Insurance and Risk
Chapter Exam Questions
Course Introduction
This course offers a comprehensive introduction to the principles and practices of insurance and risk management. Students will explore the fundamental concepts of risk, methods of risk identification, assessment, and control, as well as the role insurance plays in mitigating financial losses for individuals and organizations. The curriculum covers key topics such as types of insurance (life, health, property, liability), the structure of insurance markets, underwriting, claims management, and regulatory frameworks. Through case studies and real-world applications, students will develop an understanding of how to evaluate risk, design effective risk management strategies, and analyze insurance products to meet diverse needs in personal and business contexts.
Recommended Textbook Principles of Risk Management and Insurance 13th Edition by George E. Rejda
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Page 2
Chapter 1: Risk and Its Treatment
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Sample Questions
Q1) 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
Q2) 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
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Chapter 2: Insurance and Risk
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Q1) 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
Q2) 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
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Chapter 3: Introduction to Risk Management
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Sample Questions
Q1) 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
Q2) 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
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Chapter 4: Enterprise Risk Management and Related Topics
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Sample Questions
Q1) 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
Q2) 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.
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6
Chapter 5: Types of Insurers and Marketing Systems
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Q1) Which of the following statements is (are) true about savings bank life insurance (SBLI)?
I.Each depositor at the savings bank receives life insurance equal to his or her savings account balance.
II.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
Q2) Which of the following statements about the sale of property and liability insurance through the direct response system is (are) true?
I.Selling expenses are higher because market segmentation tends to be less precise than with other marketing methods.
II.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
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Chapter 6: Insurance Company Operations
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Sample Questions
Q1) 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.
Q2) 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
Q3) 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.
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Chapter 7: Financial Operations of Insurers
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Sample Questions
Q1) Which of the following statements is (are) true concerning investments of property and casualty insurers and life insurers?
I.Property and casualty insurance companies place greater emphasis on liquidity than do life insurers.
II.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
Q2) Life insurance policyholders may borrow the cash value from their life insurance policies. Where are life insurance policy loans shown on a life insurance company's financial statements?
A) as an asset
B) as a liability
C) as income
D) as an expense
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Page 9
Chapter 8: Government Regulation of Insurance
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Sample Questions
Q1) 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
Q2) 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.
Q3) 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.
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10
Chapter 9: Fundamental Legal Principles
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Sample Questions
Q1) 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
Q2) Which of the following types of insurance policies can usually be assigned without the insurer's consent?
I.Life insurance
II.Property insurance
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) 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.
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Chapter 10: Analysis of Insurance Contracts
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Sample Questions
Q1) 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
Q2) Reasons why a peril may be considered uninsurable and therefore excluded from insurance contracts include which of the following?
I.The losses from the occurrence of the peril may be due to a predictable decline in value.
II.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
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Chapter 11: Life Insurance
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Sample Questions
Q1) 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.
Q2) The purchase of term insurance is justified by which of the following circumstances?
I.The insured wants to save money through the policy for a specific need.
II. 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
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Chapter 12: Life Insurance Contractual Provisions
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Sample Questions
Q1) 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 age at the time the original policy was issued.
C) The option permits the insured to purchase specified amounts of life insurance in the future even if the insured has become uninsurable.
D) If a guaranteed purchase option expires without being used, it can be exercised at a later date.
Q2) Bruce lied about his health history when he purchased a life insurance policy. He died 3 years after the policy was issued. Which life insurance policy provision will require the life insurer to pay the beneficiary even though Bruce lied on the application?
A) incontestable clause
B) entire contract clause
C) ownership clause
D) change-of-plan provision
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14
Chapter 13: Buying Life Insurance
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Sample Questions
Q1) 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 remains in 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 received tax-free.
Q2) Which of the following statements about the use of interest-adjusted cost data for comparing life insurance policies is (are) true?
I.Using interest-adjusted cost data provides a more accurate measure of the cost of life insurance than is provided if the time value of money is ignored.
II.Its use is most appropriate in deciding between policies when the cost variation is very small.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 14: Annuities and Individual Retirement Accounts
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Q1) 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 is 15 years (180 months). If Juanita is alive 20 years later, how much of the $6,000 received during the year is taxable?
A) nothing
B) $3,000
C) $4,500
D) $6,000
Q2) Donna, age 50, is single and earns $40,000 annually. She is covered under her employer's retirement plan. Donna would like to start a traditional IRA and contribute $4,000 this year. Which of the following describes her ability to establish 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 contribution can be made.
