AINS 101 EXAM PREP QUESTIONS WITH CORRECT ANSWERS

AINS 101 EXAM PREP QUESTIONS WITH CORRECT ANSWERS “As a single mother on a very tight budget, Ciara is tempted to skimp on her insurance. However, her friend Mehmet tells her not to skimp on insurance, because it will help manage her cash flows. Which one of the following examples best illustrates Mehmet's point? A. Ciara needs her car to get to her job, and she needs her job to make car payments and pay for her car insurance. B. When her car's windshield breaks, Ciara has to pay only $100 of the $600 cost of replacing it. C. When her car's transmission goes out a month after the warranty expires, Ciara is faced with a $1,100 repair bill. D. Ciara finds it difficult to come up with a $787 auto insurance premium every six months. - CORRECT ANSWER When her car's windshield breaks, Ciara has to pay only $100 of the $600 cost of replacing it." "Which one of the following statements is correct regarding the benefits provided by insurance? A. Insurance reduces the financial consequences of loss exposures but not the related uncertainty. B. The primary role of insurance is to meet mandatory insurance requirements. C. The reduction in losses paid by insurers due to risk control measures benefits individual insureds but not society as a whole. D. Insurance helps reduce the financial burden to society by compensating accident victims. - CORRECT ANSWER Insurance helps reduce the financial burden to society by compensating accident victims." "A homeowners policy is a type of - CORRECT ANSWER Personal property-casualty insurance policy." "Insurance Company wrote a commercial liability policy for a manufacturer of off-road motorcycles. The potential costs of the insured's loss exposure exceed Insurance Company's capacity. Insurance Company could consider which one of the following types of contractual transferring agreement to meet its needs? - CORRECT ANSWER Reinsurance" "In an effort to reduce expenses, increase profitability, and reduce human errors; ABC Insurance Company decided to automate most of its personal lines underwriting function. The company now uses standardized application forms that are submitted electronically to one of the company's regional offices. At each regional office, a computer with a scanner reads the applications. The computer has been programmed with acceptable answers to the questions. If the answers on the application are all acceptable, the policy is automatically issued. Rejected applications are automatically forwarded to a human underwriter who reviews them. The use of this technology has reduced the company's expense ratio by two and a half percent, and reduced the time it takes to issue a policy. ABC Insurance Company's use of computers to evaluate applications electronically is an application of A. Radiant sensors. B. Artificial intelligence. C. - CORRECT ANSWER Artificial intelligence." "Jimmy decided to buy a house in his neighborhood that had been foreclosed on by the bank that held the mortgage. He is hoping to do some renovation and repair work on the house, and then sell it for a quick profit. What type of risk is this? - CORRECT ANSWER Speculative Risk" "Which one of the following represents uncertainty about outcomes that can be negative or positive? A. Loss exposure B. Transfer C. Risk D. Pooling - CORRECT ANSWER Risk" "Which one of the following describes the characteristics of a mutual insurance company? A. A corporation owned by policyholders that provides insurance to its policyholders. B. An unincorporated association that provides reciprocal coverage to subscribers. C. An unincorporated association that earns profits for its individual investors. D. A corporation owned by stockholders that earns profits for the stockholders. - CORRECT ANSWER A corporation owned by policyholders that provides insurance to its policyholders." "Autonomous Vehicle Applications (AVA) is a start-up company that develops safety technologies that can be sold to companies that are producing autonomous vehicles. One technology AVA is developing allows an autonomous vehicle to detect, extract, and analyze images; and then to respond to the images. For example, the technology would detect a presence in a crosswalk, extract the image, and a computer would analyze the image. When the image was determined to be a human being, the vehicle would slow down or stop until the crosswalk was clear. This technology, which is designed to capture and analyze images, and to act on the recognition of the image; is called - CORRECT ANSWER Computer Vision" "The primary role of insurance is to - CORRECT ANSWER Indemnify individuals and organizations for covered losses" "Which one of the following best describes the concept of pooling? A. Insureds share the cost of each other's losses. B. Risk management is concerned with positive and negative risks. C. The financial consequences of unanticipated losses are transferred to an insurer. D. Insurance benefits society as a whole. - CORRECT ANSWER Insureds share the cost of each other's losses." "A type of insurer that is owned by policyholders and may pay dividends to policyholders as a return of a portion of premiums paid is a - CORRECT ANSWER Mutual insurer." "ABC Company experienced a dramatic ideological shift in corporate policies after a national election. This is an example of which one of the following quadrants of risk? A. Operational risk B. Financial risk C. Strategic risk D. Hazard risk - CORRECT ANSWER Strategic Risk" "Renegade Insurance prides itself on its upstanding reputation through its commitment to small communities' homeowners coverage needs over the past twenty years. Which one of Renegade's actions over this time would best illustrate its continued commitment to maintaining its solvency? A. Renegade emphasizes that its insurance is readily available and accessible to customers in its service area that need it. B. Renegade's producers know policy language well so that they can easily and understandably answer policyholders' questions. C. Renegade keeps enough cash assets on hand to cover claims on policies long after it collected the premiums from customers. D. Renegade is committed to branching out in the near future to include more coverages for specialized small businesses. - CORRECT ANSWER Renegade keeps enough cash assets on hand to cover claims on policies long after it collected the premiums from customers." "What term refers to the ability of an insurer to meet its obligations as they become due? - CORRECT ANSWER Solvency" "All of the following appear on an insurer's balance sheet, EXCEPT: A. Liabilities B. Assets C. Net income D. Policyholders' surplus - CORRECT ANSWER Net income" "An insurer's balance sheet can best be described as a A. Relationship between revenue and liabilities. B. Snapshot of its financial position. C. Relationship between assets and expenses. D. Summary of premiums written. - CORRECT ANSWER Snapshot of its financial position" "The financial report for Hometown Insurer contains the following information: Earned premiums $4,000,000 Written premiums $5,000,000 Net investment income $1,000,000 Incurred losses $3,000,000 Incurred underwriting expenses $2,000,000 What was the Hometown Insurer's combined ratio? - CORRECT ANSWER (3/4) + (2/5) = .115 (115%)" "How do you get combined ratio? - CORRECT ANSWER Loss Ratio + Expense Ratio = (Incurred Losses/Earned Premiums) + (Incurred Underwriting Expenses/Written Premiums)" "The financial report for LMN Insurance contains the following information: Earned premiums $8,000,000 Written