Property and Liability Insurance
Test Questions
Course Introduction
This course offers a comprehensive exploration of property and liability insurance, focusing on the principles, practices, and products fundamental to risk management in personal and commercial contexts. Students will examine the structure of the insurance industry, policy language, underwriting processes, and the legal environment influencing property and liability coverage. Through case studies and real-world applications, the course covers topics such as homeowners, automobile, commercial property, and general liability insurance. Emphasis is placed on understanding risk assessment, claims handling, coverage analysis, and the ethical considerations faced by insurance professionals.
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) Describe the Risk Management Process.
Answer: The Risk Management Process is a systematic approach by which an organization can identify and manage its exposure to risk in ways that best fit its strategic goals. Most follow a set of five steps, namely: 1) Establish the Goals of the Risk Management Function, 2) Identify Potential Loss Exposures, 3) Measure Potential Loss Exposures, 4) Choose Risk Handling Techniques, and 5) Implement Techniques and Monitor Effectiveness.
Q2) Hazards may increase either the frequency or the severity of losses.
A)True
B)False
Answer: True
Q3) Why is a large number of exposure units generally required for a risk to be insurable?
A) It prevents the insurer from losing money.
B) It guarantees that losses will be unintentional and measurable.
C) It enables the insurer to better predict the frequency and severity of losses (moderate).
D) It minimizes physical hazards.
Answer: C
Page 3
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Chapter 2: Risk Identification
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Sample Questions
Q1) If assumption of the risk is established, it means the defendant usually must pay for damages.
A)True
B)False
Answer: False
Q2) Loss reduction and loss prevention are not the same thing.
A)True
B)False
Answer: True
Q3) Which of the following is not true about liability risks?
A) Liability risk is where the firm may be legally responsible for the harm it causes to another person.
B) Liability risks are sometimes overlooked due to their intangible nature.
C) Only a breach of contract and criminal acts can lead to liability risk for a firm.
D) A tort can lead to a liability risk.
Answer: C
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Page 4
Chapter 3: Risk Assessment and Pooling
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Sample Questions
Q1) Which of the following would be least important in making a self-insurance decision?
A) The size of the risk pool
B) Social and ethical concerns
C) Historical management policy
D) Financial ability to pay losses
Answer: C
Q2) 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).
Q3) The formula for the confidence interval is Estimated Mean + Estimated Standard Deviation.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Risk-Handling Techniques: Loss Control, Risk Transfer,
and Loss Financing
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Sample Questions
Q1) Risk assumption is the best risk management tool when the change of loss is ________ and the potential severity of loss is ________.
A) low, low
B) high, high
C) low, high
D) high, low
Q2) There are no clear rules for choosing an appropriate risk-handling technique.
A)True
B)False
Q3) Assume you own an antique car. Your prospective insurance company indicates that they will not insure your car unless you take some loss prevention steps to avoid theft. Which of the following steps is the best loss prevention measure with regards to theft?
A) Always keep a canvas cover over the car to hide it.
B) Never drive in rainy weather.
C) Never drive in big cities.
D) Store the car in a closed and locked garage.
Q4) Loss prevention activities, if successful, may increase risk.
A)True B)False
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Chapter 5: Risk-Handling Techniques: Diversification and Hedging
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Sample Questions
Q1) Which of the following statements about the correlation coefficient is correct?
A) The correlation coefficient measures risk.
B) The correlation coefficient is a number between -1 and +1.
C) The correlation coefficient measures how two variables move relative to each other.
D) All of the above are correct.
Q2) What are the generic tools used to deal with the exposures in the area of financial risk management?
Q3) As long as their correlation coefficient is less than 1, risk is being reduced by adding investments to the pool.
A)True
B)False
Q4) Exchange rate losses arise when the value of the domestic currency falls relative to foreign currencies.
A)True
B)False
Q5) The covariance shows the risk of a single variable.
A)True
B)False
7
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Chapter 6: Fundamentals of Insurance
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Sample Questions
Q1) Which of the following statements is correct about the loading expenses for insurance companies?
A) The loading expenses are measured using the expense ratio.
B) The loading expenses are governed by law.
C) The loading expenses reduce the insurance premiums charged by insurance companies.
D) The loading expenses compensate the insurance companies for the risk that they take.
