Insurance Underwriting
Exam Answer Key
Course Introduction
Insurance Underwriting explores the principles and practices by which insurance companies assess, evaluate, and manage risk in the process of accepting or rejecting insurance applications. This course covers risk selection, premium setting, policy terms, and the use of data analytics and actuarial judgment in decision-making. Students will examine underwriting guidelines for various types of insurance including life, health, property, and casualty, with attention to regulatory, ethical, and technological considerations shaping the contemporary underwriting landscape.
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) Explain briefly the law of large numbers.
Answer: The law of large numbers is a mathematical rule that explains how insurance companies operate and are able to predict aggregate losses. The law says that the larger the sample size (the more exposures pooled together), the more closely the predicted result will equal the actual result.
Q2) Risk Pooling is an example of:
A) a Catastrophic Loss Event
B) diversifying risk
C) a speculate risk
D) applying the risk-return trade-off
Answer: B
Q3) An insurance applicant dying from cancer is not likely to be insured because:
A) the loss is not definite as to time and place
B) the probability of loss varies daily, ultimately reaching 1.0
C) the loss would be catastrophic for the insurer
D) the loss is certain to occur and the price for coverage would be uneconomical
Answer: D
3
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Chapter 2: Risk Identification
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Q1) It is important for a retail store to quickly resume operations after a direct loss primarily because:
A) looting will occur
B) retail merchandise goes out of style quickly
C) most property insurance contracts demand that operations resume immediately, or as soon as possible, after a direct loss
D) customers can be quickly and permanently lost if operations do not continue
Answer: D
Q2) Enterprise risk management is concerned with:
A) both pure and speculative risks
B) insurance contracts
C) pure risks
D) subjective risks
Answer: A
Q3) Leasing is an example of risk identification.
A)True
B)False
Answer: False
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Chapter 3: Risk Assessment and Pooling
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Sample Questions
Q1) What are the requirements for an "ideally" insurable group of exposures?
Answer: There are four requirements, from the point of view of the insurer, to make an "ideal" pool of exposures. 1) there must be a large number of homogeneous exposures (characteristics and dollar size) 2) losses have to be accidental and unintentional 3) losses must be measurable, and definite in time and place and of sufficient severity to cause economic hardship, 4) losses cannot have catastrophic potential (point of view of insurer).
Q2) The confidence interval increases with a larger pool size.
A)True
B)False
Answer: False
Q3) Which of the following statements about the risk pooling is correct?
A) Risk pooling works best if the number of parties involved is small.
B) Risk pooling reduces the standard deviation of the loss distribution.
C) Risk pooling increases the loss probability.
D) Risk pooling can be used to increase the cost of bearing risk.
Answer: B
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Chapter 4: Risk-Handling Techniques: Loss Control, Risk Transfer,
and Loss Financing
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Sample Questions
Q1) Taking a defensive driving course is an example of which one of the following:
A) moral hazard
B) risk transfer
C) loss avoidance
D) loss prevention
Q2) Many captive insurance companies are located in states where insurance regulation is very strict.
A)True
B)False
Q3) Which of the following statements about risk assumption is<u> not </u>correct?
A) Risk assumption is also known as risk retention.
B) Risk assumption can be transferred through hedging.
C) Larger firms have a better ability to assume risk.
D) All of the above are correct.
Q4) What are the main considerations in determining the proper mix of retention and transfer in handling potential loss exposures?
Q5) For centuries consumers have relied upon insurance to pay for unexpected losses.
A)True
B)False
Q6) Explain the difference between loss prevention versus loss reduction. Page 6
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Page 7
Chapter 5: Risk-Handling Techniques: Diversification and Hedging
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Q1) Which of the following statements about the bundling risks into portfolios is <u>not</u> correct?
A) Due to the randomness of business activity bundling risks into portfolios will be reducing risk.
B) Natural diversification occurs across uncorrelated risks that are bundled into a portfolio.
