option?
The initial monthly payment is lower than the initial payment a
fixedannuity would have provided if purchased at the same age.
Periodic payments to the annuitant are adjusted for inflation.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
38.
Which of the following statements about converting a traditional IRA to
a RothIRA is (are) true?
Such conversions can be done with no income tax consequences.
Qualified distributions from a Roth IRA after a conversion are
receivedtax-free.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 14
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71103 9/11
39.
Which of the following statements is (are) true concerning the joint and
survivorannuity settlement option?
Under this option, payments begin after the first annuitant dies.
This settlement option is often selected by married couples.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
40.
Which of the following statements is true concerning traditional and
Roth IRAs?
A) The investment income portion of Roth IRA distributions must
bereported as taxable income.
B) Roth IRA contributions are tax deductible.
C) There are minimum distribution requirements for traditional IRAs.
D) There are no limits on the tax deductibility of traditional
IRAcontributions once the account owner has reached age 50.
Answer: C
41.
Which of the following statements is (are) true with regard to the
adequacy ofIRA funds during retirement?
To assure lifetime income, the IRA funds can be used to purchase a
lifeannuity.
The duration of IRA benefit payments depends on the rate of return
earnedon the invested assets after retirement and the withdrawal rate.
A) I only
B) II only
C) both I and II
D) Neither I nor II
Answer: C
42.
Some insurers offer a single-premium deferred annuity that does not
beginpaying benefits until an advanced age, such as 85. This product is
called
A) endowment insurance.
B) equity-indexed annuity.
C) life income with guaranteed payments annuity.
D) longevity insurance.
Answer: D
43.
Which of the following is a characteristic of a longevity annuity
(longevityinsurance)?
A) payment of the face value of the policy at age 100
B) forfeiture of the purchase price if the annuitant dies during the
deferralperiod
C) cash value can be borrowed or recouped through a nonforfeiture
option
D) high-cost annuity compared to other life annuities
Answer: B2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 14
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71103 10/11
44.
Which of the following is an advantage of a longevity annuity
(longevityinsurance)?
A) Death benefits are paid to a beneficiary if death occurs during
thedeferral period.
B) The interest rate credited to the cash value is higher than what
isearned on traditional life insurance.
C) Monthly benefits begin at an advanced age when other assets are
likelyto have been depleted.
D) The policyowner has unrestricted access to the funds during
thedeferral period through loans and cash withdrawals.
Answer: C
45.
Which of the following statements is (are) true about a longevity
annuity(longevity insurance)?
If the annuitant dies during the deferral period, the purchase price of
theannuity is forfeited.
Longevity insurance is an example of an immediate annuity.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
46.
Traditionally, tables have been prepared showing how long IRA funds
will lastbased on rates of return and annual withdrawal rates. These
tables, however,assume constant returns over the projection period.
Many financial planners arenow using a technique that allows for
fluctuations in market returns. A computeris programmed to estimate how
long funds will last under many different returnscenarios and to
determine the probability that funds will last until a specifiedage. This
technique is called
A) decision-tree analysis.
B) sensitivity analysis.
C) computer simulation.
D) cost-benefit analysis.
Answer: C
47.
Agnes and Mary Clare, two elderly sisters, own an annuity covering
both of theirlives. The annuity pays benefits to them until the first sister
dies, then theannuity terminates. Agnes and Mary Clare own a(n)
A) flexible premium annuity.
B) joint life annuity.
C) longevity annuity.
D) joint-and-survivor annuity.
Answer: B
48.
James is concerned that if he purchases a fixed immediate annuity his
funds willbe tied-up and not accessible if an emergency arises. His
insurance agent saidthat a rider could be attached to his annuity to
address this concern. The rider isa(n)2021. 3. 29. Print Principles of Risk Management
and Insurance - Chapter 14 flashcards | Easy Notecards https://www.easynotecards.com/print_list/71103
11/11
A) partial cash withdrawal rider.
B) return of premium rider.
C) guaranteed purchase option rider.
D) waiver-of-premium rider.
Answer: A
49.
Carl is concerned that if he purchases an equity indexed annuity, he
will losemoney long-term if the stock index declines. Which equity
indexed annuityprovision assures Carl that he will not lose money if he
holds the equity indexedannuity to term?
A) the indexing method
B) the participation rate
C) the guaranteed minimum value
D) the maximum rate cap
Answer: C
50.
Which statement is true regarding IRA distributions?
A) The minimum distribution rules apply to Roth IRAs, but not
totraditional IRAs.
B) Distributions from a Roth IRA are taxed at the individual’s marginal
taxrate.
C) The IRA penalty tax applies to all traditional IRA distributions
beforeage 59.5 with no exceptions.
D) Unless a life annuity is issued, a retiree may still be alive when the
IRAaccount is exhausted.
Answer: D
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 15 flashcards | Easy Notecards
https://www.easynotecards.com/print_list/71104 1/11
Principles of Risk Management and Insurance - Chapter 15
1.
Problems with the health care system in the United States that led
toimplementation of the Affordable Care Act included
Rising healthcare expenditures
Considerable waste and inefficiency in the healthcare system
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
2.
All of the following are historical reasons for the increase in health
careexpenditures in the U.S. EXCEPT
A) cost insulation because of third-party payers.
B) employer-sponsored health insurance.
C) universal health insurance coverage.
D) technological advances in health care.
Answer: C
3.
The Affordable Care Act requires that most U.S. citizens and legal
residentshave qualifying health insurance or pay a financial penalty. This
provision of theAffordable Care Act is known as the
A) Health Insurance Marketplace option.
B) public option.
C) individual mandate.
D) premium subsidy option.
Answer: C
4.
Under the Affordable Care Act, which of the following statements are
true?
Health insurers cannot use pre-existing conditions exclusions.
Health insurers cannot impose annual benefit limits and lifetime
benefitlimits.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
5.
One provision of the Affordable Care Act is designed to benefit young
adults upto age 26. This provision allows these young adults to
A) remain covered under their parents' health insurance policies.
B) receive a tax credit for their health insurance premium if they
areunemployed.
C) receive low-interest government loans to finance their health
insurance.
D) receive coverage under Medicare if they are not covered by a
privatehealth insurance plan.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 15 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71104 2/11
Answer: A
6.
Which of the following statements regarding health care expenditures in
theUnited States is (are) true?
As a nation, the U.S. spends significantly more per-person on health
carethan most other industrialized nations.
Health care expenditures in the U.S. are high because everyone is
coveredby a health insurance plan.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
7.
Individual medical expense insurance sold in the Health Insurance
Marketplace ischaracterized by which of the following?
A) narrow range of benefits
B) no lifetime benefit limits
C) no exclusions
D) first-dollar coverage
Answer: B
8.
Prior to passage of the Affordable Care Act, insurers could go back to
the date ahealth insurance policy became effective and render the policy
void due to aclerical error. This practice, which is prohibited under the
Affordable Care Actexcept in cases of fraud or intentional
misrepresentation of a material fact, iscalled
A) estoppel.
B) retention.
C) rescission.
D) reformation.
Answer: C
9.
Under the Affordable Care Act, if a health insurer does not meet the
minimumloss ratio requirement, the insurer must
A) pay a fine to the federal government.
B) issue rebates to the people the insurer covered.
C) not sell any health insurance for a period of one year.
D) reduce the premium on the policies it sells the following year.
Answer: B
10.
Purposes of the coinsurance provision in medical expense insurance
policiesinclude which of the following?
to reduce premiums
to prevent overutilization of policy benefits
A) I only
B) II only
C) both I and II
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 15 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71104 3/11
D) neither I nor II
Answer: C
11.
The effect of an annual out-of-pocket limit in an individual medical
expensepolicy is to
A) limit the lifetime benefits payable under the policy.
B) put a cap on annual benefits the insurer will pay.
C) prevent the insured from receiving duplicate benefits if
medicalexpenses are also covered under workers compensation
insurance.
D) cover 100 percent of eligible medical expenses after an insured
hasincurred a specified amount of annual out-of-pocket expenses.
Answer: D
12.
All the following are common exclusions in a medical expense
insurance policyEXCEPT
A) dental care.
B) surgeons' fees.
C) long-term care.
D) routine eye care.
Answer: B
13.
Kristen has an individual medical expense policy with a $1,000
calendar-yeardeductible, a $5,000 annual out-of-pocket limit, and a 20
percent coinsurancerequirement. Kristen was hospitalized for a surgical
procedure in March, herfirst health care treatment received during the
year. The total bill was $20,000.Considering the deductible and
coinsurance, how much of this amount mustKristen pay?
A) $4,400
B) $4,800
C) $5,000
D) $5,100
Answer: B
14.
Dirk required surgery for a kidney impairment. His total bill for
medical serviceswas $50,000. Dirk has a medical expense policy with a
$1,000 calendar-yeardeductible and a $5,000 annual out-of-pocket limit.
His coinsurance percentageis 20 percent. The out-of-pocket limit applies
to coinsurance only. Assumingthis surgery and hospitalization were the
first medical care that Dirk receivedduring the year and that all of the
hospital services were eligible for coverageunder the policy, how much
of the $50,000 bill will the insurer pay?
A) $39,000
B) $39,200
C) $40,000
D) $44,000
Answer: D
15.
Which of the following statements about long-term care insurance is
(are) true?
Long-term care insurance is inexpensive, especially if purchased at
olderages.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 15 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71104 4/11
Purchasers have a choice of daily benefits and benefit periods.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
16.
Which of the following statements is (are) true concerning benefit
paymentsunder long-term care insurance?
Expense-incurred policies pay for actual charges up to a specified
dailylimit.
Per diem policies pay a specified daily benefit regardless of the
chargesincurred.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
17.
All of the following statements about long-term care insurance are true
EXCEPT
A) Premiums can be reduced by electing shorter elimination periods.
B) A common benefits trigger is the inability to perform a certain
numberof activities of daily living.
C) Protection against inflation is usually made available as an
optionalbenefit.
D) Policies currently sold are guaranteed renewable.
Answer: A
18.
Which of the following statements about disability and disability
incomeinsurance is (are) true?
Most disability income policies replace 100 percent of gross earnings.
The probability of being disabled before age 65 is much higher
thancommonly believed.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
19.
Which of the following statements about individual disability income
policies istrue?
A) Benefits are typically paid only for disabilities resulting from
sickness.
B) Benefits paid for partial disabilities are usually greater than
benefitspaid by the same policy for total disabilities.
C) Most policies pay a benefit equal to 100 percent of the disabled
person'slost income.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 15 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71104 5/11
D) Many policies provide or make available a residual disability benefit
forpersons who are able to work but at a reduced income.
Answer: D
20.
All of the following statements about individual disability income
policies are trueEXCEPT
A) Premiums are often waived while a person is disabled but must
beresumed if the insured recovers.
B) At the time of purchase, the insured can choose the length of
thebenefit period from among several available options.
C) In order to encourage rehabilitation, benefits may be continued
duringperiods of vocational training.
D) Most disability income insurance policies contain an elimination
periodof 10 or fewer days.
Answer: D
21.
Which of the following statements about individual disability income
policies thatuse a two-part definition of total disability is (are) true?
During the initial period of disability, the insured must be unable
toperform the duties of any gainful occupation.
After the initial period of disability, the insured must be unable to
performthe duties of any occupation for which he or she is reasonably
fitted byeducation, training, and experience.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
22.
Which of the following statements concerning individual medical
expenseinsurance is (are) correct?
Once the deductible is satisfied, no additional deductible is payable
duringthe calendar year.
Family deductibles are substantially higher than individual deductibles.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
23.
All of the following statements about optional disability income benefits
are trueEXCEPT
A) Under a cost-of-living rider, benefits are periodically adjusted
forinflation.
B) A Social Security rider pays additional benefits if the insured is
turneddown for Social Security disability benefits.
C) Adding a return of premium rider results in a lower initial premium.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 15 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71104 6/11
D) Under an option to purchase additional insurance, the insured has
theright to buy additional insurance at specified times without evidence
ofinsurability.
Answer: C
24.
Kevin has an individual disability income policy that his insurer agrees
to keep inforce until age 60. However, the company has the right to
increase the premiumeach year for the underwriting class in which Kevin
has been placed. Whichrenewal provision is found in Kevin's policy?
A) noncancellable
B) guaranteed renewable
C) conditionally renewable
D) nonrenewable.
Answer: B
25.
Which of the following statements about mandatory provisions in
individualhealth insurance policies is true?
A) Insurers are not permitted to place time limits on filing claims
orproviding proof of loss.
B) The time limit on certain defenses provision prohibits the
insurancecompany from denying a claim based on a fraudulent
misstatement by theapplicant after the policy has been in force three
months.
C) The usual length of the grace period is 180 days.
D) Under the reinstatement provision, a health insurance policy that
haslapsed can be put back in force.
Answer: D
26.
One provision of the Affordable Care Act provides creates in each
state atransparent and competitive insurance marketplace where
individuals and smallfirms can purchase affordable and qualified health
coverage. This marketplace iscalled a
A) Medicaid plan.
B) Medicare plan.
C) Health Maintenance Organization (HMO).
D) Health Insurance Marketplace.
Answer: D
27.
Because of the Affordable Care Act, all new medical expense plans
that offerindividual and group coverage must accept all individuals and
employers in thestate who apply for coverage. These insurers are
required to continue to renewthe coverage at the option of the individual
or plan sponsor. Thus, under theAffordable Care Act, the renewal
provision is
A) conditionally renewable.
B) guaranteed issue.
C) nonrenewable.
D) renewable at the insurer's option.
Answer: B2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 15
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71104 7/11
28.
Greta purchased a long-term care policy. Under a typical policy,
Greta'seligibility for benefits may be triggered by
A) how long premiums have been paid.
B) inability to perform activities of daily living.
C) continuous hospitalization for at least 60 days.
D) eligibility for Medicare benefits.
Answer: B
29.
The inability of the insured to perform some but not all of the
important dutiesof his or her occupation is called
A) residual disability.
B) total disability.
C) recurrent disability.
D) partial disability.
Answer: D
30.
Ellen purchased a health insurance policy. Under the provisions of
theAffordable Care Act, which of the following renewal provisions must
the insureruse in the policy?
A) cancellable
B) guaranteed issue
C) renewable at the insurer's option
D) conditionally renewable
Answer: B
31.
The Affordable Care Act includes a provision designed to help small
employersmake health insurance coverage available to their employees.
This provisionallows small employers to reduce their federal income tax
by a percentage of theemployer's contribution to health insurance for
employees. This subsidy, in theform of reduction of income taxes, is
called a
A) marginal tax rate.
B) tax credit.
C) tax bracket.
D) tax deduction.
Answer: B
32.
All of the following are typical characteristics of individual medical
expensecoverage EXCEPT
A) annual benefit limits.
B) essential health benefits.
C) deductibles.
D) coinsurance.
Answer: A
33.
Barb was injured in an auto accident. She was totally disabled and
collecteddisability income benefits for 8 months. She would like to return
to work on apart-time basis to see if her recovery is complete. During
this period, her2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 15
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71104 8/11
insurer will pay reduced disability income benefits. This type of disability
iscalled
A) recurrent disability.
B) presumptive disability.
C) permanent disability.
D) partial disability.
Answer: D
34.
Prior to passage of the Affordable Care Act, insurance policies
typicallycontained a provision excluding coverage for impairments that
were present orwere treated during a specified period prior to the
effective date of the policy.This provision is a(n)
A) time limit on certain defenses.
B) preexisting-conditions clause.
C) benefit period provision.
D) incontestable clause.
Answer: B
35.
One long-term care insurance benefit trigger considers whether the
insuredneeds supervision to protect against threats to health or safety
due to memoryloss or disorientation. This benefit trigger is referred to
as a(n)
A) activities of daily living trigger.
B) medical necessity trigger.
C) needs test trigger.
D) severe cognitive impairment trigger.
Answer: D
36.
Beth's disability income insurance policy provides benefits for
accidental death,dismemberment, and loss of sight. The maximum amount
payable under thisbenefit is known as the
A) face value.
B) cash value.
C) principal sum.
D) monthly benefit.
Answer: C
37.
Which statement is true regarding the advanced premium tax credits
forindividuals and families under the Affordable Care Act?
A) The tax credit is the same flat amount for individuals and families.
B) The tax credit is based on income and is designed to limit the
amountspent on health insurance premiums to make the insurance
affordable.
C) The tax credit is only available to high-income individuals and
families.
D) The tax credit is an expenses that lowers taxable income.
Answer: B
38.
The Affordable Care Act has provisions that improve the quality of
health careand lower costs. All of the following are examples of these
provisions EXCEPT
A) reducing paperwork and administrative expenses.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 15 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71104 9/11
B) increasing the number of medical specialists and reducing the
number ofprimary care physicians.
C) compensating physicians based on value rather than on the volume
ofservices.
D) cracking down on healthcare fraud.
Answer: B
39.
Some managed care plans use physicians, hospitals, and health
careorganizations that agree to make medical services available to
insureds atdiscounted fees. Insureds are not required to use these
entities, but if they do,health care costs are less than if these entities
are not used. Such health careentities are called
A) Preferred Provider Organizations (PPOs).
B) Health Maintenance Organizations (HMOs).
C) Blue Cross/Blue Shield Plans.
D) Health savings accounts (HSAs).
Answer: A
40.
Which of the following statements about eligibility requirements for
qualifiedHealth Savings Accounts (HSAs) is (are) true?
Only individuals who are eligible for Medicare benefits can establish
aqualified HSA.
Applicants must be covered by a high deductible health plan and not
becovered by any other comprehensive health plan to establish a
qualifiedHSA.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
41.
All of the following statements about the tax treatment of Health
SavingsAccounts (HSAs) are true EXCEPT
A) Contributions to a qualified HSA are tax deductible.
B) Distributions from a qualified HSA used to fund medical expenses
aretaxable income.
C) Investment income in a qualified HSA accumulates income tax free.
D) Distributions from a qualified HSA prior to age 65 for
nonmedicalpurposes are subject to a 10 percent penalty tax.
Answer: B
42.
Which of the following statements about high deductible health
insurance plans is(are) true?
Coverage under a high deductible health plan is necessary to establish
aqualified health savings account (HSA).
High deductible health plans provide a maximum limit on annual
out-of-pocket expenses.
A) I only
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 15 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71104 10/11
B) II only
C) both I and II
D) neither I nor II
Answer: C
43.
Which of the following statements about health savings accounts
(HSAs) is true?
A) There are no limits to annual contributions that an individual may
maketo his or her HSA.
B) Once an individual has reached age 65 or is covered by Medicare,
noadditional contributions to the HSA may be made.
C) The health insurance plan covering the HSA account beneficiary is
notpermitted to use a deductible.
D) HSAs offer no tax benefits for the individual who establishes
theaccount.
Answer: B
44.
The Affordable Care Act requires all new medical expense plans to
provide acomprehensive set of coverages and services. This
comprehensive set ofcoverages and services that must be provided are
called
A) essential health benefits.
B) dread disease benefits.
C) long-term care benefits.
D) respite care benefits.
Answer: A
45.
The Affordable Care Act has a provision that expands a public
assistanceprogram designed to make health coverage available to
low-income individuals byincreasing the maximum amount of income that
can be earned and still qualifyfor benefits. As a result, millions of
individuals are eligible for coverage underthis program. This public
assistance program is called
A) Medicare.
B) Health Maintenance Organization.
C) Health Insurance Marketplace Exchange.
D) Medicaid.
Answer: D
46.
All of the following are methods used to fund the Affordable Care Act
EXCEPT
A) an excise tax on the sale of medical devices.
B) reduced payments to Medicare Advantage plans.
C) tort reform measures that reduce medical malpractice claims.
D) savings in the Medicare and Medicaid programs from reduced fraud
andabuse.
Answer: C
47.
Which of the following statements is true regarding disability income
insurance?
A) The purchase of disability income insurance is not necessary if you
arecovered under workers compensation.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 15 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71104 11/11
B) Increasing the elimination period reduces the premium for
disabilityincome insurance.
C) Disability income insurance usually replaces 100 percent of lost
income.
D) A uniform definition of disability appears in all disability
incomepolicies.
Answer: B
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 16 flashcards | Easy Notecards
https://www.easynotecards.com/print_list/71458 1/11
Principles of Risk Management and Insurance - Chapter 16
1.
Which of the following statements about group insurance is true?
A) Individual contracts are issued to each person covered under a
groupinsurance plan.
B) The cost of group insurance is usually higher on a per-person
basisthan the cost of individual insurance.
C) The actual experience of a large group is a factor in determining
thepremium that is charged.
D) Individual evidence of insurability is usually required.
Answer: C
2.
Which of the following statements about group insurance underwriting
principlesis (are) true?
If a plan is contributory, 100 percent of the eligible employees must
becovered.
Ideally, there should be a flow of older people into the group and
youngerpeople out of the group.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
3.
Which of the following statements about group insurance underwriting
principlesis true?
A) Employees should be required to remit premiums directly to
theinsurance company.
B) The average age of the group should ideally increase over time.
C) A group should be formed for the specific purpose of
obtaininginsurance.
D) A flow of people through the group is desirable.
Answer: D
4.
Reasons for having a minimum participation requirement before a group
iseligible for insurance include which of the following?
To lower the expense rate per unit of insurance
To minimize the possibility of insuring a group which consists largely
ofunhealthy individuals
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
5.
Which of the following statements about the eligibility requirements for
groupinsurance is true?
A) Most plans cover both full-time and part-time employees.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 16 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71458 2/11
B) An employee must be actively at work on the day the employee's
groupinsurance becomes effective.
C) An employee who signs-up for insurance during an eligibility
periodmust furnish evidence of insurability.
D) One purpose of a probationary period is to determine whether
theemployee is healthy enough to be covered under the group health
insuranceplan.
Answer: B
6.
The period of time during which an employee can sign up for group
insurancecoverage without furnishing evidence of insurability is called
a(n)
A) probationary period.
B) noninsurability window.
C) waiting period.
D) eligibility period.
Answer: D
7.
Which of the following statements about group term life insurance is
true?
A) It usually is written in the form of 5-year level term insurance.
B) An employee who leaves the group is usually not permitted to
convertto individual coverage.
C) Experience rating is used in group term life insurance plans.
D) It represents only a small percentage of the group life insurance
inforce.
Answer: C
8.
High deductible group health insurance plans have all of the
followingcharacteristics EXCEPT
A) health savings accounts or health reimbursement arrangements.
B) high dollar deductibles.
C) low coverage limits.
D) coinsurance.
Answer: C
9.
Which of the following statements about group accidental death
anddismemberment (AD&D) insurance is (are) true?
The principal sum is paid if the employee dies in an accident.
A percentage of the principal sum is paid for certain types
ofdismemberments.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
10.
New employees at Jarvis Company cannot participate in the group term
lifeinsurance plan until they have worked at the company for three
months. Thisinitial period before a new employee can participate is
called a(n)2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 16 flashcards |
Easy Notecards https://www.easynotecards.com/print_list/71458 3/11
A) probationary period.
B) elimination period.
C) open enrollment period.
D) eligibility period.
Answer: A
11.
Which of the following statements about Blue Cross Plans is (are)
true?
They provide coverage for physicians’ and surgeons’ fees.
They usually provide benefits for hospital charges.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
12.
What is the purpose of stop-loss insurance that is used with
self-insured groupmedical expense plans?
A) to require employees to buy insurance for losses in excess of
somespecified amount
B) to have a commercial insurer pay claims that exceed a specified
limit
C) to obtain administrative services from a commercial insurer
D) to exempt self-insured plans from state insurance laws that
requiremandated benefits
Answer: B
13.
All of the following are reasons why employers self-insure medical
expense plansEXCEPT
A) to reduce certain costs, such as premium taxes and commissions.
B) to provide mandated state benefits.
C) to retain funds until needed to pay claims.
D) to eliminate the need to comply with separate state laws.
Answer: B
14.
A key feature of group medical expense plans is the employee being
required topay a percentage of covered expenses in excess of the
deductible. This feature is
A) other insurance.
B) coinsurance.
C) pro-rated insurance.
D) reinsurance.
Answer: B
15.
Which of the following statements about recent developments in group
medicalcoverage is (are) true?
After increasing for many years, the premiums for group medical
expensecoverage have finally started to decline.
A growing number of employers are offering plans with higher
deductiblesfor employees.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 16 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71458 4/11
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
16.
A deductible under which expenses are accumulated on an annual
basis, and oncea specified total is reached, the deductible is satisfied for
the year is called a
A) calendar-year deductible.
B) prospective deductible.
C) straight deductible.
D) waiting period.
Answer: A
17.
Which of the following is (are) characteristics of HMO managed care
plans?
Unlimited choice of physicians and hospitals
Emphasis on controlling the cost of covered services
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
18.
Which of the following statements about HMO managed care plans is
(are) true?
There is an emphasis on controlling costs.
They provide narrow, limited, medical services to members.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
19.
An HMO physician who determines if medical care from a specialist is
necessaryis called a(n)
A) capitator.
B) internist.
C) network facilitator.
D) gatekeeper.
Answer: D
20.
An HMO that contracts with two or more independent group practices
to providemedical services to covered members is called a(n)
A) group model HMO.
B) network model HMO.
C) staff model HMO.
D) individual practice association HMO.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 16 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71458 5/11
Answer: B
21.
Which of the following statements about preferred provider organization
(PPO)health plans is (are) true?
A PPO plan contracts with health care providers to provide
medicalservices to members at reduced fees.
Plan members are given a financial incentive to use PPO providers
ratherthan other providers.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
22.
Which of the following statements concerning managed care plans is
true?
Most employees are covered under some form of managed care plan.
Managed care plans emphasize cost controls and preventative care.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
23.
All of the following statements about HMOs are true EXCEPT
A) They organize and deliver health care services.
B) HMOs place a heavy emphasis on controlling the cost of
coveredservices.
C) HMO members pay nothing for medical care until care is provided,
thenthey must pay high deductibles and large coinsurance payments.
D) The selection of physicians is usually limited to physicians
affiliatedwith the HMO.
Answer: C
24.
Which of the following statements regarding group long-term disability
incomeinsurance plans is (are) true?
These plans are usually limited to occupational disabilities.
These plans typically use a more restrictive definition of disability
after aninitial period of disability, such as two years.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
25.
Connors Company self-funds the medical expense benefits that it
provides to itsemployees. Connors Company has a contract with a
commercial health insurancecompany providing that the health insurance
company will pay all claims inexcess of $250,000. The arrangement with
the health insurance company is called2021. 3. 29. Print Principles of Risk Management
and Insurance - Chapter 16 flashcards | Easy Notecards https://www.easynotecards.com/print_list/71458
6/11
A) reinsurance.
B) managed care.
C) stop-loss insurance.
D) coinsurance.
Answer: C
26.
Some employers offer employees a choice of health care plans which
aredesigned to make employees more sensitive to health care costs, to
provide anincentive to avoid unneeded care, and to seek low-cost health
care providers.Such plans are called
A) employee assistance plans.
B) consumer-directed health plans.
C) cafeteria plans.
D) preferred provider organization (PPO) plans.
Answer: B
27.
Maria is covered under a group medical expense plan as an employee.
