RM360 All Quiz/Test questions combined

Insurance companies are able to operate more effectively in managing risk than individuals because of the law of large numbers.

True

Profit maximization is the goal of any company, including insurance companies.

False

Which of the following are components of the loss ratio calculation?

- Frequency and Severity

- Expenses and Written Premiums

- Claims and Earned Premiums

- Written and Earned Premiums

Claims and Earned Premiums

In a typical insurance company operation, the expense ratio should be between:

- 10-20%

- 25-35%

- 0%-20%

- 30%-40%

30% - 40%

Retention is determined by simply comparing the number of policies on January 1 of year 1 to the number of policies on January of year 2.

False

Regulation of the insurance industry is primarily at which level?

State

The law that states that regulation should take place at the state level is the:

- Financial Modernization Act

- McCarran - Ferguson Act

- Gramm - Leach - Bliley

- The Interstate Commerce Clause

McCarran-Ferguson Act

The NAIC is the national governing body setting all rules and policies that each state's department of insurance follows.

False

Selling unnecessary insurance products to generate commissions and sales is an example of an improper sales practice.

True

If an insurance company is admitted to do business in one state, it can do business in all states.

False

State insurance commissioners are elected by the voting public.

False

A producer/agent who resides in the state in which he/she sells insurance is known as a resident agent.

True

Producing an annual profit should always be the primary goal of any insurance operation.

False

By law, all insurance accounting is done in accordance with Generally Accepted Accounting Principles (GAAP)

False

LAE is an abbreviation for Loss Adjusting Expense.

True

Insurance company actuaries estimate future cash flows mainly to ensure that dividends are payable to shareholders and policyholders

False

Written Premium and Earned Premium are the same thing.

False

The reserves of an insurance company are the funds set aside to pay unexpected claims when the premium collected exceeds the losses, expenses, etc.

False

The only ways that a mutual insurance company can raise capital to increase surplus is through issuing surplus notes or issuing stock

False

State departments of insurance are funded primarily by premium taxes collected from the insurance companies operating in the state.

True

All insurance companies offer risk control services as part of their business, although often customers do not take advantage of them

False

The creation of a reserve by an insurance company creates an immediate liability on the balance sheet of the company

True

Monitoring insurance solvency is one of the most important functions of a state department of insurance

True

RBC, or Risk Based Capital, is a type of stress test that departments of insurance employ to assess the financial strength of insurance companies.

True

By law, all insurance companies are required to employ the same reserving methodology.

False

A state insurance guaranty fund exists to protect insurance customers from insolvency, somewhat like the FDIC does for banks

True

Net premium is determined by subtracting the cost of reinsurance from the gross premium number

True

An insurance company headquartered in Germany would be considered a foreign company in the US.

False

When a new insurance product is developed, the expected loss ratio method is typically used for establishing reserves

True

As long as an insurance company is admitted in its state of domicile, it does not need to be admitted in other states.

False

An appropriate definition of insurance is:

- An effective way to remove risk from a situation

- The substitution of a small, certain cost for a large, uncertain loss

- A legal necessary

- The best way to finance risk

The substitution of a small, certain cost for a large, uncertain loss

The success of an insurance company is measured in all of the following ways EXCEPT:

- Complaints filed against it

- Meeting customer needs

- Fulfilling legal requirements

- Writing the most premium to protect the most people

Writing the most premium to protect the most people

Although there are several reasons for the regulation of insurance operations, in reality they all "roll-up" to which of the following? Put another way, what is the over-arching reason for insurance regulation?

- To protect consumers

- To ensure sufficient companies in the market to provide competition

- To discourage the federal government from implementing a national regulatory structure

- To ensure taxes are collected on insurance companies

To protect consumers

The law that officially proclaimed that regulation of insurance operations is left to individual states is the:

- The Commerce Clause

- The States' Rights Act

- The McCarran-Ferguson Act

- Gramm - Leach - Billey

The McCarran-Ferguson Act

Depending on the state, which of the following would NOT likely be regulated by the department of insurance by requiring licensing?