C) Bundling risk into a portfolio only reduces risk if uncorrelated and/or negatively correlated exposures are included.
D) The best reduction in risk is accomplished by including negatively correlated exposures into a portfolio.
Q2) Which of the following is not an example of a financial institution that applies collective risk bearing?
A) Swiss banks
B) Mutual funds
C) Pension plans
D) Insurance companies
Q3) Input price risk and output price risk are both a form of commodity price risk.
A)True
B)False
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Chapter 6: Fundamentals of Insurance
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Sample Questions
Q1) Which of the following reasons for canceling a wedding would likely <u>not</u> be covered by a typical wedding insurance policy?
A) Bride gets food poisoning
B) Church suffers a fire loss the day before the wedding
C) Ggroom decides he doesn't want to get married
D) Caterer is unable to provide food for the reception
Q2) If insurance did not exist in the United States, which of the following might reasonably be expected to happen?
A) Banks would lower their interest rates on car loans.
B) Moral hazards would increase.
C) The occurrence of perils would decrease.
D) In general, only small businesses would be able to survive.
Q3) The scope of insurance:
A) limits the tax-deductibility of premiums
B) is limited to social insurance
C) is not clearly defined
D) does not include weddings
Q4) Change of Law insurance is a type of health insurance.
A)True
B)False
Page 9
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Chapter 7: Insurable Perils and Insuring Organizations
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Sample Questions
Q1) The Norris and Manhart cases resulted in which of the following outcomes?
A) Made insurance intrastate commerce
B) Made it illegal to charge men and women different life insurance premiums
C) Equalization of pension payments between men and women
D) Made it illegal to use gender as an underwriting factor in any type of insurance
Q2) Mutual insurance companies legally are nonprofit organizations.
A)True
B)False
Q3) From the viewpoint of an insurer, the prerequisites of an ideally insurable risk include all the following <u>except</u>:
A) the loss must be capable of being determined and measured
B) there must be a large, homogeneous group of exposure units
C) the loss should not be subject to catastrophic hazard
D) the peril should be such that the probability of loss is high
Q4) To obtain a right of ownership in a stock insurance company, you should contact:
A) an independent agent
B) a direct writer
C) a securities dealer
D) the insurance commissioner
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Chapter 8: Insurance Functions
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Sample Questions
Q1) Monah Lott is an agent for Mutual of Oregon Insurance. Monah has been strictly prohibited from accepting premium payments from his clients; they are instead supposed to remit payments directly to the insurer. Mutual of Oregon sends Venus Planet a renewal notice with a premium invoice, and nowhere on the invoice does it tell her that she cannot remit payment to her agent. To save herself a postage stamp, she drops the payment off at Monah's office. Monah accepts the payment, and puts it in her own account. When Mutual of Oregon does not receive Venus's premium, it sends her a cancellation notice. Before receiving her cancellation notice, she suffers a loss and expects Mutual of Oregon to pay her claim. What will likely happen in this scenario?
A) Mutual of Oregon will likely have to pay the claim.
B) Mutual of Oregon will not have to pay the claim, but Monah Lott likely will.
C) Neither Mutual of Oregon, nor Monah Lott, will have to pay the claim.
D) The claim will be paid by the court, and it will then sue Mutual of Oregon.
Q2) The independent agency system:
A) is doomed because agent's commissions are too high relative to direct writers
B) means the agent rather than the insurance company "owns" the business
C) is not a good career path for most college graduates because the system is doomed to extinction
D) is growing rapidly to the point of eliminating the direct writers
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Chapter 9: Insurance Markets: Economics and Issues
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Sample Questions
Q1) Which of the following statements about insurance commissioners is <u>not</u> correct?
A) Insurance commissioners interpret the state's insurance laws.
B) Insurance commissioners enforce the state's insurance laws.
C) Insurance commissioners have limited powers when it comes to protecting the insured.
D) Every state has an insurance commissioner.
