Principles of Risk Management and Insurance - Chapter 8

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Government Regulation of Insurance
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1

Reasons for regulation of insurance include which of the following?

  1. Maintaining insurer solvency
  2. Ensuring reasonable rates
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

2

The right of the states to regulate the business of insurance was first established by

  1. A) the South-Eastern Underwriters Association case.
  2. B) the case of Paul v. Virginia.
  3. C) the Financial Modernization Act.
  4. D) the Sherman Act.

Answer: B

3

The basis for current state regulation of insurance is

  1. A) the McCarran-Ferguson Act.
  2. B) Paul v. Virginia.
  3. C) the South-Eastern Underwriters Association case.
  4. D) the National Association of Insurance Commissioners.

Answer: A

4

All of the following statements about the methods of regulating insurance are true EXCEPT

  1. A) All states have insurance laws that regulate the operations of insurers.
  2. B) Insurers are totally exempt from regulation by federal agencies and laws.
  3. C) The courts regulate insurance in many ways, including the interpretation of policy clauses and provisions.
  4. D) State insurance commissioners, through administrative rulings, have considerable power over insurers doing business in their states.

Answer: B

5

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

  1. A new capital stock insurer must meet minimum capital and surplus requirements, which vary by state and line of insurance.
  2. The licensing requirements for insurance companies are less stringent than those imposed on most other types of firms.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

6

An insurance company incorporated in another state has been licensed to operate in your state. In your state, the insurer would be considered a(n)

  1. A) nonadmitted insurer.
  2. B) foreign insurer.
  3. C) alien insurer.
  4. D) reciprocal insurer.

Answer: B

7

An insurance company chartered in another country has been licensed to operate in your state. In your state, the insurer would be considered a(n)

  1. A) nonadmitted insurer.
  2. B) foreign insurer.
  3. C) alien insurer.
  4. D) reciprocal insurer.

Answer: C

8

Which of the following is considered a nonadmitted asset for an insurer?

  1. A) cash
  2. B) preferred stocks
  3. C) real estate
  4. D) office furniture

Answer: D

9

The policyholders' surplus of an insurer is defined as the difference between its

  1. A) assets and its liabilities.
  2. B) premium income and its expenses.
  3. C) reserves and its liabilities.
  4. D) assets and its nonadmitted assets.

Answer: A

10

Which of the following statements about the use of risk-based capital requirements is (are) true?

  1. Insurers must have a certain amount of capital depending on the riskiness of their investments and insurance operations.
  2. Insurers may be required to take certain actions depending on how much capital they have relative to their risk-based capital requirements.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

11

Which of the following statements about the regulation of insurance company investments is (are) true?

  1. The purpose of regulating insurance company investments is to prevent insurers from making unsound investments which could threaten their solvency.
  2. Life insurers can invest an unlimited amount of their assets in common stocks.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

12

Which of the following statements about the regulation of life insurance companies is (are) true?

  1. The percentage of assets a life insurance company may invest in a specific type of asset (e.g., stocks or bonds) is generally limited by law.
  2. The purpose of limiting the accumulation of surplus is to prevent an insurer from increasing its surplus at the expense of policyowner dividends.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

13

Which of the following statements about state insurance guaranty funds is (are) true?

  1. They limit the amount that policyholders can collect if an insurer becomes insolvent.
  2. They are usually funded by general revenues of the states.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

14

Under one type of rate regulation, insurers do not have to register their rates with state regulatory authorities. However, insurers may be required to furnish rate schedules and supporting data to state officials. A fundamental assumption underlying this type of rating law is that market forces will determine the price and availability of insurance, rather than discretionary acts of regulators. This type of rate regulation is called

  1. A) a flex-rating law.
  2. B) a prior-approval law.
  3. C) a file-and-use law.
  4. D) no filing required.

Answer: D

15

Under what type of rate regulation are insurers required to obtain approval of rates before using them if the rate change exceeds a specified predetermined range?

