RMI Exam2

Which of the following are true?

I. Insurance is regulated at the state level

II. The National Association of Insurance Commissioners (NAIC) drafts model laws

III. The insurance commissioners are charged with enforcing the laws

I, II, and III

Why is insurance regulated?

a. all insurance is legally required

b. premiums are paid well after benefits are received

c. complex legal contracts

d. all of the above

e. none of the above

C, complex legal contracts

Arguments for state regulation include:

a. state regulation is ineffective for large insurers

b. federal regulation would be less effective and more costly

c. state regulation is more flexible and can respond more quickly to local issues

d. need for a two tier system

e. all of the above

f. none of the above

C

Which of the following are true regarding regulating solvency?

I. Ensure that insurer is holding enough capital to minimize likelihood of bankruptcy

II. Manage guaranty funds

III. Liquidate insolvent insurers

I, II, and III

Which parts of insurance operations are regulated?

a. rates only

b. licensing only

c. contractual provisions only

d. agents/brokers activities

e. virtually all aspects of insurers are regulated

f. most insurer aspects are unregulated

E

Basic requirements of rate regulation include:

a. rates should be adequate

b. rates should not be excessive

c. rates should encourage loss control

d. rates should allocate cost burden fairly among insureds

e. all of the above

f. none of the above

E

Some banned agent activities include:

a. twisting

b. commissions

c. licensing

d. policy writing

e. all of the above

f. none of the above

A

When discussing regulating contract provisions, the regulator is responsible for protecting the public against:

a. deceptive language

b. misleading language

c. unfair contract provisions

d. all of the above

e. none of the above

D

One effect of regulation is:

a. regulation reduces costs

b. regulation makes consumers more vulnerable

c. regulation increases market volatility

d. regulation makes rates quicker to react to risk changes

e. all of the above

f. none of the above

F

One area of insurance that may be more of a focus of regulation going forward is:

a. availability

b. affordability

c. county level regulation

d. reduction in regulation

e. all of the above

f. none of the above

B

Examples of government provided personal insurance include:

a. auto liability insurance

b. life insurance

c. social security

d. workers’ compensation

e. all of the above

f. none of the above

C

_____ insurance covers risk of individuals, ________ insurance covers perils that destroy property

personal, property

Which type of insurers is owned by the policyholders and run by an “attorney-in-fact?”

reciprocals

Which type of insurers is owned by the policyholders?

mutual

States run ______ to protect consumers from insurer _________

guaranty funds, insolvencies

Why do life insurers prefer direct distribution of their products?

a. Maintain close control over the policy product
b. Maintain control over sales promotion and competition
c. Life insurance products are purchased less frequently than property casualty policies

d. All of the above
e. None of the above

D

A major difference between direct distribution (exclusive agents) in property insurance and indirect (independent agents) distribution is:

a. Number of insurers represented
b. Authority to bind coverage
c. Commissions
d. All of the above
e. None of the above

D

Organizations the operate on a global scale usually have different exposures than smaller firms including:

political risk, terrorism, financial markets

There are variety of options for structuring international insurance programs for
global organizations. The most popular is:

global controlled master program

Which of the following are UNIQUE functions of insurers?

underwriting

Which function of insurers is synonymous with sales?

production

Which function of insurers involves paying the appropriate loss amounts to
policyholders?

claims

Which function of insurers involves selecting which risks to insure?

underwriting

Which function of insurers involves estimating loss frequency and severity to
determine expected loss?

ratemaking

Which function of insurers involves conducting market research?

production

Which function of insurers involves transferring part of the risk to another insurer?

reinsurance

Which function of insurers involves making prompt and fair payments to insureds in
“good faith”?

claims

One method of determining how successful an underwriter has been is determining
their?

loss ratio

The _____________ is similar to the loss ratio but also takes into consideration UNDERWRITING
expenses

combined ratio

The _______________ is equal to the ______________ divided by (1 - __________________)

gross premium, pure premium, loading percentage

The loading percentage must account for:

risk loading, agent commission, expenses, taxes and fees

Insurance rates should be:

adequate

___________ used your losses from previous years as a factor in determining this year’s
premium

experience rating

___________ reinsurance is done on a case by case basis, while _____________ involves the
reinsurer accepting all risks within the terms.

faculative, treaty

____________ reinsurance is where a proportion is ceded, while _____________ involves
ceding all risk above a certain dollar amount

pro-rata, excess of loss

Underwriter X has underwriten policies with $2,000,000 in
premiums earned and losses (including loss adjustment expenses) of $1,500,000. What is X’s
loss ratio?

