Chapter 3: Risk Assessment and Pooling
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Q1) The Expected Value of a probability distribution is calculated by:
A) adding up all expected losses
B) adding up all expected losses and dividing the result by the number of observations
C) multiplying the expected losses with their probability and dividing the result by the number of observations
D) multiplying the expected losses with their probability and calculating the sum of all outcomes
Answer: D
Q2) When assessing the financial impact of a firm's pure risks, a risk manager is interested in calculating a measure of the long-run average loss that is expected in the future.
A)True
B)False
Answer: True
Q3) The confidence interval increases with a larger pool size.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Risk-Handling Techniques: Loss Control, Risk Transfer,
and Loss Financing
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Q1) Risk assumption is the best risk management tool when the change of loss is ________ and the potential severity of loss is ________.
A) low, low
B) high, high
C) low, high
D) high, low
Q2) Which of the following statements about risk assumption is<u> not </u>correct?
A) Risk assumption is also known as risk retention.
B) Risk assumption can be transferred through hedging.
C) Larger firms have a better ability to assume risk.
D) All of the above are correct.
Q3) The size of a firm:
A) has no impact on the ability to retain risk
B) is proportional to the amount of risk it is willing to take
C) determines whether a firm can hedge its risk
D) has an impact on its ability to absorb losses
Q4) Insurance increases moral hazard.
A)True
B)False
Q5) Discuss the concept of funded risk assumption.
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Chapter 5: Risk-Handling Techniques: Diversification and Hedging
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Q1) If the covariance between two stocks is 235 and the standard deviation of both stocks are 45 and 22 respectively, what is the Correlation Coefficient between the two stocks?
A) 0.24
B) 0.33
C) 0.76
D) There is not enough information to calculate the Correlation Coefficient.
Q2) The core concept underlying the risk reducing effects of diversification and hedging is the correlation coefficient.
A)True
B)False
Q3) A financial instrument whose value is based on an underlying security or commodity is called a/an:
A) insurance contract
B) employment contract
C) enterprise contract
D) derivative security
Q4) Explain the importance of the correlation coefficient for diversification.
Q5) Explain when and why a call option has value.
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Chapter 6: Fundamentals of Insurance
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Q1) The efficient insurance market requires all of the following conditions except:
A) numerous sellers and buyers
B) well-informed consumers
C) numerous purchase substitutes (homogeneity)
D) a government subsidy for lower-income citizens
Q2) The Financial Definition of insurance:
A) is that insurance is a contract in which one party agrees to compensate another party for losses covered by the contract
B) is that insurance is a financial agreement that transfers the risk of insured losses to a risk pool by an insurer
C) differs from state to state
D) is that it is any pool for which the insurance mechanism works
Q3) If insurance did not exist in the United States, which of the following might reasonably be expected to happen?
A) Banks would lower their interest rates on car loans.
B) Moral hazards would increase.
C) The occurrence of perils would decrease.
D) In general, only small businesses would be able to survive.
Q4) What is cash flow underwriting? Why is it a concern for insurance companies?
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Chapter 7: Insurable Perils and Insuring Organizations
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Q1) Dividends from mutual insurers are not subject to federal income tax.
A)True
B)False
Q2) Reciprocal exchanges are operated by managers known as notary publics.
A)True
B)False
Q3) On average, women live longer than men. If an applicant's gender is ignored in determining life insurance prices:
A) men will subsidize women
B) women will subsidize men
C) no subsidization will occur because only group longevity results are valid
D) morale hazard will increase significantly
Q4) Lloyd's of London is the largest mutual insurance company in the world measured by total premiums written.
A)True B)False
Q5) The items in an insurance pool must be similar to reduce subsidization. A)True
B)False
Q6) What is demutualization? What are some reasons companies want to demutualize?
Page 9
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Chapter 8: Insurance Functions
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Q1) Four states do not require people who sell insurance to be licensed.
A)True
B)False
Q2) All the following are true about underwriting <u>except</u>:
A) a major purpose of underwriting is to reduce adverse selection against the insurance company
B) fair rates should be charged so that each group of insureds is not subsidized by other groups
C) the underwriter should select only those insureds that are expected to have no losses
D) the underwriter makes decisions based on criteria established by the company management
Q3) Explain what a direct writer company is. Explain what the independent agency system is.
