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AINS 101: PRACTICE QUESTIONS WITH CORRECTLY ANSWERED SOLUTIONS
"Alien Insurer - CORRECT ANSWER An insurer domiciled in a country other than the US"
"Direct Response Marketing System - CORRECT ANSWER Greatly reduces compensation costs
but has higher advertising costs"
"Agency Expiration List - CORRECT ANSWER An agency's most valuable asset (does not belong
to insurer)"
"Important consideration when selecting distribution channels - CORRECT ANSWER Does the
channel capitalize on its core capabilities?"
"Knowledge acquired by the agent is presumed to be.. - CORRECT ANSWER knowledge
acquired by the insurer"
"Premium collection method used for personal insurance and small commercial accounts -
CORRECT ANSWER Direct Bill"
"What specifies scope of authority of an agent? - CORRECT ANSWER Agency contract"
"Agency Bill - CORRECT ANSWER Payment procedure in which a producer sends premium bills
to the insured, collects the premium, and sends the premium to the insurer, less any commission"
"Item Basis - CORRECT ANSWER Premium (less commission) is forwarded to the insurer when
the producer collects it or when it comes due. Least complex method"
"Statement Basis - CORRECT ANSWER Insurer sends statement to the producer showing the
premiums due. Producer is obligated to pay the premiums as due."
"Experience Rating - CORRECT ANSWER A rating plan that adjusts the premium for the current
policy period to recognize the loss experience of the insured organization during past policy periods"
"Schedule Rating - CORRECT ANSWER A rating plan that awards debits and credits based
specific categories, such as the care and condition of premises of the training and selection of employees, to reflect a modified premium that the class rate does not include"
"Retrospective Rating - CORRECT ANSWER A ratemaking technique that adjusts the insured's
premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience"
"During a catastrophe, an insurer should... - CORRECT ANSWER use abbreviated claims
handling procedures, increase settlement authority of producers, and settle all questions of valuation in the policyholder's favor"
"Many claims occurring from a single event is called a... - CORRECT ANSWER catastrophe"
"In the claims valuation process, out-of-pocket expenses are called... - CORRECT ANSWER
special damages"
"Constructive Total Loss - CORRECT ANSWER A loss that occurs when the cost to repair the
damaged property plus its remaining salvage value equals or exceeds the pre-loss value"
"General Damages - CORRECT ANSWER A monetary award to compensate a victim for losses,
such as pain and suffering, that do not involve specific measurable expenses"
"Modular Policy - CORRECT ANSWER Combines many different forms under one policy (ex.
commercial property package)"
""Other Structure" - CORRECT ANSWER Covered by policy but under separate policy limits"
"Broad statement of insurer's promises in a policy - CORRECT ANSWER Insuring Agreement"
"Coinsurance - CORRECT ANSWER Reduces amount of recovery if a property is underinsured"
"Medical Payments under Auto Policy - CORRECT ANSWER Cover only occupants of covered
auto"
"A fair approach to liability claims is to... - CORRECT ANSWER evaluate claims as though no
coverage limit existed"
"ACV - Salvage Value - CORRECT ANSWER Constructive Total Loss or not"
"Given the complexity of commercial insurance, the best distribution method are... - CORRECT
ANSWER independent agencies"
"Individual Rating - CORRECT ANSWER Points are added or subtracted to arrive at a rate"
"The extent of underwriting authority granted to an agent is based on... - CORRECT ANSWER
premium volume and loss experience"
"One factor which is NOT used in determining replacement cost is... - CORRECT ANSWER
actual cash value"
"If a house burns down from faulty wiring, the most difficult thing to determine would be... -
CORRECT ANSWER the amount of damages"
"Case Reserve - CORRECT ANSWER Loss reserve assigned to an individual claim"
"Loss Ratio includes... - CORRECT ANSWER Incurred Losses and Loss Adjustment Expenses
over Earned Premiums"
"Damages for disfigurement are considered... - CORRECT ANSWER general damages"
"Public Adjuster - CORRECT ANSWER Hired by an insured to represent an insured in a claim
and may be necessary if claim is complex or not progressing quickly"
"The ultimate goal of the claims function is to secure the profit goal of the.... - CORRECT
ANSWER insurer"
"In liability claims, the claimant is referred to as the... - CORRECT ANSWER third party"
"When implementing selected risk management techniques, a risk manager must - CORRECT
ANSWER Determine how to allocate the costs of the program."
