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                   Sample Exams 1 and 2, Plus a Sample Quiz

Select the correct answer from the drop down box. Once you are done, click submit to see your score. Missed questions will be checked. Note: Answers to the quiz questions are at the bottom of the page.

1.  Why is a large number of exposure units required for a risk to be insurable?
a. It allows the insurer to accurately predict the aggregate dollar amount of loss b. It allows for at least some losses to occur c. It reduces the moral hazard  d. It guarantees the insurer will make money  e. It spreads the losses over all the insured parties
2. Which of the following statements about the level premium method of life insurance is(are) true?  

      I. Premiums paid during the early policy years are higher than need to pay death claims. 

     II. Premiums increase at 2-year intervals beginning at age 25.  

a. I only  b. II only  c. Both I and II  d. Neither I nor II

3. Which of the following is NOT an example of a pure risk? a. Potential loss of a home by fire  b. Potential theft of a car left by the UNI Dome       c. Potential loss of your wallet containing your weekly allowance d. Potential loss of $10,000 off an investment in McLeod stock  e. All of a through d are examples of pure risks
4. Fred has an HO-2 policy and rents only the unattached converted garage to his home, which is not a self-contained apartment to Dick, a college student.  The apartment is destroyed by fire when Dick lights a cigarette, places it in an ashtray that gets bumped off an end table by his pet poodle named "Fido"..  What will happen with the claim according to the HO-2 contract? a. The fire is a covered peril since it is unfriendly and all damages will be paid under the policy  b. The peril of fire is not covered when it damages unattached structures, such as a garage  c. The fire is not covered because it was originally a friendly fire  d. Because it involved an unattached garage, the HO-2 policy will cover it, but only on a pro-rata loss sharing basis  e. There will be no payment under the policy because a rented other structure is excluded from coverage.   
5. If the insurance company cancels a homeowner's policy, the return of premium will be computed:  a. On a short-rate basis  b. There is no return of premium on a homeowner's policy  c. The insurer has the option to use short-rate or long-rate based on how many years the policyholder has paid premiums  d. a homeowner's policy can not be canceled e. A pro-rata basis
6.The principle of indemnity requires that: a. Insurance rates must be equal between all policyholders b. The insured should be paid for the loss he suffers and no more  c. people who are involved in accidents must pay for the losses that result  d. The insured must be paid the policy benefits that his or her premium has purchased e. The insured is entitled to the face amount of the policy less any paid-in premiums at the time of loss.
7. John Reindeer has the following loss statistics for the past 5 years related to medical costs related to wheel assembly injuries.  What is the mean loss and the standard error for this loss distribution?  
$ Loss # Workers
    0    800
  110    100
  200      70
  500      30
  1,000
 
a  mean loss = $30, standard error = $99.55.
b. mean loss = $40, standard error = $99.55
c. mean loss = $99.55, standard error = $40
d. mean loss = $3.15, standard error = $40.
e. mean loss = $40, standard error = $3.15
8. The goal of risk management is to: a. Minimize insurance expenditures b. Make certain that insured losses do not occur  c. Minimize the adverse effects of losses and uncertainty connected with pure risks d. Make certain that uninsured losses do not occur  e. Get the best buys in the field of insurance   
9. Which of the following would permit a casualty insurance company to void your personal auto policy (PAP)?  a. Concealing the fact that you failed your drivers test the first time you took the exam  b. Misstating your age c. lending your car to your girl friend who has two speeding tickets  d. Lending your car to someone without a license  e. Concealing the fact that you have 25 unpaid parking tickets at UNI
10. The defense provision of the auto insurance contract (PAP): a. Provides that the cost of defense will be paid by the insurer, but the defense costs reduces the limits of the policy  b. Provides that the insurer  will indemnify the insured the expenses the insured incurs in hiring an attorney to defend against negligence claims  c. Provides that the insurer does not need the consent of the insured to settle any claim against the insured  d. Provides that the insurer will pay the legal costs associated with defending the insured against all criminal charges resulting from an accident  e. Requires the insured to release additional claims after collecting from the medical payments section of the policy
11. Ms. Lopez purchases an insurance contract with the following warranty attached:  In return for a reduction in premium, the "fire alarm system will be in good working order."  What type of warranty is this? a. Implied affirmation b. This statement is NOT a warranty declaration  c. Express affirmation  d. Implied promissory note  e. Express promissory
12. Assume you have a PAP with 50/100/10 split limits.  You are responsible for a collision which injures 4 people.  The injured victims successfully sue you for $5,000, $8,000, $30,000 and $80,000.  You insurance company will pay: a. $50,000  b. $60,000 c. $110,000 d. $100,000   e. $93,000
13. Arthur Deathwish who knows he plans on flying ultra light aircraft for the rest of his short life, fails to make this fact known when applying for life insurance.  The contract is issued, and Arthur dies three years later, at which time the insurer learns of  Deathwish's failure to disclose his flying activities at the time of application.  Under these circumstances the insurer: a. Must pay the face of the policy to the beneficiary  b. is required to tender a return of the policy premiums plus interest  c. must return the premiums, but not any interest accumulation  d. must pay the beneficiary, but can subrogate against the insured's estate for recovery of the face amount of the policy on the basis of fraud  e. must report to the fraud to the federal government, and can proceed to sue the insured's estate for misrepresentation.
14. When must an insurable interest legally exist in life insurance? 
a. Only at the time of death


