Insurance Markets and Institutions
Test Bank
Course Introduction
This course examines the structure, functioning, and regulatory environment of insurance markets and institutions. Students will explore the economic role of insurance, the different types of insurance products, risk pooling and transfer mechanisms, and the interplay between private and public insurance systems. The course also covers the operations of insurance firms, including pricing, underwriting, claims management, reinsurance, and investment strategies. Emphasis is placed on current trends, challenges such as adverse selection and moral hazard, and the impact of technological innovation and regulation on the insurance industry both domestically and globally.
Recommended Textbook
Principles of Risk Management and Insurance 13th Edition by George E. Rejda
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27 Chapters
1397 Verified Questions
1397 Flashcards
Source URL: https://quizplus.com/study-set/239 Page 2
Chapter 1: Risk and Its Treatment
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59 Verified Questions
59 Flashcards
Source URL: https://quizplus.com/quiz/3703
Sample Questions
Q1) 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
Q2) Frazier Electric keeps a paper copy of business records at the company's headquarters. The company also has two back-up copies of business records stored in electronic files. The electronic files are kept in the event the paper records are damaged or destroyed. The back-up files illustrate which of the following risk control techniques?
A) loss prevention
B) loss reduction
C) diversification
D) duplication
Answer: D
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Chapter 2: Insurance and Risk
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47 Verified Questions
47 Flashcards
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Sample Questions
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) From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT
A) The loss must be accidental.
B) The loss should be catastrophic.
C) The premium must be economically feasible.
D) There must be a large number of exposure units.
Answer: B
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Chapter 3: Introduction to Risk Management
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) Parker Department Stores has been hurt in recent months by a large increase in shoplifting losses. Parker's risk manager concluded that while the frequency of shoplifting losses was high, the severity is still relatively low. What is (are) the appropriate risk management technique(s) to apply to this problem?
A) retention
B) loss prevention
C) transfer through insurance
D) avoidance
Answer: B
Q2) Which of the following is least likely to occur during a "hard" insurance market period?
A) difficulty in obtaining insurance
B) tightening underwriting standards
C) higher insurer profits
D) increasing premiums
Answer: C
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Chapter 4: Enterprise Risk Management and Related Topics
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56 Verified Questions
56 Flashcards
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Sample Questions
Q1) Which of the following statements is (are) true with regard to the use of technology in risk management programs?
I.Risk management Intranets are networks intended for an internal audience.
II.Risk management information systems can be used to store and track workers compensation claims data.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) The terrorism risk in the United States
A) is of no concern to private companies.
B) is limited to attacks by foreign nationals.
C) can be addressed through risk control and insurance.
D) is an uninsurable risk.
Q3) The relative level of surplus in the insurance industry is called the industry's A) capacity.
B) liabilities.
C) reserves.
D) admitted assets.
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Page 6
Chapter 5: Types of Insurers and Marketing Systems
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46 Verified Questions
46 Flashcards
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Sample Questions
Q1) Some investors decided to start an insurance company. Each investor contributed $50,000 to raise the capital required to charter a new company. Each investor received an ownership interest in the company. The company will raise additional capital by selling ownership rights to other investors. Under this type of organization, the customer and owner functions are separate. This type of insurer is called a A) stock company.
B) reciprocal exchange.
C) fraternal company.
D) mutual company.
Q2) Which of the following statements about the exclusive agency system for marketing property and liability insurance is true?
A) Exclusive agents typically have complete ownership of policy expirations.
B) A higher commission rate is usually paid on exclusive agents' renewal business than on new business.
C) Exclusive agents represent several different insurance companies.
D) New exclusive agents may start as employees and after a training period become independent contractors.
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Chapter 6: Insurance Company Operations
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52 Verified Questions
52 Flashcards
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Sample Questions
Q1) All of the following are reasons for a primary insurer to use reinsurance EXCEPT
A) to increase the unearned premium reserve.
B) to increase underwriting capacity.