"Financial statement analysis, loss history analysis, and flowcharts are used in - CORRECT
ANSWER Identifying loss exposures."
"In the event of a serious auto accident, what type of law would determine who was at fault? -
CORRECT ANSWER Common Law"
"When a wrongdoer commits an illegal act, the wrongdoer is subject to both civil law and criminal
law in - CORRECT ANSWER some cases"
"In insurance terminology, trucks, trailers, buses, fire engines, and ambulances designed for road
use are examples of which one of the following categories of motor vehicles? - CORRECT
ANSWER Autos"
"Contract Law is a branch of - CORRECT ANSWER Civil Law"
"Tort Law is based on mainly on - CORRECT ANSWER Common Law"
"Special form coverage - CORRECT ANSWER is the broadest form of coverage"
"Which category of loss expenses can an insurer use to compare its revenue and expenses? -
CORRECT ANSWER Incurred Losses"
"CGL policies exclude... - CORRECT ANSWER aircraft liability coverage"
"Which one of the following best describes how effective risk management benefits insurers? -
CORRECT ANSWER Encourages insurers to create innovative products and offer competitive
prices" "When implementing the selected risk management techniques, the risk management program
must include - CORRECT ANSWER A communications plan."
"Laws of agency impose specific duties of obedience, loyalty and accounting, but not... -
CORRECT ANSWER profitability"
"Under a liability policy, the maximum an insurer will pay for injury to any one person is known as
the - CORRECT ANSWER each person limit"
"Which one of the following is true regarding loss histories? - CORRECT ANSWER The quality
of loss histories depends on whether they are organized and consistent."
"All of the following are categories of liabilities found on an insurer's balance sheet, EXCEPT: -
CORRECT ANSWER Policyholders' surplus"
"Which one of the following is part of written premiums? - CORRECT ANSWER Unearned
premiums"
"An insurer's balance sheet can best be described as a - CORRECT ANSWER Snapshot of its
financial position." "The financial report for Hometown Insurer contains the following information:
- Earned premiums $4,000,
- Written premiums $5,000,
- Net investment income $1,000,
- Incurred Losses $3,000,
- Incurred underwriting expense $2,000,
What is Hometown Insurer's expense ratio? - CORRECT ANSWER 40%"
"The financial report for LMN Insurance contains the following information: Earned premiums $8,000,000Written premiums $10,000,000Incurred losses $6,000,000Incurred underwriting expenses $4,000,
What is LMN Insurance's expense ratio? - CORRECT ANSWER 40%
Expense Ratio = Incurred underwriting expenses ÷ Written premiums: $4 million ÷ $10 million = .40 (40%)" "Spencer Insurance Associates is an independent agency selling primarily homeowners policies.
This agency - CORRECT ANSWER Is free to work with as many different insurers as it wants."
"Clare is a commercial lines underwriter. She always tries to follow underwriting guidelines, effectively evaluate loss exposures, and charge adequate premiums. By doing these things,
Clare's goal is to ensure - CORRECT ANSWER Adequate policyholders' surplus."
