I85PREP
⌘ K
FLMI study materials
FLMI study resources

FLMI practice questions

One question at a time. Build your FLMI understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Insurance Principles and the Business Environment

Which of the following situations involves a pure risk?

  1. An investor buys shares hoping their price will rise
  2. A warehouse owner faces the possibility that fire will destroy the building Correct answer.
  3. A trader takes a position in foreign currency expecting a favorable rate change
  4. A company launches a new product line in an untested market

Explanation

Pure risk involves only the chance of loss or no loss, with no possibility of gain. Fire can destroy a warehouse or leave it untouched, but the owner cannot profit from the fire itself, so the exposure is pure. The other situations are speculative because each carries a chance of gain as well as loss.

Question 2Insurance Principles and the Business Environment

For life insurance, insurable interest must exist at which point in time?

  1. At the time a claim is submitted for payment
  2. At the time of the insured's death
  3. At both the time of issue and the time of death
  4. At the time the policy is issued Correct answer.

Explanation

A life insurance policy is not a contract of indemnity, so the law requires insurable interest only when the contract is formed. Property insurance works differently, because there the insured must have an insurable interest at the time of the loss.

Question 3Insurance Principles and the Business Environment

The principle of indemnity means that a property insurance payment should do which of the following?

  1. Place the insured in a better position than before the loss
  2. Equal the full policy limit in every covered loss
  3. Restore the insured to the same financial position as before the loss Correct answer.
  4. Compensate the insured for emotional distress as well as physical damage

Explanation

Indemnity holds that the insured should be restored to approximately the financial position held before the loss, no better and no worse. This is why payments are limited by the actual loss and by the policy limit rather than automatically equal to the limit.

Question 4Insurance Principles and the Business Environment

The law of large numbers assists insurers primarily by doing which of the following?

  1. Making actual losses more predictable as similar exposures increase Correct answer.
  2. Eliminating the need for reinsurance on large commercial risks
  3. Guaranteeing that no single insured will ever suffer a catastrophic loss
  4. Allowing premiums to be set without regard to historical loss data

Explanation

As the number of independent, similar exposure units grows, actual loss experience clusters more closely around the expected value. Greater predictability allows insurers to set rates with more confidence, though individual losses still occur.

Question 5Insurance Principles and the Business Environment

An insured who intentionally sets fire to covered property in order to collect the insurance proceeds is an example of which of the following?

  1. Physical hazard
  2. Legal hazard
  3. Moral hazard Correct answer.
  4. Speculative risk

Explanation

Moral hazard is a characteristic of the insured, such as dishonesty or indifference toward loss, that increases the likelihood or size of a loss. Insurers respond with underwriting, deductibles, and claim investigation.

Question 6Insurance Principles and the Business Environment

Adverse selection in insurance refers to which of the following?

  1. The tendency of high-risk people to buy insurance most eagerly Correct answer.
  2. The tendency of policyholders to let coverage lapse when premiums rise
  3. The tendency of insurers to decline applicants who live in hazardous areas
  4. The tendency of losses to increase over time because of inflation

Explanation

When applicants know more about their own risk than the insurer does, those most likely to have claims are the most motivated to purchase coverage. Insurers counter this through underwriting, exclusions, and waiting periods.

Question 7Insurance Principles and the Business Environment

A mutual insurance company is owned by which of the following?

  1. A parent holding company
  2. A state insurance department
  3. Its stockholders
  4. Its policyholders Correct answer.

Explanation

A mutual insurer is owned by its policyholders, who may receive dividends or policy credits when results are favorable. A stock insurer, by contrast, is owned by shareholders and seeks to return value to them.

Question 8Insurance Principles and the Business Environment

Reinsurance can best be described as which of the following?

  1. An agreement in which an insurer shares commissions with its agents
  2. A government program that pays claims of failed insurers
  3. Coverage an insurer buys to shift part of its risk to another insurer Correct answer.
  4. Coverage purchased by a policyholder to supplement a primary policy

Explanation

In reinsurance the primary, or ceding, insurer transfers part of its risk to a reinsurer in exchange for part of the premium. This protects surplus, adds capacity, and helps the insurer absorb large or accumulated losses.

