FINN 3271 Chapter 6 Insurance Company Operations Questions and Answers (1).doc

Chapter 6 Insurance Company Operations

1) The function of an actuary is to  A) adjust claims. claims. B) determine premium rates. C) negotiate reinsurance treaties. D) invest insurance company assets.  Answer: B ) !nsurers o"tain data which can "e used to determine rates from  A) pricing pools. pools. B) insurance advisory organi#ations. C) "an$s. D) reciprocal e%changes.  Answer: B &) 'hich of the following statements a"out underwriting policy is (are) true !. A company company must must esta"lish esta"lish an an underwri underwriting ting policy policy consist consistent ent with with company o"jectives. !!. *nderwriting *nderwriting policy is usually su"jective and allows allows the underwrite underwriter  r  considera"le considera"le fle%i"ility with respect to lines written and forms used.  A) ! only B) !! only C) "oth ! and !! D) neither ! nor !!  Answer: A +) 'hich of the following statements a"out underwriting standards is (are) true !. ,ne purpos purpose e of underwr underwritin iting g standard standards s is to reduce reduce advers adverse e selection against the insurer. !!. -uita"le rates should should "e charged so that each group group of policyowners pays its own way in terms of losses and e%penses.  A) ! only B) !! only C) "oth! and !!

D) neither ! nor !!  Answer: C /) The underwriting process "egins with the  A) agent. B) des$ underwriter. C) inspection report. D) acceptance of the application.  Answer: A 0) Common sources of underwriting information for life and health insurance include all of the following -C-2T  A) the application. B) a physical e%amination. C) the 3edical !nformation Bureau. D) the applicant4s income ta% return.  Answer: D 5) !f an underwriter suspects moral ha#ard6 the underwriter may as$ an outside firm to investigate the applicant and ma$e a detailed report to the insurer. This report is called a(n)  A) inspection report. B) application. C) 3.!.B. report. D) agent4s report.  Answer: A 7) ,ne source of life and health insurance underwriting information is an organi#ation that life and health insurance companies can join. As a mem"er6 life and health insurance companies report health impairments of applicants6 and this information is shared with mem"er companies. Although the information is shared6 the underwriting decision of the mem"er company is not disclosed. 'hat is this organi#ation called  A) 8air !saac Corporation (8!C,) B) 3edical !nformation Bureau (3!B) C) 9ational Association of !nsurance Commissioners (9A!C)

D) 9ational Association of 3utual !nsurance Companies (9A3!C)  Answer: B ) 8actors that may result in more restrictive underwriting decisions include which of the following !. !nadeuate rates. !!. The unavaila"ility of reinsurance at favora"le terms.  A) ! only B) !! only C) "oth ! and !! D) neither ! nor !!  Answer: C 1;) All of the following are functions of the mar$eting department of an insurance company -C-2T  A) to advertise the insurer4s products. B) to develop new products. C) to identify production goals. D) to ma$e final underwriting decisions.  Answer: D 11) 'hich of the following statements a"out claim settlement is (are) true !. The fair payment of claims reuires an insurer to adopt a very li"eral claims policy. !!. To prevent lawsuits6 an insurer should provide no personal assistance to a claimant other than that which is reuired "y contractual o"ligations.  A) ! only B) !! only C) "oth ! and !! D) neither ! nor !!  Answer: D 1) All of the following statements a"out claims settlement are true -C-2T

 A) Agents may have the authority to settle claims. B) !ndependent adjustors may "e used in a geographic area where the volume of "usiness is too low for an insurer to have its own adjustors. C) Company adjustors are salaried employees who wor$ for one insurer. D) A pu"lic adjustor is usually paid a flat fee regardless of the si#e of a claim.  Answer: D

