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1.  Why is a large number of exposure units required for a risk to be insurable?
a. It allows the insurer to more accurately predict the expected dollar amount of loss and calculate a pure risk premium 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 permits cross subsidization from the lower premium insureds to those higher premium paying policyholders with larger losses
2. The definition of peril is: a. The actual cause of loss b. The uncertainty concerning loss c. A measure of the accuracy with which a loss can be predicted d. The actual cause of loss e. the first cause in an unbroken chain of events
3. The moral hazard is:
a. A loss of faith in the insurer because of a denial of claims.
b. Illustrated by the loss of a wallet to a thief.
c. The potential for the insurer to increase premiums after loss.
d. The increase of loss caused by attempts to defraud the insurer .
e. The insolvency of the insurance company due to lapses in judgement from the CEO
4. A financial contract in which a small certain payment is exchanged in order for someone to be indemnified against large uncertain losses:
a. Derivative Contract Profit or policyholer surplus
b. Financial Swap Arrangement
c. Insurance
d. Subordinated Debenture
e. Mutual Fund

5. A pure risk is one where:
a. The result can only be a loss or no loss b. The result can be a gain or loss c. The result can be only a gain or no gain d. The result can not be predicted e. The result is subject to chance

6. The criteria for ideally insurable losses include all of the following EXCEPT:
a. Losses definite in time.
b. Accidental Losses.
c. A small carefully defined group of exposures.
d. A large number of homogeneous risks .
e. low probability of catastrophic loss.
7.In a casualty insurance policy in order to receive a claim payment you need to show insurable interest: :
a. At the inception of the contract.
b. Prior to the purchase of the policy.
c. When assigning coverage to another
d. At the time of loss
e. When paying the first premium for coverage.
8. The systematic (market) risk associated with an individual stock is most closely identified with the
a. Standard deviation of the returns on the stock.
b. Standard deviation of the returns on the market.
c. Beta of the stock
d. Coefficient of variation of returns on the stock.
e. Coefficient of variation of returns on the market.
9. Which of the following is NOT likely to be found on the declarations page of an insurance contract?
a. conditions suspending coverage
b. identity of the named insured
c. a list of coverage provided by the policy
d. the name of the insurance company
e. the amount of the premium for the policy

10. I.M. Hip has a renter's policy that covers the cost of him living in a different apartment should he be unable to occupy his own apartment after a fire. This type of coverage is referred to as:
a. Direct loss coverage b. Inconsequential loss coverage
c. Hazardous conditions insurance
d. Adverse selection coverage
e. Indirect loss coverage

11. In order to establish negligence of the defendant, a plaintiff must show all of the following EXCEPT:
a. a law has been broken
b. a legal duty to protect existed
c. an injury resulted directly from a breach of duty
d. a person did not act reasonably
e. the defendant breached a legal duty
12. A risk where the frequency of loss is low and the severity of loss is high represents a case where which risk management tool should be used:
a. Risk assumption
b. Loss prevention
c. Loss control
d. Insurance or risk transfer
e. Risk avoidance
13. Assume I.M Clumsy, a renter, is injured by Ima Landord's negligence. Ima did not replace burned out light bulbs in the common hallway and Clumsy was injured when he fell down the apartment building's stairs near the hallway. Ima's best line of defense would be:
a. res ipsa loquitur
b. assumption of risk - a reasonable person would get a flashlight or take other precautions
c. Ima did not intend injury
d. since the property was rented, the plaintiff always has the duty to change the light bulbs
e.there was no duty owed to the plaintiff as renter
14. Adverse selection represents a case where:
a. an insured attempts to obtain coverage at substandard rates
b. individuals who are poorer than average risks will attempt to obtain insurance at standard rates
c. the federal government must provide coverage
d. a buyer of an interest rate swap contract losses money as interest rates rise
e. an employer is held responsible for the actions of his/her employee under the doctrine of res ipsa loquitur
15. State insurance regulations require insurers set up legal reserves and set aside surplus because:
a. assets have to equal liabilities plus policyholder equity
b. reserves are long-term obligations and must be met with long-term assets
c. they provide a cushion against unexpected underwriting or investment losses
d. insurers need to set aside dollars for meeting employee pension obligations and accrued commissions for insurance agents
e. insurers need to offset assets that are classified as "nonadmitted" in order to be eligible for Federal TARP dollars
16. Disability is conservatively [strictly]defined within the OASDHI federal program as:
a. the inability to engage in any occupation
b. the inability to make the same income as before one was disabled
c. the inability to earn non-wage income to replace lost earnings from disability
d. the inability to engage in the occupation for which you were trained17%
e. the inability to earn income higher than the minimum wage due to injury
17. The purpose of the waiting period in a disability income policy is:
a. to eliminate payments for minor illness
b. to provide larger benefits to those who become injured
c. to provide indirect loss coverage in the aftermath of injury
d. to reduce the time it takes an insurer to make a claim payment of disability
e. to integrate employment sick days with the disability insurance contract
18. The most difficult and important step in the risk management process and one that can lead to a risk manager being terminated if it is not conducted properly is:
a. risk identification, particularly those risks that are foreseeable
b.finding the most costly insurer to cover all the risks that may impact an organization
c. determining the appropriate amount of premium for pure and speculative risks
d. covering all the firm's financial risks using derivative contracts
e. hiring a highly trained accountant to create a tax-sheltered captive within the organization to allow management to take vacations in Bermuda

19. Which clause or concept in insurance law provides that when an insurer indemnifies the insured for loss, the insurer has the right to recovery from a negligent third party?

a. Utmost good faith
b. Proof of loss
c. The unilateral adhesion clause
d. Subrogation
e. Stare derisis.

