Introduction to Risk Management and Insurance, 10e (Dorfman/Cather)
Chapter 8 Insurance Functions
1) Insurance brokers are:
A) compensated by a flat salary
B) legally, agents of the insurance company
C) only used in life insurance
D) legally, agents of the insurance consumer
2) All of the following statements about the claims handling function are true except:
A) overly liberal claims settlement procedures may be as bad as stingy claims settlement
procedures
B) claims settlement problems are generally more complex in property and liability insurance
than in life insurance
C) independent adjusters only work for small insurance companies
D) negotiation with the claims adjuster is often the only contact the insurance buyer has with the
insurer, besides the selling agent
3) The first step in the underwriting process is:
A) the desk underwriter review
B) the agent’s field appraisal
C) the general agent’s confidential report
D) the inspection report from Equifax or similar investigator
4) All the following are true about underwriting except:
A) a major purpose of underwriting is to reduce adverse selection against the insurance company
B) fair rates should be charged so that each group of insureds is not subsidized by other groups
C) the underwriter should select only those insureds that are expected to have no losses
D) the underwriter makes decisions based on criteria established by the company management
5) Direct writing:
A) describes the distribution system used by independent agents and brokers in the
property/liability area
B) is used only by life insurers
C) is an expensive way to distribute insurance to high income people
D) describes a system of insurance company distribution using employee/agents
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6) The independent agent system:
A) is used by direct writing companies
B) uses agents who own their own business
C) is used only in life insurance
D) requires agents to be paid a flat salary
7) Which of the following types of claims adjusters do not represent insurance companies?
A) Public adjusters
B) The insurance agent
C) The independent adjustment bureau
D) Company adjusters
8) Which of the following is not a duty of an insurance agent?
A) Duty to make a profit in the long run for the insurance agency and the insurer
B) Carefully handling all money and keeping proper records
C) Carefully conveying all relevant information
D) Duty not to enrich himself by self-dealing at the principal’s expense
9) Which of the following is not a duty of the agent?
A) No self-dealing at principal’s expense
B) Forwarding all premiums to the principal
C) Not submitting any type of business the insurer does not want
D) To guarantee the insurance buyer that the insurer will write them a policy at an affordable rate
10) Loss adjusters perform all the following functions except:
A) investigate claims to determine if fraud is involved
B) negotiate with the insured on the amount of damage claims
C) recommend denial of claims
D) act as the company’s lawyer if the case goes to court
11) One duty of the insurance company actuary is to:
A) handle claims when they involve property exposures and losses in multiple states
B) manage all contract negotiations when the agency agreement is signed by the agent and
company
C) determine premium rates and classification schemes for the underwriters to apply
D) eliminate exposures from the pool that are going to have a loss
12) Which of the following is not a duty of an actuary?
A) Calculate rates
B) Calculate dividends
C) Calculate loss reserves
D) Identify individual exposures that are going to have a loss
13) Which of the following was not listed in the text as a duty of an agent?
A) Loyalty to the principal
B) Carefully handling all money and keeping proper records
C) Carefully conveying all relevant information
D) Duty to select profitable business for carriers
14) Ramone works as a claims adjuster. He is hired by insureds to evaluate their claims when
they need his services. What kind of claims adjuster is Ramone?
A) Independent
B) Public
C) Private
D) Reserve
15) The independent agency system:
A) is doomed because agent’s commissions are too high relative to direct writers
B) means the agent rather than the insurance company “owns” the business
C) is not a good career path for most college graduates because the system is doomed to
extinction
D) is growing rapidly to the point of eliminating the direct writers
16) The primary difference between an insurance agent and an insurance broker is:
A) their compensation scheme
B) the parties they each legally represent
C) the fringe benefits their employers provide
D) there is no practical or legal difference between them, other than their titles.
17) Which of the following statements about insurance brokers is (are) true?
A) They legally represent the insurance company.
B) They have the legal power to bind the insurance company and can provide coverage for their
insureds immediately.
C) They have the right to approach a variety of insurers when searching for a particular product
or coverage.
D) Both A and B are true.
18) Jerry works as a claims adjuster. He is hired by insurance companies on a contract basis to
adjust claims when they need his services. What kind of claims adjuster is Jerry?
A) Independent
B) Public
C) Private
D) Direct
19) Fergie is a salaried claims adjuster who works exclusively for Mutual of Kentucky
Insurance. What kind of claims adjuster is Fergie?
A) Independent
B) Public
C) Private
D) Direct
20) In Jason’s agency contract, the insurer authorizes him to sell insurance policies. What type of
authority is this?
A) Actual
B) Express
C) Incidental
D) Both A and B
21) In Austin’s agency contract, the insurer authorizes him to sell insurance policies, but does not
specifically authorize him to make telephone calls to prospective clients. He makes such calls
anyway. Does he have the authority to make these calls, and if so, what type of authority is this?