premiums $10,000,000 Incurred losses $6,000,000 Incurred underwriting expenses $4,000,000 What is LMN Insurance's expense ratio? - CORRECT ANSWER 4/10 = .4 (40%)" "How do you get expense ratio? - CORRECT ANSWER Incurred underwriting expenses / Written premiums" "How do you get loss ratio? - CORRECT ANSWER Incurred Losses / Earned Premiums" "Spencer Insurance Associates is an independent agency selling primarily homeowners policies. This agency A. Is free to work with as many different insurers as it wants. B. Generally represents its customers rather than insurance companies. C. Can use the policyholder expiration lists, but they are owned by insurers. D. Cannot commit an insurer to write a policy, unlike a broker, who usually can. - CORRECT ANSWER Is free to work with as many different insurers as it wants." "The key to the direct writer marketing system is that A. Customers purchase insurance through call centers. B. An agency is contracted to sell insurance for one insurer or group of insurers. C. The insurer is using its own employees as producers. D. Customers can get quotes for coverage through web-based portals. - CORRECT ANSWER The insurer is using its own employees as producers." "One of the reasons for insurance regulation is to prevent destructive competition. In which one of the following scenarios would destructive competition be exhibited? A. North Insurance is trying to break into a specialized type of insurance market that is generally out of range for most customers; North decides to price its coverages commensurate with other insurers offering similar policies. B. South Insurance purposely writes its policies with hard-to-understand terminology that only its agents can explain, so that its insureds will purchase its products without asking a lot of questions. C. West Insurance has had three straight years of record-setting low claims and has accumulated more than expected profits; it plans on the trend continuing and overspends on new long-term investments. D. East Insurance comes up with a new rate structure allowing "preferred customers" discounted policies when they continually re - CORRECT ANSWER East Insurance comes up with a new rate structure allowing "preferred customers" discounted policies when they continually renew year after year; East eventually loses needed revenue but is rewarded by its competitors leaving the market." "Which one of the following is a nonadmitted asset? A. Real estate B. Stocks C. Bonds D. Office equipment - CORRECT ANSWER Office equipment" "The financial report for Hometown Insurer contains the following information: Earned premiums $4,000,000 Written premiums $5,000,000 Net investment income $1,000,000 Incurred Losses $3,000,000 Incurred underwriting expense $2,000,000 What is Hometown Insurer's expense ratio? - CORRECT ANSWER 2/5 = .4 (40%)" "Clare is a commercial lines underwriter. She always tries to follow underwriting guidelines, effectively evaluate loss exposures, and charge adequate premiums. By doing these things, Clare's goal is to ensure A. Adequate policyholders' surplus. B. A significant bonus. C. A collaborative relationship with her producers. D. Adverse selection. - CORRECT ANSWER Adequate policyholders' surplus." "Which one of the following statements is correct regarding the interaction between risk control and other insurer functions? A. Risk control representatives are responsible for compiling all the information required for a premium audit. B. Risk control personnel can assist underwriters in modifying a new applicant's loss exposures to meet eligibility requirements. C. By making marginal accounts acceptable, risk control helps the Claims Department settle losses. D. Risk control personnel are responsible for answering any complex questions that insureds have about premium audits. - CORRECT ANSWER Risk control personnel can assist underwriters in modifying a new applicant's loss exposures to meet eligibility requirements." "As an experienced underwriter, Rick has learned to make every effort to avoid a mistake that can produce insufficient premium to cover losses, or pricing that isn't competitive. Which one of the following underwriting mistakes can often cause these issues? A. Misclassifying exposures B. Recommending the applicant implement risk control measures C. Using predictive models D. Adjusting policy terms and conditions - CORRECT ANSWER Misclassifying exposures (Misclassification of exposures can produce insufficient premium to cover losses or pricing that isn't competitive.)" "Which one of the following is a temporary agreement providing insurance coverage until the formal policy is issued? A. Binder B. Rating classification C. Book of business D. Submission - CORRECT ANSWER Binder (A binder is a temporary agreement providing insurance coverage until the formal policy is issued.)" "The size of an employer's loss exposure for workers compensation insurance is based on A. The number of its employees. B. The final premium audit. C. The extent of its operations. D. The amount of its payroll. - CORRECT ANSWER The amount of its payroll. (The size of an employer's loss exposure for workers compensation insurance is based on the amount of its payroll.)" "Which one of the following is the fundamental measure of loss exposure used in insurance rating? A. Premium B. Exposure unit C. Risk D. Rate - CORRECT ANSWER Exposure unit. (The exposure unit is the fundamental measure of loss exposure used in insurance rating.)" "Tony now works at the corporate level for Newtown Insurance. He is considered a staff underwriter. Which one of the following is primarily a responsibility of staff underwriters? A. Manage a book of business B. Support producers C. Recommend coverage D. Revise underwriting guidelines - CORRECT ANSWER Revise underwriting guidelines (Revising underwriting guidelines is primarily a responsibility of staff underwriters.)" "Jill works in the field for Goshen Mutual as a line underwriter. Which one of the following is primarily a responsibility of line underwriters? A. Revise underwriting guidelines B. Select insureds C. Research the market D. Develop coverage forms - CORRECT ANSWER Select insureds (One of the primary responsibilities of line underwriters is to select insureds.)" "Which one of the following is the first step in the underwriting process? A. Develop underwriting alternatives B. Evaluate the submission C. Monitor the underwriting decision D. Determine an appropriate premium - CORRECT ANSWER Evaluate the submission (Evaluating the submission is the first step in the underwriting process.)" "Produce, such as apples or grapes, may be priced by the unit or by the pound. In insurance, these measures are similar to A. Construction cost index. B. Rates. C. Exposure units. D. Premiums. - CORRECT ANSWER Exposure units. (Units, pounds, and exposure units are all multiplied by the rate to arrive at the cost (premium).)" "Bob is shopping for auto insurance. Insurance Company A's rating system determines that Bob should be charged $800 per auto. If Bob is looking to insure four autos, what premium will he be charged by Insurance Company A? - CORRECT ANSWER $3200" "Work on a new claim begins for claim representative Anita upon receipt of a claim notice. Anita gathers initial information and verifies coverage. From the list of activities below, the next step Anita would take in the process is A. Assign the claim to defense counsel. B. Set a loss reserve. C. Make an offer to settle the claim. D. Retain causation experts. - CORRECT ANSWER Set a loss reserve. (After the claim representative