Principles Of Risk Management And Insurance 12th Edition

A property and casualty insurer in which the salesperson is an employee of the insurer, not an independent contractor, is called a A) fraternal insurance company. B) risk retention group. C) direct writer. D) captive insurance company. Answer: C Answer: C Answer: C Jan is employed by an insurance company. She reviews applications to determine whether her company

Why are some mutual insurers referred to as "assessment mutuals"? A) They charge low premiums because the loss exposures of their insureds are thoroughly assessed before a policy is written. B) They are noted for being very thorough in their assessment of investment opportunities. C) They are assessed for state premium taxes only

Which of the following statements is true regarding the information systems functional area of an insurance company? I. Computers and information systems are able to perform some tasks that previously were performed directly by employees. II. Information systems can speed the processing of policies by insurers. A) I only B) II only C) both I

Which distinct legal characteristic of insurance contracts states that only the insurer's promise to perform is legally enforceable? A) contracts of adhesion B) unilateral contracts C) aleatory contracts D) personal contracts Answer: B Answer: B Answer: B Which of the following statements about the personal property coverage (Coverage C) of the Homeowners 3 policy is (are) true? I. The

The loss settlement under which of the following supports the principle of indemnity? A) life insurance B) valued policies C) replacement cost property insurance D) actual cash value property insurance Answer: D Answer: D Answer: D To level a net single premium (NSP), the NSP is divided by A) the maximum number of years the premium could be paid. B)

Which of the following statements about term insurance is true? A) The coverage is appropriate if the goal is permanent lifetime protection. B) Most policies can be renewed for additional periods without evidence of insurability. C) Premiums increase at a constant rate each time the policy is renewed. D) Most policies have a cash

Consolidation in the insurance industry is a continuing trend. One area where mergers and acquisitions frequently occur is between marketing intermediaries who represent insurance purchasers. These intermediaries are called A) insurance adjusters. B) insurance agents. C) insurance underwriters. D) insurance brokers. Answer: D Answer: D Answer: D Vesting refers to A) the employer's right to terminate contributions if a

An insurance policy provision that specifies how a property loss will be settled if more than one property insurance policy covers the loss is the A) insuring agreement provision. B) loss settlement provision. C) other insurance provision. D) coinsurance provision. Answer: C Answer: C Answer: C Brad owns a cash value life insurance policy. Last year, the cash

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

Which of the following pieces of information is needed to calculate a person's human life value? A) the marital status of the person. B) the person's estimated annual Social Security benefits after retirement. C) the person's cost of self-maintenance. D) current outstanding debts, including mortgage debt. Answer: C Answer: C Answer: C A fire destroyed the home next

Liability arising out of which of the following is covered under the personal injury endorsement to the homeowners policy? A) property damage liability B) false arrest C) bodily injury D) business liability Answer: B Answer: B Answer: B Which of the following statements about variable life insurance is true? A) Premium payments are flexible. B) The death benefit cannot be

Which of the following statements about a typical personal umbrella policy is (are) true? I. Losses covered under an underlying policy and the umbrella policy are settled on a pro rata basis. II. Losses not covered by the basic underlying contracts are subject to a self-insured retention which typically is at least

By misrepresenting the true facts, Gretchen was able to convince a client to drop a life insurance policy with another company and to purchase a policy from the company that Gretchen represents. Gretchen has engaged in an illegal sales practice called A) bait and switch. B) rebating. C) retaliating. D) twisting. Answer: D Answer: D Answer: D Dan picked

The phrase "general liability" is used to refer to the legal liability of a business arising from all of the following EXCEPT A) employees injured on the job. B) defective products. C) liability assumed by contract. D) completed operations. Answer: A Answer: A Answer: A Which of the following statements about surety bonds is (are) true? I. The surety

A provision in a disability income insurance policy that requires a person to be disabled for 60 days before receiving benefits is an example of a(n) A) calendar year deductible. B) grace period. C) elimination period. D) probationary period. Answer: C Answer: C Answer: C The Homeowners 3 policy limits the amount of coverage provided on certain personal

Which of the following $100,000 whole life insurance policies, issued by the same company to a man age 32, would require the highest first-year premium? A) continuous premium (ordinary) life B) whole life paid-up at 65 C) 10-payment whole life D) 20-payment whole life Answer: C Answer: C Answer: C Which of the following are legal obligations of

Problems with the current health care system in the United States include which of the following? I. Rising health care expenditures II. Considerable waste and inefficiency in the health care system A) I only B) II only C) both I and II D) neither I nor II Answer: C Answer: C Answer: C In the context of a surety agreement,

