Principles of Insurance Review
Questions
Course Introduction
Principles of Insurance introduces students to the fundamental concepts and frameworks that underpin the insurance industry. The course explores the nature, purpose, and scope of insurance, examining key principles such as risk pooling, indemnity, insurable interest, utmost good faith, and proximate cause. Students will gain insights into the structure and functioning of insurance markets, types of insurance products, and the legal and regulatory environment. By understanding how insurers assess, manage, and transfer risk, students are equipped with foundational knowledge critical for careers in finance, business, and risk management.
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) Risk diversification is based on the principle that:
A) one should not be exposed to only one event
B) one should put all her "eggs in one basket"
C) risk can be measured subjectively
D) pure risk seldom happens
Answer: A
Q2) Enterprise Risk Management:
A) is only applicable to insurance firms
B) is an outdated method of dealing with risk
C) works best when evaluating risks is distinct company silos
D) is a process that examines all risks collectively
Answer: D
Q3) In general, aggregate losses must be predictable in advance for an insurance system to work properly.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Risk Identification
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Sample Questions
Q1) Which of the following is true about pure risks?
A) They are also known as hazard risks.
B) They are completely unrelated to hazard risks.
C) Are only recently being considered by risk managers.
D) Consist of Property and associated Human Resource risk only.
Answer: A
Q2) Why is the damage to the property of others also relevant for a firm?
A) It is a speculative risk.
B) Since a firm needs to pay for the damage to the property of others
C) Due to the complex supply chains upon which firms rely
D) It is not relevant at all.
Answer: C
Q3) All external losses are random.
A)True
B)False
Answer: False
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Chapter 3: Risk Assessment and Pooling
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Sample Questions
Q1) The probability distribution associated with the role of a die:
A) can be used to forecast the risk of restaurant law suits
B) is a non-normal distribution
C) is known in advance
D) can not be identified
Answer: C
Q2) Which of the following statements about the risk charge is correct?
A) The Risk Charge represents how much an insurance company should charge for people not paying their insurance premium.
B) The Risk Charge can only be calculated when the probability distribution is normal.
C) The Risk Charge is what is added to and subtracted from the Estimated Mean to get to the Confidence Interval.
D) All of the above are incorrect.
Answer: C
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Chapter 4: Risk-Handling Techniques: Loss Control, Risk Transfer,
and Loss Financing
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Sample Questions
Q1) When the chance of loss is great and the potential for loss severity is also very high, insurance is the best approach to the risk management problem.
A)True
B)False
Q2) Which of the following statements about duplication and physical separation is <u>not </u>correct?
A) Duplication is closely related to physical separation.
B) Like duplication, physical separation involves multiple and similar copies.
C) When a company engages in physical separation, it cannot also engage in duplication.
D) Both duplication and physical separation aim to minimize supply-chain interruptions.
Q3) "OSHA" stands for:
A) Occupational Safety Hearings Administration
B) Occupational Servants and Homemakers Act
C) Obligatory Standards for Health Act
D) Occupational Safety and Health Act
Q4) Discuss the concept of funded risk assumption.
Q5) Explain the difference between loss prevention versus loss reduction.
Page 6
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Chapter 5: Risk-Handling Techniques: Diversification and Hedging
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Sample Questions
Q1) From an insurance viewpoint, is a legal ruling that applies to many business owners a beneficial one?
A) No, because it creates a higher correlation coefficient among those business owners
B) No, because it creates uncertainty for those business owners
C) Yes, as long as the ruling applies to all business owners
D) Yes, as long as the ruling applies to enough business owners
Q2) Is there a reason why pure risk events, like a hurricane or earthquake, could be bundled into a more general risk portfolio?
A) No, pure risks have too devastating an effect.
B) Yes, since they are negatively correlated with other risk events.
C) No, they are too highly correlated with other risk events.
D) Yes, because an insurer can ask a very high premium for including it in the general risk portfolio.
Q3) Currency risk is risk associated with the fluctuation of currency values relative to another currency.
A)True
B)False
Q4) Explain when and why a call option has value.
Page 7
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Chapter 6: Fundamentals of Insurance
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Sample Questions
Q1) Which of the following is <u>not</u> a type of property and liability insurance?
A) Bank deposit insurance
B) Commercial lines insurance
C) Business interruption coverage
D) Wedding insurance
Q2) An insurance contract creates duties for the insurer, but only the insured has contractual rights.
A)True
B)False
Q3) Change of Law insurance is a type of health insurance.