receives notice of a loss, obtains initial information, and verifies coverage, a loss reserve for that claim should be established.)" "Subrogation is the insurer's right to A. Estimate the value of the damaged property. B. Transfer coverage to a third party. C. Drop a claim in exchange for an agreed amount of money. D. Recover its claim payment from the responsible party. - CORRECT ANSWER Recover its claim payment from the responsible party. (Subrogation is the insurer's right to recover its claim payment from the responsible party.)" "Compensatory damages represent A. Out-of-pocket expenses. B. Damages to deter others from committing wrongful acts. C. Actual harm suffered. D. Non-economic loss. - CORRECT ANSWER Actual harm suffered. (Compensatory damages represent actual harm suffered.)" "Damages for disfigurement are a form of A. General damages. B. Punitive damages. C. Out-of-pocket damages. D. Special damages. - CORRECT ANSWER General damages. (Damages for disfigurement are a form of general damages.)" "Reggie, Harper, Kimmie, and Stefan work in the claims department of North Insurance Company (NIC). Which one of the following is true regarding the various types of claims personnel employed at NIC? A. Harper is a specialized claims representative who works for a small local insurance organization. B. Stefan, a claims supervisor, reviews files and helps determine staff development strategies. C. Kimmie enjoys her role as a telephone claims representative whose specialty is in-person meetings. D. Reggie, a field claims representative, works in NIC's main office and likes having an indoor desk job. - CORRECT ANSWER Stefan, a claims supervisor, reviews files and helps determine staff development strategies. (Stefan, a claims supervisor, reviews files and helps determine staff development strategies.)" "Willis, a claims representative, is collaborating with his colleague Suzanna from his insurance company's risk control department. How will Suzanna help Willis? A. Provide claims experience information to help the risk control department. B. Provide laboratory analysis when Willis is investigating a claim. C. Provide inventory values and contractors' equipment lists as needed by Willis. D. Provide information so Willis can appropriately price loss exposures. - CORRECT ANSWER Provide laboratory analysis when Willis is investigating a claim. (Suzanna from risk control will help Willis by providing laboratory analysis when Willis is investigating a claim. A is incorrect as that is what Willis would do to help Suzanna. C is incorrect as these are activities the premium auditing department might do to help Willis. D is incorrect as Willis does not price loss exposures (this is done by underwriting).)" "Jerome Wilder is a claims representative with Hermani Insurance. Which group of activities listed below would best exemplify Jerome's actions, in the order they are given, as he systematically handles a new loss in his role? A. Acknowledging the claim - identifying the policy - contacting the insured B. Determining the cause of loss - investigating and documenting the claim - identifying the policy C. Determining the cause of loss and loss amount - identifying the policy - acknowledging the claim D. Investigating and documenting the claim - contacting the insured - concluding the claim - CORRECT ANSWER Acknowledging the claim - identifying the policy - contacting the insured (Of the choices given, Jerome's actions as he systematically adjusts the loss, in the order given, would be acknowledging the claim - identifying the policy - contacting the insured.)" "Henry is a new claims representative with Able Insurers. Which one of the following will Henry find is true as he gains more experience with his company's claims handling process? A. Henry sits in the cubicle next to another claims representative, Marty, who assigns claims to Henry. B. Henry will determine the type of loss - such as property damage or liability - for each claim he handles. C. Henry learns that all claims, no matter the circumstances or parties involved, could involve subrogation. D. Henry learns that policy denials do not need to be routinely reflected or included in the claims file. - CORRECT ANSWER Henry will determine the type of loss - such as property damage or liability - for each claim he handles." "Bill's three-year-old stereo was completely destroyed in a covered loss. Its expected useful life was ten years. Its replacement cost is $600. Its actual cash value (ACV) is A. $ 60. B. $180. C. $420. D. $600. - CORRECT ANSWER $420. (The stereo's Depreciation is 3/10 x $600 = $180. The ACV is $600 - $180 = $420.)" "After Marvin's car was stolen, and he was reimbursed for the loss by Greatson Insurance, the police found and returned the vehicle, which was dented and spray-painted, but still had parts that could be usable. Greatson's rights to recover and sell or otherwise dispose of insured property on which it has paid a total loss are called A. Constructive rights. B. Catastrophe rights. C. Fiduciary rights. D. Salvage rights. - CORRECT ANSWER Salvage rights. (Salvage rights allow the insurer to recover and sell or otherwise dispose of insured property on which the insurer has paid a total loss.)" "Damages for pain and suffering are a form of A. Punitive damages. B. Out-of-pocket damages. C. General damages. D. Special damages. - CORRECT ANSWER General damages. (General damages include pain and suffering.)" "Wayne, an insured, submits a claim for a seven-year-old refrigerator that was damaged due to lightning. Claims representative Guillaume will probably factor in an allowance for wear and tear. This is called A. Replacement cost. B. Stated amount. C. Depreciation. D. Agreed amount. - CORRECT ANSWER Depreciation." "A liability loss has the following damages: Medical expenses: $10,000 Damages for disfigurement: $50,000 Damages for pain and suffering: $100,000 What is the amount of general damages? A. $ 60,000 B. $110,000 C. $150,000 D. $160,000 - CORRECT ANSWER $150,000 (The amount of general damages is $150,000. General damages are for losses that do not have a specific economic value.)" "Adjuster Toni is evaluating damages in a bodily injury liability claim where she has determined that the insured is completely at fault for the accident. The claimant suffered a sprain and strain injury to his neck. His special damages total $1,500. He was out of work for a week, was disabled and prevented from performing some regular activities for a month, and attended physical therapy for six weeks. In assessing general damages, Toni should A. Multiply $1,500, the amount of special damages, by six, the number of weeks of physical therapy, and pay $9,000. B. Use past cases which are similar as a guide. C. Consider what she would want to be paid if she were in claimant's shoes. D. Multiply the amount of special damages of $1,500 by three as a rule of thumb, and pay $4,500. - CORRECT ANSWER Use past cases which are similar as a guide. (In assessing general damages, Toni should use past cases which are similar as a guide.)" "Producer Gerald Hilker is one of the most successful producers at the Westfield Agency, which represents several different insurers. Because of this, which one of the following is most likely true? A. Gerald makes most of his income from commissions from customer sales. B. Gerald usually presents a proposal for coverage soon after meeting prospective insureds. C. Gerald's interactions with customers usually end after he issues them their policies. D. Gerald, due to his success at the agency, is