Principles of Risk Management and Insurance - Chapter 5

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Types of Insurers and Marketing Systems
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1

Which of the following statements about stock insurers is true?

  1. A) They issue assessable policies.
  2. B) They are not permitted to write property and liability insurance.
  3. C) Stockholders bear any losses and share in any profits.
  4. D) They are owned by their policyholders.

Answer: C

2

Which of the following statements about mutual insurers is true?

  1. A) They are legally organized as partnerships.
  2. B) They have a board of directors which is selected by state insurance departments.
  3. C) They are owned by their stockholders.
  4. D) They may pay dividends to their policyholders.

Answer: D

3

Why are some mutual insurers referred to as "assessment mutuals"?

  1. A) They charge low premiums because the loss exposures of their insureds are thoroughly assessed before a policy is written.
  2. B) They are noted for being very thorough in their assessment of investment opportunities.
  3. C) They are assessed for state premium taxes only if they make a profit.
  4. D) They can assess policyholders if premiums are insufficient to pay losses and expenses.

Answer: D

4

The corporate structure of mutual insurers has changed in recent years. All of the following are examples of significant changes EXCEPT

  1. A) demutualization of some insurers.
  2. B) sharp increase in the number of mutual insurance companies.
  3. C) increase in company mergers.
  4. D) formation of mutual holding companies.

Answer: B

5

Which of the following statements is true about fraternal insurers?

  1. A) They are legally organized as stock insurers.
  2. B) They specialize in writing life and health insurance.
  3. C) They are taxed more heavily than other types of insurers because of discriminatory marketing practices.
  4. D) They account for the majority of life insurance in force in the United States.

Answer: B

6

Which of the following statements about reciprocal exchanges is (are) true?

  1. Reciprocal exchanges usually specialize in health insurance.
  2. Reciprocal exchanges are unincorporated mutual insurance companies.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

7

Which of the following statements about Lloyd's of London is true?

  1. A) Coverage is actually written by syndicates who belong to Lloyd's of London.
  2. B) New individual members or Names who belong to the various syndicates have unlimited legal liability.
  3. C) It operates as an admitted insurer throughout the United States.
  4. D) It allows underwriters to write coverage without meeting stringent financial requirements.

Answer: A

8

Temporary evidence of insurance until a policy is actually issued is provided by a(n)

  1. A) binder.
  2. B) brokerage agreement.
  3. C) pre-approval form.
  4. D) endorsement.

Answer: A

9

Which of the following statements about insurance brokers is (are) true?

  1. They legally represent the insured rather than the insurance company.
  2. They are prohibited from being licensed as agents.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

10

Neil needs insurance that is unavailable in the state where he lives. To obtain insurance from a nonadmitted insurer, Neil should contact a

  1. A) surplus lines broker.
  2. B) nonadmitted agent.
  3. C) general agency broker.
  4. D) direct writer.

Answer: A

11

Which of the following statements about life insurance marketing systems is true?

  1. A) Insurance brokers are not permitted to sell life insurance.
  2. B) Some exclusive agents who market property and liability insurance also sell life insurance.
  3. C) Independent insurance agents are not permitted to market life insurance.
  4. D) Financial institutions such as banks are not permitted to market life insurance.

Answer: B

12

Which of the following statements about personal producing general agents is (are) true?

  1. They often have the option of recruiting and training sub-agents.
  2. They are independent agents who produce substantial amounts of life insurance with one insurer.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

13

Advantages of the direct response system for marketing life insurance include which of the following?

  1. Advertising can be specifically directed to selected markets.
  2. Complex products can be easily sold.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

14

Which of the following statements about the exclusive agency system for marketing property and liability insurance is true?

  1. A) Exclusive agents typically have complete ownership of policy expirations.
  2. B) A higher commission rate is usually paid on exclusive agents' renewal business than on new business.
  3. C) Exclusive agents represent several different insurance companies.
  4. D) New exclusive agents may start as employees and after a training period become independent contractors.

Answer: D

15

All of the following statements about the independent agency system are true EXCEPT

  1. A) Agents are often authorized to adjust small claims.
  2. B) Agents are compensated on the basis of commissions.
  3. C) The insurer rather than the agent owns the renewal rights to the business.
  4. D) The agent is an independent business person who represents several insurers.

Answer: C

16

A property and casualty insurer in which the salesperson is an employee of the insurer, not an independent contractor, is called a

  1. A) fraternal insurance company.
  2. B) risk retention group.
  3. C) direct writer.
  4. D) captive insurance company.

Answer: C

17

Which of the following statements about the sale of property and liability insurance through the direct response system is (are) true?

  1. Selling expenses are higher because market segmentation tends to be less precise than with other marketing methods.
  2. It is the most appropriate system for selling complex products.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: D

18

Under one life insurance marketing system, agents conduct sales interviews at the workplace with the approval of the management of the business. There are few direct costs to the employer, and this marketing system is especially appropriate for low-income and middle-income workers. This life insurance marketing system is called the

  1. A) direct response system.
  2. B) worksite marketing system.
  3. C) independent agency system.
  4. D) personal producing general agency system.