Cal is renting an apartment. Which homeowners policy is specially designed to insure renters? A) HO-2 B) HO-3 C) HO-4 D) HO-6 Answer: C Answer: C Answer: C Which of the following statements about life insurance marketing systems is true? A) Insurance brokers are not permitted to sell live insurance. B) Some exclusive agents who market property and liability insurance

Which of the following statements regarding insurance and gambling is (are) true? I. Insurance is used to handle existing pure risks, while gambling creates a new speculative risk. II. Insurance usually involves risk avoidance, while gambling typically involves only risk reduction. A) I only B) II only C) both I and II D) neither I nor

Under one of the Medicare Advantage Plans, beneficiaries can receive care at a discounted rate by using health care providers that belong to the plan network. Care outside the network is also covered, but beneficiaries must pay higher out-of-pocket costs. This type of Medicare Advantage Plan is a A) Point of

The major difference between the dwelling coverage (Part A) of the Homeowners 2 (Broad From) policy and the Homeowners 3 (Special Form) policy is that A) the HO-3 provides open perils ("all risks") coverage and the HO-2 provides named-perils coverage. B) the HO-3 provides actual cash value coverage, the HO-2 provides replacement

Which of the following statements about endowment insurance policies is (are) true? I. The face amount is paid if the insured dies during the policy period or at the end of the policy period if the insured is still alive. II. The use of endowment insurance has increased in recent years because

The assets of a property and liability insurance company are primarily A) investments such as stocks and bonds. B) loss reserves. C) plant and equipment. D) premiums paid by policyholders. Answer: A Answer: A Answer: A Joyce was injured by an uninsured drunk driver while she was riding in a friend's car. Joyce and her friend each have

Carl and Carol Williams, a married couple, are doing some estate planning. Upon his death, Carl plans to leave $1,000,000 in property to his wife. This amount will reduce the value of Carl's gross estate and will be taxed later when Carol dies. This reduction of the gross estate is

Which of the following statements about a worker's primary insurance amount is (are) true? I. It is the monthly amount paid to a worker who elects early retirement at age 62. II. It is equal to 50 percent of the worker's final average pay that was subject to Social Security taxes. A) I

Which of the following statements about property and casualty insurance company operating results is (are) true? I. An insurance company can have a combined ratio greater than 1 (or 100 percent) and still be required to pay income taxes. II. By all measures, the property and casualty insurance industry is highly profitable

Which of the following statements about the insurer's obligation to provide a legal defense under the personal liability coverage (Coverage E) of the homeowners policy is (are) true? I. The insurer agrees to defend the insured only if the suit is not groundless, false, or fraudulent. II. The insurer's obligation to defend the

Which statement concerning towing and labor coverage under the PAP is (are) true? I. There's no coverage for towing if the auto breaks down - towing is only covered if the auto needs to be towed after a collision has occurred. II. Towing and labor coverage pays for repairs at a service station

Which of the following statements about treaty reinsurance is true? A) Under a surplus-share treaty, 100 percent of the ceding insurer's liability must be transferred to the reinsurer. B) Using a quota-share treaty increases the ceding insurer's unearned premium reserve. C) Under an excess-of-loss treaty, the reinsurer pays losses in full only if

Which of the following statements is (are) true with regard to Roth IRAs? I. The portion of a Roth IRA distribution that is attributable to investment income is taxable. II. There is a maximum income level above which Roth IRA contributions are not allowed. A) I only B) II only C) both I and II D)

Jerry built a home in a flood plain. He did not purchase flood insurance. Recently, a noted meteorologist predicted torrential rains for the area for the next 7 days. Jerry attempted to purchase flood insurance through the National Flood Insurance Program. Which flood insurance provision is likely to block Jerry's

Which of the following statements about monetary damages awarded by a court is (are) true? I. The purpose of general damages is to provide benefits for medical expenses or loss of earnings. II. The purpose of punitive damages is to punish the tortfeasor so that others are deterred from committing the same wrongful

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 Answer: B Answer:

One requirement for proving that an act was negligent is the existence of an unbroken chain of events between the act and the injury or harm that occurred. This unbroken chain of events is called A) condition precedent. B) cause and effect. C) proximate cause. D) condition subsequent. Answer: C Answer: C Answer: C XYZ Insurance Company writes

A Pony Express Armored Car was transporting bank receipts from six branch banks to the main bank. A group of robbers staged a daring robbery. They forced the armored car off the road, shot two guards, and took over $120,000 in cash. Which insuring agreement in a financial institution bond would