b. Only at the time the beneficiary has paid a premium

c. Both at the time of death and at the inception of the policy

d. Only at the inception of the insurance contract

e. At the time when the policy proceeds are paid to the beneficary
15.Which of the following statements about Blue Cross Plans is(are) true? 

I. They generally provide service benefits rather than cash benefits to members. 

II. They usually provide very limited benefits for doctors fees. a. Neither I nor II  b. Both I and II  c. II only  d. I only
16. The effect of a stop limit in a major medical insurance policy is to: a. Limit the lifetime benefits payable under the policy  b. Put a cap on annual benefits that will be paid by the employer c. Prevent the insured from receiving duplicate benefits if medical expenses are also covered under another type of coverage such as workers compensation insurance  d. Pay 100% of eligible medical expense after an insured has incurred a specified amount of out-of-pocket expenses  e.  Allow the insurer to limit claim payments on the basis of post-claim underwriting
17. The incontestable clause states that:  a. an insured may not contest a policy after two years  b. if the policyholder misrepresents material facts when applying for insurance the policy becomes incontestable c. the policy can not become contestable after it is issued  d. the insurer may not contest the policy after it has been in force one or two years during the lifetime of the insured  e. the policy becomes incontestable after proceeds have been paid to the beneficiary
18. Each of the following are perils EXCEPT: 
a. Fire.
b. Hail.
c. Forgery and embezzlement.
d. Earthquake
e. Incorrect instructions on a label of industrial poison
19. Poor or faulty wiring that may lead to a fire is an example of a:
a. Physical hazard
b. Named peril
c. Fundamental risk
d. Moral Hazard
e. Dynamic risk
20. All of the following are necessary for an ideally insurable loss exposure EXCEPT:
a. A large number of homogeneous exposures