- Producers/Agents

- Underwriters

- Claims Adjusters

- Independent insurance consultants

Underwriters

Which is the most likely potential reason for an insurance company to become insolvent?

- Uncontrolled premium growth

- Reinsurance that was too expensive

- Agent commissions

- Organizing as a mutual company rather than a stock company

Uncontrolled premium growth

Insurance rates must meet which criteria?

- Adequate, profitable, and available

- Adequate, approvable, and reasonable

- Profitable, not excessive, stable

- Adequate, not excessive, and non-discriminatory

Adequate, not excessive, and non-discriminatory

Which of the following is considered a regulatory duty of the legal department of an insurance company?

- Filing for approval as a company and filing rates for approval

- Defending against customer complaints and lawsuits

- Maintaining board of director records

- Assuring actuarial rates are adequate

Filing for approval as a company and filing rates for approval

All Risk Insurance Company has a (pure) loss ratio of .50, an LAE of 4% and an expense ratio of .44. It reinsures 25% of its business and pays commission to agents of 10% on new business. Using the company version of the combined ratio (not the technical/book version), what is the combined ratio for the company?

- 1.17 (117%)

- .98 (98%)

- .79 (79%)

- .29 (29%)

.98 (98%) (loss ratio + LAE + expense ratio = .5 + .04 + .44)

The most important function of the actuarial department is:

- Claims

- Rate filing

- Underwriting

- Ratemaking

Ratemaking

Of the following, which is one of the "ideals" which actuaries strive to achieve in ratemaking, although it is not required and, frankly , may be hard to attain?

- Rate responsiveness/adjustability

- Adequacy

- Avoiding adverse selection

- Secrecy

Rate responsiveness/adjustability

Which of the following is NOT a typical step in the product development process?

- Development of the concept

- IT/Systems development

- Development of marketing support materials

- Filing with appropriate insurance departments

- All of these are steps in the product development process

All of these are steps in the product development process

Rates should be developed in a way that promotes the employ of risk controls by customers. This means?

- They should encourage annual payment so that the risk of rates changing mid-year is avoided

- They should reward those customers who are more careful with lower rates than those that are less careful

- They should never need to change unless a catastrophic loss occurs

- They should offer the most discounts possible

They should reward those customers who are more careful with lower rates than those that are less careful

Of the following, which would be a good reason for a higher contingency factor in pricing?

- Inflation

- Industry-wide increased demand for higher commissions payable to agents

- Increases in reinsurance costs from year to year

- Uncertainty as to losses, i.e., a high standard deviation within the data.

Uncertainty as to losses, i.e., a high standard deviation within the data.

Charlie is the chief actuary for his insurance company. He has been asked to produce rates for a new product offering. It determining these rates, Charlie needs to take into account:

- Profit, losses, and underwriting expenses

- LAE, underwriting expenses, and surplus balance

- Losses, how much surplus is invested, and the profit target

- Losses and LAE, administrative expenses, profit and contingency, and likely, investment returns.

Losses and LAE, administrative expenses, profit and contingency, and likely, investment returns.

High winds have struck a wide area in which Fall Creek Insurance Company has several homes and buildings insured. Quite a bit of damage was done. Since the winds occurred just three days ago, the company has only received 5 claims so far. These claims have been reserved for a total of $250,000. The company estimates that, using its current loss ratio, another $3,750,000 of claims are likely within the next 24 months. This figure of $3,750,000 represents the company's:

- R&R

- Loss surplus

- IBNR

-RBNS

IBNR

When an actuary has no past loss data to speak of and the exposure is fairly unique, such as an antique car collection, the most likely ratemaking method the actuary will employ is the:

- Loss ratio method

- Pure premium method

- Judgement method

- Rolling loss exposure method

Judgement method

Blackrock Insurance company has just reported its 2019 results. They are:

Written Premium: $700,000,000

Claims Paid: $350,000,000

Administrative Expenses: $280,000,000

What is Blackrock's Expense Ratio for 2019?

