Chapter 6.

Insurance Company Operations

1) The function of an actuary is to B) determine premium rates.
2) Insurers obtain data which can be used to determine rates from B) insurance
advisory organizations.
3) Which of the following statements about underwriting policy is (are) true? I. A
company must establish an underwriting policy consistent with company objectives.
II. Underwriting policy is usually subjective and allows the underwriter considerable
flexibility with respect to lines written and forms used. A) I only
4) Which of the following statements about underwriting standards is (are) true? I.
One purpose of underwriting standards is to reduce adverse selection against the
insurer. II. Equitable rates should be charged so that each group of policyowners
pays its own way in terms of losses and expenses. C) bothI and II
5) The underwriting process begins with the A) agent.
6) Common sources of underwriting information for life and health insurance include
all of the following EXCEPT D) the applicant's income tax return.
7) If an underwriter suspects moral hazard, the underwriter may ask an outside firm
to investigate the applicant and make a detailed report to the insurer. This report is
called a(n) A) inspection report.
8) One source of life and health insurance underwriting information is an
organization that life and health insurance companies can join. As a member, life
and health insurance companies report health impairments of applicants, and this
information is shared with member companies. Although the information is shared,
the underwriting decision of the member company is not disclosed. What is this
organization called? B) Medical Information Bureau (MIB)
9) Factors that may result in more restrictive underwriting decisions include which of
the following? I. Inadequate rates. II. The unavailability of reinsurance at favorable
terms. C) both I and II
10) All of the following are functions of the marketing department of an insurance
company EXCEPT. D) to make final underwriting decisions.
11) Which of the following statements about claim settlement is (are) true? I. The
fair payment of claims requires an insurer to adopt a very liberal claims policy. II. To
prevent lawsuits, an insurer should provide no personal assistance to a claimant
other than that which is required by contractual obligations. D) neither I nor II
12) All of the following statements about claims settlement are true EXCEPT D) A
public adjustor is usually paid a flat fee regardless of the size of a claim.
13) Which of the following statements about adjustment bureaus is (are) true? I.
They are frequently used to settle claims when a large number of losses occur in a
given geographic location as a result of a catastrophic event. II. Their major
advantage is low cost because of the use of part-time adjustors. A) I only
14) All of the following statements about the settlement of a claim are true EXCEPT
C) The adjustor must file the proof of loss, which is a sworn statement
supporting his or her decision regarding a claim.
15) All of the following statements about reinsurance are true EXCEPT D) The
amount of insurance transferred to a reinsurer is called the net retention.
16) All of the following are reasons for a primary insurer to use reinsurance EXCEPT
A) to increase the unearned premium reserve.
17) The unearned premium reserve of an insurer is B) a liability representing
the unearned portion of gross premiums on outstanding policies.