Question 9Insurance Principles and the Business Environment

An auto insurer pays its insured $9,000 for damage caused by another driver's negligence and then sues the negligent driver to recover that amount. Which right is the insurer exercising?

  1. Salvage
  2. Contribution
  3. Subrogation Correct answer.
  4. Coinsurance

Explanation

Subrogation transfers the insured's right of recovery against a responsible third party to the insurer after the insurer pays the claim. It supports indemnity by preventing the insured from collecting twice for one loss.

Question 10Insurance Principles and the Business Environment

An insurer gives a producer company letterhead and business cards, and a client reasonably relies on the producer's apparent power to bind coverage that the producer does not actually have. The producer is acting with which type of authority?

  1. Express authority
  2. Apparent authority Correct answer.
  3. Implied authority
  4. Fiduciary authority

Explanation

Apparent authority arises when the principal's conduct leads a third party to reasonably believe an agent is authorized, even if no actual authority was granted. The insurer may be bound by the agent's acts as a result.

Question 11Insurance Principles and the Business Environment

An insurer reports a loss ratio of 64 percent and an expense ratio of 32 percent. What is the combined ratio and what does it indicate?

  1. 96 percent, indicating an underwriting loss
  2. 96 percent, indicating an underwriting profit Correct answer.
  3. 4 percent, indicating an underwriting profit
  4. 32 percent, indicating an underwriting profit

Explanation

The combined ratio is the sum of the loss ratio and the expense ratio: 64 + 32 = 96 percent. A combined ratio below 100 percent means premiums exceed losses and expenses, producing an underwriting profit of about 4 percent of earned premium.

Question 12Insurance Principles and the Business Environment

The McCarran-Ferguson Act of 1945 is best described by which statement?

  1. It left insurance regulation mainly to the states Correct answer.
  2. It created a federal insurance regulator to replace state supervision
  3. It requires all insurers to join a federal guaranty fund
  4. It prohibited insurers from using agents to sell policies

Explanation

The Act declared that continued state regulation of insurance serves the public interest and exempted the business from most federal regulation to the extent the states regulate it. It is the foundation of state-based insurance supervision in the United States.

Question 13Insurance Principles and the Business Environment

State life and health insurance guaranty associations exist primarily to do which of the following?

  1. Guarantee that insurers will earn a profit on the policies they sell
  2. Protect policyholders of insurers that become insolvent Correct answer.
  3. Set the premium rates that member insurers must charge
  4. Approve policy forms before an insurer may use them

Explanation

Guaranty associations assess solvent member insurers to pay covered claims of policyholders of failed insurers, usually up to statutory limits. They are a consumer protection backstop and do not prevent insolvency.

Question 14Insurance Principles and the Business Environment

A captive insurer is an insurer that does which of the following?

  1. Operates only in the state in which it was originally chartered
  2. Sells coverage only to individual consumers, mostly through the internet
  3. Is created by a parent firm to insure its own risks Correct answer.
  4. Is owned jointly by several unrelated policyholders

Explanation

A captive is a licensed insurer, typically a subsidiary, formed to finance the risks of its parent organization and affiliates. It may be a pure captive covering only the parent group or a broader arrangement.

Question 15Insurance Principles and the Business Environment

Which statement accurately describes Lloyd's of London?

  1. It is a rating agency that assigns financial strength grades to insurers
  2. It is a marketplace where independent syndicates underwrite risks Correct answer.
  3. It is a reinsurance treaty organization limited to marine risks
  4. It is a single insurance company owned by the British government

Explanation

Lloyd's is a marketplace rather than an insurer: members grouped into syndicates accept risks, usually through brokers, and each syndicate's capital backs its share. Coverage at Lloyd's is not confined to marine risks.

Question 16Insurance Principles and the Business Environment

An agent who represents several unrelated insurers and places each piece of business with whichever company best fits the client is best described as which of the following?

  1. An exclusive agent
  2. An independent agent Correct answer.
  3. A direct writer
  4. A managing general agent

Explanation

Independent agents hold contracts with multiple insurers and can compare markets for a client, whereas exclusive or career agents represent a single company. A managing general agent instead holds delegated underwriting or binding authority for an insurer.

Question 17Insurance Principles and the Business Environment

An underwriter declines an application from a candidate whose medical history indicates a high probability of costly claims. This decision most directly serves which goal?

