Exam 3 - Principles of Insurance review pt 4

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

C) both I and II

Which of the following statements about reinsurance is true?

A) Reinsurance is used to decrease underwriting capacity.
B) The reinsurer is the ceding company.
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.

D) The insurer transferring business to a reinsurer is called the ceding company.

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

A) to decrease underwriting capacity. B) to protect against catastrophic losses.
C) to stabilize profits.

A) to decrease underwriting capacity.

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)

A) underwriter.
B) actuary.
C) loss control engineer.
D) claims adjustor.

A) underwriter.

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
A) excess-of-loss reinsurance.
B) surplus-share reinsurance.
C) quota-share reinsurance.
D) pool reinsurance.

C) quota-share reinsurance.

The price per unit of insurance is called the

A) premium.
B) loss adjustment expense.
C) rate.
D) loss reserve.

C) rate.

Reasons for regulation of insurance include which of the following?
I. Maintaining insurer solvency
II. Ensuring reasonable rates

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

C) both I and II

Which of the following statements about the use of risk-based capital requirements is (are) true?
I. Insurers must have a certain amount of capital depending on the riskiness of their investments and insurance operations.
II. Insurers may be required to take certain actions depending on how much capital they have relative to their risk-based capital requirements.

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

C) both I and II

Which of the following statements about the regulation of insurance company investments is (are) true?
I. The purpose of regulating insurance company investments is to prevent insurers from making unsound investments which could threaten their solvency.
II. Life insurers can invest an unlimited amount of their assets in common stocks.

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

A) I only

By misrepresenting the true facts, Gretchen was able to convince someone to replace an existing life insurance policy with another company and to purchase a new policy from the company that Gretchen represents. Gretchen has engaged in an illegal sales practice called

A) bait and switch.
B) rebating.
C) retaliating.
D) twisting.

D) twisting.

The number of title insurance companies operating in State Z is relatively low. Recently, the largest of these companies (50 percent market share) acquired the second largest company (30 percent market share). Immediately after the acquisition, the insurer raised premiums by 75 percent. This scenario demonstrates which of the following rationales for the regulation of insurance?

A) maintain insurer solvency
B) prohibit unfair sales practices by agents
C) ensure reasonable rates
D) make insurance available

C) ensure reasonable rates

Fly-By-Night Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If Fly-By-Night becomes insolvent, which of the following will help pay the unpaid claims of the insurer?

A) guaranty fund
B) premium rebates
C) risk-based capital
D) admitted assets

A) guaranty fund

Grace is a life insurance agent. She is attempting to sell a large life insurance policy, but the prospective purchaser is having second thoughts. To persuade the prospective purchaser, Grace said, "I will earn a $1,000 commission if you buy this policy. I'll give you $500 of my commission if you buy the policy." In most states, what illegal sales practice will Grace be guilty of if she splits her commission with the purchaser?

A) rebating
B) churning
C) twisting
D) backdating

A) rebating