CORRE

CT
QUESTIONS
ANSW
ER

1. John has worked for Alloto, Inc. for 25 years and is considering retiring within the next two
years. John's retirement is an example of:

a. A personnel loss exposure for Alloto, Inc. A

b. A human loss exposure for Alloto, Inc.
c. A liability loss exposure for Alloto, Inc.
d. A loss transfer loss exposure for Alloto, Inc.

2. Pam owns a house in California located in an area susceptible to forest fires. She operates
a home business that requires her clients to come to her house. The possibility of one of
Pam's clients tripping on a step leading to Pam's house and injuring herself is:
a. Property loss exposure s B
b. Liability loss exposure
c. Personnel loss exposure
d. Human loss exposure

3. The possibility of Pam's house being damaged by fire is:

a. A property loss exposure relating to real property
b. A property loss exposure relating to personal property A
c. A non insurable loss exposure
d. A commercial loss exposure
4. A senior manager employed by a national restaurant chain was permanently disabled by
a fire in a restaurant that she managed. For the senior manager's employer, the senior
manager's disability represents a:
a. Human loss C
b. Net income loss
c. Personnel loss
d. Commercial loss

5. For the senior manager's family, the senior manager's disability represents a :
a. Human loss
b. Personnel loss A
c. Liability loss
d. Commercial loss

6. All of the following are characteristics of ideally insurable loss exposures EXCEPT:
a. Losses that are definite and measurable
b. Losses that are accidental D
c. Large number of similar exposure units
d. Large concentration of financial capacity

7.Which one of the following is most likely to have the characteristics of an ideally insurable
loss exposure?
a. Explosion of an industrial factory steam boiler
A
b. Sun damage to an exterior paint finish
c. Physical damage to a lunar land rover
d. Termite damage to a home
8. All of the following are types of private insurers EXCEPT:
a. Stock insurers
b. Mutual insurers C
c. Participating insurance consortiums
d. Reciprocal insurance exchanges

9. A mutual insurance company is owned by:

a. Independent investors
b. Policyholders B
c. State insurance departments
d. Mutual funds

10. All of the following are types of insurance provided by the federal government EXCEPT:
a. Flood insurance
b. Crop insurance C
c. Tenants insurance
d. Social Security

11. Which one of the following is a reason why government insurance programs exist?
a. Because the government has expertise in handling insurance claims
b. Because the government has the necessary financial resources B
c. Because the government has infrastructure and staff to provide insurance
d. Because the government has legal representatives in every state of the union
12.What is the process by which insurers decide which potential customers to insure and
what coverage to offer them?
a. Reinsuring
D
b. Marketing
c. Prospecting
d. Underwriting

13. State insurance departments regulate insurance rates to protect consumers against rates
that are all of the following EXCEPT:
a. Excessive
C
b. Inadequate
c. Class specific
d. Unfairly discriminatory

14. All of the following are ways in which state insurance departments regulate and protect
consumers EXCEPT:
a. Insurers must maintain a certain ratio of agents to residents in an area
A
b. Insurers must be licensed to write insurance policies in a given state
c. Insurers must meet certain tests of financial strength
d. Insurers must comply with laws on marketing, underwriting, and claims practices

15.All of the following are types of property insurance EXCEPT:

a. Fire and allied lines

D
b. Crime
c. Business income
d. Directors and officers
16. Term life insurance:
a. Provides lifetime protection
b. Accrues a cash value C
c. Provides maximum protection for the lowest cost
d. Allows the policyholder to borrow against policy savings

17. Whole life insurance:

a. Provides coverage for a specified period such as 5 or 10 years
b. Lapses when the policyholder reaches age 65 D
c. Is primarily an investment vehicle
d. Accrues a cash value

18. In insurance, the term that means restoring a party who has had a covered loss to the
same financial position that the party held before the loss occurred is:
a. Subrogate
C
b. Recoup
c. Indemnify
d. Rectify

19. Which one of the following describes the characteristics of a mutual insurance company?
a. A corporation owned by stockholders that earns profits for the stockholders.
b. An unincorporated association that provides reciprocal coverage to subscribers.
C
c. A corporation owned by policyholders that provides insurance to its
policyholders.
d. An unincorporated association that earns profits for its individual investors
20. How does a stock insurance insurer differ from a reciprocal insurance exchange?
a. A stock company is owned by stockholders.
A reciprocal insurance exchange is owned by subscribers.
b. A stock company provides insurance to its policyholder-owners. A reciprocal insurance
provides insurance to investors. A
c. Each is owned by stockholders; however, the reciprocal insurance exchange provides
coverage to investors.
d. Each is formed to provide profit to investors; however, the stock insurer is managed
through a board of directors.

21. A reinsurance company

a. Is formed to write all or part of the insurance for a parent company
b. Provides insurance for loss exposures that private insurers are unwilling to provide D
c. Transfers losses to a primary insurer
d. Accepts loss exposures from a primary insurer

22.The Social Security program can be simply described as

a. A federal program that provides retirement, survivorship, disability, and
medical benefits to eligible individuals.
b. A federal welfare benefits program that provides a minimum level of housing, food, and
income to eligible individuals and families. A
c. A state unemployment insurance program that provides income for a limited period of
time to workers who become unemployed.
d. A state program that provides a base level of income for retirement based on the level of
income and duration of employment.
23. Some federal government insurance programs provide coverage for loss exposures that
private insurers have avoided largely because of the potential for catastrophic losses. An
example of such a program is
a. Workers compensation insurance funds D
b. Unemployment insurance programs
c. Automobile insurance plans
d. The National Flood Insurance Program

24. Workers compensation insurance is offered through a residual market plan in some
states, which means
a. It is a state insurance plan that competes with private insurers to provide the insurance.
b. It is a state fund that provides a system to pay the claims of insolvent insurers.
C
c. It is a program that makes insurance available to those who cannot obtain coverage
because private insurers will not voluntarily provide it.
d. It is an insurance plan that is the only source of workers compensation insurance allowed
in the state.

25. In a northeastern state, Old Stable Insurance, an old and established insurance company
that writes homeowners insurance in the northeast experienced three unprofitable years in a
row. Large winter storms resulted in damage to homes that Old Stable insured. The losses
for the last three years have drained the company's financial resources. At the end of the
third year of the losses, the Old Stable declared bankruptcy when it became insolvent. Old
Stable was unable to pay for the claims that resulted from the last storm. Ted Van Wrinkle is
B
a policyholder with Old Stable who filed a claim as a result of the last storm. Ted's house
was damaged when the weight of snow and ice collapsed a portion of his roof. How will Ted
be paid for his loss? a. Ted must join as a creditor in Old Stable's bankruptcy and receive a
portion of his loss. b. The guaranty fund in Ted's state will pay for Ted's losses. c. Ted will
not be paid because there is no system to cover insolvencies caused by underwriting losses.
d. The state government will provide compensation to Ted through the state's FAIR plan.
26. The National Association of Insurance Commissions (NAIC) has identified a problem that
affects all states. Unscrupulous auto body shops are:
Hiring thieves to steal cars, cross state lines, and deliver the stolen vehicles to the shops
Insuring the vehicles and later claiming they are stolen
Changing the vehicle identification number (serial number)
Reselling the vehicles

The NAIC would like to address these issues uniformly across the United States by
introducing tough laws to punish the body shops for claim fraud, but the NAIC members
recognize that there are significant differences from one state to the next.
A
How can the NAIC address the problem?

a. Develop a Model Bill for the proposed solution and distribute it to the states for possible
enactment.
b. Require each state insurance commissioner to draft a proposed solution to the problem
tailored to his or her state.
c. Draft a federal bill and lobby for legislative action to address the problem uniformly.
d. Circulate a petition among all state legislators to join in a countrywide campaign to pass
tough laws in each state.