"Which one of the following statements is correct regarding the interaction between risk control
and other insurer functions? - CORRECT ANSWER A risk control evaluation can make the
difference between the applicant's being rejected or accepted by the underwriter." "Tony now works at the corporate level for Newtown Insurance. He is considered a staff
underwriter. Which one of the following is primarily a responsibility of staff underwriters? -
CORRECT ANSWER Revise underwriting guidelines"
"Aimee recently accepted a job in the Underwriting department at Noble Insurance Company. Her responsibilities will include developing coverage forms, arranging reinsurance agreements,
and conducting underwriting audits. Which one of the following is the title of Aimee's new job? -
CORRECT ANSWER Corporate underwriters, sometimes referred to as staff underwriters,
perform duties including: developing coverage forms, arranging reinsurance, conducting underwriting audits, researching the market, and revising underwriting guidelines." "Anna was reviewing an all-lines submission for SP Markets. SP Markets owns and operates 5 small grocery stores located in the suburbs of Boston. The stores all seem to be well maintained and clean. While the overall loss experience on the account is good relative to the indicated premium, the loss runs show a frequency of small general liability claims from customer slips and falls. Rather that reject the application for SP Markets, Anna would like to make suggest a modification to the producer that could make the application acceptable and possibly add value
for the insured. Which one of the following is a good modification for Anna to suggest? -
CORRECT ANSWER Propose the general liability coverage at a lower premium level, but apply
a small deductible." "As an experienced underwriter, Rick has learned to make every effort to avoid a mistake that can produce insufficient premium to cover losses, or pricing that isn't competitive. Which one of the
following underwriting mistakes can often cause these issues? - CORRECT ANSWER
Misclassifying exposures" "Shelton manufacturing has $1 million in annual sales, its liability insurance is priced per 1,000 of sales, and the per-unit rate is $0.50. What is Shelton Manufacturing's liability insurance
premium? - CORRECT ANSWER Calculated at 1,000 units ($1 million sales ÷ price per $1,000) ×
$0.50 rate = $500"
"The size of an employer's loss exposure for workers compensation insurance is based on -
CORRECT ANSWER The amount of its payroll."
"Work on a new claim begins for claim representative Anita upon receipt of a claim notice. Anita gathers initial information and verifies coverage. From the list of activities below, the next step
Anita would take in the process is - CORRECT ANSWER Set a loss reserve.
After the claim representative receives notice of a loss, obtains initial information, and verifies coverage, a loss reserve for that claim should be established."
"Actual cash value (ACV) is - CORRECT ANSWER replacement cost minus depreciation"
"The Insurance Services Office, Inc. (ISO) commercial package policy is an example of a -
CORRECT ANSWER Modular policy."
"The big differences between property and liability policies are found in their - CORRECT
ANSWER Insuring Agreements"
"Which one of the following most accurately describes one of the policy provisions in an
insurance policy? - CORRECT ANSWER The exclusions are in place to reduce duplicate
coverage" "Rachel is a new employee of Westley Insurance, and has been asked to review some existing policies to become familiar with the types of policies she will be working with. Which one of the
following will Rachel find is true as she conducts her review? - CORRECT ANSWER Rachel finds
the policy begins with a coverage overview and then goes into more coverage details."
"Which one of the following is the correct formula for calculating an insurer's combined ratio? -
CORRECT ANSWER Loss ratio + expense ratio"
"For a loss exposure to be ideally insurable it must be definite in - CORRECT ANSWER Time,
cause, and location." "Erin has recently graduated from college and relocated to Chicago. She has purchased a car and rented an apartment and now needs to purchase insurance. She is comfortable buying from social media recommendations and recently was impressed with an insurer sending her coverage details online with a minimum of forms and salesperson interactions. Which one of the following
is likely the best distribution channel to meet Erin's needs? - CORRECT ANSWER Group
marketing" "Joel is the underwriter for Stanton Industries. He received a notice from the premium auditor on the account. After a recent visit to the insured's location, the auditor wanted to make Joel aware of a decline in the business and some questionable business practices. Which one of the following
types of hazards is the auditor identifying? - CORRECT ANSWER Moral hazards"
"Many auto manufacturers have automated a portion of their assembly lines by introducing a smart product. The smart product performs repetitive tasks, such as making the same weld on each vehicle frame as it passes the smart product. These smart products, which can be fixed or mobile, reduce repetitive motion injuries. They can also be used to perform dangerous tasks and
for heavy-lifting jobs. These smart products, enabled by artificial intelligence, are called -
CORRECT ANSWER Robots."
