RMIN 5570: Exam 2 Practice Questions

A new type of terrorism insurance product is being developed. No historical loss data exists. Which ratemaking method(s) is/are appropriate to use?

a. loss ratio method only, using industry-wide loss benchmarks

b. pure premium method only, since it is independent of existing rates

c. either the pure premium or loss ratio method, since both rely on historical data

d. either the pure premium or judgement method, since neither requires existing rates to function

d. either the pure premium or judgement method, since neither requires existing rates to function

An insurer’s actual loss ratio is 70%, and its expected loss ratio is 60%. Which of the following best describes the indicated rate change?

a. a 10% rate decrease, because losses are lower than expected

b. a 16.7% rate increase, because actual losses exceed what was expected

c. a 10% rate increase, because actual losses exceed what was expected

d. no rate change is needed, because the difference is within an acceptable margin

b. a 16.7% rate increase, because actual losses exceed what was expected

Which of the following represents the complete set of data required to calculate a rate using the Pure Premium ratemaking method?

a. earning premiums, incurred losses, and expected loss ratio

b. incurred losses, earned exposure units, expense provision, and profit & contingencies factor

c. actual loss ratio, expected loss ratio, and expense provision

d. earned exposure units, earned premiums, and profit & contingencies factor

b. incurred losses, earned exposure units, expense provision, and profit & contingencies factor

Which insurers are more likely to rely on actuarial consultants?

a. a large insurers

b. small insurers

c. reinsurers only

d. government agencies only

b. small insurers

Advisory organizations are especially helpful to insurers with:

a. limited data for ratemaking

b. excess investment income

c. policy structure frame

d. a and b

d. a and b

A catastrophic accident occurred in November. By the end of the year, only part of the claim has been paid. Which statement is correct?

a. ultimate losses include only what was paid this yeat

b. incurred losses include paid losses plus outstanding reserves

c. incurred losses exclude reserves

d. ultimate losses and incurred losses are always identical at year-end

b. incurred losses include paid losses plus outstanding reserves

Why might an insurer use budgeted/projected expenses instead of relying only on past expenses when setting rates?

a. past expenses are never available

b. future operations may differ, so judgment and budgeting can better reflect expected costs

c. regulators prohibit the use of historical expenses

d. projected expenses always produce lower rates

b. future operations may differ, so judgment and budgeting can better reflect expected costs

Which of the following is not one of the ideal characteristics of rates created by insurers?

a. provide for contingencies

b. promote risk control

c. be unstable

d. reflect differences in risk exposure

c. be unstable

What is the primary goal of the insurance ratemaking process?

a. to create premiums that cover losses and expenses while allowing a reasonable profit

b. to eliminate all uncertainty in predicting future losses

c. to maximize market-share regardless of profitability

d. to guarantee insurers will never experience underwriting losses

a. to create premiums that cover losses and expenses while allowing a reasonable profit

Which statement best describes the balance insurers must consider when setting rates?

a. rates should always prioritize maximizing profits over customer retention

b. rates must eliminate all uncertainty in loss forecasting

c. rates should be set as low as possible to attract customers

d. rates are often a compromise between profitability and maintaining, or expanding, market share

d. rates are often a compromise between profitability and maintaining, or expanding, market share

Why did shipping effectively stop in the Strait of Hormuz when war risk premiums spiked 20-50x?

a. the US Navy blocked all commercial traffic

b. ship captains refused to sail through the danger zone

c. no bank or cargo owner will allow a vessel to sail without insurance, and coverage became unavailable or unaffordable

d. Iran seized all foreign vessels attempting to transit

c. no bank or cargo owner will allow a vessel to sail without insurance, and coverage became unavailable or unaffordable

Which of the following best describes Protection and Indemnity (P&I) insurance?

a. covers physical damage to the ship’s hull and engines

b. covers the cargo owner’s goods against theft or damage in transit

c. covers third-party liability like crew injury, oil spills, and damages to other vessels

d. covers war, missiles, and seizure by foreign governements

c. covers third-party liability like crew injury, oil spills, and damages to other vessels