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Chapter 15: Health-Care Reform; Individual Health Insurance Coverages
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Sample Questions
Q1) All of the following statements about the tax treatment of Health Savings Accounts (HSAs) are true EXCEPT
A) Contributions to a qualified HSA are tax deductible.
B) Distributions from a qualified HSA used to fund medical expenses are taxable income.
C) Investment income in a qualified HSA accumulates income tax free.
D) Distributions from a qualified HSA prior to age 65 for nonmedical purposes are subject to a 10 percent penalty tax.
Q2) One provision of the Affordable Care Act provides creates in each state a transparent and competitive insurance marketplace where individuals and small firms can purchase affordable and qualified health coverage. This marketplace is called a
A) Medicaid plan.
B) Medicare plan.
C) Health Maintenance Organization (HMO).
D) Health Insurance Marketplace.
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17
Chapter 16: Employee Benefits: Group Life and Health Insurance
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Sample Questions
Q1) All of the following statements about cost controls in dental insurance plans are true 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 a lifetime limit for certain types of dental services.
D) To eliminate small claims, there is no coverage for routine oral examinations, X-rays, or cleaning teeth.
Q2) HMOs typically pay network physicians or medical groups a fixed annual or monthly payment for each member, regardless of the frequency or type of service provided. This payment is called a
A) pro-rata charge.
B) persistency bonus.
C) capitation fee.
D) corridor payment.
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Chapter 17: Employee Benefits: Retirement Plans
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Q1) Which statement is true with regard to problems and issues with tax-deferred retirement plans in the United States?
A) Inadequate participation in employer-sponsored retirement plans can create economic insecurity for retired employees.
B) Retirement benefits for women are higher than retirement benefits for men, reflecting the higher wages women are paid.
C) Employees do not invest sufficient amounts in the common stock issued by the companies where they work.
D) Pension benefits are too often indexed for inflation, burdening employers with high pension costs.
Q2) Which of the following statements concerning defined-benefit pension plans is (are) true?
I.The contribution rate by the employer varies from year to year.
II. The retirement benefit is not known in advance.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Page 19
Chapter 18: Social Insurance
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Q1) Beth was injured at work and is eligible to receive workers compensation benefits. All of the following benefits are provided under workers compensation EXCEPT
A) disability income.
B) retirement benefits for dependents.
C) rehabilitation benefits.
D) medical care.
Q2) Which of the following statements is (are) true with respect to the Medicare Advantage Plans?
I.These plans replace the original Medicare program, Parts A and B, which are no longer available to new retirees.
II.These plans provide an opportunity for retirees to receive Medicare coverage through private health care plans.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Page 20
Chapter 19: The Liability Risk
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Q1) Which of the following statements about the immunity of governmental entities is (are) true?
I.Governmental entities are more likely to be immune from liability when performing proprietary functions than when performing governmental functions.
II.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
Q2) Steve was involved in an auto accident. Both drivers were partially at fault for the accident. Steve's actual damages were $50,000. He was judged to be 60 percent at fault. If Steve's state has a pure comparative negligence law, how much will Steve collect?
A) $0
B) $20,000
C) $30,000
D) $50,000
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21
Chapter 20: Auto Insurance
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Sample Questions
Q1) 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
Q2) Which of the following situations would be covered under the liability section of the PAP?
I.A mechanic is sued by a pedestrian who is injured when the mechanic has an accident while road testing the insured's auto.
II.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
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22
Chapter 21: Auto Insurance (continued)
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Q1) Which of the following statements about modified no-fault laws is (are) true?
I.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.
II.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
Q2) 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.
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Chapter 22: Homeowners Insurance, Section I
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Q1) 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
Q2) 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.
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Chapter 23: Homeowners Insurance, Section II
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Q1) 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.
Q2) 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.
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Chapter 24: Other Property and Liability Insurance Coverages
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Q1) 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.
Q2) 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
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26
Chapter 25: Commercial Property Insurance
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Q1) 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
Q2) 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.
Q3) 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
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Chapter 26: Commercial Liability Insurance
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Q1) Which of the following losses would be covered under a Commercial General Liability Policy that has no endorsements?
I.The named insured rented a building and an employee of the named insured negligently started a fire at the rented building.
II.The cost to recall defective products
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) 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.
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Chapter 27: Crime Insurance and Surety Bonds
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Q1) 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
Q2) 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.
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