Insurance Operations
Textbook Exam Questions
Course Introduction
Insurance Operations provides an in-depth exploration of how insurance companies function, covering the fundamental processes involved in underwriting, claims management, policy servicing, product development, and reinsurance. Students will examine the roles of key departments such as marketing, actuarial, customer service, and regulatory compliance, gaining a comprehensive understanding of the operational workflow within insurance firms. The course also highlights best practices in risk assessment, premium calculation, technological advancements, and ethical considerations, equipping learners with practical insights relevant to both traditional and modern insurance landscapes.
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) Loss control includes which of the following?
I.Loss reduction
II.Loss prevention
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
Q2) A special form of planned retention by which part or all of a give loss exposure is retained by the firm is called
A) hedging.
B) self-insurance.
C) passive retention.
D) noninsurance transfer.
Answer: B
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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) According to the law of large numbers, what should happen as an insurer increases the number of units insured?
A) The amount the insurer expects to pay in claims should decrease.
B) Underwriting expenses should decrease.
C) Actual results will more closely approach expected results.
D) The insurer's profitability should become more variable.
Answer: C
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Chapter 3: Introduction to Risk Management
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Sample Questions
Q1) Loss severity is defined as the
A) probable size of the losses which may occur during some period.
B) probable number of losses which 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: A
Q2) All of the following are potential advantages of retention EXCEPT
A) lower expenses.
B) increased cash flow.
C) encouragement of loss prevention.
D) protection from catastrophic losses.
Answer: D
Q3) Low-frequency, low-severity loss exposures are best handled by A) avoidance.
B) retention.
C) insurance.
D) noninsurance transfer.
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 concerning the securitization of risk is (are) true?
I.Securitization increases the capacity of the insurance industry.
II.Securitization can be used to protect against catastrophic loss.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) West Coast Insurance writes property and liability insurance in California, Oregon, and Washington. These states are all susceptible to earthquakes. To help determine how much reinsurance to purchase, West Coast Insurance hired an organization to use a computer algorithm to estimate what its insured losses would be if a severe earthquake occurred. West Coast Insurance based its purchase of reinsurance on the loss estimates. This scenario illustrates using A) value-at-risk analysis.
B) catastrophe modeling.
C) risk mapping.
D) a risk management information system.
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6
Chapter 5: Types of Insurers and Marketing Systems
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Q1) As an alternative to demutualizing, Big Mutual Insurance Company reorganized itself into a corporate form that can directly or indirectly own a stock insurance company. This form of organization is called a(n)
A) holding company.
B) shell company.
C) upstream company.
D) downstream company.
Q2) Big Life Insurance Company purchased Regional Bank. Regional Bank has 27 branches in four states. Big Life Insurance Company required one employee at each bank branch to become a licensed life insurance agent and to sell Big Life Insurance Company annuities and life insurance products. This distribution channel is an example of the
A) career agent distribution system.
B) direct response distribution system.
C) financial institution distribution system.
D) worksite marketing distribution system.
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Chapter 6: Insurance Company Operations
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Sample Questions
Q1) 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.
Q2) The underwriting process begins with the A) agent.
B) desk underwriter.
C) inspection report.
D) actuary.
Q3) 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.
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Chapter 7: Financial Operations of Insurers
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Sample Questions
Q1) Ratemakers at ABC Insurance Company calculated the pure premium to be $280 for a risk they were considering insuring. What is the gross rate for this risk, assuming a 30 percent expense ratio?
A) $364
B) $400
C) $430
D) $520
Q2) One liability on a property and liability insurance company's balance sheet is for the costs associated with settling and paying reserved claims. This liability is the
A) pre-paid expense reserve.
B) loss reserve.
C) unearned premium reserve.
D) loss adjustment expense reserve.
Q3) A property and liability insurance company's loss reserve and unearned premium reserve are
A) assets.
B) liabilities.
C) income.
D) expenses.
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Page 9
Chapter 8: Government Regulation of Insurance
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Sample Questions
Q1) ABC Insurance Company would like to purchase a bank. For many years, ABC was not permitted under federal law to enter into banking operations. Which of the following legislative acts eliminated the prohibition that prevented banks, insurers, and investment firms from entering into one another's markets?
A) The McCarran-Ferguson Act
B) The Tax Reform Act
C) The Consolidated Omnibus Budget Reconciliation Act
D) The Financial Modernization Act (Gramm-Leach-Bliley Act)
Q2) An insurance company incorporated in another state has been licensed to operate in your state. In your state, the insurer would be considered a(n)
A) nonadmitted insurer.
