CPCU 410 Module 2 Test Bank

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1. The first step in the underwriting process is:

A. Developing underwriting alternatives.

B. Selecting an appropriate underwriting alternative.

C. Evaluating a submission’s loss exposures and associated hazards.

D. Classifying loss exposures so they are properly rated.

2. Principal sources of underwriting information include all of the following, EXCEPT:

A. Producers.

B. Financial rating services.

C. Government records.

D. Authority reports.

3. Which one of the following statements is correct regarding the “Evaluate the Submission” step of the underwriting process?

A. Inspection reports provide data on the credit ratings of individuals’ businesses as well as industry averages.

B. When an underwriter has access to relevant loss data, they normally do not need any additional information.

C. While producers for direct writing and exclusive agency insurers perform field underwriting to screen applicants, independent agents do not.

D. Insurers often employ field marketing personnel who can provide both specific and general underwriting information.

4. Which one of the following represents a rating agency that provides data on credit ratings of businesses?

A. Treynor’s.

B. Standard and Poor’s.

C. Valueline.

D. Morgan and Chase.

5. During which phase of the underwriting process would an underwriter consider whether to accept a submission as is, reject the submission, or accept the submission subject to modification?

A. Monitoring underwriting decisions.

B. Determining an appropriate premium.

C. Developing underwriting alternatives.

D. Selecting an underwriting alternative.

6. Servo Corporation was recently denied commercial property insurance coverage due to a lack of an automatic fire-extinguishing sprinkler system in their building. The insurance company indicated that the application would be approved by the underwriter if Servo installs the sprinklers. Which of the following represents the type of underwriting modification proposed by the insurance company?

A. Changing insurance rates, rating plans, or policy limits.

B. Requiring risk control measures.

C. Using facultative reinsurance.

D. Amending policy terms and conditions.

7. Which one of the following typically represents the first step of the claim handling process?

A. Investigating the claim.

B. Contacting the insured or their representative.

C. Identifying the policy and setting reserves.

D. Acknowledging and assigning the claim.

8. Which one of the following statements is correct regarding acknowledging and assigning a claim?

A. All states require claim representatives who handle claims in the state to have an adjuster license.

B. For some types of losses, the claim representative may give the insured instructions to prevent further loss.

C. Before assigning a claim to a claim representative, an insurer must acknowledge the claim immediately after receiving a loss notice.

D. An important aspect of acknowledging a claimant’s liability claim, upon first contact, is to try to obtain information on the claimant’s accident history.

9. If a question of coverage has arisen under an insured’s policy, the most appropriate alternative for an insurer is to:

A. Deny the claim before a claim of waiver can be established.

B. Investigate or defend under a nonwaiver agreement or reservation of right.

C. Provide oral notice to the insured of non-coverage.

D. Attempt to void the policy based on a material misrepresentation of fact.

10. Which one of the following statements is correct regarding claim investigations?

A. Claim representatives begin investigating a claim as soon as a reserve has been established.

B. In a third-party property claim, the claimant is the insured.

C. A property damage investigation is useful in workers’ compensation claims.

D. Claim representatives conduct medical investigations in all bodily injury claims.

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11. When an insurer pays a claim to an insured due to a loss caused by a negligent third party, the insurer can recover damages from the negligent third party through the right of:

A. Subrogation.

B. Reimbursement.

C. Indemnity.

D. Arbitration.

12. Which one of the following statements is correct regarding the documentation of a claim?

A. Claim diary systems are not vital to an insurer because they are typically only read by employees of the insurer.

B. File status notes should clearly reflect the claim representative’s opinion regarding the claimant and the investigation.

C. The preliminary report is typically the only report in the claim file when the claim is complicated and takes a long time to settle.

D. Claim status reports advise the insurer how the claim is progressing on a periodic basis, typically every 15-30 days.

13. Which one of the following statements is correct regarding alternative dispute resolution?

A. The appraisal provision included in a property insurance policy can be used to settle coverage disputes.

B. An advisory opinion issued by a neutral party in a mini-trial is enforceable since the parties agreed to settle their dispute through negotiation.

C. Mediation is a negotiation process in which a neutral outside party helps participants develop a mutually agreeable settlement.

D. The main advantage of arbitration over mediation is that with arbitration, alternative solutions are presented to both parties.

14. Jack recently suffered a fire loss. He submitted a claim to his insurance company, and that claim was entered into the insurer’s claim information system. Tammy, a claim representative, was assigned Jack’s claim. She identified his coverage and determined the loss did occur during the coverage period. Tammy then contacted Jack and began her investigation of the claim. Which one of the following would most likely be the next step for Tammy, consistent with the claim handling process?

A. Verify the damages are within the policy limits.

B. Determine the loss amount.

C. Document her findings in a diary.

D. Decide whether to pay the claim.

15. Which one of the following statements is correct regarding the actuarial function?

A. The most prominent actuarial functions are market analysis and consumer protection.

B. Small insurers tend to rely on staff actuaries because their ratemaking processes are less complex.

C. Actuaries are business professionals who deal with the financial impact of risk.

D. Actuaries are typically government employees charged with approving premium rates.

16. Which one of the following statements is correct regarding the actuarial function?

A. The primary role of advisory organizations is to approve insurer rate filings.

B. Insurers are required to submit a statement of opinion by a qualified actuary with their statutory annual statement.

C. Policyholders sometimes require insurers to provide a consulting actuary’s opinion verifying the accuracy of the staff actuaries’ work.

