Insurance and Risk Solved Exam Questions
Course Introduction
This course provides a comprehensive overview of insurance and risk management principles, focusing on the identification, analysis, and mitigation of various types of risks faced by individuals and organizations. Topics include the nature and functions of insurance, the structure and operation of insurance markets, legal and regulatory frameworks, and the strategic use of insurance in managing personal and business risks. Students will explore risk assessment techniques, risk transfer mechanisms, underwriting processes, claims management, and the economic and social implications of insurance. Practical case studies and real-world applications are incorporated to develop critical thinking and problem-solving skills in the context of risk and insurance decision-making.
Recommended Textbook Principles of Risk Management and Insurance 13th Edition by George E. Rejda
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1397 Verified Questions
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Page 2
Chapter 1: Risk and Its Treatment
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Sample Questions
Q1) 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
Q2) 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
Q3) 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
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Page 3
Chapter 2: Insurance and Risk
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Sample Questions
Q1) Characteristics of a fortuitous loss include which of the following?
I.The loss is certain to occur.
II.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
Q2) 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
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4
Chapter 3: Introduction to Risk Management
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Sample Questions
Q1) 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
Q2) 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
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5
Chapter 4: Enterprise Risk Management and Related Topics
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Sample Questions
Q1) Which of the following statements regarding terrorism insurance is (are) true?
I.There is a federal backstop if terrorism claims are catastrophic.
II.Private insurers market terrorism insurance.
A) I only
B) II only
C) both I and II
D) neither I nor II
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.
Q3) Uncertainty pertaining to the organization's goals and objectives and the organization's strengths, weaknesses, opportunities, and threats is called
A) operational risk.
B) strategic risk.
C) subjective risk.
D) pure risk.
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Page 6
Chapter 5: Types of Insurers and Marketing Systems
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Sample Questions
Q1) 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.
Q2) 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.
Q3) 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
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Chapter 6: Insurance Company Operations
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Sample Questions
Q1) 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 for large commercial risks. This reinsurance arrangement is a(n)
A) quota-share treaty.
B) surplus-share treaty.
C) excess-of-loss treaty.
D) reinsurance pool.
Q2) 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.
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Chapter 7: Financial Operations of Insurers
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Sample Questions
Q1) MedProf Insurance markets medical malpractice insurance. The company's 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
Q2) 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.
Q3) 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
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Chapter 8: Government Regulation of Insurance
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Sample Questions
Q1) 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.
Q2) 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.
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Chapter 9: Fundamental Legal Principles
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Sample Questions
Q1) 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
Q2) 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.
Q3) 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.
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Chapter 10: Analysis of Insurance Contracts
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Sample Questions
Q1) 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
Q2) 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
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Chapter 11: Life Insurance
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Sample Questions
Q1) 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.
Q2) 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.
Q3) 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
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Chapter 12: Life Insurance Contractual Provisions
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Sample Questions
Q1) Which of the following statements is (are) true regarding exclusions in life insurance contracts?
I.Life insurance policies are remarkably restrictive, including numerous exclusions.
II.A life insurer may exclude death attributable to certain activities or hobbies disclosed on the application.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements is (are) true concerning the automatic premium loan provision?
I.Unlike other policy loans, interest is not charged on automatic premium loans.
II. The basic purpose of an automatic premium loan is to prevent a life insurance policy from lapsing.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 13: Buying Life Insurance
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Sample Questions
Q1) Which of the following statements is (are) true regarding taxation of life insurance?
I.Life insurance proceeds paid in a lump-sum to a designated beneficiary are received free of federal income taxes.
II.The policyowner must pay taxes annually on the amount by which the cash value 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
Q2) Consumer experts typically recommend all of the following rules when buying life insurance 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.
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Chapter 14: Annuities and Individual Retirement Accounts
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Sample Questions
Q1) When selling life annuities, what risk is the insurer pooling?
A) bad investment performance
B) premature death
C) bad expense experience
D) excessive longevity
Q2) Daryl, age 42, quit his job. His employer offered a defined contribution pension plan, and the balance in the account was $30,000 when Daryl quit. He can avoid immediate 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 former employer.
Q3) Brad funded a life annuity through installment payments. At age 60, he decided to elect an annuity settlement option and to begin to receive payments. Which of the following annuity payout options will provide Brad with the highest monthly income?