Which homeowners policy is designed for the tenants of rented premises? A) Homeowners 2 B) Homeowners 4 C) Homeowners 6 D) Homeowners 8 Answer: B Answer: B Answer: B MLX Drug Company would like to market a new hypertension drug. While the Food and Drug Administration (FDA) was testing the drug, it discovered that the drug produced a

All of the following are considered to be uninsured vehicles for purposes of the uninsured motorists coverage of the PAP EXCEPT A) a vehicle owned by an individual who is insured, but for less than the amount required by the state's financial responsibility law. B) a hit-and-run vehicle, the ownership of which

Tina purchased a personal umbrella policy with a $1 million limit and a $1,000 self-insured retention. Her insurer required her to carry a $300,000 liability limit under her homeowners policy. Tina was held responsible for slandering a public official. The public official won a $100,000 judgment against Tina. The insurer

A property and liability insurance company's loss ratio was 74 percent in 2011, 68 percent in 2012, and 66 percent in 2013. The same insurer's expense ratio was 31 percent in 2011, 33 percent in 2012, and 30 percent in 2013. Which of the following statements is true about the

Which of the following statements about stock insurers is true? A) They issue assessable policies. B) They are not permitted to write property and liability insurance. C) Stockholders bear any losses and share in any profits. D) They are owned by their policyholders. Answer: C Answer: C Answer: C Big Life Insurance Company purchased Regional Bank. Regional Bank

Acme Company has three identical manufacturing plants, one on the Texas Gulf Coast, one in southern Alabama, and one in Florida. Each plant is valued at $200 million. Acme's risk manager is concerned about the damage which could be caused by a single hurricane. The risk manager believes there is

Mark reviewed his homeowners policy. He learned that his personal property was insured on an actual cash value basis. He would like replacement cost coverage on his personal property. He contacted his agent who said, "I'll simply add an amendment to your contract that changes the basis of recovery to

All of the following requirements must be met to satisfy the doctrine of res ipsa loquitur EXCEPT A) The injured party has not contributed to the accident in any way. B) The injured party must prove negligence on the part of the defendant. C) The event is one that normally does not

ABC Appliance offers a warranty requiring an annual fee. The warranty may be purchased at the time of sale or at any time within the first year after the appliance was purchased. The warranty fee after the date of purchase is twice the time-of-purchase fee. When asked why the fee

David never stopped to consider the possible consequences of a long-term, permanent, disability. So David did not include disability income insurance in his personal risk management program. David is dealing with the risk of disability through A) passive retention. B) active retention. C) risk control. D) risk avoidance. Answer: A Answer: A Answer: A Which of the following

Tina purchased a personal umbrella policy with a $1 million limit. Her insurer required her to carry liability limits of 250/500/50 under her auto insurance policy. The personal umbrella policy was written with a $1,000 self-insured retention. Tina was responsible for an auto accident in which the other driver was

Connors Company self-funds the medical expense benefits that it provides to its employees. Connors Company has a contract with a commercial health insurance company providing that the health insurance company will pay all claims in excess of $250,000. The arrangement with the health insurance company is called A) reinsurance. B) managed care. C)

Which of the following statements about Lloyd's of London is true? A) Coverage is actually written by syndicates who belong to Lloyd's of London. B) New individual members or Names who belong to the various syndicates have unlimited legal liability. C) It operates as an admitted insurer throughout the United States. D) It allows

The National Association of Insurance Commissioners (NAIC) has drafted a "Life Insurance Policy Illustration" model law that most states have adopted. Which of the following statements concerning this model law is (are) true? I. The policy illustration must include a narrative summary describing the basic characteristics of the policy. II. The policy

Some investors decided to start an insurance company. Each investor contributed $50,000 to raise the capital required to charter a new company. Each investor received an ownership interest in the company. The company will raise additional capital by selling ownership rights to other investors. Under this type of organization, the

All of the following statements about conditions under a homeowners policy are true EXCEPT A) If an insurer broadens coverage without an additional premium during the policy period, the broadened coverage applies immediately to the present policy. B) A waiver or change in any policy provision must be approved in writing by

All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT A) close family relationship. B) potential legal liability. C) secured creditors. D) a contract right. Answer: A Answer: A Answer: A All of the following statements about the settlement of a claim are true EXCEPT A) The insurance policy usually has

A managed care plan under which members can receive medical care from non-network providers at higher out-of-pocket costs is an example of a(n) A) group practice plan. B) individual practice plan. C) exclusive provider organization. D) point-of-service plan. Answer: D Answer: D Answer: D The primary purpose of coinsurance in property insurance is to A) reduce moral hazard. B) achieve equity

