Insurance CCP Syllabus for Foundation Level Insurance Concepts Insurance as a Transfer mechanism - Law of large numbers Types

pes of loss exposures - Characteristics of insurable risks Insurance operations Benefits an costs of insurance Brief history of insurance !"#$ Insurance is a contract between "$ Insure an %tate &$ Insurer an %tate 3. Insured and Insurer '$ Insure an (gent !&#$ Insurance is not a) "$ Business* inclu ing +arious operations that must be con ucte in a way to generate income$ &$ Contract* between the insure an the insurer 3. Barter, between the insured and insurer '$ Transfer system* in which insure transfers the chance of financial loss to insurer !,-$ ( loss exposure is any) 1. Condition or situation that resents the ossibility of a loss &$ Con ition or situation that guarantees the loss ,$ #+ent for which insurance pays '$ Con ition for sharing the insurance payment between insure s !'#$ (ccor ing to law of large numbers) "$ (s the number of similar but in epen ent exposure units ecreases* the relati+e accuracy of pre ictions about future outcomes base on these exposure units increases$ &$ (s the number of similar but in epen ent exposure units increases* the relati+e accuracy of pre ictions about future outcomes base on these exposure units ecreases$ ,$ (s the number of similar but in epen ent exposure units increases* the relati+e accuracy of pre ictions about future outcomes base on these exposure units remains constant$ !. "s the nu#ber of si#ilar but inde endent e$ osure units increases, the relative accuracy of redictions about future outco#es based on these e$ osure units also increases. !.-$ /hat are the historical terms for 0roperty an Liability insurance1 "$ 2amage Insurance an 3esponsibility Insurance &$ 3eplacement insurance an III 0arty Insurance 3. Fire Insurance and Casualty Insurance '$ 0hysical Insurance an Legal Insurance !4#$ /hich line of insurance is also known as Thir -party insurance1 "$ 0roperty Insurance %. Liability Insurance ,$ Life Insurance '$ 5ealth Insurance !6-$ (ll of the following are types of property insurance #7C#0T) "$ 8ire an allie lines &$ Crime ,$ Business income !. &irectors and officers ! 9-$ (ll of the following are types of insurance pro+i e by the fe eral go+ernment #7C#0T) "$ 8loo insurance &$ Crop insurance

3. '$

'enants insurance %ocial %ecurity

!:5$ Term life insurance) "$ 0ro+i es lifetime protection &$ (ccrues a cash +alue 3. Provides #a$i#u# rotection for the lowest cost '$ (llows the policyhol er to borrow against policy sa+ings !";#$ (ll of the following are ways in which state insurance epartments regulate an protect consumers #7C#0T) 1. Insurers #ust #aintain a certain ratio of a(ents to residents in an area &$ Insurers must be license to write insurance policies in a gi+en state ,$ Insurers must meet certain tests of financial strength '$ Insurers must comply with laws on marketing* un erwriting* an claims practices !""#$ /hich one of the following is a reason why go+ernment insurance programs exist1 "$ Because the go+ernment has expertise in han ling insurance claims %. Because the (overn#ent has the necessary financial resources ,$ Because the go+ernment has infrastructure an staff to pro+i e insurance '$ Because the go+ernment has legal representati+es in e+ery state of the union !"&-$ (ll of the following are types of pri+ate insurers #7C#0T) "$ %tock insurers &$ -utual insurers 3. Partici atin( insurance consortiu#s '$ 3eciprocal insurance exchanges !",#$ %tate insurance epartments regulate insurance rates to protect consumers against rates that are all of the following #7C#0T) "$ #xcessi+e &$ Ina e<uate 3. Class s ecific '$ =nfairly iscriminatory !"'#$ ( mutual insurance company is owne by) "$ In epen ent in+estors %. Policyholders ,$ %tate insurance epartments '$ -utual fun s !".-$ (ll of the following are characteristics of i eally insurable loss exposures #7C#0T) "$ Losses that are efinite an measurable &$ Losses that are acci ental ,$ Large number of similar exposure units !. Lar(e concentration of financial ca acity !"4-$ /hole life insurance) "$ 0ro+i es co+erage for a specifie perio such as . or "; years &$ Lapses when the policyhol er reaches age 4. ,$ Is primarily an in+estment +ehicle !. "ccrues a cash value !"6#$ /hat is the process by which insurers eci e which potential customers to insure an what co+erage to offer them1 "$ 3einsuring

&$ ,$ !.

-arketing 0rospecting )nderwritin(

!"9#$ /hich one of the following is most likely to ha+e the characteristics of an i eally insurable loss exposure1 1. *$ losion of an industrial factory stea# boiler &$ %un amage to an exterior paint finish ,$ 0hysical amage to a lunar lan ro+er '$ Termite amage to a home !":#$ In insurance* the term that means restoring a party who has ha a co+ere loss to the same financial position that the party hel before the loss occurre is) "$ %ubrogate &$ 3ecoup 3. Inde#nify '$ 3ectify !&;-$ >ohn has worke for (lloto* Inc$ for &. years an is consi ering retiring within the next two years$ >ohn?s retirement is an example of) 1. " ersonnel loss e$ osure for "lloto, Inc. &$ ( human loss exposure for (lloto* Inc$ ,$ ( liability loss exposure for (lloto* Inc$ '$ ( loss transfer loss exposure for (lloto * Inc$ !&"5$ ( Bon guaranteeing that a principal will carry out the obligation for which they are bon e for ? is1. Surety Bond &$ 8i elity Bon !&,5$ (ct of throwing o+erboar part of a +essel?s cargo or hull in hopes of sa+ing a ship from sinking is known as what1 "$ 3eplacement &$ >ettison 3. "bandon#ent !&'#$ ( class rating is a rate applie to those risks* which are ifferent "$ %erious %. +o,in( !&.#$ 2epreciation is ecrease in the +alue of property ue to eflation$ "$ (gree %. &isa(ree !&4#$ 8raternal insurance is offere to a social organi@ation for their members 1. "(ree &$ 2isagree !&6#$ (n amount returne to a policyhol er by an insurance company out of its earnings is calle A "$ Claim %. &ividend !&9#$ 3etention is the amount of risk retaine by which of the following1 1. Insured &$ =n erwriter ,$ Insurance company

!&:#$ 8i elity Bon are written to co+er the obligee* usually an employer against loss fromA 1. &ishonest "ct &$ 5onest (ct ,$ (cci ent !,;-$ /hich of these o not fall un er the catastrophe category1 1. Fire &$ 5urricane ,$ #arth<uake Types of Insurers %tock Insurance Companies -utual Insurance Companies 3eciprocal Insurance #xchanges Lloy s (ssociations Capti+e Insurers 3einsurance companies 8e eral Insurance 0rograms %tate Insurance 0rograms #xcess an %urplus Lines Insurers !"#$ 0urpose of formation of %tock Insurance Company is) 1. -eturnin( a rofit to its stoc,holders &$ 0ro+i ing insurance to its stockhol ers ,$ 3eturning a profit to its policyhol ers '$ 0ro+i ing insurance to its policyhol ers !&#$ 0urpose of formation of -utual Insurance Company is) "$ 3eturning a profit to its stockhol ers &$ 0ro+i ing insurance to its stockhol ers ,$ 3eturning a profit to its policyhol ers !. Providin( insurance to its olicyholders !,#$ 2emutuali@ation refer to a process by which) "$ %tock insurance company becomes a -utual Insurance Company &$ -utual Insurance company stops in+esting in mutual fun s for in+estment income 3. .utual insurance co# any beco#es a stoc, insurance co# any '$ (llows -utual insurance company to charge its insure an a itional premium after the policy has gone into effect !'#$ ( reciprocal insurance exchange is operate through) "$ Boar of irectors electe by subscribers or members &$ Chairperson electe by members or subscriber an boar of irector of an license insurance company 3. "ttorney/in/fact, an authori0ed #ana(er bound by contract with subscribers or #e#bers '$ Chief Bustice of state boun by state laws$ !.-$ %tate 8arm Insurance Companies is a type of) "$ %tock insurance company %. .utual insurance co# any ,$ 3eciprocal insurance exchange '$ Lloy s association !4-$ =nite %tate (utomobile (ssociation C=%((D is a type of) "$ %tock insurance company &$ -utual insurance company 3. -eci rocal insurance e$chan(e '$ Lloy s association !6#$ (ll factors ha+e contribute to the growth of capti+e insurance companies except) "$ 0ro+i es insurance co+erage at a lower cost than other pri+ate insurance &$ #liminates una+ailability of esire insurance co+erage 3. Chances of loss and clai#s are #ini#i0ed

'$

Impro+es cash flow

!9#$ 3einsurance is a type of insurance in which) "$ Insure goes for a secon insurance for the same loss exposure for same expose unit with a ifferent insurer %. 1ne insurer transfers so#e or all of the loss e$ osures fro# olicies written for its insured to another insurer ,$ 0ri+ate insurance companies are force to pro+i e insurance through state laws '$ Insurer is allow to charge extra premium to pro+i e insurance for loss exposures outsi e its business line !:-$ %ocial security program co+ers all the benefit except) "$ 3etirement benefits for the el erly &$ %ur+i+orship benefits for epen ents of ecease workers ,$ 2isability payments for isable workers !. Liability lawsuits char(es !";-$ ( worker compensation insurance plan* which oes not allow pri+ate insurance companies to write /C in that state* is known as) "$ Competiti+e %tate fun &$ Insurance guarantee fun 3. .ono olistic state fund '$ 3esi ual market plan !""-$ (utomobile owners with poor ri+ing recor s can obtain auto liability insurance through) "$ 8air access to insurance re<uirements plan C8(I3D %. "uto#obile insurance lan ,$ Insurance guarantee fun '$ -onopolistic state fun !"&#$ Insurance guarantee fun ) "$ Euarantees that e+ery person obtains esire insurance %. Provides a syste# to ay the clai#s of insolvent insurers ,$ Euarantees insurance companies a fixe flow of premium in case a insure '$ 3eimburses legal cost borne by insure in liability suits

efault premium payment

!",#$ /hich one of the following escribes the characteristics of a mutual insurance company1 "$ ( Corporation owne by stockhol ers that earns profits for the stockhol ers$ &$ (n unincorporate association that pro+i es reciprocal co+erage to subscribers$ 3. " Cor oration owned by olicyholders that rovides insurance to its olicyholders. '$ (n unincorporate association that earns profits for its in i+i ual in+estors$ !"'#$ %ome fe eral go+ernment insurance programs pro+i e co+erage for loss exposures that pri+ate insurers ha+e a+oi e largely because of the potential for catastrophic losses$ (n example of such a program is "$ /orkers compensation insurance fun s &$ =nemployment insurance programs ,$ (utomobile insurance plans !. 'he 2ational Flood Insurance Pro(ra# !".-$ /orkers compensation insurance is offere through a resi ual market plan in some states* which means "$ It is a state insurance plan that competes with pri+ate insurers to pro+i e the insurance$ &$ It is a state fun that pro+i es a system to pay the claims of insol+ent insurers$ 3. It is a ro(ra# that #a,es insurance available to those who cannot obtain covera(e because rivate insurers will not voluntarily rovide it.

