CPCU 410 Practice Exam 1

1. Which one of the following statements is correct regarding an insurer’s loss reserves?

2. Which one of the following represents the risk that an asset cannot be sold on short notice without incurring a loss?

3. A credit card company sold its receivables to David for cash. The interest and principal repayments on the credit cards will be passed directly to David after passing through the credit card company. David has purchased a(n):

4. A binder is a temporary written or oral agreement to provide property-casualty insurance coverage until a formal written policy is issued. To be effective, a property-casualty binder must contain:

5. Two years ago, Juan loaned $200,000 to his friend, Jeffrey, so Jeffrey could purchase a home. The loan was established as a fixed 5% interest-only loan for 10 years. At the end of the 10th year, Jeffrey must repay the $200,000 of loan principal to Juan. For the last two years, Juan was able to invest the $10,000 ($200,000 principal balance x 5% interest rate) of annual interest income collected from Jeffrey in a savings account that was paying him 5% annually. Currently, the savings account is paying an annual interest rate of only 3%. Which one of the following risks to Juan does this represent?

6. Marybeth would like to accumulate $5,000 at the end of 12 months. Assuming she can earn a 5% rate of return on her savings, compounded quarterly, how much does she need to set aside today to achieve her goal?

7. Which one of the following is the determining factor as to whether a security is being traded in the primary or secondary market?

8. Which one of the following types of analysis determines the percentage change in values for financial statement items between consecutive years in the period being considered?

9. Which one of the following would represent a private nuisance?

10. Adam, a long-term employee of ABC Company, was fired without just cause exactly one month before becoming eligible for retirement benefits. He did not have an employment contract with ABC Company. Assuming all of the following exceptions to the employment at will doctrine are accepted in Adam’s state of employment, and state law does not address termination prior to retirement, which one of the following exceptions would most likely allow Adam to be successful in a lawsuit against ABC Company?

11. The present value of future cash flows (including salvage value) discounted at the cost of capital, less the cost of the initial investment, also discounted at the cost of capital, represents the:

12. With respect to a safety management program, the implementation of safety controls on a daily basis is generally the responsibility of:

13. Which one of the following best describes a contract of adhesion?

14. An investor recently purchased nonconvertible, cumulative preferred stock of a company listed on the NYSE. Which one of the following statements is correct regarding the stock?

15. In personal and commercial lines claims, several data analytics techniques can be used to help prevent fraud. Which one of the following represents a data analysis technique that helps identify and prevent fraud by finding similar claims and claimants?

16. Which one of the following statements is correct regarding the steps in the underwriting cycle?

17. The main function of financial markets is to:

18. Which one of the following actions is critical when handling property insurance claims?

19. Sandy’s parents own a vacation home in Colorado. Her parents want Sandy to possess the property and any rental income generated by the property during Sandy’s life. At the time of Sandy’s death, the property will pass to Sandy’s son. What Sandy’s parents want for Sandy is best described as a:

20. Irene’s son, David, owns a BB gun. The BB gun came with a disclaimer indicating the gun cannot cause bodily harm or pierce the skin of a human being. David accidentally shoots Irene’s neighbor, Janice, with the BB gun, causing Janice to lose her hearing in her right ear. Will Janice be able to file a lawsuit against the gun manufacturer?

21. Marvin is an insurance agent who has insurance contracts with a variety of insurers. He does not have a contract with InsureCo. Marvin recently sent business to InsureCo, and InsureCo issued policies, sending the appropriate commission to Marvin. InsureCo also sent Marvin application forms so Marvin could solicit more business for InsureCo. Which one of the following statements is correct regarding Marvin’s authority?

22. Gene offers to sell Patrick a computer for $500 and Patrick says, “I’ll give you $375 for it. I will stop by tomorrow with $375 cash.” Which one of the following statements is correct regarding this interaction?

23. Which one of the following statements is correct regarding the accounts receivable turnover ratio?

24. Which of the following data capture and analytics tools is now used heavily in risk management efforts related to automobile safety?

25. Which one of the following statements is correct regarding municipal bonds?

26. Which one of the following would result in the highest effective rate?

27. When a bailment is for the bailee’s sole benefit, the bailee must exercise:

28. Joe’s daughter plans to enroll in college in six years. At the time of her enrollment, tuition costs are expected to be $15,000 per year. Assuming Joe can earn 7% compounded semi-annually on his investments, how much must he invest today to fund his daughter’s first year tuition in six years?