27. The National Association of Insurance Commissioners (NAIC) created a uniform financial
statement for property and liability insurance companies. The purpose of the uniform
statement is to
a. Ensure that state insurance departments not mistake these companies for life insurers.
b. Provide accounting expertise for those state insurance departments that do not have staff C
actuaries.
c. Simplify the state insurance department's task of comparing the financial reports of many
different insurers.
d. Capture the essential criteria required for rate regulation.
28. Which one of the following provides a step-by-step explanation of how insurance rates
are developed? a. An actuary 1. Analyzes the loss trends for each rating classification 2.
Recommends rate increases for each classification 3. Provides recommendations through
rating bureaus b. An actuary 1. Predicts future losses based on factors such as weather
patterns and litigation trends 2. Determines required rate increases by classification c. The D
insurer 1. Analyzes past loss increases 2. Determines the profit margin required 3.
Distributes the loss increases and required profit among all insureds d. The insurer 1.
Develops each insurer's share of predicted losses 2. Adds an amount sufficient to cover
predicted expenses and a margin for error, profit, and catastrophes

29. Why would insurance regulators have a goal of assuring that the premiums charged by
insurers are adequate?

a. To maintain insurer solvency A

b. To eliminate the potential of a monopoly
c. To protect consumers from high insurance rates
d. To promote equity among insurers
30. An automobile insurance policyholder has complained that her insurance premium is
higher than her neighbor's premium. Both the policyholder and her neighbor have insurance
with the same company, and they have identical vehicles.

The policyholder feels that she is the subject of unfair discrimination. As the policyholder's
agent, you know the policyholder has been responsible for several small auto accidents. The
policyholder has mentioned that her neighbor has had no accidents or violation in the last
three years.

You must explain to the policyholder the objective of rate regulation ensuring that rates are
not unfairly discriminatory, as it applies in her case. Which one of the following is an
accurate explanation?
a. Insureds with similar characteristics are usually placed in the same class and charged the B
same rate unless social equity required modification in that rate structure. This has
probably occurred in your situation.
b. Insureds with similar characteristics are placed in the same class and charged the same
rate. However, your accidents have probably placed you in a different classification. Your
premium is based on the loss experience for policyholders in your classification.
c. Your neighbor has probably received a credit based on the length of time he has had his
policy with the company. This is not unfairly discriminatory because it is available to all
policyholders over time.
d. Your neighbor has been placed in a preferred category of policyholders, which gives him
rights and privileges that you do not have. Your neighbor has been given a rate reduction
based on excess profits that have been returned to policyholders.

31. One of the methods used by regulators to ensure insurance company solvency is through
the Insurance Regulatory Information System (IRIS), which is a. The licensing system
required for insurance companies that transact business in a state. b. The licensing process
for alien insurers that are incorporated in another country. c. A periodic examination
D
conducted by a team of state examiners, working at the insurer's home office to review
activities including claims, underwriting, marketing, and accounting procedures. d. Financial
ratios developed from insurers' financial statements to determine an insurers' overall
financial condition.
32. All states require insurance agents to be licensed to transact insurance business in the
state. Further, agents must meet continuing education requirements to maintain their
licenses. All of these requirements have what purpose?
a. To control the number of agents that transact business in a state to reduce the chance of
over-aggressive competition.
B
b. To ensure that these insurance company representative have prescribed minimum level
of insurance knowledge.
c. To improve the image and public perception of the insurance profession.
d. To maintain a level of vigilance in protecting insurance companies against fraudulent
behavior by the public.

33. Some communities in the United States celebrate holidays with firecrackers. Firecracker
vendors erect stands in the parking lot of shopping centers before the holidays.
One shopping center owner sponsoring a firecracker vendor's booth found that his insurance
did not cover the exposure. He found that none of the insurers licensed to do business in the
state sold insurance coverage for the exposures.
How can the shopping center owner obtain appropriate coverage for the exposure from the A
firecracker vendor's booth?
a. By obtaining coverage through the excess and surplus lines market.
b. By pooling the risk with other shopping center owners with similar exposures.
c. Through a proportionate sharing arrangement with multiple insurers.
d. From alien insurers in countries that also celebrate holidays with firecrackers.

34. States regulate the excess and surplus lines market by

a. Establishing a monitoring board comprised of all insurers licensed to do business in the
state.
b. Examining the market conduct practices of the unlicensed insurers. c
c. Licensing the excess and surplus lines brokers that transact business with the unlicensed
insurers.
d. Approving the policy forms and rates used by the unlicensed insurers.
35. A ratemaking concept in which rates are based on calculated loss experience and insured
with similar characteristics are placed in the same rating class is called

a. Unfair discrimination c
b. Premium differential
c. Actuarial equity
d. Social equity

36. The type of insurance rating law that requires rate approval by the state insurance
department before the rates can be used isa. Flex rating lawb. Open competitionc. File-and- c
use lawd. Prior-approval lawDANSWER

Which of the following is part of written premiums?

a. Investment income
C
b. Policyholders surplus
c. Unearned premiums
d. Underwriting expenses

What was the written premium for Mid-State Painting Company's business auto policy on
December 31?

a. $4,000 D
b. $6,000
c. $20,000
d. $24,000
Brown Insurance Company has the following expenses:

Licenses, taxes, and fees $70,000

Claim staff salaries $100,000
Agents' commissions $200,000
Advertising costs $50,000
Rent and utilities $60,000
A
What is the amount of Brown Insurance Company's acquisition expenses?

a. $250,000
b. $300,000
c. $350,000
d. $450,000
World Insurance Company has the following assets: Cash $ 50,000 Stocks $400,000 Bonds
$200,000 Real Estate $500,000 Furniture and office equipment $70,000 Premium balance
c
due in less than 90 days $20,000 Premium overdue more than 90 days $10,000What is the
amount of World's total admitted assets?a. $450,000b. $650,000c. $1,170,000d. $1,250,000

An insurer's financial statement shows a loss reserve and an unearned premium reserve.
These reserves are each part of the insurer's

a. Policyholders' surplus D
b. Unadmitted assets
c. Admitted assets
d. Total liabilities
The financial report for Apex Insurers contains the following information:

Admitted assets $500,000

Unadmitted assets $400,000
Liabilities $300,000
B
What is the amount of Apex Insurers' policyholders surplus?