18) A reinsurance contract that is entered into on a case-by-case basis after an

application for insurance is received by a primary insurer is called D) facultative
reinsurance.
19) Which of the following statements about treaty reinsurance is true? B) The
reinsurer must accept all business that falls within the scope of the treaty.
20) Which of the following statements about treaty reinsurance is true? D) Using a
reinsurance pool provides financial capacity to write large amounts of
insurance.
21) Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance.
Delta has a retention limit of $200,000, and nine lines of insurance are ceded to
Eversafe. How much will Eversafe pay if a $1,600,000 building insured with Delta
suffers an $800,000 loss? B) $700,000
22) Huge Insurance Company is a property insurer that is interested in protecting
itself against cumulative losses that exceed $200 million during the year. This
protection can best be obtained using C) an excess-of-loss reinsurance treaty.
23) All of the following statements about life insurance company investments are
true EXCEPT D) The majority of these investments are short-term
investments.
24) Which of the following statements about the investments of property and
liability insurers is (are) true? I. Income from investments is important in offsetting
any unfavorable underwriting experience. II. Because premium income is continually
being received, the investment objective of liquidity is of little importance. A) I only
25) Functions of an insurance company's legal department include which of the
following? I. Lobbying for legislation favorable to the insurance industry. II. Drafting
policy provisions. C) both I and II
26) Jan is employed by an insurance company. She reviews applications to
determine whether her company should insure the applicant. If insurable, Jan
assigns the applicant to a rating category based on the applicant's degree of risk.
Jan is a(n) A) underwriter.
27) Mark has been an underwriter for 20 years. An application he recently reviewed
looked odd to him. The building value in the application seemed far too high, and
Mark suspected the applicant might be planning to destroy the property after it is
insured. Mark contacted an outside firm and hired someone to investigate the
applicant and to prepare a report about the applicant. This report is called a(n). D)
inspection report.
28) Antonio is a claims adjustor for LMN Insurance Company. After the insurer is
notified that there has been a loss, Antonio meets with the insured. The first step in
the claims process that Antonio should follow is to. C) verify that a covered loss
has occurred.
29) Beverly lives in a sparsely populated area in northern Idaho. Some insurance
companies marketing coverage in northern Idaho cannot afford to have full-time
adjustors there. Several insurers hire Beverly to adjust claims for their insureds.
Beverly charges the insurers a fee for each claim that she settles. Beverly is a(n) C)
independent adjustor.
30) New Liability Insurance Company began operations last year and has been very
successful. The company's ability to grow is being restricted by an accounting rule
that requires insurers to realize acquisition expenses immediately, while not
realizing premiums received as income until some time has passed. Reinsurance is
often used in such cases for which of the following purposes? B) to reduce the
unearned premium

31) Liability Insurance Company (LIC) was approached by a regional airline to see if
LIC would write the airline's liability coverage. LIC agreed to write the coverage and
entered into an agreement with a reinsurer. Under the agreement, LIC retains 25
percent of the premium and pays 25 percent of the losses, and the reinsurer
receives 75 percent of the premium and pays 75 percent of the losses. This
reinsurance arrangement is best described as C) quota-share reinsurance
32) Ross studied engineering in college. After graduation, he went to work for an
insurance company. Ross visits properties insured by his company. He conducts
inspections and makes recommendations about alarm systems, sprinkler systems,
and building construction. In what functional area does Ross work? B) loss control
33) Amy heads the legal staff of a large property and liability insurance company.
Amy's staff is likely involved in all of the following activities EXCEPT D) reviewing
applications to determine if the company should insure the risk.
34) Sue double-majored in mathematics and statistics in college. She also enrolled
in a number of finance courses. After graduation, she was hired by Econodeath
Insurance Company. Her job is to calculate premium rates for life insurance
coverages. Sue is a(n) A) actuary.
35) Easy Pay Insurance Company may require insureds who suffer a loss to submit a
sworn statement to substantiate that a loss occurred and to describe the conditions
under which the loss occurred. This sworn statement is called a B) proof of loss.
36) All of the following are methods that a property and liability insurance company
can use to protect against catastrophic losses EXCEPT B) purchase of common
stock.
37) Which of the following statements is (are) true with respect to catastrophe
bonds? I. The bonds are issued by the U.S. Government. II. The bonds have
relatively high interest (coupon) rates. B) II only
38) Pac-Coast Insurance (PCI) concentrates its underwriting activities in California.
The company is concerned that if a catastrophic earthquake occurs, it might
threaten the solvency of the company. To address this risk, PCI issued some debt
securities. If a catastrophic earthquake occurs, PCI does not have to repay the
borrowed funds or pay interest. The securities PCI issued are called. C)
catastrophe bonds.
39) The process of transferring risk to the capital markets through the use of
financial instruments such as bonds, futures contracts, and options is knows as C)
securitization of risk.
40) Which of the following statements is (are) true about life insurance company
investments? I. The majority of life insurance company general account assets are
invested in bonds. II. The majority of life insurance company separate account
assets are invested in stocks. C) both I and II
41) One method through which reinsurance is provided is through an organization of
insurers that underwrites insurance on a joint basis. Through the organization,
financial capacity is available for large commercial risks. This reinsurance
arrangement is a(n) D) reinsurance pool
42) Most insurance companies require their marketing representatives to submit an
evaluation of the prospective insured. This important source of underwriting
information is called the B) agent's report.
43) Catastrophe bonds are made available to institutional investors in the capital
markets through an entity that is specially created for that purpose. This is entity is
called a. D) special purpose reinsurance vehicle.