She is alsocovered under her husband's plan as a dependent. If Maria is
hospitalized, howwill each plan respond to her medical bills if both plans
have the typicalcoordination-of-benefits provision?
A) Maria's plan is primary, and her husband's plan is excess.
B) Her husband's plan is primary, and Maria's plan is excess.
C) The primary plan is determined by which birthday, Maria's or
herhusband's, occurs first in the year.
D) Both plans will pay benefits on a pro rata basis.
Answer: A
28.
Under one type of HMO, the physicians are employees of the HMO
and are paid asalary and sometimes an incentive bonus to hold down
costs. This type of HMOis called a(n)
A) individual practice association (IPA).
B) staff model.
C) group model.
D) network model.
Answer: B
29.
Which of the following statements about the continuation of group
healthinsurance under the COBRA law is true?
A) A continuation of coverage must be made available even if an
employeevoluntarily terminates employment.
B) The length of the continuation of coverage is 90 days.
C) The option to continue coverage applies to minor children only, not
toadults.
D) The employer must pay the entire cost of coverage during
thecontinuation period.
Answer: A2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 16
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71458 7/11
30.
All of the following statements about cost controls in dental insurance
plans aretrue EXCEPT
A) The coinsurance percentage used may vary by type of dental
service.
B) Cosmetic dental work is usually excluded.
C) The limit on benefits may be expressed as an annual limit or as
alifetime limit for certain types of dental services.
D) To eliminate small claims, there is no coverage for routine
oralexaminations, X-rays, or cleaning teeth.
Answer: D
31.
Which of the following statements about group short-term disability
incomeplans is true?
A) Most plans pay benefits for a period of 3 to 5 years.
B) Most plans cover occupational disabilities only.
C) Most plans provide benefits for total disabilities only.
D) Most plans have a 90-day elimination (waiting) period.
Answer: C
32.
Which of the following statements about group short-term disability
incomeplans is true?
A) Most plans have a short elimination period for accidents but
coversickness from the first day of disability.
B) Disability is usually defined in terms of a worker being unable to
work inany substantial, gainful, employment.
C) The amount of disability income benefits typically is equal to
somepercentage of a worker's normal earnings.
D) Most short-term plans cover occupational disability only.
Answer: C
33.
Which of the following statements about group long-term disability
income plansis true?
A) The definition of disability becomes less restrictive after a worker
hasbeen disabled for 2 years.
B) Coverage is provided for both occupational and
nonoccupationaldisabilities.
C) Benefits are increased if a worker is eligible for Social Security
orworkers compensation benefits.
D) Maximum monthly benefits under long-term disability income plans
aresignificantly lower than the benefits paid under short-term
disabilityincome plans.
Answer: B
34.
Which of the following statements about cafeteria plans is (are) true?
Unspent flexible spending account balances are refunded to the
employee,tax-free, at year-end.
Cafeteria plans enable employees to select benefits that meet their
specificneeds.
A) I only
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 16 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71458 8/11
B) II only
C) both I and II
D) neither I nor II
Answer: B
35.
Advantages of cafeteria plans include all of the following EXCEPT
A) simplicity of benefit administration.
B) employees can select benefits that best match their needs.
C) reduced taxes for employees.
D) greater employer control over increasing benefit costs.
Answer: A
36.
Which of the following statements is (are) true concerning high
deductible healthplans?
An employee can withdraw money tax-free from a health savings
accountor health reimbursement arrangement to pay covered medical
costs.
There is a cap on an employee's out-of-pocket expenses under the
plan.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
37.
Tracy is covered by a group dental insurance plan at work. At her
latest check-up, the dentist notes that she needed crowns on two teeth.
Under her plan, if thecost of dental work will exceed $500, the dentist
submits the treatment plan tothe insurer to calculate what the plan will
cover and what the employee will pay.This provision is known as a
A) mandatory second opinion.
B) underwriting review.
C) predetermination of benefits.
D) claims audit.
Answer: C
38.
Most group health insurance plans have adopted the
coordination-of-benefitsrules developed by the National Association of
Insurance Commissioners. Underthese rules, if a dependent child is
covered by both of the health insurance plansof the child's married
parents, which health plan is primary for the child'smedical expenses?
A) always the mother's plan
B) always the father's plan
C) the plan of the parent whose birthday occurs first in the calendar
year
D) the plan of the parent who works for the larger employer, based
onnumber of total employees
Answer: C
39.
Turner Company self-insures its group health insurance plan. Turner
enteredinto an agreement with ABC Insurance through which ABC
handles the plan2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 16
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71458 9/11
design, claims processing, and record keeping for Turner. The
agreementbetween Turner and ABC is called a(n)
A) preferred provider agreement.
B) administrative services only contract.
C) exclusive provider agreement.
D) point-of-service contract.
Answer: B
40.
Med Profs is a group of 18 doctors. These doctors work out of their
own officesand treat patients on a fee-for-service basis. In addition,
Med Profs doctorsalso agree to treat HMO members at reduced fees.
The type of HMO that usesorganizations like Med Profs is called a(n)
A) group model plan.
B) closed panel plan.
C) individual practice association plan.
D) network model plan.
Answer: C
41.
Nancy's employer provides an interesting employee benefit plan. Each
employeeis given 250 employee benefit credits to spend. A wide array of
benefits isavailable, and the employee uses benefit credits to select the
benefits that he orshe wants. This type of employee benefit plan is
called a(n)
A) defined benefit plan.
B) cafeteria plan.
C) employee selection plan.
D) contributory plan.
Answer: B
42.
Marv is covered by a group health insurance plan at work. His
employer fundsthe entire cost of the group health insurance. Because of
this characteristic, thegroup health insurance plan can be described as
A) defined benefit.
B) contributory.
C) defined contribution.
D) noncontributory.
Answer: D
43.
Doris started a business 2 years ago. The business has been
successful, andDoris is thinking about offering some employee benefits
for her workers. Sheplans to offer a group term life insurance benefit.
All of the following are usualeligibility requirements for participation in a
group life insurance plan EXCEPT
A) full-time employment.
B) be actively at work when insurance becomes effective.
C) apply for insurance during the eligibility period.
D) satisfy a 2-year probationary period.
Answer: D2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 16
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71458 10/11
44.
Which of the following statements is (are) true with regard to group
lifeinsurance?
Most group life insurance is whole life coverage.
Most group life insurance plans allow a modest amount of life
insurance onthe employee's spouse and dependent children.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
45.
HMOs typically pay network physicians or medical groups a fixed
annual ormonthly payment for each member, regardless of the frequency
or type ofservice provided. This payment is called a
A) pro-rata charge.
B) persistency bonus.
C) capitation fee.
D) corridor payment.
Answer: C
46.
The Affordable Care Act requires employers with 100 or more
employees toprovide health insurance on the employees or pay a penalty
if at least oneemployee receives a tax credit and coverage through the
Health InsuranceMarketplace. This requirement—providing insurance or
paying a fine—is knownas the
A) single-payer solution.
B) employer shared responsibility.
C) essential benefit requirement.
D) portability requirement.
Answer: B
47.
Under older group medical expense plans, physicians were paid a fee
for eachcovered service and were reimbursed on the basis of reasonable
and customarycharges, up to a maximum limit. These older group
medical expense plans werecalled
A) service medical plans.
B) managed care plans.
C) point-of-service plans.
D) indemnity plans.
Answer: D
48.
Which of the following is a characteristic of a health maintenance
organization(HMO)?
A) unlimited choice of health-care providers
B) no premiums until care is provided
C) narrow, limited, medical services provided
D) emphasis on cost containment
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 16 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71458 11/11
Answer: D
49.
Which of the following is a provision of the Affordable Care Act?
A) strengthening the use of pre-existing conditions exclusions
B) prohibition of harmful practices by insurers.
C) introduction of annual and lifetime limits to control costs
D) elimination of flexible spending accounts
Answer: B
50.
The Affordable Care Act created program that enables small firms to
offerhealth insurance to their employees. The program provides
flexibility, choice,and the convenience of on-line account management.
This program is called the
A) Medical Advantage plan.
B) Medicaid program.
C) FAIR plan.
D) SHOP Marketplace program.
Answer: D
51.
An employer-funded plan with favorable tax advantages, which repays
employeesfor medical care not covered by the employer's standard
medical plan is a(n)
A) 401(k) account.
B) individual retirement account (IRA).
C) health reimbursement arrangement (HRA).
D) flexible spending account (FSA).
Answer: C
52.
Which of the following statements regarding recent developments in
employer-sponsored health plans is (are) true?
Preferred provider organizations (PPOs) continue to dominate group
healthinsurance markets.
The number of employers offering medical benefits to workers who
retireearly has increased.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
53.
Under many cafeteria plans, employees make premium contributions
with pre-taxdollars and a salary reduction that are used to purchase
group health insuranceor dental insurance. This type of cafeteria plan is
called a
A) health reimbursement arrangement plan.
B) premium conversion plan.
C) full-choice plan.
D) flexible spending account plan.
Answer: B
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 17 flashcards | Easy Notecards
https://www.easynotecards.com/print_list/71462 1/12
Principles of Risk Management and Insurance - Chapter 17
1.
Which of the following statements about the tax implications of qualified
pensionplans is true?
A) Investment income on plan assets is taxable in the year the
investmentincome is earned.
B) Employer contributions are deductible up to certain limits as
anordinary business expense.
C) Employer contributions are considered taxable income to employees
butare taxed at capital gains rates.
D) Distributions from qualified pension plans are received tax-free by
theretiree.
Answer: B
2.
Beta Corporation has 1,000 employees eligible to participate in the
firm'spension plan, and 100 of these employees are considered highly
compensated. Allof the highly compensated employees are covered by
the plan. What is theminimum number of the 900 non-highly
compensated employees who must becovered by the plan in order for
the plan to satisfy the ratio percentage test?
A) 500
B) 630
C) 667
D) 900
Answer: B
3.
What are the minimum age and service requirements that can be
imposed onemployees eligible to participate in a retirement plan?
A) age 18 and 6 months of service
B) age 21 and 1 year of service
C) age 21 and 3 years of service
D) age 25 and 4 years of service
Answer: B
4.
Which of the following statements about retirement ages in defined
benefitpension plans is (are) true?
The normal retirement age in most plans is 65.
For a defined benefit plan, the early retirement age is the earliest age
anemployee can retire with full, unreduced benefits.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
5.
Which of the following statements concerning defined-benefit pension
plans is(are) true?
The contribution rate by the employer varies from year to year.
The retirement benefit is not known in advance.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 17 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71462 2/12
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
6.
Which of the following statements concerning defined contribution
pension plansis (are) true?
The contribution rate is fixed.
The retirement benefit varies.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
7.
All of the following are potential disadvantages to employees covered
by amoney-purchase pension plan EXCEPT
A) The contribution rate by the employer is uncertain.
B) The retirement benefit can only be estimated in advance of
retirement.
C) The benefit formula may produce an inadequate benefit if an
employeeenters the plan at an older age.
D) The investment losses are borne by the employees.
Answer: A
8.
Which of the following statements about retirement benefits under
pension plansis true?
A) Under a flat percentage of annual earnings defined benefit formula,
eachemployee receives the same dollar benefit.
B) A benefit using final pay is usually based on an employee's
earningsduring the last month of plan participation.
C) A unit-benefit formula considers both earnings and years of service.
D) Past service benefits are the result of bonuses and overtime pay
duringthe period an employee participated in the plan.
Answer: C
9.
Under a unit-benefit formula, benefits are a function of both
A) earnings and years of service.
B) age and earnings.
C) age and gender.
D) years of service and position within a firm.
Answer: A
10.
Vesting refers to
A) the employer's right to terminate contributions if a pension plan
isadequately funded.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 17 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71462 3/12
B) the employer's right to recapture employee contributions to a
pensionplan if employment terminates prior to retirement.
C) the employee's right to the employer's contributions or
benefitsattributable to the contributions if employment terminates prior
toretirement.
D) the employer's right to discriminate against non-highly
compensatedemployees when determining pension benefit levels.
Answer: C
11.
Which of the following statements about the minimum vesting standards
for aqualified defined benefit plan is (are) true?
Under cliff vesting, an employee must be at least 50 percent vested
after 5years of service.
Under graded vesting, an employee must be at least 20 percent
vestedafter 3 years of service and 100 percent vested after 7 years.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
12.
Which of the following statements about the protection provided by the
PensionBenefit Guaranty Corporation is (are) true?
Only defined benefit plans are insured.
Only benefits that are not yet vested are guaranteed.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
13.
Which of the following distributions from a qualified retirement plan
would beexempt from the 10 percent penalty tax if the distribution
occurred before thecovered employee was age 59.5?
A distribution made to an employee with a qualifying disability.
A distribution made to a beneficiary or to the employee estate's after
theemployee's death.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
14.
As Social Security slants benefits in favor of lower-paid workers, the
InternalRevenue Code permits employers to adjust pension contributions
so that theoverall contributions (pension plus Social Security) are
nondiscriminatory. Thisadjustment permits employers to increase pension
contributions for highly-2021. 3. 29. Print Principles of Risk Management and Insurance Chapter 17 flashcards | Easy Notecards https://www.easynotecards.com/print_list/71462 4/12
compensated employees. Adjusting contributions to consider Social
Securitycontributions is called
A) prorating.
B) indexing.
C) offset.
D) integration.
Answer: D
15.
For a long-term employee who is covered by a defined benefit plan,
the highestretirement income will be obtained if his/her retirement
income is based on
A) initial average pay.
B) random year annual pay.
C) career-average pay.
D) final average pay.
Answer: D
16.
A financial institution that provides for the accumulation or
administration of thefunds that will be used to pay pension benefits is
called a
A) trust fund.
B) mutual fund.
C) funding instrument.
D) funding agency.
Answer: D
17.
Which of the following statements about pension funding agencies and
fundinginstruments is true?
A) Under a trust-fund plan, individual annuities are purchased each
yearfor employees participating in the plan.
B) A separate investment account is a group pension account with a
lifeinsurance company.
C) If the funding instrument is a commercial bank, the plan is called
aninsured plan.
D) Under a guaranteed investment contract, the insurer guarantees
theprincipal of a lump sum deposit but does not guarantee the interest
rate.
Answer: B
18.
Which of the following statements about trust fund plans is (are) true?
The trustee typically purchases annuities for retiring employees.
The trustee guarantees the adequacy of the fund to pay the
promisedbenefits.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
19.
Which of the following statements about Section 401(k) plans is
true?2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 17 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71462 5/12
A) Elective salary deferrals to these plans are free of federal
incometaxation until the funds are actually withdrawn.
B) These plans are exempt from rules that prevent discrimination in
favorof highly compensated employees.
C) There is no limit on the actual percentage of salary that can be
deferredby highly compensated employees under a qualified plan.
D) If an employee takes the funds made available to him or her in
cash, themoney received is not taxable.
Answer: A
20.
Which of the following statements about withdrawals from Section
401(k) plans is(are) true?
The penalty tax does not apply to hardship withdrawals.
Withdrawals may be made without penalty at age 59.5 or older.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
21.
Which of the following statements concerning retirement plans for the
self-employed is true?
They can be used by owners of incorporated businesses only.
With certain exceptions, the same rules that apply to qualified
corporateplans apply to retirement plans for the self-employed.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
22.
Which of the following statements about SIMPLE retirement plans is
true?
A) They are limited to employers with 100 or fewer eligible employees
andwho do not maintain another qualified plan.
B) Employees are not permitted to make SIMPLE plan contributions.
C) Employers are subject to more stringent nondiscrimination rules
thanthose that apply to most qualified plans.
D) Employer contributions are fully taxable in the year of the
contribution,but qualified distributions are received tax-free.
Answer: A
23.
Which of the following statements is (are) true with respect to
SIMPLEretirement plans?
Only large employers can start a SIMPLE plan, provided the employer
doesnot maintain another qualified plan.
SIMPLE plans are exempt from most nondiscrimination and
administrativerules that apply to qualified plans.
A) I only
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 17 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71462 6/12
B) II only
C) both I and II
D) neither I nor II
Answer: B
24.
Rita went to work for a manufacturing company. The company offers a
defined-benefit pension plan. The retirement benefit is equal to 1.5
percent multiplied byyears of service with the company, and the result is
multiplied by average salaryin the three highest consecutive years of
paid employment with the company.The benefit formula used at Rita's
company is a
A) flat dollar amount for all employees.
B) flat percentage of annual earnings.
C) flat dollar amount for each year of service.
D) unit-benefit formula.
Answer: D
25.
Which of the following statements is (are) true with respect to vesting
under aqualified retirement plan?
Vesting helps to reduce labor turnover.
An employee who terminates employment after four years of service
hasno vested retirement benefit under cliff vesting.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
26.
Early distributions from qualified retirement plans are assessed a 10
percentpenalty. However, there are some exceptions to this rule. All of
the followingdistributions are exempt from the penalty tax EXCEPT
A) lump-sum distributions made after age 59.5.
B) lump-sum distributions made directly to the employee at any age
whenhe or she changes employers.
C) lump-sum distributions made after the death or permanent disability
ofthe employee.
D) distributions that are part of a series of substantially equal
paymentsover the worker's life expectancy.
Answer: B
27.
ACME Company is considering starting a retirement plan for its
employees. Oneoption ACME is considering is a profit-sharing plan. All
of the following areadvantages of this type of retirement plan EXCEPT
A) The employer's cost is not affected by the age and the number
ofemployees.
B) Profit sharing plans provide an incentive for employees to work
harderand more efficiently.
C) The 10 percent penalty tax does not apply to distributions prior to
age59.5.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 17 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71462 7/12
D) ACME enjoys greater flexibility in employer contributions.
Answer: C
28.
ABC Company offers a qualified retirement plan. ABC selected a
fundinginstrument with an insurer in which the insurer promised to pay a
specifiedinterest rate for a number of years on a lump sum deposit. This
fundinginstrument is called a
A) trust-fund plan.
B) group deferred annuity.
C) separate investment account.
D) guaranteed investment contract.
Answer: D
29.
RST Company offers a qualified retirement plan. Each employee
contributes 4percent of his or her pretax income to the plan, and RST
matches the employee'scontribution. An employee's benefit at retirement
is determined by his or heraccount balance at the time of retirement.
What type of retirement plan doesRST offer?
A) defined benefit, flat percentage of annual earnings
B) defined benefit, flat dollar amount for all employees
C) defined benefit, unit-credit formula
D) defined contribution money purchase plan
Answer: D
30.
Which of the following statements is true with regard to defined
benefit anddefined contribution pension plans?
A) It’s easier for an employer to determine its annual pension
contributionunder a defined benefit plan than under a defined contribution
plan.
B) When a new pension plan is installed, it’s more beneficial for
olderworkers if it’s a defined contribution plan rather than a defined
benefitplan.
C) The employer bears the investment risk under a defined
contributionplan, and the employee bears the investment risk under a
defined benefitplan.
D) With a defined benefit plan, the retirement benefit is known is
advancebut the contributions vary; with a defined contribution plan,
thecontribution rate is fixed but the retirement benefit varies.
Answer: D
31.
JKL Company just converted its traditional defined-benefit plan to
another typeof plan. Under the plan, benefits are defined in terms of a
hypothetical accountbalance, with retirement benefits dependent upon the
value of the participant'saccount at retirement. Each year, employees
receive an interest rate credit and apay credit which is a specified
percentage of compensation. This type of plan iscalled a
A) section 401(k) plan.
B) deposit-administration plan.
C) cash-balance plan.
D) trust fund plan.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 17 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71462 8/12
Answer: C
32.
All the following statements concerning a Roth 401(k) plan are true
EXCEPT
A) After-tax dollars are used to fund the plan.
B) Investment earnings accumulate on a tax-free basis.
C) Employees at all income levels may contribute to the plan, but
annualcontributions are limited.
D) Qualified distributions at retirement are fully taxable.
Answer: D
33.
Special vesting rules apply to qualified defined contribution plans with
voluntaryemployee contributions and matching employer contributions.
Which of thefollowing statements is (are) true with respect to these
vesting rules?
Employer contributions must vest immediately.
Graded vesting is permitted, and employer contributions must be
20percent vested after 2 years, with an additional 20 percent vested in
eachof the next 4 years.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
34.
Small business owners have a number of retirement plans available to
them. Onetype of plan is limited to employers with 100 or fewer eligible
employees. Underthis type of plan, small employers are exempt from
most of thenondiscrimination and administrative rules that apply to
qualified plans. Suchplans are called
A) Keogh plans.
B) SIMPLE retirement plans.
C) cash balance plans.
D) profit sharing plans.
Answer: B
35.
Which of the following statements is (are) true with respect to
profit-sharingplans?
There is no limit on the amount that an employer can contribute
annuallyto an employee's account under a profit sharing plan.
Profit sharing plans offer greater funding flexibility for employers
thanunder other qualified plans.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
36.
Lynn works for a state university. In addition to the university’s
regularretirement plan, Lynn participates in another retirement savings
plan. She2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 17 flashcards |
Easy Notecards https://www.easynotecards.com/print_list/71462 9/12
elected to have $5,000 of her salary withheld and contributed to a
tax-shelteredannuity with an insurer. The type of plan that Lynn
established is called a
A) SIMPLE plan.
B) 403(b) plan.
C) defined benefit plan.
D) Keogh plan.
Answer: B
37.
All of the following statements about 403(b) plans are true EXCEPT
A) Contributions to a 403(b) reduce an employee's taxable income.
B) 403(b) plans are designed for employees of public school systems
andtax-exempt organizations.
C) The law limits the amount of income that an employee can elect to
deferunder a 403(b) plan.
D) Matching employer contributions are not permitted under a 403(b)
plan.
Answer: D
38.
Which of the following statements is (are) true regarding cash-balance
pensionplans?
Cash balance plans are defined contribution plans.
Under a cash balance plan, the employer creates an investment
account foreach employee into which the employer makes actual
contributions andallocates investment gains and losses.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
39.
Which of the following statements concerning defined benefit and
definedcontribution pension plans is (are) true?
The employer bears the investment risk with a defined contribution
plan.
Defined benefit plans favor workers who enter the plan at older ages.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
40.
Under a 401(k) plan, what is compared to determine if the plan
unfairlydiscriminates in favor of highly compensated employees?
A) the average percentage of salary made available to the
highlycompensated to defer is compared to the average percentage of
salarymade available to other eligible employees to defer
B) the ratio of eligible highly compensated employees is compared to
theratio of eligible other employees
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 17 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71462 10/12
C) the average percentage of salary deferred by the highly
compensated iscompared to the average percentage of salary deferred by
other eligibleemployees
D) the percentage of highly compensated employees over age 50
whoparticipate is compared to the percentage of all other employees
whoparticipate
Answer: C
41.
Under one type of retirement plan for small businesses, the
employercontributes to an IRA established for each eligible employee.
Under this type ofplan, the contribution limits are significantly higher
than they are for traditionalIRAs and Roth IRAs. This type of plan, which
requires little paperwork, is calleda
A) simplified employee pension (SEP) plan.
B) defined benefit plan.
C) Keogh plan.
D) 403(b) plan.
Answer: A
42.
In the context of employee benefits, the term "discrimination" refers to
benefitcomparisons between
A) male and female employees.
B) current employees and retirees.
C) highly compensated employees and non-highly compensated
employees.
D) members of an under-represented group (by religious preference,
race,or national origin) and the majority of employees.
Answer: C
43.
Which of the following statements regarding minimum vesting standards
forqualified defined benefit plans is (are) true?
The vesting standards apply to both employer and employee
retirementcontributions.
Employers may vest benefits more quickly than the minimum standards
.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
44.
Which of the following statements about tax-deferred retirement plans
in theU.S. is true?
Women, on average, receive lower employment-based retirement
incomethan men.
One way to hedge against inflation is to invest lump-sum
pensiondistributions in fixed-income investments.
A) I only
B) II only
C) both I and II
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 17 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71462 11/12
D) neither I nor II
Answer: A
45.
Which of the following is a common investment mistake that many
retirementplan participants make?
A) not investing heavily enough in common stock issued by the
employer
B) investing too heavily in common stock when close to retirement
C) participating in an employer-sponsored retirement plan to
obtainmatching employer contributions
D) participating in an employer-sponsored retirement plan and
contributingthe maximum amount allowed
Answer: B
46.
Winslow Corporation has many long-term employees. The company has
neverhad a pension plan. Recently, a new management team was hired.
The newpresident said he would like to start a pension plan through
which he couldreward the long-term service provided by many
employees. Which of thefollowing types of plans should Winslow
Corporation adopt?
A) section 403(b) plan
B) section 401(k) plan
C) money-purchase plan
D) defined benefit plan
Answer: D
47.
Which of the following statements about Roth 401(k) plans is true?
Contributions to a Roth 401(k) plan are made with before-tax dollars.
Qualified distributions from a Roth 401(k) are received income-tax
free.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
48.
To encourage low- to moderate-income workers to save for
retirement, a taxcredit called the Saver’s Credit is available. Which
statement about tax creditsand tax deductions is true?
A) Tax deductions are more favorable than tax credit for most
taxpayers.
B) Tax credits reduce taxes owed on a dollar-for-dollar basis.
C) Tax credits reduce taxable income.
D) Tax deductions reduce taxes owed on a dollar-for-dollar basis.
Answer: B
49.
The tax credit available through the Saver’s Credit is equal to
A) the annual IRA contribution limit.
B) $2,000 regardless of income level and tax-filing status.
C) a percentage of the contribution made to a traditional IRA, Roth
IRA,401-k, SIMPLE plan, or 403(b) plan.
D) one-fourth of the Social Security taxes paid by the taxpayer.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 17 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71462 12/12
Answer: C
50.
Which statement is true with regard to problems and issues with
tax-deferredretirement plans in the United States?
A) Inadequate participation in employer-sponsored retirement plans
cancreate economic insecurity for retired employees.
B) Retirement benefits for women are higher than retirement benefits
formen, reflecting the higher wages women are paid.
C) Employees do not invest sufficient amounts in the common stock
issuedby the companies where they work.
D) Pension benefits are too often indexed for inflation,
burdeningemployers with high pension costs.
Answer: A
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 18 flashcards | Easy Notecards
https://www.easynotecards.com/print_list/71464 1/14
Principles of Risk Management and Insurance - Chapter 18
1.
Which of the following is a reason that social insurance programs exist?
A) to compete with private insurance programs
B) to provide a base of economic security
C) to provide needs-tested benefits to low-income individuals
D) to reduce involvement of the government in insurance markets
Answer: B
2.
Which of the following statements about the characteristics of social
insuranceprograms is true?
A) Benefits are loosely related to a worker's earnings.
B) Benefits are paid primarily on the basis of individual equity.
C) Participation in social insurance programs is voluntary.
D) Social insurance programs must be fully funded at all times to
payrequired benefits.
Answer: A
3.
Which of the following statements about the characteristics of social
insuranceprograms is true?
A) They are designed to provide a floor of income with respect to the
risksthat are covered.
B) Social insurance benefits payments are unrelated to income.
C) Participants are required to satisfy a means test to receive benefits.
D) With few exceptions, participation in social insurance programs
isvoluntary.
Answer: A
4.
Which of the following statements about participation in the Social
Securityprogram is (are) true?
Most private sector employees are covered under the Social
Securityprogram.