a. $100,000
b. $200,000
c. $400,000
d. $600,000

An insurer's income statement shows amounts for all of the following for a particular period,
EXCEPT:

a. Earned premiums B
b. Policyholders surplus
c. Incurred losses
d. Underwriting expenses

INS Insurer's earned premiums are $1,800,000 for the year. Its losses and expenses are
$1,730,000. What type of financial performance did INS Insurer experience for the year?

a. A net operating gain of $70,000 B

b. A net underwriting gain of $70,000
c. A net operating loss of $1,730,000
d. A net operating gain of $1,800,000
All of the following parties are likely to monitor an insurer's financial performance, EXCEPT:

a. Regulators
C
b. Agents
c. Claimants
d. Shareholders

What is Hometown Insurer's loss ratio?

a. 20%
D
b. 30%
c. 50%
d. 75%

What is Hometown Insurer's expense ratio?

a. 20%
B
b. 40%
c. 50%
d. 75%

What is Hometown Insurer's combined ratio?

a. 75%
D
b. 95%
c. 105%
d. 115%
What is Hometown Insurer's investment income ratio?a. 10%b. 20%c. 25%d. 50% C

What is Hometown Insurer's overall operating ratio?

a. 75%
B
b. 95%
c. 105%
d. 115%

A decrease in incurred losses will generally cause a decrease in all of the following, EXCEPT:

a. Combined ratio
B
b. Expense ratio
c. Overall ratio
d. Loss ratio
Old Faithful Insurer has written premiums of $1,400,000 and policyholders' surplus of
$400,000. What does the capacity ratio indicate about Old Faithful Insurer?

a. Financial weakness A
b. Financial strength
c. Operating strength
d. Operating weakness

Amounts designated by insurers to pay claims for losses that have already occurred are
called

a. Acquisition expenses C
b. Loss adjustment expenses
c. Loss reserves
d. Unearned premium reserves

All of the following are true about the insurance agency relationship EXCEPT:

a. The agency agreement is a written agreement between the insurer and an agent
b. The agency agreement gives the agent the right to represent the insurer and sell c
insurance on the insurer's behalf
c. The principal is the party the agent authorizes to bind coverage
d. The agent is the party authorized by the principle to act on the principal's behalf

The laws of agency impose all of the following specific duties on agents EXCEPT:

a. Profitability
A
b. Obedience
c. Loyalty
d. Accounting
The authority that the principal specifically grants the agent is called:

a. Implied authority
B
b. Express authority
c. Apparent authority
d. Conditional authority

Love, Stack, and Jones Insurance sells insurance coverage for small businesses. This office of
insurance producers represents only one insurer, and the producers work on commission
with bonuses. Love, Stack, and Jones Insurance does not own the expiration list for the
policies it sells and services.

What type of marketing (or distribution) system does Love, Stack, and Jones represent? B

a. Independent agency system

b. Exclusive agency system
c. Direct writing system
d. Direct response system

Claire is a producer who is self-employed and represents a group of related insurers called
the United Insurance Group. She has no right of ownership of the expiration list of insureds.
In what distribution system does she operate?
A
a. Exclusive agency
b. Independent agency
c. Direct writing
d. Direct response
Peter is a salaried producer who is an employee of ABC Insurance Company. In what
distribution system does he operate?

a. Exclusive agency C
b. Independent agency
c. Direct writing
d. Direct response

All of the following are true about the insurance distribution system EXCEPT:a. Managing
general agencies appoint and supervise independent agents for insurers that operate in the
systemb. Insurance brokers are independent business owners or firms that place insurance
by representing the customers, not insurersc. An agency expiration list is the record of C
policies that have lapsed or been canceled due to overdue premiumsd. The direct response
system advertises to encourage the potential customers to contact the insurer to purchase
insurance

For an independent agency or an exclusive agency, the percentage of the premium that goes
to the agency or to the producer for new policies sold or existing policies renewed is the

a. Contingent commission D
b. Profit sharing
c. Salary
d. Sales commission
An independent agent received his monthly commissions for the new policies he has sold.
Even though he wrote twenty new policies that month, his commission was low. Which one of
the following explains why this could occur?

a. Commissions are not fully earned at the time of a sale. Other policies written by the
agent might have been cancelled with the unearned portion of the commission returned to
the insurance company. A
b. The agent failed to provide the level of service required by the insurance company. The
insurance commission was reduced as an incentive for better performance.
c. The agent did not meet the premium volume and profitability levels that were specified in
his contract; therefore, his commission was reduced.
d. The agent is a salaried employee of the insurance company and receives only contingent
commissions

The managers of an independent agency are hoping to earn contingent commissions from
several insurers at the end of the year. What should the agency managers attempt to do to
earn contingent commissions?

a. Reduce the number of homeowners policies written for houses in urban areas compared
to the homeowners policies written for houses in rural areas. C
b. Reduce the number of employees required to acquire and service the policies in the
agency.
c. Increase the premium volume and profitability level of the agency's business with those
insurers.
d. Increase the level of customer service provided to policyholders and claimants

Advertising by independent agencies promotes

a. Brand recognition of the companies represented
b. The agency rather than the insurers it represents B
c. Symbols used to increase recognition of the insurers represented
d. Attention to the prices of the policies offered
Insurers using direct response marketing attract new customers through all of the following
methods, EXCEPT:a. Recognition of local agentsb. Extensive advertisementc. Established A
customer basesd. Word-of-mouth advertising

The president of an insurance company that markets through independent agents is

concerned that agents in one geographic area are not motivated to seek profitable business.
Other agents in this geographic area have a better reputation for producing profitable
business.

Within the insurance company, whose job is it to fix this problem? D

a. The production underwriter's

b. The staff underwriter's
c. The producer's
d. The marketing representative's

Insurance companies attempt to motivate producers to sell the types of business the
companies want to acquire. Which one of the following would motivate producers to sell the
desired type of business?
a. Reduce commissions if sales goals are not achieved. B
b. Hold sales contests to encourage the type of sales activity.
c. Provide additional staff to help with the processing.
d. Offer subscriptions to educational services for the producers.
Which one of the following individuals represents the insurance purchaser?
a. An agent
b. A solicitor D
c. A customer service agent
d. A broker

To obtain a state agent's license, a person must meet several requirements that include
which one of the following?
a. Spend a specified amount of time as a customer service representative.
D
b. Obtain an agency contract offered by an insurance company.
c. Acquire a bond identifying the state as the principal.
d. Pass an examination after completing classroom study