b. Low probability of loss

c. Losses must be non-catastrophic from the point of view of the insurer

d. Losses must be measurable

e. Losses must be definite in time
21. Which of the following statements about stock insurance companies is true?
a. stockholders provide operating capital and receive dividends
b. they are nonprofit organizations receiving tax exempt status
c. the policyholders own the company
d. they are more likely to provide lower-cost insurance than mutual insurers.
e. they only pay dividends to their policyholders
22.The term "HMO" means:
a. Health Maintenance Organization
b. Hospital Management Organization.
c. High Maintenance Operation
d. Health Management Organization
e. Healthy Mamas Operation.
23. The term "PPO" stands for: 
a. Preferred Participating Organization
b. Participating Physicians Organization.
c. Physicians Provider Organization
d. Preferred Provider Organization.
e. Posthumous Preparatory Organization
24. Nearly all policies concerning insurance exclude loss caused intentionally by the insured.  This is necessary to meet which of the following prerequisites of an ideally insurable exposure?
a. to control the morale hazard
b. to ease of transfer of insurance costs.
c. to control speculative risk
d. the loss must be definite and measurable
e. to control the moral hazard
25. A.M. Best's Life and Health Insurance Reports allow you to determine which of the following about your insurer?
a. Its reputation for providing fair claim settlement
b. Its policyholder client service rating
c. How many complaints have been filed with the State Insurance Commissioner 
d. What it charges on average per $1,000 of face amount of life insurance coverage
e. Its financial rating
26. All of the following are ways of managing risk mentioned in the text EXCEPT:
a. Transfer
b. Competitive Bid Processing.
c. Avoidance.
d. Assumption.
e. Loss Control
27. As part of your work with the UNI FMA club you decide to hold a golf tournament and sponsor a $10,000 hole-in-one contest on the 18th green over at Pheasant Ridge Golf Course on November 17th.  Using your new found knowledge of this course, you would seek to obtain $10,000 worth of insurance coverage for the contest from a:
a. Mutual insurance company
b. Admitted insurer.
c. Reciprocal Exchange
d. Factory Mutual
e. Non-admitted carrier through a surplus lines broker.
28. The term "demutualization" refers to:
a. the process of a stock insurer converting its organizational structure to a mutual
b. the process of a mutual insurer converting its organization structure into a reciprocal.
c. the process of a mutual insurer converting its organizational structure to the stock form of ownership
d. Elimination of double taxation on insurer earnings.
e. the process of individual policyholders electing to take non-participating paid-up policies from a mutual company
29. One of the jobs of the actuary is to:
a. sell insurance policies.
b. determine premium rates and classification schemes for the insurance underwriters to apply
c. handle claims as they arise from insured loss exposures
d. guarantee that the insurer is profitable
e. certify the insurer's accounting records 
30. In selecting an insurer, the major consideration should be:
a. the company's attitude toward claims
b. the cost of the company's products.
c. the insurer's financial stability
d. the incompetence of the company's agents.
e. the company's policy on cancellations 

Correct Answers for Self Grading: 1. A 2. A 3. D 4. E 5. E 6. B 7. E 8 C 9 B 10. C 11. E 12. E 13. A !4. D 15. D

16. D 17. D 18. E 19. A 20. B 21. A 22. A 23. D 24. E 25. E 26. B 27. E 28. C 29. B 30. C


You got out of correct.

Your Score: %

                           Additional Practice Questions for Ambitious Students

Finance 160:162                           Sample Exam 1                                      Dr. A. F. Thompson

 Directions: Please answer the following questions designed to test your knowledge of the fundamentals of risk and insurance, risk management principles, basic insurance contracts, the HO and PAP policies.  Each question objective question is worth 3 points.  The value of the short essays are given with each question. 

 1. If the chance of loss is low and the severity is low, generally the most appropriate risk management tool to use is: a. Risk transfer   b. Risk reduction    c. Risk assumption     d. Loss prevention   e. Risk avoidance

2. Hazards are usually classified into the following categories: a. Perils, risks and uncertainties b. Physical, mental and moral   c. Moral, morale, and physical d. Personal, property, and liability e. Static, particular and pure

3. Installing a fire alarm system is an example of  which one of the following: a. Loss control b. Consequential loss     c. Risk retention d. Self-insurance  e. Risk avoidance

4. Which of the following is not an example of a pure risk?  a. Potential loss of a home by fire b. Potential theft of a car   c. Potential loss of your wallet containing your weekly allowances of $100    d.  Potential loss of $10,000 in the stock market   e. All of a through d are examples of pure risks

5. The principle of indemnity requires that: a. Insurance rates must be neither too high nor too low    b. The insured should be paid for the loss he suffers and no more   c. People who have accidents must pay for the losses that result   d. The insured must be paid the policy benefits that his or her premium has purchased   e. The insured is entitled to the face amount of the policy plus any paid-in premiums at the time of   loss

6. The possibility of a loss of income due to sickness or disability represents: a. A fundamental, pure risk                b. A particular, static risk   c. A particular, liability risk   d. A pure, dynamic risk e. None of  these