Each employee has the right to "opt out" of the Social Security
program ifthe employee does not wish to participate in the program.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
5.
One insured status under Social Security requires you to have earned
at least sixcredits during the last 13 calendar quarters ending with the
quarter of death,disability, or entitlement to retirement benefits. This
insured status is
A) disability insured.
B) temporarily insured.
C) fully insured.
D) currently insured.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 18 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71464 2/14
Answer: D
6.
As of this year, Brad, age 50, has 40 credits under the Social Security
program.These credits were all earned in the last 10 years. What is
Brad's insured statusunder the program?
A) He is currently and fully insured.
B) He is currently insured, but not fully insured.
C) He is fully insured, but not currently insured.
D) He is neither currently insured nor fully insured.
Answer: A
7.
Which of the following statements about the full retirement age under
the SocialSecurity program is true?
A) The current retirement age for full benefits is age 62.
B) Beginning in the year 2025, the retirement age will be
graduallyincreased to age 75.
C) Early retirement with reduced benefits is allowed as early as age
55.
D) Delayed retirement beyond the age for full benefits increases
theamount of the monthly benefit.
Answer: D
8.
All of the following persons are eligible for a benefit under the
retirementportion of the Social Security program EXCEPT
A) a divorced spouse, age 55, who was married to the retired worker
for 6years.
B) a retired worker's 63 year-old spouse who is no longer caring
forchildren.
C) a retired worker's 52 year-old spouse who is caring for a 12
year-olddaughter of the retired worker.
D) a retired worker's unmarried 20 year-old son who has been
severelydisabled because of an automobile accident while he was in
elementaryschool.
Answer: A
9.
Which of the following statements about a worker's primary insurance
amount is(are) true?
It is the monthly amount paid to a worker who elects early retirement
atage 62.
It is equal to 50 percent of the worker's final average pay that was
subjectto Social Security taxes.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
10.
Which of the following statements about the Social Security
cost-of-livingadjustment is (are) true?2021. 3. 29. Print Principles of Risk Management
and Insurance - Chapter 18 flashcards | Easy Notecards https://www.easynotecards.com/print_list/71464
3/14
The amount of the adjustment is limited to a maximum of 2.5
percentannually.
Increases are based on changes in the consumer price index.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
11.
Which of the following statements is (are) true with respect to the
Social Securityearnings test?
The earnings test does not apply to dividends, interest, and rental
income.
The earnings test does not apply to work earnings for those
individualswho have reached the full retirement age under Social
Security.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
12.
All of the following persons are eligible for survivor benefits under
SocialSecurity EXCEPT
A) dependent parents age 62 or older.
B) a surviving brother or sister, age 60 or older.
C) a surviving spouse age 60 or older.
D) a surviving spouse with eligible children younger than age 16.
Answer: B
13.
Which of the following statements about disability benefits under Social
Securityis true?
A) There is a one-year waiting period before benefits are payable.
B) Benefits are payable as long as the disabled worker is unable to
performhis or her regular occupation.
C) Benefits are payable only if the condition causing the disability
isexpected to result in death prior to age 65.
D) In addition to the disabled worker receiving the benefits, benefits
canalso be paid to eligible dependents.
Answer: D
14.
In addition to most persons over age 65, which of the following
persons is (are)eligible for Medicare benefits?
Persons under age 65 who have been entitled to Social Security
disabilitybenefits for at least 24 months
Persons under 65 who need long-term kidney dialysis treatment or
akidney transplant
A) I only
B) II only
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 18 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71464 4/14
C) both I and II
D) neither I nor II
Answer: C
15.
Which of the following statements about the coverage of health care
servicesunder Part A of Medicare is (are) true?
Services in the patient's home are covered if the patient requires
skilledcare and meets certain conditions.
Hospice care is available for beneficiaries with a terminal illness.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
16.
Which of the following statements about hospice benefits under the
hospitalinsurance (Part A) portion of Medicare is (are) true?
To become eligible for hospice care, a patient must first receive
inpatientcare for at least 10 consecutive days.
Hospice benefits are provided to persons who are terminally ill.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
17.
Which of the following expenses is covered under the medical
insurance (Part B)portion of the Medicare program?
A) long-term care in a skilled nursing facility
B) the fee charged by a surgeon for an operation
C) the cost of a semi-private room during a hospital stay
D) routine prescription drugs outside of the hospital
Answer: B
18.
Which of the following statements about the medical insurance (Part B)
portionof Medicare is (are) true?
Participation in Part B of Medicare is voluntary.
It is provided at no cost to anyone who is fully insured under
Medicare.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
19.
Which of the following statements about the role of physicians with
respect toMedicare claims is (are) true?2021. 3. 29. Print Principles of Risk
Management and Insurance - Chapter 18 flashcards | Easy Notecards
https://www.easynotecards.com/print_list/71464 5/14
Physicians who do not accept an assignment of Medicare claims can
chargeas much as 200 percent of the Medicare-approved fee.
Physicians who accept assignment agree to accept the
Medicare-approvedamount as payment in full.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
20.
Which of the following statements about Medigap policies is (are) true?
Insurers are required to have an open enrollment period of 6 months
fromthe date an applicant first enrolls in Medicare Part B and is age 65
orolder.
Most policies are of limited value because they largely duplicate
benefitsalready provided by Medicare.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
21.
Which of the following statements about the financing of the Social
Securityprogram is (are) true?
Although the self-employed pay an OASDI tax rate that is twice
theemployee rate, they are allowed certain deductions that reduce
theeffective tax rate.
The earnings base on which OASDI taxes are paid increases annually
basedon changes in average wages in the national economy.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
22.
Objectives of unemployment insurance include which of the following?
To help unemployed workers find jobs.
To encourage employers to stabilize employment.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
23.
In order to receive unemployment insurance benefits, an unemployed
workermust meet all of the following eligibility requirements EXCEPT
A) have qualifying wages and employment.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 18 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71464 6/14
B) be able to work.
C) be actively seeking work.
D) satisfy a 6-month waiting period.
Answer: D
24.
Which of the following statements about unemployment insurance
benefits istrue?
A) Benefits are a flat amount regardless of a worker's previous wages.
B) Because of federal legislation, the maximum benefit is the same in
allstates.
C) Most states pay regular benefits for a maximum duration of 26
weeks.
D) Under the extended benefits program, the federal government
continuesbenefit payments for up to 3 years for workers who have
exhausted theirregular benefits.
Answer: C
25.
Which of the following statements about the financing of
unemploymentinsurance benefits is true?
A) Each state maintains its own trust fund at the state level, and the
statepays qualified beneficiaries from the trust fund the state administers.
B) While experience rating is used for other types of insurance, it is
notused in unemployment insurance.
C) Part of an employer's contribution is used for administrative
expenses,to fund extended benefits, and to maintain a loan fund that can
be drawnupon if the state's account is depleted.
D) Most state programs are financed primarily by payroll taxes paid
byemployees.
Answer: C
26.
Which of the following statements about the problems and issues
ofunemployment insurance programs is (are) true?
Many state programs are inadequately financed.
Only a small portion of the total unemployed receive benefits at any
time.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
27.
Prior to the passage of workers compensation laws, all of the following
commonlaw defenses could be used by employers to avoid financial
responsibility forwork-related injuries EXCEPT
A) contributory negligence.
B) the fellow-servant doctrine.
C) assumption of the risk.
D) employer liability laws.
Answer: D2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 18
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71464 7/14
28.
Which of the following statements about workers compensation programs
istrue?
A) Injured workers must prove the employer was responsible for
theirinjuries to collect benefits.
B) Workers compensation disability income benefits (amount and
duration)are uniform from state to state.
C) Options available for complying with the law may include one or
more ofthe following: self-insurance, private insurance, or insurance
through astate fund.
D) Most states have elective laws whereby the employer can
choosewhether or not to provide workers compensation coverage to
employees.
Answer: C
29.
Which of the following statements about benefits provided by
workerscompensation programs is true?
A) Occupational disability and nonoccupational disability are covered.
B) Death benefits and benefits to eligible survivors are payable if a
workeris killed on the job.
C) Medical benefits are usually subject to deductibles, coinsurance,
andnumerous exclusions.
D) Retirement benefits are payable to retired workers through
workerscompensation.
Answer: B
30.
Which of the following is a current problem with workers
compensationprograms?
A) declining involvement of lawyers in workers compensation claims
B) exclusion of deaths and injuries attributable to terrorism
C) exclusion of benefits for occupational illness
D) overuse of opiate prescription drugs in workers compensation.
Answer: D
31.
Which of the following statements about problems and issues in
workerscompensation insurance is (are) true?
Uncertainties created by the increasing use of medical marijuana is
agrowing problem for employers.
Enactment of the Affordable Care Act led many employers to stop
offeringmedical benefits as part of the workers compensation coverage
on theiremployees.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
32.
Marion owns substantial financial assets. She was surprised that she
qualified forSocial Security retirement benefits when she retired because
of her highinvestment income. What characteristic of social insurance
programs is Marionoverlooking with respect to her Social Security
retirement benefits?2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter
18 flashcards | Easy Notecards https://www.easynotecards.com/print_list/71464 8/14
A) Social insurance programs are financially self-supporting.
B) Social insurance program benefits are loosely related to earnings.
C) Social insurance benefits are not means tested.
D) Full funding of social insurance programs is unnecessary.
Answer: C
33.
Tony is 48 years old. He earned the maximum taxable wage base
under SocialSecurity annually between the time when he was 26 and
when he was 40. At age40, he dropped out of the workforce to care for
children as his wife had a high-paying job. Which statement is true
regarding Tony's insured status under SocialSecurity?
A) Tony is fully insured and currently insured.
B) Tony is fully insured, but not currently insured.
C) Tony is currently insured, but not fully insured.
D) Tony is neither fully insured nor is he currently insured.
Answer: B
34.
Frank is doing some life insurance planning. A financial advisor said,
"be sure toconsider Social Security when examining sources of funds
available for familysupport if you die." The financial advisor was
referring to which Social Securitybenefit?
A) retirement benefits
B) survivor benefits
C) disability benefits
D) health insurance benefits
Answer: B
35.
Which of the following statements is true with regard to the Medicare
program?
A) While Social Security old-age benefits are available at age 62,
MedicarePart A benefits are not available, in most cases, until age 65.
B) If an individual delays collecting Social Security retirement benefits
untilafter the full retirement age, he or she is not eligible for Medicare
benefitsuntil he or she begins to collect retirement benefits.
C) Part B of Medicare is funded through a payroll tax.
D) Beneficiaries must pay a monthly premium for Medicare Part
Acoverage.
Answer: A
36.
Which of the following statements is (are) true with respect to the
MedicareAdvantage Plans?
These plans replace the original Medicare program, Parts A and B,
whichare no longer available to new retirees.
These plans provide an opportunity for retirees to receive
Medicarecoverage through private health care plans.
A) I only
B) II only
C) both I and II
D) neither I nor II
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 18 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71464 9/14
Answer: B
37.
Dale, age 65, was dismayed to learn about all of the deductibles,
co-pays, limits,and exclusions in the Medicare program. Dale bought a
type of health insurancespecifically designed to supplement Medicare,
and selected his coverage fromamong 10 standard policies that private
insurers offer. What type of healthinsurance did Dale purchase?
A) long-term care insurance
B) Medigap insurance
C) major medical insurance
D) viatical insurance
Answer: B
38.
EFG Company experienced a reduced demand for its products during
arecession. EFG managers were considering laying off some workers
when thepersonnel director said, "Let's not lay off these workers. If we
do, ourunemployment insurance premiums will increase. The state
considersemployment stability when determining our premium."
Considering the firm'semployment record when determining the rate to
charge for unemploymentinsurance is called
A) experience rating.
B) class rating.
C) schedule rating.
D) retrospective rating.
Answer: A
39.
Beth was injured at work and is eligible to receive workers
compensationbenefits. All of the following benefits are provided under
workers compensationEXCEPT
A) disability income.
B) retirement benefits for dependents.
C) rehabilitation benefits.
D) medical care.
Answer: B
40.
Marco, a risk manager in California, is interviewing for a new position
in thestate of Washington. When Marco asked about methods of providing
workerscompensation, the answer surprised him. In Washington,
employers can self-insure the risk or obtain coverage through a state
fund. Private insurers do notmarket workers compensation insurance in
Washington. Washington uses a
A) competitive state fund.
B) guaranty fund.
C) reinsurance facility.
D) monopoly state fund.
Answer: D
41.
Which of the following statements about the financing of OASDI and
Medicare is(are) true?
There is a maximum taxable wage base for OASDI.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 18 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71464 10/14
There is a maximum taxable wage base for Part A of Medicare.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
42.
Which of the following statements about taxation of Social Security
retirementbenefits under federal law is (are) true?
Social Security retirement benefits are never considered taxable
income.
Up to 85 percent of Social Security retirement benefits may be
consideredtaxable income, depending on the amount of other income
received by thebeneficiary.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
43.
Which of the following would help to reduce the long-range OASDI
actuarialdeficit?
A) increasing the payroll tax rate
B) increasing benefits
C) reducing the taxable wage base
D) increasing the cost of living adjustment
Answer: A
44.
Which of the following statements about the Medicare prescription drug
benefitis (are) true?
Beneficiaries select a prescription drug plan and pay monthly
premiums,with the premium reduced or waived for low-income
beneficiaries.
The benefit provides first-dollar coverage of prescription drugs up to
amaximum of $10,000 per year, but no coverage after $10,000.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
45.
All of the following statements about the Medicare Prescription Drug
Plan aretrue EXCEPT
A) Medicare prescription drug coverage is available to all
Medicarebeneficiaries.
B) Medicare prescription drug coverage is funded exclusively through
thePart A payroll tax.
C) The Medicare prescription drug program provides financial help
forbeneficiaries with limited income and financial resources.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 18 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71464 11/14
D) In addition to the initial deductible, there is a coverage gap where
thebeneficiary must pay the entire cost of prescription drugs.
Answer: B
46.
All of the following statements about the Medicare prescription drug
benefit aretrue EXCEPT
A) Beneficiaries are required to pay a monthly premium for the
benefit.
B) The plan provides protection against catastrophic prescription
drugexpenditures.
C) Coverage is limited to when a beneficiary is hospitalized or a
resident ofrest home.
D) The plan has a coverage gap before a beneficiary has coverage
forcatastrophic costs.
Answer: C
47.
Under one type of Medicare Advantage Plan, members of the plan can
see anydoctor or health services provider that accepts Medicare patients.
If membersreceive care outside the network of member physicians and
care facilities, theymust pay higher out-of-pocket costs. This type of
Medicare Advantage Plan is a
A) Medicare HMO.
B) Medicare PPO.
C) Medicare Special Needs Plan.
D) Medicare Private Fee-for-Service Plan.
Answer: B
48.
Which of the following statements concerning Medicare Prescription
Drug Plansis (are) true?
The monthly premium is based on the health status of the beneficiary
andthe number of prescriptions the beneficiary needs.
After the beneficiary has paid an initial deductible, Medicare pays
theentire cost of all prescription drugs the beneficiary needs.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
49.
Under Part A of Medicare, how is reimbursement for inpatient hospital
caredetermined?
A) The amount billed to Medicare by the hospital is the amount
Medicarepays.
B) Eighty percent of the hospital's regular charge for care is paid.
C) The hospital's usual, reasonable, and customary charge is paid.
D) Hospital care is classified into diagnosis-related groups (DRGs) and
theamount reimbursed depends on the DRG classification of the
caredelivered.
Answer: D2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 18
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71464 12/14
50.
Which of the following statements about the financial status of Medicare
Part Ais (are) true?
Part A has serious financial problems.
Reforms instituted by Congress have reduced total Part A expenditures
inrecent years.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
51.
All of the following changes would reduce the long-range deficit for
the SocialSecurity program EXCEPT
A) increase the OASDI taxable wage base.
B) delay scheduled increases in the full retirement age.
C) make all OASDI benefits fully taxable.
D) use general revenues of the federal government to help pay
benefits.
Answer: B
52.
As an alternative to the Original Medicare Plan, beneficiaries can elect
to enrollin private health insurance plans that cover all services that the
OriginalMedicare Plan covers except hospice care. These private health
insurance plansthat are an alternative to the Original Medicare Plan are
called
A) Medigap Insurance Programs.
B) PACE Programs.
C) Medicare Advantage Plans.
D) Medicare Prescription Drug Plans.
Answer: C
53.
Under the Medicare Prescription Drug Program, a coverage gap (also
called a"donut hole") exists after the beneficiary and drug plan pay a
certain amount forcovered drugs. The coverage gap refers to
A) the large, up-front deductible that must be satisfied if the patient
has aprescription for a covered brand-name drug.
B) the temporary gap in coverage that begins when the beneficiary
anddrug plan pay a certain amount for covered drugs during the year
and endswhen the catastrophic limit is reached and coverage resumes.
C) the temporary gap in coverage that begins after beneficiaries reach
thelifetime limit on catastrophic drug expenses and ends when a
newdeductible is met and coverage resumes.
D) the temporary gap in coverage that begins when prescription
benefitsterminate for beneficiaries who attain age 68 and resumes
whenbeneficiaries attain age 72.
Answer: B
54.
Which of the following statements regarding the Emergency
UnemploymentCompensation (EUC) program is true?2021. 3. 29. Print Principles of
Risk Management and Insurance - Chapter 18 flashcards | Easy Notecards
https://www.easynotecards.com/print_list/71464 13/14
A) EUC benefits are limited to individuals who have exhausted regular
statebenefits and have annual incomes below the federal poverty level.
B) EUC benefits are funded entirely by the federal government.
C) EUC benefits are limited to employees who have lost their job
becauseof a labor dispute.
D) EUC benefits are available on a case-by-case based and awarded
at thediscretion of the Secretary of Labor.
Answer: B
55.
One type of Medicare Advantage Plans provides focused care for a
specificgroup of people, such as diabetics and nursing home residents.
This type ofMedicare Advantage Plan is a
A) Point of Service (POS) plan.
B) Private Fee-for-Service plan.
C) Health Maintenance Organization (HMO) plan.
D) Special Needs plan.
Answer: D
56.
A serious current concern with the Social Security program is the
depletion ofthe Disability Income Trust Fund. Each of the following
contributed to thedepletion of the fund EXCEPT
A) aging of the workforce and baby boomers
B) changing to a less stringent definition of disability
C) the increased number of women in the workforce
D) growth in the size of the labor force over time
Answer: B
57.
Which of the following statements about Social Security disability
benefits istrue?
A) Benefits replace ninety percent of a disabled person’s work
earnings.
B) A waiting period is not required for Social Security disability
benefits.
C) Social Security disability benefits are limited to a maximum duration
of60 months.
D) A strict definition of disability is used in the Social Security
program.
Answer: D
58.
An important current issue in state workers compensation programs is
theoveruse of a certain category of pain-killing drugs. These drugs have
beenassociated with drug overdoses and drug addiction. This category of
drugs iscalled
A) hypertension drugs.
B) statins.
C) opiates.
D) beta-blockers.
Answer: C
59.
Which of the following statements about the impact of the
implementation of theAffordable Care Act (ACA) on workers
compensation is true?2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter
18 flashcards | Easy Notecards https://www.easynotecards.com/print_list/71464 14/14
A) Implementation of the ACA will increase fraudulent
workerscompensation claims.
B) Implementation of the ACA will create higher healthcare provider
prices.
C) Implementation of the ACA will reduce the waiting time to see
aphysician, to have tests performed, and to begin physical therapy.
D) Implementation of the ACA will discourage annual physical
check-upsand implementation of workplace wellness programs.
Answer: B
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 19 flashcards | Easy Notecards
https://www.easynotecards.com/print_list/71466 1/11
Principles of Risk Management and Insurance - Chapter 19
1.
Which of the following statements about torts is (are) true?
The person who is injured or harmed by a tort is called a plaintiff
orclaimant.
The punishment for committing a tort is damages in the form of
money.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
2.
Which of the following is an intentional tort?
A) slander
B) negligence
C) strict liability
D) murder
Answer: A
3.
A situation in which a person is held legally liable even though fault or
negligencecannot be proven is an example of
A) general damages.
B) comparative negligence.
C) an intentional tort.
D) strict liability.
Answer: D
4.
Failure to exercise the degree of care required by law to protect
others fromharm is called
A) premeditated liability.
B) vicarious liability.
C) punitive damages.
D) negligence.
Answer: D
5.
All of the following are elements of negligence EXCEPT
A) the ability to pay damages.
B) the failure to perform a legal duty to use reasonable care.
C) damage or injury to a claimant.
D) proximate cause between the negligent act and the injury or harm
thatoccurs.
Answer: A
6.
Which of the following statements about the elements of negligence is
(are) true?
The negligence of the tortfeasor may arise from a failure to act.
The damage that results must be in the form of property damage.
A) I only
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 19 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71466 2/11
B) II only
C) both I and II
D) neither I nor II
Answer: A
7.
Damages awarded for losses that can be determined or measured are
A) special damages.
B) general damages.
C) punitive damages.
D) comparative damages.
Answer: A
8.
Which of the following statements about monetary damages awarded by
a courtis (are) true?
The purpose of general damages is to provide benefits for
medicalexpenses or loss of earnings.
The purpose of punitive damages is to punish the tortfeasor so that
othersare deterred from committing the same wrongful act.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
9.
Heather sued Robert for injuries suffered in an automobile accident.
Based onthe facts presented, the jury concluded that Heather was 40
percent at fault inthe accident and Robert was 60 percent at fault. Under
the common law doctrineof contributory negligence, the jury should
award Heather
A) nothing.
B) 40 percent of her actual damages.
C) 60 percent of her actual damages.
D) 100 percent of her actual damages.
Answer: A
10.
Which of the following statements about comparative negligence laws
is (are)true?
Under the pure rule, any negligence by the plaintiff automatically
barsrecovery for damages.
Under the 50 percent rule, parties who are equally at fault are each
allowedto recover damages.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
11.
Nancy was injured when she drove her car through a stop sign and
was struck byPhilip's car. Philip saw Nancy and could have stopped.
However, he failed to do2021. 3. 29. Print Principles of Risk Management and Insurance -
Chapter 19 flashcards | Easy Notecards https://www.easynotecards.com/print_list/71466 3/11
so since he had the right-of-way. Nancy can recover damages from
Philip underwhich of the following legal doctrines?
A) vicarious liability
B) the last clear chance rule
C) contributory negligence
D) the assumption of risk doctrine
Answer: B
12.
A common situation involving strict liability includes which of the
following?
A) operating a motor vehicle
B) blasting operations
C) manufacturing a product
D) mining operations
Answer: B
13.
Which of the following may give rise to imputed negligence?
A) employer-employee relationships
B) injury to a trespasser
C) sole proprietorships
D) attractive nuisance situations
Answer: A
14.
All of the following requirements must be met to satisfy the doctrine
of res ipsaloquitur EXCEPT
A) The injured party has not contributed to the accident in any way.
B) The injured party must prove negligence on the part of the
defendant.
C) The event is one that normally does not occur in the absence
ofnegligence.
D) The defendant has exclusive control over the instrumentality
causingthe accident.
Answer: B
15.
Under certain conditions, the wrongful acts of one person can be
attributed toanother person. This practice is called
A) imputed negligence.
B) mediation.
C) comparative negligence.
D) strict liability.
Answer: A
16.
Which of the following statements about the legal obligations of a
property owneris (are) true?
A property owner must inspect the premises for the benefit of an
inviteeand correct any unsafe conditions.
A property owner has the right to set a trap designed to injure
atrespasser.
A) I only
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 19 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71466 4/11
B) II only
C) both I and II
D) neither I nor II
Answer: A
17.
Under common law, which of the following persons is most likely to be
classifiedas an invitee?
A) a mail carrier
B) a social guest
C) a door-to-door salesperson
D) a solicitor for a charitable organization
Answer: A
18.
Which of the following are legal obligations of a property owner with
respect toan invitee?
The property owner must warn an invitee of any unsafe conditions.
The property owner must inspect the premises and eliminate any
dangerousconditions revealed by the inspection.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
19.
What is the intent of the family purpose doctrine?
A) to impose liability on children for the care of elderly parents
B) to impose liability on the owner of an automobile for the negligence
ofimmediate family members operating the automobile
C) to impose liability on a parent for any negligence caused by a child
D) to impose strict liability on the owner of a wild animal for any
injuriescaused by the animal
Answer: B
20.
Which of the following statements about the immunity of governmental
entities is(are) true?
Governmental entities are more likely to be immune from liability
whenperforming proprietary functions than when performing
governmentalfunctions.
Many courts have eliminated the immunity of government entities.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
21.
The doctrine of respondeat superior applies to a(n)
A) parent's liability for a negligent child.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 19 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71466 5/11
B) pet owner's liability for the pet.
C) employer's liability for a negligent employee.
D) manufacturer's liability for a faulty product.
Answer: C
22.
Situations under which parents can be held liable for the actions of a
childinclude which of the following?
The child uses a parent's gun to injure someone.
The child is acting as an agent of the parent.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
23.
Under one doctrine, a person who understands the danger inherent in
an activitycannot recover damages in the event of injury from the
activity. This doctrine iscalled the
A) contributory negligence doctrine.
B) assumption of risk doctrine.
C) comparative negligence doctrine.
D) fellow servant doctrine.
Answer: B
24.
One tort reform permits manufacturers to assert that as long as the
productconformed to the prevailing technology and production methods at
the time itwas produced, it cannot be considered a defective product
today. This defense iscalled the
A) collateral source rule.
B) state of the art defense.
C) strict liability defense.
D) privity of contract rule.
Answer: B
25.
Traditionally, federal state, and local governments could not be sued.
Thisimmunity had eroded over time. Today, government units may be
liable forinjuries arising out of money-making activities. Such activities
are called
A) municipal operations.
B) proprietary functions.
C) commercial ventures.
D) pecuniary interest.
Answer: B
26.
All of the following are proposed solutions to the medical malpractice
problemEXCEPT
A) shortening the statute of limitations for filing lawsuits.
B) eliminating arbitration panels to resolve disputes.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 19 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71466 6/11
C) placing limitations on contingent fees charged by attorneys.
D) placing limitations on damage awards.
Answer: B
27.
A homeowner was repairing the deck on the back of his home. He left
power toolson the deck when he quit working for the day. A neighbor’s
child saw the powertools. He came on to the deck, and started to play
with a power saw. He cut offtwo of his fingers. A property owner may
be held liable for creating a conditionthat entices children to enter the
property where they are injured under thedoctrine of
A) sovereign immunity.
B) attractive nuisance.
C) family purpose.
D) respondeat superior.
Answer: B
28.
Arguments in favor of reforming the civil justice system include which
of thefollowing?
There is often a long delay in settling lawsuits.
Compensation awards have decreased significantly over the past
twodecades.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
29.
All of the following are examples of tort reform proposals EXCEPT
A) modifying the collateral source rule.
B) eliminating caps on noneconomic damages.
C) regulation of attorney fees.
D) imposing penalties to deter frivolous lawsuits.
Answer: B
30.
A defendant who is only slightly liable may be required to pay the full
amount ofdamages under which of the following?