Q2) Prior to September 11, 2001, property insurance policies:
A) covered terrorism
B) excluded terrorism from coverage
C) covered war
D) were very expensive
Q3) Consumers that have done some research to gather insurance information:
A) make the insurance market less efficient
B) probably will get better subsequent information from insurance companies
C) probably will just get "razzle-dazzle" from insurance companies
D) probably wasted their time
Q4) Briefly explain the role of the courts and the law in providing consumer protection relative to insurance products.
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Chapter 10: Insurance Regulation
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Sample Questions
Q1) The best argument for continued state insurance regulation is that state regulation is cheaper and more efficient than federal regulation would be.
A)True
B)False
Q2) What is the overall regulatory objective for a state's rate regulations?
Q3) IBNR reserves are an estimate of:
A) losses that have been incurred but not reported to the insurer
B) losses that have been incurred and reported to the insurer, but not yet settled
C) unearned premiums the insurer owes policyholders
D) agent commissions owed
Q4) Which one of the following is not a reason for the regulation of insurance?
A) To prevent insurer insolvencies
B) To promote social goals
C) The unequal knowledge and bargaining power of the parties to the contract
D) To stabilize the economy
Q5) Explain what a policy reserve is. How is a policy reserve calculated?
Q6) Explain briefly the purpose of the McCarran Act.
Q7) What is the difference between prior approval and open rating laws?
Q8) Explain what a guarantee fund is. How are guarantee funds financed?
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Chapter 11: Insurance Contracts
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Sample Questions
Q1) Concealment or fraud before, during, or after a loss generally allows an insurer to contest property insurance contracts.
A)True B)False
Q2) What are some of the reasons exclusions are found in insurance contracts?
Q3) Mr. Jiminez wants his 16 year old son to buy a life insurance policy as an investment for college. He asks you if it is legal for a minor child to purchase and own life insurance. You correctly respond by saying:
A) minors never have capacity to enter contracts
B) minors always have capacity to enter contracts
C) the courts have ruled that it is illegal for minors to purchase life insurance
D) the courts have ruled both ways on minors' ability to own life insurance
Q4) Explain the principle of indemnity. How does one measure indemnity?
Q5) The principle of indemnity says that the insured should profit from insurance. A)True B)False
Q6) Explain the principle of subrogation. Provide a mathematical example of its use.
Q7) Explain the purpose of the declaration page found in insurance contracts.
Page 14
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Chapter 12: The Personal Auto Policy
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Sample Questions
Q1) Your PAP's Medical Payments coverage will pay for your bodily injuries if you get hit by a car as a pedestrian.
A)True
B)False
Q2) All of the following would be paid under the PAP's Other than Collision coverage <u>except</u>:
A) the car skids out of control due to ice on the road, and hits a tree
B) the driver of the car hits a bunny rabbit, loses control of the car, and runs into a ditch
C) the windshield gets broken, and there is no known outside cause for the damage
D) the car is damaged by a fire the insured negligently started while shooting off fireworks on the 4th of July
Q3) PAP coverage A, which includes Property Damage Liability, provides coverage to reimburse you if your automobile is damaged.
A)True
B)False
Q4) Explain the purpose of Uninsured Motorist coverage.
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Chapter 13: Homeowners Insurance
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Sample Questions
Q1) In fire insurance, the purpose of coinsurance clauses is to prevent over-insurance.
A)True
B)False
Q2) Britney and Kevin were painting their backyard fence with a spray gun. A strong gust of wind blew paint on the neighbor's house. The neighbor sued them for all the clean-up costs. Which of the following is true about Britney and Kevin's HO policy?
A) This liability is covered by their HO policy.
B) This liability is not covered by their HO policy because the damage occurred off their premises.
C) This liability is not covered by their HO policy because the damages are not bodily injuries.
D) This type of incident is specifically excluded by the HO policy.
Q3) Why is there a "special limits of liability" section in the personal property section of the HO-3 contract?