Q2) Insurance increases the number of intentional losses that occur in society.
A)True
B)False
Q3) Participants in the private insurance market include all of the following <u>except</u>:
A) insurance buyers
B) insurance companies
C) insurance regulators
D) the FDIC
Q4) Marine insurance protects property in transit from damage.
A)True
B)False
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Chapter 7: Insurable Perils and Insuring Organizations
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Sample Questions
Q1) 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
Q2) On average, women live longer than men. If an applicant's gender is ignored in determining life insurance prices:
A) men will subsidize women
B) women will subsidize men
C) no subsidization will occur because only group longevity results are valid
D) morale hazard will increase significantly
Q3) The insurer's efficiency and underwriting practices are much more important to the consumer than the insurer's legal form of organization.
A)True
B)False
Q4) Both stock and mutual insurance companies are incorporated.
A)True
B)False
Q5) What are the basic differences between a stock and a mutual insurance company?
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Chapter 8: Insurance Functions
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Sample Questions
Q1) Fergie is a salaried claims adjuster who works exclusively for Mutual of Kentucky Insurance. What kind of claims adjuster is Fergie?
A) Independent
B) Public
C) Private
D) Direct
Q2) In 2004, the attorney general of New York accused insurance brokers of:
A) poor financial condition that could lead to insolvency
B) bid rigging
C) covering up investments in illegal securities
D) all of the above
Q3) Which of the following is not a duty of the agent?
A) No self-dealing at principal's expense
B) Forwarding all premiums to the principal
C) Not submitting any type of business the insurer does not want
D) To guarantee the insurance buyer that the insurer will write them a policy at an affordable rate
Q4) The brokerage function does not exist in life insurance sales.
A)True
B)False
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Chapter 9: Insurance Markets: Economics and Issues
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Sample Questions
Q1) CFP stands for:
A) Chartered Financial Planner
B) Certified Financial Planner
C) Casualty Finance Professional
D) Claims and Financial Planner
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) When choosing the right amount of life insurance to purchase, the consumer should <u>first</u> consider:
A) how much money she can afford for monthly premiums
B) her financial goals and reasons for buying it in the first place
C) how many assets she already owns
D) none of the above
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Chapter 10: Insurance Regulation
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Sample Questions
Q1) Explain briefly the purpose of the McCarran Act.
Q2) The McCarran-Ferguson Act recommended that:
A) states dismantle their regulatory systems
B) states submit to federal insurance regulation
C) state regulation be phased out over a ten-year period
D) none of the above
Q3) The Southeastern Underwriters Association (SEUA) case reversed the Paul v. Virginia decision.
A)True
B)False
Q4) A life insurer's policy reserve equals the difference between the mathematical liability of a future death claim and the value of:
A) future premiums the insured will have to refund to its policyholders
B) future premiums the insured will pay the insurer
C) future investment earnings on premiums the insured will pay the insurer
D) all present death claims
Q5) Different prices for identical goods is one sign of a market that has uninformed buyers.
A)True
B)False
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Chapter 11: Insurance Contracts
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Sample Questions
Q1) The functional replacement provision in some property insurance policies is used when:
A) replacing a lost item is impossible
B) replacing a lost item is much cheaper than expected
C) replacing a building will cost much more than its market value
D) an insured set of objects is collectively worth more than the sum of its individual components
Q2) Which of the following does<u> not</u> support the principle of indemnity?
A) Actual cash value
B) Contract of adhesion
C) Insurable interest
D) Subrogation
Q3) Ambiguities in the wording of an insurance contract are always construed against the writer.
A)True
B)False
Q4) Explain the principle of indemnity. How does one measure indemnity?
Q5) There is no subrogation in life insurance.
A)True
B)False
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Chapter 12: The Personal Auto Policy
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Sample Questions
Q1) Gerry has a PAP with Liability coverage limits of 25/50/10 and a $1,000 Medical Payments coverage limit. He collides with another car (he is at fault) and the following losses are incurred: Bodily injury to the driver of the other car = $100,000.
Bodily injury to the passenger of the other car = $3,000.
Property damage to the other car = $11,000.
Bodily injury to Gerry's wife = $5,000.
How much will the PAP pay, in total, for this accident?
A) $119,000
B) $60,000
C) $43,000
D) $39,000
Q2) When you borrow someone's car and wreck it, you have the option of letting your automobile insurance pay on a primary basis for the accident.
