Risk Analysis and Insurance Exam 2 Fall 2026

5. What is true about stock insurers?

Stockholders bear any losses and share in any profits.

Temporary evidence of insurance until a policy is actually issued is provided by a

Binder

One advantage of the direct response system for marketing life insurance is

Advertising can be specifically directed to selected markets

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

Captive Insurer

What is true about Lloyd's of London?

Coverage is actually written by syndicates who belong to Lloyd's of London

What is NOT true about the independent agency system?

The insurer rather than the agent owns the renewal rights to the business

A property and casualty insurer in which the salesperson is an employee of the insurer, not an independent contractor, is called a

Direct writer

David is a successful independent insurance agent. Recently, one of the life insurance companies with whom he places business offered him a special financial arrangement. If David meets sales targets, he will receive large bonuses. He will also be able to recruit and train sub-agents and receive an over-riding commission based on the amount of life insurance the sub-agents sell. Based on this description, David is a

Personal-producing general agent

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 an

Independent agent

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

Fraternal insurer

6. The underwriting process begins with the

Agent

An UNCOMMON source of underwriting information for life and health insurance is

The applicant's income tax return - They are not used

The price per unit of insurance is called the

Rate

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 an

Actuary

The primary function of an actuary is to

Determine premium rates

What is a function of the marketing department of an insurance company?

To identify production goals

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

Facultative reinsurance

Antonio is a claims adjuster 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

Verify that a covered loss has occurred

What is true about catastrophe bonds?

The bonds have relatively high interest (coupon) rates

7. LMN Mutual insurance Company has total liabilities of $300 million. The company has total assets of $380 million. What is LMN's policyholders' surplus?

$80 Million

The assets of a property and liability insurance company are primarily

Investments such as stocks and bonds

One item that appears on an insurance company's financial statements is a liability that represents an estimate of the claims reported and adjusted but not yet paid, claims reported and filed but not yet adjusted, and claims incurred but not yet reported to the company. This liability is called the insurer's

Loss reserves

A loss reserve established for each individual claim when it is reported to a property and casualty insurance company is called a

Case reserve

A property and liability insurance company's loss reserve and unearned premium reserve are

Liabilities

One life insurance company reserve is designed to smooth the company's reported surplus over time by absorbing fluctuations in security prices that are not attributable to changing interest rates. This reserve is called the

Asset valuation reserve

What would appear in the revenue section of an insurance company's income and expense statement?

Premiums

In schedule rating, each building is individually evaluated based on several rating factors. One factor refers to the possibility that the building will be damaged or destroyed by a fire that starts at an adjacent property and spreads to the building. This rating factor is known as

Exposure

JKL Insurance Company reported the following information on its accounting statements last year:

Premiums Written $90,000,000

Loss Adjustment Expenses $5,000,000

Underwriting Expenses $30,000,000

Premiums Earned $100,000,000

Incurred Losses $70,000,000

Using the formula: "Underwriting Expenses/Premiums Written = Expense Ratio"

What was JKL's expense ratio last year?

33.3 percent

JKL Insurance Company reported the following information on its accounting statements last year:

Premiums Written $90,000,000

Loss Adjustment Expenses $5,000,000

Underwriting Expenses $30,000,000

Premiums Earned $100,000,000

Incurred Losses $70,000,000

Using the formula: "(Incurred Losses + Loss Adjustment Expenses)/Premiums Earned = Loss Ratio"

What was JKL's loss ratio last year?

75.0 percent

8. Two reasons for the regulation of insurance are

Maintaining insurer solvency and Ensuring reasonable rates

The policyholders' surplus of an insurer is defined as the difference between its

Assets and Liabilities

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

Twisting

What is an advantage of federal regulation of insurance over state regulation of insurance?

More effective treatment of systemic risk

What is an advantage of state regulation of insurance over federal regulation of insurance?

Quicker response to local insurance problems

What are the major reasons for insurer insolvency?

Inadequate pricing and loss reserves + Rapid growth and inadequate surplus

What is a principal method of ensuring the solvency of insurers?

Requiring submission of annual financial statements to state regulators

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?

Rebating

The regulation of insurers in areas that affect consumers, which include claims handling, underwriting, complaints, advertising, sales practices, and other trade practices is called

Market conduct regulation

Which of the following is a method used to help ensure the solvency of insurers?

Risk-based capital standards

9. The fundamental purpose of the principle of indemnity is

To prevent the insured from profiting from insurance

How are losses settled if a property insurance policy is written on a replacement cost basis?

Losses are settled without a deduction for depreciation

When must an insurable interest legally exist in life insurance?

Only at the inception of the policy

When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?

Only at the time of the loss

Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of

Subrogation

What legal doctrine does NOT support the principle of utmost good faith?

Subrogation

What is the legal significance of a material concealment by an insurance applicant?

The contract is voidable at the insurer's option

A contract in which the values exchanged are not equal because chance is involved is called an

Aleatory contract

Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions?

Because insurance contracts are conditional

Why does the insured get the benefit of the doubt if an insurance policy contains any ambiguities or uncertainties?

Because insurance contracts are contracts of adhesion

10. The part of a property and liability insurance contract that contains information about the property or activity to be insured is called the

Declarations

The exclusion of flood in a homeowners policy is an example of an

Excluded peril

Eric's property was damaged in an accident. He phoned his agent to see if the loss was covered under his property insurance policy. The agent said, "As long as the cause of loss is not specifically excluded in the policy, the loss is covered." Based on the agent's answer, what type of insuring agreement appears in the policy?

"Open-perils" coverage

The policy provision requiring the filing of proof of loss with the insurer is an example of a

Condition

One of the reasons that deductibles are used in insurance policies is to

Eliminate coverage for small claims

Deductibles are not used in what type of insurance?

Life insurance

Under the terms of Jenny's auto insurance policy, she must pay the first $500 of any physical damage loss to her vehicle before her insurer will pay anything. What type of deductible is included in Jenny's auto insurance policy?

Straight deductible

Shauna hurt her back and was unable to work. She filed a claim under her disability income insurance policy. Under terms of the policy, a period of time must pass between when the injury occurred and when the insurer begins to replace lost earnings. This time period is called an

Elimination (waiting) period

The primary purpose of coinsurance in property insurance is to

Achieve equity in rating

The purpose of a coordination-of-benefits provision in group health insurance plans is to

Determine which plan pays first if more than one plan covers a loss