Question 1

Ross studied engineering in college.After graduation,he went to work for an insurance company.Ross visits properties insured by his company.He conducts inspections and makes recommendations about alarm systems,sprinkler systems,and building construction.In what functional area does Ross work?

Accepted Answer

Ross works in loss control, as he conducts inspections and makes recommendations to prevent or minimize losses. Underwriting involves assessing risk and determining policy terms, information systems support various functions within an organization, and claims adjusting involves processing and resolving insurance claims.

Question 2

Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance.Delta has a retention limit of $200,000,and nine lines of insurance are ceded to Eversafe.How much will Eversafe pay if a $1,600,000 building insured by Delta suffers an $800,000 loss?

Accepted Answer

The answer of Delta Insurance Company has a surplus-share treaty...

Question 3

Which of the following statements is (are)true about life insurance company investments?
I.The majority of life insurance company general account assets are invested in bonds.
II.The majority of life insurance company separate account assets are invested in stocks.

Accepted Answer

Life insurance companies typically invest the majority of their general account assets in bonds for stability and predictable income. Separate account assets, on the other hand, are often invested in stocks to provide higher potential returns for policyholders, reflecting the different risk and return objectives of these accounts.

Question 4

Jan is employed by an insurance company.She reviews applications to determine whether her company should insure the applicant.If insurable,Jan assigns the applicant to a rating category based on the applicant's degree of risk.Jan is a(n)

Accepted Answer

An underwriter is responsible for reviewing applications and assessing the risk involved in insuring potential policyholders. The underwriter assigns a rating based on the level of risk, similar to what Jan does in this scenario. An actuary determines the likelihood of future events, a loss control engineer focuses on preventing accidents and minimizing damages, and a claims adjustor investigates and settles insurance claims.

Question 5

The process of transferring risk to the capital markets through the use of financial instruments such as bonds,futures contracts,and options is known as

Accepted Answer

Securitization of risk involves transferring risk to the capital markets through the use of financial instruments such as bonds, futures contracts, and options. This allows risk to be spread out among a wider group of investors, reducing the impact of any one individual or organization experiencing a significant loss. Consolidation of risk involves combining individual risks into a larger, collective risk while compartmentalization of risk involves separating risks into different categories or segments. Avoidance of risk involves taking steps to eliminate or reduce risk altogether.

Question 6

All of the following are methods that a property and liability insurance company can use to protect against catastrophic losses EXCEPT

Accepted Answer

The purchase of common stock is not a method that a property and liability insurance company can use to protect against catastrophic losses. Common stock is an investment vehicle that generates returns as the company's stock price appreciates or through dividend payments, but it does not directly protect against catastrophic losses. The other options listed - sale of catastrophe bonds, purchase of excess-of-loss reinsurance, and quota share reinsurance with a low retention percentage - are all methods that insurance companies can use to protect against catastrophic losses.

Question 7

Amy heads the legal staff of a large property and liability insurance company.Amy's staff is likely involved in which of the following activities?

Accepted Answer

Amy's legal staff would be involved in reviewing language and policy provisions in insurance contracts to ensure they are legally sound and compliant with regulations.

Question 8

Which of the following statements about the investments of property and liability insurers is (are)true?
I.Income from investments is important in offsetting any unfavorable underwriting experience.
II.Because premium income is continually being received,the investment objective of liquidity is of little importance.

Accepted Answer

Income from investments is important for property and liability insurers to offset any unfavorable underwriting experience. However, liquidity is still an important investment objective for insurers to ensure they have the necessary funds to pay claims and other obligations. Therefore, statement II is not true.

Question 9

Beverly lives in a sparsely populated area in northern Idaho.Some insurance companies marketing coverage in northern Idaho cannot afford to have full-time adjusters there.Several insurers hire Beverly to adjust claims for their insureds.Beverly charges the insurers a fee for each claim that she settles.Beverly is a(n)

Accepted Answer

Beverly is an independent adjuster because she is not employed by any specific insurance company and is hired on a fee basis by multiple insurers to adjust claims.

Question 10

Mark has been an underwriter for 20 years.An application he recently reviewed looked strange to him.The building value in the application seemed far too high,and Mark suspected the applicant might be planning to destroy the property after it is insured.Mark hired an outside firm to investigate the applicant and to prepare a report about the applicant.This report is called a(n)

Accepted Answer

The report that Mark hired an outside firm to prepare about the applicant is specifically referred to as an "investigation report". The closest option among the choices given is "inspection report".

Question 11

All of the following statements about life insurance company investments are true EXCEPT

Accepted Answer

The statement "The majority of these investments are short-term investments" is not true. Life insurance companies often make long-term investments, such as in bonds and real estate, to match the long-term liabilities of their policyholders.

