Question 1

All of the following are reasons why mutual insurance companies convert to stock insurance companies EXCEPT

Accepted Answer

Stock companies are not exempt from state insurance regulation. In fact, they are subject to the same regulatory oversight as mutual companies. The other three reasons listed are common reasons why mutual companies may choose to convert to stock companies.

Question 2

A personal lines insurance company initiating banking and investment services for its policyowners demonstrates which financial services industry trend?

Accepted Answer

Convergence refers to the trend of companies in the financial services industry expanding their services to include previously separate sectors, such as insurance companies offering banking and investment services.

Question 3

ABC Insurance has always used the exclusive agency system to market coverages.ABC,however,cannot afford full-time agents in sparsely-populated areas.To reach customers in these areas,ABC enters into agreements with local independent agents.Using more than one marketing system is called employing a

Accepted Answer

Using both exclusive and independent agents is an example of a multiple distribution system. This allows ABC Insurance to reach customers in sparsely-populated areas without the expense of a full-time exclusive agent.

Question 4

Jim would like to start a business raising thoroughbred racehorses.The business would be the first of its kind in the state where he lives.Obtaining insurance on the horses is a key concern,and he was dismayed to learn that none of the insurers authorized to operate in his state offer this specialty insurance.What is the name of the intermediary which Jack can use to place this coverage with an insurer not admitted to his state?

Accepted Answer

A surplus lines broker can assist Jim in obtaining coverage from an insurer not authorized to operate in his state. Surplus lines brokers are licensed insurance agents who specialize in placing coverage with non-admitted insurers when coverage is not available in the standard market.

Question 5

Big Mutual Insurance Company would like to take advantage of financial services deregulation by acquiring a bank and a stock brokerage firm.Big Mutual,however,would have trouble raising the funds needed to make these acquisitions under the mutual form of organization.Big Mutual is planning to switch from the mutual form of organization to the stock form,and to issue shares of common stock to raise capital.This change in organizational structure is called

Accepted Answer

The change in organizational structure described in the scenario is known as demutualization. This involves a mutual company becoming a publicly traded corporation and issuing shares of common stock to raise capital. Demutualization is a common strategy for mutual insurance companies looking to raise funds for expansion or acquisitions in the financial services industry.

Question 6

The demutualization process is expensive and time consuming.As an alternative to demutualization,many states have enacted legislation allowing a mutual company to reorganize as a company that directly or indirectly controls another insurer.The other insurer is a stock company that can issue additional shares of stock to raise capital.The reorganized company is called a

Accepted Answer

The option C (mutual holding company) is the best choice as it describes the reorganization process where a mutual company becomes a holding company that indirectly controls a stock insurance company. This allows the mutual company to raise capital without going through the expensive and time-consuming demutualization process. The other options (A, B, and D) do not accurately describe this specific reorganization process.

Question 7

R.I.P.Company manufactures herbicide and pesticide.The company had difficulty finding affordable liability insurance.R.I.P.established its own insurance company based in Bermuda for the purpose of insuring R.I.P.'s loss exposures.The company that R.I.P.formed is called a

Accepted Answer

R.I.P. established its own insurance company, which is a form of a captive insurer. Captive insurers are owned by the insured parties, which allows them to better control and tailor their insurance coverage to their specific needs. Captive insurance companies are often formed by large corporations to insure unique or difficult-to-insure risks.

Question 8

Scott works in property and liability insurance marketing.He legally represents insurance purchasers,rather than insurance companies.Scott is paid a commission on the insurance placed with insurers.Scott is a(n)

Accepted Answer

Scott's job responsibilities and method of compensation indicate that he is an insurance broker. As a broker, he represents insurance purchasers and does not work directly for any specific insurance companies. Instead, he helps clients find the best insurance policies from a variety of insurers and earns a commission on the policies he places with those insurers.

Question 9

The financial services field is currently experiencing consolidation and convergence.If both of these trends continue,in the future we should observe

Accepted Answer

The convergence of different types of financial services (such as banking, insurance, and investments) and the consolidation of banks and financial institutions will likely result in fewer institutions overall, but offering a wider range of financial services products. This is because the goal of consolidation and convergence is to create larger, more diversified firms that can better compete in the global market.

Question 10

Some investors decided to start an insurance company.Each investor contributed $50,000 to raise the capital required to charter a new company.Each investor received an ownership interest in the company.The company will raise additional capital by selling ownership rights to other investors.Under this type of organization,the customer and owner functions are separate.This type of insurer is called a

Accepted Answer

In a stock company, the capital is raised by selling ownership shares to investors. Customers and owners have separate roles in the company, and ownership is transferable. This is different from a mutual company, where the policyholders are also the owners and have a say in the company's decisions. A reciprocal exchange is a group of policyholders who agree to insure each other, and a fraternal company is a type of mutual company that provides insurance to members of a specific organization.

