Test bank for principles of risk management and insurance 14th edition george e rejda michael mcnama

Test Bank for Principles of Risk Management and Insurance 14th Edition, George E. Rejda, Mic

Test Bank for Principles of Risk Management and Insurance 14th Edition, George E. Rejda, Michael McNamara, William Rabel, To download the complete and accurate content document, go to: https://testbankbell.com/download/test-bank-for-principles-of-risk-management-and-in surance-14th-edition-george-e-rejda-michael-mcnamara-william-rabel/

Visit TestBankBell.com to get complete for all chapters

Principles of Risk Management and Insurance, 14e (Rejda) Chapter 8 Government Regulation of Insurance 1) Reasons for regulation of insurance include which of the following?

I. Maintaining insurer solvency II. Ensuring reasonable rates A) I only B) II only C) both I and II D) neither I nor II Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 2) The right of the states to regulate the business of insurance was first established by A) the South-Eastern Underwriters Association case.

B) the Gramm-Leach-Bliley Act. C) the Financial Modernization Act. D) the Sherman Act. Answer: B Diff: 1 Question Status: Revised AACSB: Application of Knowledge 3) The basis for current state regulation of insurance is A) the McCarran-Ferguson Act. B) Paul v. Virginia.

C) the South-Eastern Underwriters Association case.

D) the National Association of Insurance Commissioners.

Answer: A Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 4) All of the following statements about the methods of regulating insurance are true EXCEPT A) All states have insurance laws that regulate the operations of insurers.

B) Insurers are totally exempt from regulation by federal agencies and laws.

C) The courts regulate insurance in many ways, including the interpretation of policy clauses and provisions.

D) State insurance commissioners, through administrative rulings, have considerable power over insurers doing business in their states.

Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 1 Copyright © 2020 Pearson Education, Inc.

5) Which of the following statements about the licensing of insurance companies is (are) true?

I. A new capital stock insurer must meet minimum capital and surplus requirements, which vary by state and line of insurance.

II. The licensing requirements for insurance companies are less stringent than those imposed on most other types of firms.

A) I only B) II only C) both I and II D) neither I nor II Answer: A Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 6) An insurance company incorporated in another state has been licensed to operate in your state.

In your state, the insurer would be considered a(n) A) nonadmitted insurer.

B) foreign insurer.

C) alien insurer.

D) reciprocal insurer.

Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 7) An insurance company chartered in another country has been licensed to operate in your state.

In your state, the insurer would be considered a(n) A) nonadmitted insurer.

B) foreign insurer.

C) alien insurer.

D) reciprocal insurer.

Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 8) Which of the following is considered a nonadmitted asset for an insurer?

A) cash B) preferred stocks C) real estate D) office furniture Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge

2 Copyright © 2020 Pearson Education, Inc.

9) The policyholders' surplus of an insurer is defined as the difference between its A) assets and its liabilities.

B) premium income and its expenses.

C) reserves and its liabilities.

D) assets and its nonadmitted assets.

Answer: A Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 10) Which of the following statements about the use of risk-based capital requirements is (are) true?

I. Insurers must have a certain amount of capital depending on the riskiness of their investments and insurance operations.

II. Insurers may be required to take certain actions depending on how much capital they have relative to their risk-based capital requirements.

A) I only B) II only C) both I and II D) neither I nor II Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 11) Which of the following statements about the regulation of insurance company investments is (are) true?

I. The purpose of regulating insurance company investments is to prevent insurers from making unsound investments which could threaten their solvency.

II. Life insurers must invest their separate account assets in bonds.

A) I only B) II only C) both I and II D) neither I nor II Answer: A Diff: 1 Question Status: Revised AACSB: Application of Knowledge

3 Copyright © 2020 Pearson Education, Inc.

12) Which of the following statements about the regulation of life insurance companies is (are) true?

I. The percentage of assets a life insurance company may invest in a specific type of asset (e.g., stocks or bonds) is generally limited by law.

II. The purpose of limiting the accumulation of surplus is to prevent an insurer from increasing its surplus at the expense of policyowner dividends.

A) I only B) II only C) both I and II D) neither I nor II Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 13) Which of the following statements about state insurance guaranty funds is (are) true?

I. They limit the amount that policyholders can collect if an insurer becomes insolvent.

II. They are usually funded by general revenues of the states.

A) I only B) II only C) both I and II D) neither I nor II Answer: A Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 14) Under one type of rate regulation, insurers do not have to register their rates with state regulatory authorities. However, insurers may be required to furnish rate schedules and supporting data to state officials. A fundamental assumption underlying this type of rating law is that market forces will determine the price and availability of insurance, rather than discretionary acts of regulators. This type of rate regulation is called A) a flex-rating law.

