1.
Which rating method provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expense) or profit and is based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time?
Correct Answer
B. Loss cost rating
Explanation
Loss costs is a rating method developed by ISO that provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expense) or profit and are based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time.
2.
Bob is covered under a major medical insurance policy. He has to meet a certain deductible for each claim that is presented to the insurer. What type of deductible arrangement must Bob have?
Correct Answer
B. Per cause
Explanation
Under a "per cause" arrangement, a deductible must be met for each individual claim, as opposed to a "per calendar year" arrangement, in which a deductible must be met for claims incurred throughout the course of the year.
3.
Which of the following is the best definition of "adverse selection"?
Correct Answer
B. The insuring of risks that are of a poorer class than the average risk
Explanation
Adverse selection is the insuring of risks that are of a poorer class (more prone to losses) than the average risk.
4.
The type of insurance that guarantees the behavior of persons and the performance of contracts other than insurance policies is known as
Correct Answer
D. Surety insurance
Explanation
Surety insurance includes the guaranteeing of behavior of persons and the guaranteeing of performance of contracts other than insurance policies and other than for payments secured by a mortgage, deed of trust, or other instrument constituting a lien or charge on real estate.
5.
An employer has decided to implement a self-funded plan. The company will pay the claims, but an insurer will administer the actual plan. What kind of contract is this?
Correct Answer
B. Administrative Service Only
Explanation
In self-funding plans, employers may choose to administer the actual plan. This is called "Administrative Service Only" (ASO).
6.
Which of the following is NOT a characteristic of an insurable risk?
Correct Answer
C. The loss must be catastrophic
Explanation
To be characterized as pure risk, the loss must be due to chance, definite and measurable, and statistically predictable. The loss, however, cannot be catastrophic, that is why insurance policies usually exclude coverage for loss caused by war or nuclear events.
7.
In a property insurance policy, what is the term for the amount of a loss that the insured must cover out of his or her own pocket, and the insurer will only pay for the additional amount of the loss above this limit?
Correct Answer
C. Deductible
Explanation
In property insurance, the amount of loss retained by the insured is called the deductible; in liability insurance, it is called a retention. Most property coverages include a deductible; most liability policies do not include a retention.
8.
To achieve the profitable distribution of exposures,
Correct Answer
C. Preferred risks and poor risks are balanced, with average risks in the middle.
Explanation
Balancing poor risks and preferred risks with average risks in the middle creates a profitable distribution of exposures.
9.
A contract which one party undertakes to indemnify another against loss is called
Correct Answer
D. Insurance
Explanation
Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.
10.
The causes of loss insured against in an insurance policy are known as
Correct Answer
A. Perils
Explanation
Perils are the causes of loss insured against in an insurance policy.
11.
Which of the following factors is NOT considered by an underwriter when determining the premium rates for an individual seeking insurance?
Correct Answer
C. Race
Explanation
Age, medical history, and sex provide sound statistical data for determining the probability of loss. Race, religion, sexual orientation, etc., are some of the factors that cannot be used because there is not sound statistical data to show that they effect the probability of loss; therefore, they are considered to be discriminatory.
12.
Profitable distribution of exposures serves the purpose of
Correct Answer
A. Protecting the insurer against adverse selection.
Explanation
A profitable distribution of exposures exists when poor risks are balanced with preferred risks, with the standard risks in the "middle." The purpose behind distributing risks in this manner is to protect the insurer from adverse selection.
13.
Monica had a spotless medical record until she was rushed to the emergency room for a gallbladder attack in December. Her major medical provider allowed her to apply her gallbladder-related expenses to the next year so that she could apply them to the new year's deductible. What provision allowed her to do this?
Correct Answer
D. Carryover
Explanation
Since Monica had not had any medical claims for that year until her gallbladder attack, she was allowed to apply those expenses toward the next year's deductible, thanks to the Carryover Provision. Major medical policies typically limit this privilege to expenses incurred within the final three months of the year.
14.
Ryan is a guitarist in a band, which is the sole source of income for his family of five. He is also studying to become an ice sculptor. Because he works with sharp objects that could easily damage his hands, what kind of risk would ice sculpting be?
Correct Answer
C. Critical
Explanation
Critical risks are those that, if the loss were to occur, would cause financial ruin to the insured and his or her family. Losses associated with important risks would cause some struggle, although not as much as losses from critical risks.
15.
12: Risks that include exposures in which the losses would lead to major changes in the person's lifestyle or occupation are classified as
Correct Answer
C. Important
Explanation
Important risks include exposures in which the losses would lead to major changes in the person's lifestyle or occupation. Losses associated with important risks would cause some struggle, although not as much as losses from critical risks.
16.
The loss ratio compares
Correct Answer
C. Premium income to losses
Explanation
Loss ratio compares the premium incomes to losses, including claims paid and claim-related expenses
17.
5: The process an insurer uses to evaluate applications and determine if a policy should be issued and on what terms, conditions, and rates is known as
Correct Answer
D. Underwriting
Explanation
Underwriting is the process of reviewing applications for insurance and deciding if a policy should or should not be issued.
18.
For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, an insured group must become
Correct Answer
B. Larger
Explanation
According to the Law of Large Numbers, the larger a group becomes, the easier it is to predict losses. Insurers use this law in order to predict certain types of losses and set appropriate premiums.
19.
All of the following are insurable events as defined in the Insurance Code EXCEPT
Correct Answer
C. An insured loses a large sum in a poker game.
Explanation
Any event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him/her, may be insured against. Speculative losses are uninsurable.