A) the joint and several liability rule
B) the collateral source rule
C) arbitration
D) res ipsa loquitor
Answer: A
31.
Alternative techniques for resolving legal disputes without litigation
includewhich of the following?
Arbitration
Mediation
A) I only
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 19 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71466 7/11
B) II only
C) both I and II
D) neither I nor II
Answer: C
32.
All of the following are categories of torts EXCEPT
A) intentional torts.
B) breach of contract.
C) strict liability.
D) negligence.
Answer: B
33.
James was injured in an auto accident caused by another motorist's
negligence.To reimburse him for his hospital bills and lost earnings,
items which can bespecifically itemized, James will receive
A) punitive damages.
B) special damages.
C) imputed damages.
D) general damages.
Answer: B
34.
James was injured in an auto accident caused by another motorist's
negligence.He received severe facial lacerations and injured his back in
the accident. Inpayment for his pain, suffering, and disfigurement, losses
which cannot bespecifically itemized, James will receive
A) punitive damages.
B) special damages.
C) imputed damages.
D) general damages.
Answer: D
35.
Michelle had major abdominal surgery. Months after the surgery, she
still didnot feel well. When she was operated on again, the surgeon
discovered twosponges that were not removed at the conclusion of the
first operation. Michelleshould be able to collect damages without having
to prove negligence under thedoctrine of
A) joint and several liability.
B) res ipsa loquitor.
C) contributory negligence.
D) uberrimae fidei.
Answer: B
36.
Francis opened a store. She knows that customers who come to the
store may beinjured on the premises and hold her responsible for their
injuries. Undercommon law, business customers in the store Francis
opened are considered
A) aliens.
B) licensees.
C) trespassers.
2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 19 flashcards | Easy
Notecards https://www.easynotecards.com/print_list/71466 8/11
D) invitees.
Answer: D
37.
Malcolm was involved in an auto accident. He was judged to be 20
percent atfault in the accident, and the other party was judged to be 80
percent at fault.Malcolm's actual damages were $40,000. Under a pure
comparative negligencerule, how much will Malcolm receive for his
injuries?
A) $8,000
B) $24,000
C) $32,000
D) $40,000
Answer: C
38.
Louise was in a hurry and tried to cross the street in the middle of
the blockrather than at a street corner. A car struck her. Even though
Louise placedherself in danger, she may still be able to collect for her
injuries if the driver hadan opportunity to avoid hitting her but failed to
do so. This rule is called the
A) last clear chance rule.
B) collateral sources rule.
C) alternative dispute resolution rule.
D) joint and several liability rule.
Answer: A
39.
Bruce believes a local manufacturer is responsible for contaminating
some landhe owns. He filed suit against the company. Rather than have
the case go tocourt, the manufacturing company's legal team suggested
mediation orarbitration to settle the case. Methods that are employed to
resolve legaldisputes without litigation, such as mediation, are called
A) collateral source rules.
B) alternative dispute resolution techniques.
C) joint and several liability techniques.
D) comparative negligence rules.
Answer: B
40.
Jan was injured in a work-related auto accident. She sued the other
driver, andthe case went to court. While questioning Jan, the defendant's
lawyer asked ifher injuries and lost earnings were covered under
workers compensation. Jan'slawyer objected to the question. The judge
ruled the question was improper andinstructed the jury to disregard the
question. Based on the judge's reaction tothe question, which of the
following rules is in force where this trial took place?
A) the joint and several liability rule
B) the last clear chance rule
C) the comparative negligence rule
D) the collateral source rule
Answer: D
41.
Trisha was injured when the delivery truck for a local furniture store
struck her.The delivery driver claimed the brakes of the delivery truck
failed, causing theaccident. Trisha filed suit, and in her lawsuit named
the delivery driver, the2021. 3. 29. Print Principles of Risk Management and Insurance Chapter 19 flashcards | Easy Notecards https://www.easynotecards.com/print_list/71466 9/11
furniture store, the service station responsible for vehicle maintenance,
and themanufacturer of the vehicle. Even though the manufacturer of the
vehicle may beonly 1 percent responsible for the accident, it may be
required to pay a largepercentage of the damages under the
A) collateral source rule.
B) assumption of risk rule.
C) joint and several liability rule.
D) last clear chance rule.
Answer: C
42.
Compensatory damages include
A) general damages and special damages.
B) special damages and punitive damages.
C) punitive damages and general damages.
D) general damages, special damages, and punitive damages.
Answer: A
43.
A person who enters or remains on the property with the occupant’s
expressedor implied permission is called (a)n
A) trespasser.
B) resident agent.
C) invitee.
D) licensee.
Answer: C
44.
In the context of medical malpractice, what is a "never event"?
A) A medical condition that despite the best screening and
technologycannot be detected.
B) A pandemic that quickly spreads and infects many people.
C) A medical error that should never occur.
D) An event for which doctors and medical facilities cannot be held
legallyresponsible.
Answer: C
45.
Steve was involved in an auto accident. Both drivers were partially at
fault forthe accident. Steve's actual damages were $50,000. He was
judged to be 60percent at fault. If Steve's state has a pure comparative
negligence law, howmuch will Steve collect?
A) $0
B) $20,000
C) $30,000
D) $50,000
Answer: B
46.
Steve was involved in an auto accident. Both drivers were partially at
fault forthe accident. Steve's actual damages were $50,000. He was
judged to be 60percent at fault. If Steve's state has a 51 percent rule
for comparativenegligence, how much will Steve collect?2021. 3. 29. Print
Principles of Risk Management and Insurance - Chapter 19 flashcards | Easy Notecards
https://www.easynotecards.com/print_list/71466 10/11
A) $0
B) $20,000
C) $30,000
D) $50,000
Answer: A
47.
A legal wrong for which the law allows a remedy in the form of
money damages isa
A) crime.
B) breach.
C) misdemeanor.
D) tort.
Answer: D
48.
One requirement for proving that an act was negligent is the existence
of anunbroken chain of events between the act and the injury or harm
that occurred.This unbroken chain of events is called
A) condition precedent.
B) cause and effect.
C) proximate cause.
D) condition subsequent.
Answer: C
49.
Under a dram shop law, a business may be held liable for damages
resulting from
A) the sale of alcohol.
B) the creation of an unsafe work place.
C) the sale of prescription drugs.
D) the creation of a hostile work environment.
Answer: A
50.
One tort reform proposal is capping noneconomic damages.
Noneconomicdamages include
A) payment for time missed from work.
B) payment for the cost of a hospital stay.
C) payment for pain and suffering.
D) payment for the cost of care provided by a physical therapist.
Answer: C
51.
Under state workers compensation programs, employers may not use
commonlaw defenses to defend against claims of workers who are
injured on the job. Insuch cases, proof of a worker's injury is proof of
responsibility of the employer.Because of this characteristic, workers
compensation is an example of
A) personal injury.
B) strict (absolute) liability.
C) comparative negligence.
D) tort liability.
Answer: B2021. 3. 29. Print Principles of Risk Management and Insurance - Chapter 19
flashcards | Easy Notecards https://www.easynotecards.com/print_list/71466 11/11
52.
Steve was involved in an auto accident. Both drivers were partially at
fault forthe accident. Steve's actual damages were $50,000. He was
judged to be 20percent at fault. If Steve's state has a contributory
negligence law, how much willSteve collect?
A) $0
B) $10,000
C) $25,000
D) $40,000
Answer: A
53.
Someone who is asked to come on to the property to benefit the
property owner,such as customers at a store or a garbage collector, is
classified as a(n)
A) trespasser.
B) resident agent.
C) invitee.
D) licensee.
Answer: C
54.
Liability may arise because of a method of collecting oil or natural
gas. Underthis collection method, a high-pressure flow of fluid is
injected underground.This collection method is called
A) clear cutting.
B) flow mining.
C) hydraulic fracturing.
D) slurry mining.
Answer: C
55.
Unmanned aircraft systems are gaining in popularity. These systems
are creatingnew liability exposures. Unmanned aircraft systems are also
known as
A) rockets.
B) hovercraft.
C) ultralights.
D) drones.
Answer: D
56.
Individuals renting out rooms in their home for overnight stays,
individualsjointly owing a car with other owners, and individuals who
give rides to peoplewho call or text them are creating “new” liability
exposures for insurers. Thesocial change that creates these new liability
exposures is called
A) the millennial generation.
B) the baby boom factor
C) the greying of America.
D) the sharing economy.
Answer: D
ch20
1
Which of the following statements about the liability limits of the PAP is
(are) true?
The policy can be written with split limits of liability.
Prejudgment interest is considered part of the damage award and is
subject to the policy limit of liability.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
2
Which of the following statements about the payment of defense costs
by the PAP is (are) true?
They are paid in addition to the policy limits.
They are payable even after the limit of liability is exhausted.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
3
All of the following are covered autos under the liability section of the
PAP EXCEPT
A) a nonowned van which is driven by the insured on a regular basis.
B) a trailer owned by the named insured.
C) a borrowed auto used by the insured as a substitute for a stolen
covered auto.
D) a newly acquired auto which replaces a vehicle previously described
in the policy.
Answer: A
4
All of the following are insured persons under the liability coverage of
the PAP EXCEPT
A) a friend to whom the named insured loans a covered auto.
B) the employer of the named insured for actions resulting from the
named insured's use of a covered auto.
C) the former spouse of the named insured who moved out of the home
2 years ago when the divorce was finalized.
D) a relative of the named insured if a member of the same household.
Answer: C
5
Which of the following persons is (are) covered for liability insurance
under the PAP?
a family member who drives a covered auto
a family member who occasionally drives a friend's auto
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
6
All of the following are covered as supplementary payments under the
liability section of the PAP EXCEPT
A) the cost of an appeal bond in a lawsuit stemming from an auto
accident.
B) the cost of a bail bond for a traffic violation when no accident is
involved.
C) interest which accrues on a liability judgment covered by the policy.
D) reasonable expenses incurred by the insured to testify at a trial
involving a lawsuit covered by the policy.
Answer: B
7
Which of the following situations would be covered by the liability
section of an unendorsed PAP if the insured is legally liable?
A) The insured injures a pedestrian while operating a friend's new
motorcycle.
B) The insured backs into and damages the garage door of his rented
house.
C) The insured intentionally runs into another motorist’s car after the
driver cut in front of him.
D) The insured damages a parked car while driving a dump truck for his
employer.
Answer: B
8
What is the purpose of the extended nonowned liability coverage
endorsement to the PAP?
A) to provide liability coverage for an insured's employer when an
insured uses his or her auto for business purposes
B) to provide liability coverage for an insured who occasionally operates
a nonowned auto
C) to provide liability coverage for anyone who loans a covered auto to
another driver
D) to provide liability coverage for an insured who operates a nonowned
auto on a regular basis
Answer: D
9
Which of the following situations would be covered under the liability
section of the PAP?
A mechanic is sued by a pedestrian who is injured when the mechanic
has an accident while road testing the insured's auto.
The daughter of the named insured is sued after she has an accident
when a new friend she just met at a campus hangout lets her drive his
car.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
10
Larry has $25,000 of bodily injury liability coverage under his PAP. This
limit is the minimum amount required by his state to be considered
financially responsible. While on a vacation, Larry visited a neighboring
state which has a minimum financial responsibility limit of $50,000 for
bodily injury. Which of the following statements describes the situation
for Larry while he was in the neighboring state?
A) Larry's policy was suspended while he was in the neighboring state.
B) Larry had only $25,000 of liability coverage.
C) Larry's policy automatically provided $50,000 of liability coverage.
D) Larry's policy automatically provided $100,000 of liability coverage.
Answer: C
11
John occasionally borrows the car of his friend, Sophie. Sophie has a
PAP with liability limits of 100/300/50. John also has a PAP, and his
liability limits 250/500/50. John had an accident while using Sophie's car
and was found to be legally liable for $300,000 in bodily injury liability
for injuries suffered by one person. How much will be paid by each
policy?
A) Sophie's policy will pay $150,000, John's policy will pay $150,000.
B) Sophie's policy will pay $50,000, John's policy will pay $250,000.
C) Sophie's policy will pay $100,000, John's policy will pay $200,000.
D) John's policy will pay the entire amount.
Answer: C
12
Which of the following statements about the medical payments coverage
of the PAP is true?
A) The amount of the benefit typically is $100,000.
B) Covered expenses must be incurred within 30 days of the accident.
C) Covered expenses include the cost of funeral services.
D) The benefit limit applies on a per-accident basis rather than on a
per-person basis.
Answer: C
13
Which of the following is a covered person under the medical payments
coverage of the PAP?
A) a family member of the named insured if struck by an auto while
crossing the street
B) a pedestrian struck by the named insured's auto
C) the named insured while she is operating her car as a taxi
D) a carjacker who is involved in an accident after stealing the insured's
car
Answer: A
14
Tony has an unendorsed Personal Auto Policy which provides medical
payments coverage. Under which of the following circumstances would
the injured person be eligible for benefits under Tony's policy?
A friend in the car is injured while Tony is driving a covered auto.
A passenger on a motorcycle driven by Tony is injured when Tony hit
another vehicle.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
15
In which of the following situations would medical payments be paid
under an unendorsed PAP?
A) injuries incurred while riding a motorcycle
B) injuries incurred while an auto is being used without the presumption
that permission would have been granted to use the auto
C) injuries incurred in an auto while it is used in a share-the-expense
car pool
D) injuries incurred during the course of employment if workers
compensation benefits are available
Answer: C
16
Which of the following statements about the uninsured motorists
coverage of the PAP is true?
A) The coverage usually applies only to property damage.
B) The coverage applies only if the uninsured motorist is legally liable.
C) Unless higher amounts are purchased, the maximum benefit is
normally limited to $1,000.
D) A covered person's only recourse is to sue the insurer if there is a
disagreement over the amount of damages.
Answer: B
17
Which of the following persons is (are) insured under the uninsured
motorists coverage of the PAP?
A pedestrian struck by a covered auto if he or she has no insurance to
pay medical expenses
The spouse of a named insured who is killed by an uninsured motorist
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
18
All of the following are considered to be uninsured vehicles for purposes
of the uninsured motorists coverage of the PAP EXCEPT
A) a vehicle owned by an individual who is insured, but for less than the
amount required by the state's financial responsibility law.
B) a hit-and-run vehicle, the ownership of which cannot be determined.
C) a vehicle owned by an individual who purchased just enough liability
insurance to satisfy the state's financial responsibility law.
D) a vehicle insured by a company which becomes insolvent before a
claim can be paid.
Answer: C
19
Joyce was injured by an uninsured drunk driver while she was riding in
a friend's car. Joyce and her friend each have a PAP with an uninsured
motorists limit of $50,000. How much will be paid by each policy if it is
determined that Joyce has $70,000 of bodily injuries?
A) Each policy will pay $35,000.
B) Joyce's policy will pay $50,000, and the friend's policy will pay
nothing.
C) Joyce's policy will pay $50,000, and the friend's policy will pay
$20,000.
D) The friend's policy will pay $50,000, and Joyce's policy will pay
$20,000.
Answer: D
20
All of the following statements about Part D (coverage for damage to
your auto) of the PAP are true EXCEPT
A) Coverage may be purchased with or without collision insurance.
B) Losses are paid regardless of fault.
C) Coverage applies to a nonowned auto occasionally driven by an
insured.
D) No coverage is provided for newly-acquired vehicles.
Answer: D
21
Which of the following is considered to be a collision loss under Part D
(coverage for damage to your auto) of the PAP?
A) The covered auto was damaged when the car hit a deer.
B) The covered auto is vandalized by a thief after it is stolen.
C) The covered auto is damaged when it slid off an icy road and hit a
fence.
D) The covered auto is damaged by a fire after the engine overheated.
Answer: C
22
John has an auto which is covered for collision losses subject to a $250
deductible. Kate's auto also has collision coverage but her deductible is
$500. Which of the following statements describes how a $2,000 collision
loss will be paid if it occurs when John borrows Kate's car because his
car is in the shop for repairs?
A) John's policy will pay $1,500, and Kate's policy will pay nothing.
B) John's policy will pay $1,750, and Kate's policy will pay nothing.
C) Kate's policy will pay $1,750, and John's policy will pay nothing.
D) Kate's policy will pay $1,500, and John's policy will pay $250.
Answer: D
23
All of the following losses are excluded under Part D (coverage for
damage to your auto) of an unendorsed PAP EXCEPT
A) vandals damaged a portable cell phone kept in the car.
B) theft of a compact disc player which was permanently installed in the
auto.
C) damage caused to a car's engine because the named insured never
changed the oil.
D) destruction of a radar detector which overheated and caught on fire.
Answer: B
24
The insurance company's options for settling a collision loss to a
covered auto under the PAP include which of the following?
Pay the loss in money.
Repair or replace the damaged auto.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
25
Duties of an insured after a collision loss covered under the PAP include
which of the following?
Take reasonable steps to protect the vehicle from further damage.
Admit fault if the insured believes he or she caused the collision.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
26
In addition to providing coverage in the United States, its territories and
possessions, and Puerto Rico, where else does the PAP provide
coverage?
A) in Mexico
B) in Canada
C) in both Mexico and Canada
D) anywhere in the world
Answer: B
27
All of the following statements about the termination provisions of the
PAP are true EXCEPT
A) The insured can cancel the policy for any reason.
B) The insurer can cancel a newly-written policy if it has been in force
for fewer than 60 days.
C) The insurer can cancel the policy after it has been in force for 60
days only if the insured has three or more traffic violations.
D) The insurer can refuse to renew the policy at its annual anniversary
date as long as proper notice is given prior to the end of the policy
period.
Answer: C
28
The purpose of the Miscellaneous-Type Vehicle Endorsement to the PAP
is to
A) add coverage for newly-acquired autos.
B) provide coverage for when the insured is using someone else's auto
with the permission of the owner.
C) insure motorcycles, mopeds, motor scooters, and similar vehicles.
D) provide coverage for when the insured is using someone else's auto
without the permission of the owner.
Answer: C
29
Which of the following statements about the Miscellaneous-Type Vehicle
Endorsement to the PAP is (are) true?
It provides bodily injury liability coverage for any vehicle rented by the
insured.
It can be added to PAP to insurance motorcycles and motor scooters.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
30
Ken purchased a PAP with liability limits of 100/300/50, medical
payments coverage, and collision coverage. Ken fell asleep while driving
late at night. He crossed the center line and hit a car approaching from
the other direction. The following losses occurred:
—The driver of the other car suffered $30,000 in bodily injuries.
—Ken's car sustained $5,000 in damages.
—Ken incurred $5,000 in medical expenses.
—The car that Ken hit was a total loss.
Which of Ken's Personal Auto Policy (PAP) coverages will cover the
other driver's medical expenses?
A) bodily injury liability
B) collision coverage
C) medical payments coverage
D) property damage liability
Answer: A
31
Ken purchased a PAP with liability limits of 100/300/50, medical
payments coverage, and collision coverage. Ken fell asleep while driving
late at night. He crossed the center line and hit a car approaching from
the other direction. The following losses occurred.
—The driver of the other car suffered $30,000 in bodily injuries.
—Ken's car sustained $5,000 in damages.
—Ken incurred $5,000 in medical expenses.
—The car that Ken hit was a total loss.
Which of Ken's Personal Auto Policy (PAP) coverages will cover the
damage to Ken's car?
A) bodily injury liability
B) collision coverage
C) medical payments coverage
D) property damage liability
Answer: B
32
Ken purchased a PAP with liability limits of 100/300/50, medical
payments coverage, and collision coverage. Ken fell asleep while driving
late at night. He crossed the center line and hit a car approaching from
the other direction. The following losses occurred.
—The driver of the other car suffered $30,000 in bodily injuries.
—Ken's car sustained $5,000 in damages.
—Ken incurred $5,000 in medical expenses.
—The car that Ken hit was a total loss.
Which of Ken's Personal Auto Policy (PAP) coverages will cover Ken's
medical expenses?
A) bodily injury liability
B) collision coverage
C) medical payments coverage
D) property damage liability
Answer: C
33
Ken purchased a PAP with liability limits of 100/300/50, medical
payments coverage, and collision coverage. Ken fell asleep while driving
late at night. He crossed the center line and hit a car approaching from
the other direction. The following losses occurred.
—The driver of the other car suffered $30,000 in bodily injuries.
—Ken's car sustained $5,000 in damages.
—Ken incurred $5,000 in medical expenses.
—The car that Ken hit was a total loss.
Which of Ken's Personal Auto Policy (PAP) coverages will cover the
damage to the car that Ken hit?
A) bodily injury liability
B) collision coverage
C) medical payments coverage
D) property damage liability
Answer: D
34
Sarah purchased a Personal Auto Policy with liability limits of 50/100/25.
Sarah ran a stop sign and hit a van. The van sustained $15,000 in
damages. The following bodily injuries were suffered by passengers in
the van: Passenger #1, $15,000; Passenger #2, $60,000; and Passenger
#3, $10,000. Sarah sustained $5,000 in medical expenses, and Sarah's
car sustained $10,000 in damages. How much will Sarah's insurer pay
under Part A: Liability Coverage?
A) $90,000
B) $100,000
C) $115,000
D) $125,000
Answer: A
35
Patricia purchased a Personal Auto Policy (PAP). Her car was
rear-ended by a driver who fled the scene. Patricia suffered whiplash,
migraine headaches, and she was unable to work. Which of the following
coverages will cover her lost work earnings?
A) medical payments
B) uninsured motorists
C) underinsured motorists
D) bodily injury liability
Answer: B
36
Rob purchased a Personal Auto Policy (PAP) with collision and
other-than-collision coverage. Which of the following losses would be
covered under his policy?
A) Rob wrecked his car while using it as a taxi cab.
B) Thieves took Rob's radar detector from his car.
C) A flash flood washed Rob's car off the road and damaged it.
D) The new tires Rob had on the car were defective and wore out after
2 months.
Answer: C
37
Angie was injured when her car was struck by a driver who ran a red
light. The other driver carried the minimum liability coverage necessary
to be considered financially responsible. Angie's injuries were $15,000
above the minimum bodily injury limit. There is a coverage that can be
added to the PAP that applies when a negligent driver carries the
minimum liability insurance required by the state, but is less than the
insured's actual damages for bodily injury. This coverage is called
A) medical payments coverage.
B) underinsured motorists coverage.
C) bodily injury liability coverage.
D) uninsured motorists coverage.
Answer: B
38
Dennis was involved in an accident. He believes the damage to his auto
is $7,000. His insurer believes the damage is only $3,500. Which PAP
provision is designed to handle disputes between the insurer and the
insured over the amount of the loss?
A) other insurance provision
B) agreed amount endorsement
C) coinsurance provision
D) appraisal provision
Answer: D
39
Which of the following statements concerning the collision damage
waiver when renting an auto is true?
It relieves the renter from legal liability to third parties arising out of
operation of the rented car.
It relieves the renter from legal liability for the vehicle if it is damaged
or stolen.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
40
Which of the following statements is (are) true with respect to the
collision damage waiver on rented cars?
It is inexpensive and is provided at no charge by most rental car
companies.
It waives the renter's liability for bodily injury liability arising out of use
of the rented auto.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
41
The purpose of gap insurance is to
A) pay the difference between the bodily injury liability limit purchased
and the actual amount of bodily injury liability if it exceeds the limit.
B) pay the difference between the amount the insurer pays if a car is a
total loss and the remaining amount owed on a lease or car loan.
C) pay the difference between the medical payments coverage limit and
the actual medical expenses of injured family members or passengers in
the insured auto.
D) pay the difference between the uninsured motorists coverage limit
and the actual amount of the medical expenses incurred by the insured.
Answer: B
42
A car damaged in an auto accident may have reduced market or resale
value after it is repaired. Some insureds have sought to recover this
reduction in market or resale value. This loss in value is called
A) gap coverage.
B) betterment.
C) diminution.
D) subrogation.
Answer: C
43
If the value of a vehicle is increased after repairs, such as repainting an
entire auto when only one fender or door is damaged, the insurer will
not pay for the increase in value. Another name for the increase in
value is
A) diminution.
B) betterment.
C) appraisal.
D) subrogation.
Answer: B
44
The 2005 PAP states that the insurer has no duty to provide coverage if
the insured fails to comply with certain listed duties. In practice,
however, the insurer is only relieved of its duty to provide coverage if
A) the insured was unaware of the listed duties.
B) failure to comply with the duties is prejudicial to the insurer.
C) the claim involves bodily injuries of more than $50,000.
D) the claim occurred in another state.
Answer: B
45
Which statement concerning towing and labor coverage under the PAP is
(are) true?
There's no coverage for towing if the auto breaks down—towing is only
covered if the auto needs to be towed after a collision has occurred.
Towing and labor coverage pays for repairs at a service station or
garage.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
46
A vehicle is considered a constructive total loss when
A) it cannot be repaired.
B) the repair cost exceeds the actual cash value.
C) it can be repaired, but the insured prefers a cash settlement.
D) it can be repaired, but the insurer prefers a cash settlement.
Answer: B
47
Owen’s car is insured under a Personal Auto Policy (PAP). A hail storm
occurred one evening, and his car was severely damaged. Which PAP
coverage, if Owen purchased it, would cover this damage to his auto?
A) property damage liability
B) uninsured motorists property damage
C) collision
D) other-than-collision
Answer: D
48
Kelly was hit by a car while she was walking to the park. She incurred
$750 in medical costs at a hospital emergency room. Kelly has coverage
for this charge under which of her Personal Auto Policy (PAP)
coverages?
A) bodily injury liability
B) other-than collision
C) medical payments
D) collision
Answer: C
49
Which of the following statements is true about uninsured motorists
coverage under the Personal Auto Policy?
A) The benefits are paid without regard to fault.
B) The insured collects from his or her own insurer, and the insurer can
recoup the loss payment from the other driver.
C) Uninsured motorists benefits are limited to the medical expenses of
the insured.
D) Subrogation is never used when uninsured motorists benefits are paid.
Answer: B
50
The appraisal provision in the Personal Auto Policy is used to determine
the
A) value of a loss payable under property damage liability.
B) amount paid for a physical damage loss to the insured's auto if the
insured and insurer disagree.
C) amount of auto insurance that should be purchased for an
older/antique car.
D) value of the loss payable under the medical payments coverage.
Answer: B
51
Dan picked up his friend Rodney to drive to their softball game. Both
Dan and Rodney have a Personal Auto Policy (PAP) with $5,000 of
medical payments coverage. Dan hit a parked car, and Rodney was
injured, incurring $9,000 of medical expenses. How will this claim be
settled under the other insurance provision of the PAP?
A) Both insurers will pay $4,500.
B) Dan's insurer will pay $5,000 and Rodney's insurer will pay $4,000.
C) Dan's insurer will pay $4,000 and Rodney's insurer will pay $5,000.
D) Dan's insurer will pay $3,000, Rodney's insurer will pay $3,000, and
Rodney must pay $3,000 out of his own pocket.