B) foreign insurer.
C) alien insurer.
D) reciprocal insurer.
Q3) Which of the following is considered a nonadmitted asset for an insurer?
A) cash
B) preferred stocks
C) real estate
D) office furniture
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Page 10
Chapter 9: Fundamental Legal Principles
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Sample Questions
Q1) Some states have a law that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law. These laws are called
A) agreed amount laws.
B) replacement cost laws.
C) homestead laws.
D) valued policy laws.
Q2) Robin plans to open a bar in a high-crime area. She had difficulty obtaining insurance for the business. She found an insurer willing to write the coverage, but only if Robin agreed to have a security alarm system in operation at all times when the business is closed. Robin's promise to have a security alarm system operational as a condition of having the insurance coverage in force is a
A) binder.
B) warranty.
C) waiver.
D) deductible.
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Chapter 10: Analysis of Insurance Contracts
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Sample Questions
Q1) The exclusion of flood in a homeowners policy is an example of an A) excluded activity.
B) excluded condition.
C) excluded property.
D) excluded peril.
Q2) A special coverage policy is a policy that
A) has no exclusions.
B) provides open-perils coverage.
C) provides coverage under special conditions.
D) has coverage for multiple lines of insurance.
Q3) Homeowners insurance policies usually cover resident relatives of the named insured who are under age 24 and who are full-time students away from home. Under the homeowners policy, these full-time students are considered
A) first named insureds.
B) second named insureds.
C) other insureds.
D) additional insureds.
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Chapter 11: Life Insurance
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Sample Questions
Q1) 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
Q2) Michael wants to make sure that life insurance proceeds are available to pay his outstanding mortgage balance if he dies. He purchased a type of life insurance in which the amount of coverage gradually declines, just as his outstanding mortgage balance gradually declines. This type of life insurance is called
A) modified life insurance.
B) decreasing term insurance.
C) re-entry term insurance.
D) current assumption whole life.
Q3) Alex, age 26, purchased a 20-payment whole life insurance policy. After Alex has made 20 premium payments, his life insurance policy is considered
A) matured.
B) reduced.
C) expired.
D) paid-up.
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Page 13
Chapter 12: Life Insurance Contractual Provisions
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Sample Questions
Q1) Al was named the beneficiary in his mother's life insurance policy. His mother died during the contestable period. The insurer denied payment, citing a material misrepresentation on the application. Al believes the insurer should pay the claim because the misrepresentation occurred on the application, and the application is not part of the formal agreement between the insurer and the policyholder. Which provision protects the insurer by making the application part of the formal agreement between the parties to the contract?
A) incontestable clause
B) entire contract clause
C) ownership clause
D) reinstatement clause
Q2) 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.
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14
Chapter 13: Buying Life Insurance
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Q1) Which of the following statements is (are) true with regard to using interest-adjusted cost data when shopping for life insurance?
I.Cost indexes apply to new policies and should not be used to determine whether to replace a policy.
II.Cost indexes should only be used to compare similar plans of insurance.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) All of the following statements about the tax treatment of life insurance purchased by an individual are true EXCEPT
A) The annual increase in the cash value is currently taxable.
B) Premium payments are not tax deductible.
C) Death benefits received in a lump sum are not taxable income.
D) Policyowner dividends are not considered taxable income.
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Chapter 14: Annuities and Individual Retirement Accounts
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Q1) Which statement is true regarding IRA distributions?
A) The minimum distribution rules apply to Roth IRAs, but not to traditional IRAs.
B) Distributions from a Roth IRA are taxed at the individual's marginal tax rate.
C) The IRA penalty tax applies to all traditional IRA distributions before age 59.5 with no exceptions.
D) Unless a life annuity is issued, a retiree may still be alive when the IRA account is exhausted.
Q2) Which of the following statements about converting a traditional IRA to a Roth IRA is (are) true?
I.Such conversions can be done with no income tax consequences.
II.Qualified distributions from a Roth IRA after a conversion are received tax-free.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 15: Health-Care Reform; Individual Health Insurance Coverages
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Sample Questions
Q1) Greta purchased a long-term care policy. Under a typical policy, Greta's eligibility for benefits may be triggered by
A) how long premiums have been paid.
B) inability to perform activities of daily living.
C) continuous hospitalization for at least 60 days.
D) eligibility for Medicare benefits.
Q2) Which of the following statements about long-term care insurance is (are) true?