 7. Adverse selection is a term used to describe: a. A situation where poorer than average risks attempt to obtain insurance at standard rates  b. The choice of the wrong insurance contract to fit a specific need             c. A loss situation in which the chance of loss can not be determined d. An actuarial error on the part of the company             e. None of these

 8. The goal of risk management is to: a. Minimize insurance expenditures   b. Make certain that uninsured losses do not occur    c. Minimize the adverse effects of losses and uncertainty connected with pure risks    d. Get the best buys in the field of insurance    e. Eliminate financial loss

9.. The risks most suited to treatment by insurance are those in which: a. The frequency of loss is high and the severity of loss is low  b. The frequency of loss is low and the severity of loss is high            c. The frequency of loss is high and the severity of loss is high d. The frequency of loss is low and the severity of loss is low             e. None of  above

 10. From the view point of the insured, the purchase of insurance is an example of: a. Avoidance b. Assumption     c. Transfer and risk sharing  d. Loss prevention and control   e. None of the above

 11. Which of the following would permit the insurance company to void your personal auto policy (PAP)?  a.Concealing the fact that your brother was convicted of drunken driving b. Misstating your age             c. Driving without a license d. Lending your car to someone without a license e. Failing to yield the right of way when entering highway 218 in Cedar Falls

 12. Sally has an HO-2 policy and rents only the unattached converted garage, which is now a self-contained apartment to a Judy, a college student.  The apartment is destroyed by fire.  What will happen with the claim according to the HO-2 contract? a. The fire is a covered peril and the damage will be paid for under the policy b. The peril of fire is not covered when it damages unattached structures, such as a garage c. There will be no payment because a rented other structure is excluded from coverage d. Because it was an unattached, the HO-2 policy does cover it, but only on a proportional loss sharing basis e. None of these

 13. Which of the following is NOT an exclusion under Section II of the Homeowners= policies?

a. Liability assumed under any unwritten contract b. Property damage to property owned by the insured                  c. Damage to property in the care, custody or control of the insured by all perils d. Liability arising out of an auto accident e. Liability arising out of the ownership or maintenance of the residence premises

 14. If the insurance company cancels an homeowners= policy, the return of premium will be computed:   a. On a short-rate basis     b. A pro-rata basis    c. There is no return of premium on a homeowner=s policy   d. The insurer has the option to use short-rate or pro-rata based on how many years the policyholder has paid in premiums   e. A homeowners= policy cannot be canceled

15. Assume you have a homeowners= policy which has the following limits: A = $50,000 [dwelling] B= $5,000 [other structures]   C= $25,000[unscheduled personal property].  Your home burns down.  You lose the home worth $40,000, an unattached garage worth $8,000, and personal property worth $30,000.  You will collect: (assume a valid contract)

a. $78,000    b. $70,000     c. $58,000      d. $50,000   e. $48,000

16. In property insurance, coinsurance is: a. An agreement between two or more insurance companies to jointly cover a large risk   b. A contractual agreement to make the insured bear a portion (usually small) of every loss c. A contract agreement to help equalize total claims to reinsurance premiums d. A contractual agreement to discourage under-insurance e. A contractual agreement to prevent first-dollar coverage on small   Anuisance@ claims

 17.  Within the homeowners= policy, property removal refers to:   a. The cost of repairing property    b. The cost of removing property after a fire     c. Loss of property threatened by an insured peril that the owner tried to save by removing the property to another secure location d. Loss of property while being removed from an old to a new residence e. Removing property to be salvaged by the insurer

 18. A waiver is: a. Part of most property insurance contracts   b. A release of any additional claims against the insurer   c. A legal response when the insurer informs the insured a claim is denied d. Giving up a known right by either the insured or the insurer   e. Used to deny coverage only when the insurer suspects fraud

 19.  A sells one-half interest in property to B.  The market value of the property is $120,000 and the actual cash value of the loss is $60,000.  Assuming the loss is covered [and there is not a replacement cost provision in the contract], A will collect:

 a. $80,000   b. $60,000   c. $40,000    d. $30,000   e. $15,000  

 20. The principle of utmost good faith: a. Holds only the insurer to a high standard of honesty in executing insurance policies   b. Generally does not apply to health insurance   c. Holds both the insured and insurer to a high standard of honesty throughout the during of the insurance policy d. Is a tool used to defraud policyholders   e. Only applies to commercial insurance