44) Which of the following statements is true regarding the information systems
functional area of an insurance company? I. Computers and information systems are
able to perform some tasks that previously were performed directly by employees.
II. Information systems can speed the processing of policies by insurers. C) both I
and II
Chapter 22 - Auto Insurance
1) Which of the following statements about the liability limits of the PAP is (are)
true? I. The policy is written with split limits of liability. II. Prejudgment interest is
considered part of the damage award and is subject to the policy limit of liability. C)
both I and II
2) Which of the following statements about the payment of defense costs by the
PAP is (are) true? I. They are paid in addition to the policy limits. II. They are payable
even after the limit of liability is exhausted. A) I only
3) All of the following are covered autos under the liability section of the PAP
EXCEPT A) a nonowned van which is driven by the insured on a regular
basis.
4) All of the following are insured persons under the liability coverage of the PAP
EXCEPT C) the former spouse of the named insured who moved out of the
home 2 years ago when the divorce was finalized.
5) Which of the following persons is (are) covered for liability insurance under the
PAP? I. A family member who drives a covered auto. II. C) both I and II
6) All of the following are covered as supplementary payments under the liability
section of the PAP EXCEPT B) the cost of a bail bond for a traffic violation
when no accident is involved.
7) Which of the following situations would be covered by the liability section of an
unendorsed PAP if the insured is legally liable?. B) The insured backs into and
damages the garage door of his rented house.
8) What is the purpose of the extended nonowned liability coverage endorsement to
the PAP? D) to provide liability coverage for an insured who operates a
nonowned auto on a regular basis
9) Which of the following situations would be covered under the liability section of
the PAP? I. A mechanic is sued by a pedestrian who is injured when the mechanic
has an accident while road testing the insureds auto. II. The daughter of the named
insured is sued after she has an accident when a new friend she just met at a
campus hangout lets her drive his car. B) II only
10) Larry has $25,000 of bodily injury liability coverage under his PAP. This limit is
the minimum amount required by his state to be considered financially responsible.
While on a vacation, Larry visited a neighboring state which has a minimum
financial responsibility limit of $50,000 for bodily injury. Which of the following
statements describes the situation for Larry while he was in the neighboring state?
C) Larrys policy automatically provided $50,000 of liability coverage.
11) John occasionally borrows the car of his friend, Sophie. Sophie has a PAP with
liability limits of 100/300/50. John also has a PAP, and his liability limits 250/500/50.
John had an accident while using Sophies car and was found to be legally liable for
$300,000 in bodily injury liability. How much will be paid by each policy? C)
Sophies policy will pay $100,000, Johns policy will pay $200,000.
12) Which of the following statements about the medical payments coverage of the
PAP is true? C) Covered expenses include the cost of funeral services.

