ARM 402 UPDATED COMPREHENSIVE QUESTIONS
AND ANSWERS SET A+
✔✔ABC Insurance Company (ABC) has entered into a 60% quota share treaty with
XYZ Reinsurance Company (XYZ). An $80,000 loss occurs that is subject to the
reinsurance treaty. Under the terms of the treaty, how much would XYZ indemnify ABC
for the loss?
A. $0
B. $32,000
C. $48,000
D. $80,000 - ✔✔C
✔✔Large deductible plans
A. Lower an organization's cost of risk.
B. Enable organizations to transfer the financial consequences of losses below the
deductible level.
C. Seldom require proof of financial security from the insured organization.
D. Provide that the insured settle all claims and bill the insurer for losses in excess of
the deductible. - ✔✔A
✔✔An advantage of a large deductible plan is that it allows the insured organization to
A. Benefit from the cash flow available on the retained loss reserves.
B. Benefit from handling its own claims without insurer control.
C. Decrease its uncertainty about the cost of its retained losses.
D. Increase its cost of risk compared with other insurance plans. - ✔✔A
✔✔Which one of the following statements is correct regarding characteristics of ideally
insurable loss exposures?
A. A common function that insurance provides is a spreading of risk across a large
number of similar exposure units within the same period.
B. Intertemporal risk transfer, the spreading of risk through time, requires a large
number of similar exposure units.
,C. One requirement of the law of large numbers is that past events occur under different
circumstances in the future.
D. Loss exposures such as homes and automobiles generally will not meet the ideally
insurable requirement that the exposure be of a large number of similar exposure units.
- ✔✔A
✔✔William is the risk manager for a manufacturing company that has decided to
expand its operations into several foreign countries. He and the executive team are
debating whether they should rely on admitted insurers for insurance coverage in the
foreign countries, or use their insurer domiciled in the U.S. For the executive team,
which one of the following is an advantage of purchasing the insurance for their foreign
operations through admitted insurers in those countries?
A. Purchasing locally will increase the company's purchasing power and strengthen the
implementation of its enterprise risk management program.
B. Doing business locally and complying with local laws will help integrate the company
into the local economy and community.
C. The premium and claims payments will be made in U.S. currency, thereby
eliminating foreign exchange rate risk.
D. By using local admitted insurers they are less likely to have prob - ✔✔B
✔✔Which one of the following types of excess liability policies would be least likely to
create gaps between the excess and the underlying insurance layers?
A. Combination excess liability policy
B. Self-contained excess liability policy
C. Specific excess liability policy
D. Pure following-form excess liability policy - ✔✔D
✔✔An insured has a commercial general liability policy with one insurer and an excess
liability policy with another insurer. There are coverage gaps due to the excess policy's
independence from the underlying policy for coverage determination. Which one of the
following types of excess policy does the insured have?
A. Aggregate excess liability policy
B. Self-contained excess liability policy
C. Following-form excess liability policy
D. Specific excess liability policy - ✔✔B
✔✔Reinsurers may transfer part of the liability that they have accepted in reinsurance
agreements to other reinsurers, known as
A. Ceding reinsurers.
B. Cedents.
C. Direct insurers.
D. Retrocessionaires. - ✔✔D
,✔✔A U.S.-based company that has international operations may use a controlled
master program to insure all of its operations. Which one of the following statements
regarding a controlled master program is true?
A. The U.S. company is required to purchase all of the coverages through locally
admitted insurers.
B. Usually there are separate policies for the domestic U.S. exposures.
C. The master policy is excess over locally purchased admitted coverage and can be no
broader than the underlying policies.
D. Excess and umbrella liability apply only to coverage on U.S. operations. - ✔✔B
✔✔A primary insurer has a five-line surplus share treaty with a $50 million limit. For a
specific loss exposure with coverage limit needs of $20 million, the primary insurer's line
guide permits a $5 million line. Which one of the following percentages will be used to
cede premiums and losses to the reinsurer?
A. 20%
B. 25%
C. 75%
D. 80% - ✔✔C
✔✔GBB Company's general liability insurance has a $500,000 per-claim limit and a $5
million annual aggregate limit. GBB purchased excess liability insurance with a $2
million per-claim limit. A customer was injured at a GBB store and was awarded a $1.5
million judgment. The first $500,000 of the claim was covered by the general liability
policy. Excess liability insurance can be written in several forms. Under which one of the
following forms is the probability the greatest that the additional $1 million will be
covered?
A. Self-contained excess liability policy
B. Workers compensation and employers' liability policy
C. Combination excess liability policy
D. Following-form excess liability policy - ✔✔D
✔✔A working cover is
A. A surplus share facultative reinsurance contract with a small line.
B. A quota share treaty with a high percent of ceding.
C. An excess of loss reinsurance agreement with a low attachment point.
D. A pro rata treaty with a variable attachment point. - ✔✔C
✔✔Which one of the following statements about the self-contained form of an excess
liability insurance policy is the most accurate?