.75

Insurer X has underwriten policies with $2,000,000 in premiums
earned, losses (including loss adjustment expenses) of $1,500,000 and underwriting expenses of
$500,000. What is X’s combined ratio (financial basis)?

1.00

Actuarial has determined that the expected frequency of a collision is .03 and the expected
severity per collision is $20,000. What is the pure premium?

600

The pure premium is $500, the loading percentage is 50%. What is the gross premium?

1000

The class rate in WC is $4.75 per $100 of payroll, Chuck’s Construction has a $500,000 payroll
and an experience modification factor of 1.05. What is Chuck’s WC premium?

24,937.50

There are many parts to an insurance contract. Which part contains information
specific to the insured, like name, address, and policy limits and deductibles?

declarations

There are many parts to an insurance contract. Which part contains information
explaining the key terms used throughout the policy?

definitions

There are many parts to an insurance contract. Which part explains what is covered
under the policy?

insuring agreement

There are many parts to an insurance contract. Which part explains what is NOT
covered under the policy?

exclusions

There are many parts to an insurance contract. Which part explains what the
insured is responsible for (insured duties)?

conditions

There are many parts to an insurance contract. Which part alters the policy in some
way? It may add coverage, delete coverage, or alter policy language. It takes precedence over
the original contract language?

endorsements/riders

There are many parts to an insurance contract. Which part of the policy often
contains loss valuation information? For example, the difference between replacement cost and
actual cash value provisions.

conditions

________________ is equal to ________________ minus _________________

actual cash value, replacement cost, depreciation

Common policy conditions include

Insured’s duties following a loss, termination conditions, assignment provisions

The exclusions section of a policy lists things that are not covered, they may include

specific perils, types of losses, types of property, locations

Some of the reasons why we see exclusions in a policy include

the risk if uninsurable, the risk should be covered under a different policy, the risk if not priced in the premium

One of the most common miscellaneous clauses in property insurance policies are:

mortgagee clause

There are a variety of miscellaneous clauses that limit the amounts payable under an insurance
contract they include:

coinsurance clauses, other insurance clauses

There are a variety of deductibles that can appear in insurance contracts. The most common
include:

straight (per occurrence) deductibles

Coinsurance in _____________ implies a cost sharing on a percentage basis, likely after a
deductible has been met.

health insurance

Coinsurance in _____________ implies the insured must bear a portion of the loss ONLY when
underinsured.

property insurance

In some cases, a loss may occur that is covered by two or more insurance policies. In this
situation the _________________ clause governs how the risk is shared.

other insurance

There are several common schemes to coordinate the benefits of multiple insurance policies
covering the same loss. They include:

pro-rata sharing, equal shares, primary/excess sharing

Chuck’s Industries is insured with a policy with $100,000 policy limit and a $1,000 straight
deductible for the 2024 calendar year. Chuck’s Industries suffers the following losses throughout
the year:
Loss Date Loss Amount
January 5th $ 5,000.00
April 8th $ 300.00
November 10th $ 11,000.00
How much in deductibles did Chuck’s Industry have to pay towards their own losses?

2,300

Chuck’s Industries is insured with a policy with $100,000 policy limit and a $1,000 aggregate
deductible for the 2024 calendar year. Chuck’s Industries suffers the following losses throughout
the year:
Loss Date Loss Amount
January 5th $ 500.00
April 8th $ 300.00
November 10th $ 900.00
How much in deductibles did Chuck’s Industry have to pay towards their own losses?

1000

John has a health insurance policy with a $1,000 deductible and an 80/20 coinsurance
requirement (no limit). John has the following losses throughout the year:
Loss Date Loss Amount
January 5th $ 1000.00
April 8th $ 4000.00

How much does John have to pay towards his own losses?

800

Chuck’s Industries has a property insurance policy with an 80% coinsurance requirement and a
$1,000,000 policy limit. Chuck’s Industries suffers a $500,000 loss during the policy period. The
replacement cost of the building at the time of the loss was $2,000,000. What is the minimum
policy limit that Chuck should have had meet the coinsurance requirement

1,600,000

Chuck’s Industries has two property insurance policies on the same commercial property. The
first policy has a policy limit of $1,000,000, the second policy has a policy limit of $2,000,000.
The two policies other insurance clauses specify that sharing is on a pro-rata basis. Chuck’s
Industries suffers a $750,000 loss during the policy period. How much does the first policy pay?