C) to protect against catastrophic losses.
D) to stabilize profits.
Q2) Which of the following statements about underwriting policy is (are) true?
I.A company must establish an underwriting policy consistent with company objectives.
II.Underwriting policy is usually subjective and allows the underwriter considerable flexibility with respect to lines written and forms used.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) The unearned premium reserve of an insurer is
A) an asset representing the investments made with premium income.
B) a liability representing the unearned portion of gross premiums on outstanding policies.
C) a liability representing claims that have been filed, but not yet paid.
D) the portion of the insurer's net worth belonging to policyowners.
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Page 8
Chapter 7: Financial Operations of Insurers
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48 Verified Questions
48 Flashcards
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Sample Questions
Q1) All of the following statements about class rating are true EXCEPT
A) Exposures with similar characteristics are placed in the same underwriting class.
B) The rate charged for each class reflects the average loss experience for that class.
C) The complexity of class rating makes it inappropriate for personal lines coverages.
D) It is based on the assumption that future losses to insureds will be determined by the same classification factors currently in use.
Q2) Which of the following statements about retrospective rating is true?
A) The premium for the current period is determined by the loss experience in prior periods.
B) The premium for the current period is determined by the loss experience during the current period.
C) The premium for the current period is determined by predicted future loss experience.
D) The premium for future periods is determined by the loss experience for the current period.
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9
Chapter 8: Government Regulation of Insurance
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51 Verified Questions
51 Flashcards
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Sample Questions
Q1) The National Association of Insurance Commissioners (NAIC) administers an "early warning system" to help ensure insurance company solvency. This system uses data provided in the annual statement to identify companies that may pose a solvency risk.
This early warning system is called
A) the risk-based capital requirements.
B) an insurance guaranty fund.
C) the Insurance Regulatory Information System (IRIS).
D) the assessment method.
Q2) A life insurance company based in Canada was licensed to operate in Massachusetts. When operating in Massachusetts, the Canadian insurer would be considered a(n)
A) domestic insurer.
B) captive insurer.
C) foreign insurer.
D) alien insurer.
Q3) The major argument in favor of an optional federal charter for insurers is that
A) small insurers need a national charter to be competitive with large insurers.
B) a federal charter will prevent insurer insolvencies.
C) a federal charter will provide greater oversight of insurer market practices.
D) national insurers are at a competitive disadvantage under the present system.
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Chapter 9: Fundamental Legal Principles
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57 Flashcards
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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) When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?
A) only at the time of the loss
B) only at the inception of the policy
C) only at the time the loss settlement takes place
D) both at the time of the loss and at the inception of the policy
Q3) Which of the following statements about subrogation is true?
A) It is used primarily for losses paid under life insurance policies.
B) It allows the insurer to sue its own insured who is negligent.
C) The insured's right to collect benefits may be forfeited if the insured interferes with the insurer's subrogation rights after a loss occurs.
D) The insurer is required to exercise its subrogation rights.
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Page 11
Chapter 10: Analysis of Insurance Contracts
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49 Verified Questions
49 Flashcards
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Sample Questions
Q1) An elimination (waiting) period is an example of a(n)
A) exclusion.
B) deductible.
C) other-insurance provision.
D) coinsurance provision.
Q2) Which of the following statements about problems arising from the use of a coinsurance clause is (are) true?
I.The amount of insurance should be periodically evaluated to avoid a coinsurance penalty because of inflation.
II.An agreed value coverage option is one method used to solve the problem of values that fluctuate throughout the policy term.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 11: Life Insurance
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) Sarah is using the needs approach to determine how much life insurance to buy. Her cash needs are $30,000; her income needs are $140,000; and special needs are $100,000. Sarah has the following assets: $20,000 in bank accounts, $30,000 in retirement plans, and $40,000 in investment accounts. Sarah owns no individual life insurance. She is covered by a $50,000 group life insurance policy through her employer. Based on this information, how much additional life insurance should Sarah purchase?