Answer: B
52
After the Personal Auto Policy has been in force for 60 days (or is a
renewal policy), all of the following are grounds for the insurer to cancel
the policy EXCEPT
A) nonpayment of premiums
B) the insured’s license to drive is suspended
C) the insurer discovers material misrepresentation by the insured in the
application process
D) the insured received a traffic ticket
Answer: D
53
Jenny purchased a Personal Auto Policy (PAP) that included property
damage liability, collision coverage, medical payments coverage, and
other-than-collision coverage. Jenny had too much alcohol to drink at a
graduation party. While driving home from the party, Jenny ran off the
road and hit a tree. Police responded to the accident, and Jenny was
arrested for driving under the influence of alcohol. Which of the
following statements is true regarding the damage to Jenny’s car?
A) Damage to the car is covered under Jenny’s property damage liability
coverage.
B) Damage to the car is covered under Jenny’s collision coverage.
C) Damage to the car is covered under Jenny’s other-than-collision loss
coverage.
D) There is no coverage as Jenny was intoxicated at the time of the
accident.
Answer: B
54
Gary purchased a Personal Auto Policy (PAP) that included collision
coverage. Gary lost control of his vehicle on an icy road. He slid across
the center line into oncoming traffic. Another vehicle hit his car, causing
severe damage to it. Ignoring any deductible, what is the insurer’s
liability for damage to Gary’s car?
A) the greater of the actual cash value or the amount necessary to
repair or replace the vehicle
B) the replacement cost of the vehicle
C) the lesser of the actual cash value or the amount necessary to repair
or replace the vehicle
D) the original purchase price of the vehicle
Answer: C
55
All of the following are considered to be a covered auto under the
Personal Auto Policy EXCEPT
A) a trailer owned by the insured.
B) a temporary substitute auto loaned to the insured while her care is
being repaired.
C) a motorcycle owned by the insured.
D) a newly acquired auto.
Answer: C
ch21
1
Under financial responsibility laws, proof of financial responsibility is
generally required under which of the following circumstances?
A) The use of an auto by any driver with fewer than 3 years of driving
experience
B) When an individual renews his or her driver's license
C) Failure to pay a final judgment resulting from an auto accident
D) The accumulation of unpaid parking tickets exceeding a specified
value
Answer: C
2
Defects of financial responsibility laws include which of the following?
Accident victims may not be fully compensated for their injuries.
They apply only to property damage losses, not to bodily injury claims.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
3
Criticisms of compulsory insurance laws include which of the following?
They provide less than complete protection since they require only a
minimum amount of liability insurance.
Even with compulsory insurance laws, a substantial number of motorists
continue to operate vehicles without insurance.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
4
Which of the following statements about unsatisfied judgment funds is
(are) true?
An accident victim must obtain a judgment against the motorist who
caused an accident and must show the judgment cannot be collected.
The major disadvantage is that the negligent uninsured motorist is
relieved of legal liability.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
5
Which of the following statements about uninsured motorists coverage is
true?
A) An innocent motorist must establish that the uninsured motorist is
legally liable.
B) The amount of coverage in most states must be at least $300,000.
C) Property damage is covered in all states but bodily injury is not
covered in all states.
D) The coverage is very expensive and beyond the affordability of all
but wealthy insureds.
Answer: A
6
Which of the following statements is true with respect to a pure no-fault
auto insurance plan?
A) Under such a plan, you would collect from your own insurer and
retain the right to sue the other party if your injuries surpass a dollar or
verbal threshold.
B) Most no-fault plans that have been adopted by states are pure
no-fault plans.
C) Under such a plan, you would collect from your own insurer and
retain the right to sue the other party without having to satisfy a
threshold.
D) Under such a plan, an accident victim cannot sue the other party, and
no payments are made for pain and suffering.
Answer: D
7
Which of the following statements about modified no-fault laws is (are)
true?
Claims less than a certain dollar threshold must be assumed by the
injured accident victim, but the injured person has the right to sue a
negligent driver.
Claims above a certain dollar threshold are paid in full by an injured
accident victim's insurer, and the right to sue a negligent driver is
eliminated.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
8
A no-fault law under which benefits are paid to an accident victim
without regard to fault and the accident victim can still sue the negligent
driver who caused the accident is referred to as a(n)
A) pure no-fault law.
B) add-on no-fault law.
C) modified no-fault law.
D) choice no-fault law.
Answer: B
9
All of the following are arguments for no-fault automobile insurance laws
EXCEPT
A) No-fault is unnecessary as it's easy to determine which driver was
negligent when a multiple-vehicle accident occurs.
B) A large portion of each premium dollar is used for purposes other
than compensating accident victims for their losses.
C) There are delays in compensating accident victims under the tort
system.
D) Seriously injured accident victims tend to be overcompensated, while
those with small economic losses are inadequately indemnified.
Answer: D
10
Arguments often used against no-fault automobile insurance laws include
all of the following EXCEPT
A) It is often difficult to determine which driver was negligent when a
multiple-vehicle accident occurs.
B) Many injured persons will not be compensated for their full losses
because payments for pain and suffering will be eliminated.
C) The defects of the negligence system are exaggerated, and the
system needs only to be reformed.
D) Claims of efficiency and premium saving are exaggerated, and
automobile insurance premiums might actually increase.
Answer: A
11
Which of the following statements about the characteristics of current
no-fault laws is true?
A) Most laws in force today are pure no-fault laws.
B) Most laws apply to both bodily injury and property damage.
C) Most laws permit payment of survivor benefits to a surviving spouse
and children.
D) States with add-on plans restrict the right of accident victims to sue
negligent drivers.
Answer: C
12
The term used to describe plans in which automobile insurers participate
to make insurance available to drivers unable to obtain coverage in the
standard market is the
A) foreign market.
B) fair market.
C) residual (shared) market.
D) high-premium market.
Answer: C
13
Under which type of automobile insurance arrangement are all automobile
insurers in a state assigned their proportionate share of high-risk drivers
based on the total volume of automobile business written in the state?
A) automobile insurance plan
B) unsatisfied judgment fund
C) reinsurance facility
D) specialty automobile plan
Answer: A
14
Disadvantages of automobile insurance plans include which of the
following?
High premiums may cause many high-risk drivers to go uninsured.
Large underwriting profits have resulted in high-risk drivers subsidizing
the cost of insurance for good drivers in the voluntary markets.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
15
Which of the following statements about joint underwriting associations
for insuring high-risk drivers is (are) true?
Underwriting losses are proportionately shared by all auto insurers based
on premiums written in the state.
Each company participating in a joint underwriting association sets it own
rates.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
16
Which of the following statements about reinsurance facilities for insuring
high-risk drivers is (are) true?
Underwriting losses in the reinsurance facility are shared by all auto
insurers in the state.
An insurer must accept all applicants for insurance, but the insurer has
the option of placing high-risk drivers in the reinsurance pool.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
17
Which of the following statements about automobile insurers that
specialize in insuring high-risk motorists with poor driving records is
(are) true?
The actual premium paid by an applicant is set by the federal
government and is independent of an applicant's driving record.
The coverages available may be more limited than those written by
insurers in the standard market.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
18
Which of the following statements about the factors affecting automobile
insurance rates is true?
A) The cost of collision coverage increases as a car gets older.
B) Because of high speeds in rural areas, rural drivers tend to pay more
for auto insurance than city drivers pay for auto insurance.
C) Young unmarried male drivers tend to have fewer accidents than
young married male drivers in the same age category.
D) People who drive a car to and from work tend to be charged higher
rates than those who use a car for pleasure purposes.
Answer: D
19
All of the following are major rating factors for determining private
passenger automobile insurance premiums EXCEPT
A) gender.
B) age.
C) race.
D) marital status.
Answer: C
20
Which of the following statements about shopping for auto insurance is
true?
A) Adequate physical damage insurance on your auto is the most
important consideration.
B) Consideration should be given to dropping liability coverage if you
drive an older car with a low market value.
C) To obtain the lowest premium, an applicant should review his or her
eligibility for all discounts offered.
D) Price comparisons are of little value since auto insurers tend to
charge the same premiums.
Answer: C
21
A state law that requires individuals who have been involved in an auto
accident or who have been convicted for certain vehicle-related offenses
to demonstrate the ability to pay liability claims up to a specified dollar
amount is called a(n)
A) financial responsibility law.
B) compulsory insurance law.
C) unsatisfied judgment fund law.
D) "no pay, no play" law.
Answer: A
22
Bill was severely injured by an uninsured driver. Bill did not purchase
uninsured motorists coverage, and the other driver, although held liable,
could not pay the damages awarded. After exhausting other sources of
recovery, Bill learned that his state is one of a few states that has a
special fund to compensate innocent accident victims. These state funds
are called
A) guaranty funds.
B) unsatisfied judgment funds.
C) rainy-day funds.
D) second injury funds.
Answer: B
23
Sharon lives in a state that has a no-fault automobile insurance law.
Under the law, an injured person has the right to sue the negligent
driver only if the bodily injury claim exceeds a dollar or verbal
threshold. The no-fault law in Sharon's state is a(n)
A) pure no-fault plan.
B) modified no-fault plan.
C) add-on plan.
D) choice no-fault plan.
Answer: B
24
A few states have dual automobile insurance systems. A motorist can
pay a higher premium and retain the right to sue under the tort system,
or pay a lower premium and be covered under the state's no-fault law.
This dual system is called a
A) pure no-fault plan.
B) modified no-fault plan.
C) "no pay, no play" law.
D) choice no-fault plan.
Answer: D
25
A number of benefits are payable under no-fault plans. Under one
provision, benefits are paid for tasks normally performed by the insured,
including such things as lawn care, housework, and home repairs. These
tasks are called
A) home health care services.
B) hospice services.
C) activities of daily living.
D) essential services expenses.
Answer: D
26
Alan has been involved in three accidents and has been ticketed for a
number of driving violations. He tried to purchase auto insurance, but
three insurers refused to sell him coverage. The generic name for state
plans designed to insure drivers like Alan is the
A) exchange market.
B) residual market.
C) voluntary market.
D) excess market.
Answer: B
27
Janet was unable to obtain auto insurance in the voluntary insurance
market. She was contacted by the state insurance department and
notified that XYZ Insurance would be her insurer. The mechanism used
in Janet's state to provide auto insurance to high-risk drivers is a(n)
A) automobile insurance plan.
B) joint underwriting association.
C) specialty automobile insurer.
D) reinsurance facility.
Answer: A
28
In the state where Susan lives, drivers whom private insurance
companies do not want to insure are placed in a common pool, and each
insurer pays its pro rata share of pool losses and expenses. A common
policy is used for all high-risk drivers. Susan's state handles high-risk
drivers through a(n)
A) automobile insurance plan.
B) joint underwriting association.
C) pure no-fault plan.
D) specialty auto insurer.
Answer: B
29
Scott had trouble obtaining auto insurance. After three companies refused
to insure him, he called the state insurance department. A representative
suggested he obtain coverage through Last Chance Insurance Company
because "that's all they insure—high-risk drivers." Scott contacted Last
Chance. He was not refused coverage; however, the premium Scott was
required to pay was three times greater than the average premium in
the market. Last Chance Insurance Company is a(n)
A) reinsurance facility.
B) automobile insurance plan.
C) specialty auto insurer.
D) joint underwriting association.
Answer: C
30
Amber believes that her auto insurance premium is too high. Which of
the following would most likely lower Amber's premium?
A) Amber could increase her physical damage deductible.
B) Amber could move from the rural area where she lives to an urban
or suburban area.
C) Amber could increase the amount of liability insurance that she
carries.
D) Amber could add "other-than-collision loss" coverage to her policy.
Answer: A
31
Which of the following statements is (are) true with respect to the use
of credit-based insurance scores as an auto insurance rating factor?
Insurers claim that drivers who have poor insurance scores are expected
to have relatively more accidents.
The use of insurance scores has been banned as a rating factor in all
states as it unfairly discriminates against certain groups of individuals.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
32
Some states have enacted laws which prohibit uninsured drivers from
suing a negligent driver for noneconomic damages, such as pain and
suffering. These laws are called
A) comparative negligence laws.
B) "no pay, no play" laws.
C) financial responsibility laws.
D) unsatisfied judgment laws.
Answer: B
33
A credit-based score that insurers claim is highly predictive of future
claims costs is an individual's
A) combined ratio.
B) loss ratio.
C) insurance score.
D) underwriting score.
Answer: C
34
A few states have enacted laws to make minimum amounts of liability
insurance available at reduced rates to individuals who cannot afford
regular insurance or who have limited financial assets to protect. The
coverage made available through such a plan is called
A) probationary insurance.
B) uninsured motorists insurance.
C) no-fault auto insurance.
D) low-cost auto insurance.
Answer: D
35
New Jersey's dollar-a-day auto insurance coverage is limited to
A) elderly individuals.
B) Medicaid recipients.
C) drivers under age 25.
D) high-risk drivers.
Answer: B
36
In Maryland, drivers who are unable to obtain auto insurance in the
voluntary market are insured through a(n)
A) state fund.
B) reinsurance facility.
C) joint underwriting association
D) automobile insurance plan.
Answer: A
37
The multi-car discount is based on the assumption that
A) two cars owned by the same person will not be driven as frequently
as one car.
B) multiple vehicle owners are safer drivers.
C) owners of more than one vehicle are more likely to be financially
responsible.
D) lower liability limits are needed if there are multiple autos insured.
Answer: A
38
The residual market for auto insurance is designed to provide insurance
to
A) superior risks who qualify for substantial discounts.
B) owners of vintage/antique autos where the replacement cost far
exceeds the actual cash value.
C) drivers who are unable to obtain coverage in the standard market.
D) businesses that need to insure a fleet of vehicles under a single
policy.
Answer: C
39
No-fault benefits are provided by adding an endorsement to the auto
insurance policy. What is this endorsement typically called?
A) uninsured motorists coverage
B) personal injury protection coverage
C) nonowned vehicle liability coverage
D) add-on benefits coverage
Answer: B
40
"No pay, no play" laws have which of the following characteristics?
A) Uninsured motorists are prevented from suing for noneconomic
damages.
B) Recovery by accident victims is limited to the amount of liability
coverage that they have purchased.
C) Driving privileges are automatically terminated if the vehicle operator
is stopped by the police and does not have liability insurance.
D) They require auto insurance purchasers to subsidize state unsatisfied
judgment funds.
Answer: A
41
Which of the following statements is true regarding unsatisfied judgment
funds?
A) An accident victim can choose to collect from the negligent driver or
from the fund.
B) The negligent driver is relieved of legal responsibility when the fund
makes a payment to the accident victim.
C) The maximum amount an individual can collect from the fund is
usually much more than the minimum liability limits required by the
state.
D) An accident victim must have exhausted other means of recovery
before collecting from the fund.
Answer: D
42
One benefit payable under a typical no-fault plan is "essential services
expenses." Which of the following would be covered under this benefit?
A) funeral expenses
B) housekeeping expenses
C) hospital bills
D) loss of income
Answer: B
43
Some insurers are experimenting with the use of an electronic device
that can be installed in a vehicle to track driving behavior. The insurers
then use the information to help determine the appropriate auto
insurance premium to charge. Such devices are called
A) data recorders.
B) radar detectors.
C) original equipment manufacturer parts.
D) thresholds
Answer: A
44
Some insurance companies intentionally seek to insure motorists with
poor driving records. These insurers commonly insure drivers who have
been turned-down or canceled by other insurers. What name is given to
insurers who provide coverage to these higher-than-average risks
drivers?
A) alien insurers
B) guaranty fund insurers
C) specialty insurers
D) surplus lines insurers
Answer: C
45
Ben lives in a state that has a no-fault auto insurance law. Another
motorist failed to yield the right of way, and hit his car. Ben filed a
claim with his own insurer. He also contacted a lawyer to discuss suing
the other driver. The lawyer told Ben that while lawsuits resulting from
auto accidents are permitted in the state, Ben’s injuries were not severe
enough to provide legal standing for a lawsuit. What type of no-fault law
is in effect in the state where Ben lives?
A) pure no-fault
B) add-on no-fault
C) choice no-fault
D) modified no-fault
Answer: D
46
Some states do not require an individual to demonstrate the ability to
pay an automobile liability claim until after the individual has been
involved in an accident or has been convicted for certain offenses, such
as driving under the influence of alcohol. This approach to dealing with
compensating innocent auto accident victims is called a(n)
A) unsatisfied judgement fund.
B) financial responsibility law.
C) uninsured motorist law.
D) compulsory insurance law.
Answer: B
ch22
1
Which of the following statements is (are) true regarding renters
insurance?
Renters insurance is needed if you rent a house, but is not needed if
you rent an apartment.
The ISO renter's policy provides open perils ("all-risks") coverage on the
insured's personal property.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
2
Which of the following statements about eligibility requirements for
homeowners insurance is (are) true?
A contract can be written on a twenty-unit apartment complex as long
as the tenants are families.
Separate forms are available for renters and condominium owners.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
3
Which of the following statements about the Homeowners 6 (unit-owners
form) policy is true?
A) It includes personal liability coverage.
B) It covers personal property on an open-perils basis.
C) It covers the dwelling on an open-perils basis.
D) It is designed for tenants who rent an apartment or a home.
Answer: A
4
Which homeowners policy is designed for the tenants of a rented
premises?
A) Homeowners 2
B) Homeowners 4
C) Homeowners 6
D) Homeowners 8
Answer: B
5
Which of the following statements about the Homeowners 8 policy is
(are) true?
Losses to the dwelling are settled on a replacement cost basis if the
dwelling is insured for its full market value.
It is designed primarily for expensive, newer, dwellings.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
6
Which of the following statements about the Homeowners 3 policy is
(are) true?
Losses to the dwelling are always settled on an actual cash value basis.
Coverage on personal property is limited to $5,000.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
7
The major difference between the dwelling coverage (Part A) of the
Homeowners 2 (Broad From) policy and the Homeowners 3 (Special
Form) policy is that
A) the HO-3 provides open perils ("all risks") coverage and the HO-2
provides named-perils coverage.
B) the HO-3 provides actual cash value coverage, the HO-2 provides
replacement cost coverage.
C) the HO-3 is always written without a deductible, the HO-2 always
written with a deductible.
D) the HO-3 can be used for any type of construction, the HO-2 is
limited to wood frame homes.
Answer: A
8
Persons insured under Section I of the Homeowners 3 policy include
which of the following?
A spouse of the named insured if living in the same household
The named insured's children who are under age 24 and who are
full-time college students
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
9
Section I of the Homeowners 3 policy provides coverage for which of
the following?
A) loss of use
B) personal liability
C) disability of the homeowner
D) medical payments
Answer: A
10
All of the following are covered under the dwelling coverage (Coverage
A) of the Homeowners 3 policy EXCEPT
A) any structure attached to the dwelling.
B) the land on which the insured dwelling is located.
C) materials and supplies intended for alteration or repair of the
dwelling.
D) materials and supplies intended for construction of a detached garage.
Answer: B
11
Which of the following statements about the coverage for other
structures (Coverage B) under the Homeowners 3 policy is true?
A) The coverage applies to a detached garage or tool shed on the
residence premises.
B) Structures attached to the dwelling by a fence or utility line are
considered to be part of the dwelling rather than other structures.
C) Coverage applies even if the other structure is used for business
purposes.
D) There is no coverage for a private garage if it is rented to a tenant
of the dwelling.
Answer: A
12
All of the following losses are subject to special limits of liability under
the Homeowners 3 policy EXCEPT
A) theft of firearms.
B) destruction by fire of property used for business purposes.
C) storm damage to a boat at a marina.
D) furniture destroyed by a fire.
Answer: D
13
Which of the following statements about the personal property coverage
(Coverage C) of the Homeowners 3 policy is (are) true?
There are special limits of liability that apply to certain types of
personal property.
The full amount of coverage applies only if the property is permanently
located at any residence of the insured.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
14
The Homeowners 3 policy limits the amount of coverage provided on
certain personal property (e.g. coin collections and silverware). This
personal property can be adequately insured by
A) lowering the deductible which applies to personal property losses.
B) storing the property away from the home at another location.
C) adding a schedule to the policy listing the property with specific
amounts of insurance.
D) adding an appraisal clause to the policy.
Answer: C
15
Which of the following property is covered under the personal property
coverage (Coverage C) of the Homeowners 3 policy?
A) a pet dog owned by the named insured
B) a bicycle owned by a foster child living with the named insured
C) a motor vehicle owned by the named insured
D) a stamp collection insured under a separate policy
Answer: B
16
Which of the following statements about coverage for loss of use
(Coverage D) under the Homeowners 3 policy is true?
A) If a covered loss makes the home unfit for living, the insurer pays
additional living expenses the insured may incur as a result of the loss.
B) The duration of payments for additional living expenses is limited to
a maximum of 30 days.
C) There is no coverage for loss of rent if an insured peril makes the
part of the premises rented to others uninhabitable.
D) There is coverage for loss of business income if an insured peril
forces a home business to be terminated.
Answer: A
17
Which of the following statements about the additional coverages under
Section I of the Homeowners 3 policy is true?
A) There is coverage for the reasonable cost incurred to protect
property from further damage after a covered loss occurs.
B) There is unlimited coverage for furnishings of the landlord in an
apartment on the premises that is rented to others.
C) Property removed from the premises because it is endangered by an
insured peril is covered on a named-perils basis while it is outside the
insured premises.
D) There is no coverage for the increased cost of construction or repair
to comply with an ordinance or law.
Answer: A
18
All of the following are additional coverages under Section I of the
Homeowners 3 policy EXCEPT
A) the reasonable expenses of removing debris after an insured loss.
B) fire department service charges for which the insured is liable by
contract or agreement.
C) damage to trees and shrubs caused by a windstorm.
D) losses incurred from the unauthorized use of a stolen credit card.
Answer: C
19
Which of the following is a covered peril under the personal property
coverage (Coverage C) of an unendorsed Homeowners 3 policy?
A) earthquake
B) nuclear radiation
C) windstorm
D) flood
Answer: C
20
Which of the following losses to a dwelling would be covered under an
unendorsed Homeowners 3 policy?
A) smoke damage resulting from agricultural operations of a neighboring
farmer
B) damage to the structure caused by a flash flood
C) damage to the structure caused by the weight of heavy snow on the
roof
D) damage to a floor caused by water backing up through a sewer pipe
Answer: C
21
Which of the following statements about covered perils under the
personal property coverage (Coverage C) of the Homeowners 3 policy is
true?
A) Theft losses to boats and watercraft are covered only if they occur
at the insured's residence.
B) Damage from an explosion is covered only if the explosion is the
result of fire or lightning.
C) Property damage from vehicles is covered only if it is caused by the
insured.
D) Smoke damage is covered only if it arises from agricultural or
industrial operations.
Answer: A
22
Which of the following types of water damage is covered under an
unendorsed Homeowners 3 policy?
A) damage from a flood caused by torrential rain
B) damage from water backing up through a drain
C) damage from water below the surface of the ground that seeps into a
basement
D) damage from water that overflows from a malfunctioning washing
machine
Answer: D
23
Which of the following is a general exclusion under Section I of the
Homeowners 3 policy? A) Water damage caused by accidental discharge
from a household appliance.
B) Losses due to the failure of the insured to use all reasonable means
to save and preserve property after the time of a loss.
C) Losses resulting from a power failure caused by an insured peril at
the residence premises.
D) Losses due to a windstorm.
Answer: B
24
Which of the following is (are) included among the duties of an insured
following a loss covered under the Homeowners 3 policy?
To file a proof of loss within a specified time period after the insurer's
request
To prepare an inventory of damaged personal property
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
25
Which of the following statements about the replacement cost provision
of the Homeowners 3 policy is true?
A) It applies to personal property losses only.
B) Except for small losses, the insured must repair or replace the
damaged property in order to receive full replacement cost.
C) The insured is required to carry an amount of insurance equal to 100
percent of the replacement value of the insured property.
D) Loss settlements are equal to 50 percent of the value of the loss if
the insured is carrying less than the required amount of insurance.
Answer: B
26
David has a Homeowners 3 policy that provides $280,000 of insurance
on his dwelling, which has a current replacement value of $400,000.
Ignoring any deductible, how much will David collect if a roof with a
replacement value of $16,000 but an actual cash value of $10,000 is
destroyed in a fire?
A) $10,000
B) $12,000
C) $14,000
D) $16,000
Answer: C
27
Which of the following statements about the appraisal clause in the
Homeowners 3 policy is (are) true?
It is used to determine a value for personal property when the policy is
issued.
It is used to help settle disputes over the amount of a loss after a loss
has occurred.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
28
Under the Homeowners 3 policy, all of the following are options of the
insurer for settling claims EXCEPT
A) paying the claim in cash.
B) replacing the property.
C) repairing the property.
D) paying the claim with insurance company stock.
Answer: D
29
All of the following are duties of the mortgagee under the standard
mortgage clause EXCEPT
A) to reimburse the insurer for any loss payments.
B) to notify the insurer of any change in ownership of the property of
which the mortgagee is aware.
C) to provide a proof of loss form if the insured fails to do so.
D) to pay the premium if the insured fails to do so.
Answer: A
30
All of the following statements about the cancellation of a Homeowners
3 policy are true EXCEPT
A) The insurer may cancel a new policy for any reason if it has been in
force for less than 60 days and is not a renewal policy.
B) At least 100 days' notice of cancellation must be given if an insurer
cancels a policy for nonpayment of premium.
C) A policy written for longer than 1 year can be cancelled for any
reason on the anniversary date by giving the insured at least 30 days'
notice of cancellation.
D) After a policy has been in force for at least 60 days, it can be
cancelled by the insurer if the risk has increased substantially since the
policy was issued.
Answer: B
31
All of the following statements about conditions under a Homeowners 3
policy are true EXCEPT
A) If an insurer broadens coverage without an additional premium during
the policy period, the broadened coverage applies immediately to the
present policy.
B) A waiver or change in any policy provision must be approved in
writing by the insurer to be valid.
C) The insurer must give written consent for an assignment of the policy
to be valid.
D) If the named insured dies, coverage automatically ceases with respect
to any property of the deceased.
Answer: D
32
Cal is renting an apartment. Which homeowners policy is specially
designed to insure renters?
A) HO-2
B) HO-3
C) HO-4
D) HO-6
Answer: C
33
Shauna purchased a condominium unit. Which homeowners policy is
specially designed for condominium unit owners?
A) HO-2
B) HO-3
C) HO-4
D) HO-6
Answer: D
34
Michelle had four matching end tables in her home. A fire damaged the
home, destroying two of the end tables. Michelle's home was covered by
an unendorsed Homeowners 3 policy. Which of the following is true with
regard to the settlement for the end tables in this case?
A) Loss to a pair or set is excluded under the policy.
B) The insurer will pay the difference in actual cash value of the
property before and after the loss.
C) The insurer will pay the replacement cost of the loss.
D) If a partial loss to a pair or set occurs, the insurer is liable for
replacement of the entire pair or set.
Answer: B
35
Betty's personal property is insured for $100,000 under her Homeowners
3 policy. If she usually keeps some personal property at a mountain
cabin that she owns, how much coverage for this property is available
under her homeowners policy?
A) $10,000
B) $20,000
C) $40,000
D) $50,000
Answer: A
36
Linda wants to purchase a homeowners policy. She has some valuable
personal property to which internal policy limits apply. Her agent said
that she could obtain coverage under her homeowners policy by
attaching a list of this valuable property with specific amounts of
insurance. Such a listing is called a(n)
A) binder.
B) schedule.
C) application.
D) warranty.