Q4) Loss adjusters perform all the following functions <u>except</u>:
A) investigate claims to determine if fraud is involved
B) negotiate with the insured on the amount of damage claims
C) recommend denial of claims
D) act as the company's lawyer if the case goes to court
Q5) What is the difference between an agent and a broker?
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Chapter 9: Insurance Markets: Economics and Issues
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Q1) All the following are requirements for perfect competition <u>except</u>:
A) a well-established regulatory environment
B) numerous sellers, each holding a small market share
C) numerous well-informed consumers
D) a homogeneous, perfectly substitutable product
Q2) FAIR plans guarantee insurance to all applicants.
A)True
B)False
Q3) When choosing the proper amount of insurance:
A) one should always insure those exposures that occur most frequently
B) one should always take a little bit less insurance than the agent recommends to save some money in the long run
C) one should never expose more to loss than one can afford to lose
D) one should take the biggest deductible that is available
Q4) Which of the following statements about the courts is correct?
A) Courts mostly deal with insurance companies denying coverage.
B) Courts mostly deal with insurance companies not paying on legitimate claims.
C) Courts mostly deal with insurance companies not providing sufficient coverage.
D) Courts mostly deal with insurance companies not paying on fraudulent claims.
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Chapter 10: Insurance Regulation
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Questions
Q1) McCarran-Ferguson Act expressed the intent of the federal government to forever abandon to the states the right to regulate insurance.
A)True
B)False
Q2) A life insurer's policy reserve equals the difference between the mathematical liability of a future death claim and the value of:
A) future premiums the insured will have to refund to its policyholders
B) future premiums the insured will pay the insurer
C) future investment earnings on premiums the insured will pay the insurer
D) all present death claims
Q3) An alien insurer is a non-U.S. insurer.
A)True
B)False
Q4) The failure of three large life insurance companies resulted in the NAIC's development of which of the following for life insurers?
A) Interest maintenance reserves
B) Asset valuation reserves
C) Risk-based capital requirements
D) National guaranty funds
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Chapter 11: Insurance Contracts
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Q1) Ambiguities in the wording of an insurance contract are always construed against the writer.
A)True
B)False
Q2) Which of the following is false concerning concealment?
A) Would be illustrated by a false answer to a question
B) To make a contract avoidable must be material
C) Typically involves an element of deception
D) The result is treated very much like material misrepresentations in insurance law
Q3) What is the principle of indemnity?
A) A court precedent that gives insureds the right to sue their insurers if they get bad claims service
B) The rule that a person may not collect more than his actual loss in the event of damage caused by an insured peril
C) The rule that a person will not be reimbursed for a loss unless he can show proof of loss
D) A way of requiring a person to pay a premium
Q4) Describe the purposes of deductibles.
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Chapter 12: The Personal Auto Policy
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Q1) Jackson has purchased Liability coverage limits of 100/200/50 on his PAP. He has an accident and finds himself liable for damages awarded in the following order: Bodily injury to A - $250,000
Bodily injury to B - $200,000
Bodily injury to C - $150,000
Property Damage to D - $40,000
Which of the following is true?
A) Jackson's insurer will pay nothing to A.
B) Jackson's insurer will pay $250,000 to A.
C) Jackson's insurer will pay $100,000 to A, $150,000 to C, and $40,000 to D.
D) Jackson's insurer will pay nothing to C.
Q2) You are in an automobile accident with an uninsured motorist, and the accident is your fault. Your Uninsured Motorist limits are 10/20 and your medical bills are $22,000.You collect from your UM coverage:
A) $0
B) $10,000
C) $20,000
D) $22,000
Q3) Explain the purpose of Uninsured Motorist coverage.
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Page 14
Chapter 13: Homeowners Insurance
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Q1) Why is there a "special limits of liability" section in the personal property section of the HO-3 contract?
Q2) In fire insurance, the purpose of coinsurance clauses is to prevent over-insurance.