"Because the insurance company usually determines policy wording and the insured has little
choice but to "take it or leave it," an insurance contract is a - CORRECT ANSWER Contract of
adhesion." "Sports, Inc. is looking to obtain a commercial property policy on its building for $400,000. If their insurer decides to charge them a rate of $0.50 per $100 of building insurance, what premium
must Sports, Inc. pay? - CORRECT ANSWER $2,000 [$400,000 (insured value) ÷ $100 (exposure
unit size)] x $0.50 (rate per unit) = $2,000." "Jessie is a new customer service representative (CSR) at the Winfield Agency. Jessie usually
engages in all the following activities, EXCEPT: - CORRECT ANSWER Determining coverage
quotes" "Sota's Superstore has recently become an insured of Keithly Insurance Company. Kaito, Keithly's premium auditor, is being sent to conduct an advance audit. Which one of the following tasks will
Kaito do to assist underwriting? - CORRECT ANSWER Classify the various exposures"
"Joe is the owner of JG Auto Repair. He is always frustrated with the amount of commercial insurance premium he pays every year, even though he has not had a single claim in over 10 years. Joe is looking to partner with an insurance company that will share its profits and maybe return a portion of his premium if the results are good. Which one of the following types of
insurer is the right fit for Joe? - CORRECT ANSWER Mutual insurer
A mutual insurer is owned by its policyholders and formed as a corporation for the purpose of providing insurance to them. To share profits, mutual insurers may pay dividends to policyholders as a return of a portion of premiums paid." "Rachel is considering investing in the stock of an insurance company. Which one of the following
is likely to provide the best indication of the insurer's financial position at this point in time? -
CORRECT ANSWER Balance sheet"
"Why are insurance regulators concerned about the effects of large catastrophes? - CORRECT
ANSWER Insurers may become insolvent."
their home and personal property, they only have to budget for the insurance premium, rather than the full cost of rebuilding the house and replacing its contents. Which one of the following
key components of insurance is the insurance agent explaining to the Smiths? - CORRECT
ANSWER Transfer"
"Because insurance contracts impose an obligation for ethical practices and behaviors on the
parties while dealing with one another, an insurance contract is called a - CORRECT ANSWER
Contract of utmost good faith." "The financial report for Hometown Insurer contains the following information: Earned premiums $4,000,000 Written premiums $5,000,000 Net investment income $1,000,000Incurred losses $3,000,000Incurred underwriting expenses $2,000,
What is Hometown Insurer's loss ratio? - CORRECT ANSWER 75%. Hometown Insurer's loss
ratio is its incurred losses ($3,000,000) divided by its earned premiums ($4,000,000), or 75 percent." "Pravalt Construction Company pays less than its competitors for workers compensation insurance because Pravalt has had substantially fewer employee injuries than other firms in its
class. This illustrates which one of the following benefits of insurance? - CORRECT ANSWER
Promote risk control activity" "Bill is an insurance producer for and employed by ABC Insurance Company (ABC). He represents only ABC when marketing insurance products, and uses an administrative staff also employed by
ABC. Bill is a producer in the - CORRECT ANSWER Direct writer marketing system."
"Jennie recently purchased a personal auto policy from Westcox Insurers. Three weeks later, Jennie reported her car was stolen from her driveway during the middle of the day. Upon further investigation, claims representative Harry finds out the home address he has on file for Jennie does not match the location where the theft occurred. In light of this scenario, which one of the
following would be particularly helpful for Harry to pursue concerning Jenny's claim? - CORRECT
ANSWER Harry can verify Jennie's address and other possible helpful information by reviewing
her policy which has her original application information attached."
"Earned premiums are the portion of written premiums that - CORRECT ANSWER Apply to the
part of the policy period that has already occurred."
"The difference between an independent agency and an exclusive agency is that an - CORRECT
ANSWER Exclusive agency is contracted to sell insurance for one insurer or group of insurers."
"James works very closely with producers on a daily basis. In addition to evaluating the applicants that the producers submit, James is involved in presenting policy quotations, processing policy endorsements, helping to explain coverages, and making coverage recommendations. James
works as a - CORRECT ANSWER Field Underwriter."
"A stock insurer differs from a reciprocal insurance exchange in which one of the following ways?