'$

It is an insurance plan that is the only source of workers compensation insurance allowe in the state$

!"45$ 5ow oes a stock insurance insurer iffer from a reciprocal insurance exchange1 1. " stoc, co# any is owned by stoc,holders. " reci rocal insurance e$chan(e is owned by subscribers. &$ ( stock company pro+i es insurance to its policyhol er-owners$ ( reciprocal insurance pro+i es insurance to in+estors$ ,$ #ach is owne by stockhol ersF howe+er* the reciprocal insurance exchange pro+i es co+erage to in+estors$ '$ #ach is forme to pro+i e profit to in+estorsF howe+er* the stock insurer is manage through a boar of irectors$ !"65$ The %ocial %ecurity program can be simply escribe as 1. " federal ro(ra# that rovides retire#ent, survivorshi , disability, and #edical benefits to eli(ible individuals. &$ ( fe eral welfare benefits program that pro+i es a minimum le+el of housing* foo * an income to eligible in i+i uals an families$ ,$ ( state unemployment insurance program that pro+i es income for a limite perio of time to workers who become unemploye $ '$ ( state program that pro+i es a base le+el of income for retirement base on the le+el of income an uration of employment$ !"95$ ( ratemaking concept in which rates are base on calculate loss experience an insure with similar characteristics are place in the same rating class is calle "$ =nfair iscrimination &$ 0remium ifferential 3. "ctuarial e3uity '$ %ocial e<uity !":# ( reinsurance company "$ Is forme to write all or part of the insurance for a parent company &$ 0ro+i es insurance for loss exposures that pri+ate insurers are unwilling to pro+i e ,$ Transfers losses to a primary insurer !. "cce ts loss e$ osures fro# a ri#ary insurer !&;5$ %ome communities in the =nite %tates celebrate holi ays with firecrackers$ 8irecracker +en ors erect stan s in the parking lot of shopping centers before the holi ays$ Gne shopping center owner sponsoring a firecracker +en or?s booth foun that his insurance i not co+er the exposure$ 5e foun that none of the insurers license to o business in the state sol insurance co+erage for the exposures$ 5ow can the shopping center owner obtain appropriate co+erage for the exposure from the firecracker +en or?s booth1 1. By obtainin( covera(e throu(h the e$cess and sur lus lines #ar,et. &$ By pooling the risk with other shopping center owners with similar exposures$ ,$ Through a proportionate sharing arrangement with multiple insurers$ '$ 8rom alien insurers in countries that also celebrate holi ays with firecrackers$ !&"5$ In a northeastern state* Gl %table Insurance* an ol an establishe insurance company that writes homeowners insurance in the northeast experience three unprofitable years in a row$ Large winter storms resulte in amage to homes that Gl %table insure $ The losses for the last three years ha+e raine the company?s financial resources$ (t the en of the thir year of the losses* the Gl %table eclare bankruptcy when it became insol+ent$ Gl %table was unable to pay for the claims that resulte from the last storm$ Te Han /rinkle is a policyhol er with Gl %table who file a claim as a result of the last storm$ Te ?s house was amage when the weight of snow an ice collapse a portion of his roof$ 5ow will Te be pai for his loss1

"$ Te must Boin as a cre itor in Gl %table?s bankruptcy an recei+e a portion of his loss$ %. 'he (uaranty fund in 'ed4s state will ay for 'ed4s losses. ,$ Te will not be pai because there is no system to co+er insol+ency cause by un erwriting losses$ '$ The state go+ernment will pro+i e compensation to Te through the state?s 8(I3 plan$ Insurance Regulation Iational (ssociation of Insurance Commissioners CI(ICD 3ate 3egulation -onitoring 8inancial health of insurers Insurer licensing (gency licensing 0olicy forms =nfair tra e practices !"5$ /hat is the legal octrine which pre+ents a person from enying the truth of a pre+ious representation of fact* especially when such representation has been relie on by the one to whom the statement was ma e calle 1 "$ Tort &$ 5a@ar 3. *sto el !&-$ ( bon is a contract* which in+ol+es at least how many parties1 "$ Two party contract %. 'hree arty contract ,$ 8our or more part contract !,#$ ( ocument rafte by the I(IC reflecting the propose solution to a gi+en problem an pro+i es a common basis to the states for rafting law that affects insurance in ustry is known as) 1. .odel law &$ %tate statute ,$ Common law '$ Insurance gui eline !'#$ 0rice of insurance for each unit of exposure is known as) "$ 0remium %. -ate ,$ Co+erage '$ Limits !.#$ 0erson analy@ing ata on past losses an the expenses associate with the losses an * combining this with other information to e+elop insurance rates is known as) "$ ( Buster %. "ctuary ,$ (ggregator '$ =n erwriter !4#$ (ctuarial #<uity is) "$ ( rating concept that consi ers rates to be unfairly iscriminatory if they penali@e an insure for characteristics that are beyon the insure Js control &$ (n un erwriting concept* where un erwriters select probable customers base on actuarial gui elines ,$ ( process by which insurer calculate rates that etermine the premium to charge for an insurance policy !. " rate #a,in( conce t throu(h which actuaries base rates on actuarially calculated loss e$ erience and lace insured with si#ilar characteristics in the sa#e ratin( class. !6-$ ( insurance company 7 is incorporate in Lon on* #nglan an license to operate in Iew 5ampshire* =%( will be known as) "$ 2omestic Insurer &$ 8oreign Insurer 3. "lien Insurer '$ Iona mitte Insurer

!9#$ (ll the following are the reason for existence of excess an surplus lines of insurance except) "$ =nusual or uni<ue exposures &$ Insure nee ing high limits ,$ Ionstan ar business !. 2ot able to obtain standard license !:#$ The type of insurance rating law that re<uires rate appro+al by the state insurance epartment before the rates can be use is "$ 8lex rating law &$ Gpen competition ,$ 8ile-an -use law !. Prior/a roval law !";#$ The Iational (ssociation of Insurance Commissioners CI(ICD create a uniform financial statement for property an liability insurance companies$ The purpose of the uniform statement is to "$ #nsure that state insurance epartments not mistake these companies for life insurers$ &$ 0ro+i e accounting expertise for those state insurance epartments that o not ha+e staff actuaries$ 3. Si# lify the state insurance de art#ent4s tas, of co# arin( the financial re orts of #any different insurers. '$ Capture the essential criteria re<uire for rate regulation$ !""-$ %tates regulate the excess an surplus lines market by "$ #stablishing a monitoring boar comprise of all insurers license to o business in the state$ &$ #xamining the market con uct practices of the unlicense insurers$ 3. Licensin( the e$cess and sur lus lines bro,ers that transact business with the unlicensed insurers. '$ (ppro+ing the policy forms an rates use by the unlicense insurers$ !"&5$ /hich one of the following pro+i es a step-by-step explanation of how insurance rates are e+elope 1 "$ (n actuary a$ (naly@es the loss tren s for each rating classification b$ 3ecommen s rate increases for each classification c$ 0ro+i es recommen ations through rating bureaus &$ (n actuary a$ 0re icts future losses base on factors such as weather patterns an litigation tren s b$ 2etermines re<uire rate increases by classification 3. 'he insurer a. "naly0es ast loss increases b. &eter#ines the rofit #ar(in re3uired c. &istributes the loss increases and re3uired rofit a#on( all insureds '$ The insurer a$ 2e+elops each insurer?s share of pre icte losses b$ ( s an amount sufficient to co+er pre icte expenses an a margin for error* profit* an catastrophes !",#$ (ll states re<uire insurance agents to be license to transact insurance business in the state$ 8urther* agents must meet continuing e ucation re<uirements to maintain their licenses$ (ll of these re<uirements ha+e what purpose1 "$ To control the number of agents that transact business in a state to re uce the chance of o+eraggressi+e competition$ %. 'o ensure that these insurance co# any re resentative have rescribed #ini#u# level of insurance ,nowled(e. ,$ To impro+e the image an public perception of the insurance profession$ '$ To maintain a le+el of +igilance in protecting insurance companies against frau ulent beha+ior by the public$

!"'-$ Gne of the metho s use by regulators to ensure insurance company sol+ency is through the Insurance 3egulatory Information %ystem CI3I%D* which is "$ The licensing system re<uire for insurance companies that transact business in a state$ &$ The licensing process for alien insurers that are incorporate in another country$ ,$ ( perio ic examination con ucte by a team of state examiners* working at the insurer?s home office to re+iew acti+ities inclu ing claims* un erwriting* marketing* an accounting proce ures$ !. Financial ratios develo ed fro# insurers4 financial state#ents to deter#ine an insurers4 overall financial condition. !".#$ /hy woul insurance regulators ha+e a goal of assuring that the premiums charge by insurers are a e<uate1 1. 'o #aintain insurer solvency &$ To eliminate the potential of a monopoly ,$ To protect consumers from high insurance rates '$ To promote e<uity among insurers !"45$ The Iational (ssociation of Insurance Commissions CI(ICD has i entifie a problem that affects all states$ =nscrupulous auto bo y shops are) 5iring thie+es to steal cars* cross state lines* an eli+er the stolen +ehicles to the shops Insuring the +ehicles an later claiming they are stolen Changing the +ehicle i entification number Cserial numberD 3eselling the +ehicles The I(IC woul like to a ress these issues uniformly across the =nite %tates by intro ucing tough laws to punish the bo y shops for claim frau * but the I(IC members recogni@e that there are significant ifferences from one state to the next$ 5ow can the I(IC a ress the problem1 1. &evelo a .odel Bill for the ro osed solution and distribute it to the states for ossible enact#ent. &$ 3e<uire each state insurance commissioner to raft a propose solution to the problem tailore to his or her state$ ,$ 2raft a fe eral bill an lobby for legislati+e action to a ress the problem uniformly$ '$ Circulate a petition among all state legislators to Boin in a countrywi e campaign to pass tough laws in each state$ !"6#$ (n automobile insurance policyhol er has complaine that her insurance premium is higher than her neighbor?s premium$ Both the policyhol er an her neighbor ha+e insurance with the same company* an they ha+e i entical +ehicles$ The policyhol er feels that she is the subBect of unfair iscrimination$ (s the policyhol er?s agent* you know the policyhol er has been responsible for se+eral small auto acci ents$ The policyhol er has mentione that her neighbor has ha no acci ents or +iolation in the last three years$ Kou must explain to the policyhol er the obBecti+e of rate regulation ensuring that rates are not unfairly iscriminatory* as it applies in her case$ /hich one of the following is an accurate explanation1 "$ Insure s with similar characteristics are usually place in the same class an charge the same rate unless social e<uity re<uire mo ification in that rate structure$ This has probably occurre in your situation$ %. Insureds with si#ilar characteristics are laced in the sa#e class and char(ed the sa#e rate. 5owever, your accidents have robably laced you in a different classification. 6our re#iu# is based on the loss e$ erience for olicyholders in your classification. ,$ Kour neighbor has probably recei+e a cre it base on the length of time he has ha his policy with the company$ This is not unfairly iscriminatory because it is a+ailable to all policyhol ers o+er time$ '$ Kour neighbor has been place in a preferre category of policyhol ers* which gi+es him rights an pri+ileges that you o not ha+e$ Kour neighbor has been gi+en a rate re uction base on excess profits that ha+e been returne to policyhol ers$

Financial Performance of Insurers 0remium Income C#arne an /ritten premiumD In+estment Income Loss #xpenses =n erwriter #xpenses In+estment #xpenses Gperational EainLloss (ssets Liabilities 0olicy 5ol erJs %urplus 8inancial %tatements 0rofitability 3atios Capacity !"#$ Loss 3atio is a ratio of claims to which of the following1 "$ 0art of annuity payment &$ Gperating expenses 3. Pre#iu#s !&#$ /hich of the following is not a mo e of premium payment1 "$ !uarterly &$ (nnually 3. Fortni(htly !,#$ /hich of the following o not fall un er li<ui ation1 "$ %elling of (ssets for cash %. Payin( off of art liability. ,$ 2issol+ing of a company !'-$ /hich part of a policy is not co+ere by Iet premium1 "$ 0rofits &$ Benefits of policy ,$ ( +antage !.-$ 3ules of accounting allows insurer to recogni@e) "$ Gnly unearne premiums as income for particular year %. 1nly earned re#iu#s as inco#e for articular year ,$ Gnly written premiums as income for particular year '$ Both earne an unearne premiums as income for particular year !45$ ( policy is ma e effecti+e on %ept "* &;;" for M";;; for a perio of "& months$ (t the en of the year i$e$ 2ec$ ,"* &;;"* company will recor ) "$ /ritten premium) M';;F #arne premium) M";;;F =nearne premium) M9;; &$ /ritten premium) M9;;F #arne premium) M';;F =nearne premium) M";;; ,$ /ritten premium) M";;;F #arne premium) M9;;F =nearne premium) M';; !. 7ritten re#iu#8 91:::; *arned re#iu#8 9!::; )nearned re#iu#8 9<:: !65$ ( policy is ma e effecti+e on %ept "* &;;" for M";;; for a perio of "& months$ /hat will be the /rittenL#arne L=nearne premium amounts recor e by the company at the en of year i$e$ 2ec ,"*&;;&$ C0olicy is not renewe D "$ /ritten premium) M";;;F #arne premium) M9;;F =nearne premium) M&;; %. 7ritten re#iu#8 9:; *arned re#iu#8 9<::; )nearned re#iu#8 9%:: ,$ /ritten premium) M";;;F #arne premium) M";;;F =nearne premium) M; '$ /ritten premium) M;F #arne premium) M9;;F =nearne premium) M; !9#$ (mounts esignate by insurance companies to pay claims for losses that ha+e alrea y occurre but are not yet settle is known as) "$ 0olicy hol er surplus %. Loss reserve ,$ Incurre loss '$ 0ai loss !:-$ G+erall gainLloss from operation is calculate by) 1. *arned re#iu# Losses )nderwritin( e$ enses = 2et invest#ent (ain>loss &$ /ritten premium N Iet in+estment gainLloss

