Principles of Risk Management and Insurance 12th Edition by George E. Rejda , Michael McNamara

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Principles of Risk Management and Insurance 12th Edition by George E. Rejda , Michael McNamara

Principles of Risk Management and Insurance, 12e (Rejda)

Chapter 2   Insurance and Risk

 

1) All of the following are characteristics of insurance EXCEPT

  1. A) risk avoidance.
  2. B) pooling of losses.
  3. C) payment of fortuitous losses.
  4. D) indemnification.

Answer:  A

Question Status:  Previous Edition

 

2) Which of the following is implied by the pooling of losses?

  1. A) sharing of losses by an entire group
  2. B) inability to predict losses with any degree of accuracy
  3. C) substitution of actual loss for average loss
  4. D) increase of objective risk

Answer:  A

Question Status:  Previous Edition

 

3) According to the law of large numbers, what happens as the number of exposure units increases?

  1. A) Actual results will increasingly differ from probable results.
  2. B) Actual results will more closely approach probable results.
  3. C) Nondiversifiable risk will decrease.
  4. D) Objective risk will increase.

Answer:  B

Question Status:  Revised

 

4) According to the law of large numbers, what should happen as an insurer increases the number of units insured?

  1. A) The amount the insurer expects to pay in claims should decrease.
  2. B) Underwriting expenses should decrease.
  3. C) Actual results will more closely approach expected results.
  4. D) The insurer’s profitability should become more variable.

Answer:  C

Question Status:  Previous Edition

 

5) Characteristics of a fortuitous loss include which of the following?

  1. The loss is certain to occur.
  2. The loss occurs as a result of chance.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  B

Question Status:  Previous Edition

6) From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT

  1. A) The loss must be accidental.
  2. B) The loss should be catastrophic.
  3. C) The premium must be economically feasible.
  4. D) There must be a large number of exposure units.

Answer:  B

Question Status:  Revised

 

7) From the standpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT

  1. A) The loss must be unintentional.
  2. B) The chance of loss must be calculable.
  3. C) The loss must be indeterminable.
  4. D) The loss must be measurable.

Answer:  C

Question Status:  Revised

 

8) Why is a large number of exposure units generally required before a pure risk is insurable?

  1. A) It prevents the insurer from losing money.
  2. B) It eliminates intentional losses.
  3. C) It minimizes moral hazard.
  4. D) It enables the insurer to predict losses more accurately.

Answer:  D

Question Status:  Previous Edition

 

9) The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following?

  1. Decrease in moral hazard
  2. More accurate prediction of future losses
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  C

Question Status:  Previous Edition

 

10) Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable?

  1. The loss must be definite as to place.
  2. The loss must be definite as to amount.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  C

Question Status:  Previous Edition

11) Methods by which insurers may minimize or avoid catastrophic losses include which of the following?

  1. The use of reinsurance
  2. Concentrating coverage written in one geographic region
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  A

Question Status:  Previous Edition

 

12) Which of the following types of risks best meets the requirements for being insurable by private insurers?

  1. A) market risks
  2. B) property risks
  3. C) financial risks
  4. D) political risks

Answer:  B

Question Status:  Previous Edition

 

13) Reasons why market, financial, and production risks are often uninsurable include which of the following?

  1. The potential to produce a catastrophic loss is great.
  2. The chance of loss cannot be accurately estimated.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  C

Question Status:  Previous Edition

 

14) Which of the following types of risks is normally uninsurable by private insurers?

  1. A) personal risks
  2. B) property risks
  3. C) liability risks
  4. D) market risks

Answer:  D

Question Status:  Previous Edition

 

15) Which of the following is a result of adverse selection?

  1. A) The insurer’s financial results will be substantially improved.
  2. B) Persons most likely to have losses are also most likely to seek insurance at standard rates.
  3. C) It is unnecessary for the insurance company to use underwriting.
  4. D) Insurance can be written only by the federal government.

