CPCU 520 EXAM QUESTIONS WITH COMPLETE
SOLUTIONS
Blithe |Insurance |Company |was |found |to |be |insolvent |following |the |hurricane |and |the
|guaranty |fund |took |over |for |the |state. |Which |one |of |the |following |is |most |likely |to |be |true
|with |respect |to |how |the |guaranty |fund |will |administer |Blithe's |policies? |- ANSWER |For
|those |policies |that |are |terminated, |the |state |will |provide |for |a |refund |of |unearned
|premiums |to |current |policyholders.
Which |of |the |following |would |include |loss |ratios, |expense |ratios |and |combined |ratios? |-
|ANSWER |Financial |controls
Which |of |the |following |is |a |correct |statement |about |the |use |of |a |treaty |and |facultative
|reinsurance? |- ANSWER |Most |treaties |require |that |all |loss |exposures |within |the
|treaty's |terms |be |reinsured.
The |risk |control |service |of |physical |survey |is |comprised |of |- ANSWER |Gathering
|underwriting |information |on |a |customer's |loss |exposures.
Routine |regulation |of |the |insurance |business |is |conducted |by |state |insurance
|departments. |State |insurance |departments |come |under |which |of |the |following |branches
|of |government? |- ANSWER |Executive
Which |of |the |following |is |the |principal |business |purpose |of |a |professional |reinsurer? |-
|ANSWER |To |provide |a |source |for |the |reinsurance |needs |of |insurers
The |loss |ratio |- ANSWER |incurred |losses |including |LAE |/ |earned |premiums
Brookgreen |Insurance |has |a |40 |percent |quota |share |treaty |with |Cypress |Reinsurance.
|Policy |A |has |a |limit |of |$50,000, |a |premium |of |$2,000, |and |incurs |a |$5,000 |loss. |Because |of
|the |quota |share |agreement, |how |much |of |the |premium |will |go |to |Cypress
,Reinsurance? |ANSWER |Cypress |Reinsurance |will |get |$2,000 |times |40 |percent |or |$800 |of
|the |premium.
Readability |legislation |has |changed |how |commercial |and |personal |policies |are |written.
|On |the |contrary, |readability |tests |do |not |really |measure |- ANSWER |How |well |the
|policies |can |be |understood.
Greatview |Insurance |wishes |to |improve |the |process |of |processing |property |claims. |The
|claims |department |has |decided |to |examine |the |various |activities |in |the |property |claim
|handling |process, |from |the |time |it |is |first |reported |until |the |final |step |when |the |payment |is
|made. |Which |one |of |the |following |types |of |organizational |strategies |does |this
|represent? |- ANSWER |Operational-level |strategy
Which |of |the |following |ratemaking |data |development |process |steps |would |an |insurer
|review |which |areas |in |a |state |deserve |higher |or |lower |rates? |- | ANSWER |Determine
|territorial |and |class |relativities
The |major |actuarial |functions |for |an |insurer |include |estimation |of |unpaid |liabilities |and
|adequacy |of |loss |reserves |as |well |as |- ANSWER |Ratemaking.
Which |of |the |following |statements |is |TRUE |about |the |users |of |claim |information?
|ANSWER |The |producers |must |have |the |policyholder |loss |information |in |order |to
|appropriately |prepare |renewal |policies.
In |adjusting |a |property |loss, |a |claim |representative |must |first |determine |whether |or |not
|the |loss |was |caused |by |a |covered |peril. |Insurance |that |covers |every |cause |of |direct
|physical |loss |or |damage |that |is |not |specifically |excluded |is |known |as |- ANSWER
|Special |form |coverage.
A |safety |management |program |is |developed |based |upon |a |- | ANSWER |Thorough
|analysis |of |the |policyholder's |operation.
The |major |components |of |an |insurer's |bulk, |or |aggregate, |loss |reserves |are |reserves |for
|unreported |claims |plus |- ANSWER |Reserves |for |losses |that |have |inadequate |case
,reserves |and |reserves |for |claims |that |have |settled |and |then |reopened.