A) No, he has no such authority.
B) Yes, and it is express authority.
C) Yes, and it is incidental authority.
D) Yes, and it is apparent authority.
22) Why is the power to bind life insurance contracts not given to agents?
A) Agents are not capable of evaluating the risks they deal with
B) This restriction minimizes fraud and misunderstanding
C) Because the agents represent the insurance buyers and not the insurance companies
D) All of the above
23) The insurance company accountant must apply what set of accounting principles when
creating insurer financial statements for the state regulators?
A) Generally Accepted Accounting Principles
B) Statutory Accounting Principles
C) International Accounting Standards Board Principles
D) Both A and B
24) Denny Crane was an agent for Mutual of Florida Insurance, but his agency contract was
recently revoked. One of his clients, Shirley Schmidt, has not yet been informed that he no
longer represents Mutual of Florida. She drops by his office to deliver a premium payment,
which he accepts and deposits into his own account. When Mutual of Florida does not receive
Shirley Schmidt’s premium, it sends her a cancellation notice. Before receiving her cancellation
notice, she suffers a loss and expects Mutual of Florida to pay her claim. What will likely happen
in this scenario?
A) Mutual of Florida will likely have to pay the claim.
B) Mutual of Florida will not have to pay the claim, but Denny Crane likely will.
C) Neither Mutual of Florida, nor Denny Crane, will have to pay the claim.
D) The claim will be paid by the court, and it will then sue Mutual of Florida.
25) Monah Lott is an agent for Mutual of Oregon Insurance. Monah has been strictly prohibited
from accepting premium payments from his clients; they are instead supposed to remit payments
directly to the insurer. Mutual of Oregon sends Venus Planet a renewal notice with a premium
invoice, and nowhere on the invoice does it tell her that she cannot remit payment to her agent.
To save herself a postage stamp, she drops the payment off at Monah’s office. Monah accepts the
payment, and puts it in her own account. When Mutual of Oregon does not receive Venus’s
premium, it sends her a cancellation notice. Before receiving her cancellation notice, she suffers
a loss and expects Mutual of Oregon to pay her claim. What will likely happen in this scenario?
A) Mutual of Oregon will likely have to pay the claim.
B) Mutual of Oregon will not have to pay the claim, but Monah Lott likely will.
C) Neither Mutual of Oregon, nor Monah Lott, will have to pay the claim.
D) The claim will be paid by the court, and it will then sue Mutual of Oregon.
26) Peggy’s insurance agent, Skip Towne, convinces her to replace her existing health insurance
policy with one that he claims is better. Peggy tells him that she will be glad to replace the policy
if the coverage provided under the new one is the same or better than that provided by the
existing policy. Skip assures her that coverage is equal or better under the new contract, so she
changes policies. Three months later, when she becomes pregnant, the insurer denies all her
claims for benefits. At that time, Peggy learns that her new policy does not provide maternity
benefits, although her previous policy did. Based on information contained in the text, who
should Peggy hold legally responsible for her lack of coverage?
A) Skip Towne
B) Her new insurer
C) Her previous insurer
D) The government
27) At the present, most insurance sold over the Internet is:
A) illegal
B) personal lines coverage
C) small business coverage
D) expensive
28) Quaniqua is an insurance agent who sells the products of over 20 different insurance
companies. What type of agent is she?
A) Exclusive
B) Direct-writing
C) Independent
D) Soliciting
29) The MIB is most helpful to which of the following professionals?
A) Life insurance agent
B) Life insurance underwriter
C) Property insurance agent
D) Secret defenders of the galaxy
30) Which of the following pieces of information would be the LEAST useful to a property
insurance underwriter?
A) Age of the property owner
B) Age of the property
C) Use of the property
D) What the surrounding properties are like
31) Simpson is an employee of United of Nowhere Insurance. He is also an agent for them.
Based on these facts, what type of insurance company MUST United of Nowhere be?
A) Direct writer
B) Life and health
C) Stock
D) Property and casualty
32) In 2004, the attorney general of New York accused insurance brokers of:
A) poor financial condition that could lead to insolvency
B) bid rigging
C) covering up investments in illegal securities
D) all of the above
33) In 2004, insurance brokers in New York were accused of violating a duty to their clients
(insurance buyers). What was that duty?
A) Loyalty to the buyer
B) No self-dealing at the buyer’s expense
C) Full disclosure to the buyer about the insurer’s financial condition
D) Full disclosure of all the broker’s investment interests in insurers
34) Which of the following is not a type of reinsurance arrangement?