,$ '$

Iet un erwriting gainLloss loss expense /ritten premium Loss expense

!";-$ CTotal earne premium N In+estment incomeD CTotal losses N Gther expensesD N ( Bustments is e<ui+alent to) "$ Iet un erwriting gainLloss &$ G+erall gainLloss from operation 3. 2et inco#e before ta$es '$ Iet operating incomeLloss !""#$ (ll of the following can be recor e as a mitte assets except) "$ Cash &$ 3eal estate ,$ Certain ata processing e<uipment !. .ore than ?: days overdue re#iu# !"&-$ Two maBor types of liabilities foun on an insurerJs financial statements are) "$ 0olicyhol ersJ %urplus an Loss 3eser+e %. Loss reserve and )nearned Pre#iu# -eserve ,$ 0olicyhol ersJ %urplus an =nearne 0remium 3eser+e '$ 0olicyhol ersJ %urplus an (ccountJs recei+able !",5$ (ll of the following are profitability ratios except) "$ Loss ratio &$ In+estment income ratio 3. Pre#iu# to sur lus ratio '$ #xpense ratio !"'#$ 0ercent of earne premiums use to fun losses an their settlements is known as) 1. Loss ratio &$ In+estment income ratio ,$ Combine ratio '$ #xpense ratio !".#$ #xpense ratio is a comparison of) "$ Incurre un erwriting expense an earne premium &$ Incurre losses an earne premium ,$ Incurre losses an written premium !. Incurred underwritin( e$ ense and written re#iu# !"4#$ In+estment income ratio is calculate by i+i ing net in+estment income by) "$ /ritten premium %. *arned re#iu# ,$ =nearne 0remium '$ Total in+estment income !"6#$ G+erall operating ratio is calculate by) 1. Loss ratio = *$ ense ratio / Invest#ent Inco#e ratio &$ Loss ratio N #xpense ratio N In+estment Income ratio ,$ Loss ratio - #xpense ratio N In+estment Income ratio '$ Loss ratio - #xpense ratio - In+estment Income ratio !"95$ 8or an insurance company (BC #arne 0remiums O .*;;;*;;; /ritten 0remiums O 4*;;;*;;; Incurre =n erwriting #xpenses O 4;;*;;;

Incurre Losses Cinclu ing loss expenseD O ,*;;;*;;; Iet In+estment Income O "*;;;*;;; CompanyJs Loss ratioL #xpense ratioLCombine ratioLIn+estment Income ratioL G+erall Gperating ratio stan s at Call ratios in PD) "$ .;L";L4;L&;L'; &$ .;L";L';L&;L6; 3. @:>1:>A:>%:>B: '$ 4;L";L.;L&;L6; !":#$ (n insurer has an o+erall operating gain when) "$ G+erall operating ratio is ";;P %. 1verall o eratin( ratio is less than 1::C ,$ G+erall operating ratio is more than";;P '$ G+erall operating ratio oes not effect !&;#$ 0remium-to-surplus ratio is also known as "$ Loss ratio %. Ca acity ratio ,$ Gperating ratio '$ Income ratio !&"#$ Capacity ratio is calculate as 1. 7ritten re#iu#s> olicyholdersD sur lus &$ #arne premiumsLpolicyhol erJs surplus ,$ /ritten premiumsLLoss reser+e '$ #arne premiumsL Loss reser+e !&&#$ /hich of the following is part of written premiums1 "$ In+estment income &$ 0olicyhol ers surplus 3. )nearned re#iu#s '$ =n erwriting expenses !&,#$ (n insurer?s financial statement shows a loss reser+e an an unearne premium reser+e$ These reser+es are each part of the insurer?s "$ 0olicyhol ers? surplus &$ =na mitte assets ,$ ( mitte assets !. 'otal liabilities !&'-$ (n insurer?s income statement shows amounts for all of the following for a particular perio * #7C#0T) "$ #arne premiums %. Policyholders sur lus ,$ Incurre losses '$ =n erwriting expenses !&.# (ll of the following parties are likely to monitor an insurer?s financial performance* #7C#0T) "$ 3egulators &$ (gents 3. Clai#ants '$ %harehol ers !&4#$ (mounts esignate by insurers to pay claims for losses that ha+e alrea y occurre are calle "$ (c<uisition expenses

&$ 3. '$

Loss a Bustment expenses Loss reserves =nearne premium reser+es

!&65$ ( ecrease in incurre losses will generally cause a ecrease in all of the following* #7C#0T) "$ Combine ratio %. *$ ense ratio ,$ G+erall ratio '$ Loss ratio !&9-$ The financial report for (pex Insurers contains the following information) ( mitte assets M.;;*;;; =na mitte assets M';;*;;; Liabilities M,;;*;;; /hat is the amount of (pex Insurers? policyhol ers surplus1 "$ M";;*;;; %. 9%::,::: ,$ M';;*;;; '$ M4;;*;;; !&:-$ Brown Insurance Company has the following expenses) Licenses* taxes* an fees M6;*;;; Claim staff salaries M";;*;;; (gents? commissions M&;;*;;; ( +ertising costs M.;*;;; 3ent an utilities M4;*;;; /hat is the amount of Brown Insurance Company?s ac<uisition expenses1 1. 9%B:,::: &$ M,;;*;;; ,$ M,.;*;;; '$ M'.;*;;; !,;5$ /orl Insurance Company has the following assets) Cash M .;*;;; %tocks M';;*;;; Bon s M&;;*;;; 3eal #state M.;;*;;; 8urniture an office e<uipment 0remium balance ue in less than :; ays 0remium o+er ue more than :; ays /hat is the amount of /orl ?s total a mitte assets1 "$ M'.;*;;; &$ M4.;*;;; 3. 91,1A:,::: '$ M"*&.;*;;;

M6;*;;; M&;*;;; M";*;;;

!,"-$ II% Insurer?s earne premiums are M"*9;;*;;; for the year$ Its losses an expenses are M"*6,;*;;;$ /hat type of financial performance i II% Insurer experience for the year1 "$ ( net operating gain of M6;*;;; %. " net underwritin( (ain of 9A:,::: ,$ ( net operating loss of M"*6,;*;;; '$ ( net operating gain of M"*9;;*;;; !,&-$ Gl 8aithful Insurer has written premiums of M"*';;*;;; an policyhol ers? surplus of M';;*;;;$ /hat oes the capacity ratio in icate about Gl 8aithful Insurer1 1. Financial wea,ness

&$ ,$ '$

8inancial strength Gperating strength Gperating weakness

Marketing In epen ent (gency %ystem #xclusi+e (gency %ystem 2irect /riting %ystem 2irect 3esponse %ystem -ixe -arketing %ystem - 3oles an 3esponsibilities of an agent Types of (uthorities Types of Commissions ( +ertising !"#$ 5ow is an in epen ent agent pai 1 1. Co##ission basis &$ %alary basis ,$ 0rofit basis !&#$ (ll the following are the responsibilities of an agent to the principal except) "$ Loyalty &$ Gbe ience ,$ 3easonable care !. Profitable !,#$ (uthority base on thir partyJs reasonable belief that agent is authori@e to act on behalf of the principal is known as) "$ #xpress authority &$ Implie authority 3. " arent authority '$ Bin ing authority !'#$ Gwnership of agency expiration list is the usual feature of) 1. Inde endent "(ency Syste# &$ #xclusi+e (gency system ,$ 2irect /riting %ystem '$ 2irect response %ystem !.-$ ( Broker is suppose to o all the following except) "$ Collect premiums from insure an remit to insurer &$ 8in people with insurance nee s an selling insurance appropriate to those nee s 3. Co##it the insurer by bindin( covera(e '$ Collect a fee or commission for their ser+ices !4-$ (n in epen ent business organi@ation that functions almost as a branch office for one or more insurance companies is known as) "$ In epen ent (gency %. .ana(in( Eeneral "(ency ,$ Broker '$ #xclusi+e (gency !6-$ Tie-in-sales an rebating are) "$ 0ro ucer super+ision practices &$ 0ro ucer moti+ation practices ,$ %ales promotion practices !. )nfair trade ractices !9#$ 0eter is a salarie pro ucer who is an employee of (BC Insurance Company$ In what istribution system oes he operate1 "$ #xclusi+e agency &$ In epen ent agency

3. '$

&irect writin( 2irect response

!:#$ 8or an in epen ent agency or an exclusi+e agency* the percentage of the premium that goes to the agency or to the pro ucer for new policies sol or existing policies renewe is the "$ Contingent commission &$ 0rofit sharing ,$ %alary !. Sales co##ission !";-$ (n in epen ent agent recei+e his monthly commissions for the new policies he has sol $ #+en though he wrote twenty new policies that month* his commission was low$ /hich one of the following explains why this coul occur1 "$ Co##issions are not fully earned at the ti#e of a sale. 1ther olicies written by the a(ent #i(ht have been cancelled with the unearned ortion of the co##ission returned to the insurance co# any$ &$ The agent faile to pro+i e the le+el of ser+ice re<uire by the insurance company$ The insurance commission was re uce as an incenti+e for better performance$ ,$ The agent i not meet the premium +olume an profitability le+els that were specifie in his contractF therefore* his commission was re uce $ '$ The agent is a salarie employee of the insurance company an recei+es only contingent commissions$ !""#$ The authority that the principal specifically grants the agent is calle ) "$ Implie authority %. *$ ress authority ,$ (pparent authority '$ Con itional authority !"&#$ (ll of the following are true about the insurance agency relationship #7C#0T) "$ The agency agreement is a written agreement between the insurer an an agent &$ The agency agreement gi+es the agent the right to represent the insurer an sell insurance on the insurer?s behalf 3. 'he rinci al is the arty the a(ent authori0es to bind covera(e '$ The agent is the party authori@e by the principle to act on the principal?s behalf !",#$( +ertising by in epen ent agencies promotes "$ Bran recognition of the companies represente %. 'he a(ency rather than the insurers it re resents ,$ %ymbols use to increase recognition of the insurers represente '$ (ttention to the prices of the policies offere !"'-$ Insurers using irect response marketing attract new customers through all of the following metho s* #7C#0T) 1. -eco(nition of local a(ents &$ #xtensi+e a +ertisement ,$ #stablishe customer bases '$ /or -of-mouth a +ertising !".#$ /hen an insurance company appoints an insurance agent to ser+e as its representati+e* what specifies the scope of authority gi+en to the agent in this relationship1 "$ Implie authority &$ Bin ing authority ,$ ( unilateral contract !. "n a(ency contract