13) All of the following are covered persons under the medical payments coverage
of the PAP EXCEPT B) a pedestrian struck by the named insureds auto.
14) Tony has a PAP which provides medical payments coverage. Under which of the
following circumstances would the injured person be eligible for benefits under
Tonys policy? I. A friend is injured while Tony is driving a nonowned auto. II. A
hitchhiker riding with Tonys son is injured when the son wrecks Tonys auto. B) II
only
15) All of the following are exclusions under the medical payments coverage of the
PAP EXCEPT. C) injuries incurred in an auto while it is used in a share-theexpense car pool.
16) Which of the following statements about the uninsured motorists coverage of
the PAP is true? A) The coverage usually applies only to property damage. B) The
coverage applies only if the uninsured motorist is legally liable.
17) Which of the following persons is (are) insured under the uninsured motorists
coverage of the PAP? I. A pedestrian struck by a covered auto if he or she has no
insurance to pay medical expenses II. The spouse of a named insured who is killed
by an uninsured motorist B) II only
18) All of the following are considered to be uninsured vehicles for purposes of the
uninsured motorists coverage of the PAP EXCEPT C) a vehicle upon which just
enough liability insurance has been purchased to satisfy the states
financial responsibility law.
19) Joyce was injured by an uninsured drunk driver while she was riding in a friends
car. Joyce and her friend each have a PAP with an uninsured motorists limit of
$50,000. How much will be paid by each policy if it is determined that Joyce has
$70,000 of bodily injuries? D) The friends policy will pay $50,000, and Joyces
policy will pay $20,000.
20) All of the following statements about Part D (coverage for damage to your auto)
of the PAP are true EXCEPT D) A newly acquired auto is covered only if the
named insured asks the company to insure it within 24 hours of
acquisition.
21) Which of the following is considered to be a collision loss under Part D (coverage
for damage to your auto) of the PAP? C) The covered auto is damaged when it
slid off an icy road and hit a fence.
22) John has an auto which is covered for collision losses subject to a $250
deductible. Kates auto also has collision coverage but her deductible is $500. Which
of the following statements describes how a $2,000 collision loss will be paid if it
occurs when John borrows Kates car because his car is in the shop for repairs? D)
Kates policy will pay $1,500, and Johns policy will pay $250.
23) All of the following losses are excluded under Part D (coverage for damage to
your auto) of an unendorsed PAP EXCEPT B) theft of a compact disc player
which was permanently installed in the auto.
24) The insurance companys options for settling a collision loss to a covered auto
under the PAP include which of the following? I. Pay the loss in money. II. Repair or
replace the damaged auto. C) both I and II
25) Duties of an insured after a collision loss covered under the PAP include which of
the following? I. Take reasonable steps to protect the vehicle from further damage.
II. Admit fault if the insured believes he or she caused the collision. A) I only
26) In addition to providing coverage in the United States, its territories and
possessions, and Puerto Rico, where else does the PAP provide coverage? B) in
Canada

27) All of the following statements about the termination provisions of the PAP are
true EXCEPT C) The insurer can cancel the policy after it has been in force
for 60 days only if the insured has three or more traffic violations.
28) The Miscellaneous-Type Vehicle Endorsement to the PAP can be used to insure
all of the following vehicles EXCEPT C) snowmobiles.
29) Which of the following statements about the Miscellaneous-Type Vehicle
Endorsement to the PAP is (are) true? I. It provides bodily injury liability coverage for
any vehicle rented by the insured. II. To lower premiums when a motorcycle is
insured, bodily injury to passengers can be excluded. B) II only
30) Ken fell asleep while driving late at night. He crossed the center line and hit a
car approaching from the other direction. The following losses occurred: The driver
of the other car suffered $30,000 in bodily injuries. Kens car sustained $5,000 in
damages. Ken incurred $5,000 in medical expenses. The car that Ken hit was a
total loss. Which of Kens Personal Auto Policy (PAP) coverages will cover the other
drivers medical expenses? A) bodily injury liability
31) Ken fell asleep while driving late at night. He crossed the center line and hit a
car approaching from the other direction. The following losses occurred: The driver
of the other car suffered $30,000 in bodily injuries. Kens car sustained $5,000 in
damages. Ken incurred $5,000 in medical expenses. The car that Ken hit was a
total loss. Which of Kens Personal Auto Policy (PAP) coverages will cover the
damage to Kens car? B) collision coverage
32) Ken fell asleep while driving late at night. He crossed the center line and hit a
car approaching from the other direction. The following losses occurred: The driver
of the other car suffered $30,000 in bodily injuries. Kens car sustained $5,000 in
damages. Ken incurred $5,000 in medical expenses. The car that Ken hit was a
total loss. Which of Kens Personal Auto Policy (PAP) coverages will cover Kens
medical expenses? C) medical payments coverage
33) Ken fell asleep while driving late at night. He crossed the center line and hit a
car approaching from the other direction. The following losses occurred: The driver
of the other car suffered $30,000 in bodily injuries. Kens car sustained $5,000 in
damages. Ken incurred $5,000 in medical expenses. The car that Ken hit was a
total loss. Which of Kens Personal Auto Policy (PAP) coverages will cover the
damage to the car that Ken hit? D) property damage liability
34) Sarah purchased a Personal Auto Policy with liability limits of 50/100/25. Sarah
ran a stop sign and hit a van. The van sustained $15,000 in damages. The following
bodily injuries were suffered by passengers in the van: Passenger #1, $15,000;
Passenger #2, $60,000; and Passenger #3, $10,000. Sarah sustained $5,000 in
medical expenses, and Sarahs car sustained $10,000 in damages. How much will
Sarahs insurer pay under Part A: Liability Coverage? A) $90,000
35) Patricia purchased a Personal Auto Policy (PAP). Her car was rear-ended by a
driver who fled the scene. Patricia suffered whiplash, migraine headaches, and she
was unable to work. Which of the following coverages will cover her lost work
earnings? B) uninsured motorists
36) Rob purchased a Personal Auto Policy (PAP) with collision and other-thancollision coverage. All of the following losses are excluded under this physical
damage coverage EXCEPT A) Rob wrecked his car while using it as a taxi cab. C) A
flash flood washed Robs car off the road and damaged it.
37) Angie was injured when her car was struck by a driver who ran a red light. The
other driver carried the minimum liability coverage necessary to be considered
financially responsible. Angies injuries were $15,000 above the minimum bodily