 21. The doctrine of proximate cause:  a. Forces the insurer to pay for all claims arising out of an unbroken sequence of events if the original insured peril was covered b. Forces the insured to pay for part of the loss when the proximate cause of the event is the insured=s fault c. Partitions loss payment between parties in close proximity to the loss d. Allows the insured to collect provided an insured peril had nothing to do with the loss                                    e. Forces the insurance company to pay for a loss if the old contract would have paid except for renewal within 10 days of the loss

22. Under a contract of adhesion: a. You get to help write the contract and administer it b. The insurance company writes the contract with approval by the state legislature c. The insurance company gets the benefit of the doubt on any unclear wording d. Ambiguities are construed against the party writing the contract e. None of these

 23. If a property insurance agent knocks on buyer B=s door, explains the contract and receives a check for the policy, which of the following most closely has occurred with respect to contracting?  a. Offer, acceptance              b. Offer, acceptance, consideration      c. Offer, counter offer, acceptance d. Offer, consideration    e. Offer, counter offer

 24. Mr. Torentino purchases an insurance contract with the following warranty attached. 

In return for a reduction in premium, the Afire alarm system will be in good working order.@

What type of warranty is this?   a. The statement is NOT a warranty declaration b. Implied affirmation    c. Express affirmation     d. Implied promissory e. Express promissory

 25. An insured with a $100 deductible collision coverage, sustains an accident with a wild deer named Bambi.  The auto suffers $600 damage.  In addition to the collision coverage, he also has $0 deductible on the other than collision coverage.  The insured can recover from the insurer: a. Full loss, less $100    b. Full loss under supplementary payments    c. Full loss d. Nothing, this damage is not covered    e. $600 less the $100 deductible under the uninsured motorist physical damage coverage

 26. Assume you have a PAP with 50/100/10   split limits.  You are responsible for a collision which insures four persons.  The injured people successfully sue you for $5,000, $8,000, $30,000 and $80,000.  Your insurance company will pay: a. $50,000    b. $60,000    c. $93,000   d. $100,000   e. $110,000

27. Underinsured Motorist (UM) coverage: a. Is the same as the uninsured motorist coverage b. Potentially pays the difference between the negligent driver=s liability coverage amount and the injured party=s UM limits c. Pays for property damage you cause when victims have no coverage d. Pays for an insured=s negligence when insufficient liability limits exist e. Pays amounts in excess of medical payments when the medical payments limit is exhausted

28. If the insured negligently injures an uninsured motorist doing $40,000 damage, the PAP will: a. Pay under coverage A, liability b. Pay under coverage C, uninsured motorist    c. Pay under both coverage A and C    d. Pay only under the larger of A or C, but not both e. Pay nothing since an uninsured motorist should not have been driving in the first place

 29. The defense provision of the auto insurance contract (PAP): a. Provides that the cost of defense will be paid by the insurer, but the defense costs reduces the limits of the policy b. Provides that the insurer will indemnify the insured by expenses the insured incurs in hiring an attorney to defend against negligence claims c. Provides that the insurer does not need the consent of the insured to settle any claim against the insured d. Requires the insurer to investigate each and every claim e. Requires the insured to release additional claims after collecting from the medical payments section of the policy

 30. A misrepresentation: a. Always voids a contract     b. Makes a contract voidable if it is material  c. Is also known as Aconcealment@ d. Is identical to a warranty e. Voids the contract at the option of the insured

 Short-Essay Question (10 points): Does the homeowner=s policy provide personal liability coverage only at the residence described in the declarations section of the contract?    Explain

 

Answers to sample questions: 1. C  2. C  3. A  4. D  5. B   6. B  7. A  8. C  9. B  10. C

11. B    12. C   13. E 14. B 15. B   16. D 17. C 18. D 19. D 20. C 21. A 22. D 23. B 

24. E 25. C 26. C 27. B 28. A 29. C 30. B

                                    Sample Exam 2

Directions: Please answer the following questions designed to test your knowledge of fundamentals and terminology, risk management, insurance regulation, personal auto insurance, liability insurance, life and health insurance, annuities, insurance planning, disability insurance and employee benefits.

