Question 1

Match the descriptions with their terms:
-A type of pro-rata reinsurance treaty in which both premiums and losses are divided according to a given percentage for each participant is a/an _________________.
A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Accepted Answer

A quota share treaty is a type of pro-rata reinsurance treaty where both premiums and losses are shared between the ceding company and the reinsurer according to a predetermined percentage.

Question 2

Match the descriptions with their terms:
-A reinsurance treaty in which losses are paid by the reinsurer only when losses exceed some predetermined deductible or retention is called a/an _________________.
A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Accepted Answer

An excess-of-loss treaty is a type of reinsurance agreement where the reinsurer covers losses that exceed a predetermined deductible or retention level.

Question 3

Match the descriptions with their terms:
-When several insurers combine to accept reinsurance, this is called a/an _________________.
A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Accepted Answer

The answer of Match the descriptions with their terms:
-When several...

Question 4

Match the descriptions with their terms:
-A/An _________________ is an independent report on an applicant prepared by an outside agency for the purpose of assisting the underwriter.
A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Accepted Answer

An inspection report is specifically designed to provide an independent assessment of an applicant for underwriting purposes, prepared by an external agency to aid the underwriter in making an informed decision.

Question 5

Match the descriptions with their terms:
-Independent associations formed by insurers to assist in underwriting are often called _________________ and normally specialize in certain areas.
A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Accepted Answer

Independent associations formed by insurers to assist in underwriting are often called pools or syndicates and normally specialize in certain areas.

Question 6

Match the descriptions with their terms:
-The _________________ is the portion of an insurance premium designed to cover the expected loss.
A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Accepted Answer

The pure premium is the portion of the insurance premium that is used to cover the expected loss.

Question 7

Match the descriptions with their terms:
-The ratio of the loss cost to the gross premium is called the _________________.
A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Accepted Answer

The loss ratio is defined as the ratio of the loss cost to the gross premium, which helps in assessing the profitability of insurance operations.

Question 8

Match the descriptions with their terms:
-The two factors that must be estimated to determine loss and that are subject to errors in forecasting are frequency of occurrence and _________________ of loss.
A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Accepted Answer

The two factors that must be estimated to determine loss are frequency of occurrence and severity of loss. Severity refers to the magnitude or impact of the loss.

Question 9

Match the descriptions with their terms:
-A/An _________________, the simplest type of reinsurance, is a specific reinsurance on an optional basis.
A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Accepted Answer

An informal facultative agreement is the simplest type of reinsurance, which is arranged on an optional basis for specific risks.

Question 10

Match the descriptions with their terms:
-Under a/an _________________, the reinsurer is bound to take certain types of risks if offered by the ceding company, but the decision of whether or not to reinsure remains with the ceding company.
A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Accepted Answer

Under a formal facultative agreement, the reinsurer is obligated to accept certain risks if offered by the ceding company, but the ceding company has the discretion to decide whether to reinsure those risks.

Question 11

Match the descriptions with their terms:
-The _________________ is an example of a surplus treaty.
A) ceding company
B) cession
C) credibility
D) excess line treaty or first surplus treaty
E) excess-of-loss treaty
F) formal facultative agreement
G) severity
H) gross premium
I) independent adjusters
J) informal facultative agreement
K) inspection report
L) loading
M) loss ratio
N) manual, or class, rating
O) merit, or individual,
P) policy writing
Q) pools or syndicates
R) preferred risks
S) production
T) pure premium
U) quota share treaty
V) rate making
W) rating bureau, or rate-making association
X) reinsurance
Y) reinsurance pool or exchange
Z) schedule rating

Accepted Answer

The excess line treaty or first surplus treaty is an example of a surplus treaty, which allows the ceding company to retain a predetermined amount of risk, with the surplus being ceded to the reinsurer.

Question 12

Which of the following generalizations is most accurate concerning underwriting?
A) A rate can be found for almost any risk, no matter how poor,
B) The underwriter depends only on statements by the applicant as a guide for acceptance or rejection,
C) Underwriting judgment is of only moderate importance in the successful operation of the insurance enterprise,
D) An underwriter has very little discretion since most of his or her decisions are already incorporated into set rules and regulations,
E) The main objective is to see that applicants accepted will have the loss experience anticipated when the rates were formulated.

Accepted Answer

The main objective of underwriting is to ensure that the pool of applicants accepted will, as a group, have the loss experience anticipated when the rates were formulated. This helps in maintaining the financial stability of the insurance company and fairness among the insured.

Question 13

Claims management in insurance is characterized by all but one of the following:
A) Overly liberal claims-settlement procedures may be as bad as stingy claims-settlement procedures,
B) Claims-settlement problems are generally more complex in life insurance than in property and liability insurance,
C) An independent adjuster generally serves the small insurer,
D) Often negotiations with the claims department is the only contact that the insurance buyer has with the insurer.

Accepted Answer

Claims-settlement problems are typically more complex in property and liability insurance than in life insurance due to the nature of the claims and the need to assess damages, liability, and other factors. Life insurance claims are generally more straightforward, involving verification of the policy and the circumstances of the death.