!"4-$ Claire is a pro ucer who is self-employe an represents a group of relate insurers calle the =nite Insurance Eroup$ %he has no right of ownership of the expiration list of insure s$ In what istribution system oes she operate1 1. *$clusive a(ency &$ In epen ent agency ,$ 2irect writing '$ 2irect response !"6#$ 0ro ucers are not allowe to pay a portion of the premiums for a policy or gi+e any commission to a policyhol er$ (ctions of this type are calle "$ Tie-in sales &$ Contingent commissions ,$ -isrepresentation of i+i en s !. -ebatin( !"9-$ (ll of the following are true about the insurance istribution system #7C#0T) "$ -anaging general agencies appoint an super+ise in epen ent agents for insurers that operate in the system &$ Insurance brokers are in epen ent business owners or firms that place insurance by representing the customers* not insurers 3. "n a(ency e$ iration list is the record of olicies that have la sed or been canceled due to overdue re#iu#s '$ The irect response system a +ertises to encourage the potential customers to contact the insurer to purchase insurance !":#$ The presi ent of an insurance company that markets through in epen ent agents is concerne that agents in one geographic area are not moti+ate to seek profitable business$ Gther agents in this geographic area ha+e a better reputation for pro ucing profitable business$ /ithin the insurance company* whose Bob is it to fix this problem1 "$ The pro uction un erwriter?s &$ The staff un erwriter?s ,$ The pro ucer?s !. 'he #ar,etin( re resentative4s !&;#$ (uthority that the insurance company specifically grants to an agent is calle "$ Bin ing authority %. *$ ress authority ,$ Implie authority '$ (pparent authority !&"#$ /hich one of the following in i+i uals represents the insurance purchaser1 "$ (n agent &$ ( solicitor ,$ ( customer ser+ice agent !. " bro,er !&&#$ To obtain a state agent?s license* a person must meet se+eral re<uirements that inclu e which one of the following1 "$ %pen a specifie amount of time as a customer ser+ice representati+e$ &$ Gbtain an agency contract offere by an insurance company$ ,$ (c<uire a bon i entifying the state as the principal$ !. Pass an e$a#ination after co# letin( classroo# study !&,-$ Insurance companies attempt to moti+ate pro ucers to sell the types of business the companies want to ac<uire$ /hich one of the following woul moti+ate pro ucers to sell the esire type of business1 "$ 3e uce commissions if sales goals are not achie+e $

%. ,$ '$

5old sales contests to encoura(e the ty e of sales activity. 0ro+i e a itional staff to help with the processing$ Gffer subscriptions to e ucational ser+ices for the pro ucers$

!&'#$ The managers of an in epen ent agency are hoping to earn contingent commissions from se+eral insurers at the en of the year$ /hat shoul the agency managers attempt to o to earn contingent commissions1 "$ 3e uce the number of homeowners policies written for houses in urban areas compare to the homeowners policies written for houses in rural areas$ &$ 3e uce the number of employees re<uire to ac<uire an ser+ice the policies in the agency$ 3. Increase the re#iu# volu#e and rofitability level of the a(ency4s business with those insurers. '$ Increase the le+el of customer ser+ice pro+i e to policyhol ers an claimants$ !&.5$ 3ipTi e Insurance Company has forme an alliance with Local Bank an =-Betcha =se Car %ales$ /hen =-Betcha sells a car* the sales person irects the customer to Local Bank for the loan an 3ipTi e for insurance$ If the customer transacts business with all three organi@ations* the customer will recei+e re uce auto rates$ /oul this be consi ere to be an unfair tra e practice by 3ipTi e1 1. 6es, it is an unfair trade ractice to tie the urchase of insurance to so#e other sale or financial arran(e#ent. &$ Kes* offering a preferre rate to a customer as escribe is consi ere to be rebating$ ,$ Io* businesses interact in this way as a regular practice$ '$ Io* this is not ecepti+e or unfair to the applicants or insure s$ !&4#$ Lo+e* %tack* an >ones Insurance sells insurance co+erage for small businesses$ This office of insurance pro ucers represents only one insurer* an the pro ucers work on commission with bonuses$ Lo+e* %tack* an >ones Insurance oes not own the expiration list for the policies it sells an ser+ices$ /hat type of marketing Cor istributionD system oes Lo+e* %tack* an >ones represent1 "$ In epen ent agency system %. *$clusive a(ency syste# ,$ 2irect writing system '$ 2irect response system !&6-$ (n insurance agent wrote insurance policies for a number of military ser+ice +eterans who were satisfie with the co+erage they recei+e an the price they pai for the co+erage$ %ubse<uently* the agent ran an a in a local newspaper stating that the insurance policies offere by his agency are QHeteran (ppro+e Insurance$Q /hy woul this be consi ere misrepresentation or false a +ertising1 "$ The statement misrepresents the benefits* con itions* or terms of the insurance policies$ &$ 'he state#ent uses a na#e or title for the insurance olicies that #isre resents the true nature of the olicies$ ,$ The statement in icates that sales are ties to other benefits$ '$ The statement makes an illegal reference to a go+ernment entity in an insurance sale$ Underwriting Importance of =n erwriting Line an %taff un erwriters - Basic =n erwriting (cti+ities 3isk selection - 0ricing the co+erage Types of rating 2etermining terms an con itions for policy - 3einsurance ecision %teps in un erwriting process Types of 5a@ar s Legal consi erations -onitoring =n erwriting process !"#$ /hich of the following reasons are true with respect to selection of insure by the insurance companies) "$ %tate laws limit the companies in pro+i ing insurance abo+e a fixe percentage of population to a+oi monopoly$ %. InsurerDs ability to rovide insurance is li#ited by its ca acity to write new olicies ,$ InsurerJs o not pro+i e insurance to specific class of people forming lower strata of the society

'$

Insurer try to use a +erse selection to pro+i e insurance

!&-$ Insurers attempt to protect their a+ailable capacity in following ways except) "$ -aintaining a sprea of risks &$ Gptimi@ing use of a+ailable resources 3. )sin( (uarantee funds '$ (rranging reinsurance !,#$ The un erwriting pricing obBecti+e is to charge a premium that is commensurate with the) 1. *$ osure &$ 0rofitability ,$ %tate laws '$ Insure Js capacity !'#$ (n insurance limit of M&.;*;;; is charge at a rate of M;$'; per M";; of insurance will gi+e a premium of) "$ 4&.; %. 1::: ,$ ";;;;; '$ ";;;; !.-$ -erit 3ating 0lans are) "$ ( type of class rates that gi+es iscounts to e ucate people &$ ( type of rate to e+elop a premium for a uni<ue exposure for which there is no establishe rate 3. .odify class rates to reflect loss characteristics of a articular insured '$ =se to assign a specific insurance rate that reflects the uni<ue characteristics of an insure or the insure Js property !4#$ Class rates are) 1. " ly to all insureds in the sa#e ratin( cate(ory. &$ ( type of rate to e+elop a premium for a uni<ue exposure for which there is no establishe rate ,$ -o ify class rates to reflect loss characteristics of a particular insure '$ =se to assign a specific insurance rate that reflects the uni<ue characteristics of an insure or the insure Js property !6#$ In i+i ual rates are) "$ (pply to all insure s in the same rating category$ &$ ( type of rate to e+elop a premium for a uni<ue exposure for which there is no establishe rate ,$ -o ify class rates to reflect loss characteristics of a particular insure !. )sed to assi(n a s ecific insurance rate that reflects the uni3ue characteristics of an insured or the insuredDs ro erty !9#$ >u gement rates are) "$ (pply to all insure s in the same rating category$ %. " ty e of rate to develo a re#iu# for a uni3ue e$ osure for which there is no established rate ,$ -o ify class rates to reflect loss characteristics of a particular insure '$ =se to assign a specific insurance rate that reflects the uni<ue characteristics of an insure or the insure Js property !:-$ Insurance %er+ices Gffice CI%GD an (merican (ssociation of Insurance %er+ices C((I%D) "$ (re known as rating bureaus an they calculate an file loss cost that form the basis of rates e+elope by in i+i ual insurers &$ (re known as rating bureaus an they calculate rates an prepare rate filings for their members ,$ (re known as insurance a +isory organi@ation an they calculate rates an prepare rate filings for their members

!.

"re ,nown as insurance advisory or(ani0ation and they file loss cost that for# the basis of rates develo ed by individual insurers

!";-$ Gne of the responsibilities of un erwriting management is elegating un erwriting authority$ (ll the following statements are true about elegating un erwriting authority except) "$ It limits the types of ecisions an un erwriter can make without recei+ing appro+al from someone at higher le+el &$ /ith some insurers un erwriting authority is highly ecentrali@e 3. "(ents are never (iven underwritin( authorities. '$ %ome insurers ha+e highly centrali@e authority with many or all final un erwriting ecisions are ma e in home office !""-$ (ll the following are true about e+aluation of ha@ar except) "$ Insure has a weak financial con ition an is susceptible to -oral ha@ar &$ #+i ence of -orale ha@ar can be foun in personality traits of insure s ,$ Interpretation of policy language by courts in a way not inten e by insurer is a part of legal ha@ar R !. "n office buildin( located ne$t to a restaurant without ade3uate fire rotection is a e$ osure to attitudinal ha0ard !"&#$ /hy woul an un erwriter mo ify the rate charge for the co+erage pro+i e when e+aluating an application for insurance1 "$ Because treaty reinsurance in una+ailable for the exposures in icate &$ To a ress the moral ha@ar s the un erwriter i entifie uring in+estigation 3. 'o better #atch the rate to the characteristics of the ris, '$ Because the applicant is not acceptable for co+erage !",#$ /hy o states re<uire that insurers notify the insure before a policy is to be cancele or nonrenewe 1 "$ To pro+i e the state an opportunity to in+estigate the reason for the cancellation or nonrenewal %. 'o (ive the olicyholder an o ortunity to re lace the covera(e ,$ To eliminate the possibility of an insurer canceling all policies co+ering a category of business or in a geographic area '$ To re uce the opportunity for an insurer to re line !"'#$ (s insurers select insure s they attempt to a+oi a +erse selection$ ( +erse selection occurs when "$ (pplicants purchase insurance with the intent of submitting frau ulent claims$ &$ (n insurer oes not select a cross-section of applicants that range from low to high probability of loss$ ,$ Competitors select the better applications* lea+ing the remain er to the insurer$ !. Peo le with the (reatest robability of loss are the ones #ost li,ely to urchase insurance. !".#$ 5ow o un erwriting gui elines help an insurer achie+e its obBecti+es1 "$ By establishing the criteria re<uire for treaty reinsurance to apply &$ By creating a channel for communication for the insurer?s +ision* mission* an obBecti+es 3. By rovidin( a unifor# set of rules that (uide underwriters toward consistent decisions '$ By maintaining a consistently applie set of beha+ioral measurements against which an in i+i ual?s performance will be measure !"4-$ Insurers screen applicants to etermine which ones they esire to insure$ If insurers o not properly select policyhol ers "$ Their profits will be excessi+e in comparison to the premiums collecte $ %. So#e insureds #i(ht be allowed to urchase insurance at rices that do not ade3uately reflect their loss e$ osures. ,$ They will ha+e an excessi+e number of new policies* an their expenses relate to writing the new policies will be excessi+e$ '$ The entire group of policyhol ers written will be substan ar $

!"6#$ 5ow o states prohibit unfair iscrimination by insurers1 "$ By re+iewing each policy cancellation or nonrenewal an the Bustification for the insurer?s action &$ By maintaining a channel for policyhol er complaints 3. By identifyin( rohibited unfair trade ractices in state insurance laws '$ By examining insurers? mission statements an obBecti+es !"9-$ 5ow oes an expert system assist un erwriters in the un erwriting process1 "$ It automatically gathers the necessary information to un erwrite an application$ %. It ensures that no necessary infor#ation is overloo,ed. ,$ It pro+i es management reports to ensure un erwriters? compliance with gui elines$ '$ It monitors the results of the ecisions ma e an suggests changes in un erwriting gui elines !":#$ The amount of business an insurer is able to write base on a comparison of the insurer?s written premium to the si@e of its policyhol ers? surplus is 1. Ca acity &$ ( +erse selection ,$ 3isk selection '$ Combine ratio !&;-$ Gne of the roles of un erwriting management is arranging reinsurance$ #xplain how treaty reinsurance helps an insurer meet its obBecti+es$ 1. 'he reinsurer auto#atically assu#es a ortion of all of the ri#ary insurer4s losses that are eli(ible under the treaty. &$ The reinsurer elegates un erwriting authority to the primary insurer* helping the primary insurer achie+e consistent results$ ,$ The reinsurer monitors the results of the primary insurer?s un erwriting gui elines to assure compliance$ '$ The reinsurer assumes a portion of the losses from all policies that ha+e been specifically liste an insure un er the treaty$ !&"#$ (ll of the following are sources of information un erwriters use as they gather information for un erwriting #7C#0T) "$ 0ro ucers &$ Eo+ernment recor s ,$ Inspection reports !. *ducational records !&&-$ There are +arious types of mo ifications an un erwriter might re<uire to make an applicant acceptable* inclu ing co+erage mo ification$ /hich one of the following is an example of a co+erage mo ification1 ( homeowners applicant has ha three minor lightning losses$ The un erwriter accepts the application 1. But re3uires the a licant to increase the deductible &$ But re<uires the applicant to install lightning ro s ,$ But increases the premium by placing the co+erage in a substan ar rating class '$ But notes that the policy will be nonrenewe if the insure submits a claim in the next year Ehost/riter 0ublishing Company publishes romance no+els$ They purchase manuscripts from freelance no+elists* e it that material* print the texts* an bin the books$ Ehost/riter owns the buil ing where its employees perform all of its publication operations$ Ehost/riter uses book-bin ing glue that is flammable an toxic* so employees try to take care in opening win ows when they are in the bin ing step of the operation$ Ehost/riter has been unwilling to install a sprinkler system or appropriate +entilation system ue to the associate costs$ %o far* opening the win ows has been effecti+e* an none of the employees has become ill from the fumes$

