Introduction to Insurance Solved Exam Questions
Course Introduction
Introduction to Insurance provides students with a foundational understanding of the principles, concepts, and types of insurance. The course covers the purposes and functions of insurance, risk management, insurance markets, and regulatory environments. Students explore key topics such as life, health, property, liability, and social insurance, as well as underwriting, claims processing, and the roles of insurers and intermediaries. Emphasis is placed on the significance of insurance in financial planning and economic stability, preparing students for further study or careers within the insurance industry.
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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Sample Questions
Q1) Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new manufacturing facility. These devices are all examples of A) risk control.
B) noninsurance transfer.
C) risk avoidance.
D) risk retention.
Answer: A
Q2) Rather than storing all of its finished goods in a single location, Davis Company divides the finished goods between two warehouses. This simple risk control technique which is designed to limit losses should a warehouse fire occur is called A) duplication.
B) risk transfer.
C) separation.
D) loss prevention.
Answer: C
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Chapter 2: Insurance and Risk
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Q1) Which of the following types of risks best meets the requirements for being insurable by private insurers?
A) most market risks
B) property risks
C) financial risks
D) political risks
Answer: B
Q2) Which of the following statements about the insurance industry as a source of investment funds is (are) true?
I.These funds result in a lower cost of capital than would exist in the absence of insurance.
II.These funds tend to promote economic growth and full employment.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
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Page 4
Chapter 3: Introduction to Risk Management
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Sample Questions
Q1) Loss frequency is defined as the
A) probable size of the losses that may occur during some period.
B) probable number of losses that 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: B
Q2) Which of the following conditions is (are) appropriate for using retention?
I.Losses are difficult to predict.
II.The worst possible loss is not serious.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: B
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Chapter 4: Enterprise Risk Management and Related Topics
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Q1) Reasons to adopt an enterprise risk management plan include all of the following EXCEPT
A) to increase earnings volatility.
B) to treat risks facing the business in a more holistic way.
C) to increase net income.
D) to gain an advantage over competitors.
Q2) Calculating the present value of a future amount is called
A) interpolating.
B) discounting.
C) compounding.
D) regression analysis.
Q3) Which of the following is a financial derivative that derives value from specific insurable losses or from an index of values?
A) commodity futures contract
B) corporate bond
C) catastrophe bond
D) insurance option
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Chapter 5: Types of Insurers and Marketing Systems
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Q1) Brian buys and sells investment securities for his clients. Brian also decided to become a licensed life insurance agent to better serve his customers. While Brian's primary focus is buying and selling financial securities for his clients in exchange for commissions, he also earns commissions on his life insurance sales. Brian is a(n)
A) direct writer.
B) stock broker.
C) insurance broker.
D) personal-producing general agent.
Q2) Sarah owns a property and liability insurance agency. She is authorized to represent several insurance companies and she is compensated by commissions. Sarah's agency owns the expiration rights to the business she sells. Sarah is a(n)
A) independent agent.
B) exclusive agent.
C) direct writer.
D) insurance broker.
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Chapter 6: Insurance Company Operations
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Q1) Liability Insurance Company (LIC) was approached by a regional airline to see if LIC would write the airline's liability coverage. LIC agreed to write the coverage and entered into an agreement with a reinsurer. Under the agreement, LIC retains 25 percent of the premium and pays 25 percent of the losses, and the reinsurer receives 75 percent of the premium and pays 75 percent of the losses. This reinsurance arrangement is best described as
A) excess-of-loss reinsurance.
B) surplus-share reinsurance.
C) quota-share reinsurance.
D) pool reinsurance.
Q2) New Liability Insurance Company began operations last year and has been very successful. The company's ability to grow is being restricted by an accounting rule that requires insurers to realize acquisition expenses immediately, while not realizing premiums received as income until some time has passed. Reinsurance is often used in such cases for which of the following purposes?
A) to stabilize profitability
B) to reduce the unearned premium reserve
C) to provide protection against catastrophic losses
D) to withdraw from a line of business or territory
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Page 8
Chapter 7: Financial Operations of Insurers
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Q1) Which of the following is an expense for a life insurance company?
A) loss reserves
B) death benefits paid to a beneficiary
C) unrealized capital gains
D) realized capital gains
Q2) XYZ Insurance Company uses class rating to determine the rate to charge for insurance. For one type of insurance, the pure premium XYZ actuaries calculated is $75 per unit. If XYZ's expense ratio is 25 percent, what is the gross rate for this coverage?
