CPCU 520 Mid term exam Chapters 1-5

1. Which is not true about agents and brokers?

a. Both are intermediaries
b. Both look for customers with insurance needs
c. Both can be a broker and agent for the same insurance company
d. Both collect the premium from the insured

2. Insurance is regulated primarily to: 2.3

a. Ensure that competition is present in the marketplace
b. Protect consumers
c. Keep insurers from going bankrupt
d. Ensure that policy language is understandable to the average insured

3. To support the risk analysis and improvements efforts, the insurer’s risk control representatives can
provide training, information or counseling service as well as many other services. Which of the following
is not commonly provided by the risk control representatives: 5.12
a. Coordinated safety programs for auto fleets
b. Construction counseling including assessment of local construction processes
c. Technical risk control information resources
d. Workers compensation risk management strategies

4. Underwriting guidelines serve all but one of the following purposes: 4.21
a. Avoid duplication of efforts
b. Ensure uniformity and consistency
c. Provide for structured decisions
d. Develop specific pricing for individual risks

5. Which of the following is not impacted as a result of Risk Control? 5.4

a. Attract and retain higher- quality accounts
b. Increase agency relationships
c. Help agency meet their goals
d. Meet the customer needs for fair premiums and adequate coverage

6. Some of the common functional areas in addition to the four core and support areas, include: 1.27-1.28
a. Accounting, Customer Service, Legal, HR
b. Reinsurance, Auditing, Risk Control, and HR
c. Special investigations, actuarial, loss control, agency services
d. General council, premium auditing, accounting and loss control

7. The systematic gathering and analyzing of data to assist in making decisions is called: 3.11
a. Advertising
b. Marketing planning
c. Public relations
d. Marketing Research

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 8. Uncollectible reinsurance, excessive expenses, and rapid premium growth are factors that may contribute
to: 2.22
a. Insurer censure by the NAIC
b. Revocation of reinsurance treaties
c. Stricter insurer license controls
d. Insurer insolvency

9. Insurers and other organizations that make insurance available through a shared risk mechanism to those
who cannot obtain coverage in the admitted market are collectively called? 1.8
a. Surplus lines broker
b. Residual market
c. Exclusive agency
d. Foreign carrier

10. In general the tendency for people with the greatest probability of loss to be the ones most likely to
purchase insurance is called? 1.28
a. Adverse selection
b. Probable maximum loss
c. Residual market
d. Red lining

11. NAIC stands for: 2.8

a. National Alliance of Insurance Companies
b. North American Insurance Council
c. National Alliance of Insurance Commissioners
d. National Association of Insurance Commissioners

12. What is an advantage of a Model Law? 2.8

a. Ensures uniform regulations between states
b. Provides legislators with well-researched solutions that can be revised to fit specific state needs
c. Provides “ready-made” statutes that can be adopted immediately by state legislatures without
further debate
d. Lowers state insurance department operating expenses

13. Premium auditors are accountable for: 5.18-5.19

a. Determining the rates to be used on the policies
b. Collecting rate making data
c. Determining the correct exposures on the policy
e. Meeting federal reporting requirements

14. In comparing insurance consumers, which has the most knowledge of the insurance market? 3.5
a. Individuals
b. Small businesses
c. Middle markets
d. National Accounts

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 15. Proprietary insurers include all but which one of the following? 1.4-1.5
a. Mutual insurers
b. Lloyds
c. Insurance exchange
d. Stock insurer

16. Captives, risk retention groups and purchasing groups are examples of what type of organization form of
ownership? 1.5-1.6
a. Mutual
b. Residual plans
c. Pools
d. Cooperatives

17. An insurance marketing system under which agents contract to sell insurance for only one insurer is called a?
3.24
a. Direct writer
b. Exclusive agency system
c. Independent broker
d. General agency system

18. A ratio that indicates an insurer’s financial strength by relating net written premiums to policyholders’
surplus can be described by all but ONE of the following. Which is not true about this ratio? 4.16
a. Generally called Premium to Surplus ratio
b. GAAP accounting requirement
c. Is a SAP accounting principal
d. Helps define Return on Equity

19. All states require the following individuals to be licensed: 2.14

a. Producers, claims representatives, public adjusters, consultants
b. Producers
c. Producers, public adjusters
d. Producers, public adjusters, consultants

