FAM EXAM QUESTIONS AND ANSWERS
What are the 2 principles that make insurance a viable product? - Answers - 1. Under
the Law of Large Numbers, as the number of observations increases, the average of the
results converges to the expected value.
2. Consumers are risk-averse so they are willing to pay more than their expected loss in
premiums
What does Renter's Insurance cover? - Answers - Mostly protects personal
possessions and interior improvements, excludes external damages and certain liability
coverages
How is the payment calculated on a homeowner's insurance policy when I<cF? -
Answers - take the minimum of the insured amount and (1/cF)*L
How is the payment calculated on a homeowner's insurance policy when I>cF? -
Answers - take the minimum of the insured amount and the loss amount
Before worker's comp insurance became no-fault, what 3 doctrines made it difficult for
employees to receive compensation? - Answers - 1. Doctrine of contributory
negligence (employee contributed to the cause of the incident)
2. Fellow-Servant doctrine (fellow worker's negligence caused the incident)
3. Assumption of risk doctrine (the worker knew the risks of the job)
Now, what are the 2 requirements for a worker to be indemnified for a work-related
injury? - Answers - 1. Must work in a covered occupation
2. Injury or disease must be caused by the employment
What do worker's compensation benefits include? - Answers - 1. Medical care
2. Disability income
3. Death benefits
4. Rehab services and benefits
What does Fire Insurance cover? - Answers - Coverage for direct losses from fire and
lightning plus one of the following:
- Personal coverage
- Commercial coverage
- Increased covered perils
- Increased covered loss
What are the 2 types of Marine Insurance and what do they cover? - Answers - 1.
Ocean Marine: covers nautical vessels and their cargo (basic only covered while cargo
is on the ship, an endorsement can cover cargo from warehouse to warehouse)
2. Inland Marine: covers transportation risks such as domestic shipments,
instrumentalities of transportation and communication, and personal property floater
risks
, What is Liability Insurance - Answers - 1. Provides defense if the insured is accused of
injuring a third party or damaging their property
2. Insurer will pay for damages up to the policy limit if the insured is found guilty
Which type of insurance is generally on a claims-made basis and why? - Answers -
Liability: only claims that are reported during the policy period are covered, makes low
frequency/high severity claims more predictable
What is tail coverage? - Answers - Extends coverage beyond the policy end date
What does an occurrence basis mean? - Answers - Insurer will cover claims that
occurred during the policy period, regardless of when they are reported
What are the 2 main types of health insurance plans and what are their main
characteristics? - Answers - - HMO: PCP is required, no coverage for OON services
- PPO: PCP not required, coverage for OON services
What does Comprehensive Major Medical cover? - Answers - Small frequent costs
and large unexpected costs, low deductible
What does Major Medical cover? - Answers - Large unexpected costs, high deductible
What does Catastrophic Major Medical cover? - Answers - Very large and infrequent
expenses that are not covered by Comprehensive (no longer allowed because of the
ACA)
What does short-term medical coverage do? - Answers - Covers lapses for recently
issued major medical policies, has a limited term (up to 1 yr), simpler UW which
decreases insurer's costs, includes a pre-existing condition exclusion
What do high-risk pool plans do? - Answers - Insure people with limited or no access
to insurance due to pre-existing conditions (no longer exists due to ACA)
What are the 6 criteria for an Insurable Risk? - Answers - 1. Economically feasible
(Insurer should be able to cover the loss and all admin expenses)
2. Economic Value of the insurance should be calculable and enough data should be
available so the insurer is highly confident in their calculations
3. Loss must be definite
4. Loss must be random in nature
5. Exposures in any rate class must be homogenous (same loss expectation or same
probability of loss)
6. Exposure units should be spacially and temporally independent
What are the 2 main jurisdictions in the US for auto insurance? - Answers - 1. At-Fault
(aka Tort) where fault must be proven in order for injured party to be compensated
What are the 2 principles that make insurance a viable product? - Answers - 1. Under
the Law of Large Numbers, as the number of observations increases, the average of the
results converges to the expected value.
2. Consumers are risk-averse so they are willing to pay more than their expected loss in
premiums
What does Renter's Insurance cover? - Answers - Mostly protects personal
possessions and interior improvements, excludes external damages and certain liability
coverages
How is the payment calculated on a homeowner's insurance policy when I<cF? -
Answers - take the minimum of the insured amount and (1/cF)*L
How is the payment calculated on a homeowner's insurance policy when I>cF? -
Answers - take the minimum of the insured amount and the loss amount
Before worker's comp insurance became no-fault, what 3 doctrines made it difficult for
employees to receive compensation? - Answers - 1. Doctrine of contributory
negligence (employee contributed to the cause of the incident)
2. Fellow-Servant doctrine (fellow worker's negligence caused the incident)
3. Assumption of risk doctrine (the worker knew the risks of the job)
Now, what are the 2 requirements for a worker to be indemnified for a work-related
injury? - Answers - 1. Must work in a covered occupation
2. Injury or disease must be caused by the employment
What do worker's compensation benefits include? - Answers - 1. Medical care
2. Disability income
3. Death benefits
4. Rehab services and benefits
What does Fire Insurance cover? - Answers - Coverage for direct losses from fire and
lightning plus one of the following:
- Personal coverage
- Commercial coverage
- Increased covered perils
- Increased covered loss
What are the 2 types of Marine Insurance and what do they cover? - Answers - 1.
Ocean Marine: covers nautical vessels and their cargo (basic only covered while cargo
is on the ship, an endorsement can cover cargo from warehouse to warehouse)
2. Inland Marine: covers transportation risks such as domestic shipments,
instrumentalities of transportation and communication, and personal property floater
risks
, What is Liability Insurance - Answers - 1. Provides defense if the insured is accused of
injuring a third party or damaging their property
2. Insurer will pay for damages up to the policy limit if the insured is found guilty
Which type of insurance is generally on a claims-made basis and why? - Answers -
Liability: only claims that are reported during the policy period are covered, makes low
frequency/high severity claims more predictable
What is tail coverage? - Answers - Extends coverage beyond the policy end date
What does an occurrence basis mean? - Answers - Insurer will cover claims that
occurred during the policy period, regardless of when they are reported
What are the 2 main types of health insurance plans and what are their main
characteristics? - Answers - - HMO: PCP is required, no coverage for OON services
- PPO: PCP not required, coverage for OON services
What does Comprehensive Major Medical cover? - Answers - Small frequent costs
and large unexpected costs, low deductible
What does Major Medical cover? - Answers - Large unexpected costs, high deductible
What does Catastrophic Major Medical cover? - Answers - Very large and infrequent
expenses that are not covered by Comprehensive (no longer allowed because of the
ACA)
What does short-term medical coverage do? - Answers - Covers lapses for recently
issued major medical policies, has a limited term (up to 1 yr), simpler UW which
decreases insurer's costs, includes a pre-existing condition exclusion
What do high-risk pool plans do? - Answers - Insure people with limited or no access
to insurance due to pre-existing conditions (no longer exists due to ACA)
What are the 6 criteria for an Insurable Risk? - Answers - 1. Economically feasible
(Insurer should be able to cover the loss and all admin expenses)
2. Economic Value of the insurance should be calculable and enough data should be
available so the insurer is highly confident in their calculations
3. Loss must be definite
4. Loss must be random in nature
5. Exposures in any rate class must be homogenous (same loss expectation or same
probability of loss)
6. Exposure units should be spacially and temporally independent
What are the 2 main jurisdictions in the US for auto insurance? - Answers - 1. At-Fault
(aka Tort) where fault must be proven in order for injured party to be compensated
