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 was higher after the date of purchase, ABC’s president
said, “Buying a warranty is voluntary. We’ve noted that those who buy the warranty
after the purchase date have a greater need for service.” Charging the same rate or a
lower rate after the date of purchase would expose ABC to what problem that also
impacts private insurers?
A) excessive premiums
B) reduced claims
C) bad investments
D) adverse selection
All of the following statements about subrogation are true EXCEPT
A) The general rule allows the insurer to recover up to the amount paid to its insured
under the policy.
B) Subrogation does not apply in life insurance.
C) Interfering with the insurer’s subrogation rights can jeopardize indemnification of the
insured.
D) The insurer reserves the right to subrogate against its own insureds.
Beginning in 2014, the Affordable Care Act requires that most U.S. citizens and legal
residents have qualifying health insurance or pay a financial penalty. This provision of
the Affordable Care Act is known as the
A) affordable health insurance exchange option.
B) public option.
C) individual mandate.
D) premium subsidy option.
An employer-funded plan with favorable tax advantages, which repays employees for
medical care not covered by the employer’s standard medical plan is a(n)
A) 401(k) account.
B) individual retirement account (IRA).
C) health reimbursement arrangement (HRA).
D) flexible spending account (FSA).
Which of the following statements is (are) true with regard to group life insurance?
I. Most group life insurance is whole life coverage.
II. Most group life insurance plans allow a modest amount of life insurance on the
employee’s spouse and dependent children.
A) I only
B) II only
C) both I and II
D) neither I nor II
In order to receive unemployment insurance benefits, an unemployed worker must meet
all of the following eligibility requirements EXCEPT
A) have qualifying wages and employment.
B) be able to work.
C) be actively seeking work.
D) satisfy a 6-month waiting period.
Last year, XYZ Insurance Company had a combined ratio of 102.4 and lost $10.2
million on the insurance that it sold. The company, however, was required to pay
income taxes. The best explanation for this apparent contradiction is that XYZ offset its
underwriting loss with
A) increased loss reserves.
B) investment income.
C) increased loss adjustment expenses.
D) unearned premiums.
One provision of the Dodd-Frank Act was creation of the Financial Stability Oversight
Council. This council is charged with identifying nonbank financial companies that
could increase the risk of collapse of the entire financial system. This risk is called
A) market risk.
B) systemic risk.
C) diversifiable risk.
D) enterprise risk.
A vehicle is considered a constructive total loss when
A) it cannot be repaired.
B) the repair cost exceeds the actual cash value.
C) it can be repaired, but the insured prefers a cash settlement.
D) it can be repaired, but the insurer prefers a cash settlement.
Which of the following persons can establish a traditional IRA?
I. Persons whose only income received is from investments.
II. Employed persons under age 70.5 who are not active participants in an
employer-sponsored retirement plan.
A) I only
B) II only
C) both I and II
D) neither I nor II
Low-frequency, low-severity loss exposures are best handled by
A) avoidance.
B) retention.
C) insurance.
D) noninsurance transfer.
Which of the following statements about the liability coverage of the Business Auto
Coverage Form is (are) true?
I. The insurer agrees to defend the insured and pay all legal defense costs arising out of
an accident involving a covered auto.
II. The insured is covered for property damage and bodily injury arising out of the use
of a covered auto.
A) I only
B) II only
C) both I and II
D) neither I nor II
John occasionally borrows the car of his friend, Sophie. Sophie has a PAP with liability
limits of 100/300/50. John also has a PAP, and his liability limits 250/500/50. John had
an accident while using Sophie’s car and was found to be legally liable for $300,000 in
bodily injury liability for injuries suffered by one person. How much will be paid by
each policy?
A) Sophie’s policy will pay $150,000, John’s policy will pay $150,000.
B) Sophie’s policy will pay $50,000, John’s policy will pay $250,000.
C) Sophie’s policy will pay $100,000, John’s policy will pay $200,000.
D) John’s policy will pay the entire amount.
Which of the following statements about the tax implications of qualified pension plans
is true?
A) Investment income on plan assets is taxable in the year the investment income was
earned.
B) Employer contributions are deductible up to certain limits as an ordinary business
expense.
C) Employer contributions are considered taxable income to employees but are taxed at
capital gains rates.
D) Distributions from qualified pension plans are received tax-free by the retiree.
One of the speculative financial risks considered in an enterprise risk management
program is the risk of loss because of adverse changes in commodity prices, interest
rates, foreign exchange rates, and the value of money. This risk is called
A) property risk.
B) financial risk.
C) strategic risk.
D) operational risk.
Which of the following statements is (are) true concerning the home business insurance
coverage endorsement?
I. It increases the coverage on business personal property at the insured residence from
$2,500 to the Coverage C limit.
II. It excludes coverage for liability arising out of the home business.
A) I only
B) II only
C) both I and II
D) neither I nor II
Factors that may result in more restrictive underwriting decisions include which of the
following?
I. Inadequate rates.
II. The unavailability of reinsurance at favorable terms.
A) I only
B) II only
C) both I and II
D) neither I nor II
Loss frequency is defined as the
A) probable size of the losses that may occur during some period.
B) probable number of losses that may occur during some period.
C) probability that any particular piece of property may be totally destroyed.
D) probability that a liability judgment may exceed a firm’s net worth.
Which of the following statements about cafeteria plans is (are) true?
I. Unspent flexible spending account balances are refunded to the employee, tax-free, at
year-end.
II. Cafeteria plans enable employees to select benefits that meet their specific needs.
A) I only
B) II only
C) both I and II
D) neither I nor II