20. Which of the following characteristics does not drive the demand for insurance products or services? 3.6
chart
a. Insurance need
b. Insurance knowledge
c. Access to insurance
d. Relationship with producer

21. Risk Control may use information supplied by the claims department. Which of the following is NOT an
area of collaboration between risk control and claims? 5.19
a. Identification of the areas of concern/research
b. Targeting loss exposures for additional attention
c. Identify characteristics associated with specific losses
d. Develop alternative management options

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 22. External constraints impacting an insurance company’s ability to meet its goals include all but which one
of the following? 1.13
a. Regulation
b. Rating agencies
c. Public opinion
d. Financial resources

23. Accurate classifications are important to the insured and the insurer. Whose role is it to verify
classifications are correct for workers compensation policies? 5.26
a. Risk consultant
b. Premium auditor
c. Underwriter
d. Claims adjustor

24. Risk control services help the insurer earn a profit in a number of ways. Which of the following does NOT
help an insurer earn a profit? 5.3-5.4
a. Improve premium volume by changing a marginal client into an acceptable one
b. Providing underwriting with a better insight into the exposures they are writing
c. Reducing losses
d. Satisfying jurisdictional requirements

25. All but one of the following is an underwriting evaluation tools. Which one is not a tool used for this
purpose? 4.27
a. Telematics
b. Predictive analytics
c. Facultative reinsurance
d. Catastrophe modeling

26. Which of the following is true about Risk Control Survey recommendations? 5.16
a. They must be practical, conform to industry and regulatory standards and must be explained in
enough detail that the insured can implement
b. They must be definable, meet compliance requirements, relate to insured exposures and be
explainable to the claims representations
c. Must include property valuation, legal requirements, training materials and other resources and
be in writing to share with UW and claims
d. May only address fire, windstorm, water damage, burglary, and other causes of property loss,
must provide cost to rebuild should a full loss occur and provide correct data for rating the policy

27. Which of the following are factors which impact the service levels provided by Risk Control services? 5.14
a. Line of business, type of exposure insured, legal requirements
b. Type of exposure insured, legal requirements, prior losses
c. Line of business, size of commercial insured, types of exposure insured
d. Type of exposure insured, legal requirements, underwriting experience

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 28. A non-admitted insurer has certain advantages over an admitted insurer, including: 2.13
a. Freedom of rate and form
b. No regulations of any sort
c. Uses producers that are unlicensed
d. Lower costs that are passed along to the insured in form of lower premium costs

29. In comparing insurance consumers, which group has the least negotiating ability? 3.4
a. Individuals
b. Small businesses
c. Middle markets
d. National accounts

30. A detailed classification breakdown of exposure units obtained by the premium audit process is necessary for
5.22
a. The insured’s legal requirements
b. Statistical reporting for rate-making purposes
c. To develop the insured’s loss costs
d. For renewal processing

31. State guaranty funds were established for what primary purpose: 2.20
a. To compensate claimants who would have received payment had the insurer not become
insolvent
b. To compensate vendors of the insurer who did not get paid prior to the insolvency
c. To compensate employees of the insurer who did not receive a final paycheck once the insurer
was declared insolvent
d. To compensate stockholders for part of their losses in the stock’s drop once it was declared
insolvent

32. A / An ________ evaluates an insurer’s reserves and attests to its accuracy as part of the
__________requirements:
a. Underwriter / state
b. CFO / state
c. Underwriter / solvency
d. Actuary / solvency

33. The division of market based on values, personalities, attitudes and lifestyles is called: 3.13
a. Behavioristic segmentation
b. Geographic segmentation
c. Demographic segmentation
d. Psychographics segmentation

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 34. Premium auditors must review the insured’s operations. They do so for a number of reasons. Which of
the following is NOT a reason to review insured’s operations? 5.34.-5.35
a. Nature of the insured’s business
b. To look for classifications not shown on the policy
c. Assess managements quality and cooperation
d. To ensure every employee is listed on the policy

35. In order to have adequate policyholders’ surplus, insurance companies are limited by regulatory
guidelines and by their own corporate constraints. The amount of business the insurer can write is called:
a. Capacity
b. Underwriting Authority
c. Underwriting book of business
d. Adverse selection

36. Staff underwriters perform all of the following duties, except: 4.8-4.9
a. Research the market
b. Formulate underwriting policy
c. Review and revise pricing plans
d. Select insureds

