Insurance Operations
Final Exam Questions
Course Introduction
This course provides an in-depth exploration of the core functions and processes within insurance companies, focusing on operational aspects such as underwriting, claims management, product development, policy issuance, and customer service. Students will examine the regulatory framework governing insurance operations, the role of technology in streamlining workflows, risk assessment techniques, and the importance of compliance and ethics in day-to-day activities. Through real-world case studies and practical examples, students will develop a comprehensive understanding of how insurance operations support the overall success and stability of insurance organizations.
Recommended Textbook Principles of Risk Management and Insurance 13th Edition by George E. Rejda
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Page 2
Chapter 1: Risk and Its Treatment
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Q1) 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
Q2) Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called A) moral hazard.
B) physical hazard.
C) attitudinal hazard.
D) legal hazard.
Answer: D
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Chapter 2: Insurance and Risk
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Sample Questions
Q1) Which of the following is a result of adverse selection?
A) The insurer's financial results will be substantially improved.
B) Persons most likely to have losses are also most likely to seek insurance at standard rates.
C) It is unnecessary for the insurance company to use underwriting.
D) Insurance can be written only by the federal government.
Answer: B
Q2) Gina would like to buy a house. She will pay 10 percent of the cost of the house as a down payment and borrow the other 90 percent from a mortgage lender. The home will serve as collateral for the loan. The lender will not make the loan to Gina unless the home is insured. Using insurance to secure the collateral for a loan illustrates which of the following benefits of insurance to society?
A) enhancement of credit
B) reduction of fear and worry
C) source of investment funds
D) incentives for loss prevention
Answer: A
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Chapter 3: Introduction to Risk Management
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Sample Questions
Q1) Which of the following statements regarding the use of retention is (are) true?
I.Retention is best used for loss exposures that have a low frequency and a high severity.
II.A financially strong firm can have a higher retention level than a firm whose financial position is weak.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
Q2) Which of the following is a source of information a risk manager could use to help identify pure loss exposures?
A) commodity prices
B) physical inspections
C) currency exchange rates
D) interest rate movements
Answer: B
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Chapter 4: Enterprise Risk Management and Related Topics
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Sample Questions
Q1) The transfer of insurable risk to the capital markets through the creation of a financial instrument is called
A) coefficient of risk.
B) securitization of risk.
C) financial risk management.
D) enterprise risk management.
Q2) Consolidation in the insurance industry is a continuing trend. One area where mergers and acquisitions frequently occur is between marketing intermediaries who represent insurance purchasers. These intermediaries are called
A) insurance adjusters.
B) insurance agents.
C) insurance underwriters.
D) insurance brokers.
Q3) Which of the following is a financial risk that may be faced by a business organization?
A) injuries suffered by employees at the workplace
B) lost income after a fire loss
C) product liability risk
D) currency exchange rate risk
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Page 6
Chapter 5: Types of Insurers and Marketing Systems
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Q1) Which of the following statements about Blue Cross and Blue Shield plans is (are) true?
I.Blue Cross and Blue Shield plans can be organized on a nonprofit basis or on a for-profit basis.
II.Blue Cross provides coverage for hospital services; Blue Shield provides coverage for physicians' and surgeons' fees.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements is true with regard to career life insurance agents?
A) They represent several different life insurance companies.
B) They are compensated largely through a salary and not through commissions.
C) They are paid the same commission rate on new and renewal business.
D) The insurer provides financing, training, supervision, and office facilities for career agents.
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Chapter 6: Insurance Company Operations
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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 price per unit of insurance is called the A) premium.
B) loss adjustment expense.
C) rate.
D) loss reserve.
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Chapter 7: Financial Operations of Insurers
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Sample Questions
Q1) ABC Insurance Company's investment income ratio last year was 4.2 percent. The company's combined ratio last year was 102.6 percent. What was ABC's overall operating ratio?
A) 96.8 percent
B) 98.4 percent
C) 103.2 percent
D) 106.8 percent
Q2) XYZ Insurance Company expects $500,000 in claims and loss adjustment expenses for each 1,000 properties that it insures in a certain category of business insurance. What pure premium should XYZ charge for each property insured?
A) $69.99
B) $166.67
C) $350.00
D) $500.00
Q3) The assets of a property and liability insurance company are primarily
A) investments such as stocks and bonds.
B) loss reserves.
C) plant and equipment.
D) premiums paid by policyholders.
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Page 9
Chapter 8: Government Regulation of Insurance
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Sample Questions
Q1) All of the following statements about insurance regulation are true EXCEPT
A) Insurance commissioners are appointed in some states and elected in some states.