Question 12

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 a(n)

Accepted Answer

Sue's majors in mathematics and statistics, as well as her enrollment in finance courses, suggest that she is qualified to work as an actuary, which involves analyzing data and using statistical models to calculate risks and determine insurance premiums. This is consistent with her job at Econodeath Insurance Company, where she is responsible for calculating premium rates for life insurance coverages.

Question 13

Easy Pay Insurance Company may require insureds who suffer a loss to submit a sworn statement to substantiate that a loss occurred and to describe the conditions under which the loss occurred.This sworn statement is called a(n)

Accepted Answer

A proof of loss is a sworn statement that is required by an insurance company to substantiate a loss and describe the conditions under which the loss occurred. This document serves as evidence of the insured's claim and is used by the insurer to determine the amount of compensation that should be paid to the insured.

Question 14

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

Accepted Answer

Antonio should first verify that a covered loss has occurred before determining the amount of the loss or delaying payment. Attempting to deny the claim regardless of coverage would be unethical and could lead to legal repercussions.

Question 15

New Liability Insurance Company began operations last year and has been very successful.The company's ability to grow is being restricted by an accounting rule that requires insurers to realize acquisition expenses immediately,while not realizing premiums received as income until some time has passed.Reinsurance is often used in such cases for which of the following purposes?

Accepted Answer

Reinsurance can help reduce the impact of the accounting rule that requires insurers to immediately realize acquisition expenses while not realizing premiums as income until later. By sharing a portion of the risk with a reinsurer, the insurer can reduce its unearned premium reserve and free up capital to support growth. Reinsurance can also provide additional protection against catastrophic losses, but this is not the primary purpose in this scenario. Withdrawing from a line of business or territory is also not relevant in this situation.

Question 16

Which of the following statements is (are)true with respect to catastrophe bonds?
I.The bonds are issued by policyowners of the insurer.
II.The bonds have relatively high interest (coupon)rates.

Accepted Answer

Catastrophe bonds are typically issued by insurers to transfer the risk of catastrophic events (such as hurricanes, earthquakes, or pandemics) to investors. The coupons on these bonds are higher than typical bonds due to the high risk involved. Therefore, statement I is incorrect as the bonds are not issued by policyowners, but by insurers. Statement II is true as catastrophe bonds have relatively high interest (coupon) rates.

Question 17

Pac-Coast Insurance (PCI)concentrates its underwriting activities in California.The company is concerned that if a catastrophic earthquake occurs,it might threaten the solvency of the company.To address this risk,PCI issued some debt securities.If a catastrophic earthquake occurs,PCI does not have to repay the full amount borrowed or pay interest.The securities PCI issued are called

Accepted Answer

The debt securities issued by PCI that do not require full repayment or payment of interest in the event of a catastrophic earthquake are known as catastrophe bonds. These bonds transfer the risk of an earthquake from the insurance company to the bond investors, who receive higher yields in exchange for taking on the risk. The bonds are structured as contingent debt, meaning that if the earthquake occurs and meets certain predetermined criteria, the bondholders may not receive full payment or interest.

Question 18

Liability Insurance Company (LIC)was approached by a regional airline to see if LIC would write the airline's liability coverage.LIC agreed to write the coverage and entered into an agreement with a reinsurer.Under the agreement,LIC retains 25 percent of the premium and pays 25 percent of the losses,and the reinsurer receives 75 percent of the premium and pays 75 percent of the losses.This reinsurance arrangement is best described as

Accepted Answer

This is quota-share reinsurance because the reinsurer and the primary insurer (LIC) are sharing the premiums and losses based on a predetermined percentage split. 25 percent retention by LIC and 75 percent shares by the reinsurer is a clear indication of the quota-share reinsurance arrangement.

Question 19

Huge Insurance Company is a property insurer that is interested in protecting itself against cumulative losses that exceed $200 million during the year.This protection can best be obtained using a(n)

Accepted Answer

An excess-of-loss reinsurance treaty provides protection against catastrophic losses that exceed a specific dollar amount. In this case, Huge Insurance Company is interested in protecting itself against cumulative losses that exceed $200 million during the year. An excess-of-loss reinsurance treaty is the best option to achieve this protection. A quota-share reinsurance treaty and surplus-share reinsurance treaty do not provide specific protection against catastrophic losses, while a reinsurance pool is a joint arrangement among insurers to spread risk, rather than a specific type of reinsurance treaty.

Question 20

Functions of an insurance company's legal department include which of the following?
I.Lobbying for legislation favorable to the insurance industry.
II.Drafting policy provisions.

Accepted Answer

The legal department of an insurance company is responsible for drafting policy provisions and also for lobbying for legislation favorable to the insurance industry. Therefore, both options I and II are correct.

Quiz 6: Insurance Company Operations