250,000

Chuck’s Industries has two property insurance policies on the same commercial property. The
first policy has a policy limit of $1,000,000, the second policy has a policy limit of $2,000,000.
The two policies other insurance clauses specify that the first policy is primary and the second is
excess. Chuck’s Industries suffers a $750,000 loss during the policy period. How much does the
first policy pay?

750,000

The Personal Auto Policy (PAP) has six parts to the policy, the four major areas of
coverage include liability, medical coverage, _______________, and _________________

uninsured motorist, coverage for damage to your auto

Which part of the personal auto policy provides bodily injury and property damage coverage to
third parties?

Part A: liability coverage

Which part of the personal auto policy covers reasonable and necessary medical expenses
caused by an auto accident and sustained by the insured?

Part B; medical coverage

Which part of the personal auto policy covers bodily injury sustained by the insured from an
accident with another vehicle if the other driver is not insured?

Part C; uninsured motorist coverage

Which part of the personal auto policy covers is split between collision and other than collision
losses?

Part D; coverage for damage to your auto

Which part of the personal auto policy requires the insured to promptly notify the insurer and
cooperate with the investigation?

Part E; duties after an accident or loss

The personal auto policy limits are stated on the declarations page. If split liability limits are
shown (Part A), $100,000/$300,000/$50,000 which amount represents the bodily injury limit per
accident?

300,000

Common exclusions in Part A: Liability of the Personal Auto Policy include:

use of vehicle such as uber/lyft

Which parts of the personal auto policy have a deductible that apply?

Part D; physical damage to your auto

_____________ often has lower deductible than ____________________ in the Personal Auto
Policy.

other than collision; collision

Part D: Damage to your Auto, Other than Collision coverage provides coverage against:

theft (NOT hitting a tree/hitting another vehicle)

Common exclusions in Part D: Damage to your Auto of the Personal Auto Policy include

damage from wear and tear, confiscation by government authorities, use of vehicle as an uber/lyft

Who can cancel the Personal Auto Policy at any time?

insured

How do states ensure that drivers have adequate assets to protect those that may be injured in
an accident?

financial responsibility laws, unsatisfied judgement fund, uninsured/underinsured motorist coverage

Which of the following are ways to manage the cost of automobile accidents and losses?

no fault insurance laws, technological improvements, telematics

Which of the following are rating factors over which you have no control?

age

True or False: Both the Personal Auto Policy and the HO – 3 Policy provide defense costs in
addition to the policy limits

true

True or False: Part A: Liability Coverage of the PAP provides coverage to anyone using the
covered auto with permission

true

True or False: Part A: Liability Coverage of the PAP provides coverage to someone driving
another person’s car, but the driver’s coverage is excess over the auto owners’ PAP policy.

true

True or False: Part C: Uninsured Motorists Coverage of the PAP provides coverage for bodily
injury of an insured if the other party’s insurance limits have been exceeded.

false

True or False: Part D: Damage to your auto coverage of the PAP excludes vandalism.

false

True or False: The Personal Auto Policy provides coverage in Canada and Mexico.

false

True or False: The Personal Auto Policy can be cancelled by the insurer for lack of premium
payment

true

WATCH THE VIDEO IN EXAM #2 MODULE THAT DISCUSSES APPLICATION QUESTIONS.

okay!

Which section of the HO-3 policy provides coverage for the main dwelling on the
premises?

coverage A: dwelling

Which section of the HO-3 policy provides coverage for the detached structures on
the premises?

coverage B: other structures

Which section of the HO-3 policy provides coverage for an attached garage?

Coverage A: dwelling

You purchase an unendorsed HO-3 policy on your home with a Coverage A: Dwelling
Limit of $500,000. What is the limit of insurance you have for a detached garage?

50,000

You purchase an unendorsed HO-3 policy on your home with a Coverage A: Dwelling
Limit of $500,000. What is the limit of insurance you have for your personal property?

250,000 (standard is 50%)

You purchase an unendorsed HO-3 policy on your home with a Coverage A: Dwelling
Limit of $500,000. What is the limit of insurance you have for your additional living expenses?

150,000

You purchase an unendorsed HO-3 policy on your home with a Coverage A: Dwelling
Limit of $500,000. What is the limit of insurance you have for your liability coverage?

100,000

Which section of the HO-3 policy has deductibles?

coverage A: dwelling

_________________ coverage provides broader coverage than ____________ coverage.

open perils, named perils

Which section of the HO-3 policy is on a named perils basis?

coverage C: personal property

Some common exclusions under Section I of the HO-3 Policy include

mold, wear and tear, vandalism, animals owned by the insured

Which of the following are perils insured against under coverage C of the HO-3 policy?

fire, explosion, vehicles