more accurately an "agent" than a "producer". - CORRECT ANSWER Gerald makes most of his income from commissions from customer sales. (Gerald makes most of his income from commissions from customer sales. B and C are both incorrect as a long term relationship with customers is more beneficial than a one time or hurried sale. D is incorrect as the two terms are synonymous for anyone selling insurance for one or more insurers.)" "Lacey is a customer service representative (CSR) who has been employed by Greeley Insurance for five years. She worked in Greeley's call center for just a year when she was moved to a busy insurance office staffed primarily with claims representatives and producers. As she continues her exemplary service to Greeley and its customers, which one of the following best describes how she supports her fellow insurance professionals in her role as a CSR? A. Lacey is not permitted to show empathy or take information related to a new loss that just occurred. B. Lacey performs all the roles of a claims professional and a producer but with a different title. C. Lacey has been trained to replicate many of the activities performed by producers. D. Lacey is not permitted to give advice on how a customer may meet specific coverage needs. - CORRECT ANSWER Lacey has been trained to replicate many of the activities performed by producers. (Lacey has been trained to replicate many of the activities performed by producers.)" "Which one of the following accurately describes activities related to customer service representatives? A. It costs more in advertising to keep an existing customer than to attract a new one. B. It takes longer to renew an existing account than it does to write a piece of new business. C. Profitability in the insurance business is directly linked to customer retention. D. Excellent service builds strong relationships but not necessarily customer loyalty. - CORRECT ANSWER Profitability in the insurance business is directly linked to customer retention." "Robin, a producer from Grantley Insurance, is always alert to changes in her clients' loss exposures. Why is this so important? A. Implemented risk management techniques may prove to be ineffective or become obsolete. B. Knowledge of such changes will inform their efforts to create a list of experts that can be called to assist. C. Producers have expertise about risk financing through insurance. D. Producers can aid clients in developing risk management cost allocation plans. - CORRECT ANSWER Implemented risk management techniques may prove to be ineffective or become obsolete. (Correct. Producers should be alert to changes in clients' loss exposures because implemented risk management techniques may prove to be ineffective or become obsolete." "Leadon Transportation is using the expertise of its producer Carmen to help the organization understand how to correct substandard performance as well as evaluate exceeded standards. One measurement she will use is the cost of risk which is best described as A. The terms of insurance or other risk-financing mechanisms. B. The total cost of all aspects of the organization that relate to managing risk. C. Substandard performance and/or risk management standards. D. The allocation of risk management costs. - CORRECT ANSWER The total cost of all aspects of the organization that relate to managing risk. (Cost of risk involves the total cost of all aspects of the organization that relate to managing risk.)" "Alicia works for the Drewman Agency, Sandi at insurer Greenway Insurance, and Rosa at Grossman Brokers, all as customer service representatives. Which one of the following is true regarding their work? A. Alicia can process policy endorsements and explain coverage to her customers. B. Sandi, Alicia, and Rosa are not involved in the generation of new business. C. Rosa can provide superior service but is not generally involved in attracting new customers. D. Sandi is the only one who can replicate the activities of a producer. - CORRECT ANSWER Alicia can process policy endorsements and explain coverage to her customers." "Producer Josh never tires in encouraging insureds to adopt and sustain a robust and measurable risk management program. As part of this effort, which one of the following will Josh find is true? A. The second step occurs when the producer and the business agree on what success looks like for the risk management program. B. Risk management goals should be attainable to the organization, but they should also pose a challenge. C. Results-based standards are always more important than activity standards to the overall success of an organization. D. The first - and most important of all steps in the process - is to establish standards of acceptable performance. - CORRECT ANSWER Risk management goals should be attainable to the organization, but they should also pose a challenge." "Waycroft Industries is working with their insurance producer Graydon Murphy. Graydon and the risk managers at Waycroft have already completed the first step of the risk consultation process. The second step of the process is A. Determining the standards of acceptable performance to be used. B. Revising the standards or correcting any substandard performance. C. Comparing an organization's results with established performance standards. D. Doing an evaluation of any substantially exceeded standards. - CORRECT ANSWER Comparing an organization's results with established performance standards. (The second step of the risk consultation process is comparing an organization's results with established performance standards.)" "Ideally insurable loss exposures are subject to losses that A. Are immeasurable in terms of frequency or severity. B. Occur gradually over long periods of time. C. Are definite in time, cause, and location. D. Result from unidentifiable causes. - CORRECT ANSWER Are definite in time, cause, and location. (Ideally insurable loss exposures are subject to losses that are definite in time, cause, and location.)" "An insurance policy is considered a contract of adhesion when it is drafted by the A. Third party. B. Insured. C. Insurance commissioner. D. Insurer. - CORRECT ANSWER Insurer. (Insurance is considered a contract of adhesion when one party, the insured, must adhere to the contract as written by the other party (the insurer). The insurer determines the wording of the policy, and the insured has little choice but to take it or leave it.)" "When preprinted forms do not provide the terms of coverage needed by a particular insured or small group of insureds, the insurer may A. Ask the customer to resubmit an application. B. Draft a manuscript form to meet the customer's needs. C. Work with an advisory organization to develop a form. D. Incorporate statutes into a policy. - CORRECT ANSWER Draft a manuscript form to meet the customer's needs. (When preprinted forms do not provide the terms of coverage needed by a particular insured or small group of insureds, the insurer may draft a manuscript form to meet the customer's needs.)" "The Insurance Services Office, Inc. (ISO) commercial package policy is an example of a A. Modular policy. B. Manuscript form. C. Self-contained policy. D. Single insurance document. - CORRECT ANSWER Modular policy. (ISO commercial package policy is an example of a modular policy; it combines different coverage parts related to different lines of business.)" "Which one of the following most accurately describes one of the policy provisions in an insurance policy? A. The declarations state the insurer's promise to the