A) $37.50
B) $55.25
C) $75.00
D) $100.00
Q3) An Econodeath Insurance Company actuary calculated the present value of the expected death claim the company will pay if it sells whole life insurance to a 30-year-old woman. This value is called the
A) net level premium.
B) gross premium.
C) net single premium.
D) life insurance policy reserve.
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Page 9
Chapter 8: Government Regulation of Insurance
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Q1) Which of the following statements is (are) true regarding the quality of insurance regulation?
I.The quality of insurance regulation is uniform from state to state.
II.All evidence suggests federal regulation of insurance would improve the quality of regulation.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about premium taxes is (are) true?
I.They are levied by the federal government as a result of the McCarran-Ferguson Act.
II.Their primary purpose is to provide funds for insurance regulation.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 9: Fundamental Legal Principles
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Sample Questions
Q1) All of the following statements about subrogation are true EXCEPT
A) The general rule allows the insurer to recover up to the amount paid to its insured under the policy.
B) Subrogation does not apply in life insurance.
C) Interfering with the insurer's subrogation rights can jeopardize indemnification of the insured.
D) The insurer reserves the right to subrogate against its own insureds.
Q2) ABC Life Insurance Company insures both smokers and nonsmokers. Beth lied on her life insurance application, checking the box for "no" in response to the question of whether she smokes cigarettes or uses other tobacco products. Even though Beth smokes 10 to 15 cigarettes each day, the policy was issued at the "preferred nonsmoker rate." Beth's lie is materiel in this case because
A) it was in writing on the application.
B) it was given with the intent to deceive.
C) the policy would have been issued on different terms if the insurer knew the true facts.
D) the policy would have been issued for a lower face value if the insurer knew the true facts.
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Page 11
Chapter 10: Analysis of Insurance Contracts
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Q1) Which of the following statements about the definition of the insured is (are) true?
I.In some cases, a person who is not specifically named may be classified as an insured.
II.Under no circumstances can more than one person be named as an insured.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Exclusions are used in insurance policies for all of the following reasons EXCEPT
A) to reduce moral hazard.
B) to waive policy conditions.
C) to eliminate coverage for uninsurable perils.
D) to eliminate coverage not needed by typical insureds.
Q3) The primary purpose of coinsurance in property insurance is to
A) reduce moral hazard.
B) achieve equity in rating.
C) minimize problems in settling claims.
D) eliminate small losses.
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Chapter 11: Life Insurance
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Q1) Ann is considering the purchase of a life insurance policy with these characteristics: flexible premium payments, the insurance and savings components are separate, the interest rate credited to the cash value is tied to a changing market interest rate but a minimum interest rate is guaranteed, and a monthly administrative fee is charged. Ann is considering buying
A) whole life insurance.
B) variable life insurance.
C) universal life insurance.
D) current assumption whole life.
Q2) A whole life insurance policy in which premiums are reduced for an initial period (e.g. 3 years) and are higher thereafter is an example of a
A) level-term policy.
B) modified life policy.
C) limited-payment whole life policy.
D) variable life policy.
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13
Chapter 12: Life Insurance Contractual Provisions
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Q1) Which of the following statements about the guaranteed purchase option is true?
A) An insured usually has 24 months to exercise an option.
B) The option cannot be exercised until the insured reaches age 40.
C) The amount of life insurance that can be purchased at each option is limited to 10 percent of the face amount of the basic policy.
D) The additional coverage can be purchased without demonstrating insurability.
Q2) What major feature distinguishes a participating policy from a nonparticipating policy?
A) the availability of a waiver-of-premium provision
B) the existence of settlement options
C) the payment of dividends
D) the method by which beneficiaries can be named
Q3) Which of the following is a common dividend option found in a participating life insurance policy?
A) reduced paid-up insurance
B) fixed period
C) paid-up additions
D) life income
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14
Chapter 13: Buying Life Insurance
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Q1) Mary is interested in comparing life insurance policies. Rather than looking at the cost per thousand, she would like to compare the rate of return earned on the savings portion of the policy. Which of the following would be of the most interest to Mary?
A) the policy's Linton Yield
B) the policy's surrender cost
C) the policy's traditional net cost
D) the policy's net payment cost
Q2) A factor that can be ignored when determining the cost of life insurance is
A) time value of money.
B) premiums paid.
C) settlement options.
D) dividends.