20. Poor or faulty wiring that may lead to fire is an example of a:
a. named peril
b. morale hazard
c. speculative risk
d. physical hazard
e. moral hazard
21. Which of the following is a definition of insurance?
a. A savings account designed to protect you in the event of a rainy day
b. A financial arrangement whereby an individual pays a small certain payment called the premium in order to be indemnified against large uncertain losses
c. A socialist plot to destroy the free enterprise system
d. A contractual agreement in which the insurer agrees to pay the insured only if the insured requests the money
e. An investment contract designed to allow the insured to earn a fair rate of return on his/her investment
22. The term insurance demutualization refers to:
a. the process of a stock insurer converting its organizational structure to mutual
b. the board of directors action in declaring dividends for the policy owners
c. the process of a mutual insurer converting its organizational structure to the stock form of ownership
d. the process of liquidating an insolvent mutual insurance company
e. the process of individual policyholders electing to take non-participating policies from a mutual company
23. A captive insurance company:
a. only provides loss control services
b. typically sells auto insurance to the public using independent agents
c. provides a mechanism for self-insurance
d. only uses attorneys-in-fact
e. cannot be operated by a manufacturing firm
24. Risk managers can identify potential property losses using:
a. walking tours of the facilities and operations subject to risk
b. checklists
c. flowcharts
d. inteviews with employees
e. all of the above
25. Interest rate risk arises for an insurer from:
a. the change in a currency's discount rate
b. changes in the value of fixed income securities because of changes in interest rates
c. the change in interest rates caused solely by inflation
d. changes in the value of currency relative to another currency
e. loss potential from a person defaulting on a loan due to high interest rates
26. The best risk management method to use when the severity of loss is high, and the frequency of loss is high is:
a. risk avoidance
b. risk assumption
c. risk transfer
d. loss prevention and control
e. insurance
27. Insurance is the best risk management tool when the chance of loss is ______ and the loss severity is _______.
a. high, low
b. low, high
c. high, high
d. low, low
e. moderate,moderate
28. One example of the use of risk assumption in insurance is:
a. the use of subrogation
b. the use of a deductible by the insured
c. the use of ipsa res loquitur when making a claim settlement
d. the use of actual cash value when settling a claim
e. the use of contingent claim analysis in determining the amount of coverage available for claim settlement.
29. While busy studying for your Risk Management and Insurance final, the Sunday evening before the big exam, you decide that a pizza would be helpful to remembering basic insurance principles. Not wanting to leave the stimulating and entertaining study of insurance to drive over to the pizza parlor you give you keys to your roomate to drive over to get the pizza. You offer to split the pizza as a reward for such service. Unfortunately, your roommate runs a traffic light and plows into your insurance professor who is out for a Sunday drive down Main street. As result of these festivities:
a. Your roommate's insurance policy will pay for all claims brought by the professor due to negligence from the accident
b. The professor knowing that one of his students is involved in the accident will forgive all losses and give that student an A for being dedicated and industrious
c. Your insurance policy will pay all claims as a result of the accident
d. Your insurance pllicy will pay all claims from the accident, but should liability damages be greater than your coverage, your roommate's policy may pay all amounts not covered under your policy.
e. Your roommate's insurance policy will pay first on the accident, and then your insurance policy pays all claims above the liability limits on your roommate's coverage.
30. When selecting an insurer for casualty coverage the insured should consider:
a. the company's record of settling claims and its financial strength and stability as noted by outside rating agencies such as AM Best
b. information from the insurance commissioner's office on any outstanding complaints
c. all of the above
d. the brilliance of the insurer's online advertising
e. only a and c

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

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

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                           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

  Fall 2009 List of Topical Subjects for the First Exam

Definition of Insurance

Fundamental Concepts --- Peril, Hazard, Direct vs. Indirect Loss, Principle of Indenmnity, Adverse Selection, Pure risk, static risk, particular risk, elements of an ideally insurable risk, Proximate Cause of Loss, Subrogation

Different Types of Insurers --- Mutual, Stock, Fraternal, Reciprocal, Lloyd's Exchange

Steps in the Risk Management Process

Methods for handling risk -- risk avoidance, risk assumption, risk transfer/insurance, loss prevention/control

Agency --- Independent, Direct Writing, Exclusive Agency

Agency Concepts ---waiver, estoppel,

Insurance occupations --- underwriter, agent, actuary, claims adjustment, legal

Liability Risk Concepts -- laws of negligence, types of visitors to property and the degree of liability, vicarious liability

Legal Concepts to the Insurance Contract -- offer & acceptance, consideration, competent parties legal form -- valid versus a void contract ---- specialized legal concepts --- utmost good faith, aleatory, adhesion, unilateral-- grounds for making an insurance contract voidable --- material misrepresentation

Concepts that reinforce the principle of indemnification -- insurable interest, actual cash value

Insurance Regulation --- Paul vs. Virginia, Southeastern Underwriter's Case, Public Law 15 [McCarran-Ferguson Act], Gramm-Leach-Bliley Act

Insurance Contract Format ---Declarations, Insuring Agreements, Exclusions, Conditions, Endorsements and Riders

Nature of Exclusions --- difference in type of risk, risk covered by other insurance, business pursuits, difficult to value losses



Risk Mangement and Insurance World Web Page. All rights reserved. 9/25/09
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