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 they are less
than the ceding insurer’s retention limit.
D) Using a reinsurance pool provides financial capacity to write large amounts of
insurance.
David purchased a $100,000 participating whole life policy. The annual premium is
$2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20
years will be $35,260. If the premiums were invested at 5 percent for 20 years, the
premiums would grow to $79,156. If the dividends were accumulated at 5 percent for
20 years, they would grow to be $24,400. The amount to which $1 deposited annually
will accumulate in 20 years at 5 percent is $34.719. Based on this information, what is
the surrender cost per thousand per year of David’s policy over the 20-year period?
A) $5.62
B) $13.75
C) $15.77
D) $27.38
Which of the following statements about mobile home insurance is (are) true?
I. Coverage for the mobile home may be written on either a replacement cost basis or an
actual cash value basis, depending on how much the mobile home has depreciated.
II. An additional coverage pays, up to a specified dollar limit, for the cost of
transporting the mobile home to a safe place when it is endangered by a covered peril.
A) I only
B) II only
C) both I and II
D) neither I nor II
A legal reserve in life insurance is a result of
A) premium taxes payable by life insurance companies being postponed during the
early policy years.
B) dividends being paid to policyholders.
C) inadequate premiums in the early policy years being subsidized by investment
earnings.
D) excess premiums in the early policy years being invested at compound interest.
An insurance company that sells earthquake insurance in an area where earthquakes are
possible has subjected itself to the risk of insolvency if a severe earthquake occurs. An
insurer can safely sell earthquake insurance in this area if it shifts the risk of
catastrophic loss to another insurer. The shifting of insured risk from one insurer to
another insurer is called
A) underwriting.
B) casualty insurance.
C) coinsurance.
D) reinsurance.
Some insurers offer a single-premium deferred annuity that does not begin paying
benefits until an advanced age, such as 85. This product is called
A) endowment insurance.
B) equity-indexed annuity.
C) life income with guaranteed payments annuity.
D) longevity insurance.
Which of the following statements about provisions in individual health insurance
policies is true?
A) Insurers are not permitted to place time limits on filing claims or providing proof of
loss.
B) After a policy is in force for 3 months, the time limit on certain defenses provision
prohibits the insurance company from denying a claim based on a fraudulent
misstatement in the application.
C) The usual length of the grace period is 180 days.
D) Under the reinstatement provision, a health insurance policy that has lapsed can be
put back in force.
Some characteristics of the judicial system and regulatory environment increase the
frequency and severity of loss. This hazard is called
A) moral hazard.
B) physical hazard.
C) attitudinal hazard.
D) legal hazard.
Which of the following statements about the traditional net cost method of measuring
the cost of life insurance is (are) true?
I. The traditional net cost method does not consider the time value of money.
II. The traditional net cost method can show that life insurance has a negative cost.
A) I only
B) II only
C) both I and II
D) neither I nor II
Which of the following situations would be covered under Section II of a homeowners
policy?
I. The insured is sued by his girlfriend because he infected her with the AIDS virus.
II. The insured’s son is sued after a friend suffered serious injury as a result of using
illegal drugs sold to him by the son.
A) I only
B) II only
C) both I and II
D) neither I nor II
Under common law, which of the following persons is most likely to be classified as an
invitee?
A) a mail carrier
B) a social guest
C) a door-to-door salesperson
D) a solicitor for a charitable organization
Why might the use of “grades” assigned by a life insurance company rating
organization not be a reliable guide for consumers?
I. There may be variations in grades given by different rating organizations.
II. They ignore factors such as profitability and quality of investments.
A) I only
B) II only
C) both I and II
D) neither I nor II
The major argument in favor of an optional federal charter for insurers is that
A) small insurers need a national charter to be competitive with large insurer.
B) a federal charter will prevent insurer insolvencies.
C) a federal charter will provide greater oversight of insurer market practices.
D) national insurers are at a competitive disadvantage under the present system.