Q3) The net single premium for a life insurance policy is
A) the premium the insurer charges to cover the death benefit and the insurer's expenses.
B) the future value of the future death benefit.
C) the present value of the future death benefit.
D) the face value of the policy discounted back for the number of year the policy will be in force.
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Page 15
Chapter 14: Annuities and Individual Retirement Accounts
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Q1) James is concerned that if he purchases a fixed immediate annuity his funds will be tied-up and not accessible if an emergency arises. His insurance agent said that a rider could be attached to his annuity to address this concern. The rider is a(n)
A) partial cash withdrawal rider.
B) return of premium rider.
C) guaranteed purchase option rider.
D) waiver-of-premium rider.
Q2) Insurers offering variable annuities charge a number of expenses. One category of expenses is to pay the fund manager and to pay brokerage fees. This expense is the
A) investment management charge.
B) administrative charge.
C) surrender charge.
D) front-end load.
Q3) Life annuity payments are made up of all of the following EXCEPT
A) return of premiums.
B) interest earnings.
C) unliquidated principal of annuitants who live too long.
D) unliquidated principal of annuitants who die early.
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Page 16
Chapter 15: Health-Care Reform; Individual Health Insurance Coverages
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Q1) Which of the following statements is (are) true concerning benefit payments under long-term care insurance?
I.Expense-incurred policies pay for actual charges up to a specified daily limit.
II.Per diem policies pay a specified daily benefit regardless of the charges incurred.
A) I only
B) II only
C) both I and II
D) neither I nor II
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
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Chapter 16: Employee Benefits: Group Life and Health Insurance
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Q1) Which of the following statements about group short-term disability income plans is true?
A) Most plans have a short elimination period for accidents but cover sickness from the first day of disability.
B) Disability is usually defined in terms of a worker being unable to work in any substantial, gainful, employment.
C) The amount of disability income benefits typically is equal to some percentage of a worker's normal earnings.
D) Most short-term plans cover occupational disability only.
Q2) Marv is covered by a group health insurance plan at work. His employer funds the entire cost of the group health insurance. Because of this characteristic, the group health insurance plan can be described as
A) defined benefit.
B) contributory.
C) defined contribution.
D) noncontributory.
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Chapter 17: Employee Benefits: Retirement Plans
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Q1) Which of the following statements about Section 401(k) plans is true?
A) Elective salary deferrals to these plans are free of federal income taxation until the funds are actually withdrawn.
B) These plans are exempt from rules that prevent discrimination in favor of highly compensated employees.
C) There is no limit on the actual percentage of salary that can be deferred by highly compensated employees under a qualified plan.
D) If an employee takes the funds made available to him or her in cash, the money received is not taxable.
Q2) Which of the following is a common investment mistake that many retirement plan participants make?
A) not investing heavily enough in common stock issued by the employer
B) investing too heavily in common stock when close to retirement
C) participating in an employer-sponsored retirement plan to obtain matching employer contributions
D) participating in an employer-sponsored retirement plan and contributing the maximum amount allowed
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Chapter 18: Social Insurance
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Q1) Prior to the passage of workers compensation laws, all of the following common law defenses could be used by employers to avoid financial responsibility for work-related injuries EXCEPT
A) contributory negligence.
B) the fellow-servant doctrine.
C) assumption of the risk.
D) employer liability laws.
Q2) Which of the following statements about the role of physicians with respect to Medicare claims is (are) true?
I.Physicians who do not accept an assignment of Medicare claims can charge as much as 200 percent of the Medicare-approved fee.
II.Physicians who accept assignment agree to accept the Medicare-approved amount as payment in full.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 19: The Liability Risk
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Q1) One tort reform permits manufacturers to assert that as long as the product conformed to the prevailing technology and production methods at the time it was produced, it cannot be considered a defective product today. This defense is called the
A) collateral source rule.
B) state of the art defense.
C) strict liability defense.
D) privity of contract rule.
Q2) In the context of medical malpractice, what is a "never event"?
A) A medical condition that despite the best screening and technology cannot be detected.
B) A pandemic that quickly spreads and infects many people.
C) A medical error that should never occur.
D) An event for which doctors and medical facilities cannot be held legally responsible.
Q3) Which of the following may give rise to imputed negligence?
