Question 1

Risk retention group is:

Accepted Answer

A risk retention group is an insurance entity formed by members of the same industry or profession to provide liability insurance coverage to its members. It is a type of captive insurance company and is regulated by the federal Liability Risk Retention Act of 1986. Therefore, choice C is the correct option which says that a risk retention group is an insurance entity formed by members of the private pool primarily to provide commercial liability insurance to its members.

Question 2

SAP stresses measurement of emerging earnings of a business from period to period while GAAP stresses measurement of the ability to pay claims in the future.

Accepted Answer

SAP (International Financial Reporting Standards) focuses on measuring and reporting a company's financial performance based on the accrual accounting method, while GAAP (Generally Accepted Accounting Principles) focuses on measuring a company's financial position and ability to pay its debts based on the historic cost accounting method. While both methods are important, they prioritize different aspects of a company's financial reporting.

Question 3

Insurance entities establish ___________ to investigate and settle some or all of the claims of the member companies.

Accepted Answer

Insurance entities establish adjustment bureaus to investigate and settle some or all of the claims of the member companies. These bureaus work on behalf of the insurance company to assess the validity of the claim and the amount of compensation to be paid out.

Question 4

The reason behind, when an insurance entity may request permission from the domiciliary state regulatory authority to use a specific accounting practice in the preparation of its statutory financial statements, may include:

Accepted Answer

An insurance entity may request permission to use a specific accounting practice if it wishes to depart from the prescribed Statutory Accounting Practices (SAP) when preparing its statutory financial statements.

Question 5

What is applied to the sale of all or a block of an entity's insurance in force of another entity?

Accepted Answer

Portfolio reinsurance is the process of transferring a block of an insurance company's policies to another company through reinsurance. This allows the selling company to reduce risk and free up capital, while the buying company gains access to a new portfolio of policies. Options A, C, and D are not relevant to this concept.

Question 6

The maximum error in the population that the auditor is willing to accept is called:

Accepted Answer

The maximum error in the population that the auditor is willing to accept is called the risk of material misstatement.

Question 7

The entity transferring the risk is called the ceding entity and the entity to which the risk is transferred is called the assuming entity.

Accepted Answer

This statement accurately defines the terms "ceding entity" and "assuming entity" in regards to the transfer of risk.

Question 8

The methods used for the premium rates establishment are:

Accepted Answer

The premium rate establishment methods used are manual, judgmental, and merit rating. Manual rating is a method in which an insurer uses a rate manual to determine the premium rate based on the insured's characteristics. Judgmental rating is a method of rate making in which an underwriter uses his or her experience and expertise to determine the premium rate. Merit rating is a method of rate making in which an insurer adjusts the standard premium rate based on the insured's loss history or other factors. These methods are all commonly used in the insurance industry to establish premium rates.

Question 9

Mutual entities, reciprocal or inter-insurance exchanges, public entity risk pools are all principal kinds of:

Accepted Answer

Mutual entities, reciprocal or inter-insurance exchanges, public entity risk pools are all types of organizations that provide property and liability insurance. These organizations are typically structured as non-profit entities owned by their members, who share in the risks and rewards.

Question 10

The contracts that are not subject to unilateral changes in its provision and requires the performance of various functions and services for an extended period is called:

Accepted Answer

Long-duration contracts are typically for an extended period and require the performance of various functions and services. These contracts are not subject to unilateral changes in its provisions, meaning that both parties must agree to any changes that are made. Short-duration contracts are typically for a short period and may not require the same level of performance and services, while medium-duration and fixed-duration contracts do not necessarily indicate whether they are subject to unilateral changes or require extensive services.

Question 11

Short-duration contracts provide insurance protection for fixed period and can cancel the contract at the end of any contract period.

Accepted Answer

Short-duration contracts typically provide insurance protection for a fixed period of time, such as one year, and allow the policyholder to cancel the contract at the end of any contract period without penalty.

Question 12

Audit risk consists of:

Accepted Answer

Audit risk consists of both the risk of material misstatement (the risk that the financial statements contain a material misstatement) and detection risk (the risk that the auditor will fail to detect a material misstatement). Therefore, the correct choice is C.

Question 13

When no tax deductions are allowed if risks are not transferred, whereas premiums paid to insurers are tax deductible, this leads to the formation of:

Accepted Answer

The situation described in the question is a common scenario for the formation of a captive insurance company. Captives are established by a parent company to provide coverage for its own risks, with premiums paid to the captive being tax deductible. Captives are often used to retain risk within the company rather than transferring it to an external insurer, which can be more expensive and offer less control over claims handling. The lack of tax deductions for external insurance premiums can make captives an attractive option for companies looking to manage their risks in a tax-efficient manner.

Question 14

The organizations in which the ownership and control of operations are vested in the policyholders are known as:

Accepted Answer

Mutual entities are organizations in which the ownership and control of operations are vested in the policyholders. Policyholders elect the board of directors, which manages the affairs of the mutual entity. Profits are returned to policyholders in the form of dividends or enhanced benefits.

Question 15

Insurance agents act as contractors in groups who express one or more entity with express authority to act for the entity in dealing with insured.

Accepted Answer

The answer of Insurance agents act as contractors in groups...

Question 16

Spreading of risks among insurance entities is called:

Accepted Answer

Reinsurance is the process by which insurance entities transfer some or all of their risks to another insurance company in exchange for a premium. This helps to spread the risk among multiple entities, reducing the burden on a single insurer and protecting against catastrophic losses. Syndication and consortium acts refer to the pooling of resources among multiple individuals or entities for a specific purpose, and risk diffusion is not a commonly used term in the insurance industry.

Question 17

The arrangements by which pools manage separate accounts for each pool member from which the losses of that member are paid is called:

Accepted Answer

The arrangements described in the question refer to the concept of claim-serving pools, where separate accounts are maintained for each pool member to cover their losses. Option A (employee pools) is not relevant to the given context, and option C (singular entity pools) does not accurately describe the arrangement explained in the question. Therefore, the correct answer is B.

Question 18

The private pools can fall in which two categories:

Accepted Answer

The private pools can fall in two categories, which are risk retention and purchasing groups. These are two types of groups that are formed to share risk among their members. In a risk retention group, members are from the same industry. In a purchasing group, members can be from different industries but have similar risk exposures. Therefore, option B is the correct answer.

Question 19

Principal objectives of state statutes are:

Accepted Answer

The answer of Principal objectives of state statutes are:
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Question 20

Which of the following is NOT the kind of public entity risk pools?

Accepted Answer

Risk-avoiding pools are not a type of public entity risk pool. Public entity risk pools typically include insurance-purchasing pools, banking pools, and claim-serving pools.

Exam 2: Certified Trust and Financial Advisor