29. An attorney realized that many individuals were injured using a defective product. The attorney would like to represent all of the individuals in a lawsuit. What type of lawsuit would the attorney most likely file?

30. A special agent derives all powers and duties from which one of the following sources?

31. John is a subscriber in a cooperative insurer. The insurer was formed as an unincorporated association and is managed by an attorney-in-fact. John and the other subscribers have agreed to insure each other and share in profits and losses in proportion to the amount of insurance purchased. John has subscribed to a:

32. David purchased CoolCo stock for $50 per share. He received a dividend of $2 per share then sold the stock for $45. What was David’s rate of return on his investment?

33. Allison, who lives in Texas, offered to sell Dave her living room furniture for $450. Allison indicated to Dave that she would be out of town on business in Chicago for the next two weeks. She asked him to mail his acceptance to her hotel within one week. Dave mailed the acceptance the following day, but Allison did not receive it at the hotel until the eighth day. Which one of the following statements is correct?

34. Which one of the following represents a risk that is avoided with zero-coupon bonds?

35. Which one of the following statements is correct regarding the various functions of an insurer?

36. Which one of the following represents one of the roles of an actuary?

37. Tommy approached Joe from behind. Tommy pulled out a knife and stabbed Joe in the back. Joe did not hear Tommy approach and was surprised by Tommy’s actions. In this scenario, Tommy has committed:

38. The Age Discrimination in Employment Act is administered by the Equal Employment Opportunity Commission and prohibits discrimination on the basis of age against individuals aged:

39. Cindy was seeking medical treatment for a leg injury she suffered when she fell down the stairs of her home. Her healthcare provider gave the following individuals access to Cindy’s medical records:
• Her doctor.
• Employees of the healthcare provider.
• Her brother.
• Her mother.
Cindy only authorized her healthcare provider to allow her brother access to her medical records. Cindy has requested the identities of those who have accessed her files, in accordance with the Health Insurance Portability and Accountability Act (HIPAA). Did her healthcare provider violate HIPAA?

40. ABC Company has the following income and expenses:
• Sales – $400,000
• Cost of Goods Sold – $300,000
• Operating Expenses – $50,000
• Investment Income – $15,000
• Investment Expenses – $12,000
• Income Taxes – $18,000
What is the gross profit for ABC Company?

41. Equipment purchased by a company is reported on its financial statements as:

42. Which one of the following statements is correct regarding financial intermediaries?

43. If a contract for the sale of goods does not contain a stated sales price for the goods, the contract is:

44. Donny invested all of his cash in an S&P 500 index mutual fund. This is representative of:

45. Constraints must be overcome in order for an insurer to achieve its goals. An example of an internal constraint is:

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

47. Tara was shopping for a new dresser online. She saw a dresser she liked on the website of a local furniture store. The dresser did not have a price listed on the website, so Tara sent an email to the store asking for a price. An employee at the store responded to Tara’s email, indicating the price of the dresser was $5.75. Tara responded to the email accepting the offer and indicating she would be dropping by the store in two days to purchase the dresser. Later that same afternoon, the store employee sent an email to Tara indicating that the actual price of the dresser was $575. Which of the following statements is correct regarding this series of events?

48. Stacy dropped her clothing off at the dry cleaner for cleaning and pressing. One night, when the dry cleaner was closed, a truck crashed into the premises, destroying Stacy’s clothes. The dry cleaner can avoid liability for the destroyed clothes if it can show that it exercised the appropriate level of care regarding the property. In this scenario, the appropriate level of care is:

49. Scott was late for work, so he drove his car through a red light to get to work faster. Joanna was heading in the opposite direction as Scott, and she made a left turn. She saw Scott run the red light, but she did not attempt to stop and as a result hit the side of Scott’s car. Scott sued Joanna for his injuries. Joanna’s defense is that Scott was negligent because he was speeding and ran a red light. Which one of the following would be the most appropriate for Scott to argue in response to Joanna’s defense?

50. Which one of the following cannot be discharged in bankruptcy?