A) $80,000
B) $130,000
C) $150,000
D) $160,000
Q2) Which of the following types of families is likely to have the least need for a large amount of life insurance?
A) a blended family
B) a traditional family
C) a single person family
D) a sandwiched family
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Chapter 12: Life Insurance Contractual Provisions
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Sample Questions
Q1) Which of the following statements about beneficiary designations is (are) true?
I.The primary beneficiary is entitled to the death proceeds of a life insurance policy only if the contingent beneficiary dies before the insured.
II.If a revocable beneficiary designation is used, the insured must obtain the beneficiary's permission of exercise most policy rights.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following would be a valid reason for an insurer to contest a policy after the contestable period has ended?
A) The policyholder made a material misrepresentation in the application process.
B) The insurer's loss ratio is running higher than the insurer anticipated.
C) The applicant had someone else take the medical examination required for policy approval for her.
D) The policyholder concealed a material fact at the time of application.
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14
Chapter 13: Buying Life Insurance
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48 Verified Questions
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Sample Questions
Q1) David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent interest is $34.719. Based on this information, what is the traditional net cost per thousand per year of David's policy over the 20-year period?
A) -$1.52
B) -$2.64
C) $5.17
D) $9.75
Q2) The average annual rate of return on a cash-value policy if it is held a specified number of years is called the policy's
A) net present value.
B) interest-adjusted cost.
C) benchmark cost.
D) Linton yield.
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Page 15
Chapter 14: Annuities and Individual Retirement Accounts
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50 Verified Questions
50 Flashcards
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Sample Questions
Q1) Which of the following statements is (are) true with respect to variable annuities?
I.The price at which accumulation units can be purchased fluctuates during the funding period.
II.The value of annuity units fluctuates over time.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) 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). Assume that Juanita receives 12 monthly payments of $500 the first year. How much taxable income must she report?
A) $3,000
B) $4,000
C) $4,500
D) $6,000
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16
Chapter 15: Health-Care Reform; Individual Health Insurance Coverages
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47 Verified Questions
47 Flashcards
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Sample Questions
Q1) Individual medical expense insurance sold in the Health Insurance Marketplace is characterized by which of the following?
A) narrow range of benefits
B) no lifetime benefit limits
C) no exclusions
D) first-dollar coverage
Q2) Ellen purchased a health insurance policy. Under the provisions of the Affordable Care Act, which of the following renewal provisions must the insurer use in the policy?
A) cancellable
B) guaranteed issue
C) renewable at the insurer's option
D) conditionally renewable
Q3) Beth's disability income insurance policy provides benefits for accidental death, dismemberment, and loss of sight. The maximum amount payable under this benefit is known as the
A) face value.
B) cash value.
C) principal sum.
D) monthly benefit.
Page 17
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Chapter 16: Employee Benefits: Group Life and Health Insurance
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53 Verified Questions
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Sample Questions
Q1) Some employers offer employees a choice of health care plans which are designed to make employees more sensitive to health care costs, to provide an incentive to avoid unneeded care, and to seek low-cost health care providers. Such plans are called
A) employee assistance plans.
B) consumer-directed health plans.
C) cafeteria plans.
D) preferred provider organization (PPO) plans.
Q2) Which of the following is a provision of the Affordable Care Act?
A) strengthening the use of pre-existing conditions exclusions
B) prohibition of harmful practices by insurers.
C) introduction of annual and lifetime limits to control costs
D) elimination of flexible spending accounts
Q3) All of the following statements about HMOs are true EXCEPT
A) They organize and deliver health care services.
B) HMOs place a heavy emphasis on controlling the cost of covered services.
C) HMO members pay nothing for medical care until care is provided, then they must pay high deductibles and large coinsurance payments.
D) The selection of physicians is usually limited to physicians affiliated with the HMO.
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Chapter 17: Employee Benefits: Retirement Plans
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Sample Questions
Q1) Which of the following statements about retirement ages in defined benefit pension plans is (are) true?