- CORRECT ANSWER Stockholders own a stock insurer. Members own a reciprocal insurance exchange." "Riley Turner is performing a comprehensive evaluation of Hardwick Enterprises to make sure its insurance and risk management efforts are serving the organization appropriately. Which one of
the following will be true in regard to this effort? - CORRECT ANSWER Besides risk
management goals being attainable, they should also pose a challenge."
"Which two of the four quadrants of risk are classified as pure risks? - CORRECT ANSWER
Hazard risks and operational risks" "Margaret was severely injured and scarred due to a recent accident. Which one of the following
is an example of general damages Margaret received? - CORRECT ANSWER Compensation for
disfigurement" "Which one of the following is the amount of business an insurer can write based on regulatory guidelines, usually a comparison of the insurer's written premiums to the policyholders' surplus?
- CORRECT ANSWER Capacity" "John's two-year-old bicycle was stolen. The bicycle's purchase price was $700, its current replacement cost is $800, and depreciation was estimated at $450. What was the bicycle's actual
cash value? - CORRECT ANSWER ACV=Replacement cost - Depreciation. The bicycle's actual
cash value is $350: $800 − $450 = $350." “One distinguishing feature between independent agency systems and other marketing systems
is the... - CORRECT ANSWER agency expiration list"
"Foreign Insurer - CORRECT ANSWER An insurer licensed to operate in a state but
incorporated in another state"
"Domestic Insurer - CORRECT ANSWER An insurer doing business in the jurisdiction in which it
was incorporated"
"Acquisition Expenses = - CORRECT ANSWER Sales salaries (bonuses and commissions) +
advertising expenses"
"Investment Income helps... - CORRECT ANSWER keep insurance premiums at a reasonable
level"
"Apparent Authority - CORRECT ANSWER when an agent acts on behalf of a principal in way
that was not intended but that the third party believes is sufficient"
"Contingent Commission - CORRECT ANSWER commission based on premium volume and
profitability"
"In the legal relationship known as agency, the principal is the... - CORRECT ANSWER insurer"
"Managing General Agencies - CORRECT ANSWER Often represent more than one insurer"
"Field Claim Representative - CORRECT ANSWER Investigates the scene of the loss, meets with
the insured, claimants and others, and inspects the damage" "Traditionally, the risk management professional's role has been associated with loss exposures
related to - CORRECT ANSWER pure risk"
"In managing loss exposures using the risk management process, the key to identifying loss
exposures is - CORRECT ANSWER Understanding how the household or organization
operates." "Estimating how large the losses may be and how often they may occur is required under which
one of the steps of the risk management process? - CORRECT ANSWER Analyzing loss
exposures"
"Most states regulate the excess and surplus lines market by - CORRECT ANSWER Requiring
that licensed surplus lines brokers transact business with the unlicensed insurers" "Which one of the following is true regarding the delegation of underwriting authority by
underwriting management? - CORRECT ANSWER The extent of underwriting authority
granted to an agent generally depends on premium volume and loss experience." "As a single mother on a very tight budget, Ciara is tempted to skimp on her insurance. However, her friend Mehmet tells her not to skimp on insurance, because it will help manage her cash
flows. Which one of the following examples best illustrates Mehmet's point? - CORRECT
ANSWER When her car's windshield breaks, Ciara has to pay only $100 of the $600 cost of
replacing it"
"Shelton Industries experienced a fire in its manufacturing plant. Several employees suffered burns and smoke inhalation injuries as they tried to escape the building. Which one of Shelton Industries' commercial property-casualty policies would pay for the employees' injuries and
illnesses? - CORRECT ANSWER Workers compensation insurance"
"Jimmy decided to buy a house in his neighborhood that had been foreclosed on by the bank that held the mortgage. He is hoping to do some renovation and repair work on the house, and then
sell it for a quick profit. Which one of the following types of risk is this for Jimmy? - CORRECT
ANSWER Speculative risk"
"Carlos is new to the insurance business and is learning about insurance regulation and what he, now working with Grady Insurance, will need to be aware of regarding the subject of compliance. Which one of the following will Carlos find is accurate as he better understands why insurance is
regulated? - CORRECT ANSWER Insurance regulation protects customers by guaranteeing
insurance is available and accessible to everyone who needs it." "As it continues to grow, Anchoy Insurance is examining other distribution channels to more effectively market its products. Through this experience, which of one the following will Anchoy
most likely learn? - CORRECT ANSWER Anchoy can use group marketing to target large
numbers of recent local college graduates."
