1. All the following are true about underwriting except:
a) a major purpose of underwriting is to reduce adverse selection against the insurance company
b) fair rates should be charged so that each group of insureds is not subsidized by other groups
c) the underwriter should select only those insureds that are expected to have no losses
d) the underwriter makes decisions based on criteria established by management
2. Which of the following is not a duty of an insurance agent?
a) duty to make a profit in the long run for the insurance agency and the insurer
b) carefully handling all money and keeping proper records
c) carefully conveying all relevant information
d) duty not to enrich himself by self dealing at the principal's expense
3. One duty of the insurance company actuary is to:
a) handle claims when they involve property exposures and losses in multiple states
b) manage all contract negotiations when the agency agreement is signed by the agent and company
c) determine premium rates and classification schemes for the underwriters to apply
d) eliminate exposures from the pool that are going to have a loss
4. The primary difference between an insurance agent and an insurance broker is:
a) their compensation scheme
b) the parties they each legally represent
c) the fringe benefits their employers provide
d) there is no practical or legal difference between them, other than their titles.
5. All of the following are rights of insurance consumers except:
a) the right to accurate information
b) the right to have complaints heard
c) the right to affordable prices
d) the right to product development and improvement
6. The efficient insurance market requires all of the following conditions except:
a) numerous sellers and buyers
b) well-informed consumers
c) numerous purchase substitutes (homogeneity)
d) a government subsidy for lower-income citizens
7. Most markets involve two parties. How many does the insurance market have?
8. Which of the following is the most important goal of insurance regulation?
a) limiting the number of insurance companies in the state
b) promoting the solvency of insurance companies
c) mandating that all citizens purchase auto insurance and health insurance
d) approving the contractual language of insurance policies sold in the state
9. Which of the following is not directly a subject of state insurance regulation?
a) financial solvency of insurance companies
b) trade practices of insurance companies, such as agent compensation and product pricing
c) marketing activities of insurance companies
d) loss ratios of property insurers and the benefit ratios of life and health insurers
Why is there unequal knowledge and bargaining power in the insurance transaction?
a) the complexity of the insurance contract and the intangible nature of the product
b) the insurance companies want to confuse consumers so it is difficult to make choices
c) consumers do not receive the policy until months after the contract goes into effect
d) there is no competition in the industry, therefore the consumer is stuck with inferior products
10. Which of the following is a subject of state insurance regulation?
a) equal employment practices of the insurer
b) standards of financial solvency
c) business acquisition practices
d) insurance contract provisions
11. Insurance regulations require legal reserves and surplus because
a) assets have to equal liabilities plus owners' equity
b) reserves are long term obligations and must be met with long term assets
c) they provide a cushion against bad underwriting and investment results
d) insurers must pre-fund all agent's commissions and underwriting expenses
12. A life insurer’s policy reserve equals the difference between the mathematical liability of a future death claim and the value of:
a) future premiums the insured will have to refund to its policyholders
b) future premiums the insured will pay the insurer
c) future investment earnings on premiums the insured will pay the insurer
d) all present death claims
13. All the following features are unique to insurance contracts (versus other business contracts) except:
a) insurable interest
c) utmost good faith
14. Jasmine phones her agent to obtain auto insurance. The agent binds coverage over the phone, and tells her she will have a $250 collision deductible. When the insurer issues the policy, the underwriter imposes a $1,000 deductible because of Jasmine’s poor driving record, then mails her the policy. She does not read it or notice this change until she has an accident six months later. She then demands that the insurer only require a $250 deductible rather than a $1,000 deductible, since she did not approve this change. Which legal principle of insurance contracts would be the insurer=s most convincing reason for refusing to honor the $250 deductible?
a) contract of adhesion
b) parol evidence rule
d) utmost good faith
15. Which of the following does not support the principal of indemnity?
a) actual cash value
b) contract of adhesion
c) insurable interest
16. A misrepresentation:
a) always voids a contract
b) makes a contract voidable if it is material
c) is sometimes referred to as a "concealment"
d) is legally treated the same way as a breach of warranty
17. The doctrine of proximate cause:
a) forces the insurer to pay for all claims arising out of an unbroken sequence of events if any one of the subsequent perils following the original excluded peril was covered
b) forces the insurer to pay for all claims arising out of an unbroken sequence of events if the original insured peril was covered
c) forces the insurer to pay for the loss when the proximate cause of the event is the insured's fault
d) divides any loss payment among parties proximately affected by the loss
18. Under a contract of adhesion:
a) subrogation is not allowed
b) ambiguous features are interpreted against the writer of the contract
c) ambiguous features are interpreted always against the insurer
d) ambiguous features are decided based upon the intent of the parties when the contract was entered
19. Luis arrives home from work one day to discover that his apartment building is on fire. He drives directly to an insurance agency to buy renters insurance, since he realized he didn’t have coverage for this loss.
Luis does not tell his agent that the building is on fire. There is also not a question on the application for coverage that asks if Luis's apartment is currently on fire. Luis pays the first premium, and the agent issues a coverage binder. Which of the following statements is/are true?
I. Luis committed a misrepresentation, so coverage may be voided at the option of the insurer
II. Luis breached a warranty, but the insurer will have to prove he did so fraudulently in order to deny coverage
III. Luis committed a concealment that was material to the risk, thus his coverage can be voided by the insurer as long as the insurer can prove that he concealed the fact with fraudulent intentions
b) I and III
d) II and III
20. What is the difference between an agent and a broker?
21. Explain briefly why increasing or decreasing price artificially can decrease the supply of insurance.
22. Explain briefly the purpose of the McCarran Act.
23. When entering into a legally enforceable insurance contract consideration must exist. Explain what consideration is and the form it takes in insurance contracts.