Answer: B
37
Which of the following is an additional coverage provided under Section I
of the Homeowners 3 policy?
A) medical payments to others
B) debris removal
C) personal liability
D) intentional property damage caused by an insured
Answer: B
38
Darla purchased an unendorsed Homeowners 3 policy. While the policy
was in force, a fire occurred that destroyed a living room set. The living
room set cost $4,000 new, but was 25 percent depreciated when the
loss occurred. Replacement furniture will cost $4,400. Assuming no
deductible, how much will Darla receive from her insurer?
A) $3,000
B) $3,300
C) $3,400
D) $4,400
Answer: B
39
A dwelling with a replacement cost of $150,000 was insured under a
Homeowners 3 policy for $100,000 at the time the roof was destroyed
by a windstorm. The actual cash value of the loss was $9,000, but it
will cost $12,000 to replace the roof. Ignoring any deductible, what will
the insurer pay to settle this loss?
A) $8,000
B) $9,000
C) $10,000
D) $12,000
Answer: C
40
Ellen believes the value of the loss to her home is $30,000. The insurer
has offered $18,000 to settle the loss. If Ellen and the insurer cannot
agree on the value of the loss, which homeowners policy provision
specifies how this dispute will be settled?
A) insurer's option
B) appraisal clause
C) loss payment clause
D) mortgage clause
Answer: B
41
Ted borrowed $140,000 from ABC Bank to purchase a home and pledged
the home as collateral for the loan. Shortly after purchasing the home,
Ted lost his job. He could not find another job and could not pay the
monthly mortgage. Ted set fire to the home. The claims adjuster
suspected arson, and an investigation proved that Ted intentionally
caused the loss. Under the mortgage clause of the Homeowners 3 policy,
how will this loss be settled?
A) The insurer has no liability because the loss was intentional.
B) The insurer will pay Ted the actual cash value of the loss as
intentional loss is not excluded.
C) The insurer will pay ABC the value of its insurable interest and pay
Ted the value of his insurable interest.
D) The insurer will pay ABC the value of its insurable interest and then
attempt to recoup the loss payment from Ted.
Answer: D
42
Mike and Susan built their "dream home." They insured their home for
its full replacement cost. They also added an endorsement that will pay
up to an additional 20 percent of the policy limit in case the cost of
rebuilding the home after a loss is greater than the policy limit. The
basis under which Mike and Susan insured their home is called
A) actual cash value.
B) valued policy coverage.
C) extended replacement cost.
D) guaranteed replacement cost.
Answer: C
43
Jose and Maria would like "open-perils" coverage on their home and
their personal property. Which unendorsed homeowners form provides
this coverage?
A) Homeowners 2
B) Homeowners 3
C) Homeowners 4
D) Homeowners 5
Answer: D
44
Which of the following statements about covered perils and loss
settlement under an unendorsed Homeowners 3 policy is true?
A) The dwelling is covered on a named-perils basis.
B) Personal property losses are settled on an actual cash value basis.
C) Losses to the dwelling are always settled on an actual cash value
basis.
D) Personal property is covered on an open-perils basis.
Answer: B
45
Which of the following statements is (are) true regarding how the
Homeowners 3 policy handles the peril of collapse?
Collapse is specifically excluded, and there are no exceptions to the
exclusion.
Collapse that is caused by a Coverage C peril is covered.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
46
Following catastrophic hurricane losses, South Coast Insurance Company
changed its deductible provision. Rather than using a specified dollar
value, $250 for example; the dollar value of the deductible increases
with the size of the loss. The type of deductible that South Coast
changed to is called a(n)
A) calendar-year deductible.
B) aggregate deductible.
C) straight deductible.
D) percentage deductible.
Answer: D
47
If there is a conflict between state law and a provision in a homeowners
policy,
A) the policy wording takes precedence.
B) the state law takes precedence.
C) the policyholder is entitled to whichever provides broader coverage.
D) the policy is null and void.
Answer: B
48
A fire destroyed the home next door to Brad's home. The fire
department chief was concerned that the damaged home would collapse
on to Brad's home, so he ordered Brad to evacuate his home. Which of
the following statements is true concerning the cost of Brad's hotel room
while he is complying with the fire chief's order?
A) The cost of the hotel room is not covered, as Brad's home was not
directly damaged.
B) The cost of the hotel room is covered under the "fair rental value"
coverage of Part D.
C) The cost of the hotel room is covered under the "prohibited use"
coverage of Part D.
D) The cost of the hotel room is covered under the dwelling coverage of
Part A.
Answer: C
49
The homeowners policy excludes a loss brought about by two or more
perils where one peril is covered under the policy and the other perils
are excluded. This situation is called
A) ordinance or law.
B) proximate cause.
C) concurrent causation.
D) nullification.
Answer: C
50
One additional coverage under the homeowners policy makes available up
to 10 percent of the Coverage A limit to cover increased repair costs
after a loss in order to comply with a stricter building code. This
additional coverage is called
A) ordinance or law.
B) reasonable repairs.
C) concurrent causation.
D) debris removal.
Answer: A
51
Brian purchased an unendorsed Homeowners 3 policy. Under the policy,
Brian's detached garage is also covered. Which of the following
statements regarding coverage on the garage is true?
A) The garage is covered on a named-perils basis.
B) Any losses to the garage are settled on an actual cash value basis.
C) The cost of removing debris is included in the policy limit on the
garage, but if the damage and cost of removing debris exceed the limit,
an additional five percent of the policy limit is available.
D) The garage is covered under the dwelling coverage, Part A.
Answer: C
52
Which of the following statements concerning the coverage of collapse of
the dwelling under an unendorsed Homeowners 3 policy is true?
A) There is no coverage for collapse, regardless of the cause of the
collapse.
B) Collapse is covered if it is caused by one of the Coverage C perils.
C) If collapse is caused by an earthquake, the loss is covered.
D) There is no coverage for collapse unless the proper endorsement is
added to the policy.
Answer: B
53
If the insurer broadens coverage during the policy period without an
increase in premium, and the broadened coverage is not part of a
general program revision, the insured is entitled to the broadened
coverage under which policy provision?
A) waiver of policy provisions
B) subrogation
C) liberalization clause
D) pair or set clause
Answer: C
54
Several different values can be considered when determining how much
insurance should be carried on a dwelling (the Coverage A limit of the
Homeowners 3 policy). The appropriate value that should be used is:
A) the home’s market value.
B) the home’s actual cash value.
C) the home’s appraised value for property tax purposes.
D) the home’s replacement cost.
Answer: D
55
The concurrent causation exclusion in the Homeowners 3 policy specifies
that:
A) if two or more perils jointly cause a loss, there is no coverage if one
of the perils is excluded.
B) if the insured has two or more policies in force at the time of the
loss, the loss is not covered.
C) if the insured has two or more policies in force at the time of the
loss, the loss is pro-rated between the insurers.
D) if two or more perils jointly cause a loss, there is coverage as long
as one of the perils is covered.
Answer: A
56
The purpose of the appraisal clause in the Homeowners 3 policy is to
A) determine the appropriate amount of homeowners insurance to
purchase.
B) set a value on the home for estate purposes if the homeowner dies.
C) settle valuation disputes between the insurer and insured after a loss
has occurred.
D) determine a mortgage lender’s insurable interest after a loss has
occurred.
Answer: C
57
Glenda insured her home for its full replacement cost under an
unendorsed Homeowners 3 policy. Which of the following statements is
true?
A) The dwelling and other structures are covered on a named-perils
basis.
B) Losses to personal property are settled on a replacement cost basis.
C) The personal property is covered on an open-perils basis.
D) Losses to the dwelling and other structures are settled on a
replacement cost basis.
Answer: D
58
Which of the following statements concerning coverage under the
Homeowners 3 policy is true?
A) If a power failure away from the insured dwelling causes a loss, the
loss is covered.
B) If a Coverage C peril causes a collapse, the resulting damage is
covered.
C) If an insured peril damages a portion of a pair or set (e.g. matching
lamps or end tables), the insurer must pay the full value of the entire
pair or set.
D) If a discharge from a home appliance causes the home to flood, the
loss is excluded. .
Answer: B
ch23
1
All of the following persons are insured for personal liability under the
homeowners policy EXCEPT
A) children of the named insured under age 24 who are attending
college full time and temporarily residing elsewhere.
B) foster children under the age of 21 who reside with the named
insured.
C) nonresident employees of the named insured.
D) the spouse of the named insured if a resident of the same household.
Answer: C
2
Persons insured for personal liability under the homeowners policy
include which of the following?
Relatives while visiting the named insured.
Overnight guests who are not relatives of the named insured.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
3
Which of the following statements about the personal liability coverage
(Coverage E) of an unendorsed homeowners policy is true?
A) Coverage is written on an accident basis.
B) Coverage is provided for bodily injury liability.
C) Coverage is provided for business and professional liability.
D) Coverage is provided for personal injury liability.
Answer: B
4
Which of the following statements about the insurer's obligation to
provide a legal defense under the personal liability coverage (Coverage
E) of the homeowners policy is (are) true?
The insurer agrees to defend the insured only if the suit is not
groundless, false, or fraudulent.
The insurer's obligation to defend the insured ceases after the amount
paid for damages from an occurrence equals the policy limit.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
5
Which of the following statements about the coverage for medical
payments to others (Coverage F) under the homeowners policy is true?
A) Medical payments may be made for any resident of the named
insured's household.
B) Medical expenses incurred within 3 years of an accident are covered.
C) Medical payments are made only if the insured is not legally liable.
D) Covered medical expenses are limited to emergency room charges.
Answer: B
6
Which of the following persons is (are) eligible for benefits under
medical payments to others (Coverage F) of the homeowners policy?
A friend who slips and falls on a wet patio while visiting the named
insured
A neighborhood child who is severely scratched by a cat in the care of
the named insured
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
7
All of the following are considered insured locations for medical
payments to others (Coverage F) under a homeowners policy EXCEPT
A) a new vacation home purchased by an insured during the policy
period.
B) a motel room where an insured is temporarily residing.
C) a hall rented by the insured for her daughter's graduation party.
D) farmland owned by the insured.
Answer: D
8
Section II of the homeowners policy has exclusions applying to all of the
following EXCEPT
A) activities of the named insured's minor children.
B) business activities.
C) transmission of a communicable disease.
D) intentional injuries.
Answer: A
9
All of the following situations are excluded from coverage under Section
II of the homeowners policy EXCEPT
A) the rental of a spare bedroom which is used by the tenant as an
office.
B) the use of a rented airplane to take a vacation.
C) the ownership of a ten-unit apartment house as an investment.
D) the performance of professional services by the insured at the
residence premises.
Answer: A
10
Which of the following situations is covered under Section II of an
unendorsed homeowners policy?
A) injuries which occur at a park resulting from a motorcycle owned by
the insured
B) injuries resulting from an auto not subject to registration because it is
in dead storage
C) injuries resulting from an auto rented by the insured while on a
vacation
D) injuries resulting from a trailer being pulled by the insured's auto
Answer: B
11
Which of the following statements regarding watercraft liability under
Section II of an unendorsed HO-3 policy is (are) true?
No coverage is available for watercraft liability.
Liability arising out of the use of watercraft that are under certain length
and horsepower limits is covered.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
12
Which of the following situations would be covered under Section II of a
homeowners policy?
The insured is sued by his girlfriend because he infected her with the
AIDS virus.
The insured's son is sued after a friend suffered serious injury as a
result of using illegal drugs sold to him by the son.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
13
For which of the following situations would there be personal liability
coverage under the homeowners policy?
The named insured accidentally injures her husband with a hammer.
The named insured breaks his wife's valuable vase while practicing his
golf swing.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
14
All of the following are exclusions in the homeowners policy that apply
to medical payments to others (Coverage F) EXCEPT
A) bodily injury resulting from nuclear radiation.
B) bodily injury to persons who are social guests at the insured location.
C) bodily injury to persons eligible to receive workers compensation
benefits.
D) bodily injury to residents of the household who are in the care of an
insured.
Answer: B
15
Which of the following statements about the additional coverages
included in Section II of the homeowners policy is true?
A) Damage to property of others is covered only if the insured is legally
liable.
B) Damage to property arising out of a business engaged in by the
insured is covered.
C) Interest that accrues on a judgment after the judgment is awarded but
before the judgment is paid is covered under claims expenses.
D) First aid expenses incurred by the insured for a bodily injury covered
under the policy are not covered.
Answer: C
16
Which of the following statements about the additional coverage for
damage to property of others in Section II of the homeowners policy is
true?
A) The maximum amount of coverage is $25,000 per occurrence.
B) Payments are made on the basis of the replacement cost of the
damaged property.
C) There is coverage for property damage arising out of a business
engaged in on a full-time basis by an insured.
D) There is coverage for intentional property damage by any insured
who is a teenager.
Answer: B
17
Liability arising out of which of the following is covered under the
personal injury endorsement to the homeowners policy?
A) bodily injury
B) property damage
C) slander
D) professional liability
Answer: C
18
Liability arising out of which of the following is covered under the
personal injury endorsement to the homeowners policy?
A) property damage liability
B) false arrest
C) bodily injury
D) business liability
Answer: B
19
Factors that affect the cost of homeowners insurance include which of
the following?
Construction material
Deductible amount
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
20
Which of the following statements about endorsements to the
homeowners policy is (are) true?
The purpose of the inflation guard endorsement is to help prevent home
owners from being under-insured.
The purpose of the watercraft endorsement is to provide coverage for
watercraft when they are used outside the United States.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
21
Which of the following statements about buying homeowners insurance is
true?
A) There is no reason to carry insurance for more than 80 percent of a
dwelling's replacement cost.
B) The deduction for depreciation will be increased if a personal
property replacement cost endorsement is purchased.
C) Premiums often can be reduced substantially by selecting a higher
deductible.
D) There is little reason to compare cost since the lack of competition
results in little price variation among companies.
Answer: C
22
Which of the following statements about an earthquake endorsement for
a homeowners policy is (are) true?
The endorsement also covers landslides and volcanic eruptions.
The coverage for earthquakes is written without a deductible.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
23
Which of the following statements about the personal property
replacement cost endorsement used with the homeowners policy is (are)
true?
The damaged or destroyed property must be repaired or replaced, no
matter the size of the loss.
It is designed primarily for antiques and fine art.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
24
Which of the following statements about the scheduled personal property
endorsement to the homeowners policy is (are) true?
It provides named-perils coverage on scheduled items.
It can be used to insure valuable items such as jewelry, silverware, and
coin collections.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
25
Which of the following losses would be covered under Section II of an
unendorsed Homeowners 3 policy?
A) The homeowner accidentally dropped a bowling ball, injuring another
bowler's foot.
B) The homeowner's nanny was injured on her day off while hiking at a
state park.
C) The insured slandered a city council member at a city council
meeting.
D) The homeowner's dog bit the homeowner's daughter.
Answer: A
26
Tom is planning to build a home. He is weighing many factors, including
construction materials, location, and other considerations. Which of the
following statements is true with regard to homeowners insurance and
Tom's new home?
A) The higher the construction costs are in the area, the lower Tom's
homeowners insurance premiums will be.
B) The lower the homeowners deductible selected, the lower the
premium will be.
C) Older homes cost more to insure than newer homes.
D) A wood frame home costs less to insure than a brick home.
Answer: C
27
Robert purchased an unendorsed Homeowners 3 policy. He is concerned
that if his personal property is destroyed, the insurer will take
depreciation into consideration when determining the loss settlement and
will pay him less than the amount needed to purchase new property.
Which endorsement can Robert add to his Homeowners 3 policy to
address this concern?
A) inflation guard endorsement
B) personal injury endorsement
C) personal property replacement cost endorsement
D) earthquake endorsement
Answer: C
28
Gail lives near a fault line. She added an earthquake endorsement to her
Homeowners 3 policy. All of the following statements about the
endorsement are true EXCEPT
A) The deductible is expressed as a percentage of the coverage limit
rather than as a dollar amount.
B) The endorsement also covers landslides and volcanic eruptions.
C) Aftershocks occurring within 72 hours of an earthquake are
considered part of the same occurrence.
D) The endorsement also covers flood losses.
Answer: D
29
Jane would like to save money on her homeowners premium. All of the
following steps will help her to reduce her homeowners premium
EXCEPT
A) raising the deductible in the homeowners policy to a higher amount.
B) shopping around a homeowners policy.
C) installing burglar alarms, smoke detectors, and dead-bolt locks.
D) adding a personal property replacement cost endorsement.
Answer: D
30
All of the following are endorsements that can be added to an ISO
Homeowners 3 policy EXCEPT:
A) personal property replacement cost endorsement.
B) scheduled personal property endorsement.
C) earthquake endorsement.
D) personal liability endorsement.
Answer: D
31
All of the following losses are excluded from coverage under Section II
of an unendorsed Homeowners 3 policy EXCEPT
A) Phyllis, a medical technician, misread a lab test and the patient is
suing her.
B) While using his canoe, Bert hit another canoe. The other canoe sank.
Bert is being sued.
C) Violet runs a for-profit daycare service in her home. The parents of
a child injured while in Violet's care are suing Violet.
D) The homeowner's son was injured when he fell off a swing in the
homeowner's yard.
Answer: B
32
Which of the following losses would be covered under the medical
payments coverage of the Homeowners 3 policy?
A) injuries to another person arising out of the insured's negligent
operation of an automobile
B) medical payments resulting from the transmission of a communicable
disease
C) injury to a resident employee at the insured's home
D) workers compensation medical payments
Answer: C
33
Which of the following losses would be covered under the personal
liability coverage (Coverage E) of an unendorsed Homeowners 3 policy?
A) liability arising out of the manufacture and sale of illegal narcotics
B) liability arising out of damage to a neighbor's property that occurred
over time
C) liability arising out of a business operated in the home.
D) liability arising out of bodily injury to an insured
Answer: B
34
Tom and Tammy Evans were ready to purchase a home. The home was
to serve as collateral for their mortgage loan. Two insurers declined to
insure the home, citing "an adverse CLUE report." Why would an insurer
reject a homeowners insurance application because of an adverse CLUE
report?
A) because the previous owner had defaulted on the mortgage loan
B) because the home is located in an area where the zoning law had
been changed
C) because there had been property insurance claims filed on the home’s
previous owner
D) because the home is located in an area that does not have a certified
fire department
Answer: C
35
Which of the following statements is (are) true concerning the use of an
individual's credit history as an insurance rating factor?
Individuals with poor credit histories, as a group, generally file fewer
homeowners claims than do individuals with good credit histories.
A poor credit history can be improved over time, allowing for the
purchase of homeowners insurance at a lower premium.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
36
A credit-based score that is highly predictive of future claims cost is an
individual's
A) CLUE score.
B) insurance score.
C) motor vehicle record score.
D) underwriting score.
Answer: B
37
Which of the following statements is (are) true concerning the home
business insurance coverage endorsement?
It increases the coverage on business personal property at the insured
residence from $2,500 to the Coverage C limit.
It excludes coverage for liability arising out of the home business.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
38
One of the "Tips for Buying a Homeowners Policy" is to consider
purchasing a personal umbrella policy. What coverage is provided by a
personal umbrella policy?
A) blanket property coverage for any damage caused by water
B) excess liability coverage and coverage for some liability claims
excluded by underlying policies
C) all-risk, replacement cost, property coverage
D) coverage for business and professional liability
Answer: B
39
Which of the following statements is true regarding the Homeowners 3
policy and identity theft?
A) Identity theft is covered under Coverage D—Loss of Use.
B) Identity theft is covered under Coverage C—Personal Property.
C) Identity theft is covered under Coverage E—Personal Liability.
D) Identity theft is covered by adding an endorsement.
Answer: D
40
Which of the following statements concerning the scheduled personal
property endorsement with agreed value loss settlement is (are) true?
The endorsement provides open-perils ("all-risks") coverage on the
scheduled property.
Losses under the endorsement are settled on an actual cash value basis.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
41
John purchased an unendorsed Homeowners 3 policy. The coverage will
expire next month. Which of the following changes will lower the
premium that John will pay?
A) reducing the deductible
B) adding a replacement cost endorsement for personal property
C) switching to an HO-2 policy
D) adding a personal injury endorsement
Answer: C
42
Liability arising out of which of the following is covered under Coverage
E of an unendorsed Homeowners 3 policy?
A) use of the insured's auto on a public road
B) use of the insured's golf cart at a golf course
C) use of the insured's motorcycle on a highway
D) use of the insured's 40-foot boat with a 200 horsepower engine
Answer: B
43
Which of the following statements regarding the Coverage E limit in the
homeowners policy is true?
A) It is an aggregate limit, and once the amount paid for one or more
claims reaches the limit, no additional coverage is provided.
B) The limit applies only if a court orders the insured to pay—there is
no coverage for settlements reached out-of-court.
C) Any legal defense costs incurred by the insurer are counted against
the limit of liability.
D) The limit applies on a per-occurrence basis to bodily injury and
property damage liability.
Answer: D
44
Which of the following statements regarding Section II conditions under
the homeowners policy is true?
A) Other insurance is handled on a pro rata basis.
B) Under no circumstances may the insured bring a lawsuit against the
insurer.
C) The liability limit is the same regardless of the number of persons
injured in a covered occurrence.
D) There is no requirement for the insured to submit written notification
of a possible claim to the insurer.
Answer: C
45
Which of the following statements regarding Section II coverage under
the Homeowners 3 policy is true?
A) Medical payments to others are covered regardless of whether the
insured is legally liable.
B) Legal defense costs incurred by the insurer to defend the insured
reduce the per-occurrence limit of liability available.
C) The insurer is not required to defend the insured against a
groundless, false, or fraudulent lawsuit.
D) Any amount paid under medical payments coverage reduces the
personal liability limit available for the same claim.
Answer: A
46
Which statement regarding Section II of an unendoresed homeowners 3
policy is true?
A) Liability arising from intentional property damage caused by the
insured’s teenager is covered.
B) Liability arising out of a home business is not covered.
C) Medical expenses for the insured’s injured child are covered.
D) First-aid expenses for injuries suffered by guest at the home are not
covered.
Answer: B
47
Which of the following statements about Coverage E: Personal Liability
under the homeowners 3 policy is true?
A) Losses attributable to personal injury are covered.
B) The liability limit stated in the policy is an aggregate limit for the
policy period.
C) The insured must be legally liable for insurer to pay damages.
D) Bodily injury liability only applies to injuries that occur at the insured
dwelling.
Answer: C
48
Polly purchased a Homeowners 3 policy. She has a swing set in the
backyard of her home. While her son and the neighbor’s child were
using the swing set, it collapsed. Both of the children required medical
care. Which of the following statements is true?
A) The medical expenses Polly’s son are covered under the policy.
B) The medical expenses of the neighbor’s child are covered under the
policy.
C) If Polly’s son sues Polly and wins, the insurer will pay the damage
award.
D) If the neighbor sues Polly, Polly must pay for the lawyer who
defends the suit.
Answer: B
ch24
1
Which of the following statements about Dwelling Property 1 (basic form)
is true?
A) Coverage on the dwelling is written on a replacement cost basis.
B) The full amount of personal property coverage applies to property
away from the insured premises.
C) Coverage for fair rental value of the dwelling is subject to both an
overall maximum and a monthly maximum.
D) "Open-perils" (all risks) coverage is automatically provided for both
the dwelling and personal property.
Answer: C
2
Perils insured under Dwelling Property 1 (basic form) include which of
the following?
Earthquake
Smoke
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
3
Which of the following perils is covered under the Dwelling Property 2
(broad form) policy?
A) weight of ice, snow, or sleet
B) flood
C) theft
D) earthquake
Answer: A
4
Which of the following statements about Dwelling Property 3 (special
form) is (are) true?
Personal property is covered only for those perils specifically named in
the policy.
The dwelling and other structures are covered on an "open perils" (all
risks) basis.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
5
Which of the following coverages are provided by an unendorsed ISO
Dwelling Program form?
Theft of personal property
Named-perils coverage for personal property
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
6
Which of the following statements about the eligibility requirements for
insuring mobile homes by endorsing a homeowners policy is (are) true?
The mobile home must be designed for year-round living.
The mobile home must be located in a fenced area with security guards.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
7
Which of the following statements about mobile home insurance is (are)
true?
Coverage for the mobile home may be written on either a replacement
cost basis or an actual cash value basis, depending on how much the
mobile home has depreciated.
An additional coverage pays, up to a specified dollar limit, for the cost
of transporting the mobile home to a safe place when it is endangered
by a covered peril.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
8
Which of the following is a characteristic of most inland marine floater
policies?
A) The insurance can be tailored to the specific type of personal
property insured.
B) Coverage amounts are pre-specified by the insurer and cannot be
changed.
C) Coverage is normally written on a named-perils basis.
D) Covered property is insured only when it is at a specified location.
Answer: A
9
Which of the following statements about the Personal Articles Floater is
(are) true?
It is designed to cover several classes of personal property.
Coverage is written on an "open perils" (all-risks) basis.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
10
Which of the following statements about various coverages under a
Personal Articles Floater is (are) true?
Each item of jewelry is described and is insured for a specified amount.
Stamp and coin collections can be insured on a blanket basis.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
11
Which of the following statements about types of property covered under
the Personal Articles Floater is true?
A) Golfer's equipment is covered only in the United States.
B) Furs are covered on a blanket basis without the necessity to schedule
individual items.
C) A higher premium must be paid to insure musical instruments if they
are played for pay.
D) Coverage for silverware and goldware is not available under the
Personal Articles Floater.
Answer: C
12
Reasons why an insured might add a scheduled personal property
endorsement to a homeowners policy include which of the following?
To lower the premium by limiting the perils covered
To obtain higher limits for certain personal property
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
13
All of the following statements about the boatowners package policy are
true EXCEPT
A) Physical damage coverage for the boat is usually written to cover all
losses except those losses specifically excluded.
B) Liability coverage is provided for bodily injury only.
C) Some policies provide optional uninsured boaters coverage.
D) Medical payments coverage for water-skiers is available under the
policy.
Answer: B
14
All of the following statements about yacht insurance are true EXCEPT
A) Property damage coverage includes damage from insects, weathering,
and wear and tear.
B) Liability coverage includes the cost of raising, removing, or
destroying a sunken or wrecked yacht.
C) Coverage can be added for maritime workers covered by the United
States Longshoremen and Harbor Workers Compensation Act.
D) Medical payments coverage pays for medical expenses because of
accidental bodily injury.
Answer: A
15
Which of the following statements about the federal flood insurance
program is true?
A) Under the write-your-own program, each insurer services the
policies it writes.
B) The regular portion of the program does not allow the purchase of
higher amounts of coverage than are available under the emergency
portion of the program.
C) No coverage is available for property owners in areas where flooding
has occurred previously.
D) The maximum amount of coverage that can be written on any single
dwelling is $25,000.
Answer: A
16
Which of the following statements about coverage under the federal flood
insurance program is (are) true?
Subsidized coverage is available for contents, but not for dwellings.
A $10,000 deductible applies to each loss.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
17
All of the following are considered floods under the federal flood
insurance program EXCEPT
A) the overflow of tidal waters.
B) the accumulation of surface water after a heavy rain.
C) a mudslide caused by an accumulation of water after a heavy rain.