What is the Strait of Hormuz?

a. a deep-water port in Saudi Arabia used for oil exports

b. a canal connecting the Red Sea to the Mediterranean

c. a UN-designated international shipping zone in the Indian Ocean

d. a narrow waterway between Iran and Oman, the only sea exit from the Persian Gulf

d. a narrow waterway between Iran and Oman, the only sea exit from the Persian Gulf

Why did some insurers respond with cancellations of policies regarding the current events happening in the Strait of Hormuz?

a. unexpected rise in risk

b. ships stopped traveling in the area

c. the insurance company became insolvent

d. changes in international law

a. unexpected rise in risk

Which of the following companies set the benchmark prices for Maritime Insurance?

a. Chubb

b. Lloyds of London

c. Zurich

d. American Club

b. Lloyds of London

In the US Maritime Reinsurance Plan, what is the specific role of the International Development Finance Corporation (DFC)?

a. serving as the ‘sovereign reinsurer’ to provide a $20 billion financial backstop

b. acting as the lead underwriter that issues daily policies directly to shipowners

c. providing military escorts and naval protection for tankers in the Strait

d. paying the fuel costs for ships that agree to transit high-risk areas

a. serving as the ‘sovereign reinsurer’ to provide a $20 billion financial backstop

Standard maritime policies (Hull & Cargo) contain a ‘War Exclusion Clause’. In the Strait of Hormuz crisis, how does the DFC & Chubb plan help shipowners sail through the area?

a. it forces the Iranian Navy to pay for any damages to ships

b. it provides a ‘War Risk Buy-Back’ that covers perils like sabotage and seizure

c. it gives shipowners a 50% discount on their Standard Life Insurance policies

d. it requires the ship’s crew to carry their own private insurance instead

b. it provides a ‘War Risk Buy-Back’ that covers perils like sabotage and seizure

The US government provides the primary financial backstop through the DFC for the closing of the Strait of Hormuz, but why must it partner with private insurers like Chubb and AIG to act as ‘Lead’ and ‘Following’ underwriters?

a. because federal law prohibits the US government from owning any insurance paperwork

b. to ensure that only American-made ships are allowed to sail through the Strait

c. to utilize the private sector’s specific data, expertise in vetting ship safety, and pricing risk

d. because private insurers are required by law to pay for all-war related damages

c. to utilize the private sector’s specific data, expertise in vetting ship safety, and pricing risk

Why do shipowners purchase separate war risk insurance instead of relying on standard marine policies?

a. standard marine policies already include full coverage for war-related events

b. war risks like conflict, terrorism, and seizures are excluded from standard policies and require separate coverage

c. war risk insurance is only required for cargo, not ships

d. governments automatically cover all war-related maritime losses

b. war risks like conflict, terrorism, and seizures are excluded from standard policies and require separate coverage

What is the primary reasons P&I Clubs are structured as mutual insurance organizations rather than traditional insurers?

a. to maximize profits for shareholder

b. to allow shipowners to share large liability risks through a pooled system

c. to avoid regulation from international insurance markets

d. to focus only on insuring cargo rather than liability

b. to allow shipowners to share large liability risks through a pooled system

What is the main goal of the plaintiff attorney using the ‘Reptile Theory’ in court?

a. to prove exactly how much money the plaintiff lost in medical bills

b. to make the jury feel that the defendant’s actions are a danger to the whole community

c. to show the jury a video of a literal reptile to distract them

d. to argue that the accident was just a one-time mistake that won’t happen again

b. to make the jury feel that the defendant’s actions are a danger to the whole community

In the RMI industry, what is the biggest problem with third-party litigation funding?

a. it requires the insurance company to pay the plaintiff’s lawyers up front

b. it guarantees that the jury will always be fair to the corporation

c. it makes it too expensive for plaintiffs to file any lawsuits

d. it turns lawsuits into ‘investments’ for hedge funds, who want the biggest payout possible

d. it turns lawsuits into ‘investments’ for hedge funds, who want the biggest payout possible