Which |of |the |following |is |a |claim |control |used |to |help |meet |regulatory |compliance? |-
|ANSWER |Access |security
Which |of |the |following |statements |is |CORRECT |regarding |the |use |of |treaty |and
|facultative |reinsurance? |- ANSWER |Most |treaties |require |that |all |loss |exposures |within
|the |terms |of |the |treaty |be |reinsured.
Financial |controls |include |assessing |the |company's |stock |price |or |- ANSWER |using
|return |on |investment |for |evaluating |specific |projects.
With |respect |to |underwriting, |it |is |an |unfair |trade |practice |to |- ANSWER |Unfairly
|discriminate |when |selecting |loss |exposures.
The |marketing |department |of |an |insurer |is |interacting |with |the |underwriting |department |to
|identify |what |characteristics |of |middle |market |businesses |produce |the |most |profitable
|commercial |insurance |accounts. |Which |of |the |following |would |be |the |best |way |to |identify
|those |characteristics? |- ANSWER |Predictive |analytics
After |data |have |been |collected |and |adjusted, |and |after |any |territorial |and |class
|relativities |have |been |determined, |rate |filings |must |be |prepared. |Which |one |of |the
|following |statements |is |true |regarding |rate |filings? |- ANSWER |If |an |advisory
|organization |files |rates |or |loss |costs |on |behalf |of |an |insurer, |it |also |handles |any
|follow-up |or |negotiations.
Which |of |the |following |is |a |possible |way |in |which |a |premium |auditor |can |contribute |to
|the |risk |control |function? |- ANSWER. |By |providing |information |about |unsafe
|procedures |or |working |conditions
Under |a |per |occurrence |excess |of |loss |treaty, |the |attachment |point |and |the |reinsurance
|limit |apply |to |- ANSWER |The |total |losses |arising |from |a |single |event |affecting |one |or
|more |policies.
, ABC |Insurance |Company |has |a |20% |quota |share |treaty |with |XYZ |Reinsurer. |One |of
|ABC's |policies |has |a |limit |of |$1 |million |and |premium |of |$8,000. |A |$50,000 |loss |is
|submitted |under |the |policy. |How |much |of |the |loss |will |XYZ |Reinsurer |pay? ANSWER
|XYZ |Reinsurer |will |pay |$50,000 |× |20%, |or |$10,000 |of |the |loss.
For |which |one |of |the |following |types |of |insurance |would |the |judgment |method |of
|ratemaking |most |likely |be |used? |- ANSWER |Terrorism |coverage
A |number |of |unique |factors |shape |the |insurance |marketplace. |Which |one |of |the
|following |factors |is |most |likely |to |lead |to |insurer |insolvency, |withdrawal |from |certain
|geographic |markets, |and |reinsurance |shortages? |- ANSWER |Unanticipated
|catastrophic |losses
Gem- |insurance |Company |wishes |to |purchase |reinsurance |for |the |professional |liability
|insurance |it |will |write |in |the |coming |year. |Which |of |the |following |statements |is |true |with
|respect |to |the |following |sources |of |reinsurance? |- ANSWER |Reinsurance |pools |may
|sell |reinsurance |to |insurers |that |are |not |members |of |the |pool.
One |of |the |functions |of |reinsurance |is |to |increase |large-line |capacity. |Which |one |of |the
|following |best |describes |this |function |from |the |perspective |of |a |primary |insurer? |-
|ANSWER |to |assume |a |loss |exposure |with |potential |financial |consequences |that |are
|higher |than |its |financial |condition |would |otherwise |permit
What |are |the |two |types |of |pro-rata |treaty |reinsurance? |- ANSWER |Quota |share |-
|Insurer |and |reinsurer |used |a |fixed |percentage |in |sharing |the |amounts |of |premiums |and
|losses.
Surplus |share |- |When |a |loss |exceeds |the |primary |insurers |amount, |the |reinsurer |assumes
|the |remaining |amount |of |the |loss.