insured. B. The definitions contain a list of forms included in the policy. C. The conditions state what the insurer specifically will not cover. D. The exclusions are in place to reduce duplicate coverage. - CORRECT ANSWER The exclusions are in place to reduce duplicate coverage. (The exclusions are in place to reduce duplicate coverage. A is incorrect as the insuring agreement, not the declarations, state the insurer's promise to the insured. B is incorrect as the declarations, not the definitions, contain a list of forms included in the policy. And C is incorrect as the exclusions, not the conditions, state what the insurer specifically will not cover.)" "Adhering to the characteristics of an ideally insurable loss exposure in selling insurance help assure that A. The losses associated with it typically involve small amounts. B. The insurer is able to predict the amount and timing of each future loss. C. The insurer can charge a high premium for the coverage. D. The insurer is able to charge a premium that the insured can afford to pay. - CORRECT ANSWER The insurer is able to charge a premium that the insured can afford to pay. (Adhering to the characteristics of an ideally insurable loss exposure in selling insurance help assure that the insurer is able to charge a premium that the insured can afford to pay.)" "Ling has noticed that her neighbor has recovered money for two homeowners property claims and an auto damage claim he has filed in recent years. Ling has been paying insurance premiums for many years and has never suffered a loss or made a claim. She feels that her insurance contracts over the years have been worthless to her. What Ling does not understand is that she has been paying premiums for a contract A. That is nontransferable. B. Of unequal amounts. C. Of adhesion. D. Of utmost good faith. - CORRECT ANSWER Of unequal amounts." "New homeowner and small business owner Sallie learns that an insurance policy may contain other documents than its insurance forms. Accordingly, which one of the following will Sallie find is true regarding her new insurance purchases? A. As Sallie's policy coverages are relatively common, she will simply require a manuscript policy. B. Sallie's application may contain endorsements which modify the basic policy form. C. Sallie learned all policies, personal and commercial, contain relevant statutory terms for clarity. D. Sallie's application for insurance was returned to her as it was no longer useful after receiving her policy. - CORRECT ANSWER Sallie's application may contain endorsements which modify the basic policy form." "Claims supervisor Charlotte is reviewing the incoming claims for the day to decide which ones to assign to various claims reps. Of those claims, which one of the following descriptions will Charlotte find is an example of a fortuitous loss? A. The value of an insured's home decreases due to a lack of maintenance. B. Insureds intentionally set a fire and burn their house down. C. An unknown vandal spray-paints graffiti on the insured's garage. D. An insured demolishes a deck that has been allowed to rot. - CORRECT ANSWER An unknown vandal spray-paints graffiti on the insured's garage." "An insurer will make a loss payment if an insured loss occurs and if the insured performs certain duties. This illustrates that an insurance policy is a A. Conditional contract. B. Contract of indemnity. C. Personal contract. D. Contract of adhesion. - CORRECT ANSWER Conditional contract." "Solvency - CORRECT ANSWER The ability of an insurer to meet its financial obligations as they become due, even those resulting from insured lossses that may be claimed several years in the future." "Income statement - CORRECT ANSWER The financial statement that reports an organization's profit or loss for a specific period by comparing the revenues generated with the expenses incurred to produce those revenues." "Earned premiums - CORRECT ANSWER The portion of the written premiums that apply to the part of the policy period that has already occurred" "Underwriting income - CORRECT ANSWER Income an insurer earns from premiums paid by policyholders minus incurred losses and underwriting expenses" "Balance sheet - CORRECT ANSWER The financial statement that reports the assets, liabilities, and owners' equity of an organization as of a specific date." "Policyholders surplus - CORRECT ANSWER An insurer's assets minus its liabilities, which represents its net worth." "Loss adjustment expenses - CORRECT ANSWER The expense that an insurer incurs to investigate, defend, and settle claims according to the terms specified in the insurance policy" "Assets - CORRECT ANSWER Types of property, both tangible and intangible, owned by an entity" "Liabilities - CORRECT ANSWER Financial obligations, or debts, owed by a company to another entity, usually the policyholder in the case of an insurer." "Investment income - CORRECT ANSWER Interest, dividends, and net capital gains received by an insurer from the insurer's financial assets, minus its investment expenses." "Loss reserve - CORRECT ANSWER An estimate of the amount of money the insurer expects to pay in the future for losses that have occurred." "Unerned premium reserve - CORRECT ANSWER An insurer liability representing the amount of premiums received from policyholders that are not yet earned." "Loss ratio - CORRECT ANSWER A ratio that measures losses an loss adjustment expenses against earned premiunms and that reflects the percentage of premiums being consumed by losses." "Expense ratio - CORRECT ANSWER An insurer's incurred underwriting expenses for a given period divided by its written premiums for the same period." "Combined ratio - CORRECT ANSWER A profitability ratio that indicates whether an insurer has made an underwriting loss or gain." "Independent agency - CORRECT ANSWER A business, operated for the benefit of its owner (or owners) that sells insurance, usually as a representative of several unrelated insurers." "Exclusive agency marketing system - CORRECT ANSWER An insurance marketing system under which agents contract to sell insurance exclusively for one insurer (or for an associated group of insurers)." "Direct writer marketing system - CORRECT ANSWER An insurance marketing system that uses sales agents (or sales representatives) who are direct employees of the insurer." "Distribution channel - CORRECT ANSWER The necessary people and physical facilities to support the sale of insurance products and services" "Producer - CORRECT ANSWER Any of several kinds of insurance personnel who place insurance and surety business with insurers and who represent either insurers or insureds, or both." "Agent - CORRECT ANSWER In the agency relationship, the party that is authorized by the principal to act on the principal's behalf." "Agency - CORRECT ANSWER A legal, consensual relationship that exists when one party, the agent, acts on behalf of another party, the principal." "Principal - CORRECT ANSWER The party in an agency relationship that authorizes the agent to act on that party's behalf." "Broker - CORRECT ANSWER An independent producer who represents insurance customers." "Agency expiration list - CORRECT ANSWER The record of an insurance agency's present policyholders and the dates their policies expire." "Certificate of insurance - CORRECT ANSWER A brief description of insurance coverage prepared by an insurer or its agent and commonly used by policyholders to provide evidence of insurance." "Predictive modeling - CORRECT ANSWER A process in which historical data based on behaviors and