A)True
B)False
Q3) All the following are provisions in the HO-3 contract that can decrease amounts payable by the insurance company <u>except</u>:
A) deductibles
B) coinsurance/replacement cost provisions
C) special limits on certain types of property
D) mortgage clause
Q4) The issue of who is a resident of the household, and thus an "insured" under the HO policy, has been litigated many times. Which of the following is a key factor that most courts consider when determining residence?
A) The educational status of the resident in question
B) Occupation of the resident in question
C) The intent of the individual
D) None of the above
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Chapter 14: Professional Financial Planning
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Q1) The fact that women live longer than men has the following impact on planning for retirement:
A) they require income for a longer period of time
B) life insurance on a husband should take this fact into account
C) they require more health insurance
D) All of the above are correct.
Q2) Financial planners:
A) should be knowledgeable of many topics
B) will make decisions for their clients
C) can assist people in the financial planning process
D) A and C above
Q3) Purchasing life insurance on the homemaker:
A) makes no sense because the homemaker generates no income
B) should not be done because of the moral hazard it creates in the working spouse
C) makes sense in many cases due to the cost of service replacement and it would help the family maintain a "normal" lifestyle
D) is very necessary when the homemaker has no minor children
Q4) Explain what a will is. What happens when a person dies without a valid will?
Q5) Why is it necessary to buy life insurance on a non-wage earning spouse?
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Chapter 15: Life Insurance Policies
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Q1) Which of the following is true with regard to term life insurance contracts?
A) Policies of less than 10 year length are illegal in 13 states.
B) One form of term life increases the amount of insurance as the balance due on a mortgage declines over time.
C) Renewable term life insurance guarantees the insured that upon renewal, his premiums will not increase.
D) Term insurance provides temporary protection.
Q2) Explain why there is a savings element to a whole life insurance contract.
Q3) What are the features that distinguish universal life from traditional forms of life insurance?
Q4) Which of the following life insurance policies would have the lowest premium for a male age 40?
A) Level term
B) Whole life continuous premium
C) Whole life paid up at 45
D) Variable life
Q5) What are the advantages of saving with cash value whole life insurance?
Q6) Why does the death benefit increase under certain conditions in the universal life Plan A (fixed face amount)?
Page 17
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Chapter 16: Standard Life Insurance Contract Provisions and Options
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Q1) Mr. Harvey needs life insurance. He is deciding whether to buy a new policy or to reinstate the one that he allowed to lapse last year. He asks you to explain the advantage of reinstatement versus purchasing a new policy, and you tell him:
A) settlement options in a new policy may be less favorable than those in the old policy
B) he will not have to present evidence of insurability
C) he will not have to pay premiums that are in arrears
D) the reinstated policy will not have an incontestability clause
Q2) The entire-contract provision makes the application for life insurance a part of the contract itself if attached.
A)True
B)False
Q3) Dallas took out a loan against her life insurance policy's cash value. She died before the loan could be repaid. The face value of the policy was $150,000. The insurer will pay Dallas' beneficiary:
A) $150,000
B) $150,000 minus the amount Dallas owed on the loan
C) $0
D) the total premiums Dallas paid in before she died
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Chapter 17: Annuities
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Q1) An annuity 5 years certain pays for 5 years or the death of the annuitant, whichever comes first.
A)True
B)False
Q2) Life annuities may be classified according to all but which one of the following criteria?
A) When liquidation payments begin
B) Method of paying premiums
C) Number of lives insured
D) Maximum number of payments guaranteed
Q3) Fixed dollar annuities are widely used as a hedge against inflation.
A)True
B)False
Q4) Which of the following does not influence how an insurer calculates monthly annuity benefits?
A) Age
B) Health status of insured annuitant
C) Sex
D) Amount of the premium the annuitant has paid
Q5) What is the difference between a SPDA and a FPDA?
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Chapter 18: Health Insurance and Disability Income
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Q1) Medicaid requires recipients to exhaust all other assets before they can receive benefits.
A)True
B)False
Q2) Individual Medicaid policies must return in benefits at least 60 percent of the premium earned.
A)True
B)False
Q3) Distinguish between a guaranteed renewable and a noncancellable health insurance contract.
Q4) Which of the following is not typically included in a major medical insurance policy?
