Insurance Law
Mock Exam
Course Introduction
Insurance Law explores the legal principles and regulatory frameworks governing the insurance industry. This course examines the formation, interpretation, and enforcement of insurance contracts, including topics such as insurable interest, risk, indemnity, subrogation, and utmost good faith. Students will analyze various types of insurance life, property, liability, health and assess the roles and obligations of insurers and insureds. The curriculum also addresses insurance regulation, claims processes, dispute resolution, and significant case law, providing a comprehensive understanding of how insurance law operates in both domestic and international contexts.
Recommended Textbook
Introduction to Risk Management and Insurance 10th Edition by Mark S. Dorfman
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Page 2
Chapter 1: Introduction to Enterprise Risk Management and Insurance
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Sample Questions
Q1) Why is Enterprise Risk Management so important for firms?
Answer: There has been a clear breakdown in corporate governance and ERM provides a solution by examining all risks in the firm collectively and by elevating the analyses to the highest level in the corporation. This way the people in the corporate boardroom can no longer escape responsibility.
Q2) Catastrophic losses are not insured by the private insurance industry because:
A) if a truly catastrophic loss occurs, it can threaten the solvency of the insurer
B) catastrophic losses can result from an individual's moral hazard
C) the federal government wants to insure catastrophic losses
D) the losses require foreign reinsurance companies to operate in the U.S.
Answer: A
Q3) Which of the following is not a risk handling technique?
A) Loss control
B) Loss diversification
C) Loss transfer
D) Loss financing
Answer: B
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Chapter 2: Risk Identification
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Sample Questions
Q1) According to a survey, which of the following is the most challenging risk to manage?
A) Human resource risk
B) Third-party liability
C) Speculative risk
D) Reputation risk
Answer: D
Q2) Provide a statement of the overall goal of the risk management function.
Answer: The overall goal of the risk management function is to make efficient pre-loss decisions to prepare for the post-loss financial consequences of losses in order to minimize the overall impact (disruption) to the firm and dollar losses.
Q3) Property Risk:
A) is an example of a speculative risk
B) is an example of an indirect risk
C) only relates to buildings
D) is an example of a pure risk
Answer: D
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4
Chapter 3: Risk Assessment and Pooling
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Sample Questions
Q1) Risk Pooling is the ability to reduce the risk of a unit by making more accurate predictions about a large pool of units.
A)True
B)False
Answer: True
Q2) Which of the following statements about the risk reduction is correct?
A) When the probability distribution is non-normal, risk cannot be reduced by increasing the pool size.
B) After the pool size has reached 36, risk can no longer be reduced any further.
C) Risk is reduced as the pool size increases.
D) All of the above are correct.
Answer: C
Q3) The formula for the confidence interval is Estimated Mean + Estimated Standard Deviation.
A)True
B)False
Answer: False
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Chapter 4: Risk-Handling Techniques: Loss Control, Risk Transfer,
and Loss Financing
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Sample Questions
Q1) Risk Retention is not a good idea if:
A) the risk is unimportant
B) you did not identify the risk
C) the frequency is so low it almost will never happen
D) the exposure is potentially catastrophic
Q2) Which of the following statements about duplication and physical separation is <u>not </u>correct?
A) Duplication is closely related to physical separation.
B) Like duplication, physical separation involves multiple and similar copies.
C) When a company engages in physical separation, it cannot also engage in duplication.
D) Both duplication and physical separation aim to minimize supply-chain interruptions.
Q3) When the chance of loss is great and the potential for loss severity is also very high, insurance is the best approach to the risk management problem.
A)True
B)False
Q4) What are the main considerations in determining the proper mix of retention and transfer in handling potential loss exposures?
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Chapter 5: Risk-Handling Techniques: Diversification and Hedging
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Sample Questions
Q1) As long as their correlation coefficient is less than 1, risk is being reduced by adding investments to the pool.
A)True
B)False
Q2) If two random variables are uncorrelated:
A) their correlation coefficient cannot be calculated
B) their correlation coefficient is zero
C) their correlation coefficient depends on the covariance
D) All of the above are incorrect.
Q3) Exchange rate losses arise when the value of the domestic currency falls relative to foreign currencies.
A)True
B)False
Q4) Which of the following statements about bearing risk collectively is correct?
A) Bearing risk collectively is not very cost-efficient.
B) Bearing risk collectively only works for small groups.
C) Bearing risk collectively is bearing risk as part of a large group.
D) All of the above are correct.
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Q5) What are the generic tools used to deal with the exposures in the area of financial risk management?
Chapter 6: Fundamentals of Insurance
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Sample Questions
Q1) Midlands Insurance has 100 policyholders. It expects that this year's losses for all of its policyholders will total $111,000. The predicted expenses of operating the insurance pool are $46,000, expected investment earnings are $20,000, and the actuary determines that there is no need to charge for a risk reserve this year. What should the premium for each of Midland's 100 policyholders be?