A) Facultative reinsurance
B) Treaty reinsurance
C) Pro-rata reinsurance
D) Cooperative reinsurance
35) Facultative reinsurance is:
A) automatic, on a treaty basis
B) always revocable for first 30 days
C) arranged separately for each new exposure
D) placed with an alien insurer
36) Pro-rata reinsurance means:
A) losses, premiums, and expenses are divided proportionately between the primary insurer and
reinsurer
B) reinsurance is automatic
C) coverage is available at market rates
D) reinsurance is layered horizontally after the primary’s retention
37) ET Insurance Company cedes to MJ Insurance Company $60,000 of a $100,000 exposure on
an excess of loss basis. A loss occurs for $60,000.
A) MJ pays $36,000; ET pays $24,000.
B) MJ pays $20,000; ET pays $40,000.
C) MJ pays $40,000, ET pays $20,000.
D) MJ pays $30,000; ET pays $30,000.
38) Pro-rata reinsurance:
A) commits the reinsurer to pay part of a claim, but only after the primary insurer’s coverage has
been completely exhausted
B) is distinguished by very high retention amounts
C) means losses, premiums and expenses are divided proportionately by the primary insurer and
the reinsurer
D) is only sold by alien reinsurers, and then only at very high rates
39) When a $1 million insured loss occurs and $300,000 of the loss is reinsured, the policy
holder of the primary company will receive:
A) $1 million from the primary company
B) $1,000,000 from the primary insurer and $300,000 from the reinsurer
C) $700,000 from the primary insurer and $300,000 from the reinsurer
D) fifty percent of the loss from each company
40) Which of the following is not a valid reason to reinsure an exposure?
A) To make insured exposures similar in dollar size
B) To provide the insured access to Lloyd’s of London
C) To buy services from the reinsurer
D) To allow agents to be more competitive
41) If Fidelity Reinsurance agrees to reinsure all autos that meet the underwriting rules specified
in the contract with the primary insurer, this type of arrangement is:
A) an automatic treaty
B) individually negotiated
C) excess of loss
D) facultative
42) In reinsurance, the primary insurer is also known as the:
A) retrocessionaire
B) first-layer reinsurer
C) ceding company
D) excess reinsurer
43) United Insurance Company insures Travelco for fire insurance. United reinsures 40% of this
exposure with Promises Reinsurance company on a pro-rata basis. If a $400,000 insured loss
occurs at Travelco, Promises Reinsurance will pay United:
A) $0
B) $400,000
C) $160,000
D) $240,000
44) United Insurance Company insures Travelco for fire insurance. United reinsures part of the
exposure with Promises Reinsurance Company on an excess of loss basis, with United’s retention
loss level equal to $150,000. In this instance, assuming a $400,000 insured loss, Promises will
pay to United:
A) $0
B) $100,000
C) $150,000
D) $250,000
45) When a primary insurer “cedes” coverage to a reinsurer, the process is called:
A) reinsurance
B) automatic coverage
C) retrocession
D) cession
46) Professional reinsurance companies:
A) engage only in reinsurance transactions
B) make up only a small part of the reinsurance market
C) are located only in the United States
D) also act as primary insurers
47) Reinsurance transactions do not occur in life insurance.
48) When a reinsurer cedes coverage to another reinsurer, it is called retrocession.
49) In reinsurance, the reinsurer is also known as the “ceding” company.
50) Pro-rata reinsurance determines the reinsurer’s share of losses in a different manner than
excess of loss reinsurance.
51) Pro-rata reinsurance coverage may be either facultative or treaty.
52) Catastrophe reinsurance can be described as a form of excess of loss reinsurance.
53) Brokers generally stand in the same position as life insurance agents with respect to the legal
power to bind the insurer to a life insurance contract.
54) If an applicant for insurance informs his broker of all material facts regarding the risk, and
the broker does not pass those facts along to the insurer, it’s possible that the insurer can legally
deny any subsequent claim.
55) An insurance broker legally represents the insurance consumer.
56) Mathematicians specializing in insurance statistics are called “actuaries.”
57) An agency contract determines the rights and duties of both the agent and the insurer.
58) Direct writing insurance companies typically use independent agents to represent them in the
sales process.
59) Legally, life insurance agents are not employees of the companies they represent.
60) The brokerage function does not exist in life insurance sales.
61) Many insurers sometimes use loss adjusters who are not employees of the company.
62) Four states do not require people who sell insurance to be licensed.
63) Most states require licensed insurance agents to be at least age 18, to have good morals, and
to pass an examination.
64) Insurance agents must never give clients legal advice.
65) The Medical Information Bureau maintains information on people who have taken medical
examinations in connection with the purchase of life insurance.
66) Consumers are not allowed to inspect their personal Medical Information Bureau files.
67) Brokers generally stand in the same legal position as agents with respect to the power to bind
the insurer to a property insurance contract.
68) What is the difference between an agent and a broker?
69) Explain what a direct writer company is. Explain what the independent agency system is.
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70) What are the steps in the loss adjustment process?
71) What is the relationship between the underwriter and the actuary? How do they interact?
72) What is the difference between pro-rata reinsurance and excess of loss reinsurance?