A. Typically, a self-contained excess liability insurance policy does not depend on the
provisions of the underlying policy for determining the scope of its coverage.
B. The coverage of a self-contained excess liability insurance policy is typically broader
in scope than the coverage of a following-form excess liability policy.
C. Self-contained excess liability insurance policies usually depend on the provisions of
the underlying policy for determining the scope of coverage.
, D. Because the policy language is in manuscript form, self-contained excess liability
insurance policies reduce or eliminate gaps in coverage between the excess and
underlying insurance layer. - ✔✔A
✔✔Treaty reinsurance
A. Obligates the reinsurer to assume those loss exposures that fall within the treaty.
B. Requires that a certificate be completed for each transaction.
C. Obligates the reinsurer to cede loss exposures covered by the agreement.
D. Requires that each loss exposure be separately submitted to the reinsurer. - ✔✔A
✔✔Which one of the following best describes the differences between a following-form
excess liability policy and a self-contained excess liability policy?
A. A self-contained excess liability policy requires a self-insured retention.
B. A combination excess liability policy follows the provisions of the underlying policies
then adds additional conditions or exclusions.
C. A self-contained excess liability policy is broader than a following-form excess liability
policy.
D. A self-contained excess liability policy is subject only to its own provisions. - ✔✔D
✔✔A facultative reinsurance agreement is written for a specified time period
A. And cannot be cancelled by either party unless contractual obligations, such as
payment of premiums, are not met.
B. But can be cancelled at any point during that period by the reinsurer for any reason,
provided adequate notice is provided to the primary insurer.
C. But can be cancelled at any time by the primary insurer.
D. And cannot be cancelled without the express written permission of the insured whose
coverage is the subject of the agreement. - ✔✔A
✔✔Which one of the following statements is true with regard to excess of loss
reinsurance?
A. Per policy excess of loss applies primarily to liability insurance, and per risk excess of
loss applies primarily to property insurance.
B. Per risk excess of loss always applies to both property and liability insurance.
C. Per policy excess of loss applies primarily to property insurance, and per risk excess
of loss applies primarily to liability insurance.
D. Per policy excess of loss applies to both property and liability insurance. - ✔✔A
✔✔New Insurance Company noticed many insurers were withdrawing from the
contractor's liability insurance market. The company believed this was a great
opportunity to enter this market and earn substantial profits. New Insurance, however,
lacked the experience and expertise to successfully market contractor's liability
insurance, and their participation in this market was a dismal failure. New Insurance
Company decided to formally withdraw from this market and to shift all future
responsibility for contractor's liability claims to a reinsurer. What type of reinsurance is
AND ANSWERS SET A+
✔✔ABC Insurance Company (ABC) has entered into a 60% quota share treaty with
XYZ Reinsurance Company (XYZ). An $80,000 loss occurs that is subject to the
reinsurance treaty. Under the terms of the treaty, how much would XYZ indemnify ABC
for the loss?
A. $0
B. $32,000
C. $48,000
D. $80,000 - ✔✔C
✔✔Large deductible plans
A. Lower an organization's cost of risk.
B. Enable organizations to transfer the financial consequences of losses below the
deductible level.
C. Seldom require proof of financial security from the insured organization.
D. Provide that the insured settle all claims and bill the insurer for losses in excess of
the deductible. - ✔✔A
✔✔An advantage of a large deductible plan is that it allows the insured organization to
A. Benefit from the cash flow available on the retained loss reserves.
B. Benefit from handling its own claims without insurer control.
C. Decrease its uncertainty about the cost of its retained losses.
D. Increase its cost of risk compared with other insurance plans. - ✔✔A
✔✔Which one of the following statements is correct regarding characteristics of ideally
insurable loss exposures?
A. A common function that insurance provides is a spreading of risk across a large
number of similar exposure units within the same period.
B. Intertemporal risk transfer, the spreading of risk through time, requires a large
number of similar exposure units.
,C. One requirement of the law of large numbers is that past events occur under different
circumstances in the future.
D. Loss exposures such as homes and automobiles generally will not meet the ideally
insurable requirement that the exposure be of a large number of similar exposure units.
- ✔✔A
✔✔William is the risk manager for a manufacturing company that has decided to
expand its operations into several foreign countries. He and the executive team are
debating whether they should rely on admitted insurers for insurance coverage in the
foreign countries, or use their insurer domiciled in the U.S. For the executive team,
which one of the following is an advantage of purchasing the insurance for their foreign
operations through admitted insurers in those countries?
A. Purchasing locally will increase the company's purchasing power and strengthen the
implementation of its enterprise risk management program.
B. Doing business locally and complying with local laws will help integrate the company
into the local economy and community.
C. The premium and claims payments will be made in U.S. currency, thereby
eliminating foreign exchange rate risk.
D. By using local admitted insurers they are less likely to have prob - ✔✔B
✔✔Which one of the following types of excess liability policies would be least likely to
create gaps between the excess and the underlying insurance layers?