D. Underwriting managers are responsible for the ratemaking activities of the insurance company.

17. Scott’s Insurance Company is a small insurer with 10 full-time staff. They provide unique insurance to niche markets. The company does not employ any staff actuaries. For its actuarial function, Scott’s Insurance Company most likely relies on:

A. Staff underwriters.

B. Certified Public Accountants.

C. The Society of Actuaries.

D. Actuarial consultants.

18. In addition to conducting on-site inspections, an insurer can promote risk control among its personal lines insureds by:

A. Developing a safety management program.

B. Collecting underwriting information on a customer’s loss exposures.

C. Providing safety training programs, preconstruction counseling, or information services.

D. Offering rate discounts for home security systems, locks, or driver education.

19. Developing a safety management program begins with a(n):

A. Risk tolerance questionnaire.

B. Complete evaluation of the insured’s operations.

C. Schedule for testing fire and security protection systems.

D. Analysis of a loss survey report.

20. Which one of the following statements is correct regarding the premium auditing process?

A. Independent contractors are included in the premium basis of workers’ compensation policies.

B. A premium audit can discover classification changes necessary to revise coverage.

C. Due to the minimal cost of premium audits, most insurers typically audit every auditable policy on an annual basis.

D. Prior to accepting the account, premium auditors visit every prospective insured.

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21. Which one of the following statements is correct regarding premium auditing?

A. Premium auditors are not permitted to use personal judgment when analyzing premium data.

B. Premium auditors should be involved in setting up an insured’s accounting records or procedures.

C. Expenses and claims typically decrease when a policyholder is classified incorrectly.

D. Premium auditors determine whether a particular policy uses the correct rating classification.

22. Which one of the following statements is correct regarding insurer customer and public relations activities?

A. The customer relations function is responsible for managing the company’s communications through mass media with its target markets.

B. In times of crisis, the public relations staff try to limit the amount of information being communicated to the public.

C. The customer relations function is initiated by prospective employees.

D. The customer relations function manages communications with individual customers from the home office.

23. Which one of the following statements is correct regarding a reinsurance agreement?

A. The retention in a reinsurance agreement is always expressed as a dollar amount of loss.

B. The reinsurance agreement typically prohibits a primary insurer from retaining part of its original liability.

C. The reinsurance agreement never alters the terms of the original, underlying insurance policies.

D. The reinsurance agreement relieves a primary insurer from their responsibilities under the original insurance contracts.

24. Which one of the following represents a principal function of reinsurance for a primary insurer?

A. Stabilize loss experience.

B. Eliminate the need for underwriters.

C. Decrease large-line capacity.

D. Facilitate entry into a market segment.

25. Which one of the following statements is correct regarding the use of reinsurance?

A. Reinsurance can be used to provide catastrophe protection for a primary insurer unless the catastrophe is man-made, such as a product recall or industrial explosion.

B. A primary insurer can stabilize loss experience by obtaining reinsurance to limit its liability for several loss exposures affected by a common event.

C. When reinsurance is used to provide surplus relief for a primary insurer, the ceding commission received facilitates premium growth and increases the primary insurer’s capacity ratio.

D. When a primary insurer withdraws from a market through the use of portfolio reinsurance, the primary insurer is no longer required to fulfill its obligations to its insureds.

26. Which one of the following is an entity that generally represents a primary insurer, develops reinsurance programs, negotiates contracts with reinsurers, and provides other services in return for a brokerage commission?

A. Syndicate.

B. Reinsurance pool.

C. Direct writing reinsurer.

D. Reinsurance intermediary.

27. Which one of the following statements is correct regarding reinsurance?

A. Reinsurance is best described as a transfer of claim paying responsibilities from a primary insurer to a reinsurer.

B. Reinsurance is a tool that insurers typically use to reduce their book of business in the case of impending insolvency.

C. Under most reinsurance arrangements, the reinsurer assumes all of the primary insurer’s insurance risk.

D. Ceding commissions consist primarily of commissions paid to producers, premium taxes, and underwriting expenses.

28. Which one of the following statements is correct regarding reinsurance?

D. The reinsurer typically assumes all of the primary insurer’s insurance risk.

A. The first function of reinsurance is to increase retention.

B. With portfolio reinsurance, the primary insurer must continue to fulfill its obligations to its insureds.

C. A retrocession reserve is an amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer’s policy acquisition expenses.

29. Super Insurer recently acquired Awesome Insurer. A small portion of Awesome’s business involved insuring planes. Super has no experience insuring planes, and this line of insurance is incompatible with Super’s strategic goals. Which one of the following would be the best option for Super regarding the book of business relating to the planes?

A. Cancel the existing policies and refund the unearned premiums to the insureds.

B. Instigate a spinoff involving a subsidiary insurer.

C. Withdraw from the market by purchasing portfolio reinsurance.

D. Purchase treaty reinsurance to transfer the liability to a reinsurer.

30. Grayco Insurance Company would like to compete for homeowners policies in an area where the home prices are higher than the amount of insurance Grayco can safely retain. Which of the following strategies would be most appropriate for Grayco?

A. Strategic alliance.

B. Reinsurance.

C. Topside focus.

D. Vertical integration.

CPCU 410 Module 2 Test Bank

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