A) $1,110
B) $1,370
C) $1,570
D) $1,770
Q2) Private insurance can be classified according to coverage. Distinct types mentioned in the text include all the following <u>except</u>:
A) Property
B) Commercial Lines
C) Auto
D) Submarine
Q3) Life insurance provides protection from the peril of death.
A)True
B)False
Q4) Discuss the building blocks of an insurance premium.
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Chapter 7: Insurable Perils and Insuring Organizations
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Sample Questions
Q1) Lloyd's of London:
A) is an unincorporated, not-for-profit insurer
B) is partly a mutual company and partly a stock company
C) sells mainly homeowners insurance to residents of London
D) operates in the surplus lines and marine insurance markets
Q2) Which of the following is not a type of mutual insurance organization?
A) Assessment
B) Advanced-premium
C) Perpetual
D) Reciprocal
Q3) In general, all of the following statements about Lloyd's of London are true <u>except</u>:
A) members have unlimited personal liability
B) individual members ("names") cooperate in groups known as syndicates
C) if a syndicate is unable to pay its portion of a loss, the insured has the right to collect that unpaid portion from Lloyd's of London
D) Lloyd's is not as preeminent in the insurance marketplace today as it once was
Q4) What are the basic differences between a stock and a mutual insurance company?
Q5) What is demutualization? What are some reasons companies want to demutualize?
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Chapter 8: Insurance Functions
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Sample Questions
Q1) Fergie is a salaried claims adjuster who works exclusively for Mutual of Kentucky Insurance. What kind of claims adjuster is Fergie?
A) Independent
B) Public
C) Private
D) Direct
Q2) An agency contract determines the rights and duties of both the agent and the insurer.
A)True
B)False
Q3) In reinsurance, the primary insurer is also known as the:
A) retrocessionaire
B) first-layer reinsurer
C) ceding company
D) excess reinsurer
Q4) Pro-rata reinsurance determines the reinsurer's share of losses in a different manner than excess of loss reinsurance.
A)True
B)False
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Chapter 9: Insurance Markets: Economics and Issues
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Sample Questions
Q1) Moody's Investors Service provides what type of information about insurers?
A) Financial strength
B) Average time it takes them to pay valid claims
C) Daily stock price reports
D) Complaint history
Q2) A lack of insurance for high-risk drivers:
A) makes the insurance market more efficient
B) should change their behavior
C) makes insurance costs go up
D) reduces regulation in the insurance market
Q3) Which of the following is the best driver to maintain an adequate supply of insurance at affordable prices?
A) Regulations
B) Excluding high-risk applicants
C) Excluding low-risk applicants
D) Competition among insurers
Q4) FAIR plans guarantee insurance to all applicants.
A)True
B)False
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Chapter 10: Insurance Regulation
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Sample Questions
Q1) Insurance regulations require legal reserves and surplus because:
A) assets have to equal liabilities plus owners' equity
B) reserves are long-term obligations and must be met with long-term assets
C) they provide a cushion against bad underwriting and investment results
D) insurers must pre-fund all agent's commissions and underwriting expenses
Q2) The right of the states to regulate insurance was first established by the:
A) SEUA decision
B) Paul v. Virginia decision
C) National Association of Insurance Commissioners Act
D) McCarran-Ferguson Act
Q3) Under regular audits and solvency testing an insurer is subject to:
A) no state guaranty fund participation
B) more restrictive rate regulation
C) the requirement to file an annual statement
D) FDIC participation and protection
Q4) NAIC stands for:
A) National Association of Investment Commissioners
B) National Affiliated Insurance Commissioners
C) National Association of Insurance Commissioners
D) none of the above
Page 12
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Chapter 11: Insurance Contracts
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Sample Questions
Q1) The principle of insurable interest is important because it:
A) makes insurance companies more profitable
B) supports the principle of indemnity
C) prevents insurers from unfairly denying insurance claims
D) prevents an insurer from subrogating against a negligent third party
Q2) A misrepresentation:
A) always voids a contract
B) makes a contract voidable if it is material
C) is sometimes referred to as a "concealment"
D) is legally treated the same way as a breach of warranty
Q3) Explain the principle of indemnity. How does one measure indemnity?
Q4) The fact that insured have reasonable expectations has typically resulted in:
A) a reduction in the scope of insurance coverage
B) an increase in morale hazard
C) difficulties preventing adverse selection
D) insurers having to cover things they never anticipated covering
Q5) Since the automobile insurance policy is written by the insurer, ambiguities are interpreted in favor of the insurer.
