AU 60 Practice Test #1 Solved 100% Correct
Ace Woodworking Company makes household furniture. Which one of the following
best describes an expense that should be classified as an operating expense on Ace's
income statement? - ANSWER-Utility charges for the manufacturing plant.
All of the following are advantages of the sole proprietorship type of business
ownership, EXCEPT: - ANSWER-Limited liability.
An insurance company needs to hire an employee with knowledge of insurance policy
forms and the ability to relate policy provisions to the loss exposures of individual
policyholders. The person will also prepare premium quotes and process cancellations.
Which one of the following employees would best suit the company's needs? -
ANSWER-Line underwriter.
An underwriter is conducting ratio analysis and notices that a company has $1.5 million
in long-term debt, $3 million in shareholder's equity, and $5 million in assets. Which one
of the following statements is true based on the company's debt to equity ratio? -
ANSWER-The debt to equity ratio is .50 and the company is mostly financed by equity.
An underwriter receives a renewal application for a property quote from his producer.
The applicant has had a series of small losses in the recent past. The underwriter is
debating whether to reject the submission or quote it with a property deductible of
$5,000. During which one of the following steps in the underwriting process is the
underwriter involved? - ANSWER-Developing underwriting alternatives.
An underwriter seeking to gain insight into the activities that might be conducted by an
applicant would use which one of the following resources? - ANSWER-North American
Industry Classification System.
Any factor that results in a gap between the intended message and the perceived
message is referred to as: - ANSWER-Noise.
Assets on the balance sheet are classified as current and noncurrent. Which one of the
following is classified as a noncurrent asset? - ANSWER-A copyright that expires in 10
months.
Common size statements are frequently used during vertical analysis. Which one of the
following is true regarding common size statements? - ANSWER-Common size
statements are good for inter-company comparisons because they correct for
differences in company size.
During a general market conduct examination of underwriting, examiners would look for
evidence of all of the following, EXCEPT: - ANSWER-Inconsistent claim practices.
, Experience rating plans can be used to modify rates of individual accounts. Which one
of the following is a benefit of experience rating plans? - ANSWER-Experience rating
plans encourage the insured to implement risk control measures.
Financial statements: - ANSWER-Can be used by agents and brokers to assess
coverage needs.
How many years of loss experience do most states require insurers to use for fire
insurance ratemaking purposes? - ANSWER-5 years.
If a company's inventory turnover ratio is higher than the industry benchmark, it
indicates that: - ANSWER-The company is selling its inventory more quickly than its
competitors.
If an account is experienced rated, for which of the following reasons might an
underwriter have to contact the prior carrier? - ANSWER-To confirm or update the loss
history provided by the insured.
In addition to having a large number of exposure units, viable risk transfer requires that
exposure units be: - ANSWER-Independent and homogenous.
In ratemaking, the component included to pay future claims and loss adjustment
expenses is referred to as: - ANSWER-Prospective loss costs.
In which one of the following types of lines of insurance do underwriters usually have
extreme flexibility in account pricing and are able to develop rates without actuarial
intervention? - ANSWER-Marine insurance.
Information efficiency refers to: - ANSWER-How the value of the information to
underwriting decisions must be weighed relative to its expense and its timeliness.
Insurance Company (IC) reports the information below for its automobile insurance line.
Using the pure premium ratemaking method, which one of the following is the rate per
exposure unit, rounded to the nearest dollar, for IC's automobile line of business? -
ANSWER-$66.
The rate per exposure unit for IC's automobile line of business is $66, calculated as
($5MM/100,000) plus (1,300,000/100,000) =$63; $63/(1-.05) = $66.
Insurance payments in excess of the amount of the loss are unlikely under property
policies because: - ANSWER-Property policies permit recovery only to the extent of
each party's insurable interest.
Insurers sometimes use composite rating to price accounts. How does composite rating
differ from other pricing methods? - ANSWER-The insured receives no price advantage
by being composite rated.