injury limit. There is a coverage that can be added to the PAP that applies when a
negligent driver carries the minimum liability insurance required by the state, but
less than the insureds actual damages for bodily injury. This coverage is called B)
underinsured motorists coverage.
38) Dennis was involved in an accident. He believes the damage to his auto is
$6,000. His insurer believes the damage is only $3,500. Which PAP provision is
designed to handle disputes between the insurer and the insured over the amount
of the loss? D) appraisal provision
39) The purpose of the collision damage waiver when renting an auto is to A)
relieve the renter of financial responsibility if the rented car is damaged
or stolen.
40) Which of the following statements is (are) true with respect to the collision
damage waiver on rented cars? I. It is inexpensive and is provided at no charge by
most rental car companies. II. It waives renters liability for bodily injury liability
arising out of the use of the rented auto. D) neither I nor II
41) The purpose of gap insurance is to B) pay the difference between the
amount the insurer pays if a car is a total loss and the amount owed on a
lease or car loan.
42) A car damaged in an auto accident may have reduced market or resale value
after it is repaired. Some insureds sought to recover this reduction in market or
resale value. This loss in value is called: C) diminution
43) If the value of a vehicle is increased after repairs, such as repainting an entire
auto when only one fender or door is damaged, the insurer will not pay for the
increase in value. Another name for the increase in value is B) betterment.
44) The 2005 PAP states that the insurer has no duty to provide coverage if the
insured fails to comply with certain listed duties. In practice, however, the insurer is
only relieved of its duty to provide coverage if B) failure to comply with the
duties is prejudicial to the insurer.
45) Which statement concerning towing and labor coverage under the PAP is (are)
true? I. If the insured purchases collision coverage, towing and labor coverage is
provided automatically. II. Towing and labor coverage pays for repairs at a service
station or garage. D) neither I nor II
Chapter 19
Legal Wrong
A violation of a person's legal rights, or a failure to perform a legal duty
owed to a certain person or to society as a whole. Includes crimes, a
breach of contract and torts.
Tort
A civil injury designed to provide a remedy (damages) for injury to a
protected interest. Could be intentional, subject to strict liability, or out of
negligence
Plaintiff (claimant)
The injured party.
Tortfeasor (defendant)
Person who intentionally or unintentionally (negligently) causes injury or
death to another person
Compensatory damages
Award of money intended to compensate an injured party for losses
actually incurred
Special damages

compensate the plaintiff for quantifiable monetary losses, such as medial

expenses, lost wages & benefits, loss of irreplaceable items, cost of
repairing or replacing, damaged property
General Damages
Type of compensatory damages--compensate individuals for the nonmonetary aspects of the harm suffered, such as pain and suffering
-award for physical or emotional pain and suffering, loss of
companionship, loss of consortium, disfigurement, loss or reputation, or
loss of impairment of mental or physical capacity
punitive damages
Awards designed to punish the wrongdoer and deter others from similar
wrongdoing
Proximate cause
There must be an unbroken chain of events between the negligent act and
the injury or harm that occurs
Res ipsa loquitur
Latin for "the thing itself speaks" - states that the elements of duty of
careand breach can be sometimes inferred from the very nature of an
accident or other outcome, even without direct evidence of how any
defendantbehaved
Contributory Negligence

