Question 1

The primary function of an actuary is to
A) adjust claims.
B) determine premium rates.
C) negotiate reinsurance treaties.
D) invest insurance company assets.

Accepted Answer

The primary function of an actuary is to determine premium rates, using statistical analysis and other mathematical techniques to assess risk and calculate the likelihood of future events. Actuaries also help insurance companies manage financial risk by developing and implementing investment strategies and evaluating the need for reinsurance. While actuaries may occasionally assist with claims adjustment, this is not their primary function.

Question 2

One source of life and health insurance underwriting information is an organization that life and health insurance companies can join. As a member, life and health insurance companies report health impairments of applicants, and this information is shared with member companies. Although the information is shared, the underwriting decision of the member company is not disclosed. What is this organization called?
A) Fair Isaac Corporation (FICO)
B) Medical Information Bureau (MIB)
C) National Association of Insurance Commissioners (NAIC)
D) National Association of Mutual Insurance Companies (NAMIC)

Accepted Answer

The organization that is described is called the Medical Information Bureau (MIB). Its purpose is to provide health and other related information to life and health insurance companies that are members of the organization. This information helps the companies to underwrite policies and determine appropriate premiums. The underwriting decision of the member company is not disclosed, but the information they report is shared with other member companies.

Question 3

Which of the following statements about treaty reinsurance is true?
A) The reinsurer is required to underwrite each individual applicant that is reinsured.
B) The reinsurer must accept all business that falls within the scope of the treaty.
C) The ceding insurer can choose which business falling within the scope of the treaty it wishes to reinsure.
D) It protects the reinsurer by requiring the ceding insurer to charge adequate premiums.

Accepted Answer

Treaty reinsurance involves an agreement where the reinsurer must accept all business that falls within the scope of the treaty, without underwriting each individual risk.

Question 4

Which of the following statements about treaty reinsurance is true?
A) Under a surplus-share treaty, 100 percent of the ceding insurer's liability must be transferred to the reinsurer.
B) Using a quota-share treaty increases the ceding insurer's unearned premium reserve.
C) Under an excess-of-loss treaty, the reinsurer pays losses in full only if they are less than the ceding insurer's retention limit.
D) Using a reinsurance pool provides financial capacity to write large amounts of insurance.

Accepted Answer

Using a reinsurance pool provides financial capacity to write large amounts of insurance. Treaty reinsurance refers to a prearranged, ongoing agreement between the ceding insurer and the reinsurer. Surplus-share and quota-share are examples of treaty reinsurance arrangements, but they do not involve the transfer of 100 percent of liability to the reinsurer. An excess-of-loss treaty specifies that the reinsurer pays losses in full only if they exceed the ceding insurer's retention limit. So, option D is the only statement that is true.

Question 5

All of the following statements about the settlement of a claim are true EXCEPT
A) The insurance policy usually has a provision specifying how a notice of loss is to be made to the insurance company.
B) One step in the investigation of a claim is to determine whether the policy was in force when the loss occurred.
C) The adjustor must file the proof of loss, which is a sworn statement supporting his or her decision regarding a claim.
D) A policy provision may determine how disputes over claim settlements are resolved.

Accepted Answer

The adjuster is not required to file the proof of loss. It is the responsibility of the policyholder to provide the proof of loss, which is a sworn statement supporting the amount of the claim.

Question 6

The unearned premium reserve of an insurer is
A) an asset representing the investments made with premium income.
B) a liability representing the unearned portion of gross premiums on outstanding policies.
C) a liability representing claims that have been filed, but not yet paid.
D) the portion of the insurer's net worth belonging to policyowners.

Accepted Answer

The unearned premium reserve is a liability on the insurer's balance sheet representing the portion of gross premiums that have been collected but not yet earned by providing coverage over the remaining term of the policy. This reserve is established to ensure that the insurer has sufficient funds to cover future claims and is required by insurance regulators.

Question 7

All of the following are reasons for a primary insurer to use reinsurance EXCEPT
A) to increase the unearned premium reserve.
B) to increase underwriting capacity.
C) to protect against catastrophic losses.
D) to stabilize profits.

Accepted Answer

Using reinsurance does not increase the unearned premium reserve, as this is a liability that represents premiums collected but not yet earned. The other three reasons listed are common motivations for primary insurers to use reinsurance.