Question 11

In 2008,Liberty Mutual Insurance Company acquired Safeco Insurance Company.This acquisition demonstrates which financial services industry trend?

Accepted Answer

The acquisition of Safeco Insurance Company by Liberty Mutual Insurance Company demonstrates the trend of consolidation in the financial services industry, where larger companies merge with or acquire smaller ones to increase market share, expand their offerings, and gain a competitive advantage.

Question 12

Sarah owns a property and liability insurance agency.She is authorized to represent several insurance companies and she is compensated by commissions.Sarah's agency owns the expiration rights to the business she sells.Sarah is a(n)

Accepted Answer

Independent agents represent multiple insurance companies and own the expiration rights to the business they sell, distinguishing them from exclusive agents, direct writers, and brokers.

Question 13

Brian is a life insurance agent.He is licensed to represent one company and has been assigned a territory.In addition to marketing life insurance products in the territory,Brian is also responsible for recruiting,training,and motivating new agents for the company in his territory.Brian is a(n)

Accepted Answer

Brian is a general agent because he not only sells insurance but also recruits, trains, and motivates new agents in his territory, which is a typical role of a general agent.

Question 14

ABC Life Insurance Company uses an interesting marketing system.The company locates life insurance agents who are already successful and signs the agents to sell ABC life insurance products.ABC does not ask their agents to recruit new agents.The type of marketing system that ABC Life Insurance Company uses is called the

Accepted Answer

The nonbuilding agency system involves recruiting successful agents who do not recruit new agents, aligning with ABC's approach.

Question 15

Which of the following statements is (are)true with respect to the financial services industry?
I.The number of firms operating in the industry continues to increase at a high rate.
II.The Financial Modernization Act of 1999 permits financial institutions to compete in other financial markets outside their core business area.

Accepted Answer

Statement I is false because there has been a trend of consolidation and mergers in the financial services industry, leading to a decrease in the number of firms.

Statement II is true as the Financial Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act, eliminated barriers between different types of financial institutions and allowed them to engage in a wider range of financial activities outside their core business area.

Question 16

Cathy just started a job with XYZ Manufacturing Company.She attended an orientation and was given a packet providing information about the various employee benefits XYZ offers.One item in the packet was a booklet and application form from an auto insurer.The insurer offers lower premiums to XYZ employees.The insurer's plan for selling individually-underwritten auto insurance to employees of XYZ Manufacturing Company is called

Accepted Answer

The answer of Cathy just started a job with XYZ...

Question 17

RST Insurance is an interesting company.It doesn't have any agents.Instead,the company sells insurance through radio ads,telemarketers,and newspaper and magazine inserts.This distribution method is called

Accepted Answer

The distribution method described is the direct response system, where customers directly respond to the company's marketing efforts through various channels without the involvement of agents or intermediaries.

Question 18

Which of the following statements is (are)true about savings bank life insurance (SBLI)?
I.Each depositor at the savings bank receives life insurance equal to his or her savings account balance.
II.The goal of SBLI is to provide low-cost life insurance to consumers.

Accepted Answer

Statement I is not true as SBLI is a separate policy that is purchased by the customer and is not automatically provided based on the savings account balance. Statement II is true as the main goal of SBLI is to offer affordable life insurance to consumers.

Question 19

The leaders of a religious group decided to start a life insurance organization to insure members of the religious group.The insurer will operate as a nonprofit organization,thus receiving favorable tax treatment.The insurer formed will be a

Accepted Answer

Fraternal insurers are nonprofit organizations that provide insurance to their members. They are typically formed by members of a fraternal or religious organization, as in this case. Fraternal insurers receive favorable tax treatment due to their nonprofit status. Health maintenance organizations (A) are a type of medical care provider, not an insurer. Stock insurers (B) are owned by shareholders and operate for profit. Reciprocal exchanges (D) are member-owned organizations that mutually exchange insurance with each other, but do not necessarily have a nonprofit status.

Question 20

One type of insurer is a community-oriented health insurer.In most states,this insurer is set-up as a non-profit organization that provides coverage for hospital services,physicians' and surgeons' fees,and other medical services.This type of insurer is called a

Accepted Answer

The description given in the question matches with the characteristics of a Blue Cross/Blue Shield Plan. These plans are community-oriented and offer coverage for hospital services, physicians' and surgeons' fees, and other medical services. They are generally set up as non-profit organizations in most states. Stock insurers are for-profit organizations, captive insurers are owned by the insured parties, and health maintenance organizations (HMOs) have a more specific structure and coverage model.

Quiz 5: Types of Insurers and Marketing Systems