Question 1

New Liability Insurance Company began operations last year and has been very successful.The company's ability to grow is being restricted by an accounting rule that requires insurers to realize acquisition expenses immediately,while not realizing premiums received as income until some time has passed.Reinsurance is often used in such cases for which of the following purposes?

Accepted Answer

Reinsurance can help reduce the unearned premium reserve by allowing the company to spread the risk and transfer part of its liabilities to other insurers. This can help alleviate the accounting issue New Liability Insurance Company is facing by allowing them to recognize premiums received as income over time, rather than immediately.

Question 2

Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance.Delta has a retention limit of $200,000,and nine lines of insurance are ceded to Eversafe.How much will Eversafe pay if a $1,600,000 building insured with Delta suffers an $800,000 loss?

Accepted Answer

The answer of Delta Insurance Company has a surplus-share treaty...

Question 3

Which of the following statements is (are)true with respect to catastrophe bonds?
I.The bonds are issued by the U.S.Government.
II.The bonds have relatively high interest (coupon)rates.

Accepted Answer

The answer of Which of the following statements is (are)true...

Question 4

Ross studied engineering in college.After graduation,he went to work for an insurance company.Ross visits properties insured by his company.He conducts inspections and makes recommendations about alarm systems,sprinkler systems,and building construction.In what functional area does Ross work?

Accepted Answer

Ross works in loss control, which involves conducting inspections and making recommendations to prevent or minimize losses for the insurance company. The other options (underwriting, information systems, and claims adjusting) do not involve physical property inspections or risk assessment.

Question 5

Easy Pay Insurance Company may require insureds who suffer a loss to submit a sworn statement to substantiate that a loss occurred and to describe the conditions under which the loss occurred.This sworn statement is called a

Accepted Answer

A proof of loss is a sworn statement that provides details about a loss and the conditions under which it occurred. It is commonly used by insurance companies to substantiate a claim and determine the amount of the loss to be paid. Binders, inspection reports, and notice of loss are different types of documents used in insurance, but they do not necessarily involve a sworn statement or the same level of detail as a proof of loss.

Question 6

The process of transferring risk to the capital markets through the use of financial instruments such as bonds,futures contracts,and options is knows as

Accepted Answer

Securitization of risk refers to the process of transferring risk to the capital markets through the use of financial instruments such as bonds,futures contracts,and options. The other options, consolidation of risk and compartmentalization of risk, refer to internal risk management techniques within an organization. Avoidance of risk refers to the decision not to engage in an activity that involves risk.

Question 7

Sue double-majored in mathematics and statistics in college.She also enrolled in a number of finance courses.After graduation,she was hired by Econodeath Insurance Company.Her job is to calculate premium rates for life insurance coverages.Sue is a(n)

Accepted Answer

Sue's double major in mathematics and statistics, as well as her enrollment in finance courses, suggests she has a strong background in quantitative analysis. As an actuary, her role would be to use her expertise in mathematics and statistics to evaluate and price risk for insurance companies. This aligns with her job of calculating premium rates for life insurance coverages at Econodeath Insurance Company. Underwriters are responsible for determining whether or not to provide insurance coverage and at what price, but may not necessarily have the same level of quantitative expertise as an actuary. Claims adjusters handle the processing and investigation of insurance claims, and producers are involved in selling insurance policies.

Question 8

Pac-Coast Insurance (PCI)concentrates its underwriting activities in California.The company is concerned that if a catastrophic earthquake occurs,it might threaten the solvency of the company.To address this risk,PCI issued some debt securities.If a catastrophic earthquake occurs,PCI does not have to repay the borrowed funds or pay interest.The securities PCI issued are called

Accepted Answer

The securities that PCI issued are called catastrophe bonds. These are a form of insurance-linked securities where the issuer (in this case, PCI) transfers the risk of a catastrophic event, such as an earthquake, to investors who buy the bonds. If the catastrophic event occurs, the investors lose their investment, but PCI does not have to repay the principal or interest on the bonds. This helps protect the company's solvency in the event of a major catastrophe.

Question 9

Which of the following statements is (are)true about life insurance company investments?
I.The majority of life insurance company general account assets are invested in bonds.
II.The majority of life insurance company separate account assets are invested in stocks.

Accepted Answer

Life insurance companies typically invest the majority of their general account assets in bonds for stability and predictable income. Separate account assets, on the other hand, are often invested in stocks to provide higher potential returns for policyholders, reflecting the different risk and return objectives of these accounts.

Question 10

Huge Insurance Company is a property insurer that is interested in protecting itself against cumulative losses that exceed $200 million during the year.This protection can best be obtained using

Accepted Answer

An excess-of-loss reinsurance treaty would best suit the needs of Huge Insurance Company. This is because an excess-of-loss treaty provides protection against catastrophic losses that exceed a certain predetermined amount, in this case, $200 million. It is a more cost-effective option compared to quota-share or surplus-share treaties, which provide more comprehensive coverage but at a higher cost. A reinsurance pool may not provide adequate protection against such large losses, and therefore, it is not the best option for Huge Insurance Company.