  1. Avoiding adverse selection against the insurer's pool of risks Correct answer.
  2. Ensuring that every applicant receives coverage at the standard rate
  3. Increasing the insurer's expense ratio in the current year
  4. Reducing the need for reinsurance on catastrophic events

Explanation

Underwriting selects applicants whose expected losses are consistent with the rates and classifications the insurer uses. Declining or rating substandard risks keeps the pool from being dominated by high-loss insureds, which is the control on adverse selection.

Question 18Insurance Principles and the Business Environment

An applicant's statement on a life insurance application that is believed true to the best of the applicant's knowledge is known as which of the following?

  1. A waiver
  2. An exclusion
  3. A representation Correct answer.
  4. A warranty

Explanation

A representation is a statement of belief that the applicant understands to be true, and a misrepresentation generally affects the contract only if it is material. A warranty, by contrast, is a statement the applicant guarantees to be literally true.

Question 19Insurance Principles and the Business Environment

A building valued at $500,000 is insured for $300,000 under a policy containing an 80 percent coinsurance clause. A covered fire loss of $100,000 occurs. Ignoring any deductible, how much will the insurer pay?

  1. $100,000
  2. $80,000
  3. $75,000 Correct answer.
  4. $60,000

Explanation

The clause requires coverage of at least 80 percent of value, or $400,000. Because the insured carried $300,000, which is 75 percent of the requirement, the insurer pays 75 percent of the $100,000 loss, or $75,000.

Question 20Insurance Principles and the Business Environment

Two property policies with equal limits cover the same building and neither bars other insurance. A covered loss occurs. How do the insurers respond?

  1. The insured may collect the full amount of the loss from each of the two insurers
  2. The insurer whose policy was issued first pays the entire amount of the loss
  3. Each insurer pays an equal share, and the insured keeps any surplus
  4. Each insurer pays its proportionate share of the loss Correct answer.

Explanation

Contribution requires insurers covering the same interest to share a loss, commonly in proportion to their applicable limits. The result is that the insured is indemnified once and cannot profit from duplicate coverage.

Question 21Insurance Principles and the Business Environment

An insurer reports total assets of $80 million and total liabilities of $62 million. Which statement about the insurer is correct?

  1. Surplus is $62 million because liabilities are subtracted from surplus
  2. Surplus is $18 million, and it equals annual premium income
  3. Surplus is $142 million, representing the insurer's total capacity
  4. Surplus is $18 million, and surplus plus liabilities equals assets Correct answer.

Explanation

On an insurer's balance sheet, assets minus liabilities equal policyholders' surplus ($80 million − $62 million = $18 million). Surplus measures financial strength and capacity to write business; it is not a measure of premium volume.

Question 22Insurance Principles and the Business Environment

An insurer issues a catastrophe bond that reduces the amount investors receive if a defined hurricane loss threshold is exceeded. What has the insurer accomplished?

  1. It has increased its surplus without any offsetting obligation
  2. It has converted a pure risk into a speculative risk for its policyholders
  3. It has shifted part of its catastrophe risk to investors Correct answer.
  4. It has eliminated its obligation to pay hurricane claims to policyholders

Explanation

In a catastrophe bond, investors accept the risk of losing principal or interest if a specified triggering event occurs, so part of the catastrophe exposure is transferred to capital markets. The insurer remains fully obligated to its policyholders under the insurance contracts it issued.

Question 23Insurance Principles and the Business Environment

Why might a mutual insurer choose to demutualize and become a stock company?

  1. To convert its policies from participating to guaranteed
  2. To raise capital from outside investors by issuing shares Correct answer.
  3. To avoid supervision by state insurance departments
  4. To eliminate the requirement that it maintain policyholders' surplus on its balance sheet

Explanation

Demutualization converts policyholder ownership into shareholder ownership, which allows the insurer to raise capital through securities markets. Policyholders typically receive cash, shares, or policy credits, and state approval is still required.

Question 24Insurance Principles and the Business Environment

A state insurance department reviews an insurer's claim practices, advertising materials, and consumer complaint record. This review is best described as which of the following?