An insurance agent wrote insurance policies for a number of military service veterans who
were satisfied with the coverage they received and the price they paid for the coverage.
Subsequently, the agent ran an ad in a local newspaper stating that the insurance policies
offered by his agency are "Veteran Approved Insurance." Why would this be considered
misrepresentation or false advertising?a. The statement misrepresents the benefits, B
conditions, or terms of the insurance policies.b. The statement uses a name or title for the
insurance policies that misrepresents the true nature of the policies.c. The statement
indicates that sales are ties to other benefits. d. The statement makes an illegal reference to
a government entity in an insurance sale.
RipTide Insurance Company has formed an alliance with Local Bank and U-Betcha Used Car
Sales. When U-Betcha sells a car, the sales person directs the customer to Local Bank for the
loan and RipTide for insurance. If the customer transacts business with all three
organizations, the customer will receive reduced auto rates.
Would this be considered to be an unfair trade practice by RipTide?
a. Yes, it is an unfair trade practice to tie the purchase of insurance to some other sale or
financial arrangement.
b. Yes, offering a preferred rate to a customer as described is considered to be rebating.
c. No, businesses interact in this way as a regular practice. D
d. No, this is not deceptive or unfair to the applicants or insureds.AANSWER
Producers are not allowed to pay a portion of the premiums for a policy or give any
commission to a policyholder. Actions of this type are called

a. Tie-in sales
b. Contingent commissions
c. Misrepresentation of dividends
d. Rebating

When an insurance company appoints an insurance agent to serve as its representative,

what specifies the scope of authority given to the agent in this relationship?
a. Implied authority
D
b. Binding authority
c. A unilateral contract
d. An agency contract

Authority that the insurance company specifically grants to an agent is called

a. Binding authority
B
b. Express authority
c. Implied authority
d. Apparent authority
Insurers screen applicants to determine which ones they desire to insure. If insurers do not
properly select policyholders
a. Their profits will be excessive in comparison to the premiums collected.
b. Some insureds might be allowed to purchase insurance at prices that do not adequately
B
reflect their loss exposures.
c. They will have an excessive number of new policies, and their expenses related to writing
the new policies will be excessive.
d. The entire group of policyholders written will be substandard.

As insurers select insureds they attempt to avoid adverse selection. Adverse selection
occurs when a. Applicants purchase insurance with the intent of submitting fraudulent
claims. b. An insurer does not select a cross-section of applicants that range from low to
D
high probability of loss. c. Competitors select the better applications, leaving the remainder
to the insurer. d. People with the greatest probability of loss are the ones most likely to
purchase insurance

Maxfield is considering expanding its policy writings to other types of insurance and different
geographic areas. How could this activity help Maxfield protect its available capacity?
a. By meeting regulatory requirements to provide coverage to a wide range of
policyholders, the insurer will be less likely to engage in unfair discrimination.
b. By reducing the chances that the company's overall results will be affected by a large
B
number of losses from one loss event.
c. The insurer will reduce its reinsurance premiums by reducing its exposure to any one
catastrophic event.
d. Diversification will allow the insurer to create a more visible image in the market,
attracting more potential applicants from which it can select.

Which one of the following is an example of how Maxfield can optimize its available
resources in order to protect its available capacity?
a. Maxfield chooses not to solicit applications for watercraft insurance.
b. Maxfield expands its policy writing in three new types of business. A
c. Maxfield's underwriters take classes to expand their understanding of claim adjustment.
d. Maxfield's management staff takes classes to learn how to provide reasonable
accommodations for physically challenged employees
Maxfield Mutual's executive staff is considering lowering its standards in the selection of
policyholders. In this way, Maxfield can maintain the same rate level, but add more
policyholders that have slightly higher exposures to loss. What is the likely result of this
decision?
D
a. Maxfield might be accused of unfair discrimination.
b. Maxfield must reduce the amount of reinsurance it purchases.
c. Maxfield must spread its risks at the same time to be profitable.
d. Maxfield's premiums will not be commensurate with the exposures.

Which of the following types of insurance rates would be appropriate for the type of
insurance and loss exposures that Maxfield Mutual writes?
a. Merit rates
C
b. Individual rates
c. Class rates
d. Judgement rates

One of the roles of underwriting management is arranging reinsurance. Explain how treaty
reinsurance helps an insurer meet its objectives.
a. The reinsurer automatically assumes a portion of all of the primary insurer's losses that
are eligible under the treaty.
b. The reinsurer delegates underwriting authority to the primary insurer, helping the primary
A
insurer achieve consistent results.
c. The reinsurer monitors the results of the primary insurer's underwriting guidelines to
assure compliance.
d. The reinsurer assumes a portion of the losses from all policies that have been specifically
listed and insured under the treaty.

How do underwriting guidelines help an insurer achieve its objectives? a. By establishing the
criteria required for treaty reinsurance to apply b. By creating a channel for communication
for the insurer's vision, mission, and objectives c. By providing a uniform set of rules that C
guide underwriters toward consistent decisionsd. By maintaining a consistently applied set
of behavioral measurements against which an individual's performance will be measured
How does an expert system assist underwriters in the underwriting process?
a. It automatically gathers the necessary information to underwrite an application.
b. It ensures that no necessary information is overlooked.
B
c. It provides management reports to ensure underwriters' compliance with guidelines.
d. It monitors the results of the decisions made and suggests changes in underwriting
guidelines

All of the following are sources of information underwriters use as they gather information for
underwriting EXCEPT:
a. Producers
D
b. Government records
c. Inspection reports
d. Educational records

Which one of the following represents a physical hazard in the GhostWriter Publishing case?
a. The suspicious fire
b. The ownership of the building C
c. The book-binding glue
d. The 50-gallon drum

Which one of the following represents a morale hazard in the GhostWriter Publishing case?
a. Failure to install sprinklers and ventilation
b. Use of the glue A
c. The suspicious fire
d. The lack of profits
Which one of the following represents a legal hazard in the GhostWriter Publishing case?
a. The treatment of the employees
b. The toxic pollution D
c. The inability to provide GhostWriter's involvement in the fire
d. The court interpretation of the policy language

Regarding the injury to customers, the water glass next to the flour container was the:a. Loss
C
exposureb Proximate causec. Hazardd. Accident

Why would an underwriter modify the rate charged for the coverage provided when
evaluating an application for insurance?
a. Because treaty reinsurance in unavailable for the exposures indicated
C
b. To address the moral hazards the underwriter identified during investigation
c. To better match the rate to the characteristics of the risk
d. Because the applicant is not acceptable for coverage

There are various types of modifications an underwriter might require to make an applicant
acceptable, including coverage modification. Which one of the following is an example of a
coverage modification?