- 50%

- 40%

- 93.3%

- 100%

40%

Worldwide Insurance Company is a stock company. On the balance sheet, Worldwide Insurance's surplus would be characterized as:

- Dividends

- Shareholder equity

- Policyholder equity

- Earned premium

Shareholder equity

The Loss Ratio Method of ratemaking is typically used in which situation?

- A brand new product is being priced

- To determine indications for future rate changes on an existing product

- When no past data is available to predict future losses

- When the time to rollout a product is especially short

To determine indications for future rate changes on an existing product

You are examining the financial statement of Three States Insurance Company and notice that from one year to the next, the company's surplus decreased fairly substantially. Without knowing more, what might you reasonably suspect would be the reason?

- Returns on investments were lower than anticipated

- Premium revenue was down

- Losses were above those expected, likely due to a catastrophic loss

- AM Best has reduced the company's financial rating which caused a decrease in surplus

Losses were above those expected, likely due to a catastrophic loss

IN the more recent past, state insurance departments have begun adopting more standardized processes making it easier and more predictable to do business across state lines. Which of the following is the most responsible for this?

- The federal government

- The NAIC

- AM Best's use of BCAR scoring

- Large liability losses

The NAIC

Which is NOT typically a concern for state regulators when examining the conduct of producers/agents?

- High commissions

- Selling unnecessary insurance products

- Misrepresenting coverages and capabilities of policies

- Misusing or stealing client company funds

High commissions

Premium auditing is valuable for several reasons, including all of the following EXCEPT:

- Determining the correct premium for the risk

- Collecting data

- Reinforcing an insured's confidence that they are receiving a fair rate

- To detect and deter fraud

- All of the above are reasons for premium auditing

All of the above are reasons for premium auditing

Tiny Insurance company is in its tenth year of operation. In 2018, Tiny showed (written) premium of $25,000,000. In 2019, at the end of 2019, Tiny (a mutual company) showed surplus of $12,500,000. What is Tiny's premium to surplus ratio?

-10%

-50%

-25%

-200%

200%

LAE can best be defined as:

- Total claims losses paid

- Total claims minus claims denied

- The expenses associated with paying claims

- Expenses incurred in the underwriting process

The expenses associated with paying claims.

One way that insurance companies might measure how well they are meeting customer needs is through the retention ratio. On January 1, 2018, City Insurance Company had 300,000 policies on the books. During 2018, City Insurance lost 30,000 of those policies and wrote an additional 30,000 new policies. What was City Insurance's retention ratio for 2018.

- 100%

- 70%

- 90%

- 0%

270,000/300,000 = 90%

The Insurance Fraud Prevention Act is one of the federal laws regulating insurance companies. The Insurance Fraud Prevention Act provides:

- Statutory accounting practices must be used rather than GAAP in insurance companies

- Limited investment options for insurance companies

- No one with a felony conviction may work in the industry without permission from a state regulator

- Anyone caught lying on an insurance application faces up to 5 years in prison

No one with a felony conviction may work in the industry without permission from a state regulator.

The highest ranking attorney in the insurance company is known as:

- Chief of staff

- General Counsel

- Executive Attorney

- Chief Compliance Officer

General Counsel

The advertising area of Reed Insurance has negotiated an agreement with the local television station to air commercials for Reed. Prior to signing the contract, it is sent to the legal department for review. This process is what part of the legal department's duties?

- Regulatory

- Business Support

- Corporate

- Legislative

Business Support

In commercial insurance, the "middle market" is well-defined as companies that spend over $100,000 in premium on insurance each year.

False

Martin is an independent agent with a small book of business. He is unable to meet the required minimum production limits of more than one company. Writing business through an "aggregator" is an option for Martin to get access to multiple insurance companies.

True

Suzanne is a line underwriter for Federated Insurance Company. Suzanne should not rely on producing agents to provide information that she uses in the evaluation of the risk applied for.