  1. An actuarial audit of the insurer's loss reserves
  2. A financial examination focused on the insurer's solvency position
  3. A market conduct examination of how it treats customers Correct answer.
  4. A rate filing review to approve proposed premiums

Explanation

Market conduct examinations assess sales, advertising, underwriting, and claims handling to confirm compliance with consumer protection requirements. Financial examinations and reserve reviews instead focus on solvency.

Question 25Insurance Principles and the Business Environment

A company pays small, predictable property damage losses from a funded reserve and buys insurance only for losses above $100,000. Which pairing of risk management techniques does this illustrate?

  1. Planned retention plus transfer of excess risk Correct answer.
  2. Complete transfer of all property risk to an insurer
  3. Avoidance of the risk of large losses only
  4. Risk avoidance combined with loss prevention

Explanation

Funding a reserve for predictable losses is planned retention, while insuring losses above a chosen level transfers the excess severity to an insurer. Avoidance would mean not undertaking the activity that creates the exposure at all.

Question 26Insurance Principles and the Business Environment

Which statement best describes pure risk?

  1. A risk that strikes every person in a population at exactly the same time.
  2. A risk that is deliberately created in order to collect an insurance payout.
  3. A situation in which there is only the chance of loss or no loss, with no possibility of gain. Correct answer.
  4. A situation that offers the chance of gain as well as the chance of loss.

Explanation

Pure risk involves only the possibility of loss or no loss, which is why it is generally insurable. Speculative risk involves the chance of gain and is generally not insurable. The definition does not depend on intent or on all members of a population being affected.

Question 27Insurance Principles and the Business Environment

The law of large numbers holds that, as the number of similar independent exposure units increases, which result becomes more likely?

  1. The insurer's operating expenses decline to zero as premium volume grows.
  2. Each individual exposure unit becomes less likely to suffer any loss at all.
  3. Actual loss experience tends to approach the expected or predicted loss experience. Correct answer.
  4. The chance of a catastrophic loss rises in direct proportion to the number of units.

Explanation

The law of large numbers is the statistical principle that larger numbers of similar independent exposures produce actual results closer to expected results. This predictability is the foundation of pooling and ratemaking. It does not change the probability for any one exposure or eliminate expenses.

Question 28Insurance Principles and the Business Environment

In life insurance, insurable interest must exist at which point?

  1. At the time the policy is applied for and issued. Correct answer.
  2. At the time a claim is submitted to the insurer.
  3. At the time of the insured's death.
  4. Continuously throughout the entire life of the policy.

Explanation

For life insurance, insurable interest is required when the contract is formed, because the policy is not a contract of indemnity and the beneficiary's interest need not continue. Property insurance, by contrast, requires insurable interest at the time of loss. Requiring interest only at application prevents gambling on a life while allowing legitimate coverage to continue.

Question 29Insurance Principles and the Business Environment

The principle of indemnity provides that a property insurance payment should do which of the following?

  1. Replace the damaged property with new property of whatever type the insured chooses.
  2. Provide the insured with a profit so that the loss is not repeated.
  3. Pay a fixed amount stated on the declarations page regardless of the actual loss.
  4. Restore the insured to approximately the same financial position as before the loss, without gain. Correct answer.

Explanation

Indemnity means the insured is made whole financially, no better and no worse off than before the loss. This principle supports policy limits, deductibles, and actual cash value or replacement cost valuation. It prevents insurance from becoming a source of profit.

Question 30Insurance Principles and the Business Environment

The principle of utmost good faith in insurance requires which of the following?

  1. Only the insurer has a legal duty of honesty toward the applicant.
  2. Both parties must disclose all material facts relevant to the risk being insured. Correct answer.
  3. The insurer must pay every claim submitted without any investigation.
  4. The applicant may omit unfavorable information if it is not asked about directly.

Explanation

Utmost good faith imposes a duty of full and fair disclosure on both parties, most visibly through the applicant's representations and the insurer's policy terms. Material facts are those that would affect the insurer's decision to accept or rate the risk. Concealment or misrepresentation can give the insurer grounds to rescind.

Question 31Insurance Principles and the Business Environment

A stock insurance company is one that is which of the following?