What |are |the |three |types |of |Excess |of |Loss |Reinsurance? |- ANSWER |Per |Risk, |Per
|Occurrence, |and |Aggregate |Excess
SOLUTIONS
Blithe |Insurance |Company |was |found |to |be |insolvent |following |the |hurricane |and |the
|guaranty |fund |took |over |for |the |state. |Which |one |of |the |following |is |most |likely |to |be |true
|with |respect |to |how |the |guaranty |fund |will |administer |Blithe's |policies? |- ANSWER |For
|those |policies |that |are |terminated, |the |state |will |provide |for |a |refund |of |unearned
|premiums |to |current |policyholders.
Which |of |the |following |would |include |loss |ratios, |expense |ratios |and |combined |ratios? |-
|ANSWER |Financial |controls
Which |of |the |following |is |a |correct |statement |about |the |use |of |a |treaty |and |facultative
|reinsurance? |- ANSWER |Most |treaties |require |that |all |loss |exposures |within |the
|treaty's |terms |be |reinsured.
The |risk |control |service |of |physical |survey |is |comprised |of |- ANSWER |Gathering
|underwriting |information |on |a |customer's |loss |exposures.
Routine |regulation |of |the |insurance |business |is |conducted |by |state |insurance
|departments. |State |insurance |departments |come |under |which |of |the |following |branches
|of |government? |- ANSWER |Executive
Which |of |the |following |is |the |principal |business |purpose |of |a |professional |reinsurer? |-
|ANSWER |To |provide |a |source |for |the |reinsurance |needs |of |insurers
The |loss |ratio |- ANSWER |incurred |losses |including |LAE |/ |earned |premiums
Brookgreen |Insurance |has |a |40 |percent |quota |share |treaty |with |Cypress |Reinsurance.
|Policy |A |has |a |limit |of |$50,000, |a |premium |of |$2,000, |and |incurs |a |$5,000 |loss. |Because |of
|the |quota |share |agreement, |how |much |of |the |premium |will |go |to |Cypress
,Reinsurance? |ANSWER |Cypress |Reinsurance |will |get |$2,000 |times |40 |percent |or |$800 |of
|the |premium.
Readability |legislation |has |changed |how |commercial |and |personal |policies |are |written.
|On |the |contrary, |readability |tests |do |not |really |measure |- ANSWER |How |well |the
|policies |can |be |understood.
Greatview |Insurance |wishes |to |improve |the |process |of |processing |property |claims. |The
|claims |department |has |decided |to |examine |the |various |activities |in |the |property |claim
|handling |process, |from |the |time |it |is |first |reported |until |the |final |step |when |the |payment |is
|made. |Which |one |of |the |following |types |of |organizational |strategies |does |this
|represent? |- ANSWER |Operational-level |strategy
Which |of |the |following |ratemaking |data |development |process |steps |would |an |insurer
|review |which |areas |in |a |state |deserve |higher |or |lower |rates? |- | ANSWER |Determine
|territorial |and |class |relativities
The |major |actuarial |functions |for |an |insurer |include |estimation |of |unpaid |liabilities |and
|adequacy |of |loss |reserves |as |well |as |- ANSWER |Ratemaking.
Which |of |the |following |statements |is |TRUE |about |the |users |of |claim |information?
|ANSWER |The |producers |must |have |the |policyholder |loss |information |in |order |to
|appropriately |prepare |renewal |policies.
In |adjusting |a |property |loss, |a |claim |representative |must |first |determine |whether |or |not
|the |loss |was |caused |by |a |covered |peril. |Insurance |that |covers |every |cause |of |direct
|physical |loss |or |damage |that |is |not |specifically |excluded |is |known |as |- ANSWER
|Special |form |coverage.
A |safety |management |program |is |developed |based |upon |a |- | ANSWER |Thorough
|analysis |of |the |policyholder's |operation.
The |major |components |of |an |insurer's |bulk, |or |aggregate, |loss |reserves |are |reserves |for
|unreported |claims |plus |- ANSWER |Reserves |for |losses |that |have |inadequate |case
,reserves |and |reserves |for |claims |that |have |settled |and |then |reopened.