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
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Page 16
Chapter 15: Health-Care Reform; Individual Health Insurance Coverages
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Sample Questions
Q1) All of the following are historical reasons for the increase in health care expenditures 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.
Q2) Some managed care plans use physicians, hospitals, and health care organizations that agree to make medical services available to insureds at discounted 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 care entities are called
A) Preferred Provider Organizations (PPOs).
B) Health Maintenance Organizations (HMOs).
C) Blue Cross/Blue Shield Plans.
D) Health savings accounts (HSAs).
Q3) 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 and abuse.
Page 17
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Chapter 16: Employee Benefits: Group Life and Health Insurance
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Sample Questions
Q1) Which of the following statements about preferred provider organization (PPO) health plans is (are) true?
I.A PPO plan contracts with health care providers to provide medical services to members at reduced fees.
II.Plan members are given a financial incentive to use PPO providers rather than other providers.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) The Affordable Care Act requires employers with 100 or more employees to provide health insurance on the employees or pay a penalty if at least one employee receives a tax credit and coverage through the Health Insurance Marketplace. This requirement-providing insurance or paying a fine-is known as the
A) single-payer solution.
B) employer shared responsibility.
C) essential benefit requirement.
D) portability requirement.
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Chapter 17: Employee Benefits: Retirement Plans
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Sample Questions
Q1) 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.
Q2) For a long-term employee who is covered by a defined benefit plan, the highest retirement 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.
Q3) ACME Company is considering starting a retirement plan for its employees. One option ACME is considering is a profit-sharing plan. All of the following are advantages of this type of retirement plan EXCEPT
A) The employer's cost is not affected by the age and the number of employees.
B) Profit sharing plans provide an incentive for employees to work harder and more efficiently.
C) The 10 percent penalty tax does not apply to distributions prior to age 59.5.
D) ACME enjoys greater flexibility in employer contributions.
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Page 19
Chapter 18: Social Insurance
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Q1) Which of the following statements about the financing of unemployment insurance benefits is true?
A) Each state maintains its own trust fund at the state level, and the state pays qualified beneficiaries from the trust fund the state administers.
B) While experience rating is used for other types of insurance, it is not used 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 drawn upon if the state's account is depleted.
D) Most state programs are financed primarily by payroll taxes paid by employees.
Q2) A serious current concern with the Social Security program is the depletion of the Disability Income Trust Fund. Each of the following contributed to the depletion 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
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Page 20
Chapter 19: The Liability Risk
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Sample Questions
Q1) 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.
Q2) 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. In payment for his pain, suffering, and disfigurement, losses which cannot be specifically itemized, James will receive
A) punitive damages.
B) special damages.
C) imputed damages.
D) general damages.
Q3) 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.
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Page 21
Chapter 20: Auto Insurance
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Sample Questions
Q1) Which of the following persons is (are) covered for liability insurance under the PAP?
I.a family member who drives a covered auto
II.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
Q2) 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.
Q3) 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.
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Page 22
Chapter 21: Auto Insurance (continued)
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Q1) 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.
Q2) 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.
Q3) 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.
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23
Chapter 22: Homeowners Insurance, Section I
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Q1) 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.
Q2) 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.
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24
Chapter 23: Homeowners Insurance, Section II
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Q1) 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.
Q2) 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.
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Chapter 24: Other Property and Liability Insurance Coverages
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Q1) 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.
Q2) 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
Q3) 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
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Page 26
Chapter 25: Commercial Property Insurance
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Q1) 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.
Q2) Which of the following statements about the businessowners policy is (are) true?
I.It is designed to meet the insurance needs of large manufacturing firms.
II.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
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Chapter 26: Commercial Liability Insurance
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Q1) Which of the following statements is (are) true concerning the self-insured retention (SIR) under a commercial umbrella liability policy?
I.The SIR applies to claims covered by the umbrella policy but not by any underlying insurance.
II.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
Q2) 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
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Chapter 27: Crime Insurance and Surety Bonds
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Q1) Which of the following statements is (are) true with regard to the ISO commercial crime coverage forms?
I.The discovery version only covers losses which occur during the policy period.
II.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
Q2) 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.
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