Chapter 25: Insurance Operations
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1. Which of the following statements is incorrect?
a.
Insurance provides a payment to the insured under conditions specified by the insurance policy contract.
b.
Individuals who are less exposed to specific conditions that cause financial damage are more likely to
purchase insurance against those conditions.
c.
Insurance can cause the insured to take more risks because they are protected.
d.
Insurance companies employ underwriters to calculate the risk of specific insurance policies.
ANSWER:
b
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
2. Those insurance companies whose claims are ____ predictable need to maintain ____ liquidity.
a.
less; less
b.
more; more
c.
less; more
d.
none of the above
ANSWER:
c
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
3. A ____ life insurance company is owned by its policyholders; most life insurance companies are ____.
a.
stock-owned; mutual
b.
mutual; mutual
c.
stock-owned; stock-owned
d.
mutual; stock-owned
ANSWER:
d
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
4. ____ insurance provides insurance for a policyholder only over a specified period.
a.
Term
b.
Whole life
c.
Universal
d.
A and C
ANSWER:
d
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
5. Which type of life insurance policy does not build a cash value for policyholders?
a.
whole life
b.
term
c.
universal life
Chapter 25: Insurance Operations
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d.
All of the above build a cash value.
ANSWER:
b
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
6. Which type of life insurance policy specifically accommodates the needs of people who need more insurance now than
later?
a.
whole life
b.
term
c.
decreasing term
d.
universal life
ANSWER:
c
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
7. Which type of life insurance policy can offer flexibility on the size and timing of premium payments?
a.
whole life
b.
term
c.
universal life
d.
decreasing term
ANSWER:
c
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
8. Under ____, the benefits awarded by the life insurance company to a beneficiary vary with the assets backing the
policy.
a.
whole life insurance
b.
term insurance
c.
variable life insurance
d.
universal life insurance
ANSWER:
c
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
9. ____ is(are) not a typical source of funds for life insurance companies.
a.
Deposit insurance premiums
b.
Annuity plans
c.
Investment income
d.
Life and health insurance premiums
ANSWER:
a
DIFFICULTY:
Moderate
Chapter 25: Insurance Operations
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Page 4
insurance companies?
a.
Property and casualty policies are longer term.
b.
The type of policies offered by life insurance companies are less focused.
c.
Future compensation amounts paid on property and casualty policies are more difficult to forecast.
d.
Life insurance companies need to maintain a more liquid asset portfolio.
ANSWER:
c
DIFFICULTY:
Challenging
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
15. The most common use of funds for property and casualty insurance companies is for
a.
corporate bonds and municipal securities.
b.
Treasury bills.
c.
corporate stock.
d.
commercial paper.
ANSWER:
a
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
16. ____ effectively reallocates a portion of an insurance company’s return and risk to other insurance companies.
a.
Reinsurance
b.
Cash flow underwriting
c.
Factor insurance
d.
Universal insurance
ANSWER:
a
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
17. Individuals who are insured under a managed health care plan can usually choose any provider of health care services.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
18. ____ insurance covers losses due to dishonest employees.
a.
Key employee
b.
Credit line
c.
Malpractice
d.
Fidelity bond
ANSWER:
d
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
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19. ____ insurance covers losses due to a contract not being fulfilled.
a.
Fidelity bond
b.
Credit line
c.
Surety bond
d.
Business interruption
ANSWER:
c
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
20. Which of the following is not involved in the regulation of the insurance industry?
a.
the National Association of Insurance Commissioners (NAIC)
b.
the Insurance Regulatory Information System (IRIS)
c.
the Federal Deposit Insurance Corporation (FDIC)
d.
All of the above are involved in the regulation of the insurance industry.
ANSWER:
c
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
21. With a(n) ____ insurance policy, the benefits awarded by the life insurance company to the beneficiary differ,
depending on the assets backing the policy.
a.
universal life
b.
whole life
c.
variable life
d.
group life
e.
none of the above
ANSWER:
c
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
22. The most common type of mortgage held by life insurance companies are ____ mortgages.
a.
commercial
b.
residential
c.
farm
d.
none of the above
ANSWER:
a
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
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23. The ____ facilitates cooperation among the various state agencies whenever an insurance issue is a national concern.
a.
Securities and Exchange Commission
b.
Federal Deposit Insurance Corporation
c.
National Association of Insurance Commissioners
d.
National Association of Securities Dealers
e.
none of the above
ANSWER:
c
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
24. The adverse selection problem as related to the insurance industry means that people who have insurance are less
likely to suffer losses than people who do not have insurance.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
25. The moral hazard problem as related to the insurance industry means that some people take more risks once they are
insured.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
26. Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term
insurance.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
27. Group insurance policies are very popular for employers and employees.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
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Page 7
28. Real estate values usually have little impact on the market value of a life insurance company’s asset portfolio and only
affect property and casualty insurance companies.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
29. Property and casualty insurance and life insurance are similar in terms of the predictability of payouts to cover claims.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
30. _____ insurance provides a financial payout if specified employees of a business become disabled or die.
a.
Best person
b.
Employment liability
c.
Key employee
d.
Credit line
ANSWER:
c
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
31. Bond insurance is available only for corporate bonds and not for municipal securities.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
32. An insurance company’s liquidity is measured as
a.
net profit minus losses
b.
premium income minus policy expenses
c.
invested assets divided by loss reserves and unearned premium reserves
d.
none of the above
ANSWER:
c
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
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Page 8
33. The primary source of funds for a life insurance company income is
a.
life insurance premiums.
b.
annuity plans.
c.
health insurance premiums.
d.
investment income.
e.
none of the above
ANSWER:
b
DIFFICULTY:
Easy
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
34. Property and casualty (PC) insurance companies may use cash flow underwriting, in which they tend to lower their
premium prices as interest rates rise.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
35. The practice of adapting insurance prices to interest rates by lowering premiums when interest rates rise and raising
premiums when interest rates decline is called:
a.
cyclical rate adjusting.
b.
collateralizing premiums.
c.
cash flow underwriting.
d.
reinsurance.
ANSWER:
c
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
36. Mortgage insurance protects:
a.
homeowners against damage to their home such as from storms or fire.
b.
homeowners in the event that they cannot make their mortgage payments.
c.
the lender who provided the mortgage in the event that the homeowner defaults on the mortgage.
d.
all of the above
ANSWER:
c
DIFFICULTY:
Moderate
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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Page 9