Which of these is a common reason why juries today are more likely to give nuclear verdicts?

a. prices have gone down for everything, so jurors want to give away more money

b. most jurors today want to help big corporations

c. jurors have become numb to large numbers and are more skeptical of large corporations’ motives

d. today, jurors encourage companies to take risks as long as they take responsibility for their mistakes

c. jurors have become numb to large numbers and are more skeptical of large corporations’ motives

Third-party litigation funding primarily benefits plaintiffs by:

a. guaranteeing a specific verdict amount

b. allowing them to reject fair settlements and hold out for larger outcomes with no out-of-pocket costs

c. reducing the plaintiff’s attorney fees

d. giving them direct access to the defendant’s insurance limits

b. allowing them to reject fair settlements and hold out for larger outcomes with no out-of-pocket costs

From 2010 to 2019, average general liability verdict awards increased by:

a. 116%

b. 85%

c. 224%

d. 150%

c. 224%

How does ‘tail volatility’ specifically burden insurers and the insured?

a. it increases the frequency of small claims

b. it causes courts to throw out excess liability policies

c. it forces them to maintain reserve capacity for old claims that are now being litigated more aggressively

d. it shifts legal jurisdiction to plaintiff-friendly states

c. it forces them to maintain reserve capacity for old claims that are now being litigated more aggressively

Which of the following best explains why erosion of tort reform is particularly dangerous for actuarial modeling?

a. it gives plaintiffs more time to file lawsuits

b. it increases the number of cases that reach trail

c. it removes caps on non-economic damages, eliminating the ceiling insurers rely on for loss projections

d. it disqualifies certain types of expert witnesses

c. it removes caps on non-economic damages, eliminating the ceiling insurers rely on for loss projections

In the Topgolf case, which combination of social inflation factors most directly contributed to the $15.8 million verdict?

a. juror sympathy

b. anti-corporate sentiment

c. a judicial hellhole environment, expanding liability standards

d. all of the above

d. all of the above

When companies increase their self-insured retention (SIR) limits in response to social inflation, what is the secondary consequence for the insurance market?

a. insurers must offer higher limits to compensate

b. it stabilizes premiums by removing high-risk companies from the insured pool

c. it causes a loss in premium volume and erodes insurer-client trust

d. reinsurers absorb more of the excess liability

c. it causes a loss in premium volume and erodes insurer-client trust

Why are Gen Z and Millennial jurors particularly receptive to nuclear verdicts?

a. they have more personal experience with corporate negligence claims

b. they are more familiar with legal procedure and thus more confident in awarding large sums

c. they view large verdicts as a necessary mechanism to compel behavior change from multi-billion dollar corporations

d. they are more likely to have been impacted by rising insurance premiums

c. they view large verdicts as a necessary mechanism to compel behavior change from multi-billion dollar corporations

t/f: The Bermuda form is a hybrid of a claim made and an occurrence form

true

Which of the following is considered the go-to for unique and weird risks?

a. Bermuda

b. London

c. USA

d. Asia

b. London

What is the primary difference between a Managing General Agent (MGA) and a Managing General Underwriter (MGU)?

a. MGAs only work with admitted carriers, while MGUs work with non-admitted carriers

b. MGAs have the authority to underwrite and bind policies, while MGUs primarily focus on pricing and risk revalutation

c. MGAs are retail brokers, while MGUs are wholesale brokers

d. MGUs have full underwriting authority, while MGAs do not

b. MGAs have the authority to underwrite and bind policies, while MGUs primarily focus on pricing and risk revalutation

A firm has the authority to evaluate risk, set pricing, and bind insurance policies on behalf of a carrier. What type of entity is this?

a. Retail Broker

b. Wholesale (E&S) Broker

c. Managing General Agent (MGA)

d. Managing General Underwriter (MGU)

c. Managing General Agent (MGA)

t/f: MGAs and MGUs may participate in underwriting decisions, but the insurance carrier ultimately assumes the risk

true

What type of business would likely be in the E&S market?

