Question 1

All of the following are reasons why mutual insurance companies convert to stock insurance companies EXCEPT
A)Stock companies can offer stock options to attract and retain key personnel.
B)Stock companies can raise new capital more easily.
C)Stock companies are exempt from state insurance regulation.
D)Stock companies offer greater flexibility to expand through acquisitions.

Accepted Answer

Stock companies are not exempt from state insurance regulation, and in fact, are subject to additional securities regulations. Therefore, all the other options are valid reasons why mutual insurance companies may choose to convert to stock insurance companies.

Question 2

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
A)mutualization.
B)retrocession.
C)reinsurance.
D)demutualization.

Accepted Answer

The process described in the scenario is known as demutualization, which involves a mutual insurance company changing its organizational structure to become a stock corporation and issuing shares of common stock to raise capital. This allows the company to access the benefits of financial services deregulation and make acquisitions like acquiring a bank and stock brokerage firm.

Question 3

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)
A)exclusive agent.
B)direct writer.
C)branch manager.
D)insurance broker.

Accepted Answer

Scott represents insurance purchasers and is paid a commission on the insurance placed with insurers. This is the role of an insurance broker. An exclusive agent represents only one insurance company and is not paid a commission but rather a salary plus bonuses. A direct writer is a company employee who writes and sells insurance policies for their company. A branch manager is a person responsible for managing a branch office for an insurance company. None of these roles fit Scott's description.

Question 4

Which of the following statements about Blue Cross and Blue Shield plans is (are)true?
I.Blue Cross and Blue Shield plans can be organized on a nonprofit basis or on a for-profit basis.
II.Blue Cross provides coverage for hospital services;Blue Shield provides coverage for physicians' and surgeons' fees.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Statement I is true as Blue Cross and Blue Shield plans can be organized on a nonprofit or for-profit basis depending on the specific plan. Statement II is also true as Blue Cross typically provides coverage for hospital services and Blue Shield provides coverage for physician and surgeon fees.

Question 5

Jim would like to start a business raising thoroughbred racehorses.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 that Jim can use to place this coverage with an insurer not admitted to his state?
A)alien insurer
B)general agent
C)surplus lines broker
D)direct writer

Accepted Answer

A surplus lines broker can help Jim place coverage with an insurer not admitted to his state, which is necessary since none of the authorized insurers offer this specialty insurance. The other options do not apply to this scenario.

Question 6

Marcy advises her clients on investments,taxes,wealth management,estate issues,budgeting,and insurance.Marcy is also a licensed life insurance agent.When Marcy sells life insurance to a client,the distribution channel used is a(n)
A)stock broker.
B)financial planner.
C)insurance broker.
D)direct writer.

Accepted Answer

Marcy, acting as a financial planner, advises her clients on a broad range of financial matters including investments, taxes, wealth management, estate issues, budgeting, and insurance. When she sells life insurance, she does so in the capacity of a financial planner, integrating it into her broader advisory services.

Question 7

Which of the following statements about Lloyds of London (are)true?
I.The majority of the business underwritten by Lloyds of London is for unusual risks,such as valuable race horses and professional athletes.
II.Lloyds of London is a group of underwriters who underwrite insurance,not an insurance company.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Lloyds of London is not an insurance company but a marketplace where underwriters come together to underwrite insurance. While they do cover unusual risks, the majority of their business is not limited to such risks.

Question 8

Which of the following statements is true regarding independent insurance agents in property and liability insurance?
A)The insurer owns the expiration rights,not the independent agent.
B)Independent agents are only permitted to represent one insurance company.
C)Independent agents are paid the same commission rate on new and renewal business.
D)Independent agents are not permitted to sell life and health insurance.

Accepted Answer

Independent agents typically receive the same commission rate on both new and renewal business, as they work with multiple insurers and maintain client relationships over time.

Question 9

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
A)captive insurer.
B)reciprocal insurer.
C)fraternal insurer.
D)holding company.

Accepted Answer

R.I.P. established its own insurance company specifically to insure its own loss exposures. This is known as a captive insurer, which is a subsidiary company formed by a large parent company to finance and insure the risks of its owner. Captive insurers are typically set up in favorable locations such as Bermuda to take advantage of tax and regulatory benefits.

Question 10

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.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Statement I is not true about Savings Bank Life Insurance (SBLI) as it does not provide life insurance equal to the savings account balance of each depositor. SBLI is a type of term life insurance that is offered by savings banks with the goal of providing low-cost life insurance to consumers. Therefore, Statement II is true.

Question 11

RST Insurance Company does not have any agents.Instead,the company sells insurance through radio ads,telemarketers,and newspaper and magazine inserts.This distribution method is called
A)reciprocal exchange.
B)direct response system.
C)mass merchandising.
D)multiple distribution system.