Answer: B

19

Which of the following is a characteristic of a typical mass merchandising plan?

  1. A) higher commission scales for agents and higher administrative expenses
  2. B) payment of premiums through payroll deduction
  3. C) group rather than individual underwriting
  4. D) contributions by the employer to the cost of coverage

Answer: B

20

David is a successful independent insurance agent. Recently, one of the life insurance companies with whom he places business offered him a special financial arrangement. If David meets sales targets, he will receive large bonuses. He will also be able to recruit and train sub-agents and receive an over-riding commission based on the amount of life insurance the sub-agents sell. Based on this description, David is a(n)

  1. A) insurance broker.
  2. B) personal-producing general agent.
  3. C) direct writer.
  4. D) multiple life exclusive agent.

Answer: B

21

Sarah owns a property and liability insurance agency. She is authorized to represent several insurance companies and she is compensated by commissions. Sarah's agency owns the expiration rights to the business she sells. Sarah is a(n)

  1. A) independent agent.
  2. B) exclusive agent.
  3. C) direct writer.
  4. D) insurance broker.

Answer: A

22

The leaders of a religious group decided to start a life insurance organization to insure members of the religious group. The insurer will operate as a nonprofit organization, thus receiving favorable tax treatment. The insurer formed will be a

  1. A) health maintenance organization.
  2. B) stock insurer.
  3. C) fraternal insurer.
  4. D) reciprocal exchange.

Answer: C

23

Scott works in property and liability insurance marketing. He legally represents insurance purchasers, rather than insurance companies. Scott is paid a commission on the insurance placed with insurers. Scott is a(n)

  1. A) exclusive agent.
  2. B) direct writer.
  3. C) branch manager.
  4. D) insurance broker.

Answer: D

24

ABC Insurance has always used the exclusive agency system to market coverages. ABC, however, cannot afford full-time agents in sparsely-populated areas. To reach customers in these areas, ABC enters into agreements with local independent agents. Using more than one marketing system is called employing a

  1. A) direct response system.
  2. B) general agency system.
  3. C) multiple distribution system.
  4. D) branch office system.

Answer: C

25

Cathy just started a job with XYZ Manufacturing Company. She attended an orientation and was given a packet providing information about the various employee benefits XYZ offers. One item in the packet was a booklet and application form from an auto insurer. The insurer offers lower premiums to XYZ employees. The insurer's plan for selling individually-underwritten auto insurance to employees of XYZ Manufacturing Company is called

  1. A) direct response.
  2. B) mass merchandising.
  3. C) financial institution distribution.
  4. D) multiple marketing.

Answer: B

26

Brian buys and sells investment securities for his clients. Brian also decided to become a licensed life insurance agent to better serve his customers. While Brian's primary focus is buying and selling financial securities for his clients in exchange for commissions, he also earns commissions on his life insurance sales. Brian is a(n)

  1. A) direct writer.
  2. B) stock broker.
  3. C) insurance broker.
  4. D) personal-producing general agent.

Answer: B

27

ABC Term Life Insurance Company uses an interesting marketing system—it has no agents. Instead, the company markets its coverages through television and radio ads, newspaper inserts, and the Internet. The type of marketing system that ABC Term Life Insurance Company uses is called the

  1. A) mass merchandising system.
  2. B) mixed marketing system.
  3. C) direct response system.
  4. D) worksite marketing system.

Answer: C

28

Big Mutual Insurance Company would like to take advantage of financial services deregulation by acquiring a bank and a stock brokerage firm. Big Mutual, however, would have trouble raising the funds needed to make these acquisitions under the mutual form of organization. Big Mutual is planning to switch from the mutual form of organization to the stock form, and to issue shares of common stock to raise capital. This change in organizational structure is called

  1. A) mutualization.
  2. B) retrocession.
  3. C) reinsurance.
  4. D) demutualization.

Answer: D

29

Jim would like to start a business raising thoroughbred racehorses. Obtaining insurance on the horses is a key concern, and he was dismayed to learn that none of the insurers authorized to operate in his state offer this specialty insurance. What is the name of the intermediary that Jim can use to place this coverage with an insurer not admitted to his state?

A) alien insurer

B) general agent

C) surplus lines broker

D) direct writer

Answer: C

30

Some investors decided to start an insurance company. Each investor contributed $50,000 to raise the capital required to charter a new company. Each investor received an ownership interest in the company. The company will raise additional capital by selling ownership rights to other investors. Under this type of organization, the customer and owner functions are separate. This type of insurer is called a

  1. A) stock company.
  2. B) reciprocal exchange.
  3. C) fraternal company.
  4. D) mutual company.

Answer: A

31

RST Insurance Company does not have any agents. Instead, the company sells insurance through radio ads, telemarketers, and newspaper and magazine inserts. This distribution method is called

  1. A) reciprocal exchange.
  2. B) direct response system.
  3. C) mass merchandising.
  4. D) multiple distribution system.