  1. A) flex-rating law
  2. B) prior-approval law
  3. C) file-and-use law
  4. D) use-and-file law

Answer: A

16

By misrepresenting the true facts, Gretchen was able to convince someone to replace an existing life insurance policy with another company and to purchase a new policy from the company that Gretchen represents. Gretchen has engaged in an illegal sales practice called

  1. A) bait and switch.
  2. B) rebating.
  3. C) retaliating.
  4. D) twisting.

Answer: D

17

Which of the following statements about premium taxes is (are) true?

  1. They are levied by the federal government as a result of the McCarran-Ferguson Act.
  2. Their primary purpose is to provide funds for insurance regulation.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: D

18

Which of the following is an advantage of federal regulation of insurance over state regulation of insurance?

  1. A) greater opportunity for innovation
  2. B) more effective treatment of systemic risk
  3. C) greater responsiveness to local needs
  4. D) more competent regulators

Answer: B

19

Which of the following is an advantage of state regulation of insurance over federal regulation of insurance?

  1. A) uniformity of laws
  2. B) greater efficiency
  3. C) more effective in negotiating international agreements pertaining to insurance
  4. D) quicker response to local insurance problems

Answer: D

20

A shortcoming of state regulation of insurance according to Congressional committees and the General Accounting Office is that state regulation

  1. A) leads to decentralized governmental power.
  2. B) provides opportunities for innovation.
  3. C) provides inadequate consumer protection.
  4. D) is more responsive to local needs.

Answer: C

21

The major reasons for insurer insolvency include which of the following?

  1. Inadequate pricing and loss reserves
  2. Rapid growth and inadequate surplus
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

22

Which of the following is a principal method of ensuring the solvency of insurers?

  1. A) requiring submission of annual financial statements to state regulators
  2. B) tracking and investigating market conduct complaints against insurers
  3. C) disciplining agents of the insurer for illegal sales practices
  4. D) regulating the forms (applications and policies) employed by the insurer

Answer: A

23

The number of title insurance companies operating in State Z is relatively low. Recently, the largest of these companies (50 percent market share) acquired the second largest company (30 percent market share). Immediately after the acquisition, the insurer raised premiums by 75 percent. This scenario demonstrates which of the following rationales for the regulation of insurance?

  1. A) maintain insurer solvency
  2. B) prohibit unfair sales practices by agents
  3. C) ensure reasonable rates
  4. D) make insurance available

Answer: C

24

In which of the following did the Court decide that insurance was interstate commerce when conducted across state lines, and therefore was subject to federal regulation?

  1. A) Paul v. Virginia
  2. B) South-Eastern Underwriters Association case
  3. C) McCarran-Ferguson Act
  4. D) Financial Modernization Act

Answer: B

25

A life insurance company based in Canada was licensed to operate in Massachusetts. When operating in Massachusetts, the Canadian insurer would be considered a(n)

  1. A) domestic insurer.
  2. B) captive insurer.
  3. C) foreign insurer.
  4. D) alien insurer.

Answer: D

26

XYZ Mutual Insurance Company has total assets of $10 million. The policyholders' surplus is $2 million. What are XYZ Mutual's total liabilities?

  1. A) $4.0 million
  2. B) $8.0 million
  3. C) $10.0 million
  4. D) $12.0 million

Answer: B

27

Mutual Property Insurance Company has a surplus of $2 million. According to a conservative rule, how much in new net premiums can Mutual Property Insurance Company safely write?

  1. A) $2 million
  2. B) $8 million
  3. C) $10 million
  4. D) $20 million

Answer: A

28

Fly-By-Night Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If Fly-By-Night becomes insolvent, which of the following will help pay the unpaid claims of the insurer?