"The key to the direct writer marketing system is that - CORRECT ANSWER The insurer is using
its own employees as producers." "Insuring individuals with a high probability of loss at a cost lower than the insurer would
normally charge for that risk because it wasn't aware of the actual risk involved is known as -
CORRECT ANSWER Adverse selection."
"Johann is an insurance company employee who investigates the scene of a loss and meets with
insureds, claimants, lawyers, Johann is most accurately called - CORRECT ANSWER A claims
supervisor." "Willis, a claims representative, is collaborating with his colleague Suzanna from his insurance
company's risk control department. How will Suzanna help Willis? - CORRECT ANSWER
Provide laboratory analysis when Willis is investigating a claim." "Understanding the steps in the claims handling process is important to new claims reps. Which one of the following steps generally comes after investigating and documenting the claim and
before concluding the claim? - CORRECT ANSWER Determining cause of loss and loss amount"
"The processing of almost every claim involves which one of the following activities? - CORRECT
ANSWER Determining the amount of damages or extent of loss"
"Risk control can assist the claims department by - CORRECT ANSWER Providing laboratory
analyses."
"Risk control can assist the claims department by - CORRECT ANSWER Providing laboratory
analyses." "At Greenfield Insurance Company, Bernadette and Rachel are corporate underwriters, and Tomas and Jose are field underwriters. All of the following are underwriting activities typically
performed by corporate (or staff) underwriters like Bernadette and Rachel, EXCEPT: - CORRECT
ANSWER Support producers and insureds"
"Windsor Insurance has sold more personal auto policies in the recent quarter than ever before in its history, thanks to new commission incentives for ambitious staff members. Even though Windsor is collecting more money upfront, it is actually making less per policy after remitting the higher commissions. Some claim payments are also now being delayed, resulting in many complaints against the company. Which one of the following objectives of insurance regulation is
not being realized through this scenario? - CORRECT ANSWER Maintaining insurer solvency"
"All of the following are sources of underwriting information to evaluate an insurance
submission, EXCEPT: - CORRECT ANSWER Underwriting authority reports"
"Winston is skimming through his new personal auto policy that just arrived. Winston discovers that every insurance policy is represented through a collection of policy provisions. He discovers
all of the following policy provisions, EXCEPT: - CORRECT ANSWER Exceptions"
"Martina, a premium auditor for Cintriell Insurance Company is conducting a premium audit for Carolina's Cookies. Carolina mentioned to Martina that she is opening a coffee shop at another location. By sharing this information, Martina would provide a contribution to which one of the
following insurer functions? - CORRECT ANSWER Underwriting"
"Sean was driving and caused an injury to a pedestrian named Wilbur. In the context of the resulting claim made to Sean's insurance company and assigned to Andrea in the claims
department, Sean and Wilbur and Andrea are, respectively, - CORRECT ANSWER Insured and
claimant and claims representative" "Joe and Helene are married with two teenage children and two dogs. They own three cars and a large house with a swimming pool in the back yard. Their insurance agent advised them that the pool, teenage drivers, and dogs put them at risk for large liability losses. Which one of the
following personal property-casualty insurance policies would provide them with protection for
their high potential for large liability losses? - CORRECT ANSWER Personal umbrella"
"A liability loss has the following damages: Medical expenses:$10,000Damages for disfigurement:$50,000Damages for pain and suffering: $100,
What is the amount of special damages? - CORRECT ANSWER The amount of special damages
is $10,000. Special damages are for specific, identifiable expenses."
"Which one of these is most directly associated with a satisfied customer? - CORRECT
ANSWER Leads and referrals that can be used to generate new business"
"Destructive competition in the insurance industry could result in - CORRECT ANSWER
Insurance shortages."