Answer:  B

Question Status:  Previous Edition

16) The tendency for unhealthy people to seek life or health insurance at standard rates is an example of

  1. A) moral hazard.
  2. B) fundamental risk.
  3. C) attitudinal hazard.
  4. D) adverse selection.

Answer:  D

Question Status:  Revised

 

17) Which of the following statements regarding insurance and gambling is (are) true?

  1. Insurance is used to handle existing pure risks, while gambling creates a new speculative risk.
  2. Insurance usually involves risk avoidance, while gambling typically involves only risk reduction.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  A

Question Status:  Previous Edition

 

18) In addition to marketing life insurance, life insurers typically sell which of the following products?

  1. Retirement annuities
  2. Disability income insurance
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  C

Question Status:  Previous Edition

 

19) Inland marine insurance provides coverage for

  1. A) goods being shipped on land.
  2. B) premature death of members of the armed forces.
  3. C) goods being shipped on ocean-going vessels.
  4. D) liability exposures of nonprofit organizations.

Answer:  A

Question Status:  Previous Edition

 

20) All of the following are classified as casualty insurance EXCEPT

  1. A) life insurance.
  2. B) general liability insurance.
  3. C) workers compensation insurance.
  4. D) burglary and theft insurance.

Answer:  A

Question Status:  Previous Edition

21) Which of the following is a form of casualty insurance?

  1. A) fire insurance
  2. B) general liability insurance
  3. C) inland marine insurance
  4. D) ocean marine insurance

Answer:  B

Question Status:  Previous Edition

 

22) The term “multiple-line insurance” is used to describe a type of insurance that combines which of the following coverages into a single contract?

  1. A) workers compensation and health insurance
  2. B) life and disability insurance
  3. C) property and casualty insurance
  4. D) pensions and annuities

Answer:  C

Question Status:  Previous Edition

 

23) All of the following are benefits to society that result from insurance EXCEPT

  1. A) less worry and fear.
  2. B) elimination of moral hazard.
  3. C) indemnification for loss.
  4. D) loss prevention.

Answer:  B

Question Status:  Previous Edition

 

24) Which of the following statements about the insurance industry as a source of investment funds is (are) true?

  1. These funds result in a lower cost of capital than would exist in the absence of insurance.
  2. These funds tend to promote economic growth and full employment.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  C

Question Status:  Previous Edition

 

25) All of the following are social costs associated with insurance EXCEPT

  1. A) insurance company operating expenses.
  2. B) fraudulent claims.
  3. C) inflated claims.
  4. D) increased cost of capital.

Answer:  D

Question Status:  Previous Edition

26) A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that the farmer sustained. Which characteristic of insurance is embodied in this agreement?

  1. A) pooling of losses
  2. B) fortuitous losses
  3. C) risk avoidance
  4. D) indemnification

Answer:  A

Question Status:  Previous Edition

 

27) XYZ Insurance Company writes coverage for most perils which can damage property. XYZ, however, does not write flood insurance on property located in flood plains. Which requirement of an ideally insurable risk might be violated if XYZ wrote flood insurance on property located in flood plains?

  1. A) There must be a large number of similar exposure units.
  2. B) The loss should not be catastrophic.
  3. C) The chance of loss must be calculable.
  4. D) The losses must be determinable and measurable.

Answer:  B

Question Status:  Revised

 

28) ABC Appliance offers a warranty requiring an annual fee. The warranty may be purchased at the time of sale or at any time within the first year after the appliance was purchased. The warranty fee after the date of purchase is twice the time-of-purchase fee. When asked why the fee was higher after the date of purchase, ABC’s president said, “Buying a warranty is voluntary. We’ve noted that those who buy the warranty after the purchase date have a greater need for service.” Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers?