Ehost/riter?s employees ump any unuse book-bin ing glue in a .;-gallon rum behin the buil ing$ The #n+ironmental 0rotection (gency etermine that the rum has been leaking for years* an the toxins in the glue ha+e run into the groun $ They ha+e or ere Ehost/riter to perform a clean-up$ Ehost/riter submitte a claim to its insurer for the expenses associate with the clean-up$ 3ecent court ecisions ha+e ero e the original exclusions in the insurer?s policy language that woul eliminate pollution losses$ The insurer will be re<uire to pay for the pollution loss$ In the last year* profits ha+e been own for Ehost/riter$ Gne e+ening* the fire epartment respon e to a fire reporte at Ehost/riter?s buil ing$ They were able to extinguish the three small fires that starte simultaneously in the buil ing$ Ehost/riter?s owners sai they ha recei+e anonymous threats that someone woul Qburn them own$Q Ehost/riter?s owners were suspecte of in+ol+ement* but nothing coul be pro+en$ !&,-$ /hich one of the following represents a physical ha@ar in the Ehost/riter 0ublishing case1 "$ The suspicious fire &$ The ownership of the buil ing 3. 'he boo,/bindin( (lue '$ The .;-gallon rum !&'-$ /hich one of the following represents a morale ha@ar in the Ehost/riter 0ublishing case1 1. Failure to install s rin,lers and ventilation &$ =se of the glue ,$ The suspicious fire '$ The lack of profits !&.-$ /hich one of the following represents a legal ha@ar in the Ehost/riter 0ublishing case1 "$ The treatment of the employees &$ The toxic pollution ,$ The inability to pro+i e Ehost/riter?s in+ol+ement in the fire !. 'he court inter retation of the olicy lan(ua(e The -axfiel -utual Insurance Company writes only homeowners insurance for homes that range in +alue from M";;*;;; to M&;;*;;; in one state in the central plains of the =nite %tates$ -axfiel has written insurance profitably for 6. years$ This long perio of profitability has e+elope a consi erable a+ailable capacity for -axfiel -utual$ 5owe+er* in the last fi+e years -axfiel ?s executi+e staff has become increasingly concerne about the increasing number of torna o losses -axfiel ?s policyhol ers ha+e experience $ Losses pai uring these years ha+e been higher than any other perio in -axfiel ?s history$ In a ition* competitors ha+e aggressi+ely markete in the state an -axfiel has lost policyhol ers to the competitors for lower premiums$ !&4-$ -axfiel is consi ering expan ing its policy writings to other types of insurance an ifferent geographic areas$ 5ow coul this acti+ity help -axfiel protect its a+ailable capacity1 "$ By meeting regulatory re<uirements to pro+i e co+erage to a wi e range of policyhol ers* the insurer will be less likely to engage in unfair iscrimination$ %. By reducin( the chances that the co# any4s overall results will be affected by a lar(e nu#ber of losses fro# one loss event. ,$ The insurer will re uce its reinsurance premiums by re ucing its exposure to any one catastrophic e+ent$ '$ 2i+ersification will allow the insurer to create a more +isible image in the market* attracting more potential applicants from which it can select$ !&6-$ /hich one of the following is an example of how -axfiel can optimi@e its a+ailable resources in or er to protect its a+ailable capacity1 1. .a$field chooses not to solicit a lications for watercraft insurance. &$ -axfiel expan s its policy writing in three new types of business$

,$ '$

-axfiel ?s un erwriters take classes to expan their un erstan ing of claim a Bustment$ -axfiel ?s management staff takes classes to learn how to pro+i e reasonable accommo ations for physically challenge employees$

!&9-$ -axfiel -utual?s executi+e staff is consi ering lowering its stan ar s in the selection of policyhol ers$ In this way* -axfiel can maintain the same rate le+el* but a more policyhol ers that ha+e slightly higher exposures to loss$ /hat is the likely result of this ecision1 "$ -axfiel might be accuse of unfair iscrimination$ &$ -axfiel must re uce the amount of reinsurance it purchases$ ,$ -axfiel must sprea its risks at the same time to be profitable$ !. .a$field4s re#iu#s will not be co##ensurate with the e$ osures. !&:-$ /hich of the following types of insurance rates woul be appropriate for the type of insurance an loss exposures that -axfiel -utual writes1 "$ -erit rates &$ In i+i ual rates 3. Class rates '$ >u gement rates Claims 0arties in+ol+e in a claim - Types of claims Iotice of loss - Types of claims representati+es 3oles an responsibilities %teps in claim han ling Eeneral amages special amages puniti+e amages 8actors affecting settlement amount - (ctual cash +alue 3eplacement cost (gree +alue %ubrogation %al+age Loss 3eser+es =nfair claim practices !"#$ In case of liability claims* the claimant is "$ 8irst party &$ %econ party 3. 'hird Party '$ ( Buster !&#$ ( thir party refers to "$ Insure &$ Insureer 3. Person or business that is not a arty to the insurance contract but who #i(ht assert a clai# a(ainst the insured '$ 0erson responsible for in+estigating* e+aluating an settling claims !,#$ Insurance professional generally use term Claimant to refer to "$ I party Insure &$ II party Insurer 3. III arty '$ Claim representati+e !'#$ (ll the following are responsibilities of the claim representati+e except) "$ 3espon promptly to submitte claims &$ 0roperly e+aluate the claims ,$ Treat the parties fairly !. Pay the clai# !.-$ 3eser+ation of rights letter is a 1. 2otice sent by the insurer to an insured that the insurer is roceedin( with the investi(ation of a clai# but that the insurer retains the ri(ht to deny covera(e later &$ Iotice sent by the insure to an insurer that the insure is willing to help insurer in procee ing with the in+estigation of a claim but that the insure retains the right to eny this support later

,$ '$

Iotice sent by the insurer to an insure that the insurer is not procee ing with the in+estigation of a claim is enying the co+erage Iotice sent by the insurer to an insure that the insurer is procee ing with the in+estigation of a claim but that the court retains the right to eny co+erage later

!4#$ (ll of the following are reasons of using an in epen ent a Busters by an insurer except "$ Iumber of policyhol ers in a particular area is +ery less &$ Claim in+ol+es an uni<ue or complex situation ,$ %taff claim representati+e oes not ha+e sufficient expertise !. Law #andate an inde endent adFuster to be included in clai#s rocess !6#$ 2raft authority is authority expressi+ely gi+en by the insurer to "$ In epen ent a Buster to collect claim information an pro+i e it to insurer %. "(ents to settle and ay certain of clai#s by writin( a clai# draft u to certain li#it ,$ %taff claim representati+e '$ 8iel claim representati+e !9#$ ( claim representati+e representing an insure is calle as "$ (gent &$ In epen ent a Buster 3. Public adFuster '$ T0( !:#$ ( claim for the property of some one other than insure is a type of "$ 0roperty Insurance Claim %. Liability Clai# ,$ -e ical Claim '$ In emnity Claim amage ue to insure Js allege negligence

!";#$ ( house which was un er mortgage C.;PD pai was amage ue to fire$ -ortgagee "$ 5as no right to claim as he is not an insure on insurance policy &$ 5as a right to collect total* amount from the insurer 3. 5as a ri(ht to collect a#ount to the e$tent of outstandin( #ort(a(e since he has an insurable interest in real ro erty !""-$ Bur en of proof for the perils co+ere un er policy lies 1. In so#e cases with insureds and other ti#es at insurer &$ (lways with insure ,$ (lways with insurer '$ Ieither with insurer nor with insure !"&#$ Cost to replace the property minus an allowance for the propertyJs epreciation is known as "$ 3eplacement Cost %. "CG ,$ (gree Halue '$ 2epreciation Cost -etho !",-$ 0roperty such as fine arts* anti<ues an collection are commonly +alue by "$ 3eplacement Cost &$ (CH 3. "(reed Galue '$ 2epreciation Cost -etho

!"'-$ (n auto was amage while ri+ing on an icy roa in night ue to fault of ri+er$ Its (CH at the time of acci ent was calculate as M";;;; an anticipate sal+age +alue as M&;;;$ 3epair cost is anticipate as M6;;;$ /hat will be the action of insurer) 1. Pay insured the re air cost &$ 0ay insure the (CH an use sal+age rights ,$ 0ay insure the (CH an use the subrogation rights '$ 0ay insure the repair cost an use sal+age rights !".#$ 2amage awar e by court for the purpose of punishing the wrong oer an to eter others from committing similar wrongs is known as) "$ Eeneral 2amages &$ %pecial 2amages 3. Punitive &a#a(es '$ Legal 2amages !"4#$ /hat is the maBor purpose of claim han ling1 "$ To etermine whether co+erage exists &$ To obtain a e<uate information 3. 'o satisfy the insurance co# any4s obli(ation under the olicy '$ To respon promptly to claimant re<uests !"6#$ /hat is the purpose of =nfair Claim 0ractices laws1 "$ To Bustify legal claim practices &$ To etermine the +alue of the loss ,$ To punish insurers !. 'o s ecify ille(al clai# ractices !"9#$ %ubrogation is the insurer?s right to 1. -ecover its clai# ay#ent fro# the arty res onsible &$ 2rop a claim in exchange for an agree amount of money ,$ #stimate the +alue of the amage property '$ Transfer co+erage to a thir party !":#$ Eranting raft authority to agents will generally increase "$ Claim settlement expenses &$ Time to settle claims ,$ Cost of insurance !. Custo#er satisfaction !&;-$ /hat is the largest an most important liability of property an liability insurers1 "$ (c<uisition costs &$ ( ministration costs 3. Loss reserves '$ =nearne premium reser+es !&"-$ /hat is an example of general amages1 "$ 5ospital expenses &$ Lost wages ,$ 0rescriptions !. &isfi(ure#ent !&&#$ (ll of the following can escribe an in epen ent a Buster* #7C#0T) "$ %elf-employe &$ Contracte by an insurer 3. *# loyee of an insurer '$ #mployee of an a Busting firm