B) a prior-approval law.

C) a file-and-use law.

D) no filing required.

Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge

4 Copyright © 2020 Pearson Education, Inc.

15) Under what type of rate regulation are insurers required to obtain approval of rates before using them if the rate change exceeds a specified predetermined range?

A) flex-rating law B) prior-approval law C) file-and-use law D) use-and-file law Answer: A Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 16) By misrepresenting the true facts, Gretchen was able to convince someone to replace an existing life insurance policy with another company and to purchase a new policy from the company that Gretchen represents. Gretchen has engaged in an illegal sales practice called A) bait and switch.

B) rebating.

C) retaliating.

D) twisting.

Answer: D Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 17) Which of the following statements about premium taxes is (are) true?

I. They are levied by the federal government as a result of the McCarran-Ferguson Act. II. Their primary purpose is to provide funds for insurance regulation.

A) I only B) II only C) both I and II D) neither I nor II Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 18) Which of the following is an advantage of federal regulation of insurance over state regulation of insurance?

A) greater opportunity for innovation B) more effective treatment of systemic risk C) greater responsiveness to local needs D) more competent regulators Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge

5 Copyright © 2020 Pearson Education, Inc.

19) Which of the following is an advantage of state regulation of insurance over federal regulation of insurance?

A) uniformity of laws B) greater efficiency C) more effective in negotiating international agreements pertaining to insurance D) quicker response to local insurance problems Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 20) A shortcoming of state regulation of insurance according to Congressional committees and the General Accounting Office is that state regulation A) leads to decentralized governmental power.

B) provides opportunities for innovation.

C) provides inadequate consumer protection.

D) is more responsive to local needs.

Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 21) The major reasons for insurer insolvency include which of the following?

I. Inadequate pricing and loss reserves II. Rapid growth and inadequate surplus A) I only B) II only C) both I and II D) neither I nor II Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 22) Which of the following is a principal method of ensuring the solvency of insurers?

A) requiring submission of annual financial statements to state regulators B) tracking and investigating market conduct complaints against insurers C) disciplining agents of the insurer for illegal sales practices D) regulating the forms (applications and policies) employed by the insurer Answer: A Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge

6 Copyright © 2020 Pearson Education, Inc.

23) The number of title insurance companies operating in State Z is relatively low. Recently, the largest of these companies (50 percent market share) acquired the second largest company (30 percent market share). Immediately after the acquisition, the insurer raised premiums by 75 percent. This scenario demonstrates which of the following rationales for the regulation of insurance?

A) maintain insurer solvency B) prohibit unfair sales practices by agents C) ensure reasonable rates D) make insurance available Answer: C Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 24) In which of the following did the Court decide that insurance was interstate commerce when conducted across state lines, and therefore was subject to federal regulation?

A) Paul v. Virginia B) South-Eastern Underwriters Association case C) McCarran-Ferguson Act D) Financial Modernization Act Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 25) A life insurance company based in Canada was licensed to operate in Massachusetts. When operating in Massachusetts, the Canadian insurer would be considered a(n) A) domestic insurer.

B) captive insurer.

C) foreign insurer.

D) alien insurer.

Answer: D Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 26) XYZ Mutual Insurance Company has total assets of $10 million. The policyholders' surplus is $2 million. What are XYZ Mutual's total liabilities?

A) $4.0 million B) $8.0 million C) $10.0 million D) $12.0 million Answer: B Diff: 2 Question Status: Previous Edition AACSB: Analytical Thinking 7 Copyright © 2020 Pearson Education, Inc.

27) Mutual Property Insurance Company has a surplus of $2 million. According to a conservative rule, how much in new net premiums can Mutual Property Insurance Company safely write?

A) $2 million B) $8 million C) $10 million D) $20 million Answer: A Diff: 2 Question Status: Previous Edition AACSB: Analytical Thinking 28) Fly-By-Night Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If Fly-By-Night becomes insolvent, which of the following will help pay the unpaid claims of the insurer?

A) guaranty fund B) premium rebates C) risk-based capital D) admitted assets Answer: A Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 29) Grace is a life insurance agent. She is attempting to sell a large life insurance policy, but the prospective purchaser is having second thoughts. To persuade the prospective purchaser, Grace said, "I will earn a $1,000 commission if you buy this policy. I'll give you $500 of my commission if you buy the policy." In most states, what illegal sales practice will Grace be guilty of if she splits her commission with the purchaser?

