ARM 402 EOC EXAMS QUESTIONS AND ANSWERS
SET A+
✔✔Commercial general liability insurance policies written on an occurrence basis apply
to bodily injury and property damage that occurs during the policy period. This provision
supports the principle that insurable loss exposures must ideally be
A. Fortuitous.
B. Pure risks.
C. Definite.
D. Independent. - ✔✔C
✔✔Ideally insurable loss exposures are subject to losses that
A. Occur gradually over long periods of time.
B. Are definite in time, cause, and location.
C. Result from unidentifiable causes.
D. Are immeasurable in terms of frequency or severity. - ✔✔B
✔✔One of the basic forms for an excess liability policy that is subject to the same
provisions as the underlying liability policy is the
A. Monoline form.
B. Following-form.
C. Self-contained form.
D. Manuscript form. - ✔✔B
✔✔Kendall Incorporated is a manufacturer based in the U.S. which has growing
international exposures. It does not own any permanent offices or manufacturing
facilities in foreign countries, but it does have several employees who travel to these
countries on a fairly regular basis. Kendall Incorporated purchased an exporters
package policy through its U.S.-based insurer to cover the incidental exposures in these
foreign countries. Which one of the following coverages will Kendall need to purchase
from admitted insurers in the individual countries?
A. Crime
B. Personal property
,C. Compulsory auto liability
D. Foreign voluntary workers compensation - ✔✔C
✔✔Self-contained excess liability policies
A. Can create coverage gaps between excess and underlying layers.
B. Typically cover in excess of an exhausted underlying aggregate limit.
C. Contain a deductible specific to the policy.
D. Have the same conditions as the underlying layer. - ✔✔A
✔✔An insured has a specific excess liability policy with a $100,000 per occurrence
retention and a $1,000,000 maximum limit. The insured suffers separate losses of
$25,000, $50,000, $100,000, and $900,000 during one policy year. Under the specific
excess liability policy, the insurer will pay
A. $100,000.
B. $800,000.
C. $1,000,000.
D. $1,075,000. - ✔✔B
✔✔Reinsurers help primary insurers increase their large-line capacity by
A. Accepting liability for loss exposures that the primary insurer is unwilling or unable to
retain.
B. Providing high layers of insurance above the underlying limits.
C. Supplementing primary insurers' earnings.
D. Influencing regulations related to the maximum amount of insurance allowed. - ✔✔A
✔✔An organization may use a large deductible plan to do which one of the following?
A. Retain high severity losses
B. Increase its cost of risk
C. Defer cash outflows for accidental losses
D. Avoid paying residual market loadings - ✔✔C
✔✔One reason that primary insurers purchase reinsurance for catastrophes is to
A. Satisfy regulatory requirements for reinsurance.
B. Reduce policyholders' surplus to acceptable levels.
C. Stabilize insurer earnings.
D. Increase large-line capacity. - ✔✔C
✔✔A replenishment of policyholders' surplus provided by the ceding commission paid to
the primary insurer by the reinsurer is
A. Surplus relief.
B. A portfolio.
C. The capacity ratio.
D. Large-line capacity. - ✔✔A
,✔✔For a company that has international operations, which one of the following is an
advantage of using a controlled master program?
A. Local risk managers have greater control and responsibility for their foreign
subsidiaries.
B. Only one insurance policy is purchased that provides all coverage in a single
contract.
C. Less information is generated that must be reviewed and analyzed under a controlled
master program.
D. Premiums are lower because of the elimination of duplicate coverage and increased
purchasing power. - ✔✔D
✔✔A large deductible is similar to a self-insured retention (SIR) in that both
A. Give the insurer complete control over claim handling.
B. Require that the insured adjust and pay claims up to the deductible or SIR amount.
C. Require the insured organization to retain a relatively large amount of loss.
D. Provide detailed reports to the insurer on all claims. - ✔✔C
✔✔The maximum amount of insurance or limit of liability that an insurer will accept on a
single loss exposures is called a
A. Retrocession.
B. Line.
C. Novation.
D. Loss limit. - ✔✔B
✔✔Oscar's custom-built vehicle looks like a sausage sandwich on wheels. He plans to
drive it to special events at schools around the country where it will serve as a mobile
billboard to promote his product. Oscar is surprised to learn that insurers are reluctant to
insure his vehicle because it fails to meet one of the ideal characteristics of an insurable
risk. Which characteristic is Oscar's vehicle least likely to meet?
A. Pure risk
B. Definite and measurable
C. Large number of similar exposure units
D. Independent and not catastrophic - ✔✔C
✔✔Private insurers are reluctant to provide windstorm insurance on coastal properties.