  1. A) guaranty fund
  2. B) premium rebates
  3. C) risk-based capital
  4. D) admitted assets

Answer: A

29

Grace is a life insurance agent. She is attempting to sell a large life insurance policy, but the prospective purchaser is having second thoughts. To persuade the prospective purchaser, Grace said, "I will earn a $1,000 commission if you buy this policy. I'll give you $500 of my commission if you buy the policy." In most states, what illegal sales practice will Grace be guilty of if she splits her commission with the purchaser?

  1. A) rebating
  2. B) churning
  3. C) twisting
  4. D) backdating

Answer: A

30

State X's premium tax rate is 2 percent. State Y's premium tax rate is 3 percent. State X insurers are required to pay the 3 percent rate on business written in State Y. State X requires insurers from State Y to pay a 3 percent premium tax on business written in State X, even though the premium tax rate is only 2 percent in State X. This practice is known as a

  1. A) tax tariff.
  2. B) guaranty fund assessment.
  3. C) risk-based capital requirement.
  4. D) retaliatory tax law.

Answer: D

31

ABC Insurance Company would like to purchase a bank. For many years, ABC was not permitted under federal law to enter into banking operations. Which of the following legislative acts eliminated the prohibition that prevented banks, insurers, and investment firms from entering into one another's markets?

  1. A) The McCarran-Ferguson Act
  2. B) The Tax Reform Act
  3. C) The Consolidated Omnibus Budget Reconciliation Act
  4. D) The Financial Modernization Act (Gramm-Leach-Bliley Act)

Answer: D

32

Under one type of rating law, insurers are free to change rates and to use modified rates immediately. However, the new rate must be filed with regulators within a specified period, such as 60 days after the modified rate is employed. This type of rating law is called

  1. A) prior approval.
  2. B) file-and-use.
  3. C) use-and-file.
  4. D) flex rating.

Answer: C

33

The regulation of insurers in areas that affect consumers, which include claims handling, underwriting, complaints, advertising, sales practices, and other trade practices is called

  1. A) solvency surveillance.
  2. B) market conduct regulation.
  3. C) combined ratio analysis.
  4. D) market share regulation.

Answer: B

34

The National Association of Insurance Commissioners (NAIC) administers an "early warning system" to help ensure insurance company solvency. This system uses data provided in the annual statement to identify companies that may pose a solvency risk. This early warning system is called

  1. A) the risk-based capital requirements.
  2. B) an insurance guaranty fund.
  3. C) the Insurance Regulatory Information System (IRIS).
  4. D) the assessment method.

Answer: C

35

Which of the following statements is (are) true regarding the quality of insurance regulation?

  1. The quality of insurance regulation is uniform from state to state.
  2. All evidence suggests federal regulation of insurance would improve the quality of regulation.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: D

36

Which of the following statements concerning the proposed optional federal charter for life insurers is (are) true?

  1. Large insurers operating in many states would more likely prefer a state charter while smaller, regional, insurers would more likely choose a federal charter.
  2. Proponents of the federal charter argue that it would speed the development and approval of new products.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

37

Which of the following is a method used to help ensure the solvency of insurers?

  1. A) commercial lines deregulation
  2. B) risk-based capital standards
  3. C) use of credit-based insurance scores
  4. D) use of no filing required rating laws

Answer: B

38

A score derived from an individual's credit history and other factors that is used by many auto and homeowners insurers for underwriting and rating purposes is called a(n)

  1. A) CLUE score.
  2. B) insurance score.
  3. C) expense ratio score.
  4. D) combined ratio score.

Answer: B

39

All of the following are arguments in favor of using an applicant's credit record in personal lines underwriting EXCEPT

  1. A) Most consumers have good credit records and benefit when credit history is used as a rating factor.
  2. B) Use of credit data in underwriting and rating eliminates price discrimination against minority groups when they purchase insurance.
  3. C) Underwriting and rating may be more consistent if applicants' credit histories are considered.
  4. D) There is high correlation between an applicant's credit record and future claims experience.