Accepted Answer

The distribution method described in the scenario is a direct response system, as the company is selling insurance directly to customers through various forms of advertising and communication without the use of traditional agents or intermediaries.

Question 12

As an alternative to demutualizing,Big Mutual Insurance Company reorganized itself into a corporate form that can directly or indirectly own a stock insurance company.This form of organization is called a(n)
A)holding company.
B)shell company.
C)upstream company.
D)downstream company.

Accepted Answer

A holding company is a corporate form that exists to own other companies, either directly or indirectly. This allows Big Mutual Insurance Company to own a stock insurance company without demutualizing, as the holding company can still maintain control over the stock insurance company while retaining its mutual structure. Shell companies, upstream companies, and downstream companies are not applicable in this scenario.

Question 13

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
A)stock company.
B)reciprocal exchange.
C)fraternal company.
D)mutual company.

Accepted Answer

A stock company is a type of insurer where ownership is held by shareholders who provide capital to the company in return for ownership rights. The shareholders bear the risks and receive the profits of the company. Customers purchase insurance policies from the company but do not have any ownership rights. The fact that the investors in this scenario receive ownership interest in the company indicates that this is a stock company.

Question 14

ABC Term Life Insurance Company uses an interesting marketing system-it has no agents.Instead,the company markets its coverages through television and radio ads,newspaper inserts,and the Internet.The type of marketing system that ABC Term Life Insurance Company uses is called the
A)mass merchandising system.
B)mixed marketing system.
C)direct response system.
D)worksite marketing system.

Accepted Answer

ABC Term Life Insurance Company uses a direct response system, where customers can directly contact the company through various marketing channels instead of going through intermediaries such as agents.

Question 15

Brian buys and sells investment securities for his clients.Brian also decided to become a licensed life insurance agent to better serve his customers.While Brian's primary focus is buying and selling financial securities for his clients in exchange for commissions,he also earns commissions on his life insurance sales.Brian is a(n)
A)direct writer.
B)stock broker.
C)insurance broker.
D)personal-producing general agent.

Accepted Answer

Brian is primarily involved in buying and selling financial securities for his clients, which is the role of a stock broker. The additional activity of selling life insurance does not change his primary classification.

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
A)direct response.
B)mass merchandising.
C)financial institution distribution.
D)multiple marketing.

Accepted Answer

The insurer's plan is called mass merchandising. This approach involves offering insurance products, like auto insurance, at lower premiums to employees of a specific company or members of a specific organization, leveraging the group's size to negotiate better rates.

Question 17

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
A)health maintenance organization.
B)stock insurer.
C)fraternal insurer.
D)reciprocal exchange.

Accepted Answer

Fraternal insurers are nonprofit organizations that operate for the benefit of their members, typically belonging to a particular religious or fraternal organization. They often provide insurance and other services to their members at discounted rates and qualify for favorable tax treatment due to their nonprofit status.

Question 18

Which of the following statements is true with regard to career life insurance agents?
A)They represent several different life insurance companies.
B)They are compensated largely through a salary and not through commissions.
C)They are paid the same commission rate on new and renewal business.
D)The insurer provides financing,training,supervision,and office facilities for career agents.

Accepted Answer

Career life insurance agents are often supported by the insurer with financing, training, supervision, and office facilities. This support system is part of the career agency system, distinguishing it from other types of insurance agent arrangements.

Question 19

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)
A)independent agent.
B)exclusive agent.
C)direct writer.
D)insurance broker.

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 20

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
A)direct response system.
B)general agency system.
C)multiple distribution system.
D)branch office system.

Accepted Answer

The use of both exclusive agents and independent agents constitutes a multiple distribution system, which involves utilizing more than one marketing system to distribute insurance products.

Quiz 5: Types of Insurers and Marketing Systems

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

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)

Marcy advises her clients on investments,taxes,wealth management,estate issues,budgeting,and insurance.Marcy is also a licensed life insurance agent.When Marcy sells life insurance to a client,the distribution channel used is a(n)

Which of the following statements is true regarding independent insurance agents in property and liability insurance?

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

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.

RST Insurance Company does not have any agents.Instead,the company sells insurance through radio ads,telemarketers,and newspaper and magazine inserts.This distribution method is called

As an alternative to demutualizing,Big Mutual Insurance Company reorganized itself into a corporate form that can directly or indirectly own a stock insurance company.This form of organization is called a(n)

ABC Term Life Insurance Company uses an interesting marketing system-it has no agents.Instead,the company markets its coverages through television and radio ads,newspaper inserts,and the Internet.The type of marketing system that ABC Term Life Insurance Company uses is called the

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

Which of the following statements is true with regard to career life insurance agents?

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)

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