A)True
B)False
Q3) What is the difference between Collision and Other than Collision coverages? Why does the PAP list certain perils in Other than Collision when they can be caused by collision? What happens if the cause of loss is not listed?
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Chapter 13: Homeowners Insurance
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Sample Questions
Q1) Mr. Xavier has an HO-3 contract with $100,000 dwelling coverage, $50,000 personal property coverage, and a $500 deductible. The dwelling is 50% depreciated. Sewage backs up into the basement and destroys the furnace, which will cost $8,000 to replace. The policy will pay:
A) nothing because of the water damage exclusion
B) nothing because the property is not covered
C) $7,500 because of replacement cost coverage
D) $3,500 because of actual cash value and the deductible
Q2) Ira is a homeowner covered by an HO-3 policy. He lives with his wife and three teenage children, plus one teenage foster child. Who in the household is not covered for personal liability by the HO policy?
A) Ira's foster child
B) Ira's wife
C) Any of the Ira's three teenage children
D) All of the persons listed above are covered.
Q3) Which of the following perils is <u>not</u> covered by the HO-3 form?
A) Windstorm or hail
B) Riot or civil commotion
C) Sudden and accidental smoke damage
D) Volcanic earthquakes
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Chapter 14: Professional Financial Planning
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Sample Questions
Q1) In a key-employee insurance purchase, the business should be the owner and the beneficiary of the policy.
A)True
B)False
Q2) Which of the following is<u> not</u> a business use of life insurance?
A) To protect a business against loss caused by the death of a key person
B) To provide a means of rewarding and retaining valuable personnel
C) To lower business losses when an employee is fired
D) To provide some amount of life insurance to employees
Q3) With five owners of a business, an entity purchase plan usually makes more sense than a cross-purchase plan.
A)True
B)False
Q4) The maximum estate tax rate is 58.
A)True
B)False
Q5) The needs-based approach is one technique for calculating how much life insurance one needs. Explain briefly the method for calculating this amount.
Q6) Why is it necessary to buy life insurance on a non-wage earning spouse?
Page 16
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Chapter 15: Life Insurance Policies
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Sample Questions
Q1) Which of the following is a permanent need for purchasing life insurance?
A) Funding a child's college education
B) Paying off a mortgage loan
C) Providing for funeral expenses
D) Funding the readjustment period for a spouse
Q2) The primary reason life insurance policies have a savings element is to allow the:
A) insured to have money for old age or for other purposes
B) insurer to reduce the cost of insurance by investing money at high interest rates
C) insured to accumulate funds to aid in the long-term financing of private business enterprises
D) insured to obtain lifetime protection at a level premium
Q3) A universal life insurance policy (ULI) is considered to be:
A) term insurance only
B) a form of fixed face, fixed premium whole life insurance
C) a whole life policy where the face amount may be changed at any time
D) providing more flexibility in paying premiums
Q4) In general, what are the uses for term life insurance? Provide examples.
Q5) Explain why there is a savings element to a whole life insurance contract.
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Chapter 16: Standard Life Insurance Contract Provisions and Options
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Q1) The automatic premium loan provision in life insurance:
A) pays the face amount of a life insurance policy to a terminally ill insured
B) pays premiums due out of the policy's cash value if the policy owner forgets to pay
C) provides spendable cash to a terminally ill insured out of the cash value
D) provides disability income payments as a loan from the cash value
Q2) ________ cannot be a designated life insurance beneficiary.
A) The insured's estate
B) A business corporation
C) The insured
D) None of the above
Q3) Which of the following is <u>not</u> a standard provision found in U.S. life insurance contracts?
A) Grace period
B) Incontestable clause
C) Provision for misstatement of age
D) Immediate notice of loss provision
Q4) The insured is the person whose death causes the insurer to pay the claim.
A)True
B)False
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Chapter 17: Annuities
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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) Insurers have greater administrative charges for flexible-premium deferred annuities (FPDAs) than they do for single-premium deferred annuities (SPDAs) because:
A) they do not have minimum required deposits for FPDAs
B) there is considerably more adverse selection among persons purchasing FPDAs
C) FPDA purchasers have much greater flexibility in making premium payments
D) This is a trick question; insurers do not impose higher administrative charges on FPDAs versus SPDAs
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Chapter 18: Health Insurance and Disability Income
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Q1) Traditional Blue Cross benefits are expressed in terms of services rather than dollars.