A) rebating B) churning C) twisting D) backdating Answer: A Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking

8 Copyright © 2020 Pearson Education, Inc.

30) State X's premium tax rate is 2 percent. State Y's premium tax rate is 3 percent. State X insurers are required to pay the 3 percent rate on business written in State Y. State X requires insurers from State Y to pay a 3 percent premium tax on business written in State X, even though the premium tax rate is only 2 percent in State X. This practice is known as a A) tax tariff.

B) guaranty fund assessment.

C) risk-based capital requirement.

D) retaliatory tax law.

Answer: D Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 31) ABC Insurance Company would like to purchase a bank. For many years, ABC was not permitted under federal law to enter into banking operations. Which of the following legislative acts eliminated the prohibition that prevented banks, insurers, and investment firms from entering into one another's markets?

A) The McCarran-Ferguson Act B) The Tax Reform Act C) The Consolidated Omnibus Budget Reconciliation Act D) The Financial Modernization Act (Gramm-Leach-Bliley Act) Answer: D Diff: 2 Question Status: Previous Edition AACSB: Reflective Thinking 32) Under one type of rating law, insurers are free to change rates and to use modified rates immediately. However, the new rate must be filed with regulators within a specified period, such as 60 days after the modified rate is employed. This type of rating law is called A) prior approval.

B) file-and-use.

C) use-and-file.

D) flex rating.

Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge

9 Copyright © 2020 Pearson Education, Inc.

33) The regulation of insurers in areas that affect consumers, which include claims handling, underwriting, complaints, advertising, sales practices, and other trade practices is called A) solvency surveillance.

B) market conduct regulation.

C) combined ratio analysis.

D) market share regulation.

Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 34) The National Association of Insurance Commissioners (NAIC) administers an "early warning system" to help ensure insurance company solvency. This system uses data provided in the annual statement to identify companies that may pose a solvency risk. This early warning system is called A) the risk-based capital requirements.

B) an insurance guaranty fund.

C) the Insurance Regulatory Information System (IRIS).

D) the assessment method.

Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 35) Which of the following statements is (are) true regarding the quality of insurance regulation?

I. The quality of insurance regulation is uniform from state to state.

II. All evidence suggests federal regulation of insurance would improve the quality of regulation.

A) I only B) II only C) both I and II D) neither I nor II Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge

10 Copyright © 2020 Pearson Education, Inc.

36) Which of the following statements concerning the proposed optional federal charter for life insurers is (are) true?

I. Large insurers operating in many states would more likely prefer a state charter while smaller, regional, insurers would more likely choose a federal charter.

II. Proponents of the federal charter argue that it would speed the development and approval of new products.

A) I only B) II only C) both I and II D) neither I nor II Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 37) Which of the following is a method used to help ensure the solvency of insurers?

A) commercial lines deregulation B) risk-based capital standards C) use of credit-based insurance scores D) use of no filing required rating laws Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 38) A score derived from an individual's credit history and other factors that is used by many auto and homeowners insurers for underwriting and rating purposes is called a(n) A) CLUE score.

B) insurance score.

C) expense ratio score.

D) combined ratio score.

Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge

11 Copyright © 2020 Pearson Education, Inc.

39) All of the following are arguments in favor of using an applicant's credit record in personal lines underwriting EXCEPT A) Most consumers have good credit records and benefit when credit history is used as a rating factor.

B) Use of credit data in underwriting and rating eliminates price discrimination against minority groups when they purchase insurance.

C) Underwriting and rating may be more consistent if applicants' credit histories are considered.

D) There is high correlation between an applicant's credit record and future claims experience.

Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 40) All of the following statements about insurance regulation are true EXCEPT A) Insurance commissioners are appointed in some states and elected in some states.

B) Insurers are subject to regulation by certain federal agencies and laws.

C) The National Association of Insurance Commissioners (NAIC) can force states to adopt the model laws that it drafts.

D) An insurance commissioner can revoke or suspend an insurer's license to do business in his or her state.

Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 41) A systemic risk is a risk that A) can be eliminated through diversification.

B) can be the cause of the collapse of an entire system.

C) can be insured privately.

D) can be easily contained so that it does not spread.

Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 42) The purpose of the Financial Analysis Solvency Tracking (FAST) system employed by the NAIC is to A) prioritize insurance companies for additional regulatory action.

B) quicken the approval of rates in prior approval states.

C) speed-up the claims settlement process for insurers charged with delaying claims payments.

D) quickly address market conduct complaints by consumers.

Answer: A Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge

12 Copyright © 2020 Pearson Education, Inc.

43) To correct abuses in the financial services industry, Congress passed an Act in 2010 that included numerous provisions to reform the financial services industry. This Act was the A) Financial Modernization Act. B) McCarran-Ferguson Act. C) Dodd-Frank Act. D) Biggert-Waters Act. Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 44) One provision of the Dodd-Frank Act was creation of the Financial Stability Oversight Council. This council is charged with identifying nonbank financial companies that could increase the risk of collapse of the entire financial system. This risk is called A) market risk.

