CPCU 410 Practice Exam 2

1. InsureCo is a property and casualty insurer licensed to sell insurance in the state of Montana. Management has set aggressive profit goals for the company, and as a result, the company filed for a rate increase on its homeowners’ line of insurance. The filed rate increase was not approved by the state insurance department, causing InsureCo to miss its profit goals for the year. This is an example of which one of the following external constraints on achieving insurer goals?

2. Which one of the following statements is correct regarding the rights and duties of a bailee?

3. Which one of the following represents a type of premium audit in which the auditor examines the insured’s books and records at the insured’s premises?

4. Donna said to her friend Ron, “I will not sell my property for less than $5,000.” Ron then replied, “I accept your offer.” In this situation, a contract:

5. A company wants to purchase a machine for $60,000. The cash inflows from the use of the machine are expected to be:

Timing of Payment	Cash Inflows
End of year 1	$50,000
End of year 2	$40,000
End of year 3	$20,000

If the discount rate is 8%, what is the net present value of the project?

6. The owners of a proprietary stock insurer may receive a dividend from the company. The funds used to pay these dividends arise from:

7. The two most prominent actuarial functions are:

8. RonCo recently raised capital by selling their common stock in an initial public offering. They also issued debt securities. After the issue, the stock and debt securities trade in the:

9. The store manager for Scott’s Furniture called Lamps Inc. and said, “Send me 100 of your brown lamps.” Lamps agreed but did not specify a price for the lamps. For the last three years, Lamps has charged Scott’s $20 per brown lamp. The lamps arrived at Scott’s store. The store manager signed the shipping invoice which listed the number of lamps but not the price. Which one of the following statements is correct regarding this scenario?

10. Mary mails an offer to rent equipment to Robert, stating, “Send me a yes or no answer. If l do not hear from you by noon on Thursday, I will conclude that your answer is no.” Robert mails an acceptance, but Mary does not receive the letter until after noon on Thursday. Which one of the following statements is correct?

11. Under the public policy exception to the employment-at-will doctrine, an employee cannot be fired for reasons that violate established public policy of the state. Which one of the following would be considered a reason that would fall under the public policy exception?

12. A city in California is issuing bonds to build a toll bridge. Interest payments made by the city on the bonds will be payable from the tolls collected from the bridge. Which one of the following types of bonds were issued by the city?

13. The main goal of the investors in a proprietary insurance company is to:

14. Cory’s tree snapped and fell into the street, blocking one lane of traffic heading West. Three hours later, Jim was driving West on the street and talking on his cell phone. Jim saw the tree lying in the street, but he made no attempt to avoid it and his car struck the tree, causing damage to his car. If Jim sues Cory for negligence, which defense could Cory invoke to potentially avoid liability?

15. An insurance company wants to use trend analysis to determine its success in meeting revenue goals for the past two years. The analysis will most likely focus on:

16. To what amount will $20,000 grow in five years in a certificate of deposit that earns 7% interest compounded quarterly?

17. Which one of the following sets of ratios addresses the risk of mismatched cash flow from assets and liabilities?

18. Which one of the following scenarios would a defendant being sued for invasion of privacy most likely be able to argue that an invasion of privacy had not occurred?

19. Insurers typically invest in bonds and stocks to create investment gains that help cover insurance losses. If the value of an insurer’s investments dropped below the amount of liabilities it held, it could become insolvent. This is an example of:

20. Storage services contractually provided from remote locations through the internet or another network without a direct server connection is referred to as:

21. Agnes is in the 37% tax bracket. She purchased two bonds – a municipal bond and a corporate bond, both with a par value of $100,000 and a coupon rate of 5%. Considering federal income taxes, the difference in after-tax interest income received by the municipal bond and the corporate bond each year is:

22. When performing a present value calculation, which of the following is necessary?

23. With respect to the formation of an insurance contract, the premium payment or promise of premium payment represents the:

24. If a dispute arises between the insurer and the insured with respect to the meaning of certain policy terms, the courts usually rule in favor of the insured because:

25. A specialty insurer has been the only insurer offering liability insurance in West Texas over the last few years. Another insurer has decided to start offering liability insurance in West Texas beginning next month. Which one of the following risks is the specialty insurer exposed to in this situation?