events are blended with multiple variables and used to construct models of anticipated future outcomes." "Catastrophe model - CORRECT ANSWER A type of computer program that estimates losses from future potential catastrophic events." "Policyholders' surplus - CORRECT ANSWER An insurer's assets minus its liabilities, which represents its net worth." "Underwriting - CORRECT ANSWER The process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made." "Book of business - CORRECT ANSWER A group of policies with a common characteristic, such as territory or type of coverage, or all policies written by a particular insurer or agency." "Rate manual - CORRECT ANSWER A resource for classifying accounts and developing premiums for given types of insurance; includes necessary rules, factors, and guidelines to apply those rates." "Telematics - CORRECT ANSWER The use of technological devices to transmit data via wireless communication and GPS tracking." "Capacity - CORRECT ANSWER The amount of business an insurer is able to write, usually based on a comparison of the insurer's written premiums to its policyholders' surplus." "Unerwriting guidelines (UW Guide) - CORRECT ANSWER A written manual that communicates an insurer's underwriting policy and that specifies the attributes of an account that an insurer is willing to insure" "Exosure unit - CORRECT ANSWER The unit of measure (for example, area, gross receipts, payroll, or value insured) used to determine an insurance policy premium." "Rate - CORRECT ANSWER The price per exposure unit for insurance coverage" "Binder - CORRECT ANSWER A temporary written or oral agreement to provide insurance coverage until a formal written policy is issued." "Adverse selection - CORRECT ANSWER Insuring individuals with a high probability of loss at a cost lower than the insurer would normally charge for that risk because it wasn't aware of the actual risk involved" "Claim - CORRECT ANSWER A demand by a person or business seeking to recover from an insurer for a loss that may be covered by an insurance policy" "Claimant - CORRECT ANSWER A party that makes a claim and that can be either a first-party claimant or a third-party claimant" "Claims representative - CORRECT ANSWER A person responsible for investigating, evaluating, and settling claims." "Deductible - CORRECT ANSWER A portion of a covered loss that is not paid by the insurer" "Insurable interest - CORRECT ANSWER An interest in the subject of an insurance policy that is not unduly remote and that would cause the interested party to suffer financial loss if an insured event occurred." "Actual Cash Value (ACV) - CORRECT ANSWER The cost to replace property with new property of like kind and quality less depreciation" "Depreciation - CORRECT ANSWER The reduction in value caused by the physical wear and tear or technological or economic obsolescence of property." "Subrogation - CORRECT ANSWER The process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss." "Salvage rights - CORRECT ANSWER The insurer's rights to recover and sell or otherwise dispose of insured property on which the insurer has paid a total loss or a constructive total loss." "Damages - CORRECT ANSWER Money claimed by, or a monetary award to, a party who has suffered bodily injury or property damage for which another party is legally responsible." "Compensatory damages - CORRECT ANSWER A payment awared by a court to reimburse a victim for actual harm" "Special damages - CORRECT ANSWER A form of compensatory damages that awards a sum of money for specific, identifiable expenses associated with the injured person's loss, such as medical expenses or lost wages. (Specific, identifiable expenses)" "General damages - CORRECT ANSWER A monetary award to compensate a victim for losses, such as pain and suffering, that do not involve specific measurable expenses." "Punitive damages - CORRECT ANSWER A payment awarded by a court to punish a defendant for a reckless, malicious, or deceitful act to deter similar conduct; the award need not bear any relation to a party's actual damages." "Loss exposure - CORRECT ANSWER Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs." "Loss run - CORRECT ANSWER A report detailing an insured's history of claims that have occurred over a specific period, valued as of a specific date." "Brokerage - CORRECT ANSWER Compensation in the form of a flat fee or a commission that is paid by the reinsurer to the reinsurance intermediary for services provided." "Risk management - CORRECT ANSWER The process of making and implementing decisions that will minimize the adverse effects of accidental losses on an organization" "Pure risk - CORRECT ANSWER A chance of loss or no loss, but no chance of gain." "Fortuious loss - CORRECT ANSWER A loss that is accidental and unexpected" "Independent exposures - CORRECT ANSWER Group of many persons purchasing insurance independently and not affected by the losses of others." "Contract of indemnity - CORRECT ANSWER A contract in which the insurer agrees, in the event of a covered loss, to pay an amount directly related to the amount of the loss." "Principle of indemnity - CORRECT ANSWER The principle that insurance policies should provide a benefit no greater than the loss suffered by an insured." "Utmost good faith - CORRECT ANSWER An obligation to act in complete honesty and to disclose all relevant facts." "Contract of adhesion - CORRECT ANSWER Any contract in which one party must either accept the agreement as written by the other party or reject it." "Conditional contract - CORRECT ANSWER A contract that one or more parties must perform only under certain conditions." "Declarations page - CORRECT ANSWER An insurance policy information page or pages providing specific details about the insured and the subject of the insurance." "Insuring agreement - CORRECT ANSWER A statement in an insurance policy that the insurer will, under described circumstances, make a loss payment or provide a service." "Condition - CORRECT ANSWER Any provision in an insurance policy that qualifies an otherwise enforceable promise of the insurer." "Exclusion - CORRECT ANSWER A policy provision that eliminates coverage for specified exposures." "What three concepts are pertinent to understanding insurance? - CORRECT ANSWER Risk, Transferring, and Pooling" "What are the three common types of personal and commercial insurance? - CORRECT ANSWER Personal insurance, Personal Property-Casualty Insurance, and Commercial Insurance" "What is personal insurance? - CORRECT ANSWER 1. Property insurance protects an insured's assets by covering the cost of repairing or replacing property that is damaged, los or destroyed. It can also cover related lost income or extra expenses. 2. Liability insurance provides payments for injury to others or damage to others' property for which the insured is legally responsible. It also covers the cost to defend the insured against related lawsuits. 3. Although not the focus of this content, life insurance replaces the income-earning potential lost through death. It also helps to pay expenses related to an insured's death. 4. Health insurance protects individuals and families from financial losses caused by sickness and accidents." "What is personal property-casualty insurance? - CORRECT ANSWER 1. Homeowners—Provides protection when people's homes and/ or belongings are damaged or stolen and liability coverage for situations such as the family dog biting a guest. 