In a surety arrangement, the party who benefits from the bond if the bonded party fails
to perform is the
A) principal.
B) obligee.
C) fidelity.
D) surety.
Which of the following statements about the financing of the Social Security program is
(are) true?
I. Although the self-employed pay an OASDI tax rate that is twice the employee rate,
they are allowed certain deductions that reduce the effective tax rate.
II. The earnings base on which OASDI taxes are paid increases annually based on
changes in average wages in the national economy.
A) I only
B) II only
C) both I and II
D) neither I nor II
Purposes of the coinsurance clause in health insurance contracts include which of the
following?
I. To reduce premiums.
II. To exclude coverage for certain medical procedures.
A) I only
B) II only
C) both I and II
D) neither I nor II
Neil needs insurance that is unavailable in the state where he lives. To obtain insurance
from a nonadmitted insurer, Neil should contact a
A) surplus lines broker.
B) nonadmitted agent.
C) general agency broker.
D) direct writer.
Which of the following statements about financial risk is (are) true?
I. Enterprise risk does not include financial risk.
II. Financial risk is easily addressed through the purchase of insurance.
A) I only
B) II only
C) both I and II
D) neither I nor II
The difference between the present value of future benefits payable under a life
insurance policy and the present value of net premiums for the policy is the policy’s
A) retrospective reserve.
B) policyholders surplus.
C) prospective reserve.
D) admitted assets.
According to the law of large numbers, what should happen as an insurance company
increases the number of loss exposures that it insures?
A) Fewer losses should be expected to occur.
B) The amount of premiums needed to cover losses should decrease.
C) The volatility of the insurance company’s underwriting results should increase.
D) The difference between actual and expected results should decrease.
If there is a conflict between state law and a provision in a homeowners policy,
A) the policy wording takes precedence.
B) the state law takes precedence.
C) the policyholder is entitled to whichever provides broader coverage.
D) the policy is null and void.
Some life insurers sell insurance directly to the public by using telephone
representatives or fee-only financial planners. As the marketing expenses are
substantially lower, the insurer can pass the savings on to the purchaser. The life
insurance sold in this manner is called
A) low-load life insurance.
B) preferred risk life insurance.
C) ordinary life insurance.
D) industrial life insurance.
Under one type of rating law, insurers are free to change rates and to use modified rates
immediately. However, the new rate must be filed with regulators within a specified
period, such as 60 days after the modified rate is employed. This type of rating law is
called
A) prior approval.
B) file-and-use.
C) use-and-file.
D) flex rating.
All of the following statements about class rating are true EXCEPT
A) Exposures with similar characteristics are placed in the same underwriting class.
B) The rate charged for each class reflects the average loss experience for that class.
C) The complexity of class rating makes it inappropriate for personal lines coverages.
D) It is based on the assumption that future losses to insureds will be determined by the
same classification factors currently in use.
Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita
will receive $500 per month from the insurer, and her life expectancy is 15 years (180
months). Assume that Juanita receives 12 monthly payments of $500 the first year. How
much taxable income must she report?
A) $3,000
B) $4,000
C) $4,500
D) $6,000
All of the following statements about business objectives in designing a rating system
are true EXCEPT
A) The rating system should encourage loss control activities.
B) The rating system should be independent of long-run changes in economic
conditions.
C) The rating system should be simple to understand.
D) The rating system should be stable over short periods so that consumer satisfaction
can be maintained.
Which of the following statements about eligibility requirements for homeowners
insurance is (are) true?
I. A contract can be written on a twenty-unit apartment complex as long as the tenants
are families.
II. Separate forms are available for renters and condominium owners.
A) I only
B) II only
C) both I and II
D) neither I nor II
The inability of the insured to perform some but not all of the important duties of his or
her occupation is called
A) residual disability.
B) total disability.
C) recurrent disability.
D) partial disability.
Which of the following statements about chance of loss and risk is (are) true?
I. If the chance of loss is identical for two groups, the objective risk must be the same.
II. Two individuals may perceive differently the risk inherent in a given activity.
A) I only
B) II only
C) both I and II
D) neither I nor II
Granite Insurance Company entered into a treaty reinsurance agreement with Rock
Solid Reinsurance (RSR). Granite’s retention limit is $400,000 and RSR agreed to
provide reinsurance for up to $2.0 million. If Granite writes an $800,000 policy, RSR is
responsible for 50 percent of the losses. If Granite insures a $1.6 million risk, RSR is
responsible for 25 percent of any losses. What type of reinsurance arrangement did
Granite enter into with RSR?
A) facultative reinsurance
B) surplus share reinsurance
C) quota share reinsurance
D) excess of loss reinsurance