A)True
B)False
Q4) The loading expenses plus a fair rate of return minus any investment income is the starting point for the calculation of the risk premium for an insurance policy.
A)True
B)False
Q5) Commercial Property Policies are a type of Personal Lines Insurance.
A)True
B)False
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Chapter 7: Insurable Perils and Insuring Organizations
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Sample Questions
Q1) What is demutualization? What are some reasons companies want to demutualize?
Q2) Of all evaluation criteria to determine whether a risk classification is appropriate, simplicity is the most important one.
A)True
B)False
Q3) In which of the following insurance pools would there be no subsidization?
A) Fire insurance
B) Life insurance
C) Automobile insurance
D) There would be subsidization in all of these pools.
Q4) Reciprocal exchanges are unincorporated.
A)True
B)False
Q5) Savings bank life insurance:
A) is sold only in a few Eastern states in the U.S.
B) is a form of group credit life and disability coverage
C) can only be purchased in amounts of $5,000 or less
D) is the same as industrial life insurance
Q6) What are the basic differences between a stock and a mutual insurance company?
Q7) How do a reciprocal exchange and a mutual insurance company differ?
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Chapter 8: Insurance Functions
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Sample Questions
Q1) 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
Q2) Most states require licensed insurance agents to be at least age 18, to have good morals, and to pass an examination.
A)True
B)False
Q3) Direct writing insurance companies typically use independent agents to represent them in the sales process.
A)True
B)False
Q4) When a reinsurer cedes coverage to another reinsurer, it is called retrocession. A)True
B)False
Q5) What is the difference between pro-rata reinsurance and excess of loss reinsurance?
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Chapter 9: Insurance Markets: Economics and Issues
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Sample Questions
Q1) Which of the following statements about the insurance market is <u>not</u> correct?
A) Compulsory insurance laws make the insurance market more efficient.
B) The insurance market has many buyers and sellers.
C) Insurance companies do not hold constrictive rights to their clients.
D) The insurance market consist of buyers , sellers, and regulators.
Q2) The text suggests that insurance consumers should:
A) inform themselves about the company, policy, etc. to protect their own self-interest
B) rely on government regulation to protect their interest, since insurance companies and policies cannot be understood by the public
C) rely on attorneys and the lawsuit process to protect themselves
D) rely on self-regulation of insurance companies and the insurer's goodwill to protect their interest
Q3) A lack of insurance for high-risk drivers:
A) makes the insurance market more efficient
B) should change their behavior
C) makes insurance costs go up
D) reduces regulation in the insurance market
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Chapter 10: Insurance Regulation
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Sample Questions
Q1) What is the purpose of the interest maintenance reserve?
A) To absorb losses arising from sales of assets for less than their cost (capital losses)
B) To absorb losses arising from the insolvency of debtors (credit losses)
C) To absorb losses caused by changes (increases) in interest rates on government securities
D) To absorb losses caused by guaranty fund assessments made against insurer assets
Q2) An alien insurer is a non-U.S. insurer.
A)True
B)False
Q3) The regulator's objective with respect to insurance rates is to ensure that rates are:
A) understood by consumers and affordable for most consumers
B) equal for all applicants, adequate, and minimally discriminatory
C) fair, adequate and not unfairly discriminatory
D) fair, not excessive, and affordable
Q4) The Gramm-Leach-Bliley Act took effect on January 1, 1998.
A)True
B)False
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Chapter 11: Insurance Contracts
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Sample Questions
Q1) A statement of opinion by the insured on a life insurance application:
A) is a sufficient reason to allow an insurer to later void the contract
B) is illegal, and insurers must not request such information
C) is not a sufficient reason for an insurer to later void the contract
D) provides reliable information to the underwriter
Q2) Which one of the following is true concerning consideration in property insurance?
A) Dollars must change hands from the insured to the insurer before a contract exists.
B) The only valid consideration is cash payment of all premiums in full.
C) Abiding by the contractual language and paying the premium is the consideration the insured provides.
D) If the premium is not paid at the time of a loss, the insured is given a 30-day grace period to pay.
Q3) Property insurance policies are standardized for all the following reasons except:
A) to improve the accuracy of insurance rates
B) to help reduce costs to consumers
C) to eliminate competition between insurers
D) to reduce litigation over policy meaning
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Page 13
Chapter 12: The Personal Auto Policy
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Sample Questions
Q1) 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
Q2) In the Personal Automobile Policy, "your covered auto" includes all of the following <u>except</u>:
A) any car listed on the declarations page
B) a newly acquired auto
C) your trailer, if being towed by a passenger car, pickup, panel truck, or van
D) a motorcycle, just as long as it is not borrowed
Q3) The PAP only covers losses that occur while the automobile is within the United States, Canada, or Mexico, or being transported between ports thereof.