Ace Woodworking Company makes household furniture. Which one of the following
best describes an expense that should be classified as an operating expense on Ace's
income statement? - ANSWER-Utility charges for the manufacturing plant.
All of the following are advantages of the sole proprietorship type of business
ownership, EXCEPT: - ANSWER-Limited liability.
An insurance company needs to hire an employee with knowledge of insurance policy
forms and the ability to relate policy provisions to the loss exposures of individual
policyholders. The person will also prepare premium quotes and process cancellations.
Which one of the following employees would best suit the company's needs? -
ANSWER-Line underwriter.
An underwriter is conducting ratio analysis and notices that a company has $1.5 million
in long-term debt, $3 million in shareholder's equity, and $5 million in assets. Which one
of the following statements is true based on the company's debt to equity ratio? -
ANSWER-The debt to equity ratio is .50 and the company is mostly financed by equity.
An underwriter receives a renewal application for a property quote from his producer.
The applicant has had a series of small losses in the recent past. The underwriter is
debating whether to reject the submission or quote it with a property deductible of
$5,000. During which one of the following steps in the underwriting process is the
underwriter involved? - ANSWER-Developing underwriting alternatives.
An underwriter seeking to gain insight into the activities that might be conducted by an
applicant would use which one of the following resources? - ANSWER-North American
Industry Classification System.
Any factor that results in a gap between the intended message and the perceived
message is referred to as: - ANSWER-Noise.
Assets on the balance sheet are classified as current and noncurrent. Which one of the
following is classified as a noncurrent asset? - ANSWER-A copyright that expires in 10
months.
Common size statements are frequently used during vertical analysis. Which one of the
following is true regarding common size statements? - ANSWER-Common size
statements are good for inter-company comparisons because they correct for
differences in company size.
During a general market conduct examination of underwriting, examiners would look for
evidence of all of the following, EXCEPT: - ANSWER-Inconsistent claim practices.
, Experience rating plans can be used to modify rates of individual accounts. Which one
of the following is a benefit of experience rating plans? - ANSWER-Experience rating
plans encourage the insured to implement risk control measures.
Financial statements: - ANSWER-Can be used by agents and brokers to assess
coverage needs.
How many years of loss experience do most states require insurers to use for fire
insurance ratemaking purposes? - ANSWER-5 years.
If a company's inventory turnover ratio is higher than the industry benchmark, it
indicates that: - ANSWER-The company is selling its inventory more quickly than its
competitors.
If an account is experienced rated, for which of the following reasons might an
underwriter have to contact the prior carrier? - ANSWER-To confirm or update the loss
history provided by the insured.
In addition to having a large number of exposure units, viable risk transfer requires that
exposure units be: - ANSWER-Independent and homogenous.
In ratemaking, the component included to pay future claims and loss adjustment
expenses is referred to as: - ANSWER-Prospective loss costs.
In which one of the following types of lines of insurance do underwriters usually have
extreme flexibility in account pricing and are able to develop rates without actuarial
intervention? - ANSWER-Marine insurance.
Information efficiency refers to: - ANSWER-How the value of the information to
underwriting decisions must be weighed relative to its expense and its timeliness.
Insurance Company (IC) reports the information below for its automobile insurance line.
Using the pure premium ratemaking method, which one of the following is the rate per
exposure unit, rounded to the nearest dollar, for IC's automobile line of business? -
ANSWER-$66.
The rate per exposure unit for IC's automobile line of business is $66, calculated as
($5MM/100,000) plus (1,300,000/100,000) =$63; $63/(1-.05) = $66.
Insurance payments in excess of the amount of the loss are unlikely under property
policies because: - ANSWER-Property policies permit recovery only to the extent of
each party's insurable interest.
Insurers sometimes use composite rating to price accounts. How does composite rating
differ from other pricing methods? - ANSWER-The insured receives no price advantage
by being composite rated.