a. local used car dealership that sells standard consumer vehicles with a clean record

b. a boutique indoor bar and restaurant that features competitive axe-throwing lanes

c. a small suburban firm providing tax preparation and standard bookkeeping services for local residents

d. a commercial bakery that specializes in sourdough and sells exclusively to local grocery stores

b. a boutique indoor bar and restaurant that features competitive axe-throwing lanes

t/f: The Excess & Surplus (E&S) market is primarily designed for high-risk or unique businesses that have been denied coverage or are unable to find adequate insurance options within the standard insurance market

true

What is the largest broker in the E&S space?

a. Howden

b. RT Specialty

c. Jencap Group

d. AmWins Group

d. AmWins Group

What role acts as the intermediary between the retail broker and the E&S carrier?

a. retail broker

b. wholesale broker

c. MGA

d. carrier

b. wholesale broker

How does an E&S carrier primarily make a profit?

a. charging brokerage fees

b. taking a percentage commission from brokers

c. premium - losses - expenses

d. charging client service fees

c. premium - losses - expenses

Which of the following best explains why sports insurance is described as a ’package’ rather than a single policy?

a. because sports organizations usually insured only one risk at a time

b. because sports-related losses are limited to injuries and lawsuits

c. because organizations face multiple exposures that often require separate coverages such as liability, cyber. auto, and workers’ compensation

d. because one policy automatically includes every possible sports-related loss without exclusions

c. because organizations face multiple exposures that often require separate coverages such as liability, cyber. auto, and workers’ compensation

A youth league wants protection against spectator injuries, property damage, and a tournament cancellation caused by severe weather. Which choice best reflects the deck’s approach to coverage?

a. general liability alone should handle all three exposures

b. a Business Owner’s Policy may address property and liability, but cancellation-related loss may require separate business interruption or event-related protection

c. commercial auto is the most comprehensive solution because it includes liability and weather loss

d. worker’s compensation is sufficient as long as volunteers are present

b. a Business Owner’s Policy may address property and liability, but cancellation-related loss may require separate business interruption or event-related protection

Which scenario mist clearly illustrates the distinction between player medical coverage and organizational liability coverage?

a. a fan slips in the concourse and seeks reimbursement for treatment

b. a player tears a ligament and needs follow-up care, while separately alleging the organization was negligent in maintaining safe playing conditions

c. a team bus is involved in a crash while transporting equipment

d. a coach downloads malware onto the league registration system

b. a player tears a ligament and needs follow-up care, while separately alleging the organization was negligent in maintaining safe playing conditions

Why is cyber risk treated as an emerging issue in sports insurance rather than as a minor administrative concern?

a. because cyber losses only affect professional franchises and not smaller organizations

b. because digital systems used for registration, payments, medical information, and ticketing create operational and privacy exposures beyond traditional bodily injury risk

c. because cyber losses are already fully covered by general liability polcies

d. because sports organizations are no longer usiing digital platforms for consumer interaction

b. because digital systems used for registration, payments, medical information, and ticketing create operational and privacy exposures beyond traditional bodily injury risk

Which of the following is the strongest example of enterprise risk management rather than traditional management in a sports organization?

a. purchasing a general liability policy after a spectator injury occurs

b. reviewing only workers’ compensation claims at year-end

c. coordinating player safety, cybersecurity, financial planning, weather contingency plans, and reputation management to support long-term organizational goals

d.delegating all injury prevention decisions to athletic trainers without executive involvement

c. coordinating player safety, cybersecurity, financial planning, weather contingency plans, and reputation management to support long-term organizational goals

In the deck, risk managers are described as allowing ‘risk takers to take risks’. What is the best interpretation of that statement?

a. risk managers encourage organizations to ignore avoidable hazards

b. risk managers eliminate all uncertainty so no losses occur

c. risk managers support the organization’s objectives by controlling, financing, and monitoring risks rather than preventing all activity

d. risk managers are responsible only for buying insurance after a claim happens

c. risk managers support the organization’s objectives by controlling, financing, and monitoring risks rather than preventing all activity