A homeowners applicant has had three minor lightning losses. The underwriter accepts the
application A
a. But requires the applicant to increase the deductible
b. But requires the applicant to install lightning rods
c. But increases the premium by placing the coverage in a substandard rating class
d. But notes that the policy will be nonrenewed if the insured submits a claim in the next
year
How do states prohibit unfair discrimination by insurers?
a. By reviewing each policy cancellation or nonrenewal and the justification for the insurer's
action
C
b. By maintaining a channel for policyholder complaints
c. By identifying prohibited unfair trade practices in state insurance laws
d. By examining insurers' mission statements and objectives

Why do states require that insurers notify the insured before a policy is to be canceled or
nonrenewed?
a. To provide the state an opportunity to investigate the reason for the cancellation or
nonrenewal
B
b. To give the policyholder an opportunity to replace the coverage
c. To eliminate the possibility of an insurer canceling all policies covering a category of
business or in a geographic area
d. To reduce the opportunity for an insurer to red line

The amount of business an insurer is able to write based on a comparison of the insurer's
written premium to the size of its policyholders' surplus is
a. Capacity
A
b. Adverse selection
c. Risk selection
d. Combined ratio

What is the major purpose of claim handling?a. To determine whether coverage existsb. To
obtain adequate informationc. To satisfy the insurance company's obligation under the C
policyd. To respond promptly to claimant requests
Generally, an inside claim representative
a. Meets with parties involved with the loss
b. Handles claims by phone or mail from the insurer's office B
c. Visits the scene of the loss to investigate damages
d. Offers claim settlement service for a fee to insurers

Mary's car collides with two other cars, and several people are injured. The accident occurs
near her insurer's branch office location. What type claim representative will Mary's insurer
generally use to handle this claim?
a. Independent adjuster D
b. Public adjuster
c. Inside claim representative
d. Outside claim representative

All of the following can describe an independent adjuster, EXCEPT:

a. Self-employed
b. Contracted by an insurer C
c. Employee of an insurer
d. Employee of an adjusting firm

Jim notifies ABC Insurer of an accident with an ABC insured in a state in which ABC does not
do business. What type of claim staff will ABC Insurer generally use to investigate this claim?

a. Inside claim representative C

b. Outside claim representative
c. Independent adjuster
d. Independent agent
Granting draft authority to agents will generally increase
a. Claim settlement expenses
b. Time to settle claims D
c. Cost of insurance
d. Customer satisfaction

Sue's homeowner's policy covers her camera against theft. While on vacation, Sue's camera
is stolen. In which step in the claim settlement process would the claim representative
A
determine the camera's replacement cost?a. Valuationb. Settlementc. Negotiationd.
Investigation

John has an unendorsed homeowner's policy. John's two year old bicycle is stolen. The
bicycle's purchase price was $800, and depreciation is estimated at $450. What is the
bicycle's actual cash value?
a. $225 B
b. $350
c. $450
d. $800

A 50,000 square foot building of standard construction is totally destroyed by fire. The
construction cost for medium quality in that location is $70 per square foot. What is the best
estimate of the building's replacement cost?
a. $2,000,000 B
b. $3,500,000
c. $4,000,000
d. $5,500,000
A collision damages Sue's car. The car's actual cash value is $2,000. Repair costs are
estimated at $1,800. Salvage value is estimated at $500. What is the insurer's loss payment?

a. $1,500 C
b. $1,800
c. $2,000
d. $2,300

What is an example of general damages?

a. Hospital expenses
b. Lost wages D
c. Prescriptions
d. Disfigurement

A liability loss has the following damages: Medical expenses $10,000 Damages for
disfigurement $50,000 Damages for pain and suffering $100,000What is the amount of A
special damages?a. $10,000b. $50,000c. $100,000d. $160,000
A liability loss has the following damages:

Medical expenses $10,000

Damages for disfigurement $50,000
Damages for pain and suffering $100,000
C
What is the amount of general damages?

a. $60,000
b. $110,000
c. $150,000
d. $160,000

What is the purpose of Unfair Claim Practices laws?

a. To justify legal claim practices
b. To determine the value of the loss D
c. To punish insurers
d. To specify illegal claim practices

What is the largest and most important liability of property and liability insurers?
a. Acquisition costs
b. Administration costs C
c. Loss reserves
d. Unearned premium reserves
ABC Company pays for all its property losses up to $3 million and insures losses over $3
million. What is this arrangement called?
a. Coinsurance
C
b. Reinsurance
c. Self-insurance
d. Umbrella insurance

Subrogation is the insurer's right to a. Recover its claim payment from the party
responsibleb. Drop a claim in exchange for an agreed amount of moneyc. Estimate the value A
of the damaged propertyd. Transfer coverage to a third party

XYZ Company has established a self-insurance plan to treat its loss exposures. Other than its
internal staff, what resources would XYZ Company generally use to settle claims?
a. Independent adjusters
C
b. Public adjusters
c. Third party administrators
d. Outside claim representatives

Joe owns a building covered by a property insurance policy. Joe intentionally sets fire to this
building, and it is destroyed. Using only this information, what statement best describes why
Joe's property insurance policy is unenforceable for this loss?
a. Joe acted under emotional duress.
C
b. Joe acted irrationally.
c. Joe acted in violation of public policy.
d. Joe acted under the influence of alcohol.
An insurer will make a loss payment if an insured loss occurs and if the insured performs
certain duties. This illustrates that an insurance policy is a
a. Contract of adhesion
C
b. Contract of indemnity
c. Conditional contract
d. Personal contract

What statement best illustrates a violation of utmost good faith?

a. The insurer makes a loss payment less than the amount of a claim.
b. The insurer correctly denies coverage for a loss. D
c. The insured does not report a covered loss to the insurer.
d. The insured intentionally conceals material facts from the insurer.

An insurance policy is a contract of adhesion written by the

a. NAIC
b. IRIS C
c. Insurer
d. Actuary

To reinforce the principle of indemnity, what provision is required in insurance policies? a.

D
Coinsuranceb. Cancellationc. Proof of lossd. Other insurance
 All of the following items are generally located on the declarations page of an insurance
policy, EXCEPT:
a. Deductibles
C
b. Premiums
c. Exclusions
d. Endorsements

Mark's car collides with Pat's car. Pat believes that she will "make out great" because both
her insurance and Mark's insurance will pay Pat for her car's damage. If both insurers made
this loss payment, what principle of insurance would this violate?
C
a. Adhesion
b. Utmost good faith
c. Indemnity
d. Assignment

In some cases, the ultimate loss payment can exceed the policy limit shown in the
declarations because the loss payment can include costs for all of the following, EXCEPT:
a. Defense costs
C
b. Debris removal
c. Additional perils
d. Additional coverages

In an insurance policy, what is the purpose of the insuring agreement?

a. Establishes procedures for carrying out the terms of the contract
b. Makes a broad promise to provide coverage B
c. Explains the specific meanings of terms with respect to the coverages
d. Eliminates coverage for specified exposures
With standard forms, the insurer can generally expect all of the following, EXCEPT:
a. Consistent company operations
b. Increased expense for policy issuance B
c. Consistent court interpretations
d. Decreased claim settlement disputes

Other than common policy declarations, a modular Commercial Package Policy (CPP) must
containa. Common policy exclusionsb. Common policy conditionsc. Commercial property B
conditionsd. Commercial liability declarations

Green Company has commercial property insurance with ABC Insurer. The policy term is 1/1
to
12/31. ABC Insurer has notified Green that it will stop the coverage on 6/30. What policy
condition does ABC's notification represent?
B
a. Changes
b. Cancellation
c. Assignment
d. Subrogation

What policy condition does the insurer use to recover some of its expenses and to discourage
insurance buyers from canceling their insurance before the end of the policy period?

a. Cancellation provision D
b. Liberalization clause
c. Pro rata refund
d. Short rate refund
Jim canceled his auto policy 315 days after the inception date. The one year premium is
$1,095. Assuming that a year is 365 days, what is Jim's pro rata premium refund?
a $50
B
b. $150
c. $780
d. $945

Brown Company's Policy includes a liberalization clause. Brown's insurer introduces a policy
change that broadens coverage at no additional premium. How will this change apply to
Brown's existing policy?
a. The broadened coverage does not apply to Brown Company's policy. B
b. The broadened coverage automatically applies to Brown Company's policy.
c. The broadened coverage will apply to Brown Company's policy with an endorsement.
d. The broadened coverage will apply to Brown Company's new policies as they are issued.

