Introduction to Risk Management and Insurance, 10e (Dorfman/Cather)
Chapter 7 Insurable Perils and Insuring Organizations
1) Mrs. Barker has a poodle that she loves very much. The poor little dog is killed in a house fire,
and Mrs. Barker asks her homeowners insurance company to pay $100,000 for the loss of the
dog. The insurer denies the claim. On what grounds would it be able to do this?
A) Too much moral hazard potential exists with the loss of pets.
B) It’s impossible to measure, economically, the value of a beloved pet.
C) Animals are never insurable items.
D) The insurer could not legally deny the claim.
2) Adverse selection results in which of the following?
A) No underwriting is necessary.
B) Applicants for insurance have a higher probability of loss than the average group of insureds.
C) The federal government must write the insurance.
D) Better insureds are attracted to the group.
3) The use of an applicant’s personal opinions by underwriters for rating criteria directly violates
which guiding principle of underwriting?
A) Separation and class homogeneity
B) Reliability
C) Incentive value
D) Social acceptability
4) All the following are necessary for an ideally insurable loss exposure except:
A) large number of homogeneous exposures
B) losses must be accidental and unintentional from the point of view of the insured
C) losses must be measurable
D) low probability of loss
5) 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
6) The Norris and Manhart cases resulted in which of the following outcomes?
A) Made insurance intrastate commerce
B) Made it illegal to charge men and women different life insurance premiums
C) Equalization of pension payments between men and women
D) Made it illegal to use gender as an underwriting factor in any type of insurance
7) From the viewpoint of an insurer, the prerequisites of an ideally insurable risk include all the
following except:
A) the loss must be capable of being determined and measured
B) there must be a large, homogeneous group of exposure units
C) the loss should not be subject to catastrophic hazard
D) the peril should be such that the probability of loss is high
8) “Subsidization” in an insurance pool means:
A) the bad risks pay more for insurance than good risks
B) the premiums collected by the insurers don’t adequately cover the losses experienced by the
pool
C) those who experience losses have their premiums raised
D) exposures that should be charged higher insurance rates are averaged in a pool so that the
good as well as bad exposures pay the same rate
9) In which of the following insurance pools would there be no subsidization?
A) Fire insurance
B) Life insurance
C) Automobile insurance
D) There would be subsidization in all of these pools.
10) If you were a life insurance underwriter, asking which of the following underwriting
questions would probably be socially unacceptable to an insurance applicant?
A) Have you ever tested positive for HIV?
B) Have you smoked any tobacco products within the last year?
C) Are you heterosexual, homosexual, or bisexual?
D) Have you traveled to a foreign country within the last ten years?
11) If you were an underwriter of homeowners insurance coverage, asking which of the
following underwriting questions would probably be socially unacceptable to the homeowner
applicant?
A) What religious beliefs do you have?
B) Does anyone in your family smoke cigarettes in the house?
C) Do you have an alarm system installed and working?
D) Do you have a swimming pool?
12) Which of the following statements about stock insurance companies is true?
A) Stockholders provide operating capital and receive dividends.
B) They are nonprofit organizations.
C) The insureds own the company.
D) They are more likely to provide lower-cost insurance than mutuals.
13) The term “demutualization” refers to:
A) the process of a stock insurer converting its organizational structure to mutual
B) the board of directors’ action in declaring dividends for the policy owners
C) the process of a mutual insurer converting its organizational structure to the stock form
D) the process of liquidating an insolvent mutual insurance company
14) Lloyd’s of London:
A) is a large property-liability insurance company with head-quarters in London
B) sells stock
C) is a marketplace where separate syndicates accept exposures for their own accounts
D) sells insurance directly to the public
15) A reciprocal exchange is:
A) a nonprofit corporation
B) unincorporated
C) a mutual insurance company
D) a federal insurance company
16) All the following are true about fraternal insurers except:
A) they market their product to social organizations
B) they are nonprofit and have tax advantages
C) they specialize in life insurance
D) they typically sell coverage through commercial banks
17) The Gramm-Leach-Bliley (GLB) Act:
A) allows banks to acquire insurance companies
B) prohibits banks from acquiring insurance companies
C) allows banks to form insurance companies
D) both A and C
18) A mutual insurer:
A) is not a corporation
B) is run by an attorney-in-fact
C) is legally a nonprofit organization
D) technically is a charitable organization
19) Which of the following is not a type of mutual insurance organization?
A) Assessment
B) Advanced-premium
C) Perpetual
D) Reciprocal
20) An assessment mutual:
A) provides primarily fire and windstorm insurance
B) is owned by stockholders who supply the capital
C) distribute all investment earnings to its policyholders in the form of a dividend
D) requires only assessments from each policyholder after the end of each year to cover losses
21) Savings bank life insurance:
A) is sold only in a few Eastern states in the U.S.
B) is a form of group credit life and disability coverage
C) can only be purchased in amounts of $5,000 or less
D) is the same as industrial life insurance
22) Buying insurance from a mutual may not always be desirable because:
A) the mutual is trying to make a profit for the stockholders
B) you may be paying for other insureds’ losses
C) premiums may be greater than that of a stock company if the mutual is improperly managed
D) the officers of the company are not responsible to the policy holders
23) Which of the following statements is false?
A) Assessment mutuals provide primarily fire and windstorm insurance.
B) A stock insurance company is a profit-making venture in both life and property insurance.
C) Dividends are paid to stockholders of stock companies.
D) In stock companies, non-insured stockholders bear none of the risk of loss.