 

1. The DEFENSE provision of the automobile insurance contract: (a) provides that the cost of defense will be paid by the insurer, and these costs reduce the limits of the policy (b) provides that the insurer will indemnify the insured for expenses the insured incurs in hiring an attorney to defend against negligence claims (c) provides that the insurer does not need the consent of the insured to settle any claim against the insured (d) requires the insurer to investigate each and every claim (e) requires the insured to release additional claims after collecting from the medical payments section of the policy

 

2. Compulsory Liability Insurance Laws are designed to: (a) reduce auto insurance rates (b) decrease the number of people who carry auto insurance (c) reduce the number of auto accidents (d) reduce the number of drunk drivers on the road (e) force individuals to purchase auto liability insurance

 

3. An Iowa tornado causes Clint Eastwood=s garage to collapse on his vintage corvette destroying it. Damage is $5,000 to the car.  Mr. Eastwood has a PAP with both COLLISION and OTHER THAN COLLISION coverages.  A $200 deductible applies to the COLLISION coverage.  There is a $0 deductible on OTHER THAN COLLISION coverage.  How much is paid by the PAP to Clint for the tornado damage?  (a) $0 (b) $1,000 (c) $4,000 (d) $4,800

(e) $5,000

 

4. You are in an auto accident with an uninsured motorist and you are at fault.  Your UNINSURED MOTORIST (UM) limits are 10/20 and you medical bills are $22,000.  You collect from your UM coverage: (a) $ 0  (b) $10,000 (c) $20,000 (d) $22,000 (e) up to $10,000 in excess of the medical coverage collection

 

5. Muffy, Buffy and Tuffy are members of the Alpha Gamma Beta Sorority.  One evening they are in Muffy=s car and Muffy is driving down University Avenue.  They are on their way to the American Red Cross to do some work on behalf of the sorority.  On the way Muffy pulls out in front of a large truck hauling hogs to IBP.  The truck driver cannot avoid hitting her car.  The Cedar Falls police declare Muffy to be at fault in the accident, and the truck driver subsequently sues Muffy and her sorority for her negligent driving.  Which of the following is a TRUE statement about this situation? 

 

(a) Muffy=s PAP LIABILITY Coverage will protect her, but not the sorority

(b) Muffy=s PAP LIABILITY Coverage will protect the driver of the hog truck, but not her

(c) Muffy=s PAP LIABILITY Coverage will protect Muffy and the sorority

(d) Muffy=s PAP LIABILITY COVERAGE will protect the sorority, but not Muffy

6. OTHER THAN COLLISION Coverage under the PAP includes coverage for which of the following:

I.             Hitting a deer while visiting Hartman Reserve

II.            Hitting a John Deere (tractor) while visiting Tama

III.             Hitting a chicken going to an Iowa State football game

IV.       Hitting a chicken, losing control of your car as a result, and crashing into a ditch

 

(a) I and III (b) I,II, and III (c) I and IV (d) II, III, and IV (e) I, III, and IV

 

7. Which of the following is NOT a type of property covered by the building and personal property form?  (a) automobiles (b) business personal property (c) personal property of others (d) building   (e) inventory

 

8. Indirect loss coverage (business income insurance) will cover all the following EXCEPT: 

(a) lost profits (b) continuing expenses (c) income taxes on lost profits (d) extra expenses incurred to maintain operations after a loss (e) extra expenses to abate or minimize the business interruption loss

 

9. Which of the following would NOT be an example of a hostile fire?  (a) your house burns down due to poor electrical wiring (b) a car is destroyed by arson at the garage where it is being housed (c) a fire in the fireplace destroys stock certificates that are accidentally used to start a fire during the winter (d) a couch starts on fire when a cigarette falls on it (e) a camp fire spreads and starts a forest fire

 

10. All of the following legal doctrines result in more individuals being held liable for negligence EXCEPT: (a) last clear chance (b) contributory negligence (c) comparative negligence