B) Insurers are subject to regulation by certain federal agencies and laws.
C) The National Association of Insurance Commissioners (NAIC) can force states to adopt the model laws that it drafts.
D) An insurance commissioner can revoke or suspend an insurer's license to do business in his or her state.
Q2) A systemic risk is a risk that
A) can be eliminated through diversification.
B) can be the cause of the collapse of an entire system.
C) can be insured privately.
D) can be easily contained so that it does not spread.
Q3) XYZ Mutual Insurance Company has total assets of $10 million. The policyholders' surplus is $2 million. What are XYZ Mutual's total liabilities?
A) $4.0 million
B) $8.0 million
C) $10.0 million
D) $12.0 million
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Chapter 9: Fundamental Legal Principles
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Sample Questions
Q1) A contract in which the values exchanged are not equal because chance is involved is called a(n)
A) contract of adhesion.
B) unilateral contract.
C) conditional contract.
D) aleatory contract.
Q2) If a third party is led to reasonably believe that an agent is acting within the scope of his/her authority, even though the agent is exceeding his/her authority, the principal may still be bound by the agent's actions. In this case, the agent has bound the principal by
A) implied authority.
B) apparent authority.
C) incidental authority.
D) express authority.
Q3) The loss settlement under which of the following supports the principle of indemnity?
A) life insurance
B) valued policies
C) replacement cost property insurance
D) actual cash value property insurance
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Page 11
Chapter 10: Analysis of Insurance Contracts
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Sample Questions
Q1) Laura's medical insurance policy includes a $500 deductible. Laura is required to pay 20 percent of covered expenses in excess of the deductible, and her insurer will pay 80 percent of covered expenses in excess of the deductible. Laura was hospitalized and her covered medical expenses were $10,500. How much of the $10,500 will be paid by the insurer?
A) $7,500
B) $7,900
C) $8,000
D) $10,000
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) The purchase of term insurance is justified by which of the following circumstances?
I.The insured wants to save money through the policy for a specific need.
II. The insured has a temporary need for life insurance protection.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Most family heads need substantial amounts of life insurance. However, with limited income, money spent on life insurance reduces the amount of discretionary income available for other high-priority needs. What an insured person gives up when he or she purchases life insurance instead of using the premium dollars for other purposes is called the
A) estimated cost of life insurance.
B) net cost of life insurance.
C) real (inflation-adjusted) cost of life insurance.
D) opportunity cost of buying life insurance.
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13
Chapter 12: Life Insurance Contractual Provisions
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Sample Questions
Q1) All of the following statements about the interest settlement option are true EXCEPT
A) The minimum guaranteed interest rate is usually equal to the prime rate.
B) The interest can be paid monthly, quarterly, semiannually, or annually.
C) The beneficiary may be allowed to withdraw part or all of the proceeds.
D) The beneficiary may be allowed to change to another settlement option.
Q2) Which of the following statements about the grace period in a whole life insurance contract is (are) true?
I.The purpose of the grace period is to prevent the policy from lapsing by giving the policyowner additional time to pay an overdue premium.
II.If the insured dies during the grace period, the death benefit is reduced by 50 percent. A) I only
B) II only
C) both I and II
D) neither I nor II
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14
Chapter 13: Buying Life Insurance
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Sample Questions
Q1) The first step in "shopping for life insurance" is to
A) estimate the amount of life insurance to purchase.
B) decide whether you want a policy which pays dividends.
C) determine if you need life insurance.
D) decide on the best type of life insurance for you.
Q2) All of the following statements about the income tax treatment of individually-purchased life insurance are true EXCEPT
A) policyowner dividends are received tax-free.
B) the annual increase in cash value is not taxable while the policy remains in force.
C) premiums paid for individual life insurance are a tax deductible expense.
D) life insurance proceeds paid to a beneficiary in a lump-sum are received tax-free.
Q3) The policy reserve at the end of any given policy year is called the
A) terminal reserve.
B) unearned premium reserve.
C) mean reserve.
D) initial reserve.
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Chapter 14: Annuities and Individual Retirement Accounts
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Q1) With an equity-indexed annuity, what name is given to the method of crediting excess interest to the annuity?
A) the capitation method
B) the indexing method
C) the distribution method
D) the earnings method
Q2) Stan paid an insurance company $50,000 for a fixed annuity when he was 50 years old. At age 62, Stan plans to begin to receive payments from the insurer. There are no guarantees on the number of payments he will receive. Based on the description provided, this annuity can be described as a(n)
A) deferred annuity.
B) life annuity with guaranteed payments.
C) immediate annuity.
D) variable annuity.
Q3) When selling life annuities, what risk is the insurer pooling?