Question 11

Liability Insurance Company (LIC)was approached by a regional airline to see if LIC would write the airline's liability coverage.LIC agreed to write the coverage and entered into an agreement with a reinsurer.Under the agreement,LIC retains 25 percent of the premium and pays 25 percent of the losses,and the reinsurer receives 75 percent of the premium and pays 75 percent of the losses.This reinsurance arrangement is best described as

Accepted Answer

Quota-share reinsurance involves the reinsurer and insurer sharing both premiums and losses at a predetermined percentage split. In this case, LIC retains 25 percent of the premium and pays 25 percent of the losses, while the reinsurer receives 75 percent of the premium and pays 75 percent of the losses. This fits the definition of a quota-share reinsurance arrangement.

Question 12

Functions of an insurance company's legal department include which of the following?
I.Lobbying for legislation favorable to the insurance industry.
II.Drafting policy provisions.

Accepted Answer

The legal department of an insurance company performs multiple functions, including lobbying for legislation that favors the insurance industry and drafting policy provisions. Therefore, both option I and II are the correct choices.

Question 13

Antonio is a claims adjustor for LMN Insurance Company.After the insurer is notified that there has been a loss,Antonio meets with the insured.The first step in the claims process that Antonio should follow is to

Accepted Answer

The first step in the claims process should be verifying that a covered loss has occurred. This involves investigating the loss and determining whether it is covered under the policy before proceeding with determining the amount of the loss and paying the claim. Attempting to deny the claim immediately or delaying payment are not appropriate actions without first verifying that the loss is covered.

Question 14

Mark has been an underwriter for 20 years.An application he recently reviewed looked odd to him.The building value in the application seemed far too high,and Mark suspected the applicant might be planning to destroy the property after it is insured.Mark contacted an outside firm and hired someone to investigate the applicant and to prepare a report about the applicant.This report is called a(n)

Accepted Answer

The report that Mark hired someone to prepare is called an inspection report, as it involves investigating the applicant and their intentions for the property. The other choices are not applicable in this context - an agent's report would pertain to the agent's own activities, a binder is a type of temporary insurance contract, and a physical inspection would refer to an assessment of the physical condition of the property itself.

Question 15

Amy heads the legal staff of a large property and liability insurance company.Amy's staff is likely involved in all of the following activities EXCEPT

Accepted Answer

The legal staff is not typically involved in reviewing applications to determine if the company should insure the risk. That responsibility usually falls on the underwriting department.

Question 16

Beverly lives in a sparsely populated area in northern Idaho.Some insurance companies marketing coverage in northern Idaho cannot afford to have full-time adjustors there.Several insurers hire Beverly to adjust claims for their insureds.Beverly charges the insurers a fee for each claim that she settles.Beverly is a(n)

Accepted Answer

Beverly is an independent adjustor as she works for multiple insurance companies and charges them a fee for each claim settlement.

Question 17

Which of the following statements about the investments of property and liability insurers is (are)true?
I.Income from investments is important in offsetting any unfavorable underwriting experience.
II.Because premium income is continually being received,the investment objective of liquidity is of little importance.

Accepted Answer

Statement I is true as income from investments can help offset any losses from underwriting. Statement II is false as liquidity is still an important investment objective even with continual premium income, as insurers may need to pay out claims or unexpected expenses.

Question 18

All of the following are methods that a property and liability insurance company can use to protect against catastrophic losses EXCEPT

Accepted Answer

The purchase of common stock does not provide protection against catastrophic losses. The other options listed (sale of catastrophe bonds, purchase of excess-of-loss reinsurance, and quota share reinsurance with a low retention percentage) are all methods that property and liability insurance companies can use to protect against catastrophic losses.

Question 19

Jan is employed by an insurance company.She reviews applications to determine whether her company should insure the applicant.If insurable,Jan assigns the applicant to a rating category based on the applicant's degree of risk.Jan is a(n)

Accepted Answer

An underwriter works for an insurance company and is responsible for reviewing applications to determine whether an applicant is insurable. The underwriter assesses the level of risk associated with the applicant and assigns them to a rating category.

Question 20

All of the following statements about life insurance company investments are true EXCEPT

Accepted Answer

The majority of life insurance company investments are long-term investments, not short-term. Life insurance companies invest in a variety of assets such as bonds, stocks, real estate, and alternative investments. The primary objective in making these investments is safety of principal, but also to generate enough returns to pay out claims and maintain financial stability.

Quiz 6: Insurance Company Operations