I.Long-term care insurance is inexpensive, especially if purchased at older ages.
II.Purchasers have a choice of daily benefits and benefit periods.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) All of the following are typical characteristics of individual medical expense coverage EXCEPT
A) annual benefit limits.
B) essential health benefits.
C) deductibles.
D) coinsurance.
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Chapter 16: Employee Benefits: Group Life and Health Insurance
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Sample Questions
Q1) An HMO physician who determines if medical care from a specialist is necessary is called a(n)
A) capitator.
B) internist.
C) network facilitator.
D) gatekeeper.
Q2) Which of the following statements about the continuation of group health insurance under the COBRA law is true?
A) A continuation of coverage must be made available even if an employee voluntarily terminates employment.
B) The length of the continuation of coverage is 90 days.
C) The option to continue coverage applies to minor children only, not to adults.
D) The employer must pay the entire cost of coverage during the continuation period.
Q3) 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
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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) Beta Corporation has 1,000 employees eligible to participate in the firm's pension plan, and 100 of these employees are considered highly compensated. All of the highly compensated employees are covered by the plan. What is the minimum number of the 900 non-highly compensated employees who must be covered by the plan in order for the plan to satisfy the ratio percentage test?
A) 500
B) 630
C) 667
D) 900
Q3) All the following statements concerning a Roth 401(k) plan are true EXCEPT
A) After-tax dollars are used to fund the plan.
B) Investment earnings accumulate on a tax-free basis.
C) Employees at all income levels may contribute to the plan, but annual contributions are limited.
D) Qualified distributions at retirement are fully taxable.
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Chapter 18: Social Insurance
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Q1) Which of the following statements about the Social Security cost-of-living adjustment is (are) true?
I.The amount of the adjustment is limited to a maximum of 2.5 percent annually.
II.Increases are based on changes in the consumer price index.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Dale, age 65, was dismayed to learn about all of the deductibles, co-pays, limits, and exclusions in the Medicare program. Dale bought a type of health insurance specifically designed to supplement Medicare, and selected his coverage from among 10 standard policies that private insurers offer. What type of health insurance did Dale purchase?
A) long-term care insurance
B) Medigap insurance
C) major medical insurance
D) viatical insurance
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Page 20
Chapter 19: The Liability Risk
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Q1) Which of the following statements about the elements of negligence is (are) true?
I.The negligence of the tortfeasor may arise from a failure to act.
II.The damage that results must be in the form of property damage.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about monetary damages awarded by a court is (are) true?
I.The purpose of general damages is to provide benefits for medical expenses or loss of earnings.
II.The purpose of punitive damages is to punish the tortfeasor so that others are deterred from committing the same wrongful act.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 20: Auto Insurance
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Sample Questions
Q1) Larry has $25,000 of bodily injury liability coverage under his PAP. This limit is the minimum amount required by his state to be considered financially responsible. While on a vacation, Larry visited a neighboring state which has a minimum financial responsibility limit of $50,000 for bodily injury. Which of the following statements describes the situation for Larry while he was in the neighboring state?
A) Larry's policy was suspended while he was in the neighboring state.
B) Larry had only $25,000 of liability coverage.
C) Larry's policy automatically provided $50,000 of liability coverage.
D) Larry's policy automatically provided $100,000 of liability coverage.
Q2) John has an auto which is covered for collision losses subject to a $250 deductible. Kate's auto also has collision coverage but her deductible is $500. Which of the following statements describes how a $2,000 collision loss will be paid if it occurs when John borrows Kate's car because his car is in the shop for repairs?
A) John's policy will pay $1,500, and Kate's policy will pay nothing.
B) John's policy will pay $1,750, and Kate's policy will pay nothing.
C) Kate's policy will pay $1,750, and John's policy will pay nothing.
D) Kate's policy will pay $1,500, and John's policy will pay $250.
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Page 22
Chapter 21: Auto Insurance (continued)
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Q1) Disadvantages of automobile insurance plans include which of the following?
I.High premiums may cause many high-risk drivers to go uninsured.
II.Large underwriting profits have resulted in high-risk drivers subsidizing the cost of insurance for good drivers in the voluntary markets.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) A few states have dual automobile insurance systems. A motorist can pay a higher premium and retain the right to sue under the tort system, or pay a lower premium and be covered under the state's no-fault law. This dual system is called a
A) pure no-fault plan.
B) modified no-fault plan.
C) "no pay, no play" law.
D) choice no-fault plan.