1&) 'hich of the following statements a"out adjustment "ureaus is (are) true !. They are freuently used to settle claims when a large num"er of losses occur in a given geographic location as a result of a catastrophic event. !!. Their major advantage is low cost "ecause of the use of part
10) All of the following are reasons for a primary insurer to use reinsurance -C-2T  A) to increase the unearned premium reserve. B) to increase underwriting capacity. C) to protect against catastrophic losses. D) to sta"ili#e profits.  Answer: A 15) The unearned premium reserve of an insurer is  A) an asset representing the investments made with premium income. B) a lia"ility representing the unearned portion of gross premiums on outstanding policies. C) a lia"ility representing claims that have "een filed6 "ut not yet paid. D) the portion of the insurer4s net worth "elonging to policyowners.  Answer: B 17) A reinsurance contract that is entered into on a case<"y
;) 'hich of the following statements a"out treaty reinsurance is true  A) *nder a surplus;;6;;;6 and nine lines of insurance are ceded to -versafe. ?ow much will -versafe pay if a >160;;6;;; "uilding insured with Delta suffers an >7;;6;;; loss  A) >0;;6;;; B) >5;;6;;; C) >5;6;;; D) >7;;6;;;  Answer: B ) ?uge !nsurance Company is a property insurer that is interested in protecting itself against cumulative losses that e%ceed >;; million during the year. This protection can "est "e o"tained using  A) a uota
income6 investment earnings6 and maturing investments that must "e reinvested. B) !ncome from these investments reduces the cost of insurance. C) A primary o"jective in ma$ing these investments is safety of principal. D) The majority of these investments are short
D) claims adjustor.  Answer: A 5) 3ar$ has "een an underwriter for ; years. An application he recently reviewed loo$ed odd to him. The "uilding value in the application seemed far too high6 and 3ar$ suspected the applicant might "e planning to destroy the property after it is insured. 3ar$ contacted an outside firm and hired someone to investigate the applicant and to prepare a report a"out the applicant. This report is called a(n)  A) agent4s report. B) "inder. C) physical inspection. D) inspection report.  Answer: D 7) Antonio is a claims adjustor for @39 !nsurance Company. After the insurer is notified that there has "een a loss6 Antonio meets with the insured. The first step in the claims process that Antonio should follow is to  A) determine the amount of the loss. B) attempt to deny the claim regardless of whether he "elieves the claim is covered. C) verify that a covered loss has occurred. D) delay paying the claim if the claim is covered.  Answer: C ) Beverly lives in a sparsely populated area in northern !daho. ome insurance companies mar$eting coverage in northern !daho cannot afford to have full
&;) 9ew @ia"ility !nsurance Company "egan operations last year and has "een very successful. The company4s a"ility to grow is "eing restricted "y an accounting rule that reuires insurers to reali#e acuisition e%penses immediately6 while not reali#ing premiums received as income until some time has passed. =einsurance is often used in such cases for which of the following purposes  A) to sta"ili#e profita"ility B) to reduce the unearned premium reserve C) to provide protection against catastrophic losses D) to withdraw from a line of "usiness or territory  Answer: B &1) @ia"ility !nsurance Company (@!C) was approached "y a regional airline to see if @!C would write the airline4s lia"ility coverage. @!C agreed to write the coverage and entered into an agreement with a reinsurer. *nder the agreement6 @!C retains / percent of the premium and pays / percent of the losses6 and the reinsurer receives 5/ percent of the premium and pays 5/ percent of the losses. This reinsurance arrangement is "est descri"ed as  A) e%cess
&&) Amy heads the legal staff of a large property and lia"ility insurance company. Amy4s staff is li$ely involved in all of the following activities -C-2T  A) reviewing policy wording "efore policies are adopted and mar$eted. B) recouping su"rogation recoveries from third parties who injured individuals insured "y Amy4s company. C) providing legal advice a"out mar$eting6 ta%ation6 and insurance law. D) reviewing applications to determine if the company should insure the ris$.  Answer: D &+) ue dou"le
 A) sale of catastrophe "onds. B) purchase of common stoc$. C) purchase of e%cess
&) The process of transferring ris$ to the capital mar$ets through the use of financial instruments such as "onds6 futures contracts6 and options is $nows as  A) consolidation of ris$. B) avoidance of ris$. C) securiti#ation of ris$. D) compartmentali#ation of ris$.  Answer: C +;) 'hich of the following statements is (are) true a"out life insurance company investments !. The majority of life insurance company general account assets are invested in "onds. !!. The majority of life insurance company separate account assets are invested in stoc$s.  A) ! only B) !! only C) "oth ! and !! D) neither ! nor !!  Answer: C +1) ,ne method through which reinsurance is provided is through an organi#ation of insurers that underwrites insurance on a joint "asis. Through the organi#ation6 financial capacity is availa"le for large commercial ris$s. This reinsurance arrangement is a(n)  A) uota
 Answer: B +&) Catastrophe "onds are made availa"le to institutional investors in the capital mar$ets through an entity that is specially created for that purpose. This is entity is called a  A) ris$ retention group. B) fraternal insurance company. C) captive insurance company. D) special purpose reinsurance vehicle.  Answer: D ++) 'hich of the following statements is true regarding the information systems functional area of an insurance company !. Computers and information systems are a"le to perform some tas$s that previously were performed directly "y employees. !!. !nformation systems can speed the processing of policies "y insurers.  A) ! only B) !! only C) "oth ! and !! D) neither ! nor !!  Answer: C