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A reinsurance contract that is entered into on a case-by-case basis after an application for
insurance is received by a primary insurer is called facultative reinsurance.

ABC Insurance Company entered into a reinsurance agreement with XYZ Reinsurance.
Under the contract, XYZ Re has no liability unless ABC's loss ratio exceeds 75 percent for
the year. XYZ Re agreed to pay all losses in excess of the 75 percent loss ratio. ABC
Insurance Company is using reinsurance to stabilize profits.

All of the following are functions of the marketing department of an insurance company
EXCEPT to make final underwriting decisions.
All of the following are methods that a property and liability insurance company can use to
protect against catastrophic losses EXCEPT purchase of common stock.

All of the following are reasons for a primary insurer to use reinsurance EXCEPT to
increase the unearned premium reserve.

All of the following statements about claims settlement are true EXCEPT A public
adjustor is usually paid a flat fee regardless of the size of a claim.

All of the following statements about life insurance company investments are true
EXCEPT The majority of these investments are short-term investments.

All of the following statements about reinsurance are true EXCEPT The amount of
insurance transferred to a reinsurer is called the net retention.

All of the following statements about the settlement of a claim are true EXCEPT The
adjustor must file the proof of loss, which is a sworn statement supporting his or her
decision regarding a claim.

Amy heads the legal staff of a large property and liability insurance company. Amy’s staff
is likely involved in all of the following activities EXCEPT reviewing applications to
determine if the company should insure the risk.

Antonio is a claims adjustor for LMN Insurance Company. After the insurer is notified that
there has been a loss, Antonio meets with the insured. The first step in the claims process
that Antonio should follow is to verify that a covered loss has occurred.

Beverly lives in a sparsely populated area in northern Idaho. Some insurance companies
marketing coverage in northern Idaho cannot afford to have full-time adjustors there.
Several insurers hire Beverly to adjust claims for their insureds. Beverly charges the
insurers a fee for each claim that she settles. Beverly is a(n) independent adjustor.

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Catastrophe bonds are made available to institutional investors in the capital markets
through an entity that is specially created for that purpose. This is entity is called a special
purpose reinsurance vehicle.

Common sources of underwriting information for life and health insurance include all of
the following EXCEPT the applicant’s income tax return.

Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance. Delta has a
retention limit of $200,000, and nine lines of insurance are ceded to Eversafe. How much
will Eversafe pay if a $1,600,000 building insured with Delta suffers an $800,000 loss?
$700,000

Easy Pay Insurance Company may require insureds who suffer a loss to submit a sworn
statement to substantiate that a loss occurred and to describe the conditions under which the
loss occurred. This sworn statement is called a proof of loss.
Factors that may result in more restrictive underwriting decisions include which of the
following? I. Inadequate rates. II. The unavailability of reinsurance at favorable terms.
Both I and II

Functions of an insurance company’s legal department include which of the following? I.

Lobbying for legislation favorable to the insurance industry. II. Drafting policy provisions.
Both I and II

Granite Insurance Company entered into a treaty reinsurance agreement with Rock Solid
Reinsurance (RSR). Granite's retention limit is $400,000 and RSR agreed to provide
reinsurance for up to $2.0 million. If Granite writes an $800,000 policy, RSR is responsible
for 50 percent of the losses. If Granite insures a $1.6 million risk, RSR is responsible for 25
percent of any losses. surplus share reinsurance

Gwen is in charge of accounting at Integrity Insurance Company. Integrity is a publicly-

traded insurer. In describing her job, Gwen said, "There aren't too many businesses where
you are required to keep two sets of book." Gwen's comment most likely refers to her
company preparing accounting statements using statutory and GAAP accounting.
Huge Insurance Company is a property insurer that is interested in protecting itself against
cumulative losses that exceed $200 million during the year. This protection can best be
obtained using an excess-of-loss reinsurance treaty.

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If an underwriter suspects moral hazard, the underwriter may ask an outside firm to
investigate the applicant and make a detailed report to the insurer. This report is called a(n)
inspection report.

Insurers obtain data which can be used to determine rates from insurance advisory
organizations.

Jan is employed by an insurance company. She reviews applications to determine whether

her company should insure the applicant. If insurable, Jan assigns the applicant to a rating
category based on the applicant’s degree of risk. Jan is a(n) underwriter.

Liability Insurance Company (LIC) was approached by a regional airline to see if LIC
would write the airline’s liability coverage. LIC agreed to write the coverage and entered
into an agreement with a reinsurer. Under the agreement, LIC retains 25 percent of the
premium and pays 25 percent of the losses, and the reinsurer receives 75 percent of the
premium and pays 75 percent of the losses. This reinsurance arrangement is best described
as quota-share reinsurance.