!&,#$ Eenerally* an insi e claim representati+e "$ -eets with parties in+ol+e with the loss %. 5andles clai#s by hone or #ail fro# the insurer4s office ,$ Hisits the scene of the loss to in+estigate amages '$ Gffers claim settlement ser+ice for a fee to insurers !&'-$ (BC Company pays for all its property losses up to M, million an insures losses o+er M, million$ /hat is this arrangement calle 1 "$ Coinsurance &$ 3einsurance 3. Self/insurance '$ =mbrella insurance !&.#$ %ue?s homeowner?s policy co+ers her camera against theft$ /hile on +acation* %ue?s camera is stolen$ In which step in the claim settlement process woul the claim representati+e etermine the camera?s replacement cost1 1. Galuation &$ %ettlement ,$ Iegotiation '$ In+estigation !&4-$ ( collision amages %ue?s car$ The car?s actual cash +alue is M&*;;;$ 3epair costs are estimate at M"*9;;$ %al+age +alue is estimate at M.;;$ /hat is the insurer?s loss payment1 "$ M"*.;; &$ M"*9;; 3. 9%,::: '$ M&*,;; !&6#$ >ohn has an unen orse homeowner?s policy$ >ohn?s two year ol bicycle is stolen$ The bicycle?s purchase price was M9;;* an epreciation is estimate at M'.;$ /hat is the bicycle?s actual cash +alue1 "$ M&&. %. 93B: ,$ M'.; '$ M9;; !&9-$ -ary?s car colli es with two other cars* an se+eral people are inBure $ The acci ent occurs near her insurer?s branch office location$ /hat type claim representati+e will -ary?s insurer generally use to han le this claim1 "$ In epen ent a Buster &$ 0ublic a Buster ,$ Insi e claim representati+e !. 1utside clai# re resentative &:5$ >im notifies (BC Insurer of an acci ent with an (BC insure in a state in which (BC oes not o business$ /hat type of claim staff will (BC Insurer generally use to in+estigate this claim1 "$ Insi e claim representati+e %. 1utside clai# re resentative ,$ In epen ent a Buster '$ In epen ent agent !,;#$ ( .;*;;; s<uare foot buil ing of stan ar construction is totally estroye by fire$ The construction cost for me ium <uality in that location is M6; per s<uare foot$ /hat is the best estimate of the buil ing?s replacement cost1 "$ M&*;;;*;;; %. 93,B::,:::

,$ '$

M'*;;;*;;; M.*.;;*;;;

!,"-$ ( liability loss has the following amages) -e ical expenses M";*;;; 2amages for isfigurement M.;*;;; 2amages for pain an suffering M";;*;;; /hat is the amount of general amages1 "$ M4;*;;; &$ M"";*;;; 3. 91B:,::: '$ M"4;*;;; !,&-$ ( liability loss has the following amages) -e ical expenses 2amages for isfigurement 2amages for pain an suffering /hat is the amount of special amages1 1. 91:,::: &$ M.;*;;; ,$ M";;*;;; '$ M"4;*;;; !,,-$ 7KS Company has establishe a self-insurance plan to treat its loss exposures$ Gther than its internal staff* what resources woul 7KS Company generally use to settle claims1 "$ In epen ent a Busters &$ 0ublic a Busters 3. 'hird arty ad#inistrators '$ Gutsi e claim representati+es Insurance Contracts #lements of a contract Characteristics of insurance contract %ections in policy ocument %elfcontaine policies -o ular policies %tan ar forms Hs -anuscript policies !"-$ Business personal property is known as what1 "$ #state &$ 8un 3. Contents !&#$ #n orsement when attache to the original insurance policy becomes what of the following1 "$ (n illegal part of the contract %. " le(al art of the contract ,$ ( uplicate contract !,#$ /hat is the process calle by which an insurance company seeks reimbursement from another company or person for a claim it has alrea y pai 1 "$ Copay &$ Ioncontributory 3. Subro(ation !'-$ ( policy iffers from a bin er as M";*;;; M.;*;;; M";;*;;;

"$ %. ,$ '$

0olicy is a incomplete oral contract of insurance while bin er is a complete contract of insurance an can be either oral or written Policy is a co# lete written contract of insurance while binder is a te# orary contract of insurance and can be either oral or written 0olicy is a complete written or oral contract of insurance while bin er is a temporary written contract of insurance 0olicy is a complete oral contract of insurance while bin er is a temporary contract of insurance an can be either oral or written

!.#$ In some states for auto insurance purposes* following in i+i ual is consi ere as a legally competent party "$ Insane or otherwise mentally incompetent &$ =n er the influence of rugs or alcohol 3. .inors H ersons not of le(al a(eI !4#$ (n intentional failure to isclose a material fact is known as) "$ -isrepresentation %. Conceal#ent ,$ Consi eration '$ 0rincipal of In emnity !6#$ ( false statement of a material fact is known as 1. .isre resentation &$ Concealment ,$ Consi eration '$ 0rincipal of In emnity !9-$ Insurance policies are consi ere to be contracts of a hesion because "$ Both the insure an insurer are suppose to a here to contract once policy is issue %. Insured #ust adhere to the a(ree#ent as written by the insurer ,$ Insurer must a here to the agreement as written by the insure '$ Court has to a here to contract while gi+ing Bu gements !:-$ (n acci ent insurance policy specifies to pay M.;;; in case of person loosing hearing ability of one ear$ %uppose the insure gets hurt in an acci ent an his total expenses amount to M&;;; an he loses his hearing capability from left ear* insurance company will pay "$ M&;;; as the insurance contract is an contract of in emnity &$ M&;;; as the insurance contract was as +alue policy ,$ M.;;; as the insurance contract is an contract of in emnity !. 9B::: as the insurance contract was as valued olicy !";#$ /here will you fin the name* location an a resses of the insure an insurer in a policy1 "$ 2efinition 0age &$ Insuring (greement 3. &eclaration Pa(e '$ Con itions !""#$ Inception an #xpiration ate of the policy will appear in "$ 2efinition 0age &$ Insuring (greement 3. &eclaration Pa(e '$ -iscellaneous 0ro+isions !"&#$ 0olicy limits an premium amounts are generally shown in "$ 2efinition 0age &$ Insuring (greement

3. '$

&eclaration Pa(e Con itions

!",-$ ( mutual insurance company is likely to escribe the right of each insure to +ote in the election of the boar of irectors in the following section "$ 2efinition 0age &$ Insuring (greement ,$ 2eclaration 0age !. .iscellaneous Provisions !"'#$ Termination of a policy by either the insurer or the insure "$ Changes &$ #n orsement 3. Cancellation '$ 3enewal uring the policy perio is known as

!".#$ %hort rate refun is use to pay back the premium to insure when "$ Insurer cancels the policy with an a +ance notice %. Insured cancels the olicy ,$ Court or ers to cancel the policy '$ Insurer cancels the policy without an a +ance notice !"4-$ ( liberali@ation clause is a policy con ition that pro+i es that "$ If a policy form is broa ene at accepte a itional premium by maBority of insure * the broa ene co+erage automatically applies to all existing policies of the same type$ %. If a olicy for# is broadened at no additional re#iu#, the broadened covera(e auto#atically a lies to all e$istin( olicies of the sa#e ty e. ,$ #+en if a policy form is broa ene at no a itional premium* the broa ene co+erage oes not automatically applies to all existing policies of the same type$ '$ If a policy form is broa ene at no a itional premium* the broa ene co+erage automatically applies to all future policies of the same type$ !"6#$ Gther than common policy eclarations* a mo ular Commercial 0ackage 0olicy CC00D must contain "$ Common policy exclusions %. Co##on olicy conditions ,$ Commercial property con itions '$ Commercial liability eclarations !"9#$ In an insurance policy* what is the purpose of the insuring agreement1 "$ #stablishes proce ures for carrying out the terms of the contract %. .a,es a broad ro#ise to rovide covera(e ,$ #xplains the specific meanings of terms with respect to the co+erages '$ #liminates co+erage for specifie exposures !":#$ /hat statement best illustrates a +iolation of utmost goo faith1 "$ The insurer makes a loss payment less than the amount of a claim$ &$ The insurer correctly enies co+erage for a loss$ ,$ The insure oes not report a co+ere loss to the insurer$ !. 'he insured intentionally conceals #aterial facts fro# the insurer. !&;#$ To reinforce the principle of in emnity* what pro+ision is re<uire in insurance policies1 "$ Coinsurance &$ Cancellation ,$ 0roof of loss !. 1ther insurance

!&"#$ /hen an insure transfers his or her rights in a policy to a thir party* this is calle "$ %ettlement &$ Liberali@ation 3. "ssi(n#ent '$ %ubrogation !&&-$ /hat policy con ition oes the insurer use to reco+er some of its expenses an to iscourage insurance buyers from canceling their insurance before the en of the policy perio 1 "$ Cancellation pro+ision &$ Liberali@ation clause ,$ 0ro rata refun !. Short rate refund !&,-$ (ll of the following items are generally locate on the eclarations page of an insurance policy* #7C#0T) "$ 2e uctibles &$ 0remiums 3. *$clusions '$ #n orsements !&'#$ (n insurance policy is a contract of a hesion written by the "$ I(IC &$ I3I% 3. Insurer '$ (ctuary !&.#$ /ith stan ar forms* the insurer can generally expect all of the following* #7C#0T) "$ Consistent company operations %. Increased e$ ense for olicy issuance ,$ Consistent court interpretations '$ 2ecrease claim settlement isputes !&4-$ (n insurer will make a loss payment if an insure loss occurs an if the insure performs certain uties$ This illustrates that an insurance policy is a "$ Contract of a hesion &$ Contract of in emnity 3. Conditional contract '$ 0ersonal contract !&6#$ In some cases* the ultimate loss payment can excee the policy limit shown in the eclarations because the loss payment can inclu e costs for all of the following* #7C#0T) "$ 2efense costs &$ 2ebris remo+al ,$ ( itional perils !. "dditional covera(es !&9#$ /hat statement best escribes subrogation in an insurance policy1 "$ The insurer agrees* in the e+ent of a co+ere loss* to pay an amount irectly relate to the amount of the loss$ %. 'he insurer ta,es over the insured4s ri(ht to collect da#a(es fro# a third arty. ,$ The insure a heres to the agreement as written by the insurer$ '$ The insure transfers its rights or interest in a policy to a thir party$ !&:-$ -ark?s car colli es with 0at?s car$ 0at belie+es that she will Qmake out greatQ because both her insurance an -ark?s insurance will pay 0at for her car?s amage$ If both insurers ma e this loss payment* what principle of insurance woul this +iolate1

"$ &$ 3. '$

( hesion =tmost goo faith Inde#nity (ssignment

!,;#$ >oe owns a buil ing co+ere by a property insurance policy$ >oe intentionally sets fire to this buil ing* an it is estroye $ =sing only this information* what statement best escribes why >oe?s property insurance policy is unenforceable for this loss1 "$ >oe acte un er emotional uress$ &$ >oe acte irrationally$ 3. +oe acted in violation of ublic olicy. '$ >oe acte un er the influence of alcohol$ !,"-$ >im cancele his auto policy ,". ays after the inception ate$ The one year premium is M"*;:.$ (ssuming that a year is ,4. ays* what is >im?s pro rata premium refun 1 "$ M.; %. 91B: ,$ M69; '$ M:'. !,&-$ Bill ri+es through a stop sign an colli es with >eff?s car$ The collision cause physical amage to both cars but no inBuries$ Bill an >eff report the acci ent to their insurers$ #ach recei+es a loss payment from his respecti+e insurer* an they ha+e their cars repaire $ /hat is the next step in the claim settlement process1 "$ Bill?s insurer will attempt to reco+er for the loss from >eff?s insurer$ %. +eff4s insurer will atte# t to recover for the loss fro# Bill4s insurer. ,$ Bill?s insurer will bring a lawsuit against >eff?s insurer$ '$ >eff?s insurer will bring a lawsuit against Bill?s insurer$ !,,#$ Ereen Company has commercial property insurance with (BC Insurer$ The policy term is "L" to "&L,"$ (BC Insurer has notifie Ereen that it will stop the co+erage on 4L,;$ /hat policy con ition oes (BC?s notification represent1 "$ Changes %. Cancellation ,$ (ssignment '$ %ubrogation !,'#$ Brown Company?s 0olicy inclu es a liberali@ation clause$ Brown?s insurer intro uces a policy change that broa ens co+erage at no a itional premium$ 5ow will this change apply to Brown?s existing policy1 "$ The broa ene co+erage oes not apply to Brown Company?s policy$ %. 'he broadened covera(e auto#atically a lies to Brown Co# any4s olicy. ,$ The broa ene co+erage will apply to Brown Company?s policy with an en orsement$ '$ The broa ene co+erage will apply to Brown Company?s new policies as they are issue $ !,.#$ Beth has auto physical amage co+erage with a M.;; e uctible$ ( collision causes M"*9;; amage to Beth?s car$ 5ow much is the loss payment from Beth?s insurer1 "$ M.;; %. 91,3:: ,$ M"*9;; '$ M&*,;; Property Loss Exposures Types of property Conse<uence of 0roperty Losses 0eril - Iame perils Hs Gpen perils 5a@ar s 0arties affecte by 0roperty Loss - Basic 8orm Broa form %pecial 8orm