2. Personal auto—If the insured is at fault in an accident, provides coverage for bodily injury to another person or damage to another person's auto. Also provides coverage for damage to the insured auto (not wear and tear). Typically legally required. 3. Personal umbrella—Provides additional protection for people with a high potential for large liability losses." "What is commercial insurance? - CORRECT ANSWER 1. Many businesses purchase a commercial package policy or a businessowners policy, both of which provide business owners with property, crime, and liability coverages. 2. Common types of commercial property-casualty insurance: a. Commercial property—Covers damage to buildings or their contents that results from fire, vandalism, and other causes of loss. b. Commercial crime—Protects against losses from theft of business property and money, including employee theft. c. Commercial general liability—Protects a business against its legal liability to others for bodily injury and property damage. d. Commercial auto—Covers liability for bodily injury and property damage caused by the use of the business's autos and also damage to the business's own autos when they are in an accident. e. Workers compensation—Covers legally required benefits that businesses are required to pay to their employees for jobrelated injuries and illnesses. f. Commercial umbrella—Provides additional liability limits beyond those provided by other commercial policies, protecting a business in the event of a large liability loss." "What are the main types of commercial property-casualty insurance? - CORRECT ANSWER Commercial property, commercial crime, commercial general liability, commercial auto, workers compensation, and commercial umbrella" "What role does government insurance play? - CORRECT ANSWER 1. When private insurers are unable or unwilling to satisfy legitimate insurance needs, government programs can. 2. If a government requires a type of insurance, such as a state's requiring workers compensation insurance, then it must ensure that the insurance is available at a reasonable price. 3. Providing convenience to insureds, by reducing either the time or the resources needed to obtain insurance coverage, adds to the efficiency of the market. 4. The government may participate in insurance to accomplish social goals and reduce risk to society." "What is the difference between pure and speculative risk? - CORRECT ANSWER 1. Pure and speculative risks must often be managed differently, and insurance is just one of many risk management techniques. 2. Pure risk, such as the risk of fire, can usually be managed by purchasing insurance. The speculative risk might be managed by maintaining the property to enhance its resale value" "What are the four risk quadrants? - CORRECT ANSWER 1. Hazard risk Arises from property, liability, or personnel loss exposures (Pure) 2. Operational risk Arises from people, processes, systems, or controls (Pure) 3. Financial risk Arises from the effect of market forces on financial assets or liabilities (Speculative) 4. Strategic risk Arises from trends in the economy and society- (Speculative)" "What is hazard risk? - CORRECT ANSWER Arises from property, liability, or personnel loss exposures" "What is operational risk? - CORRECT ANSWER Arises from people, processes, systems, or controls" "What is financial risk? - CORRECT ANSWER Arises from the effect of market forces on financial assets or liabilities" "What is strategic risk? - CORRECT ANSWER Arises from trends in the economy and society" "What are some ways that insurance regulation protects consumers? - CORRECT ANSWER 1. Verifying that insurance policies, which can be hard to understand, truly benefit the customer 2. Requiring insurers to pay legitimate claims and honestly represent the benefits of a policy 3. Guaranteeing that insurance is available and accessible to everyone who needs it" "Why do regulators enforce rules around insurer solvency? - CORRECT ANSWER 1. To guarantee that insurers have enough cash on hand to pay for future claims made on all the policies they issue, even the ones for which they long ago collected the premium 2. To ensure that a catastrophe that affects lots of policyholders at once doesn't deplete insurers' resources and make them unable to pay claims 3. To prevent an insurer from recklessly investing its profits or engaging in fraudulent activities that could jeopardize its reserves" "What does an insurer's income statement show? - CORRECT ANSWER An insurer's income statement shows its revenues, expenses, and net income for a particular period of time." "Mary would like to understand the profitability of the Underwriting Department she works for. If the combined ratio is $0.97, what profit was achieved for each premium dollar the insurer earned? - CORRECT ANSWER 3 cents per every premium dollar" "Identify the two ratios that make up the combined ratio. - CORRECT ANSWER The combined ratio is the sum of the loss ratio, which measures how much of each premium dollar the insurer uses to pay losses and loss adjustment expenses, and the expense ratio, which indicates how much of each premium dollar is used to pay the insurer's expenses, such as employee wages, marketing costs, and so forth." "What are the four ways that insurance is commonly marketed and sold through? - CORRECT ANSWER a. Independent agents and brokers b. Exclusive agencies c. Direct writers d. Distribution channels" "Regarding how they sell insurance, what do agents and brokers have in common, and what is different about them? - CORRECT ANSWER Both agents and brokers sell insurance products to individuals and businesses and provide policy services. The broker represents the customer, while the agent represents one or more insurers." "What would be the ideal way for an insurer to market its products if trying to sell auto insurance to young drivers? - CORRECT ANSWER An insurer trying to sell auto insurance to young drivers would probably advertise heavily online." "What is underwriting? - CORRECT ANSWER The process of evaluating risks, selecting who can be insured, pricing that insurance coverage, determining policy terms and conditions, and monitoring those decisions. The primary purpose of underwriting is to help an insurer develop and maintain a growing, profitable book of business." "What are the key activities the underwriters perform? - CORRECT ANSWER Minimize adverse selection, ensure adequate policyholders' surplus, an enforce underwriting guidelines" "What valuable information can risk control professionals and auditors provide to underwriters? - CORRECT ANSWER 1. Field inspection reports on the premises and operations of new insurance applicants and existing insureds renewing their policies 2. Descriptions of operations that can help classify loss exposures 3. Technical information on the fire and health hazards of new building materials and production processes 4. Loss control measures that could help an applicant meet underwriting guidelines 5. New loss exposures at an insured's premises 6. Changes in an insured's commercial operations" "What are the two types of underwriters? - CORRECT ANSWER Field and corporate" "What do field underwriters do? - CORRECT ANSWER 1. Select insureds. The most important thing field underwriters do is select new and renewal accounts that meet the insurer's underwriting guidelines. 2. Ensure accurate classification and pricing. Field underwriters are responsible for ensuring accurate account classification so each account can be priced properly. 3. Recommend or provide coverage. Field underwriters work with producers to recommend or provide applicants with appropriate coverage. 