A)True
B)False
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Page 14
Chapter 13: Homeowners Insurance
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Sample Questions
Q1) All of the following are available under one of the HO forms <u>except</u>:
A) personal liability insurance
B) theft insurance
C) medical payments coverage for others
D) automobile physical damage coverage
Q2) Which of the following perils is <u>not</u> covered by the HO-3 form?
A) Aircraft & vehicles
B) Flood
C) Theft
D) Falling objects
Q3) Mary's house catches on fire. $9,000 of her jewelry is destroyed by the fire. What is the maximum amount her HO-3 policy will pay for this loss?
A) $12,000
B) $9,600
C) $2,500
D) $1,500
Q4) Explain why there is a coinsurance clause applied to the building structures. How does it work?
Q5) What is meant by "Medical Payments to others"? Why does the coverage exist?
Page 15
Q6) Explain the concept of concurrent causation as it applies to collapse.
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Chapter 14: Professional Financial Planning
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Sample Questions
Q1) The maximum estate tax rate is 58.
A)True
B)False
Q2) In a key-employee insurance purchase, the business should be the owner and the beneficiary of the policy.
A)True
B)False
Q3) The needs-based approach should be used to determine whether life insurance is needed and how much.
A)True
B)False
Q4) Financial planners:
A) should be knowledgeable of many topics
B) will make decisions for their clients
C) can assist people in the financial planning process
D) A and C above
Q5) The early adult years are mainly characterized by pre-retirement planning.
A)True
B)False
Q6) Explain what a will is. What happens when a person dies without a valid will?
Page 16
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Chapter 15: Life Insurance Policies
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Sample Questions
Q1) When an ordinary life insurance policy becomes payable as a death claim, the beneficiary is entitled to the:
A) cash surrender value
B) face amount plus the reserve value
C) face amount
D) face amount plus the cash value
Q2) Universal life insurance is an interest sensitive product.
A)True
B)False
Q3) If a term life policy is convertible, the insured has the option to convert it to:
A) cash
B) an annuity
C) a decreasing term policy
D) a permanent form of coverage
Q4) In a limited payment policy, only a portion of the face amount is paid if death occurs in the early years.
A)True
B)False
Q5) What are the advantages of saving with cash value whole life insurance?
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Chapter 16: Standard Life Insurance Contract Provisions and Options
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Sample Questions
Q1) The typical grace period found in a life insurance policy is 60 days.
A)True
B)False
Q2) Explain what happens with regard to the insured misstating his/her age. Does the incontestable clause modify this result? Explain.
Q3) Which of the following is <u>not</u> a life insurance nonforfeiture option?
A) Cash
B) Reduced face paid up term insurance
C) Extended term insurance
D) Reduced face paid up whole life insurance
Q4) The entire-contract provision makes the application for life insurance a part of the contract itself if attached.
A)True
B)False
Q5) Only whole life insurance policies have a grace period.
A)True B)False
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Q6) Explain how dividends may be used when distributed to the policy owner in a participating contract.
Chapter 17: Annuities
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Sample Questions
Q1) What is the difference between a SPDA and a FPDA?
Q2) When an annuitant receives liquidation payments, part of the payment is a return of principal and is thus exempt from Federal Income tax. The tax-exempt portion of the payment is calculated using the:
A) exclusion ratio
B) refund ratio
C) vested ratio
D) combined ratio
Q3) Oprah has $250,000 and wishes to purchase a single-premium annuity. All other things being equal, which of the following annuities will provide her with the smallest monthly liquidation payment?
A) 20-year period certain, joint and 2/3 survivor, single premium
B) 20-year period certain, single premium
C) 20-year period certain, joint and survivor, single premium
D) Straight life annuity, single premium.
Q4) Explain the purpose of the annuity contract in a financial plan.
Q5) Explain briefly how annuity distributions are taxed.
Q6) It is not possible to have a level premium, immediate annuity.
A)True
B)False
Page 19
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Chapter 18: Health Insurance and Disability Income
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Sample Questions
Q1) Which of the following is not typically included in a major medical insurance policy?