What statement best describes subrogation in an insurance policy?

a. The insurer agrees, in the event of a covered loss, to pay an amount directly related to
the amount of the loss.
B
b. The insurer takes over the insured's right to collect damages from a third party.
c. The insured adheres to the agreement as written by the insurer.
d. The insured transfers its rights or interest in a policy to a third party

Bill drives through a stop sign and collides with Jeff's car. The collision caused physical
damage to both cars but no injuries. Bill and Jeff report the accident to their insurers. Each
receives a loss payment from his respective insurer, and they have their cars repaired. What
is the next step in the claim settlement process?a. Bill's insurer will attempt to recover for B
the loss from Jeff's insurer. b. Jeff's insurer will attempt to recover for the loss from Bill's
insurer.c. Bill's insurer will bring a lawsuit against Jeff's insurer. d. Jeff's insurer will bring a
lawsuit against Bill's insurer
Beth has auto physical damage coverage with a $500 deductible. A collision causes $1,800
damage to Beth's car. How much is the loss payment from Beth's insurer?
a. $500
B
b. $1,300
c. $1,800
d. $2,300

When an insured transfers his or her rights in a policy to a third party, this is called
a. Settlement
b. Liberalization C
c. Assignment
d. Subrogation

All of the following are property that might be exposed to losses and that can be covered by
property insurance, EXCEPT:
a. Motor vehicles and trailers
D
b. Money and securities
c. Ships and their cargo
d. Sentimental value of heirlooms

In the loss to The Printer's Thumb, what was the cause of loss (or peril)?
a. The electrical wiring
b. Fire resulting from lightning B
c. The accumulated paper in the trash
d. Special coverage
How will the claim representative assigned to The Printer's Thumb loss determine whether
the peril is covered by the property policy?

a. If the peril is not specifically excluded by the policy, coverage is provided.

A
b. If the peril is listed and described in the policy, coverage is provided.
c. If the manager of The Printer's Thumb can prove that the loss was caused by a covered
peril.
d. If the manager of The Printer's Thumb can prove that he was not responsible for the loss.

What type of financial consequences has The Printer's Thumb incurred by establishing the
temporary office in the mall?a. Reduction in value of propertyb. Lost incomec. Total loss d. D
Increased expenses

In addition to The Printer's Thumb, what other party was affected financially by the property
loss?
a. The mall where the temporary office was rented
B
b. The building mortgagee
c. The manager
d. The vendors that sold The Printer's Thumb the photocopiers

What was the Printer's Thumb's relationship to the customer whose original documents and
files were destroyed in the fire as they were waiting to be copied.
a. The customer was an unsecured lender.
C
b. The Printer's Thumb was a user of property.
c. The Printer's Thumb was a bailee.
d. The customer was a bailee
The claim representative assigned to The Printer's Thumb loss is trying to identify the
coverage limits in the property insurance policy that apply to the photocopiers that were
destroyed. Under what category of covered property should the claim representative find
coverage for the photocopiers?
C
a. Floater coverage
b. Building equipment
c. Business personal property
d. Nonowned property

A fire that leaves its intended place is

a. A hostile fire
b. A friendly fire
A
c. A proximate cause of loss
d. An ensuing loss A - ANSWER

For the loss that occurred at The Printer's Thumb building, what was the proximate cause of
loss?
a. The lightning
A
b. The fire
c. The electrical wiring
d. The trash accumulation

Water damage to a building following a windstorm is often not covered by a property policy
unlessa. The windstorm is confirmed by the weather service.b. The policy is written with
D
named perils.c. The policy is written with special coverage.d. Wind caused an opening in the
structure through which water entered.
The taking of property from a person by someone who has caused or threatened to cause
personal harm is
a. Burglary
B
b. Robbery
c. Theft
d. Dishonesty

Catastrophe perils, such as war, are generally excluded from property insurance policies
because the risk is considered to be uninsurable since
a. The losses could be prevented.
b. The premiums required to cover the exposure would be unaffordable by most families and D
businesses.
c. Most families and businesses do not face the loss exposure.
d. The funds of the entire insurance industry might be inadequate to pay for all the claims

Property insurance policies typically exclude loss from maintenance perils. Such losses are
generally uninsurable because
a. Covering such losses would result in a moral hazard.
b. They are either certain to occur, over time, or are avoidable. B
c. Maintenance policies are written only through excess and surplus lines.
d. It is difficult (if not impossible) to identify the date of loss and therefore the policy or
insurer providing coverage.

The financial expenses incurred by The Printer's Thumb to rent the office space at the mall is
which form of financial consequence that might be covered by their property insurance
policy?
a. A direct loss C
b. Lost income
c. Extra expense
d. Optional rental reimbursement
In property insurance, a named insured
a. Is the secured lender(s) as identified on the declarations page.
b. Can be many parties based on the contract language and the situation. C
c. Is the policyholder whose name appears on the declarations page.
d. Is the first name appearing on the declarations page.

Which one of the following describes the rights granted to a mortgagee versus the rights
granted to a loss payee under a property insurance policy?a. A mortgagee and a loss payee
have the same rights. The two clauses simply differentiate loans for real and personal
property.b. In the event of a loss, the mortgagee is paid first, the named insured second,
D
and any loss payee is third.c. The terms are used interchangeably depending on the
insurance contract.d. A mortgagee is granted some rights that are greater than those
granted to the named insured; however, the loss payee has the same rights as the named
insured.

What purpose do insurance-to-value provisions serve in property insurance policies?

a. They discourage insurance fraud by ensuring that the property is worth the value
requested in the policy limits.
b. They encourage insureds to purchase an amount of insurance that is equal to, or close to, B
the value of the covered property.
c. They establish the maximum amount the insurance company will pay for any loss.
d. They establish the options available to the insurance company in settling the loss.