4. Manage a book of business. This involves evaluating the quality and profitability of all the business written for a group of policies. 5. Support producers and insureds. This can involve presenting policy quotations, processing policy endorsements, helping to explain coverages, and making coverage recommendations. 6. Support marketing objectives. Since field underwriters work closely with producers and insureds, they can help educate the Marketing Department on what types of accounts are most profitable for the insurer." "What do corporate underwriters do? - CORRECT ANSWER 1. Research the market. Insurers must continually research fundamental issues, such as the potential markets they want to target. Corporate underwriters assist with this effort by evaluating things like the effect of adding or deleting entire lines of business or expanding into new geographic areas. 2. Formulate underwriting policy. Formulating the policy is a collaborative effort between corporate underwriters and others, and the results are communicated through underwriting guidelines. 3. Revise underwriting guidelines. Corporate underwriters revise underwriting guidelines so that they reflect any changes in the underwriting policy. 4. Develop coverage forms. Corporate underwriters collaborate with the insurer's actuarial and legal departments to develop new coverage forms and modify existing forms to meet customer needs. 5. Review rates. Rates are reviewed by underwriters and updated regularly to respond to changes in loss experience, regulatory developments, and competition. 6. Educate and train. Corporate underwriters are typically responsible for determining and fulfilling the training needs of field underwriters. 7. Arrange reinsurance. Corporate underwriters determine reinsurance needs and select reinsurers. 8. Assist with complex accounts. When complex or unique issues arise with an account, corporate underwriters consult with other underwriters to resolve these issues. 9. Conduct underwriting audits. Corporate underwriters review files to check whether individual underwriters are following the insurer's underwriting guidelines." "What are the key steps in the underwriting process? - CORRECT ANSWER Evaluate the application, Develop underwriting alternatives, select an underwriting alternative, implement the underwriting decision, and monitor the underwriting decision." "What factors go into calculating a policy premium? - CORRECT ANSWER 1. One of the main activities underwriters perform is determining the premium for a policy. This is commonly called rating. 2. The premium is calculated by multiplying the insurance rate (think of this as the unit price) by the number of exposure units. 3. Other factors may affect the final premium, such as whether optional coverages are purchased." "What are some factors that can affect premium? - CORRECT ANSWER 1. Underwriters may deviate from a manual rate for a particular rating classification to reflect differences between the insured's actual risk and the average risk in that classification. 2. Factors that can affect the final premium: a. Increasing policy limits b. Purchasing optional coverages c. Good-student discounts d. Installing fire-protection systems e. Positive loss experience in the recent past f. The care and condition of the premises g. An insured's employees receiving specific training" "How are insurance premiums calculated? - CORRECT ANSWER Insurance premiums are calculated by multiplying the insurance rate by the number of exposure units." "Kevin is an underwriter in training. How would you describe an exposure unit to Kevin? - CORRECT ANSWER An exposure unit is a unit of measure (for example, area, gross receipts, payroll, value insured) used to determine an insurance policy premium." "Crystal was late for work and ran a red light, accidentally rear-ending Martin. Both were uninjured and exchanged insurance information. Martin then called Crystal's insurer and reported his damages to Shawn. In this scenario, who is the claims representative and who is the claimant? - CORRECT ANSWER Shawn is the claims representative and Martin is the claimant" "Kyle would like to become a field claims representative. How would you describe the related duties to him? - CORRECT ANSWER Field claims representatives work outside of the office, generally handling claims that require the scene of the loss to be investigated and holding in-person meetings with insureds, claimants, lawyers, and any other people involved with the claim." "Jill is responsible for the professional development of claims personnel. What role does she play in the Claims Department? - CORRECT ANSWER Claims manager" "Mary is a claims representative. Ken, an insured, drove his car into a pond on his property. What is the first step in the claims handling process that Mary should take? - CORRECT ANSWER Acknowledging the claim" "Mary has just searched the organization's database for the corresponding policy. She determines that the loss occurred during Ken's policy period and that coverages in the policy apply to the loss and then calculates an appropriate loss reserve. What is the next step she should complete? - CORRECT ANSWER Contact the insured" "What must Mary do immediately before concluding the claim? - CORRECT ANSWER Determine the cause of loss and loss amount" "What valuation method involves reimbursing the insured for the cost of replacing the property, minus depreciation? - CORRECT ANSWER Actual cash value" "What are the two types of damages awarded in legal liability cases? - CORRECT ANSWER Compensatory and punitive (Compensatory damages reimburse a victim for actual harm, and punitive damages are awarded to punish a defendant and deter others from following their example)" "When verifying whether coverage applies to a liability claim, what is the key difference from a property claim? - CORRECT ANSWER When verifying whether coverage applies to a liability claim, the key difference from a property claim is that the claims representative must determine whether the insured is legally responsible for the loss." "When Mariah was making a smoothie with her new electric blender, the handle broke, slashing her with glass. She wound up needing several stitches on her right hand, which caused her to miss a week of work. It turned out that the defect was something the manufacturer knew about but decided would be too expensive to redesign. What types of damages could Mariah receive if she sued the manufacturer? - CORRECT ANSWER The types of damages Mariah could receive if she sued the manufacturer include general damages for the pain she suffered, special damages to cover the cost of receiving stitches, and punitive damages because the manufacturer knew about the defect but chose not to correct it." "Matthew wants to become a producer. What are three activities a producer performs (whether he or she works for an agency, a brokerage, or an insurer)? - CORRECT ANSWER Sales, risk management review, policy issuance, premium collection, customer service, claims handling" "Matthew asks you what is considered the most important function a producer can perform. What would you tell him? - CORRECT ANSWER Sales is the most important function a producer can perform." "Which producer function can help lay the groundwork for sales while also strengthening the producer/customer relationship? - CORRECT ANSWER The risk management review can help lay the groundwork for sales while also strengthening the producer/customer relationship." "Name three ways a CSR can add value, in addition to selling products. - CORR