A) Large deductible
B) Participating provision
C) Large number of exclusions
D) High face amount
Q5) Major medical insurance has relatively large deductibles.
A)True
B)False
Q6) Explain how a typical major medical contract works.
Page 20
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Chapter 19: Employee Benefits
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Q1) Explain how employees are taxed on group life insurance supplied as an employee benefit.
Q2) The monthly fee that HMOs charge employers is called the:
A) capitation payment
B) capitation and insurance premium
C) insurance premium
D) subscription fee
Q3) A qualified benefit plan must not discriminate in favor of highly compensated employees.
A)True
B)False
Q4) Under ERISA, which of these is not required of a qualified plan?
A) Plans must cover all full-time employees with at least one year of service.
B) Plans should not provide disproportionately high benefits to the highly compensated employees.
C) Defined benefit plans must be funded in advance according to ERISA requirements.
D) All employees must receive the same percentage of wages as benefits.
Q5) What are the rules to be considered a qualified plan?
Q6) Why are employers interested in providing employee benefits to their employees?
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Chapter 20: Social Security
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Q1) Social security benefits are:
A) provided on a current-income basis
B) actuarially reserved
C) welfare assistance
D) not funded by general tax revenues
Q2) The private insurance system and the Social Security system are both "fully-funded."
A)True
B)False
Q3) The "retirement test" reduces Social Security benefits if there is non-wage (for example, dividend or interest) income in excess of about $6,000.
A)True
B)False
Q4) Social Security is financed by a tax on:
A) employees and employers
B) only on employees
C) only on employers
D) all residents of the United States
Q5) What are the requirements for receiving Social Security disability benefits?
Q6) Describe the characteristics of a government insurance program.
Page 22
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Chapter 21: Unemployment and Workers Compensation Insurance
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Q1) Unemployment insurance is both a state and a federal program.
A)True
B)False
Q2) The exclusive remedy of workers' compensation law states that the:
A) compensation scheme for a work-related injury is the employee's choice
B) employer can sue employees for misconduct after compensation is paid
C) employee can only collect from the workers' compensation system for work-related injuries
D) worker must exclusively use the tort system to resolve liability claims against the employer
Q3) Unemployment insurance is financed by a ________ on covered wages.
A) 7.65% federal tax on covered wages up to $7,000
B) 6% federal tax on covered wages up to $7,000
C) 5.4% federal tax on covered wages up to $87,000
D) 6% state tax on covered wages up to $7,000
Q4) All workers' compensation claims are reviewed by special courts.
A)True
B)False
Q5) What are the general types of benefits provided under workers' compensation?
Q6) Explain the economic significance for the existence of unemployment insurance. Page 23
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Page 24
Chapter 22: Commercial Property Insurance
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Q1) Which of the following factors would <u>not</u> be considered in setting an ocean marine insurance rate?
A) Route of the ship
B) Type of cargo being transported
C) Experience of the captain and crew
D) ISO's standard base rate for marine exposures
Q2) Ocean marine insurance typically covers all the following categories of loss <u>except</u>:
A) losses caused by ship owner's fraud
B) loss of ship by pirates
C) loss of cargo in a tidal wave
D) loss of freight
Q3) Loss of income after a fire loss is an indirect loss.
A)True
B)False
Q4) Which of the following is not a factor in the cost of aircraft insurance?
A) Perils covered
B) Experience and training of the pilot
C) Type of cargo carried
D) Landing and hangar fees charged by local airports
Page 25
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Chapter 23: Commercial Liability Insurance
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Q1) Under a claims-made liability insurance policy, the insurer will pay if the injury sustained by the claimant:
A) occurs during the policy period
B) occurs after the policy period
C) is first reported during the policy period, regardless of when the actual accident may have happened
D) is first reported during the policy period, and if the accident causing the injury occurred after the policy's retroactive date
Q2) Legal rules dictate how an employer must act from the time a job position is created until the time that position is eliminated.
A)True
B)False
Q3) The term "professional liability insurance" is also known as "errors and omissions" insurance.
A)True
B)False
Q4) Explain the need for a claims-made form. Explain how a liability insurance contract written on a claims-made form works.
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