A. Combination excess liability policy
B. Self-contained excess liability policy
C. Specific excess liability policy
D. Pure following-form excess liability policy - ✔✔D
✔✔An insured has a commercial general liability policy with one insurer and an excess
liability policy with another insurer. There are coverage gaps due to the excess policy's
independence from the underlying policy for coverage determination. Which one of the
following types of excess policy does the insured have?
A. Aggregate excess liability policy
B. Self-contained excess liability policy
C. Following-form excess liability policy
D. Specific excess liability policy - ✔✔B
✔✔Reinsurers may transfer part of the liability that they have accepted in reinsurance
agreements to other reinsurers, known as
A. Ceding reinsurers.
B. Cedents.
C. Direct insurers.
D. Retrocessionaires. - ✔✔D
,✔✔A U.S.-based company that has international operations may use a controlled
master program to insure all of its operations. Which one of the following statements
regarding a controlled master program is true?
A. The U.S. company is required to purchase all of the coverages through locally
admitted insurers.
B. Usually there are separate policies for the domestic U.S. exposures.
C. The master policy is excess over locally purchased admitted coverage and can be no
broader than the underlying policies.
D. Excess and umbrella liability apply only to coverage on U.S. operations. - ✔✔B
✔✔A primary insurer has a five-line surplus share treaty with a $50 million limit. For a
specific loss exposure with coverage limit needs of $20 million, the primary insurer's line
guide permits a $5 million line. Which one of the following percentages will be used to
cede premiums and losses to the reinsurer?
A. 20%
B. 25%
C. 75%
D. 80% - ✔✔C
✔✔GBB Company's general liability insurance has a $500,000 per-claim limit and a $5
million annual aggregate limit. GBB purchased excess liability insurance with a $2
million per-claim limit. A customer was injured at a GBB store and was awarded a $1.5
million judgment. The first $500,000 of the claim was covered by the general liability
policy. Excess liability insurance can be written in several forms. Under which one of the
following forms is the probability the greatest that the additional $1 million will be
covered?
A. Self-contained excess liability policy
B. Workers compensation and employers' liability policy
C. Combination excess liability policy
D. Following-form excess liability policy - ✔✔D
✔✔A working cover is
A. A surplus share facultative reinsurance contract with a small line.
B. A quota share treaty with a high percent of ceding.
C. An excess of loss reinsurance agreement with a low attachment point.
D. A pro rata treaty with a variable attachment point. - ✔✔C
✔✔Which one of the following statements about the self-contained form of an excess
liability insurance policy is the most accurate?
A. Typically, a self-contained excess liability insurance policy does not depend on the
provisions of the underlying policy for determining the scope of its coverage.
B. The coverage of a self-contained excess liability insurance policy is typically broader
in scope than the coverage of a following-form excess liability policy.
C. Self-contained excess liability insurance policies usually depend on the provisions of
the underlying policy for determining the scope of coverage.
, D. Because the policy language is in manuscript form, self-contained excess liability
insurance policies reduce or eliminate gaps in coverage between the excess and
underlying insurance layer. - ✔✔A
✔✔Treaty reinsurance
A. Obligates the reinsurer to assume those loss exposures that fall within the treaty.
B. Requires that a certificate be completed for each transaction.
C. Obligates the reinsurer to cede loss exposures covered by the agreement.
D. Requires that each loss exposure be separately submitted to the reinsurer. - ✔✔A
✔✔Which one of the following best describes the differences between a following-form
excess liability policy and a self-contained excess liability policy?
A. A self-contained excess liability policy requires a self-insured retention.
B. A combination excess liability policy follows the provisions of the underlying policies
then adds additional conditions or exclusions.
C. A self-contained excess liability policy is broader than a following-form excess liability
policy.
D. A self-contained excess liability policy is subject only to its own provisions. - ✔✔D
✔✔A facultative reinsurance agreement is written for a specified time period
A. And cannot be cancelled by either party unless contractual obligations, such as
payment of premiums, are not met.
B. But can be cancelled at any point during that period by the reinsurer for any reason,
provided adequate notice is provided to the primary insurer.
C. But can be cancelled at any time by the primary insurer.
D. And cannot be cancelled without the express written permission of the insured whose
coverage is the subject of the agreement. - ✔✔A
✔✔Which one of the following statements is true with regard to excess of loss
reinsurance?
A. Per policy excess of loss applies primarily to liability insurance, and per risk excess of
loss applies primarily to property insurance.
B. Per risk excess of loss always applies to both property and liability insurance.
C. Per policy excess of loss applies primarily to property insurance, and per risk excess
of loss applies primarily to liability insurance.
D. Per policy excess of loss applies to both property and liability insurance. - ✔✔A
✔✔New Insurance Company noticed many insurers were withdrawing from the
contractor's liability insurance market. The company believed this was a great
opportunity to enter this market and earn substantial profits. New Insurance, however,
lacked the experience and expertise to successfully market contractor's liability
insurance, and their participation in this market was a dismal failure. New Insurance
Company decided to formally withdraw from this market and to shift all future
responsibility for contractor's liability claims to a reinsurer. What type of reinsurance is