Q4) Grave markers are usually covered by HO policies.
A)True
B)False
Q5) What is meant by "Medical Payments to others"? Why does the coverage exist?
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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) With respect to a trust fund, what is the role of the trustee?
A) Provide the initial funding for the trust
B) Receive the benefits of the trust
C) Provide management of the trust's property
D) Determine the beneficiary of the trust
Q3) Purchasing life insurance on the homemaker:
A) makes no sense because the homemaker generates no income
B) should not be done because of the moral hazard it creates in the working spouse
C) makes sense in many cases due to the cost of service replacement and it would help the family maintain a "normal" lifestyle
D) is very necessary when the homemaker has no minor children
Q4) The early adult years are mainly characterized by pre-retirement planning.
A)True
B)False
Q5) 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) A convertible term policy allows the insured to convert a term policy into any other type of policy including a different type of term policy.
A)True
B)False
Q2) Choose the item below that is <u>not</u>rue for group life insurance.
A) Benefit amounts are usually increased by the employer at 5-year intervals.
B) Their number is growing.
C) Benefits are determined by a predetermined formula.
D) The group must not be formed solely to purchase insurance.
Q3) Why does the death benefit increase under certain conditions in the universal life Plan A (fixed face amount)?
Q4) Explain why there is a savings element to a whole life insurance contract.
Q5) Which of the following life insurance policies would have the lowest premium for a male age 40?
A) Level term
B) Whole life continuous premium
C) Whole life paid up at 45
D) Variable life
Q6) What are the advantages of saving with cash value whole life insurance?
Page 18
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Chapter 16: Standard Life Insurance Contract Provisions and Options
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Q1) The age of the beneficiary is a factor used to calculate the amount paid from a life insurance policy under the ________ settlement option.
A) life income
B) interest
C) fixed amount
D) fixed
Q2) Explain briefly the operation of the guaranteed insurability rider, the waiver of premium rider, and the double indemnity rider.
Q3) One life insurance nonforfeiture option allows the insured to convert a whole life policy into term insurance.
A)True
B)False
Q4) The contract feature that waives life insurance premiums if the insured becomes permanently disabled is the:
A) disability assignment rider
B) premium waiver clause
C) disability income option rider
D) waiver of premium rider
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Chapter 17: Annuities
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Sample Questions
Q1) An installment-refund annuity:
A) guarantees that annuity payments will continue to a successor beneficiary until the insurer pays out a total amount equal to the premium
B) guarantees that annuity payments will continue to a successor beneficiary until the insurer pays out a total amount equal to the excess interest
C) guarantees that annuity payments will continue to a successor beneficiary until the insurer pays out a total amount equal to the liquidation value
D) guarantees that annuity payments will continue to a successor beneficiary until the insurer pays out a total amount equal to the structured settlement premium
Q2) No medical exam is required for the purchase of an annuity, no matter how old the applicant.
A)True
B)False
Q3) What is the difference between a SPDA and a FPDA?
Q4) Explain briefly how annuity distributions are taxed.
Q5) Explain the purpose of the annuity contract in a financial plan.
Q6) Explain how an annuity 10 years certain would work.
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Chapter 18: Health Insurance and Disability Income
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Q1) HMOs:
A) are the same as PPOs but cover only groups of individuals
B) collect a capitation payment for each insured and provide "comprehensive" health and preventive care
C) tend to be found mostly in rural areas
D) provide a reduced fee if the insured has zero claims during the preceding policy year
Q2) Which of the following clauses are associated with major medical coverage?
A) Subrogation
B) Mortgagee
C) Replacement cost
D) Deductible
Q3) Disability income insurance replaces income that cannot be earned while a person is disabled according to the contract's definition of disability.
A)True
B)False
Q4) HMOs are health insurers specializing in cancer insurance.
A)True
B)False
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Chapter 19: Employee Benefits
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Q1) Why are employers interested in providing employee benefits to their employees?