A) bad investment performance
B) premature death
C) bad expense experience
D) excessive longevity
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Page 16
Chapter 15: Health-Care Reform; Individual Health Insurance Coverages
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Sample Questions
Q1) Which of the following statements regarding health care expenditures in the United States is (are) true?
I.As a nation, the U.S. spends significantly more per-person on health care than most other industrialized nations.
II.Health care expenditures in the U.S. are high because everyone is covered by a health insurance plan.
A) I only
B) II only
C) both I and II
D) neither I nor II
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).
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Chapter 16: Employee Benefits: Group Life and Health Insurance
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Sample Questions
Q1) All of the following are reasons why employers self-insure medical expense plans EXCEPT
A) to reduce certain costs, such as premium taxes and commissions.
B) to provide mandated state benefits.
C) to retain funds until needed to pay claims.
D) to eliminate the need to comply with separate state laws.
Q2) Under one type of HMO, the physicians are employees of the HMO and are paid a salary and sometimes an incentive bonus to hold down costs. This type of HMO is called a(n)
A) individual practice association (IPA).
B) staff model.
C) group model.
D) network model.
Q3) Which of the following statements about HMO managed care plans is (are) true?
I.There is an emphasis on controlling costs.
II.They provide narrow, limited, medical services to members.
A) I only
B) II only
C) both I and II
D) neither I nor II
Page 18
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Chapter 17: Employee Benefits: Retirement Plans
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Q1) To encourage low- to moderate-income workers to save for retirement, a tax credit called the Saver's Credit is available. Which statement about tax credits and tax deductions is true?
A) Tax deductions are more favorable than tax credit for most taxpayers.
B) Tax credits reduce taxes owed on a dollar-for-dollar basis.
C) Tax credits reduce taxable income.
D) Tax deductions reduce taxes owed on a dollar-for-dollar basis.
Q2) What are the minimum age and service requirements that can be imposed on employees eligible to participate in a retirement plan?
A) age 18 and 6 months of service
B) age 21 and 1 year of service
C) age 21 and 3 years of service
D) age 25 and 4 years of service
Q3) A financial institution that provides for the accumulation or administration of the funds that will be used to pay pension benefits is called a
A) trust fund.
B) mutual fund.
C) funding instrument.
D) funding agency.
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Page 19
Chapter 18: Social Insurance
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Q1) Beth was injured at work and is eligible to receive workers compensation benefits. All of the following benefits are provided under workers compensation EXCEPT
A) disability income.
B) retirement benefits for dependents.
C) rehabilitation benefits.
D) medical care.
Q2) EFG Company experienced a reduced demand for its products during a recession. EFG managers were considering laying off some workers when the personnel director said, "Let's not lay off these workers. If we do, our unemployment insurance premiums will increase. The state considers employment stability when determining our premium." Considering the firm's employment record when determining the rate to charge for unemployment insurance is called
A) experience rating.
B) class rating.
C) schedule rating.
D) retrospective rating.
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Chapter 19: The Liability Risk
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Sample Questions
Q1) Under a dram shop law, a business may be held liable for damages resulting from A) the sale of alcohol.
B) the creation of an unsafe work place.
C) the sale of prescription drugs.
D) the creation of a hostile work environment.
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) Damages awarded for losses that can be determined or measured are
A) special damages.
B) general damages.
C) punitive damages.
D) comparative damages.
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21
Chapter 20: Auto Insurance
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Sample Questions
Q1) Jenny purchased a Personal Auto Policy (PAP) that included property damage liability, collision coverage, medical payments coverage, and other-than-collision coverage. Jenny had too much alcohol to drink at a graduation party. While driving home from the party, Jenny ran off the road and hit a tree. Police responded to the accident, and Jenny was arrested for driving under the influence of alcohol. Which of the following statements is true regarding the damage to Jenny's car?
A) Damage to the car is covered under Jenny's property damage liability coverage.
B) Damage to the car is covered under Jenny's collision coverage.
C) Damage to the car is covered under Jenny's other-than-collision loss coverage.
D) There is no coverage as Jenny was intoxicated at the time of the accident.
Q2) Which of the following situations would be covered by the liability section of an unendorsed PAP if the insured is legally liable?
A) The insured injures a pedestrian while operating a friend's new motorcycle.
B) The insured backs into and damages the garage door of his rented house.
C) The insured intentionally runs into another motorist's car after the driver cut in front of him.
D) The insured damages a parked car while driving a dump truck for his employer.
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Chapter 21: Auto Insurance (continued)
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Q1) Which of the following statements about the characteristics of current no-fault laws is true?
A) Most laws in force today are pure no-fault laws.