  1. Owned by the federal government and managed by a board of governors.
  2. Owned jointly by its employees through an employee stock ownership plan.
  3. Owned by shareholders and operated to earn a profit for those shareholders. Correct answer.
  4. Owned by its policyholders and operated on a nonprofit basis.

Explanation

A stock insurer is a corporation owned by shareholders who elect a board of directors and who share in profits through dividends and stock value. Policyholders are customers rather than owners. Mutual insurers, by contrast, are owned by their policyholders.

Question 32Insurance Principles and the Business Environment

What is the primary role of the National Association of Insurance Commissioners (NAIC)?

  1. It develops model laws and coordinates regulation among the state insurance departments. Correct answer.
  2. It writes and enforces federal statutes governing insurance.
  3. It directly licenses and examines every insurer operating in the United States.
  4. It guarantees payment of claims for insurers that become insolvent.

Explanation

The NAIC is an association of state insurance regulators that drafts model laws and regulations and promotes uniformity and cooperation among the states. It has no direct regulatory authority over insurers, because that authority rests with the states. Guaranty associations, not the NAIC, pay claims of insolvent insurers.

Question 33Insurance Principles and the Business Environment

An insurance policy is generally treated as a contract of adhesion, which means which of the following?

  1. The insured may rewrite any clause with which the insured disagrees.
  2. Courts always enforce the policy exactly as written, without exception.
  3. Both parties negotiate every term equally before signing.
  4. The insurer drafts the policy, and ambiguities are construed against the insurer. Correct answer.

Explanation

In a contract of adhesion, one party drafts the terms and the other accepts or rejects them. Because the insurer controls the wording, courts generally resolve genuine ambiguities in favor of the insured. This rule gives the drafter an incentive to write clear policy language.

Question 34Insurance Principles and the Business Environment

A homeowner with a full-replacement policy stops repairing a leaking roof because insurance will cover any resulting damage. This behavior is an example of which of the following?

  1. Speculative risk
  2. Adverse selection
  3. Moral hazard Correct answer.
  4. Law of large numbers

Explanation

Moral hazard is the increased likelihood or severity of loss caused by the insured's attitude or behavior once insurance is in place. The homeowner's decision to neglect maintenance because a claim will be paid fits that definition. Insurers address moral hazard through deductibles, policy conditions, and claim investigation.

Question 35Insurance Principles and the Business Environment

Which of the following is the main reason speculative risk is generally not insurable?

  1. It involves only the chance of loss or no loss.
  2. It affects too few people for the risk to be spread.
  3. It is always the result of deliberate fraud by the insured.
  4. It contains the possibility of gain as well as loss, and allowing a profit from loss would conflict with the principle of indemnity. Correct answer.

Explanation

Speculative risk, such as investing in a new venture, includes the chance of gain as well as loss. Insurance is designed to indemnify losses, not to fund or protect profitable ventures, so speculative exposures are generally excluded. Some speculative risks can be handled through other financial tools rather than insurance.

Question 36Insurance Principles and the Business Environment

Surplus lines insurance is best described as which of the following?

  1. Coverage for a risk that cannot be placed with an admitted insurer and is written by a nonadmitted insurer. Correct answer.
  2. Coverage written by an admitted insurer for risks located outside its home state.
  3. Coverage that an insurer sells only to other insurance companies.
  4. Coverage provided by a state residual market pool for high-risk drivers.

Explanation

Surplus lines insurance is placed with nonadmitted insurers when the risk is unusual or high-hazard and cannot be insured by admitted carriers in the state. Surplus lines brokers must generally be licensed, and the nonadmitted insurer must meet state eligibility standards. Because the insurer is not admitted, state guaranty association protection may not apply.

Question 37Insurance Principles and the Business Environment

An insurer organized under the laws of a country other than the United States is classified in the United States as which of the following?

  1. Surplus lines
  2. Domestic
  3. Foreign
  4. Alien Correct answer.

Explanation

Classification depends on the insurer's place of incorporation relative to the jurisdiction where it does business. In a given state, an insurer incorporated in that state is domestic, an insurer incorporated in another state is foreign, and an insurer incorporated outside the United States is alien. Surplus lines describes a market segment, not a place of incorporation.

Question 38Insurance Principles and the Business Environment

A fraternal benefit society is best described as which of the following?