This is because the loss exposures fail to meet the criterion that ideally insurable
exposures must be
A. Independent and not catastrophic.
B. A large number of similar exposure units.
C. Fortuitous.
D. Definite and measurable. - ✔✔A
✔✔A chemical manufacturing company has coverage under a typical commercial
general liability (CGL) policy providing $1,000,000 in coverage for each occurrence. The
company also has typical following-form excess liability insurance with $3,000,000 in
, coverage for each occurrence. A $2,000,000 loss occurs that is excluded by the CGL
policy. The following-form excess liability policy would
A. Cover the full amount of the loss.
B. Cover the loss only up to $1,000,000.
C. Not cover the claim because it is not covered by the underlying policy.
D. Pro-rate the amount of the loss with the CGL policy. - ✔✔C
✔✔Smith Enterprises is a national plastics distributor with property values in excess of
$20 million spread throughout the country. Smith Enterprises wants to insure all of its
property exposures with the same insurer. Which function of reinsurance would be most
beneficial to Smith's primary insurer?
A. Increase large-line capacity
B. Provide underwriting guidance
C. Stabilize loss experience
D. Provide catastrophe protection - ✔✔A
✔✔An excess liability insurance policy that covers a claim in excess of the underlying
limits only if the loss is covered by the underlying policy is called
A. A layered policy.
B. A following-form excess policy.
C. A true excess policy.
D. An umbrella policy. - ✔✔B
✔✔Quota share reinsurance is a type of pro rata reinsurance in which the primary
insurer and the reinsurer
A. Divide the reinsurer's excess profits equally.
B. Split losses according to a sliding scale.
C. Split policy premiums according to a negotiated sliding scale.
D. Share the amounts of insurance using a fixed percentage. - ✔✔D
✔✔Self-insurance is most appropriate for organizations that have all of the following
characteristics, EXCEPT:
A. Willingness to devote capital and resources to the program's financing and
administration
B. Commitment to risk control
C. Ability to tolerate risk retention
D. Low predictability of total losses - ✔✔D
✔✔A captive insurer
A. Collects premiums, issues policies, and pays covered losses.
B. Usually insures medium to high severity of losses.
C. Acts as any other insurer but does not fund losses.
D. Does not have substantial administrative requirements. - ✔✔A
✔✔Any organization can self-insure its loss exposures, provided that
SET A+
✔✔Commercial general liability insurance policies written on an occurrence basis apply
to bodily injury and property damage that occurs during the policy period. This provision
supports the principle that insurable loss exposures must ideally be
A. Fortuitous.
B. Pure risks.
C. Definite.
D. Independent. - ✔✔C
✔✔Ideally insurable loss exposures are subject to losses that
A. Occur gradually over long periods of time.
B. Are definite in time, cause, and location.
C. Result from unidentifiable causes.
D. Are immeasurable in terms of frequency or severity. - ✔✔B
✔✔One of the basic forms for an excess liability policy that is subject to the same
provisions as the underlying liability policy is the
A. Monoline form.
B. Following-form.
C. Self-contained form.
D. Manuscript form. - ✔✔B
✔✔Kendall Incorporated is a manufacturer based in the U.S. which has growing
international exposures. It does not own any permanent offices or manufacturing
facilities in foreign countries, but it does have several employees who travel to these
countries on a fairly regular basis. Kendall Incorporated purchased an exporters
package policy through its U.S.-based insurer to cover the incidental exposures in these
foreign countries. Which one of the following coverages will Kendall need to purchase
from admitted insurers in the individual countries?
A. Crime
B. Personal property
,C. Compulsory auto liability
D. Foreign voluntary workers compensation - ✔✔C
✔✔Self-contained excess liability policies
A. Can create coverage gaps between excess and underlying layers.
B. Typically cover in excess of an exhausted underlying aggregate limit.
C. Contain a deductible specific to the policy.
D. Have the same conditions as the underlying layer. - ✔✔A
✔✔An insured has a specific excess liability policy with a $100,000 per occurrence
retention and a $1,000,000 maximum limit. The insured suffers separate losses of
$25,000, $50,000, $100,000, and $900,000 during one policy year. Under the specific
excess liability policy, the insurer will pay
A. $100,000.
B. $800,000.
C. $1,000,000.
D. $1,075,000. - ✔✔B
✔✔Reinsurers help primary insurers increase their large-line capacity by
A. Accepting liability for loss exposures that the primary insurer is unwilling or unable to
retain.
B. Providing high layers of insurance above the underlying limits.
C. Supplementing primary insurers' earnings.
D. Influencing regulations related to the maximum amount of insurance allowed. - ✔✔A
✔✔An organization may use a large deductible plan to do which one of the following?