The gross premium is defined as A) the net premium plus the loading allowance. B) the terminal reserve plus the commission. C) the net premium minus expenses. D) the sum of all acquisition expenses. Answer: A Answer: A Answer: A Maria is covered under a group medical expense plan as an employee. She is also covered under her

Which of the following is considered a nonadmitted asset for an insurer? A) cash B) preferred stocks C) real estate D) office furniture Answer: D Answer: D Answer: D Which of the following statements about the commercial crime insurance policy is true? A) Loss from the unauthorized disclosure of confidential information is covered. B) Theft committed by the named insured

Pac-Coast Insurance (PCI) concentrates its underwriting activities in California. The company is concerned that if a catastrophic earthquake occurs, it might threaten the solvency of the company. To address this risk, PCI issued some debt securities. If a catastrophic earthquake occurs, PCI does not have to repay the full amount

Reggie just purchased a home. A friend told him to consider insurance coverage for natural disasters when insuring the home. A loss from which of the following perils is covered under an unendorsed Homeowners 3 policy? A) tsunami B) earthquake C) flood D) forest fire Answer: D Answer: D Answer: D As Social Security slants benefits in favor

Which of the following statements about reinsurance facilities for insuring high-risk drivers is (are) true? I. Underwriting losses in the reinsurance facility are shared by all auto insurers in the state. II. An insurer must accept all applicants for insurance, but the insurer has the option of placing high-risk drivers in the

All of the following statements about the boatowners package policy are true EXCEPT A) Physical damage coverage for the boat is usually written to cover all losses except those losses specifically excluded. B) Liability coverage is provided for bodily injury only. C) Some policies provide optional uninsured boaters coverage. D) Medical payments coverage for

Marion owns substantial financial assets. She was surprised that she qualified for Social Security retirement benefits when she retired because of her high investment income. What characteristic of social insurance programs is Marion overlooking with respect to her Social Security retirement benefits? A) Social insurance programs are financially self-supporting. B) Social insurance program

JKL Insurance Company reported the following information on its accounting statements last year: What was JKL's expense ratio last year? A) 5.0 percent B) 30.0 percent C) 33.3 percent D) 50.0 percent Answer: C Answer: C Answer: C Which of the following statements about group short-term disability income plans is true? A) Most plans have a short elimination period for

Which of the following statements is (are) true with respect to the Medicare Advantage Plans? I. These plans replace the original Medicare program, Parts A and B, which are no longer available to new retirees. II. These plans provide an opportunity for retirees to receive Medicare coverage through private health care plans. A)

In a surety arrangement, the party who benefits from the bond if the bonded party fails to perform is the A) principal. B) obligee. C) fidelity. D) surety. Answer: B Answer: B Answer: B Which of the following statements about the financing of the Social Security program is (are) true? I. Although the self-employed pay an OASDI tax rate that

Which of the following statements about trust fund plans is (are) true? I. The trustee typically purchases annuities for retiring employees. II. The trustee guarantees the adequacy of the fund to pay the promised benefits. A) I only B) II only C) both I and II D) neither I nor II Answer: D Answer: D Answer: D A common situation

A manufacturing company just hired a new risk manager, and she has instituted several employee safety programs. She has persuaded the insurer writing the company's workers compensation insurance to base the premium on the company's actual loss experience during the current period rather than on the company's historical performance. This

Jan was injured in a work-related auto accident. She sued the other driver, and the case went to court. While questioning Jan, the defendant's lawyer asked if her injuries and lost earnings were covered under workers compensation. Jan's lawyer objected to the question. The judge ruled the question was improper

What is the effect of the optional agreed value provision in the building and personal property coverage form? A) It provides replacement cost coverage. B) It increases insured values along with inflation. C) It suspends the coinsurance clause. D) It reduces the deductible to $50. Answer: C Answer: C Answer: C When he became risk manager of Boller

Which of the following statements about the entire contract clause is true? A) It allows the insurer to change the policy terms without the insured's consent. B) It specifies that all statements in the application are considered warranties. C) It specifies that the life insurance policy and the attached application constitute the complete

A score derived from an individual's credit history and other factors that is used by many auto and homeowners insurers for underwriting and rating purposes is called a(n) A) CLUE score. B) insurance score. C) expense ratio score. D) combined ratio score. Answer: B Answer: B Answer: B Which of the following statements about claims settlement is true? A)

Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions? A) because insurance contracts are aleatory B) because insurance contracts are unilateral C) because insurance contracts are conditional D) because insurance contracts are contracts of adhesion Answer: C Answer: C Answer: C XYZ Insurance Company expects $500,000 in claims