I.The normal retirement age in most plans is 65.
II.For a defined benefit plan, the early retirement age is the earliest age an employee can retire with full, unreduced benefits.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about retirement benefits under pension plans is true?
A) Under a flat percentage of annual earnings defined benefit formula, each employee receives the same dollar benefit.
B) A benefit using final pay is usually based on an employee's earnings during the last month of plan participation.
C) A unit-benefit formula considers both earnings and years of service.
D) Past service benefits are the result of bonuses and overtime pay during the period an employee participated in the plan.
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19
Chapter 18: Social Insurance
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Sample Questions
Q1) Which of the following statements about the full retirement age under the Social Security program is true?
A) The current retirement age for full benefits is age 62.
B) Beginning in the year 2025, the retirement age will be gradually increased to age 75.
C) Early retirement with reduced benefits is allowed as early as age 55.
D) Delayed retirement beyond the age for full benefits increases the amount of the monthly benefit.
Q2) As of this year, Brad, age 50, has 40 credits under the Social Security program. These credits were all earned in the last 10 years. What is Brad's insured status under the program?
A) He is currently and fully insured.
B) He is currently insured, but not fully insured.
C) He is fully insured, but not currently insured.
D) He is neither currently insured nor fully insured.
Q3) Which of the following is a current problem with workers compensation programs?
A) declining involvement of lawyers in workers compensation claims
B) exclusion of deaths and injuries attributable to terrorism
C) exclusion of benefits for occupational illness
D) overuse of opiate prescription drugs in workers compensation.
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Page 20
Chapter 19: The Liability Risk
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56 Verified Questions
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Sample Questions
Q1) 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.
Q2) Louise was in a hurry and tried to cross the street in the middle of the block rather than at a street corner. A car struck her. Even though Louise placed herself in danger, she may still be able to collect for her injuries if the driver had an opportunity to avoid hitting her but failed to do so. This rule is called the
A) last clear chance rule.
B) collateral sources rule.
C) alternative dispute resolution rule.
D) joint and several liability rule.
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Chapter 20: Auto Insurance
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55 Verified Questions
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Sample Questions
Q1) Duties of an insured after a collision loss covered under the PAP include which of the following?
I.Take reasonable steps to protect the vehicle from further damage.
II.Admit fault if the insured believes he or she caused the collision.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) All of the following are insured persons under the liability coverage of the PAP EXCEPT
A) a friend to whom the named insured loans a covered auto.
B) the employer of the named insured for actions resulting from the named insured's use of a covered auto.
C) the former spouse of the named insured who moved out of the home 2 years ago when the divorce was finalized.
D) a relative of the named insured if a member of the same household.
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Chapter 21: Auto Insurance (continued)
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Sample Questions
Q1) Sharon lives in a state that has a no-fault automobile insurance law. Under the law, an injured person has the right to sue the negligent driver only if the bodily injury claim exceeds a dollar or verbal threshold. The no-fault law in Sharon's state is a(n)
A) pure no-fault plan.
B) modified no-fault plan.
C) add-on plan.
D) choice no-fault plan.
Q2) Criticisms of compulsory insurance laws include which of the following?
I.They provide less than complete protection since they require only a minimum amount of liability insurance.
II.Even with compulsory insurance laws, a substantial number of motorists continue to operate vehicles without insurance.
A) I only
B) II only
C) both I and II
D) neither I nor II
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23
Chapter 22: Homeowners Insurance, Section I
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58 Verified Questions
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Sample Questions
Q1) All of the following statements about the cancellation of a Homeowners 3 policy are true EXCEPT
A) The insurer may cancel a new policy for any reason if it has been in force for less than 60 days and is not a renewal policy.
B) At least 100 days' notice of cancellation must be given if an insurer cancels a policy for nonpayment of premium.
C) A policy written for longer than 1 year can be cancelled for any reason on the anniversary date by giving the insured at least 30 days' notice of cancellation.