Which |of |the |following |is |a |claim |control |used |to |help |meet |regulatory |compliance? |-
|ANSWER |Access |security
Which |of |the |following |statements |is |CORRECT |regarding |the |use |of |treaty |and
|facultative |reinsurance? |- ANSWER |Most |treaties |require |that |all |loss |exposures |within
|the |terms |of |the |treaty |be |reinsured.
Financial |controls |include |assessing |the |company's |stock |price |or |- ANSWER |using
|return |on |investment |for |evaluating |specific |projects.
With |respect |to |underwriting, |it |is |an |unfair |trade |practice |to |- ANSWER |Unfairly
|discriminate |when |selecting |loss |exposures.
The |marketing |department |of |an |insurer |is |interacting |with |the |underwriting |department |to
|identify |what |characteristics |of |middle |market |businesses |produce |the |most |profitable
|commercial |insurance |accounts. |Which |of |the |following |would |be |the |best |way |to |identify
|those |characteristics? |- ANSWER |Predictive |analytics
After |data |have |been |collected |and |adjusted, |and |after |any |territorial |and |class
|relativities |have |been |determined, |rate |filings |must |be |prepared. |Which |one |of |the
|following |statements |is |true |regarding |rate |filings? |- ANSWER |If |an |advisory
|organization |files |rates |or |loss |costs |on |behalf |of |an |insurer, |it |also |handles |any
|follow-up |or |negotiations.
Which |of |the |following |is |a |possible |way |in |which |a |premium |auditor |can |contribute |to
|the |risk |control |function? |- ANSWER. |By |providing |information |about |unsafe
|procedures |or |working |conditions
Under |a |per |occurrence |excess |of |loss |treaty, |the |attachment |point |and |the |reinsurance
|limit |apply |to |- ANSWER |The |total |losses |arising |from |a |single |event |affecting |one |or
|more |policies.
, ABC |Insurance |Company |has |a |20% |quota |share |treaty |with |XYZ |Reinsurer. |One |of
|ABC's |policies |has |a |limit |of |$1 |million |and |premium |of |$8,000. |A |$50,000 |loss |is
|submitted |under |the |policy. |How |much |of |the |loss |will |XYZ |Reinsurer |pay? ANSWER
|XYZ |Reinsurer |will |pay |$50,000 |× |20%, |or |$10,000 |of |the |loss.
For |which |one |of |the |following |types |of |insurance |would |the |judgment |method |of
|ratemaking |most |likely |be |used? |- ANSWER |Terrorism |coverage
A |number |of |unique |factors |shape |the |insurance |marketplace. |Which |one |of |the
|following |factors |is |most |likely |to |lead |to |insurer |insolvency, |withdrawal |from |certain
|geographic |markets, |and |reinsurance |shortages? |- ANSWER |Unanticipated
|catastrophic |losses
Gem- |insurance |Company |wishes |to |purchase |reinsurance |for |the |professional |liability
|insurance |it |will |write |in |the |coming |year. |Which |of |the |following |statements |is |true |with
|respect |to |the |following |sources |of |reinsurance? |- ANSWER |Reinsurance |pools |may
|sell |reinsurance |to |insurers |that |are |not |members |of |the |pool.
One |of |the |functions |of |reinsurance |is |to |increase |large-line |capacity. |Which |one |of |the
|following |best |describes |this |function |from |the |perspective |of |a |primary |insurer? |-
|ANSWER |to |assume |a |loss |exposure |with |potential |financial |consequences |that |are
|higher |than |its |financial |condition |would |otherwise |permit
What |are |the |two |types |of |pro-rata |treaty |reinsurance? |- ANSWER |Quota |share |-
|Insurer |and |reinsurer |used |a |fixed |percentage |in |sharing |the |amounts |of |premiums |and
|losses.
Surplus |share |- |When |a |loss |exceeds |the |primary |insurers |amount, |the |reinsurer |assumes
|the |remaining |amount |of |the |loss.
What |are |the |three |types |of |Excess |of |Loss |Reinsurance? |- ANSWER |Per |Risk, |Per
|Occurrence, |and |Aggregate |Excess