 (d) vicarious liability (e) ability to use res ipsa loquitur

 

11. Suppose you were in a comparative negligence state, and you were suing someone who had injured you.  Your total injuries amounted to $100,000, and the jury found that you were only 5% at fault in the incident.  How much money would you then be entitled to collect from the defendant?  (a) $100,000 (b) $95,000 (c) $0 (d) $90,000 (e) none of these

 

12. The Areasonable person@ standard changes based upon which one of the following factors?  (a) the extent and dollar amount of the injury that occurs (b) the defendant=s professional status relative to the event causing the injury (c) whether the loss occurred during the policy period

(d) the insurer=s duty to defend the policyholder (e) the number of previous lawsuits against the defendant

 

13. Damages awarded to compensate for pain and suffering are called: (a) extraordinary damages (b) punitive damages (c) personal injuries (d) exemplary damages (e) hedonic damages

 

14. A claims-made liability insurance contract: (a) pays for injuries suffered by the insured during the policy period (b) pays for defense costs only when an insured is sued, but does not pay for liability claims (c) pays for claims only when an insured is sued, but does not pay for defense costs (d) is designed to pay for claims filed against the insured during the policy period (e) is designed to pay for claims and defense costs associated with prior policy periods= liability claims against the insured

 

15. The Americans with Disabilities Act (ADA) requires employers to do which of the following? (a) hire a minimum number of disabled persons (b) discriminate in favor of disabled persons (c) actively seek out disabled persons as potential employees (d) make reasonable accommodations for disabled employees or qualified job applicants (e) all of these

 

16. Pro-rata reinsurance means: (a) losses, premiums and expenses are divided proportionately between the primary insurer and reinsurer (b) reinsurance is automatic (c) reinsurance is available at market rates (d) reinsurance is layered horizontally after the primary=s retention (e) reinsurance is available only between professional reinsurance companies

 

17. The main goal of life insurance is to provide protection against: (a) dying before your financial obligations are met (b) outliving your income stream (c) the probability of dying increasing as you grow older (d) claims of creditors when in bankruptcy (e) provide beneficiaries with creditor protection

 

18. The conversion privilege in term policies means that within a period specified in the policy, the insured may: (a) elect to continue the term policy for another period of the same length

 (b) exchange the term policy for a permanent plan of insurance (c) increase or decrease the amount of term insurance (d) elect to include the nonforfeiture provision in the policy (e) convert the face amount of a defined benefit annuity

 

19. A life annuity which pays nothing to a contingent beneficiary at the annuitant=s death is the: (a) period certain annuity (b) straight life annuity (c) refund annuity (d) reversionary annuity

(e) joint and survivor annuity

 

20. To properly handle the orderly transfer of business ownership at death, it is necessary to have: (a) an unfunded buy-sell agreement (b) a life insurance contract to fund the purchase and a buy-sell agreement (c) a verbal understanding of the valuation method (d) a verbal commitment of the heirs to sell the business (e) adequate life insurance on all owners, shareholders and their spouses

 21. Determining a needs based life insurance estimate can be characterized by which of the following formulas?

(a)        life insurance needed = present value of future income

(b)        life insurance needed = burial + education - food - shelter

(c)        life insurance needed = income + social security - savings

(d)        life insurance needed = total needs - existing assets to meet the needs

(e)        life insurance needed = projected income - taxes

 

22. A. Mortale who knows he is dying of cancer, fails to make this fact known when he applies for life insurance.  The contract is issued and A. Mortale dies three years later, at which time the insurer learns of A. Mortale=s failure to disclose his illness.  The insurer: (a) must pay the face of the policy to the beneficiary (b) is required to tender a return of the policy premiums plus interest  (c) must return the premiums, but not any interest accumulation (d) must pay the beneficiary, but can subrogate against the insured=s estate for the face amount less paid in premiums without interest (e) must report the fraud to the federal government, and can proceed to sue the insured=s estate for misrepresentation

 

