CPCU 520 Practice Exam 2

33%

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1. A SWOT analysis is applied during which stage of the strategic management process?

A. Strategy implementation.

B. Strategy evaluation.

C. Strategy formulation.

D. Strategy determination.

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

A. Satisfy statutory requirements.

B. Mutually insure each other.

C. Provide low-cost insurance to policyholders.

D. Earn a profit.

3. Which one of the following insurance consumers is most likely to have highly complex insurance needs?

A. Middle market.

B. Individual.

C. National account.

D. Small business.

4. Which one of the following statements is correct regarding ratemaking data aggregation methods?

A. The calendar-year method involves aggregating data from accounting records to estimate earned premiums and incurred losses.

B. Losses under the accident-year method are affected by changes in reserves for events that occurred in other periods.

C. The report-year method is the most commonly used data loss aggregation method of all the methods.

D. The policy-year method is the least accurate of all methods.

5. Which one of the following types of damages is designed to punish a wrongdoer for a reckless, malicious, or deceitful act?

A. Pain and suffering.

B. Punitive damages.

C. Special damages.

D. General damages.

6. Rob’s Insurance Company (RIC) is a small, regional personal lines insurer. The company has grown substantially over the past three years. The senior management team would like to write additional homeowners coverage but would like to transfer all losses exceeding $100,000 per policy to a reinsurer. Which one of the following types of reinsurance will be most effective in satisfying management’s goals?

A. Excess of loss treaty reinsurance.

B. Excess of loss facultative reinsurance.

C. Pro rata treaty reinsurance.

D. Pro rata facultative reinsurance.

7. SouthNorth Insurance Company actuaries are analyzing the company’s loss reserves. The loss reserve analysis method being used assumes that future changes in losses will occur similarly as in the past. This method involves compiling experience into a loss development triangle, calculating the age-to-age development factors, and applying factors to experience to make projections. What loss reserve analysis method are the actuaries using?

A. Credibility method.

B. Loss development method.

C. Bornhuetter-Ferguson method.

D. Expected loss ratio method.

8. A review of the financial statements for Allrite Insurance revealed the following:

Year	Incurred Losses & LAE	Earned Premium	Combined Ratio	Operating Ratio
Year 1	$450,000	$600,000	106%	91%
Year 2	$600,000	$800,000	109%	94%
Year 3	$750,000	$1,000,000	112%	97%

Which one of the following statements is correct regarding these amounts?

A. The company’s loss ratio is deteriorating.

B. The company’s expenses are increasing relative to written premiums.

C. The company’s investment results are improving.

D. The company had an underwriting profit all three years.

9. A review of Robbins Insurance Company financial statements reveals the following:

Incurred Losses - $16,000,000
Earned Premiums - $25,000,000
Incurred Underwriting Expenses - $7,000,000
Written Premiums - $35,000,000

What is the expense ratio for Robbins Insurance Company?

A. 14%

B. 20%

C. 64%

D. 84%

10. Ricky works as an agent for Easy Insurers. Ricky was meeting with Sal, a potential customer, about purchasing an HO-3 homeowners’ insurance policy. Ricky told Sal that the policy covered damage caused by flood, even though Ricky knew the policy did not cover such damage. Sal purchased the policy. Ricky may be penalized for:

A. Rebating, because Ricky engaged in an illegal activity.

B. Unfair discrimination, unless the premium offered to Ricky was less than the usual premium charged.

C. Misrepresentation, which may violate the state’s Unfair Trade Practices Act.

D. Twisting, because the policy does not cover flood damage.

11. Which one of the following statements is correct regarding an insurer’s investment income?

A. Some states require investment income be considered explicitly in rate calculations.

B. Investment returns are more likely to affect property insurance rates than liability insurance rates.

C. An insurer’s investment operations generate investment income through the sale of shares of the company.

D. Insurers are prohibited from investing premiums collected, as these funds must be available to pay claims.

12. An important way to track and measure the success of an information technology (IT) project is to use metrics to evaluate the efficiency and effectiveness of the business process it is intended to improve. A standard IT metric that can work well for any organization is:

A. Loss ratio.

B. Percentage of uptime.

C. Telematics.

D. Cloud computing.

13. The Five Forces Model, developed by Professor Michael E. Porter, deals with the external environment. All of the following represent forces in the Five Forces Model, EXCEPT:

A. Bargaining power of reinsurers and other suppliers.

B. Rivalry among insurer’s management team.

C. Threat of new entrants.

D. Threat of substitute products or services.

14. Before accepting an applicant, a line underwriter must determine whether he or she has the necessary underwriting authority to make the decision. Underwriting authority typically is based on:

A. Underwriting guidelines and contractual arrangements.

B. Salary and line of insurance.

C. Grade level and experience.

D. Age and location.

15. Which one of the following statements is correct regarding constraints in establishing underwriting policy?

A. The state insurance commissioner formulates an insurer’s underwriting policy that guides underwriting decisions.

B. State regulators perform premium audits to ensure that insurers adhere to the classification and rating plans they have filed.