A)True
B)False
Q2) Criticisms of the American health care system include all of the following <u>except</u>:
A) waiting to repair the system will make cost control and universal access worse
B) the current system is more consistent with the American political philosophy than socialized medicine
C) Americans pay too much for health care
D) too many Americans do not have adequate access to health care
Q3) 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
Q4) What is the difference between an HMO and a PPO in providing health care?
Q5) Distinguish between cost shifting and cost containment in health care.
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Chapter 19: Employee Benefits
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Q1) Wex Enterprises hires you as a benefit consultant. Mr. Wex wants to reduce the number of employees covered by the company's group health insurance plan. Which of the following reasons would you advise him to use to legally determine who to exclude from the health insurance plan?
A) Health status of the employee
B) Job classification (hourly employee versus salaried employee)
C) Genetic information about employees
D) Disability of employees
Q2) The monthly fee that HMOs charge employers is called the:
A) capitation payment
B) capitation and insurance premium
C) insurance premium
D) subscription fee
Q3) The Family and Medical Leave Act:
A) applies to employers having 15 or more employees
B) gives employees the right to have paid leave for the birth of a child
C) gives employees the right to have unpaid leave to care for a foster child
D) does not require employees to give employers medical evidence of the illness that requires their leave
Q4) Why are employers interested in providing employee benefits to their employees?
Page 21
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Chapter 20: Social Security
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Q1) Social Security eligibility is based on how many ________ are earned.
A) years of full-time employment
B) total dollars
C) quarters of coverage
D) units of insurance
Q2) The Social Security normal retirement age for a person born in 1970 is 65.
A)True
B)False
Q3) To have one quarter of coverage in the Social Security program, you must have:
A) worked 3 months
B) worked 4 months
C) earned a certain amount of covered income
D) been retired at least 3 months
Q4) Explain what the dramatic shift was in political philosophy leading to the Social Security Act of 1935.
Q5) To receive Social Security retirement benefits one must be:
A) fully insured and of retirement age
B) currently insured and of retirement age
C) fully insured and meet the definition of disability
D) in financial need
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Chapter 21: Unemployment and Workers Compensation Insurance
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Questions
Q1) The states can finance deficits in their unemployment compensation programs with interest-free loans from the federal government.
A)True
B)False
Q2) Explain how a worker can be disqualified for unemployment benefits.
Q3) 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
Q4) Assumption of risk was a common defense used by employers prior to the enactment of workers' compensation laws.
A)True
B)False
Q5) What is the federal covered maximum wage for unemployment insurance taxation?
A) $700
B) $7,000
C) $70,000
D) $700,000
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Chapter 22: Commercial Property Insurance
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Sample Questions
Q1) Ocean marine policies are typically "specified perils" contracts.
A)True
B)False
Q2) Jana loans a leather jacket to Brenda. Brenda must return the jacket to Jana in one week. This arrangement is called a/an:
A) mortgage
B) agency rent
C) assignment
D) bailment
Q3) Which of the following is <u>not</u> a benefit of standard policies?
A) Smaller insurers can offer cheaper insurance than larger companies for the same exposures.
B) Litigation should be reduced as policy meaning becomes understood.
C) Consumers are more likely to learn and understand the meaning of standard policies.
D) Data collection and rate computation is easier and more accurate.
Q4) Loss of income after a fire loss is an indirect loss.
A)True
B)False
Q5) List and explain the major types of ocean marine loss exposures.
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Chapter 23: Commercial Liability Insurance
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Q1) "Social inflation" means a person can collect additional damages after the original judgment because costs increase (as reflected by the Consumer Price Index).
A)True
B)False
Q2) Libel committed by a business can result in a lawsuit that asks the business to pay:
A) personal injury damages
B) bodily injury damages
C) loss of consortium damages
D) dram shop benefits
Q3) One of the suggested solutions to the professional liability problem is a redefinition of the term "negligence."
A)True
B)False
Q4) Explain the idea behind business liability umbrella policies.
Q5) No-fault insurance assumes that the defendant is always at fault, and is thus a form of strict liability insurance.
A)True
B)False
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