AINS 21 EXAM QUESTIONS WITH COMPLETE SOLUTIONS

1. A flex rating law is - ANSWER An insurance rating law under which prior approval is required only if the new rates exceed a certain percentage above (and sometimes below) the rates previously file. 2. The two objectives of insurance policy form regulation are to ensure that policies are clear and readable and to - ANSWER Detect and address any policy provisions that are unfair. 3. Some insurance rating laws allow rates to be put into use immediately but require insurers to files the rates with the state within a specific period of time. These types of laws are known as - ANSWER Use-and-file laws. 4. When deciding to approve or disapprove an insurer's request for a rate, a state insurance commissioner must determine if the rates are adequate. Adequate means that the rates should be - ANSWER Sufficient to pay all claims and the expenses related to those claims. 5. For an insurer to be considered solvent, states require it to have financial reserves - ANSWER Well in excess of its ordinary expenses. 6. Market conduct regulation focuses on insurers' treatment of applicants for insurance, insureds, and others who present claims for coverage. Market conduct regulation affects all of the following areas of operations of an insurer, EXCEPT: Select one: A. Risk control B. Sales C. Claims handling D. Underwriting - ANSWER Risk control 7. Insurers are required to submit annual financial statements to - ANSWER State insurance departments. 8. Which one of the following is true regarding the administration of the Insurance Regulatory Information System (IRIS)? A. If an insurer cannot be rehabilitated, the state's guaranty fund may be available to increase the effects of the insurer insolvency. B. Under a special provision in state licensing laws, state regulators are empowered to completely take over an insurer at any time. C. If regulators determine that an insurer is insolvent, the state insurance department places it in receivership. D. If the insurer has financial ratios that are inside predetermined norms, IRIS identifies the company for regulatory attention. - ANSWER If regulators determine that an insurer is insolvent, the state insurance department places it in receivership. 9. Unfair trade practices acts involve which one of the following insurance company operations? - ANSWER Underwriting 10. Which one of the following statements is true? - ANSWER D. Insurance regulators review policies to determine if they benefit consumers. 11. The capital of a stock insurance company comes primarily from - ANSWER Sale of company stock 12. Don is an agent trying to find appropriate coverage for his customer, Wayne Industrial Supplies, which has large, unique, and hard-to-place commercial loss exposures. Fortunately, Wayne is in a state that has deregulated some insurance coverages, which will make Don's job a little easier. Based on this information, which one of the following statements is true? - ANSWER If Wayne's loss exposures can be covered by inland or ocean marine coverages, these may be exempt from regulation. 13. A northeastern state in the US has a mandatory rate law in effect. A southeastern state has established a file and-use law. A Pacific coast state requires insurers to follow a prior-approval law, and a midwest state has enacted a flex rating law. Which one of the states and its regulators asserts the greatest extent of control over insurer rates? - ANSWER Midwest, pacific coast, southeastern answer - Northeastern 14. Which one of the following is generally exempt from state insurance regulations pertaining to policy forms and rates? - ANSWER Surplus line insurers 15. Todd is a producer selling commercial insurance to small to medium sized businesses. Because some of them are struggling to pay the premiums, and because Todd gets more commissions the more policies he sells, he has started giving a portion of the policy premium back to his customers that place multiple coverages with him. In doing so, Todd is specifically engaging in the unfair trade practice of - ANSWER A.False advertising. B. Misrepresentation. C. Rebating. D. Tie-in sales. Rebating 16. Which one of the following categories of loss expenses can an insurer use to compare its revenue and expenses? - ANSWER A. Loss reserves at end of period B. Change in loss reserves C. Loss reserves at beginning of period D. Incurred losses Incurred losses, which are the sum of paid losses and the change in loss reserves over the period for which premium is earned, represent the most accurate loss expense figure to compare with premium revenue. 17. Brown Insurance Company has the following expenses: Dividends $70,000 Claim staff salaries $100,000 Agents' commissions $200,000 Advertising $50,000 Rent and utilities $60,000 18. What is the amount of Brown Insurance Company's acquisition expenses? - ANSWER A. $250,000 B. $300,000 C. $350,000 D. $450,000 $250,000. Acquisition expenses = Sales salaries, commissions, and bonuses + advertising. $200,000 + $50,000 = $250,000. Rent and utilities are part of general expenses. 