37. Which of these activities is not one of the six major steps of the product development life cycle? 3.17
a. Opportunity assessment
b. Development of contract underwriting and pricing
c. Business forecast
d. SWOT analysis

38. Market research methods may include all but one of the following: 3.13
a. Focus groups
b. Surveys
c. Niche marketing
d. Predictive analytics

39. The process of identifying and dividing the groups within a market that share needs and characteristics
and that will respond similarly to a marketing action is called: 2.32
a. Target Marketing
b. Market Segmentation
c. Niche Marketing
d. Market analysis

40. What are the major goals of rate regulation? 2.39

a. Ensure that insurers do not become insolvent
b. Ensure that insurers meet the NAIC seven core financial principles through fair rates
c. Ensure that rates are adequate, not excessive, not unfairly discriminatory
d. Ensure that rates are flexible to promote competition between insurers

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 41. Securing reinsurance for an entire portfolio or class of business is called: 4.10
a. Treatise agreements
b. Treaty reinsurance
c. Facultative reinsurance
d. Loss development

42. Return on Equity is not only a benchmark for employing capacity but also a fundamental measure of
insurer profitability. The more conservative formula for ROE is: 4.15
a. SAP = Net Income/ Average owners’ equity
b. SAP = Net Income/ Average policyholders’ surplus
c. GAAP = Net Income/Average owners’ equity
d. GAAP = Net income/average policyholders’ surplus

43. A rating plan that adjusts the premium for the current policy period to recognize the loss experience of
the insured organization during past policy periods is called: 4.28
a. Schedule rating
b. Rating plan
c. Retrospective rating
d. Experience rating

44. Which is not an insurer differentiation as to the offerings available to meet the coverage and service
needs of the customer segment?
a. Products offered
b. Geographic area
c. Regulation
d. Distribution system

45. Grain and Farmers Insurance Company has its corporate headquarters in MO, branches in KY and WV, and
was incorporated in SC. While operating in the state of WV, Grain and Farmers is a / an: 2.10-2.11
a. Alien insurer
b. Domestic insurer
c. Freelance insurer
d. Foreign insurer

46. An insurer whose current liabilities exceed its current assets is deemed to be: 2.20
a. Marginalized
b. In liquidation
c. Insolvent
d. In actuarial misalignment

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__________________________________________________________________________________________
O &M Insurance results for last year included:

Incurred losses: $2 Million

Underwriting expense: $1 Million
Earned premium: $3 Million
Written premium: $4 Million
Investment income: $500,000

Use the above information for the next 3 questions:

47. The loss ratio for O & M was:

a. 66.7%
b. 75%
c. 33.3%
d. 50%

(incurred losses/earned premium)

48. The combined ratio for O & M was:
a. 66.7%
b. 75%
c. 91.7%
d. 108.4%
(Loss ratio + expense ratio 66.7 + 25%= 91.7%)

49. Overall operating ratio for O & M was:

a. 75.7%
b. 79.2%
c. 91.7%
d. 108.4%
(loss ratio + expense ratio)- investment ratio (investment income/earned))

91.7- 16%= 75.7%

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 You are responsible for a territory which includes a number of law firms. You know law firms are a
profitable book of business for your firm, with results last year of 82% combined and trending to 90%
this year. The management team is concerned about the negative trend and asks all underwriters take a
second look at the book as they come up for renewal.

Your book of business includes four law firms which all renew next month:

Losses Earned UW expenses Written

premium Premium
ABC Law office 200,000 400,000 50,000 500,000

1234 Law Firm 250,000 500,000 120,000 600,000

Law & Sons 200,000 800,000 200,000 1,000,000

Law & Daughters 450,000 900,000 150,000 1,000,000

50. What is the combined ratio for 1234 Law Firm?

a. 50%
b. 60%
c. 70%
d. 80%

51. Which firm had the worst results?

a. ABC Law Offices
b. 1234 Law Firm
c. Law & Sons
d. Law & Daughters

52. Law & Daughters was located in an area where storm damage added 15% to the loss ratio due to the cat.
How will this impact your analysis of the results?
a. Not at all
b. Factor cat in analysis and reduce loss ratio accordingly
c. Due to loss, send do not review notice
d. Refer to manage for decision

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