Question 8

The underwriting process begins with the
A) agent.
B) desk underwriter.
C) inspection report.
D) actuary.

Accepted Answer

The underwriting process begins with the agent, who first collects information from the potential policyholder and initiates the underwriting process.

Question 9

Common sources of underwriting information for life and health insurance include all of the following EXCEPT
A) the application.
B) a physical examination.
C) the Medical Information Bureau.
D) the applicant's income tax return.

Accepted Answer

An applicant's income tax return is not typically used as a source of underwriting information for life and health insurance. The other options listed, including the application, physical examination, and Medical Information Bureau, are commonly used sources of underwriting information.

Question 10

Which of the following statements about underwriting standards is (are) true?
I.One purpose of underwriting standards is to reduce adverse selection against the insurer.
II.Equitable rates should be charged so that each group of policyowners pays its own way in terms of losses and expenses.
A) I only
B) II only
C) both I and II
D) neither I nor II

Accepted Answer

I is true as underwriting standards are designed to identify and select only those risks that are likely to have lower-than-average losses. This helps reduce adverse selection against the insurer by ensuring that they have a balance of high-risk and low-risk policyholders.

II is also true as equitable rates should be charged to ensure that each group of policyholders pays its own way in terms of losses and expenses. This means that the premiums charged to each group should accurately reflect the level of risk they pose to the insurer, rather than being subsidised by other groups.

Question 11

Morgan was hired by an insurance company after she graduated from college. Upon completion of a training program, Morgan was assigned to a territory where she adjusts claims of the insurer's policyowners. Morgan is a(n)
A) public adjustor.
B) staff claims representative.
C) agent.
D) independent adjustor.

Accepted Answer

Morgan is an employee of the insurance company, so she is a staff claims representative, also known as a company adjustor. Public adjustors and independent adjustors work independently and are not employees of the insurance company. An agent's role is to sell insurance policies, not adjust claims.

Question 12

Which of the following statements about claims settlement is true?
A) Agents are never authorized to settle claims.
B) Independent adjustors may be used in a geographic area where the volume of business is too low for an insurer to have its own adjustors.
C) A public adjustor is a salaried employee who works for one insurer.
D) A staff claims representative is hired by a policyholder to represent him or her if the policyholder does not agree with the claim settlement offered by the insurer.

Accepted Answer

Independent adjustors may be used in areas with low business volume as they are not staffed permanently by the insurer. Agents do not settle claims, and public adjusters are not salaried employees of any insurer but are professionals who work for policyholders to advocate for their claims. Staff claims representatives, also known as claims adjusters, are hired by insurers to settle claims on their behalf.

Question 13

Insurers obtain data that can be used to determine rates from
A) pricing pools.
B) insurance advisory organizations.
C) banks.
D) reciprocal exchanges.

Accepted Answer

Insurance advisory organizations (such as ISO, AAIS, and NCCI) collect and analyze data on a variety of factors that influence insurance rates, such as claims experience, loss ratios, and underwriting profitability. Insurers can use this data to determine appropriate rates for their policies. Pricing pools are not a source of data, banks do not typically provide insurance data, and reciprocal exchanges are a form of self-insurance and typically do not provide data for rate determination.

Question 14

A reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer is called
A) a reinsurance pool.
B) automatic treaty reinsurance.
C) retrocession.
D) facultative reinsurance.

Accepted Answer

Facultative reinsurance is a one-off reinsurance arrangement made by an insurer and a reinsurer that occurs after an insurance application has been received. It is made in order to cover an individual risk or group of risks that the primary insurer does not want to bear the full risk for. This differs from automatic treaty reinsurance, in which the primary insurer cedes a portion of its business to a reinsurer on an ongoing basis, and from a reinsurance pool, which is a group of insurers that come together to pool their risks and share responsibility for losses. Retrocession refers to a reinsurer buying reinsurance for its own risk.

Question 15

If an underwriter suspects moral hazard, the underwriter may ask an outside firm to investigate the applicant and make a detailed report to the insurer. This report is called a(n)
A) inspection report.
B) application.
C) M.I.B. report.
D) agent's report.

Accepted Answer

An inspection report is a detailed investigation conducted by an outside firm to investigate an applicant suspected of moral hazard. The purpose of an inspection report is to help the underwriter make an informed decision about whether to insure the applicant or not. The other options (B, C, and D) do not fit the description of a report specifically requested by the underwriter to investigate moral hazard.