23. The higher the interest rate used in the life insurance premium calculation: (a) the higher the net single premium (b) the greater the administrative costs and investment expenses (c) the lower the net single premium (d) the lower the pure endowment feature on the contract (e) the shorter the extended term period on the contract

 

24. The purpose of the waiting period in disability income insurance is: (a) to eliminate payments for minor illness (b) to provide larger benefits to the insured (c) to provide indirect loss coverage  (d) to increase the premium for the contract (e) to integrate employment sick days with the disability plan

 

25. Which one of the following is TRUE concerning the preexisting condition clause in health insurance?  (a) it makes a preexisting insurance contract pay for prior medical conditions (b) it eliminates health care reimbursement for conditions existing before the effective date of the current contract (c) it coordinates the payment of already existing conditions among multiple policies (d) it pays for preexisting conditions as long as the insurer agrees to covering the condition resulting from medical breakdown (e) it always allows coverage if there has been no treatment for the prior 18 months

 

Multiple Choice Answers:

1. C 2. E 3. E 4. A 5. C 6. E 7. A 8. C 9. C 10. B 11. B 12. B 13. C 14. D 15. D

16. A 17. A 18. B 19. B 20. B 21. D 22. A 23. C 24. A 25. B

 

Topical Review for the 2nd Exam in Risk Management and Insurance – Fall 2008

 

Topics:
Methods of paying for life insurance – Level Payment, Net Single Premium
Advantages and Disadvantages of Buying Term and Investing the Difference between the Whole Life Premium and Annual Renewable Term Premiums
Differences in the types of Life Insurance Policies – Term Life Insurance, Permanent Life Insurance: Whole Life Insurance, Universal Life Insurance, Variable Life Insurance
Differences in Life Insurance Premiums by Age at Issue
Different Types of Life Insurance Policies and which might be appropriate in various circumstances, e.g. young professional couple with two kids, versus middle aged single mother with 3 kids, etc.
Different Types of annuities and which might be appropriate in various circumstances, e.g. retired couple in need of maximizing retirement income willing to invest $10,000 in an annuity, a single individual with no dependents desiring to maximize income, etc.
Differences between a mutual (participating) life insurance policy versus a stock (non-participating) life insurance policy
Knowledge of the standard features [clauses] to the life insurance contract – entire contract, incontestability, non-forfeiture, beneficiary, suicide, accidental death, etc.
Fundamental concepts – pure vs. speculative risks, fundamental vs. particular, static vs. dynamic, definitions of insurance, indemnity, hazard, adverse selection, subrogation, peril, proximate cause of loss
Steps to the Risk Management Process
Methods of Dealing with Risk and when to use them
Types of Insurers: Mutual, stock, Reciprocal, Fraternal, Lloyds Organization
Insurance occupations [ what they do]: underwriter, actuary, dual accounting, claims adjuster, loss adjuster, independent vs. direct writing agent
The most difficult and important step in the risk management process
Classifications of visitors to property and the relative standards of care
Basic Legal Principles to the Insurance Contract – conditions in order for the insurance policy to come into existence – what makes a policy void vs. voidable, an understanding of what is a material misrepresentation and how it differs between property/casualty vs. life insurance
Special legal features to the insurance contract – utmost good faith, reasonable expectations, adhesion, unilateral, aleatory contracts
When insurable interest has to be shown with respect to a particular insurance policy
      Life insurance vs. property/casualty insurance
The various methods used for settling a property/casualty insurance policy
Definitions of res ipsa loquitur, subrogation, coinsurance as means of defining insurer liability
Differences and similarities between the HO and PAP policies with respect to medical payments coverage
Different types of HO policies – HO-1,H0-2, H0-3, H0-4, H0-6
Sections I and II of the HO policy -  types of coverages, basic exclusions
PAP – Types of Coverages
Differences and Similarities between:  Under Insured Motorist Coverage vs. Uninsured Motorist Coverage
Differences between the Collision vs. Non-collision coverage on a PAP
Standard provisions to an insurance contract – Declarations, insuring agreements, etc.

Important Court Cases:   Paul vs. Virginia,  Southeastern Underwriter’s case



Dr. A. Frank Thompson Risk Management and Insurance  All rights reserved.8/12/07