  1. A social organization with a lodge system that provides insurance coverage to its members. Correct answer.
  2. A government agency that writes insurance for low-income households.
  3. A company owned by its policyholders that writes coverage for the general public.
  4. A nonprofit health maintenance organization that employs salaried physicians.

Explanation

Fraternal benefit societies are membership organizations with a lodge or chapter system that offer life and health insurance to members as part of their broader social and charitable purpose. They are typically nonprofit and are regulated under special provisions of state insurance law. They differ from mutual insurers, which sell to the public and are owned by policyholders.

Question 39Insurance Principles and the Business Environment

Under federal law, a risk retention group is an insurer that is which of the following?

  1. Owned by a single large employer and used to insure only that employer's risks.
  2. Created by a state to insure workers compensation for all employers in the state.
  3. Owned by its members, formed to assume and spread their own liability risks, and chartered in one state. Correct answer.
  4. A federal agency that writes liability coverage for small businesses.

Explanation

The federal Liability Risk Retention Act permits groups of businesses with similar liability exposures to form risk retention groups owned by their members. The group must be chartered in one state and may then operate in other states without full licensing there, subject to registration and compliance requirements. This structure gives members more control over the cost and availability of liability coverage.

Question 40Insurance Principles and the Business Environment

An insurer gives a producer blank policy forms and a rate book, although the agency agreement does not expressly authorize the producer to bind coverage. The producer accepts a risk and tells the applicant that coverage is in force. If a loss occurs, the insurer is most likely bound because of which of the following?

  1. Apparent authority Correct answer.
  2. Express authority
  3. Ratification
  4. Implied authority

Explanation

Apparent authority arises when the insurer's conduct leads a reasonable third party to believe the producer has authority to act. Supplying blank forms and rate materials creates that impression even without express binding authority. The insurer can be bound as a result, though it may later seek recourse from the producer.

Question 41Insurance Principles and the Business Environment

A producer who collects premiums from clients and holds them before remitting them to the insurer is acting in which capacity?

  1. As an underwriter
  2. As a fiduciary Correct answer.
  3. As a claims adjuster
  4. As a reinsurer

Explanation

Premiums collected on behalf of an insurer are trust funds, and the producer holds them in a fiduciary capacity. The producer must account for the funds, keep them separate from personal funds, and remit them promptly. Misuse of premium funds can lead to license revocation and criminal liability.

Question 42Insurance Principles and the Business Environment

The Insurance Regulatory Information System (IRIS) is used by state regulators primarily to do which of the following?

  1. Set uniform premium rates for all insurers operating in a state.
  2. Resolve disputes between insurers and policyholders over claim settlements.
  3. License individual insurance producers in each state.
  4. Identify insurers whose financial ratios fall outside expected ranges as an early warning of possible trouble. Correct answer.

Explanation

IRIS applies a series of financial ratio tests to insurers' annual statements and flags those with unusual results. Regulators use the flags as a screening tool to decide which insurers merit closer examination, not as a final determination of insolvency. The system is an early-warning device, not a rate-setting or licensing mechanism.

Question 43Insurance Principles and the Business Environment

Risk-based capital (RBC) requirements are designed to do which of the following?

  1. Guarantee that an insolvent insurer's claims will be paid in full.
  2. Set a uniform price for every policy sold by an insurer.
  3. Limit an insurer's investment portfolio to U.S. Treasury securities only.
  4. Require an insurer to hold capital that reflects the amount and types of risk it assumes. Correct answer.

Explanation

Risk-based capital formulas assign capital charges according to the risks an insurer takes on, such as asset risk, underwriting risk, and interest-rate risk. An insurer with riskier operations must hold more capital, which promotes solvency. RBC is a regulatory minimum, not a guarantee fund.

Question 44Insurance Principles and the Business Environment

An insurer's unearned premium reserve represents which of the following?

  1. Profits that have not yet been distributed to shareholders.
  2. Money collected from reinsurers for past losses.
  3. Amounts set aside for claims that have been reported but not yet paid.
  4. The portion of premiums written that covers future coverage periods and has not yet been earned. Correct answer.

Explanation

A premium is earned as coverage is provided over the policy term. The unearned premium reserve is the portion of written premium that applies to future coverage and would have to be returned if the policy were cancelled. It is a liability on the insurer's balance sheet.