Answer: B

32

Which of the following statements about Blue Cross and Blue Shield plans is (are) true?

  1. Blue Cross and Blue Shield plans can be organized on a nonprofit basis or on a for-profit basis.
  2. Blue Cross provides coverage for hospital services; Blue Shield provides coverage for physicians' and surgeons' fees.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

33

Which of the following statements about Lloyds of London (are) true?

  1. The majority of the business underwritten by Lloyds of London is for unusual risks, such as valuable race horses and professional athletes.
  2. Lloyds of London is a group of underwriters who underwrite insurance, not an insurance company.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

34

As an alternative to demutualizing, Big Mutual Insurance Company reorganized itself into a corporate form that can directly or indirectly own a stock insurance company. This form of organization is called a(n)

  1. A) holding company.
  2. B) shell company.
  3. C) upstream company.
  4. D) downstream company.

Answer: A

35

All of the following are reasons why mutual insurance companies convert to stock insurance companies EXCEPT

  1. A) Stock companies can offer stock options to attract and retain key personnel.
  2. B) Stock companies can raise new capital more easily.
  3. C) Stock companies are exempt from state insurance regulation.
  4. D) Stock companies offer greater flexibility to expand through acquisitions.

Answer: C

36

R.I.P. Company manufactures herbicide and pesticide. The company had difficulty finding affordable liability insurance. R.I.P. established its own insurance company based in Bermuda for the purpose of insuring R.I.P.'s loss exposures. The company that R.I.P. formed is called a

  1. A) captive insurer.
  2. B) reciprocal insurer.
  3. C) fraternal insurer.
  4. D) holding company.

Answer: A

37

Which of the following statements is (are) true about savings bank life insurance (SBLI)?

  1. Each depositor at the savings bank receives life insurance equal to his or her savings account balance.
  2. The goal of SBLI is to provide low-cost life insurance to consumers.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

38

Which of the following statements is true with regard to career life insurance agents?

  1. A) They represent several different life insurance companies.
  2. B) They are compensated largely through a salary and not through commissions.
  3. C) They are paid the same commission rate on new and renewal business.
  4. D) The insurer provides financing, training, supervision, and office facilities for career agents.

Answer: D

39

Which of the following statements is true regarding independent insurance agents in property and liability insurance?

  1. A) The insurer owns the expiration rights, not the independent agent.
  2. B) Independent agents are only permitted to represent one insurance company.
  3. C) Independent agents are paid the same commission rate on new and renewal business.
  4. D) Independent agents are not permitted to sell life and health insurance.

Answer: C

40

Marcy advises her clients on investments, taxes, wealth management, estate issues, budgeting, and insurance. Marcy is also a licensed life insurance agent. When Marcy sells life insurance to a client, the distribution channel used is a(n)

  1. A) stock broker.
  2. B) financial planner.
  3. C) insurance broker.
  4. D) direct writer.

Answer: B

41

Which of the following statements is (are) true regarding insurance agents and insurance brokers?

  1. A property and liability insurance agent has the authority to bind the insurer for certain types of coverage.
  2. A licensed broker who is not a licensed agent has the legal authority to bind an insurer.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

42

Big Life Insurance Company purchased Regional Bank. Regional Bank has 27 branches in four states. Big Life Insurance Company required one employee at each bank branch to become a licensed life insurance agent and to sell Big Life Insurance Company annuities and life insurance products. This distribution channel is an example of the

  1. A) career agent distribution system.
  2. B) direct response distribution system.
  3. C) financial institution distribution system.
  4. D) worksite marketing distribution system.

Answer: C

43

The local franchise of a national bar and grill chain continued to serve a drunk customer. The drunk customer tried to drive home. He hit and killed two people who were riding bicycles. The representatives of those who were killed filed a lawsuit against the national chain. As jury awards in the area where the incident occurred are high, insurers selling liquor liability insurance refused to issue new coverage until the case was resolved. Because no admitted insurers sell the coverage, liquor liability insurance in this case is considered a(n)

  1. A) residual line.
  2. B) mandatory coverage.
  3. C) orphan policy.
  4. D) surplus line.

Answer: D

44

Peggy is an independent insurance agent who places substantial amounts of business with XYZ Insurance Company. XYZ pays Peggy a bonus when she meets a sales goal. XYZ also allows Peggy to recruit and train sub-agents. She receives additional commissions based on the sales generated by the sub-agents. Based on this description, we can conclude that Peggy is a

  1. A) direct writer.
  2. B) personal producing general agent.
  3. C) multiple line exclusive agent.
  4. D) broker.

Answer: B

45

A reciprocal exchange is managed by a corporation that is authorized to collect premiums, pay losses, invest funds, seek new members, and perform other functions. This corporate manager is called a(n)

  1. A) holding company.
  2. B) attorney-in-fact.
  3. C) resident agent.
  4. D) captive manager.

Answer: B

46

A plan for selling individually underwritten property and liability insurance to members of a group is called

  1. A) direct response.
  2. B) multiple distribution.
  3. C) niche marketing.
  4. D) mass merchandising.

Answer: D