Mark has been an underwriter for 20 years. An application he recently reviewed looked odd
to him. The building value in the application seemed far too high, and Mark suspected the
applicant might be planning to destroy the property after it is insured. Mark contacted an
outside firm and hired someone to investigate the applicant and to prepare a report about
the applicant. This report is called a(n) A) agent’s report. Inspection report.

Most insurance companies require their marketing representatives to submit an evaluation

of the prospective insured. This important source of underwriting information is called the
agent’s report.

New Liability Insurance Company began operations last year and has been very successful.
The company’s ability to grow is being restricted by an accounting rule that requires
insurers to realize acquisition expenses immediately, while not realizing premiums
received as income until some time has passed. Reinsurance is often used in such cases for
which of the following purposes? To reduce the unearned premium reserve

One method through which reinsurance is provided is through an organization of insurers

that underwrites insurance on a joint basis. Through the organization, financial capacity is
available for large commercial risks. This reinsurance arrangement is a(n) reinsurance
pool.

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One source of life and health insurance underwriting information is an organization that
life and health insurance companies can join. As a member, life and health insurance
companies report health impairments of applicants, and this information is shared with
member companies. Although the information is shared, the underwriting decision of the
member company is not disclosed. What is this organization called? Medical Information
Bureau (MIB)

Pac-Coast Insurance (PCI) concentrates its underwriting activities in California. The

company is concerned that if a catastrophic earthquake occurs, it might threaten the
solvency of the company. To address this risk, PCI issued some debt securities. If a
catastrophic earthquake occurs, PCI does not have to repay the borrowed funds or pay
interest. The securities PCI issued are called catastrophe bonds.

Ross studied engineering in college. After graduation, he went to work for an insurance
company. Ross visits properties insured by his company. He conducts inspections and
makes recommendations about alarm systems, sprinkler systems, and building
construction. In what functional area does Ross work? loss control

State insurance regulators require LMN Life Insurance Company to maintain a separate
account. The assets in the separate account would support the liabilities for which of the
following products? variable life insurance

Sue double-majored in mathematics and statistics in college. She also enrolled in a number
of finance courses. After graduation, she was hired by Econodeath Insurance Company.
Her job is to calculate premium rates for life insurance coverages. Sue is a(n) actuary.

The function of an actuary is to determine premium rates.

The price per unit of insurance is called the rate

The process of transferring risk to the capital markets through the use of financial
instruments such as bonds, futures contracts, and options is knows as securitization of
risk.

The underwriting process begins with the agent.

The unearned premium reserve of an insurer is a liability representing the unearned
portion of gross premiums on outstanding policies.

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What type of reinsurance arrangement did Granite enter into with RSR? surplus share
reinsurance

When a fraternal insurer began operations, it asked each member, regardless of age, to pay
$20 per month to the fraternal's group life insurance plan. In exchange, each member
received the same amount of life insurance. Soon younger members of the group began to
drop out when they realized their premiums were subsidizing a group with a higher chance
of loss. Which important underwriting principle was violated in this case? There should be
equity among policyholders.

Which of the following statements about adjustment bureaus is (are) true? I. They are
frequently used to settle claims when a large number of losses occur in a given geographic
location as a result of a catastrophic event. II. Their major advantage is low cost because of
the use of part-time adjustors. I only

Which of the following statements about claim settlement is (are) true? I. The fair payment
of claims requires an insurer to adopt a very liberal claims policy. II. To prevent lawsuits,
an insurer should provide no personal assistance to a claimant other than that which is
required by contractual obligations. Neither I nor II

Which of the following statements about the investments of property and liability insurers
is (are) true? I. Income from investments is important in offsetting any unfavorable
underwriting experience. II. Because premium income is continually being received, the
investment objective of liquidity is of little importance. I only

Which of the following statements about treaty reinsurance is true? The reinsurer must
accept all business that falls within the scope of the treaty.

Which of the following statements about treaty reinsurance is true? Using a reinsurance
pool provides financial capacity to write large amounts of insurance.

Which of the following statements about underwriting policy is (are) true? I. A company
must establish an underwriting policy consistent with company objectives. II. Underwriting
policy is usually subjective and allows the underwriter considerable flexibility with respect
to lines written and forms used. I only

Which of the following statements about underwriting standards is (are) true? I. One
purpose of underwriting standards is to reduce adverse selection against the insurer. II.
Equitable rates should be charged so that each group of policyowners pays its own way in
terms of losses and expenses. Both I and II

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Which of the following statements is (are) true about life insurance company investments?
I. The majority of life insurance company general account assets are invested in bonds. II.
The majority of life insurance company separate account assets are invested in stocks. Both
I and II

Which of the following statements is (are) true with respect to catastrophe bonds? I. The
bonds are issued by the U.S. Government. II. The bonds have relatively high interest
(coupon) rates. II only

Which of the following statements is true regarding the information systems functional area
of an insurance company? I. Computers and information systems are able to perform some
tasks that previously were performed directly by employees. II. Information systems can
speed the processing of policies by insurers. Both I and II

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