B) systemic risk.

C) diversifiable risk.

D) enterprise risk.

Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 45) The Dodd-Frank Act created a federal body with some limited regulatory authority. For example, the organization can represent the federal government in international negotiations regarding insurance and it can preempt state law where it conflicts with negotiated international agreements. This body is called the A) National Insurance Bureau.

B) Federal Insurance Office.

C) Department of International Insurance.

D) International Insurance Bureau.

Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 46) Which of the following is authority given to the Federal Insurance Office created by the Dodd-Frank Act? A) to represent the federal government in international discussions of insurance regulation B) to license and charter new insurance companies that plan to operate nationally C) to be the primary monitor of insurance company solvency D) to be the primary regulator of all aspects of insurance Answer: A Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 13 Copyright © 2020 Pearson Education, Inc.

47) One method of ensuring the solvency of insurers is a periodic review, every three to five years, of insurers that operate on a multistate basis. This review is coordinated by the NAIC. This review is called a(n) A) annual report.

B) early warning system.

C) field examination.

D) inspection report.

Answer: C Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 48) The major argument in favor of an optional federal charter for insurers is that A) small insurers need a national charter to be competitive with large insurers.

B) a federal charter will prevent insurer insolvencies.

C) a federal charter will provide greater oversight of insurer market practices.

D) national insurers are at a competitive disadvantage under the present system.

Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 49) The risk-based capital requirements for life insurers are based on a formula that considers four types of risk. One risk reflects whether the insurer will have enough surplus if claims are higher than expected. This risk is called A) asset risk.

B) insurance risk.

C) interest rate risk.

D) business risk.

Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 50) The risk-based capital requirements for life insurers are based on a formula that considers four types of risk. One risk reflects a range of uncertainties that life insurers face including such things as bad management decisions and guaranty fund assessments. This risk is called A) asset risk.

B) insurance risk.

C) interest rate risk.

D) business risk.

Answer: D Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge

14 Copyright © 2020 Pearson Education, Inc.

51) Liability items on an insurer's balance sheet that reflect obligations that must be met in the future are called A) pre-paid expenses.

B) reserves.

C) surplus.

D) nonadmitted assets.

Answer: B Diff: 1 Question Status: Previous Edition AACSB: Application of Knowledge 52) An emerging concern for insurance companies is the threat of hackers stealing data, taking over their computer system and demanding ransom, and malicious tampering with a computer system. This emerging risk for insurance companies is A) innovation risk.

B) supply chain risk.

C) cybersecurity risk.

D) sharing economy risk.

Answer: B Diff: 1 Question Status: New AACSB: Application of Knowledge 53) The Federal Insurance Office studied insurance regulation and released their Modernization Report. One recommendation was that states should move forward with a newer method of calculating policy reserves in life insurance. The new approach is based on risk analysis and risk management techniques that reflect risks more accurately than the current method. The new approach is called A) principles-based reserving.

B) rule-based reserving.

C) loss ratio reserving.

D) tabular reserving.

Answer: A Diff: 1 Question Status: New AACSB: Application of Knowledge 54) The Federal Insurance Office recommended direct federal involvement in all of the following areas EXCEPT A) financial stability of large national and international insurers.

B) improvement of accessibility and affordability of insurance for Native Americans.

C) uniformity in rate regulation and insurance forms.

D) uniformity in the treatment of reinsurers.

Answer: C Diff: 1 Question Status: New AACSB: Application of Knowledge 15 Copyright © 2020 Pearson Education, Inc.

Test Bank for Principles of Risk Management and Insurance 14th Edition, George E. Rejda, Mic

55) Blue Sky Insurance Company sells life annuities to sick elderly people, routinely denies legitimate claims, and cancels insureds after they submit a claim. What type of insurance regulation would sanction Blue Sky for such wrongful behavior?

A) solvency regulation B) risk classification regulation C) rate regulation D) market conduct regulation Answer: D Diff: 1 Question Status: New AACSB: Application of Knowledge 56) Which of the following statements is (are) true regarding taxation of insurance companies?

I. Insurance companies are exempt from having to pay state and federal income taxes. ll. The primary purpose of the premium tax is to raise revenues for the state, not to provide funds for insurance regulation.

A) I only B) II only C) both I and II D) neither I nor II Answer: B Diff: 1 Question Status: New AACSB: Application of Knowledge

16 Copyright © 2020 Pearson Education, Inc.

Visit TestBankBell.com to get complete for all chapters