A. Retain high severity losses
B. Increase its cost of risk
C. Defer cash outflows for accidental losses
D. Avoid paying residual market loadings - ✔✔C
✔✔One reason that primary insurers purchase reinsurance for catastrophes is to
A. Satisfy regulatory requirements for reinsurance.
B. Reduce policyholders' surplus to acceptable levels.
C. Stabilize insurer earnings.
D. Increase large-line capacity. - ✔✔C
✔✔A replenishment of policyholders' surplus provided by the ceding commission paid to
the primary insurer by the reinsurer is
A. Surplus relief.
B. A portfolio.
C. The capacity ratio.
D. Large-line capacity. - ✔✔A
,✔✔For a company that has international operations, which one of the following is an
advantage of using a controlled master program?
A. Local risk managers have greater control and responsibility for their foreign
subsidiaries.
B. Only one insurance policy is purchased that provides all coverage in a single
contract.
C. Less information is generated that must be reviewed and analyzed under a controlled
master program.
D. Premiums are lower because of the elimination of duplicate coverage and increased
purchasing power. - ✔✔D
✔✔A large deductible is similar to a self-insured retention (SIR) in that both
A. Give the insurer complete control over claim handling.
B. Require that the insured adjust and pay claims up to the deductible or SIR amount.
C. Require the insured organization to retain a relatively large amount of loss.
D. Provide detailed reports to the insurer on all claims. - ✔✔C
✔✔The maximum amount of insurance or limit of liability that an insurer will accept on a
single loss exposures is called a
A. Retrocession.
B. Line.
C. Novation.
D. Loss limit. - ✔✔B
✔✔Oscar's custom-built vehicle looks like a sausage sandwich on wheels. He plans to
drive it to special events at schools around the country where it will serve as a mobile
billboard to promote his product. Oscar is surprised to learn that insurers are reluctant to
insure his vehicle because it fails to meet one of the ideal characteristics of an insurable
risk. Which characteristic is Oscar's vehicle least likely to meet?
A. Pure risk
B. Definite and measurable
C. Large number of similar exposure units
D. Independent and not catastrophic - ✔✔C
✔✔Private insurers are reluctant to provide windstorm insurance on coastal properties.
This is because the loss exposures fail to meet the criterion that ideally insurable
exposures must be
A. Independent and not catastrophic.
B. A large number of similar exposure units.
C. Fortuitous.
D. Definite and measurable. - ✔✔A
✔✔A chemical manufacturing company has coverage under a typical commercial
general liability (CGL) policy providing $1,000,000 in coverage for each occurrence. The
company also has typical following-form excess liability insurance with $3,000,000 in
, coverage for each occurrence. A $2,000,000 loss occurs that is excluded by the CGL
policy. The following-form excess liability policy would
A. Cover the full amount of the loss.
B. Cover the loss only up to $1,000,000.
C. Not cover the claim because it is not covered by the underlying policy.
D. Pro-rate the amount of the loss with the CGL policy. - ✔✔C
✔✔Smith Enterprises is a national plastics distributor with property values in excess of
$20 million spread throughout the country. Smith Enterprises wants to insure all of its
property exposures with the same insurer. Which function of reinsurance would be most
beneficial to Smith's primary insurer?
A. Increase large-line capacity
B. Provide underwriting guidance
C. Stabilize loss experience
D. Provide catastrophe protection - ✔✔A
✔✔An excess liability insurance policy that covers a claim in excess of the underlying
limits only if the loss is covered by the underlying policy is called
A. A layered policy.
B. A following-form excess policy.
C. A true excess policy.
D. An umbrella policy. - ✔✔B
✔✔Quota share reinsurance is a type of pro rata reinsurance in which the primary
insurer and the reinsurer
A. Divide the reinsurer's excess profits equally.
B. Split losses according to a sliding scale.
C. Split policy premiums according to a negotiated sliding scale.
D. Share the amounts of insurance using a fixed percentage. - ✔✔D
✔✔Self-insurance is most appropriate for organizations that have all of the following
characteristics, EXCEPT:
A. Willingness to devote capital and resources to the program's financing and
administration
B. Commitment to risk control
C. Ability to tolerate risk retention
D. Low predictability of total losses - ✔✔D
✔✔A captive insurer
A. Collects premiums, issues policies, and pays covered losses.
B. Usually insures medium to high severity of losses.
C. Acts as any other insurer but does not fund losses.
D. Does not have substantial administrative requirements. - ✔✔A
✔✔Any organization can self-insure its loss exposures, provided that