B) Most laws apply to both bodily injury and property damage.
C) Most laws permit payment of survivor benefits to a surviving spouse and children.
D) States with add-on plans restrict the right of accident victims to sue negligent drivers.
Q2) No-fault benefits are provided by adding an endorsement to the auto insurance policy. What is this endorsement typically called?
A) uninsured motorists coverage
B) personal injury protection coverage
C) nonowned vehicle liability coverage
D) add-on benefits coverage
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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Chapter 22: Homeowners Insurance, Section I
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Sample Questions
Q1) Which of the following statements about the coverage for other structures (Coverage B) under the Homeowners 3 policy is true?
A) The coverage applies to a detached garage or tool shed on the residence premises.
B) Structures attached to the dwelling by a fence or utility line are considered to be part of the dwelling rather than other structures.
C) Coverage applies even if the other structure is used for business purposes.
D) There is no coverage for a private garage if it is rented to a tenant of the dwelling.
Q2) Which of the following losses to a dwelling would be covered under an unendorsed Homeowners 3 policy?
A) smoke damage resulting from agricultural operations of a neighboring farmer
B) damage to the structure caused by a flash flood
C) damage to the structure caused by the weight of heavy snow on the roof
D) damage to a floor caused by water backing up through a sewer pipe
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Chapter 23: Homeowners Insurance, Section II
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Q1) Factors that affect the cost of homeowners insurance include which of the following?
I.Construction material
II.Deductible amount
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Gail lives near a fault line. She added an earthquake endorsement to her Homeowners 3 policy. All of the following statements about the endorsement are true
EXCEPT
A) The deductible is expressed as a percentage of the coverage limit rather than as a dollar amount.
B) The endorsement also covers landslides and volcanic eruptions.
C) Aftershocks occurring within 72 hours of an earthquake are considered part of the same occurrence.
D) The endorsement also covers flood losses.
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25
Chapter 24: Other Property and Liability Insurance Coverages
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Q1) Steve and Mary are art collectors. They own lithographs, etchings, and vintage photographs valued at over $250,000. Steve and Mary display their art collection at their home. They can insure this valuable personal property through a A) title insurance policy.
B) dwelling property form.
C) personal articles floater form.
D) personal umbrella policy.
Q2) 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.
Q3) Perils insured under Dwelling Property 1 (basic form) include which of the following?
I.Earthquake
II.Smoke
A) I only
B) II only
C) both I and II
D) neither I nor II
26
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Chapter 25: Commercial Property Insurance
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Q1) The business income and extra expense coverage form covers loss of business income and continuing normal operating expenses. How is business income (revenue) defined?
A) total sales
B) total sales less cost of goods sold
C) pre-tax net profit
D) after-tax net income
Q2) One inland marine coverage form is the accounts receivable coverage form. In which of the following cases would the purchaser of this form (the insured) be indemnified through the coverage?
A) if the insured cannot pay amounts owed because the purchaser has become insolvent
B) if the insured cannot pay amounts owed because the purchaser has incurred an insured physical damage loss
C) if the insured cannot collect accounts receivable because of the destruction of records
D) if the insured cannot collect accounts receivable because the purchaser extended credit to poor credit risks
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Chapter 26: Commercial Liability Insurance
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Q1) Which of the following statements concerning directors and officers liability insurance (D&O) is (are) true?
I.D&O policies usually cover the personal liability of directors and officers.
II.D&O policies exclude coverage for claims brought by employees and by stockholders.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about the liability coverage of the Business Auto Coverage Form is (are) true?
I.The insurer agrees to defend the insured and pay all legal defense costs arising out of an accident involving a covered auto.
II.The insured is covered for property damage and bodily injury arising out of the use of a covered auto.
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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Q1) Bishop Appliance Store is covered by a commercial crime insurance policy. The policy provides coverage for "Employee Theft" on a blanket basis. When the store owner arrived to open the store for business one morning, he discovered that many small electrical appliances were missing. A surveillance tape showed a company employee had disabled the burglar alarm before leaving work, and had returned to the store later and had taken the appliances. Which of the following statements regarding this loss is true?
A) There is no coverage under "Employee Theft" as the loss was property, not money. B) There is no coverage as the employee was not specifically named in the policy.
C) There is coverage because "Employee Theft" includes coverage for property.
D) There is no coverage as it requires that the employee be caught while committing the theft.
Q2) All of the following are ISO commercial crime coverage exclusions EXCEPT
A) dishonest acts committed by a named insured or partner of the named insured. B) indirect loss resulting from covered losses.
C) theft committed by an employee of the named insured.
D) losses from unauthorized trading in stocks and bonds.
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