False

A commercial underwriter receives an application for property coverage on a building that has had past issues with roof leakage. Since the only options for an underwriter are to accept or reject the risk, the underwriter should reject this application.

False

Direct agents are normally paid the highest commission rates, but in exchange, they do not own their book of business.

False

The IT function is much more important to insurance carriers today than in the past.

True

A highly effective IT department can assist in determining accurate premium rates thus making the insurance company more profitable

True

You have been hired as the advertising and marketing director of a small, regional insurance carrier. Your advertising budget annually is a fraction of large carriers like GEICO, Progressive, and Liberty Mutual although your company issues the same types of products. Market segmentation (niche marketing) is one method to compete for market attention in this situation.

True

All insurance departments require an underwriting audit be conducted at least every four years.

False

A reinsurance agreement may allow an insurer to take on more risk and grow more aggressively than it would have the capacity otherwise.

True

An independent insurance agent is responsible for all of his/her own expenses in operating the agency.

True

Facultative reinsurance means that each case is considered separately and on its own merits.

True

Data Warehousing and Blockchain are systems by which all data is accessed from the same source so that all data is identical across the organization.

True

The term "cannibalization" refers to a company's ability to take market share from other insurance companies.

False

Steve is an independent insurance agent. This means he is not an employee of any insurance company.

True

Producers who are direct writers are always paid on a commission-only basis

False

The more complex an insurance product, the less likely it will be successfully sold on the internet

True

In pro-rata reinsurance, the insurance company and the reinsurer share losses and profits proportionally

True

Affinity marketing involves targeted advertising to consumers based on shared characteristics, such as membership in a club.

True

The goal of underwriting is to avoid all losses.

False

An appropriate definition of underwriting is:

- Any non-contractual transfer of risk

- The scientific process in identifying potential losses and avoiding liability for them before they occur

- The process by which an insurer determines whether, and on what basis, an insurance application will be accepted

- The placement of large risks with appropriate reinsurance companies

The process by which an insurer determines whether, and on what basis, an insurance application will be accepted.

Information Technology can be beneficial in all of the following ways EXCEPT:

- All of these are ways in which IT can be beneficial

- Optimizing operations and resources

- Providing information support to strategy and decision-making.

- Gaining a competitive advantage for the insurance company

- Facilitating governance, risk, and compliance

All of these are ways in which IT can be beneficial

Of the following types of direct marketing, which usually produces the highest response rate?

- Telephone cold calling

- Email marketing

- Canvassing (knocking on doors)

- Direct mail

Email marketing

Charlie sells auto and homeowners insurance mostly. He has connected with a small business owner with 20 employees. The small business owner is going to allow Charlie to have space in the company's offices to market auto and homeowners to the company's employees. Any employee who signs up can elect to have his or her premiums deducted from his or her paycheck. This arrangement is known as:

- Partnership marketing

- Affinity marketing

- Sponsorship marketing

- Worksite selling

Worksite selling

Continental Insurance Company signs a reinsurance agreement with Big Data Reinsurance Company which states that the Big Data will accept all risks written by Continental Insurance within the parameters set forth in the agreement. This type of agreement is known as:

- Surplus share reinsurance

- Facultative reinsurance

- Treaty reinsurance

- Quota share treaty reinsurance

Treaty reinsurance

Trevor has accepted a position as an insurance producer/agent. He is provided with office space, training and supervision. He may only sell one company's policies and has no ownership of the business he produces. He is provided with a list of customers to work with immediately, however. He is not an employee of the insurance carrier. What type of agent is Trevor?

- Managing General Agent (MGA)

- Independent

- Direct writer

- Exclusive/captive

Exclusive/captive

Which of the following is NOT a constraint in a company's underwriting process? In other words, which of these would not limit the ability of an insurance company to accept new risks?