If both parties are negligent, no recovery

Any degree of negligence is sufficient

does not take into consideration how much negligence

Provides incentive for person to exercise "due care"

Comparative negligence
If both the defendant and plaintiff contribute to the plaintiff's injury, the
financial burden of the injury is shared by both parties according to their
respective degrees of fault
Pure rule
can collect damages for your injury even if you are negligent, but your
award is reduced proportionately
50 percent rule
plaintiff can only recover if his fault is less than or equal to 50%
51% percent rule
you cannot recover if you are 51% or more at fault (you can have equal or
less fault than other party)
last clear chance rule
a plaintiff who is endangered by his or her own negligence can still
recover damages from the defendant if the defendant has a last clear
chance to avoid the accident but fails to do so
Assumption of Risk
defense arises from the plaintiff's knowledge of and willful undertaking of
an activity that is inherently dangerous
a "state of the art" defense
would mean a product manufactured using current technology could not
be judged against the performance of a product using improved
technology unavailable at the time the product was made (golfer that died

due to problems with pressurization in an old plane could not recover from
the plane manufacturer)
Imputed negligence
the negligence of one person can be attributed to anothertypes: employer
& employee, vicarious liability law, family purpose doctrine, dram shop law
dram shop law
a business that sells liquorcan be held liable for damages that may result
from the sale of liquor
Respondent superior
the principal is liable for the actions of an agent
Collateral Source Rule
The collateral source rule prohibits the introduction of any evidence of
payments from collateral sources in the liability portion of a proceeding.
This rule is in place to prevent from misleading the jury.
Joint and several liability rule
several people may be responsible for the injury, but a defendant who is
only slightly responsible may be required to pay the full amount of
damages
Alternative Dispute Resolution (ADR)
Any procedure or device for resolving a dispute outside of the traditional
judicial process
Arbitration
A technique by which parties in a dispute agree to be bound by the
decision of an independent third party
Mediation
A technique by which a neutral third party tries to arrange a settlement
without resorting to litigation
1) Which of the following statements about torts is (are) true? I. The person who is
injured or harmed by a tort is called a plaintiff or claimant. II. The punishment for
committing a tort is damages in the form of money. C) both I and II
2) Which of the following is an intentional tort? D) slander
3) A situation in which a person is held legally liable even though fault or negligence
cannot be proven is an example of A) strict liability.
4) Failure to exercise the degree of care required by law to protect others from harm
is called D) negligence.
5) All of the following are elements of negligence EXCEPT C) the ability to pay
damages.
6) Which of the following statements about the elements of negligence is (are) true?
I. The negligence of the tortfeasor may arise from a failure to act. II. The damage
that results must be in the form of property damage. A) I only
7) Damages awarded for losses that can be determined or measured are A) special
damages.
8) Which of the following statements about monetary damages awarded by a court
is (are) true? I. The purpose of general damages is to provide benefits for medical
expenses or loss of earnings. II. The purpose of punitive damages is to punish the
tortfeasor so that others are deterred from committing the same wrongful act. B) II
only
9) Heather sued Robert for injuries suffered in an automobile accident. Based upon
the facts presented, the jury concluded that Heather was 40 percent at fault in the

accident and Robert was 60 percent at fault. Under the common law doctrine of
contributory negligence, the jury should award Heather A) nothing.
10) Which of the following statements about comparative negligence laws is (are)
true? I. Under the pure rule, any negligence by the plaintiff automatically bars
recovery for damages. II. Under the 50 percent rule, parties who are equally at fault
are each allowed to recover damages. B) II only