A)True
B)False
Page 13
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Chapter 12: The Personal Auto Policy
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Sample Questions
Q1) If an insured is using his/her own private passenger car under normal circumstances, in what situations can the insured lose legal liability coverage?
Q2) Celeste has Liability coverage limits on her PAP of 100/200/50. She has an accident and finds herself liable for damages awarded in the following order: Bodily injury to A$250,000
Bodily injury to B - $30,000
Bodily injury to C - $150,000
Property Damage to D - $48,000
Which of the following is true?
A) Her insurer will pay $150,000 to C.
B) Her insurer will pay $250,000 to A.
C) Her insurer will pay $30,000 to B.
D) Both A and C are true.
Q3) When you borrow someone's car and wreck it, you have the option of letting your automobile insurance pay on a primary basis for the accident.
A)True
B)False
Q4) Explain the purpose of Uninsured Motorist coverage.
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Page 14
Chapter 13: Homeowners Insurance
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Sample Questions
Q1) No consequential or loss of use losses are covered by the standard homeowners' policy.
A)True
B)False
Q2) The Liability coverage in the HO policy does all the following <u>except</u>:
A) defends a suit against the insured even if the allegations of the suit are groundless, false or fraudulent
B) covers the insured's own property destroyed by another's negligence
C) pays for immediate medical and surgical expenses incurred by other(s)
D) reimburses the insured for all reasonable expenses incurred at the request of the company
Q3) Which of the following is <u>not</u> exclusion in a typical HO-3 policy?
A) Catastrophic events
B) Coverage where another policy is specifically designed to provide coverage
C) Failure of power or another utility
D) All of the above are a typical exclusion in a HO-3 policy.
Q4) In fire insurance, the purpose of coinsurance clauses is to prevent over-insurance.
A)True
B)False
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Chapter 14: Professional Financial Planning
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Sample Questions
Q1) The needs-based approach should be used to determine whether life insurance is needed and how much.
A)True
B)False
Q2) What are the main financial planning problems encountered in the "early adult" years?
Q3) The Federal Estate Tax is a flat percent on all assets owned at death.
A)True
B)False
Q4) Financing retirement is a challenge for many Americans. Which of the following is <u>not</u> a reason that retirement planning has become more challenging?
A) Many employers no longer fund retirement programs for their employees.
B) Many employees have complicated but generous health insurance plans provided by their employer.
C) Social Security has increased the normal retirement age and lowered benefit targets.
D) Increases in longevity put a greater burden on retirement savings.
Q5) Why is it necessary to buy life insurance on a non-wage earning spouse?
Q6) Explain what a will is. What happens when a person dies without a valid will?
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Chapter 15: Life Insurance Policies
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Sample Questions
Q1) After taking an introductory course in insurance, your parents ask you what type of life insurance policy they should purchase if they want permanent death protection and the potential for earning a relatively high rate of return on their cash value. Which type of life insurance would you suggest?
A) Term life
B) Whole life
C) Universal life
D) Variable life
Q2) Your best friend discovers you just took an introductory insurance course. He asks you what type of life insurance policy he should buy, given that he is 28 years old. Which type of life insurance should you recommend?
A) Term life
B) Whole life
C) Universal life
D) Cannot be determined from the given information
Q3) Under a group life insurance plan, in general, individuals do not have to pass an insurer's medical examination.
A)True
B)False
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Page 17
Chapter 16: Standard Life Insurance Contract Provisions and Options
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Q1) What is/are the advantage(s) to purchasing an annuity from your life insurer by using the cash value in your whole life policy, rather than cashing in the policy and using the withdrawn cash values to purchase an annuity from another company?
A) No new acquisition costs are charged, and possibly better annuity assumptions
B) No new acquisition costs are charged, and annuity prices are guaranteed to be low
C) No new acquisition costs is the only advantage
D) Cheaper annuity pricing is the only advantage
Q2) The double indemnity option makes good sense for most families since the cost is low, and the option doubles the face amount of insurance for most causes of death other than accident.
A)True
B)False
Q3) A tontine is:
A) a form of endowment insurance
B) used frequently to provide retirement income
C) a life insurance contract paying a death claim on the second person to die
D) one reason for the divisible surplus provision
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Page 18
Chapter 17: Annuities
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Q1) A male age 65 will receive lower monthly benefits per $1,000 of premium payment than a female age 65, because of the female's better longevity.
A)True
B)False
Q2) An annuity, five years certain, makes payments to the annuitant:
A) for 5 years or until the annuitant's death, whichever event happens last
B) for only the first 5 years of the liquidation period
C) only if the insured dies within the first five years
D) for 5 years or until the annuitant's death, whichever event happens first
Q3) Ron Liven is a retiree receiving a monthly annuity payment. This year his annuity payment is $4,000 per month. Last year, it was $3,700 per month, and the year before it was $3,500. Ron does NOT know what his payment will be NEXT year. What type of annuity does he have?