D) the discharge of water from a home appliance, such as a water
heater or washing machine.
Answer: D
18
Which of the following statements about federal flood insurance is true?
A) It is available even if property has been previously flooded.
B) It is unavailable in high-risk flood areas.
C) It is available only for residences, not for businesses.
D) Waiting periods are not used in the federal flood insurance program.
Answer: A
19
The basic purpose of FAIR plans is to provide
A) property insurance to persons who cannot obtain it in normal
markets.
B) automobile insurance to persons who cannot obtain it in normal
markets.
C) health insurance to persons who cannot afford it in normal markets.
D) workers compensation insurance to employers who do business in
several states.
Answer: A
20
Which of the following statements concerning FAIR plans is (are) true?
All property is eligible for coverage regardless of physical condition.
Losses and expenses are shared by insurers who participate in a plan.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
21
Mark purchased a boat owners package policy. While using his boat, he
negligently hit a pier. A person standing on the pier fell and was
severely injured. Which of the boat owners package policy coverages
will respond to a lawsuit filed as a result of this negligent act?
A) physical damage coverage
B) liability coverage
C) medical expense coverage
D) uninsured boaters coverage
Answer: B
22
Which of the following statements about title insurance is true?
A) A premium must be paid annually to keep the policy in force.
B) The policy term runs for 30 years or the length of the insured's
mortgage loan, whichever is shorter.
C) The policy guarantees that the owner will keep possession of the
property if a defect in the title is discovered.
D) The policy provides protection against title defects that occurred
prior to the effective date of the policy.
Answer: D
23
Which of the following statements about a typical personal umbrella
policy is (are) true?
Losses covered under an underlying policy and the umbrella policy are
settled on a pro rata basis.
Losses not covered by the basic underlying contracts are subject to a
self-insured retention which typically is at least $25,000.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
24
The personal umbrella policy covers some personal injuries. Which of
the following is considered a personal injury?
A) bodily injury
B) property damage
C) defamation of character
D) liability arising from professional services
Answer: C
25
Paul has a personal auto policy with a per-person liability limit of
$300,000. He also has a personal umbrella policy with a limit of
$2,000,000 and a self-insured retention of $1,000. How much will be
paid by each policy if a person wins a judgment of $500,000 against
Paul as a result of bodily injury arising from the auto accident?
A) The auto policy will pay nothing, and the umbrella policy will pay
$449,000.
B) The auto policy will pay $250,000, and the umbrella policy will pay
$250,000.
C) The auto policy will pay $300,000, and the umbrella policy will pay
$199,000.
D) The auto policy will pay $300,000, and the umbrella policy will pay
$200,000.
Answer: D
26
All of the following are commonly excluded by personal umbrella policies
EXCEPT
A) acts committed with the intent to cause bodily injury or property
damage.
B) professional liability.
C) aircraft liability.
D) libel, slander, and other types of personal injury.
Answer: D
27
William would like to insure his home. He does not want theft or
personal liability coverage; however, he would like "open perils"
(all-risks) coverage on the dwelling. William should purchase a
A) Homeowners 3 Policy.
B) Dwelling Property 1 Form.
C) Dwelling Property 2 Form.
D) Dwelling Property 3 Form.
Answer: D
28
Steve and Mary are art collectors. They own lithographs, etchings, and
vintage photographs valued at over $250,000. Steve and Mary display
their art collection at their home. They can insure this valuable personal
property through a
A) title insurance policy.
B) dwelling property form.
C) personal articles floater form.
D) personal umbrella policy.
Answer: C
29
Martin would like to insure valuable personal property limited in
coverage by his homeowners policy. Martin has two options. He can
purchase the coverage through a separate personal articles floater policy
or he can add an endorsement to his homeowners policy. The
endorsement is called the
A) extended coverage endorsement.
B) scheduled personal property endorsement.
C) personal injury endorsement.
D) replacement cost endorsement.
Answer: B
30
Carolyn is considering the purchase of a large (60-foot) boat. She called
her insurance agent to see if she needs a separate policy for the boat.
The agent said that a special category of insurance policies was
designed to insure large watercraft. These policies are called
A) yacht insurance policies.
B) flood insurance policies.
C) floater policies.
D) Dwelling Property 3 (special form) policies.
Answer: A
31
Jerry built a home in a flood plain. He did not purchase flood insurance.
Recently, a noted meteorologist predicted torrential rains for the area for
the next 7 days. Jerry attempted to purchase flood insurance through the
National Flood Insurance Program. Which flood insurance provision is
likely to block Jerry's efforts to obtain coverage for protection against
the predicted torrential rain?
A) waiting period
B) definition of covered flood
C) deductible
D) insurance limit
Answer: A
32
Which of the following statements is (are) true about the National Flood
Insurance Program?
You can't purchase flood insurance through this program if your property
is located in a high-flood-risk area.
Coverage is not available for any property which has been flooded
previously.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
33
Frank purchased a building in a run-down area of a city. When Frank
was unable to obtain property insurance in the voluntary insurance
market, an agent suggested that he contact a state pool created in the
1960s that makes property insurance available in riot-prone areas. The
state pool the agent referred to is called a(n)
A) unsatisfied judgment fund.
B) FAIR plan.
C) guaranty fund plan.
D) assigned risk plan.
Answer: B
34
Len is considering the purchase of a home. As a home is a large
investment, Len wants to make sure that there are no liens, easements,
or other encumbrances preventing him from an unchallenged right to
possess and enjoy his property. Len can protect this right through the
purchase of
A) extended coverage insurance.
B) replacement cost insurance.
C) personal umbrella insurance.
D) title insurance.
Answer: D
35
Tina purchased a personal umbrella policy with a $1 million limit. Her
insurer required her to carry liability limits of 250/500/50 under her auto
insurance policy. The personal umbrella policy was written with a $1,000
self-insured retention. Tina was responsible for an auto accident in
which the other driver was severely injured. The other driver's bodily
injuries were $400,000 and the property damage was $20,000. How much
will the insurer pay under Tina's umbrella policy?
A) nothing
B) $149,000
C) $150,000
D) $170,000
Answer: C
36
Tina purchased a personal umbrella policy with a $1 million limit and a
$1,000 self-insured retention. Her insurer required her to carry a
$300,000 liability limit under her homeowners policy. Tina was held
responsible for slandering a public official. The public official won a
$100,000 judgment against Tina. The insurer that wrote Tina's
homeowners policy denied coverage. How much will the insurer pay
under Tina's personal umbrella policy?
A) nothing
B) $49,000
C) $99,000
D) $100,000
Answer: C
37
All of the following are ISO personal umbrella liability policy exclusions
EXCEPT
A) liability arising out of uncompensated board service for a nonprofit
organization.
B) liability arising out of expected or intentional injury.
C) liability arising out of business operations.
D) liability arising out of operation of watercraft not covered by an
underlying policy.
Answer: A
38
Which of the following statements is (are) true with regard to an
unendorsed ISO Dwelling Form?
The Dwelling forms provide theft coverage and personal liability
insurance.
The Dwelling 3 form provides broader property coverage than the
Dwelling 1 form.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
39
Congressional action in 2012 extended the National Flood Insurance
Program (NFIP) until 2017. Which of the following is a key provision of
the Biggert-Waters Flood Insurance Reform and Modernization Act of
2012?
A) elimination of the waiting period for coverage to start
B) elimination and phase-outs of several rate subsidies
C) write-off of the multi-billion dollar deficit attributable to Hurricane
Katrina claims
D) elimination of deductibles in NFIP policies
Answer: B
40
Which statement is true about medical expense coverage under the
boatowners package policy?
A) It pays the medical expenses of a covered person who is injured
while in the boat.
B) It pays the medical expenses of another boat operator who is injured
as a result of negligent operation of the boat by the insured.
C) It pays the medical expenses of a swimmer or a water skier being
towed by another boat if he or she is hit by the insured's boat.
D) It pays the medical expenses of someone on a dock or pier if the
insured's boat hits the dock or pier and injures him or her.
Answer: A
41
Andrea purchased an auto insurance policy with bodily injury liability
limits of 250/500 ($250,000/$500,000). She also purchased a personal
umbrella policy with a $1 million limit and a $500 self-insured retention.
Andrea was talking on her cell phone while driving, and her car struck
and killed a pedestrian in a crosswalk. The court ordered her to pay
$750,000 to the spouse of the person she killed. How will this claim be
settled?
A) The umbrella policy will pay $749,500.
B) Each policy will pay $375,000.
C) $250,000 will be paid under the auto policy and $500,000 will be paid
by the umbrella policy.
D) The auto policy will pay $250,000, Andrea will pay $500, and the
umbrella policy will pay $499,500.
Answer: C
42
Tom and Nancy Boyle were surprised to learn that some of their
valuable personal property—a gun collection, jewelry, a mink coat, and
sterling silverware—was subject to internal limits under their
homeowners policy. What separate insurance policy can the Boyles
purchase to obtain the desired coverage on this personal property?
A) personal umbrella policy
B) dwelling form
C) personal articles floater
D) title insurance
Answer: C
43
Valerie's home does not qualify for coverage under a standard
homeowners policy. Valerie would like to have "open-perils" (all-risks)
coverage on her dwelling and named-perils coverage on her personal
property. Which of the following policies should Valerie purchase?
A) Dwelling Property 1—Basic Form
B) Dwelling Property 2— Broad Form
C) Dwelling Property 3—Special Form
D) All of these policies provide "open perils" coverage on the dwelling
and named-perils coverage on personal property.
Answer: C
44
Under the ISO program, a mobile home can be insured by
A) adding the appropriate endorsement to the ISO personal auto
insurance policy.
B) using an ISO floater policy.
C) adding the appropriate endorsement to an ISO Homeowner 2 or
Homeowners 3 form.
D) using an ISO inland marine form.
Answer: C
45
Which of the following statements about mobile home insurance under
the ISO program is true?
A) The mobile home is insured on a replacement cost basis, but actual
cash value coverage can be added by endorsement if it is more
appropriate.
B) There is no coverage available for “other structures.”
C) Built-in, permanently attached furniture is considered personal
property.
D) Personal liability insurance is not part of the coverage available to
mobile home owners.
Answer: A
46
All of the following are characteristics of inland marine floater policies
EXCEPT
A) Coverage can be specifically tailored to the specific type of personal
property insured.
B) Coverage applies only when the property is at a specified location,
such as the insured’s home.
C) The amount of insurance can be selected by the purchaser.
D) Broader coverage can be obtained through an inland marine floater
policy.
Answer: B
47
While the Homeowners Flood Insurance Affordability Act of 2014
rolled-back some premium increases in the Biggert-Waters Act, it
included a provision to help fund the large deficit in the National Flood
Insurance Program. The provision to help fund the deficit is
A) a surcharge on every new home that is constructed in a flood plain.
B) additional income tax paid by building supply companies in states
where the largest flood losses have occurred.
C) additional premium taxes charged to each insurer in the
Write-Your-Own program.
D) a surcharge on every flood insurance policy that is sold.
Answer: D
ch25
1
Which of the following is (are) included in the common declarations page
of a commercial package policy?
A description of the insured property
A listing of the causes-of-loss that are covered by the policy
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
2
Which of the following items is (are) contained in the common policy
conditions page of the commercial package policy?
A description of the property that is insured.
A provision describing the insurer's right to audit the insured's books
and records
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
3
Which of the following is covered under the building and personal
property coverage form?
A) the insured's stock and inventory when located inside the insured
building
B) vehicles owned by the insured
C) aircraft and watercraft owned by the insured
D) a manufacturing building owned by a key customer or key supplier of
the insured.
Answer: A
4
Which of the following statements about the building and personal
property coverage form is (are) true?
A limited amount of coverage is provided for pollutant cleanup and
removal at the described premises if the release or discharge of the
pollutant results from a covered cause of loss.
Fire department service charges are specifically excluded because they
are a normal cost of doing business.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
5
All of the following are extensions of coverage under the building and
personal property coverage form EXCEPT
A) newly acquired or constructed property.
B) valuable papers and records.
C) personal property temporarily off the premises.
D) currency and securities.
Answer: D
6
Which of the following statements about the provisions of the building
and personal property coverage form is (are) true?
A separate deductible must be satisfied for each building damaged in the
same occurrence.
Under the replacement cost option, there is no deduction for
depreciation.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
7
One of the additional coverages under the building and personal property
coverage form is "increased cost of construction." The coverage is
payable if
A) a skilled artisan is needed to duplicate the construction of the
damaged property.
B) a labor strike or materials shortage increases construction costs.
C) an ordinance or building code increases the cost of construction.
D) the materials necessary to rebuild the damaged structure are more
expensive than ordinary building materials.
Answer: C
8
What is the effect of the optional agreed value provision in the building
and personal property coverage form?
A) It provides replacement cost coverage.
B) It increases insured values along with inflation.
C) It suspends the coinsurance clause.
D) It reduces the deductible to $50.
Answer: C
9
Which of the following perils is not included in the causes-of-loss basic
form of the ISO commercial package policy?
A) fire
B) lightning
C) explosion
D) flood
Answer: D
10
Which of the following statements about the causes-of-loss special form
of the ISO commercial package policy is (are) true?
The causes-of-loss special form provides open perils coverage and
insures against direct physical loss.
The causes-of-loss special form excludes loss caused by earthquake.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
11
Which of the following statements is (are) true concerning the value
reporting form?
Failure to report accurately suspends coverage.
If the insured underreports the property values at a location, and a loss
occurs at that location, recovery is limited to the proportion that the last
value reported bears to the value that should have been reported.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
12
Which of the following types of forms is used to insure fluctuations in
business personal property, such as inventory and finished goods?
A) accounts receivable coverage form
B) a value reporting form
C) difference in conditions insurance
D) business income insurance
Answer: B
13
Which of the following statements about the business income coverage
form is true?
A) Business income is defined as gross earnings before taxes.
B) Payroll is excluded unless it is specifically added.
C) The form covers loss of business income and extra expenses
incurred during restoration.
D) The form can be used by a manufacturing operation only.
Answer: C
14
The building and personal property coverage form provides several
optional coverages. Under one optional coverage, no deduction is taken
for depreciation when settling a covered loss. This optional coverage is
called
A) extra expense.
B) agreed value.
C) replacement cost.
D) inflation guard.
Answer: C
15
Which of the following statements about the extra expense coverage
form is (are) true?
It provides coverage for the increased cost that must be paid to continue
operations during a period of restoration.
It provides coverage for lost business income if a key customer or key
supplier experiences a loss.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
16
XYZ, Inc. would suffer serious financial consequences if either of its two
major customers were shut down and could not purchase XYZ products.
Which of the following types of consequential loss protection would
provide protection against this exposure?
A) leasehold interest
B) extra expense
C) marine insurance
D) business income from dependent properties
Answer: D
17
Which of the following forms is used to insure buildings that are under
construction?
A) builders risk coverage form
B) floor plan coverage form
C) new construction coverage form
D) labor and materials coverage form
Answer: A
18
Which of the following statements about the condominium
commercial-unit owners coverage form is (are) true?
It provides coverage for the unit owner's proportionate financial interest
in the condominium building.
It provides coverage for the business personal property of the unit
owner.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
19
All of the following statements about business income insurance are true
EXCEPT
A) Business income is defined as total sales that would have been made
if the loss had not occurred.
B) Payroll is considered a continuing normal operating expense.
C) Business income insurance does not cover the physical damage
caused by a peril which created the interruption in business.
D) The business income coverage form can be purchased with a
coinsurance requirement.
Answer: A
20
Which of the following statements about the equipment breakdown
protection coverage form is (are) true?
The covered cause of loss is a breakdown of covered equipment,
including boilers, machinery, and electrical and mechanical equipment.
It provides coverage for the reasonable cost of expediting permanent
repair or replacement of damaged property.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
21
Reimbursement for spoilage of frozen food caused by failure of a
refrigeration unit at a frozen foods processor can be covered under
A) equipment breakdown insurance.
B) extra expense insurance.
C) builders risk insurance.
D) difference in conditions insurance.
Answer: A
22
One inland marine coverage form is the accounts receivable coverage
form. In which of the following cases would the purchaser of this form
(the insured) be indemnified through the coverage?
A) if the insured cannot pay amounts owed because the purchaser has
become insolvent
B) if the insured cannot pay amounts owed because the purchaser has
incurred an insured physical damage loss
C) if the insured cannot collect accounts receivable because of the
destruction of records
D) if the insured cannot collect accounts receivable because the
purchaser extended credit to poor credit risks
Answer: C
23
Which of the following statements describes a Difference in Conditions
(DIC) Policy?
A) It is a type of commercial umbrella liability policy.
B) It is an open perils policy that covers perils not insured by basic
property insurance contracts.
C) It is designed to cover indirect losses for which the insured has
direct damage coverage.
D) It is used to settle disputes when an insured has more than one
insurance policy with differing policy provisions.
Answer: B
24
Which of the following statements about ocean marine insurance
coverages is (are) true?
Hull insurance limits coverage to the breakdown of a ship's machinery
and equipment.
Protection and indemnity insurance provides liability insurance to the
ship owner for bodily injury and property damage to third parties.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
25
There are a number of implied warranties in ocean marine insurance.
One implied warranty is that the vessel is properly constructed and
maintained, and that it is properly equipped for the voyage to be
undertaken. This implied warranty is the warranty of
A) seaworthiness.
B) barratry.
C) no deviation from planned course.
D) legal purpose.
Answer: A
26
Which of the following statements about ocean marine insurance is true?
A) The coverage is narrow and excludes perils of the sea.
B) Hull insurance includes collision liability covering the ship's owner if
the ship collides with another ship.
C) Protection and indemnity (P&I) insurance covers the shipper of goods
for cargo losses.
D) A particular average loss is a loss incurred only if a ship is totally
lost or destroyed.
Answer: B
27
All of the following are considered to be instrumentalities of
transportation and communication for purposes of inland marine insurance
EXCEPT
A) trains.
B) tunnels.
C) transmission lines.
D) television towers.
Answer: A
28
All of the following statements about inland marine forms are true
EXCEPT
A) A mail coverage form covers securities in transit by first-class mail,
registered or certified mail, or express mail.
B) A commercial articles coverage form is used to insure photographic
equipment and musical instruments.
C) A jewelers block coverage form is used by individuals to insure
jewelry limited in coverage by the homeowners form.
D) The signs coverage form covers neon, mechanical, and electrical
signs.
Answer: C
29
A firm wishing to insure a single shipment of merchandise sent by a
common carrier would purchase a(n)
A) annual transit policy.
B) trip transit policy.
C) bailee's liability policy.
D) equipment floater.
Answer: B
30
Which of the following statements about the businessowners policy is
(are) true?
It is designed to meet the insurance needs of large manufacturing firms.
It is a package policy designed to meet the basic property and liability
needs of an insured in a single contract.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
31
All of the following statements about the businessowners policy are true
EXCEPT
A) Coverage for business personal property includes coverage for leased
personal property which the named insured has a contractual
responsibility to insure.
B) The amount of insurance on the buildings increases by a stated
percentage each year.
C) Additional coverages include pollutant cleanup and removal.
D) The policy must be written with a deductible of at least $2,000 for
property losses.
Answer: D
32
Renee is risk manager of XYZ Company. She purchased a Commercial
Package Policy for her company and added one optional coverage. This
option suspends the coinsurance clause and substitutes a new agreement
covering any loss in the same proportion that the limit of insurance
purchased bears to a value specified in the declarations. This provision
is known as
A) waiver of inventory coverage.
B) inflation guard coverage.
C) agreed value coverage.
D) replacement cost coverage.
Answer: C
33
Frank's property insurance requires periodic reporting of inventory
values. Frank believes he can save money by under-reporting the
inventory. Last period, Frank reported $200,000 when the value was
really $400,000. Shortly after filing the report, when the value was
$500,000, the inventory was destroyed. Ignoring any deductible, how
much will Frank's insurer pay?
A) nothing, as underreporting voids coverage
B) $200,000
C) $250,000
D) $400,000
Answer: C
34
Rick is risk manager of Herald News, a daily newspaper in a competitive
market. Rick wants to make sure that if Herald's printing facility is
damaged or destroyed, the paper will continue to be published. What
type of insurance can Rick purchase to cover the added cost of
continuing to print the paper after a physical damage loss has occurred?
A) contingent business income coverage
B) product liability insurance
C) business income from dependent properties coverage
D) extra expense coverage
Answer: D
35
One type of commercial property insurance excludes perils that are
covered by the basic coverages. Some businesses buy this coverage to
fill coverage gaps, including flood and earthquake, and to cover property
in other countries. This type of insurance is called
A) protection and indemnity insurance.
B) building and personal property coverage form.
C) difference in conditions insurance.
D) builders risk coverage form.
Answer: C
36
Inter-Ocean Transfer owns 12 large cargo ships which transport goods.
Inter-Ocean Transfer can obtain physical damage insurance on these
vessels by purchasing
A) hull insurance.
B) cargo insurance.
C) protection and indemnity insurance.
D) freight insurance.
Answer: A
37
An Inter-Ocean Transfer cargo ship was forced to jettison some cargo in
heavy seas. The various interests in the voyage at the time the property
was jettisoned were
If $400,000 worth of iron ore was jettisoned, for how much of this
amount would Inter-Ocean Transfer be responsible under general
average?
A) nothing
B) $160,000
C) $200,000
D) $400,000
Answer: B
38
Tom opened a store in a mall. His store is located between a theater
and a department store. Tom counts on the theater and department store
to generate walk-in business at his store. While his store has been
successful, Tom knows that if either or both of the other businesses
closed, his store would suffer an economic loss. What type of dependent
property situation is illustrated in this scenario?
A) contributing location
B) recipient location
C) manufacturing location
D) leader location
Answer: D
39
The exterior walls, the roof, and the plumbing, heating and air
conditioning systems of a residential condominium can be insured through
the purchase of which of the following forms?
Condominium association coverage form
Condominium commercial unit-owners coverage form
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
40
A navigation error caused a cargo ship to run aground on a reef. The
ship, valued at $1.5 million, was carrying $1.5 million in grain and $1.5
in electronic devices. The ship sustained a $150,000 physical damage
loss. If this loss is a "particular average" loss, how will the loss be
settled?
A) The owners of each of the three interests are responsible for
$50,000.
B) The owner of the ship is responsible for the entire $150,000 loss.
C) The two cargo owners are each responsible for $75,000 of the loss.
D) The owner of the ship is responsible for the first $100,000 of the
loss, and the two cargo owners are each responsible for $25,000 of the
loss.
Answer: B
41
The business income and extra expense coverage form covers loss of
business income and continuing normal operating expenses. How is
business income (revenue) defined?
A) total sales
B) total sales less cost of goods sold
C) pre-tax net profit
D) after-tax net income
Answer: C
42
John is risk manager of Alpha-2-Omega Company. John wants coverage
for "direct physical loss" ("open perils" coverage) under the business and
personal property (BPP) coverage form. Which causes-of-loss form
should he select?
A) special form
B) basic form
C) standard form
D) broad form
Answer: A
43
If the optional replacement cost coverage provision is not selected, how
are losses settled under the building and personal property (BPP)
coverage form?
A) market value
B) original purchase price
C) actual cash value
D) book value
Answer: C
44
Which ocean marine coverage provides comprehensive liability insurance
for property damage caused by the ship to piers and docks, damage to
the ship's cargo, and injury to the passengers or crew?
A) collision liability clause
B) hull insurance
C) freight insurance
D) protection and indemnity insurance
Answer: D
45
Which of the following statements about the ISO businessowners policy
is true?
A) The current form is written on a named-perils basis, but an
"open-perils" (all risks) endorsement is available.
B) It provides business income and extra expense coverage as an
additional coverage.
C) The policy covers business personal property but does not cover
buildings.
D) The policy is designed to meet the special needs of large businesses.
Answer: B
46
Which of the following statements concerning terrorism insurance is (are)
true?
Terrorism insurance covers direct physical damage to the insured’s
property resulting from an act of terrorism.
Terrorism insurance and be added through an endorsement to the
commercial property insurance policy or purchased as a separate,
stand-alone policy.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
47
CompuFix services desktop and laptop computers. The owner of
CompuFix is concerned that computers that are left with the business to
be repaired may be damaged or destroyed. To address this risk,
CompuFix should purchase
A) mobile equipment and property insurance.
B) coverage for property held by bailees.
C) coverage for property of dealers—a “block” policy.
D) equipment breakdown insurance.
Answer: B
ch26
1
The phrase "general liability" is used to refer to the legal liability of a
business arising from all of the following EXCEPT
A) employees injured on the job.
B) defective products.
C) liability assumed by contract.
D) completed operations.
Answer: A
2
Liability arising out of work performed by independent contractors is
referred to as
A) contractual liability.
B) contingent liability.
C) care, custody, and control liability.
D) customer's liability.
Answer: B
3
A customer was injured when a furnace exploded following its faulty
installation by a heating and cooling business. For the heating and
cooling business, this is an example of
A) contingent liability.
B) completed operations liability.
C) products liability.
D) contractual liability.
Answer: B
4
The Commercial General Liability (CGL) Policy covers liability for which
of the following loss exposures?
Bodily injury of an employee of the insured arising out of and in the
course of employment
Bodily injury of a customer injured by a defective product manufactured
by the insured
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
5
Which of the following exposures is covered under a Commercial General
Liability Policy with no endorsements?
A) liability arising out of seepage of pollutants
B) employment-related practices liability
C) personal injury liability
D) aircraft liability
Answer: C
6
Bay Gallery owns a building on Wharf Street. Bay Gallery purchased a
Commercial General Liability Policy with no endorsements. All of the
following claims would be covered under the policy EXCEPT
A) An artist sued the gallery for slander after an employee of the
gallery said the artist's work looks like it was painted by an intoxicated
monkey.
B) A customer is injured when a painting falls from the wall and strikes
the customer.
C) A customer is injured after falling on a slippery floor at the gallery.
D) An employee of the gallery accidentally started a fire that caused
extensive damage to the building.
Answer: D
7
Which of the following losses would be covered under a Commercial
General Liability Policy that has no endorsements?
The named insured rented a building and an employee of the named
insured negligently started a fire at the rented building.
The cost to recall defective products
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
8
Which of the following is (are) covered under an unendorsed Commercial
General Liability Policy?
False arrest of a customer wrongly accused of shoplifting
Publication of material that violates an individual's right to privacy
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
9
In addition to the named insured, all of the following are insureds under
the Commercial General Liability Policy EXCEPT
A) suppliers of products to the named insured's business.
B) the insured's employees while acting within the scope of their
employment.
C) the manager of the insured's real estate.
D) partners of the named insured.
Answer: A
10
Which of the following is (are) covered under a claims-made policy?
Claims arising out of occurrences which take place during the policy
period, regardless of when the claim is made
Claims first reported during the policy period, provided the event
occurred after a retroactive date stated in the policy
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
11
A provision included in a claims-made commercial general liability policy
provides coverage for claims filed after the policy has expired. This
provision is called a(n)
A) extended reporting period provision.
B) agreed amount endorsement.
C) retroactive date provision.
D) per-occurrence limit clause.
Answer: A
12
Which of the following statements about workers compensation insurance
is (are) true?