Question 14

Insurance Company XYZ has an agreement to bear 15 percent of all losses and to retain 15 percent of all premiums in a certain type of insurance. Apparently, XYZ has reinsurance of which type?
A) formal facultative,
B) informal facultative,
C) excess of loss,
D) spread of loss,
E) quota share.

Accepted Answer

Quota share reinsurance is a type of agreement where the insurer and the reinsurer share premiums and losses in a fixed proportion, which matches the description given for Insurance Company XYZ.

Question 15

Supervision of advertising programs of insurers is most likely to be under
A) underwriting,
B) rate making,
C) production,
D) claims management,
E) investment and finance.

Accepted Answer

Supervision of advertising programs of insurers is most closely associated with production, as advertising is a key component in generating new business and retaining existing customers, which falls under the realm of production or marketing within an insurance company.

Question 16

The pure premium is
A) the same as the gross premium,
B) the gross premium increased for loading,
C) the gross premium less the allowance for loading,
D) the insurance rate multiplied by the number of exposure units,
E) another name for a credible premium.

Accepted Answer

The pure premium is the portion of the gross premium that is used to pay losses and loss adjustment expenses, excluding the loading for insurer's expenses, profit, and contingencies. Therefore, it is the gross premium less the allowance for loading.

Question 17

The main difference between pricing insurance and pricing other commodities is
A) in insurance, the future loss is unknown and must be estimated,
B) in insurance, prices are strictly regulated,
C) in insurance, pricing is done scientifically,
D) all three are correct,
E) none of these are correct.

Accepted Answer

In insurance, the cost is primarily based on estimating future losses, which is uncertain and requires statistical and actuarial analysis, distinguishing it from pricing most other commodities where costs can be more directly calculated.

Question 18

An insurance rate must by law in most states meet all but one of the following requirements:
A) must be adequate to meet future losses,
B) must not be excessive,
C) must be fair,
D) must encourage loss control efforts by the insured,
E) all of these conditions must be met.

Accepted Answer

Insurance rates are typically required to be adequate, not excessive, and fair, but they are not legally required to encourage loss control efforts by the insured.

Question 19

The concept of "fairness" in insurance rate making is best described by which of the following?
A) The rate should reflect all individual differences that may affect future loss experience,
B) The rate should reflect the loss experience of the class into which an insured is placed,
C) The rate should be higher for those age groups having the most losses, and less for other age groups,
D) The rate should be high enough to cover all losses of the insurer,
E) The rate should be low enough for all insureds needing insurance to afford coverage.

Accepted Answer

Fairness in insurance rate making typically means that rates should reflect the loss experience of the class into which an insured is placed, ensuring that individuals in similar risk categories are charged similar rates.

Question 20

A rate-making method designed to adjust a premium to reflect the actual loss experience of an insured in a given time period is known as
A) retrospective rating,
B) experience rating,
C) manual, or class, rating,
D) schedule rating,
E) preferred risk rating.

Accepted Answer

Retrospective rating is a method where the final premium is adjusted based on the actual loss experience during the policy period, allowing for a more accurate reflection of the insured's risk.

Quiz 23: Functions and Organization of Insurers

Match the descriptions with their terms: -A type of pro-rata reinsurance treaty in which both premiums and losses are divided according to a given percentage for each participant is a/an _________________.

Match the descriptions with their terms: -A reinsurance treaty in which losses are paid by the reinsurer only when losses exceed some predetermined deductible or retention is called a/an _________________.

Match the descriptions with their terms: -When several insurers combine to accept reinsurance, this is called a/an _________________.

Match the descriptions with their terms: -A/An _________________ is an independent report on an applicant prepared by an outside agency for the purpose of assisting the underwriter.

Match the descriptions with their terms: -Independent associations formed by insurers to assist in underwriting are often called _________________ and normally specialize in certain areas.

Match the descriptions with their terms: -The _________________ is the portion of an insurance premium designed to cover the expected loss.

Match the descriptions with their terms: -The ratio of the loss cost to the gross premium is called the _________________.

Match the descriptions with their terms: -The two factors that must be estimated to determine loss and that are subject to errors in forecasting are frequency of occurrence and _________________ of loss.

Match the descriptions with their terms: -A/An _________________, the simplest type of reinsurance, is a specific reinsurance on an optional basis.

Match the descriptions with their terms: -Under a/an _________________, the reinsurer is bound to take certain types of risks if offered by the ceding company, but the decision of whether or not to reinsure remains with the ceding company.

Match the descriptions with their terms: -The _________________ is an example of a surplus treaty.

Which of the following generalizations is most accurate concerning underwriting?

Claims management in insurance is characterized by all but one of the following:

Insurance Company XYZ has an agreement to bear 15 percent of all losses and to retain 15 percent of all premiums in a certain type of insurance. Apparently, XYZ has reinsurance of which type?

Supervision of advertising programs of insurers is most likely to be under

The pure premium is

The main difference between pricing insurance and pricing other commodities is

An insurance rate must by law in most states meet all but one of the following requirements:

The concept of "fairness" in insurance rate making is best described by which of the following?

A rate-making method designed to adjust a premium to reflect the actual loss experience of an insured in a given time period is known as