An insurance-to-value provision in property insurance policies that reduces the amount the
insurer will pay for a covered loss that occurs to property that is underinsured is
a. A coinsurance clause
A
b. A deductible
c. A policy limit
d. The replacement value
The law that consists of the body of principles and rules established over time by courts on a
case-by-case basis is called:
a. Administrative law
C
b. Constitutional law
c. Common law
d. Regulatory law

The legal right of recovery can be based on all of the following, EXCEPT:
a. Torts
D
b. Contracts
c. Statutes
d. Exposures

Under tort law, an individual can face a claim for legal liability on the basis of any
of the following, EXCEPT:
a. Negligence
B
b. Contracts
c. International torts
d. Absolute liability

When John was driving his car, he was inattentive and was unable to stop in time to avoid
hitting a car stopped at a traffic light. He damaged the stopped car he collided with. What is
A
the basis for John's liability?a. Negligenceb. Absolute liabilityc. Statutory liabilityd. No-fault
statutes
Regarding the injury to customers, the baker's failure to follow procedures to prevent
contaminants from entering the ingredients of baked goods was the:
a. Loss exposure
B
b. Proximate cause
c. Hazard
d. Accident

Among the elements of a negligence are all of the following, EXCEPT:

a. Duty owed to another
b. Breach of duty owed D
c. Injury or damage
d. Minimum threshold of loss

The event that sets in motion an uninterrupted chain of events contributing to the loss is
called:
a. Absolute liability
B
b. Proximate cause
c. International tort
d. Negligence

A man told a pedestrian that he would break her arm if she did not give him her purse. This
is an example of:
a. False arrest
C
b. Invasion of privacy
c. Assault
d. Battery
In speaking with John, Mark said that Peter embezzled $500,000 from their employer. If this
statement is false, it is an example of:
a. Slander
A
b. Libel
c. Breach of warranty
d. Misdemeanor

The damages awarded for pain and suffering due to an injury are part of:a. Judicial
D
damagesb. Punitive damagesc. Special damagesd. General damages

The possibility of Amanda's Bakery being sued by the injured customers is the:
a. Loss exposure
b. Proximate cause A
c. Hazard
d. Accident

All of the following are true, EXCEPT:

a. Liability insurance claims involve three parties
b. Property insurance claims involve one party B
c. Liability insurance pays claims on behalf of the insured
d. Property insurance pays claims to an insured
In a liability insurance policy, personal injury means injury arising from all of the following,
EXCEPT:
a. Invasion of privacy
D
b. Libel
c. Slander
d. Battery

Under a liability policy, damages awarded for pain and suffering are called:
a. Special damages
b. General damages B
c. Indirect damages
d. Consequential damages

Assuming the retroactive date is the same as the policy inception date of a claims-made
liability policy, which one of the following is true for coverage to apply?

a. Coverage will never apply when the retroactive date is the same as the policy inception
date. C
b. Bodily injury or property damage must occur during the policy period or anytime before
policy inception.
c. Claims must be submitted during the policy period.
d. Claims can be submitted anytime during or after the policy period

The intentional and unlawful threat of bodily harm is:a. Statutory injuryb. Encroachmentc.
D
Batteryd. Assault
A tort is:
a. The legal right of recovery for damage or injury
b. A failure to act in a reasonably prudent manner C
c. Any wrongful act other than a crime or breach of contract
d. An unbroken chain of events that causes injury or damage

The liability that someone could incur because of an inherently dangerous activity like
building demolition is called:
a. Nonretractable liability C
b. Nontransferable
c. Absolute liability
c. Compulsory liability

The following list of the steps in the risk management process is correct with one exception.
Which one of the steps shown is inaccurate?
1. Identifying and analyzing loss exposures
2. Gathering information to support assumptions about the loss exposures
3. Selecting the most appropriate risk management techniques
4. Implementing the chosen techniques in a risk management program B
5. Monitoring and modifying the risk management program
a. 1
b. 2
c. 3
d. 4
What information can a risk manager gather from a flowchart to identify loss exposures?
a. Bottlenecks that can stop production
b. Critical areas with unskilled workers A
c. Competition that can reach the market before the client
d. Inefficiencies that can be corrected through automation

A risk manager in an industrial plant is trying to determine where she needs to spend most of
her time in reducing the number of accidents. The plant has a history of work-related
injuries, and she wants to make sure that is reduced. What should the risk manager C
measure to determine where she should expend her efforts? a. The number of workers in
each areab. The flow chart bottlenecksc. The loss frequencyd. The loss severity

Why is it easier to gauge the potential severity of property losses than of liability losses?
a. Property loss exposures are confined to the building and contents. Liability losses can
encompass the surrounding grounds of the business.
b. Property loss exposures have a documented annual frequency and severity that can be
determined as an average according to the type of business. Liability loss exposures cannot
D
be determine with this level of accuracy.
c. Property loss exposures have a calculable frequency. The frequency of liability loss
exposures cannot be determined with accuracy.
d. Property loss exposures have a calculable severity. The severity of liability loss exposures
is much harder to determine
If Jane sells her vehicle, and begins using public transportation, which one of the following
risk management techniques will she be applying to her situation?
a. Avoidance
A
b. Loss control
c. Noninsurance transfer
d. Retention

Jane is concerned that Joe might be hurt in her compact car if he is involved in an accident.
She has read consumer reports indicating that people occupying trucks and sports utility
vehicles suffer less injuries when their vehicles are involved in accidents.
If Jane trades her compact car in for a sports utility vehicle, which one of the following risk
management techniques will she be applying? C
a. Avoidance
b. Loss prevention
c. Loss reduction
d. Noninsurance transfer

While she is at work, Jane has begun parking in a lot that has an attendant to reduce the
chance of her vehicle being damaged while it is parked on the street. Which one of the
following risk management techniques is Jane applying?
a. Avoidance B
b. Loss prevention
c. Noninsurance transfer
d. Retention
Jane has decided to apply a retention risk management technique to reduce her
insurance premium. She is deleting the physical damage coverage (collision and
other-than-collision) on her car. Her car is currently worth $3,000. She will be
able to save $250 every six months. Based on informal guidelines for selecting B
risk management techniques, is this a good decision? a. Yes, Jane will save $500
per year. b. Yes, if Jane can afford to lose $3,000. c. No, because the plan does not
include loss control. d. No, this type of coverage is required in most states.

Pete Morrow is implementing a set of risk management techniques at his company to help
reduce the frequency of products liability claims that his company has experienced. Which
of the following is an important step for Pete to include in this implementation process?
C
a. Identifying exposures
b. Determining which exposures can be retained
c. Communicating the risk management information d. Monitoring the results

How might the monitoring and modifying step in the risk management process be simply
described?
a. Check to make sure the decisions made are still valid, and make changes as needed.
a
b. Create a new workflow and identify new bottlenecks that have occurred.
c. Make sure insurance is not being used as a substitute for loss control.
d. Identify noninsurance transfers through hold harmless agreements.