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23
Chapter 22: Homeowners Insurance, Section I
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Sample
Questions
Q1) A dwelling with a replacement cost of $150,000 was insured under a Homeowners 3 policy for $100,000 at the time the roof was destroyed by a windstorm. The actual cash value of the loss was $9,000, but it will cost $12,000 to replace the roof. Ignoring any deductible, what will the insurer pay to settle this loss?
A) $8,000
B) $9,000
C) $10,000
D) $12,000
Q2) Shauna purchased a condominium unit. Which homeowners policy is specially designed for condominium unit owners?
A) HO-2
B) HO-3
C) HO-4
D) HO-6
Q3) If there is a conflict between state law and a provision in a homeowners policy,
A) the policy wording takes precedence.
B) the state law takes precedence.
C) the policyholder is entitled to whichever provides broader coverage.
D) the policy is null and void.
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Page 24
Chapter 23: Homeowners Insurance, Section II
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Q1) Which of the following statements about endorsements to the homeowners policy is (are) true?
I.The purpose of the inflation guard endorsement is to help prevent home owners from being under-insured.
II.The purpose of the watercraft endorsement is to provide coverage for watercraft when they are used outside the United States.
A) I only
B) II only
C) both I and II
D) neither I nor II
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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25
Chapter 24: Other Property and Liability Insurance Coverages
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Q1) 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
Q2) Mark purchased a boat owners package policy. While using his boat, he negligently hit a pier. A person standing on the pier fell and was severely injured. Which of the boat owners package policy coverages will respond to a lawsuit filed as a result of this negligent act?
A) physical damage coverage
B) liability coverage
C) medical expense coverage
D) uninsured boaters coverage
Q3) Under the ISO program, a mobile home can be insured by
A) adding the appropriate endorsement to the ISO personal auto insurance policy.
B) using an ISO floater policy.
C) adding the appropriate endorsement to an ISO Homeowner 2 or Homeowners 3 form.
D) using an ISO inland marine form.
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Chapter 25: Commercial Property Insurance
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Q1) Which of the following statements about ocean marine insurance is true?
A) The coverage is narrow and excludes perils of the sea.
B) Hull insurance includes collision liability covering the ship's owner if the ship collides with another ship.
C) Protection and indemnity (P&I) insurance covers the shipper of goods for cargo losses.
D) A particular average loss is a loss incurred only if a ship is totally lost or destroyed.
Q2) A navigation error caused a cargo ship to run aground on a reef. The ship, valued at $1.5 million, was carrying $1.5 million in grain and $1.5 in electronic devices. The ship sustained a $150,000 physical damage loss. If this loss is a "particular average" loss, how will the loss be settled?
A) The owners of each of the three interests are responsible for $50,000.
B) The owner of the ship is responsible for the entire $150,000 loss.
C) The two cargo owners are each responsible for $75,000 of the loss.
D) The owner of the ship is responsible for the first $100,000 of the loss, and the two cargo owners are each responsible for $25,000 of the loss.
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Chapter 26: Commercial Liability Insurance
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Q1) The auto dealers coverage form includes coverage for violating odometer (mileage) disclosure laws and selling a vehicle where there was a title defect. Which coverage under the auto dealers coverage form would respond to such claims?
A) garagekeepers liability coverage
B) liability coverage for "covered autos"
C) general liability insurance coverage
D) acts, errors or omissions liability coverage
Q2) A customer was injured when a furnace exploded following its faulty installation by a heating and cooling business. For the heating and cooling business, this is an example of A) contingent liability.
B) completed operations liability.
C) products liability.
D) contractual liability.
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Chapter 27: Crime Insurance and Surety Bonds
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Q1) All of the following statements about a surety are true EXCEPT
A) A surety theoretically expects no losses to occur.
B) The principal is the party who agrees to answer for the debt, default, or obligation of another party.
C) The surety has the legal right to recover a loss payment from the defaulting principal.
D) There are three parties to a surety bond: the principal, the surety, and the obligee.
Q2) In the ISO Commercial Crime Coverage form, theft is defined as the
A) unlawful taking of property to the deprivation of the insured.
B) unlawful taking of property from the care and custody of a person by someone who has caused or threatens to cause bodily harm or who has committed an unlawful act witnessed by that person.
C) unlawful taking of money or securities through the alteration of a negotiable instrument.
D) unlawful taking of property from inside the premises by someone who unlawfully enters or leaves the premises as evidenced by marks of forcible entry or exit.
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