Question 16

Which of the following is a function of the marketing department of an insurance company?
A) to settle claims after a loss has been reported
B) to determine the cost of products the insurer sells
C) to make final underwriting decisions
D) to identify production goals

Accepted Answer

The primary function of the marketing department in an insurance company is to identify production goals, develop and promote products, and attract new customers.

Question 17

Which of the following statements about claim settlement is (are) true?
I.The fair payment of claims requires an insurer to adopt a very liberal claims policy.
II.To prevent lawsuits, an insurer should provide no personal assistance to a claimant other than that which is required by contractual obligations.
A) I only
B) II only
C) both I and II
D) neither I nor II

Accepted Answer

Both statements are false. The fair payment of claims requires a reasonable and objective claims policy that balances the interests of the claimant and insurer. Providing personal assistance to a claimant, beyond contractual obligations, can actually help prevent lawsuits by addressing any questions or concerns they may have and demonstrating that the insurer is committed to resolving the claim fairly.

Question 18

Which of the following statements about underwriting policy is (are) true?
I.A company must establish an underwriting policy consistent with company objectives.
II.Underwriting policy is usually subjective and allows the underwriter considerable flexibility with respect to lines written and forms used.
A) I only
B) II only
C) both I and II
D) neither I nor II

Accepted Answer

Statement I is true. Underwriting policy must be established in order to guide underwriters in determining which risks to accept or reject. This policy should be consistent with the company's overall objectives. Statement II is not necessarily true. While underwriting involves some degree of subjectivity, underwriters are still bound by company guidelines and objective criteria such as actuarial data and statistical analysis. Underwriting policy should provide a framework for underwriters to work within, rather than giving them unlimited flexibility.

Question 19

Which of the following statements about reinsurance is true?
A) A reinsurer may not purchase reinsurance.
B) The reinsurer is the first insurer that provides claims services to the insured after a loss occurs.
C) The amount of insurance transferred to a reinsurer is called the net retention.
D) The insurer transferring business to a reinsurer is called the ceding company.

Accepted Answer

Reinsurance is a way for insurers to transfer some of their risk to another insurer. The insurer transferring the risk is called the ceding company, while the insurer assuming the risk is called the reinsurer. Option A is incorrect as reinsurers may purchase reinsurance to reduce their own risk exposure. Option B is incorrect as the first insurer that provides claims services to the insured after a loss occurs is the primary insurer, not the reinsurer. Option C is incorrect as the amount of insurance retained by the insurer after transferring some of it to the reinsurer is called the net retention.

Question 20

Factors that may result in more restrictive underwriting decisions include which of the following?
I.Inadequate rates.
II.The unavailability of reinsurance at favorable terms.
A) I only
B) II only
C) both I and II
D) neither I nor II

Accepted Answer

Inadequate rates and the unavailability of reinsurance at favorable terms both increase the risk for the insurer, which may result in more restrictive underwriting decisions. Therefore, both statement I and II are correct.

Quiz 6: Insurance Company Operations

The primary function of an actuary is to

Which of the following statements about treaty reinsurance is true?

Which of the following statements about treaty reinsurance is true?

All of the following statements about the settlement of a claim are true EXCEPT

The unearned premium reserve of an insurer is

All of the following are reasons for a primary insurer to use reinsurance EXCEPT

The underwriting process begins with the

Common sources of underwriting information for life and health insurance include all of the following EXCEPT

Which of the following statements about underwriting standards is (are) true? I.One purpose of underwriting standards is to reduce adverse selection against the insurer. II.Equitable rates should be charged so that each group of policyowners pays its own way in terms of losses and expenses.

Morgan was hired by an insurance company after she graduated from college. Upon completion of a training program, Morgan was assigned to a territory where she adjusts claims of the insurer's policyowners. Morgan is a(n)

Which of the following statements about claims settlement is true?

Insurers obtain data that can be used to determine rates from

A reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer is called

If an underwriter suspects moral hazard, the underwriter may ask an outside firm to investigate the applicant and make a detailed report to the insurer. This report is called a(n)

Which of the following is a function of the marketing department of an insurance company?

Which of the following statements about reinsurance is true?

Factors that may result in more restrictive underwriting decisions include which of the following? I.Inadequate rates. II.The unavailability of reinsurance at favorable terms.