What is a benefit that a business can receive by applying sound risk management?
a. It will meet state and federal safety regulations.
b. It will have a better opportunity to achieve business goals. B
c. It will not have to worry about losses.
d. It will be able to attract and retain talented employees and managers.
What will Jane be able to gain as a benefit by applying sound risk management to her
transportation situation?
a. No future increases in her insurance premium.
D
b. A loss free future
c. Economic growth
d. Greater peace of mind

Businesses, individuals, and families that practice sound risk management can benefit
society by doing all of the following, EXCEPT:
a. Increasing interest in leisure activities
A
b. Reducing the overall number of losses
c. Controlling medical expenses through reduced injuries
d. Stimulating economic growth

What is an effective way for Frank and Jan to begin identifying the liability loss exposures
associated with their new home? a. Hire a professional risk manager b. Determine the value
D
of the home and contents c. Purchase a homeowners insurance policy d. Inspect the home to
look for items and activities that might cause injury or damage

Frank and Jan researched lead paint hazards and abatement techniques on the Internet.
They discovered that the best action they can take inside the house is to remove loose paint
chips and dust, replace the windows, and seal the walls with a paint designed for that
purpose.
What risk management technique does this activity involve? B
a.. Avoidance
b. Loss control
c. Retention
d. Noninsurance transfer
Frank and Jan have discovered that the pollution that is resulting from the fuel oil leaking into
the soil is not covered by their homeowners insurance policy. They fear that the oil might
seep into the water table and contaminate their neighbors' well water. Illness and damage
that might result would be very expensive.
Frank and Jan can purchase an endorsement that will provide coverage for this pollution
exposure. The endorsement would cost $50 per year.
B
Is this an effective risk management selection for Frank and Jan until they can replace the
tank?
a. Yes, they should do this indefinitely and not replace the tank.
b. Yes, they are exchanging a large exposure for a little premium.
c. No, they are spending a lot of money for little protection.
d. No, each neighbor will have insurance to cover any damage to their wells.

The dollar amount of damage that results or might result from a loss exposure is the
a. Loss severity
b. Loss frequency A
c. Loss prevention
d. Loss reduction

The risk management technique that eliminates a loss exposure and reduces the chance of
loss to zero is
a. Retention
D
b. Loss control
c. Noninsurance transfer
d. Avoidance
 p. 10XJane DockerCentury SchoolbookÿÿÿÿÃJane owns a ten-year-old compact car that she
uses to drive to work each day. Jane drives 20 miles into the city and parks her car on a
street near her office. Jane's son, Joe, is 15 years old, and he will obtain his driver's license
this summer when he becomes 16. Joe has already expressed an interest in obtaining his
own vehicle or driving Jane's compact car.Jane is concerned about the cost of owning a
vehicle, buying the insurance, and the risk of parking the vehicle on the street. If Joe obtains
his own vehicle or begins driving his own, she knows that her expenses and her concerns will
increase. Jane is considering risk management alternatives to help her reduce expenses and
risks.Frank and JanCentury SchoolbookÿÿÿÿqFrank and Jan are each twenty-five years old,
and they have purchased their first home together. It required all of their savings and some
money from their parents to make their down payment. The house needs repairs that they
will do themselves and with the help of friends. The first project will be to seal the lead paint
that is on the interior of the house and remove flaking lead paint that is on the exterior of the
house.Frank and Jan are also aware that a buried heating-oil tank in the yard is leaking
slowly, but they have decided that replacing that tank must wait until they have the funds in
a year or two.Maxfield Ins. Co.Century SchoolbooküÿÿÿÿThe Maxfield Mutual Insurance
Company writes only homeowners insurance for homes that range in value from $100,000 to
$200,000 in one state in the central plains of the United States. Maxfield has written
insurance profitably for 75 years. This long period of profitability has developed a
considerable available capacity for Maxfield Mutual. However, in the last five years
Maxfield's executive staff has become increasingly concerned about the increasing number
of tornado losses Maxfield's policyholders have experienced. Losses paid during these years
have been higher than any other period in Maxfield's history. In addition, competitors have
aggressively marketed in the state and Maxfield has lost policyholders to the competitors for
lower premiums. GhostWriter PublishCentury SchoolbookÿÿÿÿŽGhostWriter Publishing
Company publishes romance novels. They purchase manuscripts from freelance novelists,
edit that material, print the texts, and bind the books. GhostWriter owns the building where
its employees perform all of its publication operations. GhostWriter uses book-binding glue
that is flammable and toxic, so employees try to take care in opening windows when they are
in the binding step of the operation. GhostWriter has been unwilling to install a sprinkler
system or appropriate ventilation system due to the associated costs. So far, opening the
windows has been effective, and none of the employees has become ill from the fumes.
GhostWriter's employees dump any unused book-binding glue in a 50-gallon drum behind
the building. The Environmental Protection Agency determined that the drum has been
leaking for years, and the toxins in the glue have run into the ground. They have ordered
GhostWriter to perform a clean-up. GhostWriter submitted a claim to its insurer for the
expenses associated with the clean-up. Recent court decisions have eroded the original
exclusions in the insurer's policy language that would eliminate pollution losses. The insurer
will be required to pay for the pollution loss. In the last year, profits have been down for
GhostWriter. One evening, the fire department responded to a fire reported at GhostWriter's
building. They were able to extinguish the three small fires that started simultaneously in
the building. GhostWriter's owners said they had received anonymous threats that someone
would "burn them down." GhostWriter's owners were suspected of involvement, but nothing
could be proven. The Printer's ThumbÿÿÿÿõThe Printer's Thumb is a store specializing in
printing and photocopying for local businesses. The Printer's Thumb's customers depend on
fast and accurate service for their printing needs. The Printer's Thumb has developed a
positive reputation by providing that service. The Printer's Thumb occupies a building it
owns; Ultimate Lender holds the mortgage to the building. All of the equipment used for
printing and photocopying was purchased with cash and located in the building. The building
and its contents are covered by a property insurance "special coverage" policy.One evening
after working hours, lightning struck the building resulting in a fire in the electrical wiring.
Papers that had accumulated in the trash ignited and substantial fire damage resulted.
Damage resulted to the building, contents, and a customer's original documents and files
that were waiting to be copied.Until repairs could be made, the Printer's Thumb rented a
temporary office in an available space in a local mall. The manager of The Printer's Thumb
did not want to lose the customers that he had worked so hard to develop by shutting down
servicing while repairs were made. All of The Printer's Thumb's customers have agreed to
continue business at the new location.Mammoth Insurance CoÿÿÿÿMid-State Painting
Company owns vans, trucks, and cars that carry workers, supplies, and equipment to
worksites. On November 1, Mammoth Insurance Company issued a business auto policy with
a one-year period to Mid-State Painting Company. The premium for the policy is
$24,000.Hometown Insurer CasÿÿÿÿéThe financial report for Hometown Insurer contains the
following information:Earned premiums $4,000,000Written premiums
$5,000,000Investment income $1,000,000Incurred Losses $3,000,000Incurred underwriting
expense $2,000,000Amanda's BakeryÿÿÿÿŠAmanda's Bakery sold muffins that contained
shards of glass. The glass shards inadvertently became mixed with the muffin batter when
the baker's water glass fell and broke on the counter next to the flour container. The baker
failed to follow procedures for preventing contaminants from becoming mixed with the
ingredients of baked goods. Two customers were injured after eating the muffins.Pam's
houseCentury SchoolbookÿÿÿÿœPam owns a house in California located in an area
susceptible to forest fires. She operates a home business that requires her clients to come
to her house.Restaurant fireCentury Schoolbookÿÿÿÿ}A senior manager employed by a
national restaurant chain was permanently disabled by a fire in a restaurant that she
managed.DBEDITOR