A sports organization adopts wearable devices and predictive analytics to monitor fatigue and injury risk. From an insurance perspective, why is this significant?

a. it eliminates the need for all accident-related coverage

b. it may improve underwriting, loss prevention, and risk assessment by generating more detailed exposure data

c. it guarantees lower premiums regardless of claims history

d. it shifts all injury responsibility from the team to the athlete

b. it may improve underwriting, loss prevention, and risk assessment by generating more detailed exposure data

Which answer best captures the role of social insurance in sports insurance?

a. it reduces liability concerns by encouraging faster settlement of claims

b. it refers to the growing number of social media accounts maintained by teams

c. it increases the severity and cost of liability claims, making lawsuits more financially significant for insurers and sports organizations

d. it applies only to cyber coverage and privacy litigation

c. it increases the severity and cost of liability claims, making lawsuits more financially significant for insurers and sports organizations

A league administrator argues that string risk management makes insurance less important. Based on that presentation, what is the best response?

a. correct, because effective controls eliminate the need for insurance in most sports settings

b. incorrect, because insurance and risk management service the exact same function

c. incorrect, because risk management helps reduce and monitor loss, while insurance finances losses that still occur

d. correct because ERM replaces all traditional insurance products

c. incorrect, because risk management helps reduce and monitor loss, while insurance finances losses that still occur

Which of the following would be the most accurate conclusion based on the deck’s emerging trends section?

a. sports insurance is becoming less complex because organizations are focusing mainly on physical injury exposures

b. the market is evolving because sports organizations must manage traditional risks like injury and property damage alongside newer issues such as cyber. AI, mental health, and data privacy

c. future sports insurance demand will likely decline because technology removes uncertainty from athletic operations

d. emerging trends are most unrelated to coverage decisions and underwriting practices

b. the market is evolving because sports organizations must manage traditional risks like injury and property damage alongside newer issues such as cyber. AI, mental health, and data privacy

An insurance company is attempting to formulate a strategy by analyzing the general environment. Which factor will not be accounted for when observing this environment?

a. legal proceedings

b. demographic and sociocultural norms

c. customer opinions

d. economic developments

c. customer opinions

The Five Factor Approach and SWOT Analysis are used in the ____ stage of the strategic management process.

a. strategy implementation

b. strategy formulation

c. strategy evaluation

d. strategy determination

b. strategy formulation

Alignment between internal resources and external factors allows for

a. well-rounded products

b. sustainable competitive advantage

c. quality customer service

d. a complete mission statement

b. sustainable competitive advantage

Which of the following is not a step in the strategy formulation process?

a. analysis of internal and external environemnts

b. development of long-term strategies and organizational goals

c. determine the strategy at different organizational levels

d. formulate the mission statement

d. formulate the mission statement

Which step in strategy implementation focuses on ensuring. employees understand the strategy across the entire organization?

a. creating a framework for execution

b. communicating the strategy effectively

c. assigning responsibilities and authority

d. allocating resources

b. communicating the strategy effectively

Which of the following is NOT a step in the strategy evaluation process?

a. establish performance standards

b. measure actual results

c. develop mission and vision statements

d. take corrective action

c. develop mission and vision statements

t/f: Strategy evaluation is only performed after a strategy has been fully implemented and does not involve making ongoing adjustments during execution.

false

A marketing department designing a campaign to align with company-wide growth goals is using which type of strategy

a. corporate-level strategy

b. business-level strategy

c. functional-level strategy

d. operational-level strategy

c. functional-level strategy

Why is it important that each strategy level supports the one above it?

a. to eliminate the need for tactical decision-making

b. to ensure all departments operate independently

c. to maintain alignment with organizations missions and goals

d. to priortize short-term profit over long-term goals

c. to maintain alignment with organizations missions and goals

Which components of SWOT are considered internal?

a. Opportunities and threats

b. strengths and weaknesses

c. strengths and opportunities

d. weaknesses and threats

b. strengths and weaknesses