Deck 8: Insurance Functions

Question 1

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

Answer 1

C

Question 2

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

Answer 2

D

Question 3

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

Answer 3

C

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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.

Question 10

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

Question 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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 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.

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 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

Question 23

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

Question 24

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.

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 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

Question 32

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

Question 33

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.

Question 34

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

Question 35

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.

Question 36

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.

Question 37

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

Question 38

At the present, most insurance sold over the Internet is:

A) illegal
B) personal lines coverage
C) small business coverage
D) expensive

Question 39

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

Question 40

Which of the following is not a type of reinsurance arrangement?

A) Facultative reinsurance
B) Treaty reinsurance
C) Pro-rata reinsurance
D) Cooperative reinsurance

Question 41

An insurance broker legally represents the insurance consumer.

Question 42

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

Question 43

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

Question 44

Mathematicians specializing in insurance statistics are called "actuaries."

Question 45

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.

Question 46

When a reinsurer cedes coverage to another reinsurer, it is called retrocession.

Question 47

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.

Question 48

Legally, life insurance agents are not employees of the companies they represent.

Question 49

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

Question 50

Pro-rata reinsurance determines the reinsurer's share of losses in a different manner than excess of loss reinsurance.

Question 51

In reinsurance, the primary insurer is also known as the:

A) retrocessionaire
B) first-layer reinsurer
C) ceding company
D) excess reinsurer

Question 52

Pro-rata reinsurance coverage may be either facultative or treaty.

Question 53

Reinsurance transactions do not occur in life insurance.

Question 54

When a primary insurer "cedes" coverage to a reinsurer, the process is called:

A) reinsurance
B) automatic coverage
C) retrocession
D) cession

Question 55

The brokerage function does not exist in life insurance sales.

Question 56

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

Question 57

Direct writing insurance companies typically use independent agents to represent them in the sales process.

Question 58

An agency contract determines the rights and duties of both the agent and the insurer.

Question 59

In reinsurance, the reinsurer is also known as the "ceding" company.

Question 60

Catastrophe reinsurance can be described as a form of excess of loss reinsurance.

Question 61

What is the relationship between the underwriter and the actuary? How do they interact?

Question 62

Many insurers sometimes use loss adjusters who are not employees of the company.

Question 63

Insurance agents must never give clients legal advice.

Question 64

List some of the reasons why insurance companies engage in the reinsurance transaction.

Question 65

Consumers are not allowed to inspect their personal Medical Information Bureau files.

Question 66

What is the difference between pro-rata reinsurance and excess of loss reinsurance?

Question 67

Explain what a direct writer company is. Explain what the independent agency system is.

Question 68

What is the difference between an agent and a broker?

Question 69

The Medical Information Bureau maintains information on people who have taken medical examinations in connection with the purchase of life insurance.

Question 70

Most states require licensed insurance agents to be at least age 18, to have good morals, and to pass an examination.

Question 71

Four states do not require people who sell insurance to be licensed.

Question 72

What are the steps in the loss adjustment process?

Question 73

Brokers generally stand in the same legal position as agents with respect to the power to bind the insurer to a property insurance contract.