Question 45Insurance Principles and the Business Environment

An insurer that sells its policies through salaried employees who deal directly with customers, rather than through independent agents, is known as which of the following?

  1. A managing general agent
  2. A surplus lines broker
  3. A direct writer Correct answer.
  4. An exclusive agency insurer

Explanation

A direct writer markets its products through its own salaried sales force, telephone, or online channels rather than through independent producers. This model gives the insurer more control over the sales process and can reduce commission costs. Exclusive agency insurers use captive agents who represent only one company, which is a different arrangement.

Question 46Insurance Principles and the Business Environment

A visitor slips on an unmarked wet floor at a store and is injured. Which combination of elements must the visitor generally prove to recover damages under negligence law?

  1. That the store intended to cause the injury and acted with malice.
  2. That the visitor was an employee of the store and was injured while working.
  3. Only that the store carried liability insurance at the time of the fall.
  4. A duty of care owed by the store, a breach of that duty, causation of the injury, and actual damages. Correct answer.

Explanation

Negligence requires the claimant to prove four elements: a duty owed, a breach of that duty, a causal connection between the breach and the injury, and actual damages. The store owes business invitees a duty to keep the premises reasonably safe. Liability insurance may pay a judgment but is not itself an element of the claim.

Question 47Insurance Principles and the Business Environment

A reciprocal insurer is best described as which of the following?

  1. A stock company owned by shareholders whose shares trade publicly.
  2. A government corporation that insures bank deposits.
  3. A nonprofit service organization that sells insurance only to union members.
  4. An unincorporated group of subscribers, managed by an attorney-in-fact, who exchange indemnity arrangements among themselves. Correct answer.

Explanation

In a reciprocal insurer, each subscriber agrees to insure the others and to be insured by them, and an attorney-in-fact manages the exchange for a fee. The subscribers are both insureds and insurers of one another. This structure is distinct from stock and mutual companies.

Question 48Insurance Principles and the Business Environment

An insurer lists office furniture, goodwill from an acquisition, and high-grade corporate bonds among its assets. Which statement correctly describes how solvency regulators treat these items?

  1. Only the office furniture is admitted, because it is tangible property.
  2. All three are admitted assets because they appear on the balance sheet.
  3. Goodwill is admitted because it represents real economic value to the insurer.
  4. The corporate bonds are admitted assets, while office furniture and goodwill are generally nonadmitted. Correct answer.

Explanation

Admitted assets are those regulators recognize for statutory solvency purposes because they are liquid and available to pay claims. High-quality bonds qualify, while items such as furniture, equipment, and goodwill are generally nonadmitted and excluded from surplus. This treatment conservatively measures the resources available to policyholders.

Question 49Insurance Principles and the Business Environment

A state insurance department takes control of an insurer that is financially impaired but still considered viable. Which action is the department most likely to seek first?

  1. Criminal prosecution of the insurer's board before any financial action.
  2. Rehabilitation, in which the insurer is operated under court supervision to restore financial soundness. Correct answer.
  3. Immediate liquidation, with all policies cancelled that same day.
  4. A federal bankruptcy filing under Chapter 7.

Explanation

Rehabilitation is a court-supervised process intended to preserve a viable insurer by correcting its financial problems, sometimes through new management, revised operations, or assumptions of business. Liquidation is reserved for insurers that cannot be rehabilitated and involves winding up the company. The goal is to protect policyholders while preserving the business as a going concern when possible.

Question 50Insurance Principles and the Business Environment

A producer offers to pay the first month's premium for a new client from the producer's own funds if the client buys a policy. Under state insurance law, this conduct is most likely which of the following?

  1. Permitted, because the producer is using personal funds rather than insurer funds.
  2. Permitted, because the payment is a gift rather than a reduction in premium.
  3. Prohibited only if the insurer has not approved the payment in writing.
  4. Prohibited as illegal rebating, because a producer may not offer inducements not specified in the policy. Correct answer.

Explanation

Anti-rebating laws prohibit producers from offering any inducement not specified in the policy as an incentive to buy insurance. The source of the funds and the label used do not change the analysis; paying part of a premium is a classic rebate. These laws promote fair competition and prevent discrimination among policyholders.