C. The higher the premium-to-surplus ratio, the greater an insurer’s ability to write additional insurance business.

D. Return on equity is a key financial ratio used by insurance regulators for solvency surveillance.

16. 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.

17. A recent tornado caused extensive damage in Northeast Oklahoma. An insurance company’s staff claim representatives are too busy to handle the large number of claims themselves. To help process the claims, the insurance company should hire:

A. Third-party administrators.

B. Independent adjusters.

C. Public adjusters.

D. Producers.

18. ABC Chemical Company has experienced three on-site accidents in the last 18 months. Due to their unique and risky loss exposure, insurers in their state of domicile have refused to provide insurance coverage to ABC going forward. To obtain coverage, ABC’s best course of action would be to contact a:

A. Regional broker.

B. Direct writer.

C. General agent.

D. Surplus lines broker.

19. 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?

A. 10%.

B. 25%.

C. 50%.

D. 75%.

20. Ajax Insurance Company has entered into a surplus share reinsurance agreement with GSMO Company. If the line is $50,000 and the amount ceded is $200,000, what percentage of the policy premium and policy losses would Ajax Insurance Company receive?

A. 20%.

B. 25%.

C. 75%.

D. 80%.

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21. To attract customers, an insurer must provide the products and services that those customers request. The insurer goal of meeting customers’ needs often conflicts with which one of the following goals?

A. Diversifying risk.

B. Earning a profit.

C. Maintaining efficiency.

D. Fulfilling a duty to society.

22. Although some insurance commissioners are elected, most insurance commissioners are appointed. Which one of the following represents a reason cited by proponents of an appointing system?

A. An appointed commissioner is not obligated to any particular group or special interest.

B. An appointed commissioner would be in office for a full term.

C. An appointed commissioner need not be duly influenced by political contributions.

D. An appointed commissioner would be keenly aware of issues important to the public.

23. Which one of the following represents an underwriting activity performed by a line underwriter?

A. Selecting new and renewal accounts meeting criteria established in underwriting guidelines.

B. Researching fundamental issues such as which markets the insurer should target.

C. Formulating and implementing underwriting policy.

D. Revising underwriting guidelines so they accurately reflect changes in underwriting policy.

24. Which one of the following represents a technology scheme in which a person targets a company by obtaining email addresses of employees and sends an email to each employee persuading them to open a harmful link?

A. Cloud computing.

B. Phishing.

C. Access control list.

D. Collusion.

25. All of the following represent reasons that premium audits occur, EXCEPT:

A. To collect ratemaking data.

B. To detect fraud.

C. To obtain additional information.

D. To price a potential new line of insurance.

26. The two major types of insurers by licensing status are:

A. Domestic and foreign.

B. Admitted and nonadmitted.

C. Independent agency and direct writer.

D. Mutual and government.

27. Stoves Insurance (SI) wants to be licensed in a certain state so they can sell auto insurance and homeowners insurance in that state. They will form an unincorporated association to provide insurance coverage to its members. SI will derive its initial surplus through borrowing and collecting premium deposits. What type of insurer is SI?

A. Stock insurer.

B. Foreign insurer.

C. Mutual insurer.

D. Alien insurer.

28. When an insurer is making a market segmentation selection, which one of the following is an important factor of the internal environment to consider?

A. Technical resources.

B. Market segment competition.

C. Regulatory environment.

D. Population beliefs and behaviors.

29. The staff underwriters of ABC Insurance Company met to determine specific strategies that should be implemented that would be consistent with the company’s mission statement. Which type of underwriting activity has been accomplished?

A. Researching the market.

B. Formulating underwriting policy.

C. Evaluating loss experience.

D. Revising underwriting guidelines.

30. XYZ Insurance Company considered a policyholder’s industrial class to be in “Classification Y.” However, premium auditors in the same state considered the industrial class to be in “Classification Z.” This difference in rating results in:

A. Lower reinsurance requirements overall.

B. Inequitable rates for all insureds in the state for both classes.

C. A breach of contract by the insurance company.

D. An overall increase in underwriting capacity by the insurance company.

31. Which one of the following statements is correct regarding organizational levels?

D. Direct writers are an example of backward integration.

A. Related diversification occurs when insurers sell directly to consumers without the use of wholesalers.

B. A vertical integration strategy can either be backward or forward.

C. Vertical integration strategies usually increase expenses, so the strategies must be well thought out.

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

A. New regulations require additional insurer resources that will negatively impact profits.

B. An energetic and young underwriting department is struggling due to lack of experience.

C. The brand is well known in the state due to many years of television and radio ads.

D. The use of social media by customers has led to increased competition.

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

A. The process is applied to new policy applications, but it is not effective for renewal policies or changes in policy provisions.

B. The first step in the underwriting process is developing underwriting alternatives to address the submission’s exposures and hazards.

C. After the producer submits the application, they are generally not involved as an underwriting source to evaluate the submission.