24) All the following statements are true concerning mutual insurance companies except:
A) they may pay dividends
B) they are owned by their policyholders
C) they are legally organized as perpetual partnerships
D) they are nonprofit
25) In general, all of the following statements about Lloyd’s of London are true except:
A) members have unlimited personal liability
B) individual members (“names”) cooperate in groups known as syndicates
C) if a syndicate is unable to pay its portion of a loss, the insured has the right to collect that
unpaid portion from Lloyd’s of London
D) Lloyd’s is not as preeminent in the insurance marketplace today as it once was
26) A mutual insurance company might be characterized by all of the following except:
A) policyholder ownership
B) non-profit operations
C) taxable dividends to owners
D) assessable policies
27) Lloyd’s of London:
A) is an unincorporated, not-for-profit insurer
B) is partly a mutual company and partly a stock company
C) sells mainly homeowners insurance to residents of London
D) operates in the surplus lines and marine insurance markets
28) Stock insurers:
A) are unincorporated
B) only sell property and liability insurance
C) cannot sell automobile insurance
D) are organized as profit-making ventures
29) A stock insurer is managed by:
A) an attorney-in-fact
B) an agency supervisor
C) a fraternal representative
D) representatives chosen by shareholders
30) 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
31) The United States’ Life-Health insurance industry wrote how many billion worth of
premiums in 2008?
A) 96.5
B) 223.6
C) 518.1
D) 641.6
32) The United States’ Property-Liability insurance industry wrote how many billion worth of
premiums in 2008?
A) 25.4
B) 97.4
C) 317
D) 439.8
33) Assessment mutuals:
A) primarily provide fire and windstorm coverage for small towns and farmers
B) do a lot more business than advance premium mutuals
C) do about the same amount of business as advance premium mutuals
D) are shareholder owned
34) Earthquake insurance:
A) is provided too cheaply by insurance companies
B) typically costs $1 per $20,000 protection
C) is sold in only a limited number of geographical markets
D) is bought by Californians only
35) What is the effect when the most favorably situated exposures leave a (potential) insurance
pool?
A) Premiums go down.
B) Nothing
C) The cost of insurance needs to be borne by more policyholders.
D) The cost of insurance needs to be borne by fewer policyholders.
36) Which of the following statements about the insurer death spiral is correct?
A) The insurance pool is shrinking to those who really need insurance.
B) The government has enacted laws to prevent the death spiral.
C) The insurance pool is shrinking to those who are facing low risk.
D) The insurance premium that needs to be paid is minimized.
37) Which of the following statements about the insurer death spiral is not correct?
A) The insurance pool is shrinking to those who really need insurance.
B) The remaining policyholders are not susceptible to the peril being insured.
C) The insurance pool is shrinking to those who are facing high risk.
D) The insurance premium that needs to be paid is very high.
38) Is the insurer death spiral applicable to Tornado Insurance?
A) Yes, only people in a limited number of states are susceptible to tornadoes.
B) Yes, Tornado Insurance premiums are extremely high.
C) No, the desire to purchase Tornado Insurance is not limited to a small group of consumers.
D) No, there is a definite loss capable of causing economic hardship.
39) Which of the following is not an evaluation criterion to determine whether a risk
classification is appropriate?
A) Separation
B) Reliability
C) Incentive Value
D) Simplicity
40) Private insurers are classified according to ownership arrangements. Distinct types
mentioned in the text include all the following except:
A) stock companies
B) mutual companies
C) reciprocals
D) reinsurer
41) Which of the following statements is correct?
A) Net Premiums Written by Life-Health Insurers have decreased between 1998 and 2008.
B) Net Premiums Written by Property-Liability Insurers have stayed basically the same between
1998 and 2008.
C) Net Premiums Written by Life-Health Insurers were higher than those written by Property-
Liability Insurers in 1998.
D) Net Premiums Written by Life-Health Insurers were lower than those written by Property-
Liability Insurers in 2008.
42) In an insurer death spiral only people who do not really need insurance purchase it.
43) Of all evaluation criteria to determine whether a risk classification is appropriate, simplicity
is the most important one.
44) In an insurer death spiral the insurance pool shrinks.
45) The insurer’s efficiency and underwriting practices are much more important to the consumer
than the insurer’s legal form of organization.
46) Competition would totally eliminate subsidization in insurance pools if there were no
regulator restricting competition between insurance companies.
47) The items in an insurance pool must be similar to reduce subsidization.
48) Subsidization in insurance pools occurs if a 40-year-old male is charged the same life
insurance premium as a 20-year-old male.
49) Both stock and mutual insurance companies are incorporated.
50) Dividends from mutual insurers are a part of the contract, and minimum dividends are
guaranteed.
51) Dividends from mutual insurers are not subject to federal income tax.
52) Mutual insurance companies legally are nonprofit organizations.
53) Reciprocal exchanges are operated by managers known as notary publics.
54) Reciprocal exchanges provide a considerable amount of automobile insurance.
55) Reciprocal exchanges are unincorporated.
56) Lloyd’s of London is the largest mutual insurance company in the world measured by total
premiums written.
57) To own a part of a stock insurance company, a person must purchase an insurance policy
from that company.
58) The Gramm-Leach-Bliley Act (1999) allows banks, security dealers, and insurance
companies to combine together to form financial services holding companies.
59) How do a reciprocal exchange and a mutual insurance company differ?
60) What is demutualization? What are some reasons companies want to demutualize?
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61) Describe the changes that were brought about by the Gramm-Leach-Bliley Act, and, its
overall impact on financial services today.
62) What are the basic differences between a stock and a mutual insurance company?
63) Lloyd’s of London is not an insurance company. What is it and how does it provide
insurance?