Under the workers compensation part of the policy, the insurer agrees to
pay the benefits required by the workers compensation law of any state
listed in the policy declarations.
The employers liability part of the policy provides workers compensation
benefits when employees are working in states other than those listed in
the policy declarations.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
13
Which of the following statements regarding employer liability insurance
under the workers compensation insurance coverage form is (are) true?
Employer liability insurance covers an employee injury that occurs on
the job but may not be considered work-related.
If an injured employee sues a negligent third-party, and the third-party
sues the employer for contributory negligence, the lawsuit is covered
under employer liability insurance.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
14
An employee of Nelson Manufacturing was injured by a defective
machine Nelson purchased from Clark Corporation. The employee's tort
action against Clark was successful. Clark, in turn, sued Nelson, alleging
that Nelson failed to provide proper operating instructions to the
employee. This claim (Clark vs. Nelson) is covered under Part Two of
Nelson's workers compensation and employer liability policy. Such claims
are called
A) third-party over cases.
B) absolute liability cases.
C) joint-and-several liability cases.
D) mass tort cases.
Answer: A
15
All of the following are coverage options under the physical damage
coverage in the Business Auto Coverage Form EXCEPT
A) comprehensive coverage.
B) specified causes-of-loss coverage.
C) collision coverage.
D) property damage liability coverage.
Answer: D
16
Which of the following statements about the liability coverage of the
Business Auto Coverage Form is (are) true?
The insurer agrees to defend the insured and pay all legal defense costs
arising out of an accident involving a covered auto.
The insured is covered for property damage and bodily injury arising out
of the use of a covered auto.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
17
The auto dealers coverage form pays for damages that the insured is
legally obligated to pay because of damage to a customer’s auto left in
the insured’s car while it is being serviced or repaired. This coverage is
called
A) garagekeepers coverage.
B) general liability coverage.
C) other-than-collision loss coverage.
D) acts, errors or omissions liability coverage.
Answer: A
18
All of the following statements about aviation insurance are true EXCEPT
A) Physical damage coverage can be written on an "all-risks" basis.
B) Liability coverage also applies to bodily injury arising out of the
premises where the aircraft is stored.
C) Liability coverage applies to liability arising out of a workers
compensation law.
D) Aviation insurance is a highly-specialized market with relatively few
insurers.
Answer: C
19
Which of the following statements is (are) true concerning the
self-insured retention (SIR) under a commercial umbrella liability policy?
The SIR applies to claims covered by the umbrella policy but not by any
underlying insurance.
The SIR only applies to those claims for which the underlying policy has
paid first, and the umbrella policy is paying on an excess basis.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer: A
20
Which of the following statements about the typical commercial umbrella
policy is (are) true?
The policy is designed to cover only those loss exposures specifically
excluded by the underlying insurance contracts.
The policy is excess over the required underlying coverages.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
21
Which of the following losses is generally covered under a commercial
umbrella policy?
A) liability arising out of workers compensation laws
B) liability arising out of pollution
C) liability arising out of use of a business auto
D) the cost of recalling defective products
Answer: C
22
All of the following statements about liability coverage under the
businessowners policy are true EXCEPT
A) Liability arising out of personal and advertising injury is covered as
part of the insuring agreement.
B) Medical payments coverage is provided.
C) Employees acting within the scope of their employment are excluded
from coverage.
D) Coverage is included for the legal costs of defending the insured.
Answer: C
23
Which of the following is covered under the liability coverage of a
businessowners policy?
A) damage to the insured's property
B) bodily injury liability
C) automobile liability
D) professional liability
Answer: B
24
Which of the following statements about physicians, surgeons, and
dentists liability insurance is true?
A) Liability coverage is restricted to accidental acts.
B) The policy eliminates the need for medical practitioners to purchase
general liability insurance.
C) The insurer must obtain the consent of medical practitioners before
the insurer can settle claims.
D) The policy covers the physician for the negligent acts of an
employee.
Answer: D
25
Which of the following statements about errors and omissions insurance
is (are) true?
It is purchased by professionals to protect against claims arising for
negligent acts, errors, and omissions.
It is designed to meet the needs of stock brokers, attorneys, engineers,
architects and other professionals who give advice to clients.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
26
A-1 Electrical Service is an electrical contractor that employs 14
electricians. A-1 faces many loss exposures. One general liability
exposure arises out of faulty work that A-1 electricians may perform for
customers at their homes or businesses. This liability exposure is known
as
A) premises and operations liability.
B) products liability.
C) completed operations liability.
D) contingent liability.
Answer: C
27
Executives of a Fortune 500 firm blocked an acquisition attempt by a
larger company. When the stockholders learned they could have made
large profits had the acquisition not been blocked, they filed a lawsuit
against the executives of the firm. What type of liability insurance
protects the executives of the organization against such suits?
A) dram shop liability insurance
B) directors and officers liability insurance
C) employers liability insurance
D) employment related practices liability insurance
Answer: B
28
ABC Company purchased an ISO Commercial General Liability Policy.
The agent who sold ABC the coverage noted that the coverage trigger
in this policy was different from the trigger in the previous policy. The
new policy covers only those claims which are first reported during the
policy period, provided the event occurred after a retroactive date. This
type of policy is known as
A) extended reporting coverage.
B) claims-made coverage.
C) accident only coverage.
D) occurrence coverage.
Answer: B
29
HRC Company purchased an unendorsed ISO Commercial General
Liability (CGL) policy. Which of the following claims would be covered
under the CGL?
A) workers compensation liability
B) liability arising from intentional acts
C) personal and advertising injury liability
D) professional liability
Answer: C
30
Ted is risk manager of XYZ Company. He is concerned his company
might be sued by current or former employees alleging wrongful
termination, failure to promote, racial or gender discrimination, or sexual
harassment. What type of liability insurance can Ted purchase to cover
these types of claims?
A) workers compensation insurance
B) employer liability insurance
C) employment-related practices liability insurance
D) directors and officers liability insurance
Answer: C
31
Medical malpractice insurance written on a claims-made basis can leave
a surgeon vulnerable to malpractice claims if the surgeon retires,
changes insurers, or drops coverage. A provision can be added to the
claims-made form that protects the surgeon for future claims arising
from incidents that occurred while the claims-made policy was in force.
This provision is called a(n)
A) cut-through endorsement.
B) drop-down endorsement.
C) agreed amount endorsement.
D) extended reporting period endorsement.
Answer: D
32
Which of the following statements is true concerning the ISO
employment-related practices liability form?
A) Coverage is provided without a co-payment provision.
B) Legal defense costs are included as part of the policy limit.
C) Wrongful termination is excluded from coverage.
D) Liability to employees is excluded from coverage.
Answer: B
33
Jenkins Company purchased a commercial umbrella policy with a $10
million limit and a $100,000 self-insured retention. The insurer required
Jenkins Company to carry a $1 million per-occurrence limit on its
general liability policy and a $1 million per-occurrence limit on its
business auto policy. Jenkins purchased these required limits. A Jenkins
driver was negligent while operating a company vehicle and killed
another motorist. The court ruled that Jenkins must pay $5 million. How
much of this amount will be paid by the umbrella policy?
A) $1.0 million
B) $3.9 million
C) $4.0 million
D) $5.0 million
Answer: C
34
David started a public accounting firm. David is concerned that
accountants on his staff may give incorrect accounting advice, and the
accounting firm may be sued. What type of liability insurance should
David purchase to protect against such claims?
A) errors and omissions insurance
B) directors and officers liability insurance
C) general liability insurance
D) employers liability insurance
Answer: A
35
Holiday DeCor Company is insured by a commercial general liability
policy (CGL). Holiday DeCor rented a storage facility for one month to
store some excess inventory. While visiting the storage facility, a
Holiday DeCor employee discarded a cigarette. The resulting fire
severely damaged the storage facility. Which statement is true regarding
coverage of this damage under the CGL?
A) There is no coverage as the damage occurred at a rented premises.
B) There is no coverage because property damage liability is excluded.
C) The damage is covered under the fire legal liability coverage.
D) There is no coverage because an employee of Holiday DeCor caused
the loss.
Answer: C
36
Which of the following statements is (are) true with respect to the
treatment of legal defense costs under the ISO Commercial General
Liability policy?
Legal defense costs usually are counted against the policy limit.
Once the insurer has paid out the applicable limit of liability, the
insurer's duty to defend ends.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
37
Which of the following statements concerning directors and officers
liability insurance (D&O) is (are) true?
D&O policies usually cover the personal liability of directors and
officers.
D&O policies exclude coverage for claims brought by employees and by
stockholders.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
38
Jennifer was just asked to serve on the Board of an insurance company.
Jennifer is concerned that if the company is mismanaged, the
policyowners, stockholders, and employees might sue the management
team. What type of liability insurance will protect Jennifer from such
claims if she accepts a position on the insurance company's Board?
A) commercial general liability insurance
B) employment-related practices liability insurance
C) workers compensation and employer liability insurance
D) directors and officers liability insurance
Answer: D
39
The general liability policy covers bodily injury or property damage
caused by "an accident, including continuous repeated exposure to
substantially the same general harmful conditions." This cause is loss is
called a(n)
A) occurrence.
B) accident.
C) event.
D) incident.
Answer: A
40
One general liability loss exposure develops as a result of a written or
oral agreement to assume the legal liability of another party. A lease
that specifies that the building owner is held harmless for liability arising
out of use of the building is an example. This liability loss exposure is
A) premises and operations liability.
B) contractual liability.
C) products and completed operations liability.
D) contingent liability.
Answer: B
41
The employees of an industrial heating and cooling company spent four
days installing a large gas furnace in a newly-constructed building. While
testing the furnace one week later, an explosion occurred, damaging the
building. Damage to the building was covered under the heating and
cooling company's general liability insurance. When the heating and
cooling company also sought reimbursement for the time its employees
spent installing the furnace, the insurer denied coverage and noted a
specific applicable exclusion. What exclusion denies coverage for such
reimbursement?
A) damage to the insured's product
B) damage to the insured's work
C) damage to impaired property
D) damage to the insured's reputation.
Answer: B
42
Some directors and officers (D&O) liability policies include an insuring
agreement tcovers the legal liability of a corporation arising out of the
wrongful acts of directors and officers. This coverage for the corporation
is called
A) blanket coverage.
B) corporate reimbursement coverage.
C) personal liability of directors and officers coverage.
D) entity coverage.
Answer: D
43
One physical damage coverage alternative under the Business Auto
Policy provides coverage for losses caused by certain named perils, such
as fire, lightning, or explosion; theft; windstorm, hail or earthquake;
flood; vandalism or mischief; or the sinking, burning, collision or
derailment of any conveyance transporting the covered auto. This
physical damage coverage alternative is
A) collision coverage.
B) property damage liability.
C) comprehensive coverage.
D) specified causes-of-loss coverage.
Answer: D
44
The auto dealers coverage form includes coverage for violating odometer
(mileage) disclosure laws and selling a vehicle where there was a title
defect. Which coverage under the auto dealers coverage form would
respond to such claims?
A) garagekeepers liability coverage
B) liability coverage for “covered autos”
C) general liability insurance coverage
D) acts, errors or omissions liability coverage
Answer: D
45
One type of liability insurance covers damages arising from the failure of
a data holder to protect private information from being accessed by an
unauthorized party. This type of liability coverage is called
A) errors and omissions insurance.
B) cyber liability insurance.
C) terrorism insurance.
D) employment-related practices liability insurance.
Answer: B
46
Which of the following statements about purchasing cyber liability
insurance is true?
The coverage can be obtained by adding the appropriate endorsement to
the general liability coverage.
The coverage can be obtained by purchasing stand-alone cyber liability
coverage.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
ch27
1
In the ISO Commercial Crime Coverage form, theft is defined as the
A) unlawful taking of property to the deprivation of the insured.
B) unlawful taking of property from the care and custody of a person by
someone who has caused or threatens to cause bodily harm or who has
committed an unlawful act witnessed by that person.
C) unlawful taking of money or securities through the alteration of a
negotiable instrument.
D) unlawful taking of property from inside the premises by someone who
unlawfully enters or leaves the premises as evidenced by marks of
forcible entry or exit.
Answer: A
2
In the ISO Commercial Crime Coverage form, robbery is defined as the
A) unlawful taking of property to the deprivation of the insured.
B) unlawful taking of property from the care and custody of a person by
someone who has caused or threatens to cause bodily harm or who has
committed an unlawful act witnessed by that person.
C) unlawful taking of money or securities through the alteration of a
negotiable instrument.
D) unlawful taking of property from inside the premises by someone who
unlawfully enters or leaves the premises as evidenced by marks of
forcible entry or exit.
Answer: B
3
In the ISO Commercial Crime Coverage form, safe burglary is defined as
the
A) unlawful taking of property to the deprivation of the insured.
B) unlawful taking of property from the care and custody of a person by
someone who has caused or threatens to cause bodily harm or who has
committed an unlawful act witnessed by that person.
C) unlawful taking of money or securities through the alteration of a
negotiable instrument.
D) unlawful taking of property from within a locked safe or vault by
someone who enters the safe or vault as evidenced by marks of forcible
entry upon the exterior.
Answer: D
4
Which of the following statements is (are) true with regard to the ISO
commercial crime coverage forms?
The discovery version only covers losses which occur during the policy
period.
The loss-sustained version covers losses which occur during the policy
period and the loss is discovered during the policy period or within one
year after the policy expires.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
5
A burglar took some blank checks during a break-in at XYZ Company.
He was careful to make sure that the theft would be difficult to
discover. Three months later, he wrote himself a check for $20,000 and
signed the company treasurer's name on the check. After the check was
cashed, the loss was discovered. Which commercial crime coverage form
would cover this loss?
A) Inside the Premises—Theft of Money and Securities
B) Money Orders and Counterfeit Currency
C) Forgery or Alteration
D) Outside the Premises
Answer: C
6
All of the following are ISO commercial crime coverage exclusions
EXCEPT
A) dishonest acts committed by a named insured or partner of the
named insured.
B) indirect loss resulting from covered losses.
C) theft committed by an employee of the named insured.
D) losses from unauthorized trading in stocks and bonds.
Answer: C
7
Bernice is an underwriter. She is reviewing a commercial crime coverage
application. The coverage will be written using the discovery form.
Bernice is concerned that a large undiscovered loss may exist prior to
the policy's inception date. Which provision should Bernice add to the
policy to protect the insurer against liability for such previous losses?
A) extended reporting endorsement
B) loss sustained during prior insurance provision
C) waiver of inventory provision
D) retroactive date endorsement
Answer: D
8
Which of the following statements is (are) true with respect to financial
institution bonds?
Fidelity coverage covers losses resulting from the dishonest acts of
employees.
Financial institutions usually insure their crime exposures through
financial institutions bonds.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
9
The head teller of a bank embezzled $50,000 from the bank. Which
insuring agreement in a financial institution bond is designed to cover
such losses?
A) Insuring Agreement A—Fidelity
B) Insuring Agreement B—On Premises
C) Insuring Agreement C—In Transit
D) Insuring Agreement D—Forgery or Alteration
Answer: A
10
An armed robber pulled a gun on a teller at the Fourth National Bank.
He made off with over $10,000 in cash. Which insuring agreement in a
financial institution bond is designed to cover such losses?
A) Insuring Agreement A—Fidelity
B) Insuring Agreement B—On Premises
C) Insuring Agreement C—In Transit
D) Insuring Agreement D—Forgery or Alteration
Answer: B
11
A Pony Express Armored Car was transporting bank receipts from six
branch banks to the main bank. A group of robbers staged a daring
robbery. They forced the armored car off the road, shot two guards, and
took over $120,000 in cash. Which insuring agreement in a financial
institution bond would cover the stolen money in this case?
A) Insuring Agreement A—Fidelity
B) Insuring Agreement B—On Premises
C) Insuring Agreement C—In Transit
D) Insuring Agreement D—Forgery or Alteration
Answer: C
12
Fifth National Bank decided to loan $200,000 to Fred Franklin. As
collateral for the loan, Fred posted stock certificates. When Fred
defaulted on the loan, Fifth National tried to sell the stock. They
discovered the stock certificates were stolen from someone else. Which
insuring agreement in a financial institution bond is designed to cover
such losses?
A) Insuring Agreement B—On Premises
B) Insuring Agreement C—In Transit
C) Insuring Agreement D—Forgery or Alteration
D) Insuring Agreement E—Securities
Answer: D
13
Smith is Manager of ABC Department Store. Jones, ABC's Security
Director, visited Smith to ask some questions. During questioning, Smith
admitted that he stole $10,000 in merchandise. He was disciplined, but
not fired. The loss was not reported to the insurer that wrote ABC's
crime insurance. Six weeks later, Smith was observed on a surveillance
camera stealing over $50,000 in jewelry from ABC. ABC immediately
reported the loss to its crime insurer. Which ISO crime coverage
condition may prevent ABC from collecting for this loss?
A) termination as to any employee
B) discovery form
C) loss sustained form
D) loss sustained under prior insurance
Answer: A
14
National Bank believed it had been properly authorized to transfer
$250,000 to the off-shore account of one of its corporate customers.
The authorization was fraudulent, however, and the transferred funds
were stolen. Under which commercial crime coverage insuring agreement
would such a loss be covered?
A) Money Orders and Counterfeit Currency
B) Forgery or Alteration
C) Outside the Premises
D) Computer and Funds Transfer Fraud
Answer: D
15
Jack, owner of Jack's Bar and Grill, was robbed while attempting to
deposit receipts at his bank's night depository. Jack had purchased an
ISO commercial crime coverage form. This loss would be covered under
which insuring agreement?
A) Inside the Premises—Theft of Money and Securities
B) Outside the Premises
C) Money Orders and Counterfeit Currency
D) Inside the Premises—Robbery or Safe Burglary of Other Property
Answer: B
16
In the context of a surety agreement, the party who agrees to perform
certain acts or fulfill certain obligations is called the
A) fidelity.
B) obligee.
C) surety.
D) principal.
Answer: D
17
In the context of a surety agreement, the party who agrees to answer
for the debt, default, or obligation of another party is called the
A) principal.
B) obligee.
C) surety.
D) fidelity.
Answer: C
18
Which of the following statements about surety bonds is (are) true?
The surety has a legal right to recover a loss payment it made on
behalf of a defaulting principal.
The obligee is the party who benefits from the bond if the principal fails
to perform.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
19
Tracy is a trust officer at a bank. One of her responsibilities is to
manage funds that have been set aside for the benefit of minor children.
What type of bond guarantees that Tracy will faithfully execute her
required duties in this capacity?
A) fiduciary bond
B) public official bond
C) court bond
D) performance bond
Answer: A
20
Which of the following statements about various types of surety bonds is
true?
A) A judicial bond guarantees that a public official will faithfully perform
his or her duties for the protection of the public.
B) A payment bond guarantees that the bonded person will appear in
court.
C) A license and permit bond guarantees that the bonded party will
comply with all the laws and regulations governing his or her activities.
D) A bid bond guarantees that the principal will complete a construction
project on time.
Answer: C
21
A bond that guarantees that the person responsible for the property of
another will faithfully exercise his or her duties is called a
A) fiduciary bond.
B) performance bond.
C) court bond.
D) contract bond.
Answer: A
22
Appliance World sells small appliances. The store purchased an ISO
crime coverage policy. Last night, someone used a crowbar to pry open
a locked door, leaving marks of forced entry. The thief took a number
of appliances. The crime that occurred in this case is called
A) burglary.
B) shoplifting.
C) larceny.
D) robbery.
Answer: A
23
Which of the following statements is (are) true with respect to the
differences between insurance and surety bonds?
Insurance is a two-party contract; surety involves three parties.
Insurers usually do not have the right to recover a loss payment from an
insured, while a surety does have the legal right to recoup a loss
payment.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
24
All of the following statements about a surety are true EXCEPT
A) A surety theoretically expects no losses to occur.
B) The principal is the party who agrees to answer for the debt, default,
or obligation of another party.
C) The surety has the legal right to recover a loss payment from the
defaulting principal.
D) There are three parties to a surety bond: the principal, the surety,
and the obligee.
Answer: B
25
Graham is a cashier at a convenience store. A customer pulled a gun on
him, and said that he would shoot Graham unless he gave him all the
money in the cash register. This crime, which is covered under the ISO
commercial crime coverage form, is called
A) extortion.
B) murder.
C) robbery.
D) burglary.
Answer: C
26
A cashier at Food World Supermarket accepted a phony $100 bill. Which
ISO commercial crime coverage is designed to cover such a loss?
A) Forgery or Alteration
B) Money Orders and Counterfeit Currency
C) Inside the Premises—Theft of Money and Securities
D) Inside the Premises—Robbery or Safe Burglary of Other Property
Answer: B
27
XYZ Insurance Company markets a wide range of coverages. One type of
coverage provides monetary compensation if a bonded party fails to
perform certain acts. This coverage is called
A) property insurance.
B) liability insurance.
C) a fidelity bond.
D) a surety bond.
Answer: D
28
Al's Electric Service is an electric contracting company in Metro City.
The owner of the company, Al Richards, posted a bond guaranteeing that
all work performed by his company will comply with local building codes.
This bond is an example of a
A) fiduciary bond.
B) license and permit bond.
C) contract bond.
D) judicial bond.
Answer: B
29
State X hired Build-Right Construction to build a bridge. State X required
that construction be completed within 2 years after the contract was
signed. Les Johnson is the president of Build-Right. State X required that
Build-Right's promise to perform be guaranteed by a third party.
Build-Right purchased a performance bond from Rock Solid Indemnity.
The bond requires Rock Solid to be responsible if Build-Right does not
have the project completed on time. In this scenario, which party is the
principal?
A) State X
B) Build-Right Construction
C) Les Johnson
D) Rock Solid Indemnity
Answer: B
30
State X hired Build-Right Construction to build a bridge. State X required
that construction be completed within 2 years after the contract was
signed. Les Johnson is the president of Build-Right. State X required that
Build-Right's promise to perform be guaranteed by a third party.
Build-Right purchased a performance bond from Rock Solid Indemnity.
The bond requires Rock Solid to be responsible if Build-Right does not
have the project completed on time. In this scenario, which party is the
obligee?
A) State X
B) Build-Right Construction
C) Les Johnson
D) Rock Solid Indemnity
Answer: A
31
State X hired Build-Right Construction to build a bridge. State X required
that construction be completed within 2 years after the contract was
signed. Les Johnson is the president of Build-Right. State X required that
Build-Right's promise to perform be guaranteed by a third party.
Build-Right purchased a performance bond from Rock Solid Indemnity.
The bond requires Rock Solid to be responsible if Build-Right does not
have the project completed on time. In this scenario, which party is the
surety?
A) State X
B) Build-Right Construction
C) Les Johnson
D) Rock Solid Indemnity
Answer: D
32
In a surety arrangement, the party who benefits from the bond if the
bonded party fails to perform is the
A) principal.
B) obligee.
C) fidelity.
D) surety.
Answer: B
33
Tenth National Bank extended a $2 million loan to ABC Development
Company. Tenth National accepted a mortgage on a building as collateral
for the loan. The mortgagee's signature on the loan, however, was a
forgery. The resulting loss is covered by which financial institution bond
coverage?
A) Insuring Agreement A— Fidelity
B) Insuring Agreement D—Forgery or Alteration
C) Insuring Agreement E—Securities
D) Insuring Agreement G—Fraudulent Mortgages
Answer: D
34
Insurer A began to provide crime insurance coverage for JKL Company
three months ago. Insurer B provided coverage up until the time Insurer
A's coverage became effective. Forty-five days after the effective date
of Insurer A's coverage, a loss was discovered that occurred while
Insurer B was providing coverage. The loss would have been covered
under Insurer A's policy had it been in effect the previous period. Which
policy provision in the current Insurer A policy would make Insurer A
responsible for this loss?
A) loss sustained during prior insurance not issued by us
B) termination as to any employee
C) extended reporting period
D) loss sustained form
Answer: A
35
One commercial crime policy condition is "termination as to any
employee." This condition terminates crime coverage
A) on any employee once he or she is no longer employed by the
company.
B) on any employee once it is learned that he or she has committed a
theft or dishonest act.
C) on any employee who does not wish to be covered under the policy.
D) on a selected category of employees (e.g. cashiers or clerical
employees).
Answer: B
36
Bishop Appliance Store is covered by a commercial crime insurance
policy. The policy provides coverage for "Employee Theft" on a blanket
basis. When the store owner arrived to open the store for business one
morning, he discovered that many small electrical appliances were
missing. A surveillance tape showed a company employee had disabled
the burglar alarm before leaving work, and had returned to the store
later and had taken the appliances. Which of the following statements
regarding this loss is true?
A) There is no coverage under "Employee Theft" as the loss was
property, not money.
B) There is no coverage as the employee was not specifically named in
the policy.
C) There is coverage because "Employee Theft" includes coverage for
property.
D) There is no coverage as it requires that the employee be caught
while committing the theft.
Answer: C
37
Which of the following statements about the commercial crime insurance
policy is true?
A) Loss from the unauthorized disclosure of confidential information is
covered.
B) Theft committed by the named insured or his/her partners is covered.
C) Inventory shortages are only covered if proof of loss depends on an
inventory computation or on a profit and loss computation.
D) Indirect losses, such as loss of profits after a business is closed
because of a burglary, are excluded.
Answer: D
38
Metro City would like a pedestrian bridge constructed across Big Creek.
The city will accept bids on the project until a specified date. Bidders
must submit a bid bond that guarantees if the bid is accepted, the bidder
will sign the construction contract and furnish a bond that guarantees the
construction work will be completed according to contract specifications.
This second bond the bidder must post is a
A) performance bond.
B) payment bond.
C) maintenance bond.
D) completion bond.
Answer: A
39
Two tellers of a Tenth National Bank branch colluded to embezzle
$40,000 over a six-month period. State bank examiners detected the
embezzlement during a routine bank examination. Tenth National
purchased a financial institution bond. Under which of the following
insuring agreements is this loss covered?
A) Insuring Agreement A—Fidelity
B) Insuring Agreement B—On Premises
C) Insuring Agreement C—In Transit
D) Insuring Agreement D—Forgery or Alteration
Answer: A
40
Which of the following statements is (are) true with respect to the
kidnap/ransom and extortion coverage available through ISO’s Commercial
Crime Coverage program?
It covers the loss of money that is paid for ransom if someone is
kidnaps.
It covers some indirect costs association with a kidnapping, such as
hiring a hostage negotiator.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
41
Which of the following statements is true with regard to the
kidnap/ransom extortion coverage available through ISO’s Commercial
Crime Coverage program?
A) Ransom is covered only if the hostage is returned alive.
B) Money surrendered as a result of an extortion threat is covered.
C) The kidnap/ransom coverage is limited to the direct loss associated
with the kidnapping–the ransom payment.
D) This coverage can only be written on a monoline basis and cannot be
combined with other crime coverages.
Answer: B
42
Which of the following statements is true regarding covered losses under
the commercial crime coverage form?
A) Theft committed by business partners of the named insured is
covered.
B) Money surrendered as a result of an extortion threat is covered.
C) A loss that results from disclosure of confidential business
information, such as a patent to trade secret, is covered.
D) Liability associated with data security breaches is excluded.
Answer: D