!"#$ 8or insurance purposes* personal property inclu es "$ Buil ings &$ -otor +ehicles an trailers 3. Furniture and fi$tures '$ Boiler an machinery !&-$ Bull o@ers* roa gra ers an forklift fall un er which of the following category of motor +ehicles "$ (uto %. .obile *3ui #ent ,$ 3ecreational Hehicles '$ Transport Hehicle !,-$ 0aint cans an oile rugs can be "$ Calle as perils or ha@ar s &$ Calle as perils because it can be a cause of loss but not ha@ar 3. Called as ha0ard as they increase the li,elihood of a loss by fire eril but are not erils by the#selves '$ Ieither a peril nor a ha@ar !'-$ (n anti<ue painting inure un er special form co+erage Cexclu ing floo lossD was lost uring a floo $ #ither floo or theft uring floo can be the reason for missing painting$ "$ Insurer will not pay for painting until insure pro+es that painting was stolen %. Insurer will have to ay until insurer roves that aintin( was swe t away by flood ,$ Insurer will not pay for painting since floo loss is exclu e '$ Insurer will ha+e to pay without any party pro+ing the peril !.#$ (ll the following are terms use by the insurance professionals to escribe the co+erage pro+i e by all-risks policies except) "$ (cci ental irect physical loss %. 2a#ed erils ,$ Gpen perils '$ %pecial form co+erage !4-$ 0erson or business that hol s the property of others for some specific purpose is known as 1. Bailee &$ -ortgagee ,$ -ortgagor '$ %ecure cre itor !6#$ 8loaters are policies "$ That o not ha+e a fixe co+erage limits an +ery on monthly basis %. 'hat are desi(ned to cover ro erty that #oves fro# location to location ,$ That allow change in co+ere property on perio ical basis if the total ollar +alue remains same '$ That allow premium to be eferre for a specific perio of time !9#$ 3egar ing co+erage pro+ision for money "$ Commercial property insurance usually contain limitation on amount while homeowners policies usually ha+e a exclusion %. Co##ercial ro erty insurance usually contain e$clusions while ho#eowners olicies usually have a li#itation on a#ount ,$ Both type of policies usually ha+e exclusion '$ Both type of policies usually ha+e limitation on amount !:#$ 0ersonal an commercial property insurance policies on buil ings an personal property that pro+i es co+erage for approximately a o@en name perils is known as 1. Basic for# covera(e

&$ ,$ '$

Broa form co+erage %pecial form co+erage Common form co+erage

!";#$ 0ersonal an commercial property insurance policies on buil ings an personal property that co+ers all causes of loss that are not specifically exclu e is known as "$ Basic form co+erage &$ Broa form co+erage 3. S ecial for# covera(e '$ Common form co+erage !""-$ ( property co+ere only for fire peril was amage by the firefighters while spraying water to control a fire$ Insurer will "$ Iot pay for the amage as water is not a co+ere peril %. Pay for the da#a(e thou(h water is not a covered eril but fire was the ro$i#ate cause ,$ Iot pay for the amage as firefighters negligence cause the amage !"&-$ If the insurance company eci es to cancel a commercial insurance policy* it will sen the notice of cancellation to all the below except) 1. "dditional insured &$ 8irst name insure ,$ -ortgagee '$ Loss payee !",5$ -ortgage clause pro+i es more le+el of protection than a loss payable clause as) "$ Insurer promises to notify mortgagee about cancellation an non renewal but not to loss payee &$ Insurer promises to pay mortgagee the co+ere claims to the extent of its insurable interest but not to loss payee ,$ If insure fails to pay the premium* mortgagee has the right to pay the premium to the insurer but loss payee oes not !. If a clai# is denied because the insured did not co# ly with the ter#s of the olicy, the #ort(a(ee #ay still collect under the olicy but loss ayee can not !"'-$ (n insurance to +alue pro+ision in many property insurance policies which re uces the amount that an insurer will pay for a co+ere loss is known as "$ Haluation 0ro+ision &$ %ettlement Gptions 3. Co/insurance '$ 2e uctibles !".#$ (ll of the following are property that might be expose to losses an that can be co+ere by property insurance* #7C#0T) "$ -otor +ehicles an trailers &$ -oney an securities ,$ %hips an their cargo !. Senti#ental value of heirloo#s !"4-$ ( fire that lea+es its inten e place is 1. " hostile fire &$ ( frien ly fire ,$ ( proximate cause of loss '$ (n ensuing loss !"6-$ /hich one of the following escribes the rights grante to a mortgagee +ersus the rights grante to a loss payee un er a property insurance policy1

"$ &$ ,$ !.

( mortgagee an a loss payee ha+e the same rights$ The two clauses simply ifferentiate loans for real an personal property$ In the e+ent of a loss* the mortgagee is pai first* the name insure secon * an any loss payee is thir $ The terms are use interchangeably epen ing on the insurance contract$ " #ort(a(ee is (ranted so#e ri(hts that are (reater than those (ranted to the na#ed insured; however, the loss ayee has the sa#e ri(hts as the na#ed insured.

!"9#$ (n insurance-to-+alue pro+ision in property insurance policies that re uces the amount the insurer will pay for a co+ere loss that occurs to property that is un erinsure is 1. " coinsurance clause &$ ( e uctible ,$ ( policy limit '$ The replacement +alue !":#$ Catastrophe perils* such as war* are generally exclu e from property insurance policies because the risk is consi ere to be uninsurable since "$ The losses coul be pre+ente $ &$ The premiums re<uire to co+er the exposure woul be unaffor able by most families an businesses$ ,$ -ost families an businesses o not face the loss exposure$ !. 'he funds of the entire insurance industry #i(ht be inade3uate to ay for all the clai#s !&;#$ In property insurance* a name insure "$ Is the secure len erCsD as i entifie on the eclarations page$ &$ Can be many parties base on the contract language an the situation$ 3. Is the olicyholder whose na#e a ears on the declarations a(e. '$ Is the first name appearing on the eclarations page$ !&"-$ /ater amage to a buil ing following a win storm is often not co+ere by a property policy unless "$ The win storm is confirme by the weather ser+ice$ &$ The policy is written with name perils$ ,$ The policy is written with special co+erage$ !. 7ind caused an o enin( in the structure throu(h which water entered. !&&-$ 0roperty insurance policies typically exclu e loss from maintenance perils$ %uch losses are generally uninsurable because "$ Co+ering such losses woul result in a moral ha@ar $ %. 'hey are either certain to occur, over ti#e, or are avoidable. ,$ -aintenance policies are written only through excess an surplus lines$ '$ It is ifficult Cif not impossibleD to i entify the ate of loss an therefore the policy or insurer pro+i ing co+erage$ !&,#$ /hat purpose o insurance-to-+alue pro+isions ser+e in property insurance policies1 "$ They iscourage insurance frau by ensuring that the property is worth the +alue re<ueste in the policy limits$ %. 'hey encoura(e insureds to urchase an a#ount of insurance that is e3ual to, or close to, the value of the covered ro erty. ,$ They establish the maximum amount the insurance company will pay for any loss$ '$ They establish the options a+ailable to the insurance company in settling the loss$ !&'#$ The taking of property from a person by someone who has cause or threatene to cause personal harm is "$ %. ,$ Burglary -obbery Theft

'$

2ishonesty

Lia ility Loss Exposures Legal Liability (cti+ities lea ing to liability loss - 0arties affecte by Liability loss - Torts Contracts %tatutes Types of inBuries an amages Types of payments - Constitutional law- %tatutory lawCommon law - Criminal law Ci+il law !"-$ Laws consisting of a bo y of principles an rules establishe o+ertime by courts on a case-by-case basis is known as) "$ %tatutory Law %. Co##on Law ,$ Constitutional Law '$ Ci+il law !&-$ =n er tort law* an in i+i ual or organisation can face a claim for legal liability on the basis of any of the following except) 1. Breach of 7arranty &$ Iegligence ,$ Intentional Torts '$ (bsolute Liability !,-$ (n employee ri+es a customer to a meeting an negligently causes an acci ent in which the customer is inBure $ In this case "$ #mployer is a tortfeasor an employeeJs responsibility will shift from employee to employer &$ #mployee is a tortfeasor but employeeJs responsibility will shift from employee to employer 3. *# loyee is a tortfeasor and e# loyer has vicarious liability and res onsibility e$tends to include e# loyer '$ #mployer is a tortfeasor an employee has +icarious liability an responsibility exten s to inclu e employer !'-$ ( written or printe untrue statement that amages a personJs reputation is an intentional tort of following type) "$ (ssault &$ Battery 3. Libel '$ %lan er !.-$ (n oral untrue statement that amages a personJs reputation is an intentional tort of following type) "$ (ssault &$ Battery ,$ Libel !. Slander !4-$ The intentional threat of bo ily harm is an intentional tort of following type) 1. "ssault &$ Battery ,$ Libel '$ %lan er !6-$ The unlawful physical contact with another person is an intentional tort of following type) "$ (ssault %. Battery ,$ Libel '$ %lan er

!9-$ ( contractual pro+ision that obligates one party to assume the legal liability of another party is known as "$ /arranty &$ (bsolute Liability ,$ %tatutory Liability !. 5old 5ar#less "(ree#ent !:-$ If >aniffer buys a haircon itioner recommen e an sol by her beautician an the con itioner ruins the hair instea * the beautician coul be hel liable for a "$ %tatutory liability &$ Intentional tort ,$ (bsolute liability !. Breach of contract !";-$ In a liability policy that pro+i es claims-ma e co+erage "$ Insurer agrees to pay all claims submitte uring the policy perio if the co+ere e+ent occurs before a retroacti+e ate &$ Insurer will not pay any claims submitte uring the policy perio if the co+ere e+ent occurs on or after a retroacti+e ate ,$ Insurer agrees to pay some fixe percentage of all claims submitte uring the policy perio if the co+ere e+ent occurs on or after a retroacti+e ate !. Insurer a(rees to ay all clai#s sub#itted durin( the olicy eriod if the covered event occurs on or after a retroactive date !""-$ >essicaJs personal auto policy carries a BI-02 limit as ";;L,;;L.;$ In an acci ent case >essica was aske to pay claimant M&;;*;;; towar bo ily inBury* M&;;;; towar s property amage an M";;*;;; towar s bo ily inBury of a passenger of claimant$ (s per the policy co+erage "$ Insurer will pay M&;;*;;; to claimant* M";;*;;; to passenger an M";*;;; towar s property amage &$ Insurer will pay M&;;*;;; to claimant* nothing to passenger an M";*;;; towar s property amage$ >essica will ha+e to pay M";;*;;; to passenger from her own pocket 3. Insurer will ay 91::,::: to clai#ant, 91::,::: to assen(er and 91:,::: towards ro erty da#a(e. +essica will have to ay 91::,::: to clai#ant fro# her own oc,et '$ Insurer will pay M&;;*;;; to claimant* M";;*;;; to passenger an >essica will ha+e to pay M";*;;; towar s property amage from her pockets !"&-$ =n er a liability policy* amages awar e for pain an suffering are calle ) "$ %pecial amages %. Eeneral da#a(es ,$ In irect amages '$ Conse<uential amages !",-$ In speaking with >ohn* -ark sai that 0eter embe@@le M.;;*;;; from their employer$ If this statement is false* it is an example of) 1. Slander &$ Libel ,$ Breach of warranty '$ -is emeanor !"'-$ ( man tol a pe estrian that he woul break her arm if she i not gi+e him her purse$ This is an example of) "$ &$ 3. '$ 8alse arrest In+asion of pri+acy "ssault Battery