26. Under the Federal Bankruptcy Act, if an individual debtor chooses a liquidation option in which his or her nonexempt assets are distributed to creditors and the balance of his or her obligations are forgiven, the debtor has filed under Chapter:

27. Which one of the following statements is correct regarding the comparison of corporate bonds and Treasury bonds?

28. Which one of the following represents a right that may be exercised only by the owner of property?

29. Sitwell Industries has the following information:
• Sales – $30,000
• Cost of Goods Sold – $22,000
• Selling, General, and Administrative Expenses – $6,000
• Income Taxes – $1,000
What is the net profit margin percentage for Sitwell Industries?

30. The effective annual interest rate for a 4% nominal rate that is compounded semi-annually is:

31. CR Norton is a homebuilder. They are in the process of selling one of their new homes to James, an accountant. James is obtaining a $500,000, 3% mortgage from ABC Bank. The bank will use cash from its depositors to fund the loan to James. Which one of these parties represents a financial intermediary?

32. Which one of the following represents a provision of the Employee Retirement Income Security Act (ERISA)?

33. A debenture is:

34. The goal of underwriting is to write a profitable book of business for the insurer. It accomplishes this goal by developing appropriate underwriting guidelines that can help the insurer:

35. A review of Woerhle Insurance Company financial statements reveals the following:
• Incurred Losses - $12,000,000
• Loss Adjustment Expenses - $1,000,000
• Earned Premiums - $26,000,000
• Incurred Underwriting Expenses - $10,000,000
• Written Premiums - $40,000,000
What is the loss ratio for Woerhle Insurance Company?

36. Which one of the following statements is correct regarding preferred stock?

37. Three motorists were involved in an automobile accident. The court found the parties at fault to the following degree:

Party	Degree of Fault
Amy	15% at fault
Bob	25% at fault
Charlie	60% at fault

If Bob proves damages of $200,000, and Charlie is bankrupt, then under the Uniform Contribution Among Joint Tortfeasors Act, Amy would be liable for:

38. An insurance producer is limited in authority only to drumming up insurance applications and forwarding them to the insurance company. This producer is a:

39. Which one of the following is an example of how blockchain technology can affect the claims management process?

40. Before an underwriter decides whether to accept or reject an application for insurance, the underwriter should:

41. Which one of the following statements is correct regarding physical surveys conducted during the underwriting process?

42. A binder is used to provide insurance coverage until a formal written policy is issued. Which of the following must be included in a binder for property insurance?

43. A company created a new software program and will have exclusive control of the program for several years. This legal right is granted through a:

44. Executive Order 11246 prohibits employers with federal contracts from:

45. Which one of the following items would be included on a company’s balance sheet?

46. Laundry Inc. makes washers and dryers for personal residences. To keep its costs low, its assembly plans were substandard in that they specified poor quality heating components for their dryers. One of the dryers caught on fire as a result of the poor-quality heating components, destroying the home where the dryer was installed. If the homeowner sues Laundry Inc., the type of product defect that should be asserted is:

47. Scott, an investment advisor, believes in the weak form of the efficient market hypothesis. In recommending stocks for clients, Scott will most likely rely on:

48. Which one of the following statements is correct regarding the General Data Protection Regulation (GDPR)?

49. Which one of the following statements is correct regarding antidiscrimination laws?

50. Stayco, a small company, experienced a fire that completely destroyed inventory and current accounting records. A recent report issued by the company immediately before the fire revealed the following:
• Sales – $400,000
• Gross profit percentage – 25%
• Beginning inventory – $50,000
• Additions to inventory during the year – $370,000
What is the amount of their ending inventory destroyed by the fire?