Answer: B

40

All of the following statements about insurance regulation are true EXCEPT

  1. A) Insurance commissioners are appointed in some states and elected in some states.
  2. B) Insurers are subject to regulation by certain federal agencies and laws.
  3. C) The National Association of Insurance Commissioners (NAIC) can force states to adopt the model laws that it drafts.
  4. D) An insurance commissioner can revoke or suspend an insurer's license to do business in his or her state.

Answer: C

41

A systemic risk is a risk that

  1. A) can be eliminated through diversification.
  2. B) can be the cause of the collapse of an entire system.
  3. C) can be insured privately.
  4. D) can be easily contained so that it does not spread.

Answer: B

42

The purpose of the Financial Analysis Solvency Tracking (FAST) system employed by the NAIC is to

  1. A) prioritize insurance companies for additional regulatory action.
  2. B) quicken the approval of rates in prior approval states.
  3. C) speed-up the claims settlement process for insurers charged with delaying claims payments.
  4. D) quickly address market conduct complaints by consumers.

Answer: A

43

To correct abuses in the financial services industry, Congress passed an Act in 2010 that included numerous provisions to reform the financial services industry. This Act was the

  1. A) Financial Modernization Act.
  2. B) McCarran-Ferguson Act.
  3. C) Dodd-Frank Act.
  4. D) Biggert-Waters Act.

Answer: C

44

One provision of the Dodd-Frank Act was creation of the Financial Stability Oversight Council. This council is charged with identifying nonbank financial companies that could increase the risk of collapse of the entire financial system. This risk is called

  1. A) market risk.
  2. B) systemic risk.
  3. C) diversifiable risk.
  4. D) enterprise risk.

Answer: B

45

The Dodd-Frank Act created a federal body with some limited regulatory authority. For example, the organization can represent the federal government in international negotiations regarding insurance and it can preempt state law where it conflicts with negotiated international agreements. This body is called the

  1. A) National Insurance Bureau.
  2. B) Federal Office of Insurance.
  3. C) Department of International Insurance.
  4. D) International Insurance Bureau.

Answer: B

46

Which of the following is authority given to the Federal Insurance Office created by the Dodd-Frank Act?

  1. A) to represent the federal government in international discussions of insurance regulation
  2. B) to license and charter new insurance companies that plan to operate nationally
  3. C) to be the primary monitor of insurance company solvency
  4. D) to be the primary regulator of all aspects of insurance

Answer: A

47

One method of ensuring the solvency of insurers is a periodic review, every three to five years, of insurers that operate on a multistate basis. This review is coordinated by the NAIC. This review is called a(n)

  1. A) annual report.
  2. B) early warning system.
  3. C) field examination.
  4. D) inspection report.

Answer: C

48

The major argument in favor of an optional federal charter for insurers is that

  1. A) small insurers need a national charter to be competitive with large insurers.
  2. B) a federal charter will prevent insurer insolvencies.
  3. C) a federal charter will provide greater oversight of insurer market practices.
  4. D) national insurers are at a competitive disadvantage under the present system.

Answer: D

49

The risk-based capital requirements for life insurers are based on a formula that considers four types of risk. One risk reflects whether the insurer will have enough surplus if claims are higher than expected. This risk is called

  1. A) asset risk.
  2. B) insurance risk.
  3. C) interest rate risk.
  4. D) business risk.

Answer: B

50

The risk-based capital requirements for life insurers are based on a formula that considers four types of risk. One risk reflects a range of uncertainties that life insurers face including such things as bad management decisions and guaranty fund assessments. This risk is called

  1. A) asset risk.
  2. B) insurance risk.
  3. C) interest rate risk.
  4. D) business risk.

Answer: D

51

Liability items on an insurer’s balance sheet that reflect obligations that must be met in the future are called

  1. A) pre-paid expenses.
  2. B) reserves.
  3. C) surplus.
  4. D) nonadmitted assets.

Answer: B