A useful measure for an organization is the total of the organization's expenditures for treating loss exposures including retained losses, loss control expenses, insurance premiums, and other related expenses. This measure is called the organization's A) cost of capital. B) cost of goods sold. C) cost of risk. D) cost of equity. Answer: C Answer: C Answer:

Which of the following forms is used to insure buildings that are under construction? A) builders risk coverage form B) floor plan coverage form C) new construction coverage form D) labor and materials coverage form Answer: A Answer: A Answer: A Which of the following statements about the medical payments coverage of the PAP is true? A) The amount

Beth purchased a $50,000 nonparticipating whole life insurance policy. The annual premium was $1,278. The cash value of the policy after 10 years will be $13,740. The future value of $1 deposited at the start of the year for 10 years, assuming 5 percent interest, is $13.207. If the premiums

All of the following provisions under the Affordable Care Act have an impact on the current Medicare Program EXCEPT A) free preventative care for seniors. B) additional funding to reduce fraud in the Medicare Program. C) free rest home care for beneficiaries over age 90. D) rebates for the Part D coverage gap (donut

Which of the following statements about the risk of terrorism in the United States is (are) true? I. Congress created a federal backstop for terrorism claims. II. Coverage for losses attributable to terrorism is not marketed by private insurers in the U.S. A) I only B) II only C) both I and II D) neither I

Which of the following statements is (are) true concerning high deductible health plans? I. An employee can withdraw money tax-free from a health savings account or health reimbursement account to pay covered medical costs. II. There is a cap on an employee's out-of-pocket expenses under the plan. A) I only B) II only C) both

One of the additional coverages under the building and personal property coverage form is "increased cost of construction." The coverage is payable if A) a skilled artisan is needed to duplicate the construction of the damaged property. B) a labor strike or materials shortage increases construction costs. C) an ordinance or building code

Gwen is in charge of accounting at Integrity Insurance Company. Integrity is a publicly-traded insurer. In describing her job, Gwen said, "There aren't too many businesses where you are required to keep two sets of book." Gwen's comment most likely refers to her company A) preparing accounting statements using statutory and

The Dodd-Frank Act created a federal body with some limited regulatory authority. For example, the organization can represent the federal government in international negotiations regarding insurance and it can preempt state law where it conflicts with negotiated international agreements. This body is called the A) National Insurance Bureau. B) Federal Office of

Betty's personal property is insured for $100,000 under her Homeowners 3 policy. If she usually keeps some personal property at a mountain cabin that she owns, how much coverage for this property is available under her homeowners policy? A) $10,000 B) $20,000 C) $40,000 D) $50,000 Answer: A Answer: A Answer: A The long-run relative frequency of an event

All of the following are ISO commercial crime coverage exclusions EXCEPT A) dishonest acts committed by a named insured or partner of the named insured. B) indirect loss resulting from covered losses. C) theft committed by an employee of the named insured. D) losses from unauthorized trading in stocks and bonds. Answer: C Answer: C Answer: C A

Which of the following statements about the replacement cost provision of the Homeowners 3 policy is true? A) It applies to personal property losses only. B) Except for small losses, the insured must repair or replace the damaged property in order to receive full replacement cost. C) The insured is required to carry

Beth was injured at work and is eligible to receive workers compensation benefits. All of the following benefits are provided under workers compensation EXCEPT A) disability income. B) retirement benefits. C) rehabilitation. D) medical care. Answer: B Answer: B Answer: B Which of the following statements is (are) true regarding the net present value of a capital investment? I.

Sarah is using the needs approach to determine how much life insurance to buy. Her cash needs are $30,000; her income needs are $140,000; and special needs are $100,000. Sarah has the following assets: $20,000 in bank accounts, $30,000 in retirement plans, and $40,000 in investment accounts. Sarah owns no

Bridget started to fund a variable annuity. Three years later, she experienced financial difficulty. She called her agent and cancelled the contract. The insurer returned all but 4 percent of the account balance. The 4 percent kept by the insurer is a(n) A) account administration fee. B) investment management fee. C) front-end load. D)

John purchased an unendorsed Homeowners 3 policy. The coverage will expire next month. Which of the following changes will lower the premium that John will pay? A) reducing the deductible B) adding a replacement cost endorsement for personal property C) switching to an HO-2 policy D) adding a personal injury endorsement Answer: C Answer: C Answer: C Which

XYZ Insurance Company markets a wide range of coverages. One type of coverage provides monetary compensation if a bonded party fails to perform certain acts. This coverage is called A) property insurance. B) liability insurance. C) a fidelity bond. D) a surety bond. Answer: D Answer: D Answer: D Beth purchased a $50,000 nonparticipating whole life insurance policy.