D. If an application is accepted, the underwriting process also determines for what amount of insurance, pricing and under what condition the policy will be offered.

34. Which one of the following statements is correct regarding the reasons for insurer insolvency?

A. In most circumstances, there is one mistake or event that causes an insurer to become insolvent.

B. Decreased competition during hard phases of the underwriting cycle often contributes to an increase in insurer insolvencies.

C. Some insolvencies occur when an insurer is overexposed to losses from a major catastrophe.

D. A significant reduction in premiums precedes nearly all major insolvencies.

35. An organization of member companies that reinsure by fixed percentage the total amount of insurance appearing on policies issued by the organization is known as a(n):

A. Reinsurance intermediary.

B. Professional reinsurer.

C. Syndicate.

D. Association.

36. The two primary goals of the claim function are:

A. Satisfying the insurer’s obligations to the insured and supporting the insurer’s profit goals.

B. Being sensitive to those suffering a loss and providing prompt service to policyholders.

C. Providing the marketing department with current data and informing insurers of rulings affecting loss exposures.

D. Reviewing post-loss evaluations with underwriting and sharing loss information with actuaries.

37. Which one of the following components of insurance rates includes the amount needed for licenses and fees paid to advisory organizations, and acquisition expenses?

A. Underwriting profit.

B. Allocated loss adjustment expenses.

C. Expense provision.

D. Contingencies factor.

38. 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.

39. Which one of the following statements is correct regarding the alignment of IT and business strategies?

A. IT personnel rarely see themselves as a separate unit apart from the rest of the organization.

B. A legacy system that is retrofitted onto the business structure is often the best way to align IT and business strategies.

C. IT project to-do lists often get depleted and leave the IT personnel without much to do.

D. Some IT personnel need to better understand the insurance business and the insurer’s operations.

40. Which one of the following organizational structures helps to eliminate costs within the company?

A. Cost leadership.

B. Functional structure.

C. Multidivisional structure.

D. Centralized structure.

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

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.

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

42. To be considered a foreign insurer, an insurer would need to:

A. Incorporate in the state where it would like to do business.

B. Obtain a license in a state other than its domicile state.

C. Take out a surety bond guaranteeing its minimum capital and surplus according to the state’s requirements.

D. Have at least $500,000 in anticipated premium from the policyholders of the intended state.

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

A. Telematics are often used when gathering data during a physical survey.

B. Surveys mainly consist of a comprehensive review of the insurance application in an attempt to formulate a safety management program.

C. The risk control representative evaluates loss exposures and hazards relating to property loss, legal lability arising out of the premises, and employee injuries relative to working conditions.

D. Technology is important to the underwriting process overall but does not play a role in physical surveys because it is important for the risk control representative to be very hands-on.

44. Which one of the following statements is correct regarding the claims function?

A. The insurer’s primary internal recipients of claims information are the marketing, underwriting, and actuarial departments.

B. If a claims representative notices loss exposures during the claims investigation, and these exposures were not available during the application process, premium adjustments will not be made.

C. Claim representatives’ interaction with underwriters is limited to providing loss information.

D. Actuaries need accurate information on losses that have been paid, but they do not need information on losses that have occurred and are reserved for payment.

45. Which one of the following statements is correct regarding Fair Access to Insurance Requirements (FAIR) plans?

A. These plans are required in all states.

B. These plans do not provide coverage in areas susceptible to loss by riot or civil commotion.

C. These plans provide property insurance to owners who are unable to obtain standard coverage.

D. These plans primarily provide coverage for residents in storm-prone areas.

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

A. New customer data could be verified almost immediately by removing third-party requests for information from the process.

B. The creation of an industry-wide proof-of-insurance ledger could remove the onus on individual insureds to prove they have insurance.

C. The establishment of a communal leger could help quicken the handling of fraud investigations.

D. The use of smart contracts could alter the types of insurance products insurers can offer.

47. Under which of the following laws can an insurer use new rates immediately after filing with the state insurance department?

A. Flex rating law.

B. Use-and-file law.

C. File-and-use law.

D. Prior-approval law.

48. Which one of the following represents the main distinguishing characteristic between independent agents and other distribution systems?

A. Independent agents own their agency expiration list.

B. Independent agents are only permitted to sell life and health insurance.

C. Independent agents are permitted to represent only one insurer.

D. Independent agents operate nationally.

49. Which one of the following statements is correct regarding measures used to ensure regulatory compliance?

A. Internal claim audits are typically conducted by the state insurance commissioner.

B. Authority levels refers to an individual’s ability to review and change information in a claim information system.

C. Claim guidelines specify how certain claim handling tasks should be performed by setting policies and procedures.

D. An activity log is generally ineffective when more than one claim representative is working on a claim.

50. A type of reinsurance in which the reinsurer agrees to reinsure an entire class or portfolio of loss exposures within the agreement is referred to as:

A. Non-obligatory reinsurance.

B. Facultative reinsurance.

C. Intermediary reinsurance.

D. Treaty reinsurance.

CPCU 520 Practice Exam 2

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