19. The largest expense category for most insurers is payment for - ANSWER A. Acquisition expenses. B. Additions to loss reserves. C. Loss adjustment expenses. D. Losses arising from claims. The largest expense category for most insurers is payment for losses arising from claims. 20. Which one of the following is the best measure of the amount of insurance provided for a given period? - ANSWER Earned premiums are the portion of written premiums that apply to the part of the policy period that has already occurred. 21. Generally, how often must a foreign insurer's license be renewed? - ANSWER Annually 22. A stock insurer is distinguished from a mutual insurer by the fact that - ANSWER Owners are not necessarily insureds. 23. Owners of reciprocal insurance exchanges are also known as - ANSWER Subscribers. 24. 25. Which one of the following statements is true? A. Mutual insurers are usually large national insurers. B. Mutual insurers include few regional insurers. C. Mutual insurance companies include some large national insurers. D. Mutual insurers are exclusively regional or local insurers. - ANSWER Mutual insurance companies include some large national insurers. An Ohio insurer that is licensed to sell insurance in Michigan is known as what in Michigan? - ANSWER A foreign insurer 26. Which one of the following is generally exempt from state insurance regulations pertaining to policy forms and rates? A. Surplus line insurers B. Health insurers C. Commercial property insurers D. Workers compensation insurers - ANSWER Surplus line insurers 27. Which one of the following is part of written premiums? - ANSWER A. Investment income B. Policyholders' surplus C. Underwriting expenses D. Unearned premiums Unearned premiums are part of written premiums and apply to the part of the policy period that has not yet occurred. 28. Which one of the following is true with regard to non admitted assets? - ANSWER A. Regulators allow them to be shown on insurers' financial statements. B. They can be readily converted to cash at or near their market value. C. Regulators assume that they are readily available for paying claims. D. They help prevent an insurer from overstating its true financial condition. D. Because non admitted assets cannot be readily converted to cash at or near their market value, regulators do not allow them to be shown on insurers' financial statements, which helps prevent an insurer from overstating its true financial condition. 29. Which one of the following is shown on the balance sheet of an insurer? - ANSWER A. Cash and short-term investments B. Incurred losses C. Acquisition expenses D. Net investment income A. Cash and short-term investments are admitted assets that are shown on the balance sheet of an insurer. The other items listed are shown on an insurer's income statement. 30. Earned premiums are shown on an insurer's income statement because they are - ANSWER A. Revenues. B. Equal to net income. C. Expenses. D. Admitted assets. A. Earned premiums are revenues shown on an insurer's income statement. 31. An insurer's income statement can best be described as a financial statement that shows the - ANSWER Relationship between revenues, expenses, and net income. 32. Rachel is considering investing in the stock of an insurance company. Which one of the following is likely to provide the best indication of the insurer's financial position at this point in time? - ANSWER Balance sheet - Of the items listed, an insurer's balance sheet provides the best indication of its financial position because it shows admitted assets, liabilities, and policyholders' surplus at a particular point in time. 33. Which one of the following is the correct formula for calculating an insurer's combined ratio? - ANSWER Loss ratio + expense ratio - The combined ratio formula is the sum of the loss ratio and expense ratio 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? Select one: A. 75% B. 95% C. 105% D. 115% - ANSWER D. Hometown's combined ratio equals its loss ratio ($3,000,000/$4,000,000) or 75 percent, plus its expense ratio ($2,000,000/$5,000,000) or 40 percent, for a total of 115 percent. Which one of the following best explains why underwriting expenses are divided by written premiums rather than earned premiums in order to calculate an insurer's expense ratio? - ANSWER Many underwriting expenses, such as producers' commissions, are incurred at the beginning of the policy period. Therefore, using written premiums rather than earned premiums for the denominator provides a better match for comparing revenues to expenses when calculating the expense ratio. Which one of the following is the correct formula for an insurer's overall operating ratio? - ANSWER Combined ratio − Investment income ratio