Q2) Which one of the following is <u>not</u> a typical exclusion/limitation in group major medical plans?
A) Cosmetic surgery
B) Custodial care
C) Emergency medical care
D) Mental health expenses
Q3) A defined contribution retirement plan defines the amount of benefits to be contributed to the employee during retirement.
A)True
B)False
Q4) Which of the following is <u>not </u>a reasonable justification of employee benefits from the point of view of the employer?
A) Take advantage of business tax benefits
B) Retain, motivate and attract employees
C) Can legally funnel disproportionately high benefits to the owners on a tax advantaged basis
D) Allows freedom of benefit selection as opposed to the government mandating employee minimum benefits
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Chapter 20: Social Security
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Q1) Each of the following is a Social Security benefit <u>except</u>:
A) retirement
B) unemployment
C) survivor
D) disability
Q2) 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
Q3) The "retirement test" reduces Social Security benefits if there is non-wage (for example, dividend or interest) income in excess of about $6,000.
A)True
B)False
Q4) Social Security operates on the basis of pooling exposures and predicting losses in advance.
A)True
B)False
Q5) Describe the characteristics of a government insurance program.
Q6) What are the requirements for receiving Social Security disability benefits?
Page 23
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Chapter 21: Unemployment and Workers Compensation Insurance
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Q1) Which of the following is false concerning unemployment insurance?
A) It is experience-rated.
B) It originated in the Social Security Act of 1935.
C) It is paid for by both the employee and employer in the form of a wage-based tax.
D) It does not provide benefits to a worker who voluntarily quits a job.
Q2) The exclusive remedy of workers' compensation law states that the:
A) compensation scheme for a work-related injury is the employee's choice
B) employer can sue employees for misconduct after compensation is paid
C) employee can only collect from the workers' compensation system for work-related injuries
D) worker must exclusively use the tort system to resolve liability claims against the employer
Q3) Which of the following does not influence a worker's eligibility for, and amount of, unemployment benefits?
A) Waiting period
B) Earnings record
C) Continuing interest in employment
D) Type of work performed
Q4) List and explain briefly the purposes of the workers' compensation laws.
Page 24
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Chapter 22: Commercial Property Insurance
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Q1) Which of the following is <u>not</u> an indirect loss?
A) Loss of rental income after a flood
B) Continuing expenses during a shutdown after a loss
C) Extra expenses after a loss to keep the business going
D) Loss of inventory in a flood
Q2) Which of the following is <u>not</u> an indirect loss?
A) Loss of income subsequent to a direct property loss
B) Continuing expenses incurred during a shutdown after a direct property loss
C) Extra expenses to keep a business operating after a direct property loss
D) Production machine is destroyed due to fire
Q3) Identify the exposure that is not shared by aircraft and marine insurance policies.
A) Cargo loss exposure
B) Legal liability exposure
C) Freight loss exposure
D) All of the above are similar in aircraft and marine coverage.
Q4) What are the categories of business income losses? Briefly explain each.
Q5) "Cargo" and "freight" losses are the same thing in ocean marine insurance.
A)True
B)False
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Chapter 23: Commercial Liability Insurance
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Q1) Which of the following is false concerning Environmental Impairment Liability (EIL) coverage?
A) It is expensive and difficult to place.
B) Most small firms do not need it since they are immune from liability.
C) The content of the insurance contract is subject to negotiation between insureds and insurers.
D) Federal laws impose legal responsibility on polluters.
Q2) Legal rules dictate how an employer must act from the time a job position is created until the time that position is eliminated.
A)True
B)False
Q3) All the following are legal duties of a product manufacturer except:
A) police vendor's activities when the product is in the vendor's hands
B) manufacture safe products
C) provide safe packaging
D) provide adequate instructions
Q4) Explain the idea behind business liability umbrella policies.
Q5) Explain the need for a claims-made form. Explain how a liability insurance contract written on a claims-made form works.
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