D) After a policy has been in force for at least 60 days, it can be cancelled by the insurer if the risk has increased substantially since the policy was issued.
Q2) All of the following are duties of the mortgagee under the standard mortgage clause EXCEPT
A) to reimburse the insurer for any loss payments.
B) to notify the insurer of any change in ownership of the property of which the mortgagee is aware.
C) to provide a proof of loss form if the insured fails to do so.
D) to pay the premium if the insured fails to do so.
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Page 24
Chapter 23: Homeowners Insurance, Section II
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Sample Questions
Q1) Which of the following statements regarding watercraft liability under Section II of an unendorsed HO-3 policy is (are) true?
I.No coverage is available for watercraft liability.
II.Liability arising out of the use of watercraft that are under certain length and horsepower limits is covered.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Tom is planning to build a home. He is weighing many factors, including construction materials, location, and other considerations. Which of the following statements is true with regard to homeowners insurance and Tom's new home?
A) The higher the construction costs are in the area, the lower Tom's homeowners insurance premiums will be.
B) The lower the homeowners deductible selected, the lower the premium will be.
C) Older homes cost more to insure than newer homes.
D) A wood frame home costs less to insure than a brick home.
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Chapter 24: Other Property and Liability Insurance Coverages
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Sample Questions
Q1) Carolyn is considering the purchase of a large (60-foot) boat. She called her insurance agent to see if she needs a separate policy for the boat. The agent said that a special category of insurance policies was designed to insure large watercraft. These policies are called
A) yacht insurance policies.
B) flood insurance policies.
C) floater policies.
D) Dwelling Property 3 (special form) policies.
Q2) All of the following statements about yacht insurance are true EXCEPT
A) Property damage coverage includes damage from insects, weathering, and wear and tear.
B) Liability coverage includes the cost of raising, removing, or destroying a sunken or wrecked yacht.
C) Coverage can be added for maritime workers covered by the United States Longshoremen and Harbor Workers Compensation Act.
D) Medical payments coverage pays for medical expenses because of accidental bodily injury.
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26
Chapter 25: Commercial Property Insurance
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Sample Questions
Q1) Which of the following items is (are) contained in the common policy conditions page of the commercial package policy?
I.A description of the property that is insured.
II.A provision describing the insurer's right to audit the insured's books and records
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following perils is not included in the causes-of-loss basic form of the ISO commercial package policy?
A) fire
B) lightning
C) explosion
D) flood
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Chapter 26: Commercial Liability Insurance
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Sample Questions
Q1) The auto dealers coverage form pays for damages that the insured is legally obligated to pay because of damage to a customer's auto left in the insured's car while it is being serviced or repaired. This coverage is called
A) garagekeepers coverage.
B) general liability coverage.
C) other-than-collision loss coverage.
D) acts, errors or omissions liability coverage.
Q2) Which of the following is (are) covered under a claims-made policy?
I.Claims arising out of occurrences which take place during the policy period, regardless of when the claim is made
II.Claims first reported during the policy period, provided the event occurred after a retroactive date stated in the policy
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 27: Crime Insurance and Surety Bonds
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Sample Questions
Q1) National Bank believed it had been properly authorized to transfer $250,000 to the off-shore account of one of its corporate customers. The authorization was fraudulent, however, and the transferred funds were stolen. Under which commercial crime coverage insuring agreement would such a loss be covered?
A) Money Orders and Counterfeit Currency
B) Forgery or Alteration
C) Outside the Premises
D) Computer and Funds Transfer Fraud
Q2) A Pony Express Armored Car was transporting bank receipts from six branch banks to the main bank. A group of robbers staged a daring robbery. They forced the armored car off the road, shot two guards, and took over $120,000 in cash. Which insuring agreement in a financial institution bond would cover the stolen money in this case?
A) Insuring Agreement A-Fidelity
B) Insuring Agreement B-On Premises
C) Insuring Agreement C-In Transit
D) Insuring Agreement D-Forgery or Alteration
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