A) Fixed incremental increase
B) Installment refund
C) Cash refund
D) Variable annuity
Q4) Explain briefly how annuity distributions are taxed.
Q5) How do insurers classify annuities to describe their benefits?
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Chapter 18: Health Insurance and Disability Income
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Sample Questions
Q1) Because people sometimes forget to pay their premiums on time, health insurance policies normally contain a/an ________ to prevent unnecessary termination of the insured.
A) grace period clause
B) reinstatement clause
C) pro-rata clause
D) entire contract
Q2) Blue Cross is:
A) owned by the doctors
B) owned by Blue Shield
C) not sold on a group basis
D) a hospital service prepayment plan
Q3) Major medical insurance has relatively large deductibles.
A)True
B)False
Q4) Individual Medicaid policies must return in benefits at least 60 percent of the premium earned.
A)True
B)False
Q5) Distinguish between cost shifting and cost containment in health care.
Page 20
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Chapter 19: Employee Benefits
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Sample Questions
Q1) The traditional "tripod approach" to economic security assumed that who would provide economic security for the individual worker?
A) The employer and the worker
B) The employer and the government
C) The government and the worker
D) The employer, the worker, and the government
Q2) Which of the following statements about IRAs is false?
A) Annual contributions made to the account are tax-deductible up to certain amounts.
B) They earn tax-deferred investment income.
C) Only people in certain income categories can make deductible IRA contributions.
D) The maximum annual deductible contribution is $4,000 per person.
Q3) Why are employers interested in providing employee benefits to their employees?
Q4) Explain the difference between a defined contribution and a defined benefit plan.
Q5) Explain the advantages to an employer of a defined benefit pension plan versus a defined contribution pension plan.
Q6) Explain the difference between a PPO and an HMO.
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Page 21
Chapter 20: Social Security
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Q1) Medicare has three coverage parts; one part is mandatory, the other two are optional.
A)True
B)False
Q2) Which of the following benefits is not provided under the Social Security program?
A) Survivor benefits
B) Disability benefits
C) Retirement benefits
D) Welfare payments to poor people
Q3) Explain what the dramatic shift was in political philosophy leading to the Social Security Act of 1935.
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.
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Chapter 21: Unemployment and Workers Compensation Insurance
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Sample Questions
Q1) Choose the year closest to the enactment of unemployment insurance:
A) 1929
B) 1935
C) 1946
D) 1955
Q2) What are the general types of benefits provided under workers' compensation?
Q3) Which of the following statements about workers' compensation insurance is true?
A) The cost to employers has been increasing.
B) The premiums have been decreasing.
C) Insurers have been making high profits on this coverage.
D) None of the above
Q4) Experience rating of workers' compensation insurance rewards employers with good safety records.
A)True
B)False
Q5) Workers' compensation is likely to cover all the following <u>except</u>:
A) 100 percent of lost wages during disability
B) medical expenses
C) rehabilitation expenses
D) reasonable funeral expenses
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Chapter 22: Commercial Property Insurance
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Sample Questions
Q1) An aircraft owner would need all of the following coverages <u>except</u>:
A) hull insurance
B) freight insurance
C) fire insurance
D) liability insurance
Q2) The amount an insurer charges per $100 of exposed property value is called the:
A) rate
B) premium
C) expense ratio
D) funding ratio
Q3) A bailees' customer policy is a type of ocean marine insurance.
A)True
B)False
Q4) Which of the following factors would generally <u>not</u> be considered in a class rating scheme?
A) Community firefighting capability
B) Use of the structure
C) External surrounding exposures
D) The existence of sidewalks around the building
Q5) List and explain the major types of ocean marine loss exposures.
Page 24
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Chapter 23: Commercial Liability Insurance
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Q1) One of the suggested solutions to the professional liability problem is a redefinition of the term "negligence."
A)True
B)False
Q2) The ADA holds a business responsible for providing:
A) guaranteed jobs for disabled workers
B) opportunities for disabled workers
C) opportunities for drunk workers
D) retirement benefits for disabled workers
Q3) Keith hosts a New Year's Eve party, and Margaret attends the party. She drinks several beers at the party, and Keith provided the beers. She leaves the party in her car, has an accident and is injured. Which of the following is true?
A) All judges are required to find that Keith is liable for Margaret's injuries.
B) No judge will find that Keith is liable for Margaret's injuries, since he was not serving alcohol for a profit.
C) Margaret cannot sue Keith for any injuries sustained, since she voluntarily consumed the alcohol.
D) None of the above
Q4) Explain the idea behind business liability umbrella policies.
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