- Financial constraints such as lack of surplus

- Authority given to underwriters

- Reinsurance agreements (or lack thereof)

- Lack of personnel to handle increased business/activity

Authority given to underwriters

Janice, a line underwriter, has received an application for insurance. She reviews the notes from the producing agent, orders motor vehicle reports (MVRs) and credit reports on the applicants, and looks at the CLUE database for details on previous losses. What stage of the underwriting process is Janice in at this point?

- Selecting alternatives

- Developing alternatives

- Implementing the decision

- Evaluation

Evaluation

Craig is a line underwriter considering an application for inland marine coverage. Which of the following are potential actions for Craig in considering this application for insurance?

- Accept or reject the application

- Evaluate the risk, audit the risk, counteroffer

- Accept the risk, reject the risk, counteroffer

- Accept the risk, reinsure the risk, reject the risk

Accept the risk, reject the risk, counteroffer

Reinsurance can provide several benefits to an insurance operation. Which of these is NOT a benefit to having adequate reinsurance?

- Increase large line capacity

- Provide catastrophe protection

- Stabilize loss experience

- Allow sales in other states

Allow sales in other states

Teresa, an underwriter, with Bulldog Insurance Company, has received an application for a $5,000,000 liability umbrella. This is, by far, the largest the company has ever received. Teresa does not have the underwriting authority to make a decision on this application and turns to her boss, Marleen. Marleen contacts a couple of reinsurance companies and explains the risk to each one, hoping that one of them will agree to reinsure the bulk of the $5,000,000 liability limit. What type of reinsurance transaction is this?

- Excess of loss

- Quota share

- Treaty

- Facultative

Facultative

You have been retained to examine and report on the effectiveness of a group of line underwriters for a large insurance carrier. Which of the following events/situations could potentially distort the results of your report?

- Catastrophe losses such as a hailstorm

- The experience of any given underwriter

- The financial condition of the insurance company

- The ages of the underwriters

Catastrophe losses such as a hailstorm

A process by which a staff underwriter reviews decisions made by a line underwriter over a period of time to assure adherence with underwriting guidelines is called a(n):

- Premium audit

- Compliance audit

- Annual review

- Underwriting audit

Underwriting audit

Davey Insurance Company is looking for ways to compete with much larger insurance companies with much larger ad budgets. Davey decides to target a smaller market based on shared characteristics. This strategy is a type of:

- Market segmentation/niche marketing

- Exclusive marketing

- Direct marketing

- Narrow marketing

Market segmentation/niche marketing

An individual consumer of insurance is most likely to purchase all of the following types of insurance EXCEPT:

- Auto insurance

- Homeowners insurance

- Workers compensation

- Life insurance

Workers compensation

For a producer, prospecting is one of, perhaps the, most important functions of the position. Which of the following activities would you expect a prospecting agent to engage in?

All of these are expected prospecting activities

- Developing and maintaining a website

- Securing referrals from current clients

- Advertising in local newspapers

- Developing centers of influence (COIs)

All of these are expected prospecting activities

Stockbrokers Mutual Insurance Company has several reinsurance agreements. One of them provides coverage for losses once the total annual losses of Stockbrokers Mutual exceed $25,000,000. This type of reinsurance is called:

- Excess of loss

- Surplus share

- Facultative

- Treaty

Excess of loss

Based on the success of recent marketing/branding/advertising campaigns for insurance companies targeting the individual P&C market, which characteristic in the Young and Rubicon Model is the least effective?

- Knowledge

- Esteem

- Differentiation

- Relevance

Knowledge

In developing a marketing plan, the likelihood that current policyholders could be sold the new product in addition to their current policy(ies) must be taken into account. This concept is known as:

- Prospecting

- Niche marketing

- Cross-selling

- Affinity marketing

Cross-selling

Bethany is a recently hired underwriter for Safety First Insurance Company. She is assigned personal lines and is given a notebook containing information about acceptable risks, her authority to bind coverage, and situations which she is likely to encounter. This notebook is:

- The company's underwriting strategy

- Only needed when Bethany is more experiened

- Given to all new employees to assure everyone understands the company's goals

- Her underwriting guidelines

Her underwriting guidelines