!".-$ The e+ent that sets in motion an uninterrupte chain of e+ents contributing to the loss is calle ) "$ (bsolute liability %. Pro$i#ate cause ,$ International tort '$ Iegligence !"4-$ The law that consists of the bo y of principles an rules establishe o+er time by courts on a caseby-case basis is calle ) "$ ( ministrati+e law &$ Constitutional law 3. Co##on law '$ 3egulatory law !"6-$ The amages awar e for pain an suffering ue to an inBury are part of) "$ >u icial amages &$ 0uniti+e amages ,$ %pecial amages !. Eeneral da#a(es !"9-$ (mong the elements of a negligence are all of the following* #7C#0T) "$ 2uty owe to another &$ Breach of uty owe ,$ InBury or amage !. .ini#u# threshold of loss !":-$ In a liability insurance policy* personal inBury means inBury arising from all of the following* #7C#0T) "$ In+asion of pri+acy &$ Libel ,$ %lan er !. Battery !&;-$ /hen >ohn was ri+ing his car* he was inattenti+e an was unable to stop in time to a+oi hitting a car stoppe at a traffic light$ 5e amage the stoppe car he colli e with$ /hat is the basis for >ohn?s liability1 1. 2e(li(ence &$ (bsolute liability ,$ %tatutory liability '$ Io-fault statutes !&"-$ The liability that someone coul incur because of an inherently angerous acti+ity like buil ing emolition is calle ) "$ Ionretractable liability &$ Iontransferable 3. "bsolute liability '$ Compulsory liability !&&-$ The intentional an unlawful threat of bo ily harm is) "$ %tatutory inBury &$ #ncroachment ,$ Battery !. "ssault !&,-$ =n er tort law* an in i+i ual can face a claim for legal liability on the basis of any of the following* #7C#0T) "$ Iegligence

%. ,$ '$

Contracts International torts (bsolute liability

!&'-$ (ll of the following are true* #7C#0T) "$ Liability insurance claims in+ol+e three parties %. Pro erty insurance clai#s involve one arty ,$ Liability insurance pays claims on behalf of the insure '$ 0roperty insurance pays claims to an insure !&.-$ ( tort is) "$ The legal right of reco+ery for amage or inBury &$ ( failure to act in a reasonably pru ent manner 3. "ny wron(ful act other than a cri#e or breach of contract '$ (n unbroken chain of e+ents that causes inBury or amage !&4-$ The legal right of reco+ery can be base on all of the following* #7C#0T) "$ Torts &$ Contracts ,$ %tatutes !. *$ osures !&6-$ (ssuming the retroacti+e ate is the same as the policy inception ate of a claims-ma e liability policy* which one of the following is true for co+erage to apply1 "$ Co+erage will ne+er apply when the retroacti+e ate is the same as the policy inception ate$ &$ Bo ily inBury or property amage must occur uring the policy perio or anytime before policy inception$ 3. Clai#s #ust be sub#itted durin( the olicy eriod. '$ Claims can be submitte anytime uring or after the policy perio $ Risk management Importance of 3isk -anagement %teps in risk management (+oi ing risk Controlling risk (ccepting risk Transferring risk !"#$ (ll of the following are risk management techni<ues except) "$ (+oi ance &$ Loss control ,$ 3etention !. Loss e$ osure !&#$ 0hysical inspection of locations* operations etc is a part of "$ #xamining risk management techni<ues %. Identifyin( and analy0in( loss e$ osures ,$ Implementing chosen techni<ues '$ -onitoring an mo ifying the risk management program !,#$ ( risk manager was seen asking <uestions an filling up a <uestionnaire$ 5e was "$ I entifying loss exposure through physical inspection %. Identifyin( loss e$ osure throu(h loss e$ osure survey ,$ #xamining risk management techni<ues '$ Implementing risk management techni<ue !'#$ ( risk management techni<ue that eliminates a loss exposure an re uces the chance of loss to @ero is known as 1. "voidance &$ Loss Control

,$ '$

3etention Ioninsurance Transfer

!.#$ ( risk management techni<ue that attempts to ecrease the fre<uency or se+erity of losses is known as "$ (+oi ance %. Loss Control ,$ 3etention '$ Ioninsurance Transfer !4#$ ( risk management techni<ue that in+ol+es retaining all or part of a particular loss expoaure is known as "$ (+oi ance &$ Loss Control 3. -etention '$ Ioninsurance Transfer !6-$ ( restaurant not i entifying its liability exposure for ser+ing too much alcohol to a customer an therefore failing to purchase li<uor liability insurance is actually using following risk management techni<ue "$ Intentional retention %. )nintentional -etention ,$ Ioninsurance transfer '$ (+oi ance !9#$ ( risk management techni<ue in which one party transfers the potential financial conse<uence of a particular loss exposure to another party that is not an insurance company is known as "$ (+oi ance &$ Loss Control ,$ 3etention !. 2oninsurance 'ransfer !:-$ /hy is it easier to gauge the potential se+erity of property losses than of liability losses1 "$ 0roperty loss exposures are confine to the buil ing an contents$ Liability losses can encompass the surroun ing groun s of the business$ &$ 0roperty loss exposures ha+e a ocumente annual fre<uency an se+erity that can be etermine as an a+erage accor ing to the type of business$ Liability loss exposures cannot be etermine with this le+el of accuracy$ ,$ 0roperty loss exposures ha+e a calculable fre<uency$ The fre<uency of liability loss exposures cannot be etermine with accuracy$ !. Pro erty loss e$ osures have a calculable severity. 'he severity of liability loss e$ osures is #uch harder to deter#ine. !";#$ 5ow might the monitoring an mo ifying step in the risk management process be simply escribe 1 1. Chec, to #a,e sure the decisions #ade are still valid, and #a,e chan(es as needed. &$ Create a new workflow an i entify new bottlenecks that ha+e occurre $ ,$ -ake sure insurance is not being use as a substitute for loss control$ '$ I entify noninsurance transfers through hol harmless agreements$ !""#$ The ollar amount of amage that results or might result from a loss exposure is the 1. Loss severity &$ Loss fre<uency ,$ Loss pre+ention '$ Loss re uction

!"&#$ ( risk manager in an in ustrial plant is trying to etermine where she nee s to spen most of her time in re ucing the number of acci ents$ The plant has a history of work-relate inBuries* an she wants to make sure that is re uce $ /hat shoul the risk manager measure to etermine where she shoul expen her efforts1 "$ The number of workers in each area &$ The flow chart bottlenecks 3. 'he loss fre3uency '$ The loss se+erity !",-$ /hat information can a risk manager gather from a flowchart to i entify loss exposures1 1. Bottlenec,s that can sto roduction &$ Critical areas with unskille workers ,$ Competition that can reach the market before the client '$ Inefficiencies that can be correcte through automation !"'-$ The following list of the steps in the risk management process is correct with one exception$ /hich one of the steps shown is inaccurate1 "$ I entifying an analy@ing loss exposures %. Eatherin( infor#ation to su ort assu# tions about the loss e$ osures ,$ %electing the most appropriate risk management techni<ues '$ Implementing the chosen techni<ues in a risk management program .$ -onitoring an mo ifying the risk management program "$ %. ,$ '$ " % , '

!".#$ Businesses* in i+i uals* an families that practice soun risk management can benefit society by oing all of the following* #7C#0T) 1. Increasin( interest in leisure activities &$ 3e ucing the o+erall number of losses ,$ Controlling me ical expenses through re uce inBuries '$ %timulating economic growth !"4#$ /hat is a benefit that a business can recei+e by applying soun risk management1 "$ It will meet state an fe eral safety regulations$ %. It will have a better o ortunity to achieve business (oals. ,$ It will not ha+e to worry about losses$ '$ It will be able to attract an retain talente employees an managers$ !"6#$ 0ete -orrow is implementing a set of risk management techni<ues at his company to help re uce the fre<uency of pro ucts liability claims that his company has experience $ /hich of the following is an important step for 0ete to inclu e in this implementation process1 "$ I entifying exposures &$ 2etermining which exposures can be retaine 3. Co##unicatin( the ris, #ana(e#ent infor#ation '$ -onitoring the results !"9#$ The risk management techni<ue that eliminates a loss exposure an re uces the chance of loss to @ero is "$ 3etention &$ Loss control ,$ Ioninsurance transfer !. "voidance

!":-$ 8rank an >an are each twenty-fi+e years ol * an they ha+e purchase their first home together$ It re<uire all of their sa+ings an some money from their parents to make their own payment$ The house nee s repairs that they will o themsel+es an with the help of frien s$ The first proBect will be to seal the lea paint that is on the interior of the house an remo+e flaking lea paint that is on the exterior of the house$ 8rank an >an are also aware that a burie heating-oil tank in the yar is leaking slowly* but they ha+e eci e that replacing that tank must wait until they ha+e the fun s in a year or two$ /hat is an effecti+e way for 8rank an >an to begin i entifying the liability loss exposures associate with their new home1 "$ 5ire a professional risk manager &$ 2etermine the +alue of the home an contents ,$ 0urchase a homeowners insurance policy !. Ins ect the ho#e to loo, for ite#s and activities that #i(ht cause inFury or da#a(e !&;-$ 8rank an >an researche lea paint ha@ar s an abatement techni<ues on the Internet$ They isco+ere that the best action they can take insi e the house is to remo+e loose paint chips an ust* replace the win ows* an seal the walls with a paint esigne for that purpose$ /hat risk management techni<ue oes this acti+ity in+ol+e1 "$ (+oi ance %. Loss control ,$ 3etention '$ Ioninsurance transfer !&"-$ 8rank an >an ha+e isco+ere that the pollution that is resulting from the fuel oil leaking into the soil is not co+ere by their homeowners insurance policy$ They fear that the oil might seep into the water table an contaminate their neighbors? well water$ Illness an amage that might result woul be +ery expensi+e$ 8rank an >an can purchase an en orsement that will pro+i e co+erage for this pollution exposure$ The en orsement woul cost M.; per year$ Is this an effecti+e risk management selection for 8rank an >an until they can replace the tank1 "$ Kes* they shoul o this in efinitely an not replace the tank$ %. 6es, they are e$chan(in( a lar(e e$ osure for a little re#iu#. ,$ Io* they are spen ing a lot of money for little protection$ '$ Io* each neighbor will ha+e insurance to co+er any amage to their wells$ !&&-$ >ane owns a ten-year-ol compact car that she uses to ri+e to work each ay$ >ane ri+es &; miles into the city an parks her car on a street near her office$ >ane?s son* >oe* is ". years ol * an he will obtain his ri+er?s license this summer when he becomes "4$ >oe has alrea y expresse an interest in obtaining his own +ehicle or ri+ing >ane?s compact car$ >ane is concerne about the cost of owning a +ehicle* buying the insurance* an the risk of parking the +ehicle on the street$ If >oe obtains his own +ehicle or begins ri+ing his own* she knows that her expenses an her concerns will increase$ >ane is consi ering risk management alternati+es to help her re uce expenses an risks$ If >ane sells her +ehicle* an begins using public transportation* which one of the following risk management techni<ues will she be applying to her situation1 1. "voidance &$ Loss control

,$ '$

Ioninsurance transfer 3etention

!&,-$ >ane is concerne that >oe might be hurt in her compact car if he is in+ol+e in an acci ent$ %he has rea consumer reports in icating that people occupying trucks an sports utility +ehicles suffer less inBuries when their +ehicles are in+ol+e in acci ents$ If >ane tra es her compact car in for a sports utility +ehicle* which one of the following risk management techni<ues will she be applying1 "$ (+oi ance &$ Loss pre+ention 3. Loss reduction '$ Ioninsurance transfer !&'-$ /hile she is at work* >ane has begun parking in a lot that has an atten ant to re uce the chance of her +ehicle being amage while it is parke on the street$ /hich one of the following risk management techni<ues is >ane applying1 "$ (+oi ance %. Loss revention ,$ Ioninsurance transfer '$ 3etention !&.-$ >ane has eci e to apply a retention risk management techni<ue to re uce her insurance premium$ %he is eleting the physical amage co+erage Ccollision an other-than-collisionD on her car$ 5er car is currently worth M,*;;;$ %he will be able to sa+e M&.; e+ery six months$ Base on informal gui elines for selecting risk management techni<ues* is this a goo "$ Kes* >ane will sa+e M.;; per year$ %. 6es, if +ane can afford to lose 93,:::. ,$ Io* because the plan oes not inclu e loss control$ '$ Io* this type of co+erage is re<uire in most states$ ecision1