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#2 Quiz - RM 357e - Chapters 7 thru 10 Name____________________________UT EID_______________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1. All of the following would appear in the asset section of an insurance company's balance sheet EXCEPT a. loss reserves. b. common stock. c. real estate. d. bonds. 2. Reasons for the unearned premium reserve include which of the following? I. To pay losses that occur during the policy period. II. To pay premium refunds to policyholders in the event of cancellation. a. I only b. II only c. both I and II d. neither I nor II 3. One item that appears on an insurance company's financial statements is a liability that represents an estimate of the claims reported and adjusted but not yet paid, claims reported and filed but not yet adjusted, and claims incurred but not yet reported to the company. This liability is called the insurer's a. unearned premium reserve. b. net income. c. loss reserve. d. admitted assets. 4. Which of the following statements about property and casualty insurance company operating results is (are) true? I. An insurance company can have a combined ratio greater than 1 (or 100 percent) and still be required to pay income taxes. II. By all measures, the property and casualty insurance industry is highly profitable when compared to other industries. a. I only b. II only c. both I and II d. neither I not II 5. All of the following statements about regulatory objectives of insurance rate making are true EXCEPT a. Rates unfairly discriminate if loss exposures that are similar with respect to losses and expenses are charged substantially different rates. b. Insurers know in advance if the coverages marketed will be profitable, so rate regulation is not needed. c. Rates are excessive if policyholders are paying substantially more than the actual value of their protection. d. One purpose of rate adequacy is to maintain the solvency of insurers. 1. 2. 3. 4. 5. 1 6. The unit of measurement used in property and casualty insurance pricing is called the a. unit rate. b. experience unit. c. premium. d. exposure unit. 7. The portion of an insurance premium allocated to expenses, profit, and a margin for contingencies is called the a. loading. b. gross premium. c. pure premium. d. experience rate. 8. All of the following statements about the combined ratio are true EXCEPT a. It is equal to the loss ratio plus the expense ratio. b. A combined ratio greater than 1 (or 100 percent) means an underwriting loss has occurred. c. A combined ratio less than 1 (or 100 percent) indicates that an underwriting loss has occurred. d. The combined ratio does not consider investment income. 9. Reasons for regulation of insurance include which of the following? I. Maintaining insurer solvency. II. Ensuring reasonable rates. a. I only b. II only c. both I and II d. neither I nor II 10. The basis for current state regulation of insurance is a. the South-Eastern Underwriters Association case. b. the National Association of Insurance Commissioners. c. the McCarran-Ferguson Act. d. Paul v. Virginia. 11. An insurance company incorporated in another state has been licensed to operate in your state. In your state, the insurer would be considered a(n) a. foreign insurer. b. nonadmitted insurer. c. alien insurer. d. reciprocal insurer. 12. Under one type of rating law, insurers are not required to file their rates with the state insurance department. However, insurers may be required to furnish rate schedules and supporting data to state officials. A fundamental assumption underlying this type of rating law is that market forces will determine the price and availability of insurance, rather than discretionary acts of regulators. This type of rating law is called a(n) a. file-and-use law. b. prior-approval law. c. flex-rating law. d. open competition law. 6. 7. 8. 9. 10. 11. 12. 2 13. The major reasons for insurer insolvency include which of the following? I. Inadequate pricing and loss reserves. II. Rapid growth and inadequate surplus. a. I only b. II only c. both I and II d. neither I nor II 14. Fly-By-Night Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If Fly-By-Night becomes insolvent, which of the following will help pay the unpaid claims of the insurer? a. risk-based capital b. premium taxes c. guaranty fund d. admitted 15. assets State X's premium tax rate is 2 percent. State Y's premium tax rate is 3 percent. State X insurers are required to pay the 3 percent rate on business written in State Y. State X requires insurers from State Y to pay a 3 percent premium tax on business written in State X, even though the premium tax rate is only 2 percent in State X. This practice is known as a a. retaliatory tax law. b. risk-based capital requirement. c. guaranty fund assessment. d. tax tariff. 16. The regulation of insurers in areas that affect consumers, which include claims handling, underwriting, complaints, advertising, sales practices, and other trade practices is called a. combined ratio analysis. b. market share regulation. c. solvency surveillance. d. market conduct regulation. 17. All of the following are arguments in favor of using an applicant's credit record in personal lines underwriting EXCEPT a. There is high correlation between an applicant's credit record and future claims experience. b. Use of credit data in underwriting or rating discriminates against certain groups. c. Underwriting and rating may be more consistent if applicants' credit histories are considered. d. Most consumers have good credit records and benefit when credit history is used as a rating factor. 18. Sam's stereo was destroyed by a fire. The stereo cost $1200 when it was purchased, but a similar new stereo now costs $1800. Assuming the stereo was 50 percent depreciated, what is the actual cash value of Sam's loss? a. $900 b. $1200 c. $600 d. $1800 13. 14. 15. 16. 17. 18. 3 19. A total loss under a valued policy is settled on the basis of the a. replacement value of the loss. b. market value of the loss. c. amount (or limit) of insurance covering the loss. d. actual cash value of the loss. 20. Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis? a. Losses are settled without a deduction for depreciation. b. The policy is converted to a valued policy. c. The insurer must replace the damaged or destroyed property in lieu of a cash settlement. d. Losses are settled without the applicable deductible. 21. When must an insurable interest legally exist in property insurance? a. only at the inception of the policy b. only at the time the loss settlement process takes place c. only at the time of the loss d. both at the time of the loss and at the inception of the policy 22. Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for her loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of a. insurable interest. b. utmost good faith. c. subrogation. d. warranty. 23. What is the legal significance of a material concealment by an insurance applicant? a. The contract is automatically voided from its inception. b. The contract is voidable at the insurer's option. c. The insurer is immediately entitled to a higher premium. d. Loss payments are reduced by the degree of the concealment. 24. David lives in an apartment in a high-crime area. In order to obtain physical damage insurance on his car, David promised to park the car in a garage with 24-hour security. This agreement, which was incorporated into the insurance contract, is an example of a a. contract of adhesion. b. warranty. c. unilateral contract. d. representation. 25. Why does the insured get the benefit of the doubt if an insurance policy contains any ambiguities or uncertainties? a. because insurance contracts are contracts of adhesion b. because insurance contracts are unilateral c. because insurance contracts are conditional d. because insurance contracts are aleatory 19. 20. 21. 22. 23. 24. 25. 4 26. The portion of a property and liability insurance contract that contains information about the property or activity to be insured is called the a. declarations. b. insuring agreement. c. conditions. d. exclusions. 27. Which of the following statements about "all-risks" coverage is (are) true? I. All losses are covered except those losses specifically excluded. II. The burden of proof is on the insured to prove that a loss is covered. a. I only b. II only c. both I and II d. neither I nor II 26. 27. 5 AnswerKey Testname:QUIZ_TWO_FALL_2009_CH7THRU10 1. a 2. c 3. c 4. a 5. b 6. d 7. a 8. c 9. c 10. c 11. a 12. d 13. c 14. c 15. a 16. d 17. b 18. a 19. c 20. a 21. c 22. c 23. b 24. b 25. a 26. a 27. a 6 ... View Full Document

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