A) employer-employee relationships
B) injury to a trespasser
C) sole proprietorships
D) attractive nuisance situations
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Chapter 20: Auto Insurance
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Q1) Dennis was involved in an accident. He believes the damage to his auto is $7,000. His insurer believes the damage is only $3,500. Which PAP provision is designed to handle disputes between the insurer and the insured over the amount of the loss?
A) other insurance provision
B) agreed amount endorsement
C) coinsurance provision
D) appraisal provision
Q2) Patricia purchased a Personal Auto Policy (PAP). Her car was rear-ended by a driver who fled the scene. Patricia suffered whiplash, migraine headaches, and she was unable to work. Which of the following coverages will cover her lost work earnings?
A) medical payments
B) uninsured motorists
C) underinsured motorists
D) bodily injury liability
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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) Arguments often used against no-fault automobile insurance laws include all of the following EXCEPT
A) It is often difficult to determine which driver was negligent when a multiple-vehicle accident occurs.
B) Many injured persons will not be compensated for their full losses because payments for pain and suffering will be eliminated.
C) The defects of the negligence system are exaggerated, and the system needs only to be reformed.
D) Claims of efficiency and premium saving are exaggerated, and automobile insurance premiums might actually increase.
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Chapter 22: Homeowners Insurance, Section I
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Q1) Persons insured under Section I of the Homeowners 3 policy include which of the following?
I.A spouse of the named insured if living in the same household II.The named insured's children who are under age 24 and who are full-time college students
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Jose and Maria would like "open-perils" coverage on their home and their personal property. Which unendorsed homeowners form provides this coverage?
A) Homeowners 2
B) Homeowners 3
C) Homeowners 4
D) Homeowners 5
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Chapter 23: Homeowners Insurance, Section II
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Q1) All of the following losses are excluded from coverage under Section II of an unendorsed Homeowners 3 policy EXCEPT
A) Phyllis, a medical technician, misread a lab test and the patient is suing her.
B) While using his canoe, Bert hit another canoe. The other canoe sank. Bert is being sued.
C) Violet runs a for-profit daycare service in her home. The parents of a child injured while in Violet's care are suing Violet.
D) The homeowner's son was injured when he fell off a swing in the homeowner's yard.
Q2) Robert purchased an unendorsed Homeowners 3 policy. He is concerned that if his personal property is destroyed, the insurer will take depreciation into consideration when determining the loss settlement and will pay him less than the amount needed to purchase new property. Which endorsement can Robert add to his Homeowners 3 policy to address this concern?
A) inflation guard endorsement
B) personal injury endorsement
C) personal property replacement cost endorsement
D) earthquake endorsement
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Page 25
Chapter 24: Other Property and Liability Insurance Coverages
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Q1) All of the following are characteristics of inland marine floater policies EXCEPT
A) Coverage can be specifically tailored to the specific type of personal property insured.
B) Coverage applies only when the property is at a specified location, such as the insured's home.
C) The amount of insurance can be selected by the purchaser.
D) Broader coverage can be obtained through an inland marine floater policy.
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
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Chapter 25: Commercial Property Insurance
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Q1) Reimbursement for spoilage of frozen food caused by failure of a refrigeration unit at a frozen foods processor can be covered under
A) equipment breakdown insurance.
B) extra expense insurance.
C) builders risk insurance.
D) difference in conditions insurance.
Q2) Which of the following statements about the condominium commercial-unit owners coverage form is (are) true?
I.It provides coverage for the unit owner's proportionate financial interest in the condominium building.
II.It provides coverage for the business personal property of the unit owner.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 26: Commercial Liability Insurance
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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) The Commercial General Liability (CGL) Policy covers liability for which of the following loss exposures?
I.Bodily injury of an employee of the insured arising out of and in the course of employment
II.Bodily injury of a customer injured by a defective product manufactured by the insured
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) Two tellers of a Tenth National Bank branch colluded to embezzle $40,000 over a six-month period. State bank examiners detected the embezzlement during a routine bank examination. Tenth National purchased a financial institution bond. Under which of the following insuring agreements is this loss covered?
A) Insuring Agreement A-Fidelity
B) Insuring Agreement B-On Premises
C) Insuring Agreement C-In Transit
D) Insuring Agreement D-Forgery or Alteration
Q2) Al's Electric Service is an electric contracting company in Metro City. The owner of the company, Al Richards, posted a bond guaranteeing that all work performed by his company will comply with local building codes. This bond is an example of a
A) fiduciary bond.
B) license and permit bond.
C) contract bond.
D) judicial bond.
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