A) Large deductible
B) Participating provision
C) Large number of exclusions
D) High face amount
Q2) Medicaid recipients must:
A) wait six-months before they can enroll
B) provide a core requirement of minimum benefits
C) not have any pre-existing conditions
D) first spend all their financial assets
Q3) Distinguish between cost shifting and cost containment in health care.
Q4) How does Blue Cross health insurance cover hospitalization?
A) By covering a specific number of days in the hospital
B) It pays up to 80% of all usual and customary charges in a semi-private room
C) It pays a flat dollar amount per day of hospitalization, regardless of the actual charges incurred
D) Hospitalization coverage is not provided by Blue Cross policies
Q5) What is the difference between an HMO and a PPO in providing health care?
Q6) Explain how a typical major medical contract works.
Page 20
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Chapter 19: Employee Benefits
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Sample Questions
Q1) Carlos and Mary are married, and covered under Carlos' group health plan provided by his employer. Carlos dies. How long can Mary continue her health coverage, according to COBRA provisions?
A) 0 months
B) 18 months
C) 24 months
D) 36 months
Q2) Which of the following is not required for qualification of a group health or disability plan?
A) Must cover all full-time and part-time employees from the first day of work
B) Must be in writing
C) Must create legally enforceable rights for the employees
D) Must be for the exclusive benefit of the employees
Q3) The traditional American method of providing retirement and health benefits is best described as a democratic socialist approach.
A)True
B)False
Q4) Explain the difference between a defined contribution and a defined benefit plan.
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Chapter 20: Social Security
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Sample Questions
Q1) Mr. Smalley is a retiree on the Medicare prescription drug plan. This year his drug expenditures are $15,100. What percentage will Medicare pay of the medications that cost between $6,657.50 and $15,100?
A) 0
B) 75
C) 95
D) None of the above
Q2) Which of the following groups would <u>not</u> be covered by Social Security?
A) Doctors in private practice
B) Professional athletes
C) Coal miners
D) Certain exempt state employees
Q3) Survivor benefits may be paid to both the widow and dependent children of a deceased worker.
A)True
B)False
Q4) What are the requirements for receiving Social Security disability benefits?
Q5) Members of the U.S. Army are covered by the Social Security program.
A)True
B)False
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Chapter 21: Unemployment and Workers Compensation Insurance
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Sample Questions
Q1) Experience rating of the unemployment program has which of the following effects?
A) Penalizes good employers that never fire employees
B) Encourages short-term layoffs and causes an unstable workforce
C) Charges employers more when the economy is weak, thus charging for poor experience when companies can least afford it
D) Provides funds to continue employment instead of dismissing employees
Q2) Which of the following is paid for under most workers' compensation systems?
A) Injuries resulting from intoxication
B) Self-inflicted intentional injuries
C) Injuries resulting from willful failure to follow safety rules
D) Injuries occurring from "horse-play" on the job
Q3) 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.
Q4) List and explain briefly the purposes of the workers' compensation laws.
Q5) What are the general types of benefits provided under workers' compensation?
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Chapter 22: Commercial Property Insurance
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Sample Questions
Q1) Which of the following is <u>not</u> a function of the Insurance Services Office (ISO)?
A) Collecting loss data
B) Developing standard insurance policies
C) Coordinating prices between insurance companies
D) Providing public information about insurance
Q2) List and explain the major types of ocean marine loss exposures.
Q3) What is the difference between a general average and a particular average in ocean marine insurance?
Q4) What purpose do reporting forms serve in commercial property insurance contracts?
Q5) Which of the following is an example of intangible property?
A) Custom-designed accounting software
B) Leased shopping center space that your business occupies
C) Custom-made cabinetry in a retail space
D) A limited edition automobile
Q6) Loss of income after a fire loss is an indirect loss.
A)True
B)False
Q7) What are the categories of business income losses? Briefly explain each.
Page 24
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Chapter 23: Commercial Liability Insurance
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Q1) Indhar suffers minor injuries when Monica negligently crashes her car into his. Monica is also slightly injured in the accident. Both of them have automobile liability policies in force. Under the no-fault liability system:
A) Indhar will be compensated by Monica's automobile liability insurer
B) Indhar will be compensated by his liability insurer, which will also compensate Monica
C) Indhar and Monica will each collect from the Federal Emergency Management Agency
D) each will collect from their own auto insurance policy
Q2) Which of the following products would be most likely to create a long-tailed liability exposure?
A) Prescription drug
B) Hypodermic needle
C) Hairbrush
D) Beach ball
Q3) Today more states operate some form of no-fault automobile insurance law than tort liability law.
A)True
B)False
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