  1. A) excessive premiums
  2. B) reduced claims
  3. C) bad investments
  4. D) adverse selection

Answer:  D

Question Status:  Previous Edition

 

29) Alpha Insurance Company insures a broad range of risks, including whatever is not covered by fire, marine, and life insurers. Which term best describes the wide range of risks written by Alpha Insurance?

  1. A) fidelity insurance
  2. B) casualty insurance
  3. C) social insurance
  4. D) property insurance

Answer:  B

Question Status:  Previous Edition

30) LMN Insurance markets homeowners insurance. The LMN homeowners policy combines property and casualty insurance in the same contract. Insurance policies combining property and casualty coverage in the same contract are called

  1. A) mono-line policies.
  2. B) multi-year policies.
  3. C) multiple-line policies.
  4. D) manuscript policies.

Answer:  C

Question Status:  Previous Edition

 

31) One branch of government insurance programs has a number of distinguishing characteristics. These programs are compulsory, they are financed by mandatory contributions rather than general tax revenues, and benefits are weighted in favor of low-income groups. These government insurance programs are called

  1. A) welfare programs.
  2. B) social insurance programs.
  3. C) casualty insurance programs.
  4. D) private insurance programs.

Answer:  B

Question Status:  Previous Edition

 

32) Gina would like to buy a house. She will pay 10 percent of the cost of the house as a down payment and borrow the other 90 percent from a mortgage lender. The home will serve as collateral for the loan. The lender requires Gina to purchase property insurance on the home so that the collateral supporting the loan will be protected. This scenario illustrates which of the following benefits of insurance to society?

  1. A) enhancement of credit
  2. B) reduction of fear and worry
  3. C) source of investment funds
  4. D) incentives for loss prevention

Answer:  A

Question Status:  Previous Edition

 

33) ABC Insurance Company calculated the amount that it expected to pay in claims under each policy sold. Rather than selling the insurance for the amount it expected to pay in claims, ABC added an allowance to cover the cost of doing business, including commissions, taxes, and acquisition expenses. This allowance is called a(n)

  1. A) policyowner dividend.
  2. B) premium.
  3. C) expense loading.
  4. D) rate credit.

Answer:  C

Question Status:  Previous Edition

34) JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 2,000 homeowners this year?

  1. A) The total number of claims filed by JKL policyowners should decrease.
  2. B) The total dollar value of claims will decrease.
  3. C) The average size of loss will decline in value.
  4. D) The actual results will more closely approach the expected results.

Answer:  D

Question Status:  Previous Edition

 

35) Apex Insurance Company wrote a large number of property insurance policies in an area where earthquake losses could occur. When the president of Apex was asked if she feared that a severe earthquake might put the company out of business, she responded, “Not a chance. We transferred most of that risk to other insurance companies.” An arrangement by which an insurer that initially writes insurance transfers to another insurer part or all of the potential losses associated with such insurance is called

  1. A) hedging.
  2. B) speculating.
  3. C) reinsurance.
  4. D) loss avoidance.

Answer:  C

Question Status:  Previous Edition

 

36) Bronson Casualty Company sells casualty insurance only.  Which of the following coverages could you purchase from Bronson Casualty Company?

  1. A) life insurance
  2. B) fire insurance
  3. C) marine insurance
  4. D) liability insurance

Answer:  D

Question Status:  New

 

37) Which of the following statements regarding insurance and hedging is (are) true?

  1. Insurance involves the transfer of insurable risk while hedging handles risk that is typically uninsurable.
  2. Both insurance and hedging rely on the law of large numbers to reduce risk.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  A

Question Status:  Previous Edition

38) Ashley opened an all-you-can-eat buffet restaurant. The cost per-person was based upon what Ashley believed an average restaurant patron would consume. The restaurant began to lose money. Ashley concluded that her patrons had “above average” appetites, and were attracted to her restaurant because they could eat as much as they wanted while being charged an average price. A similar phenomenon exists in insurance markets. This problem is called

  1. A) moral hazard.
  2. B) adverse selection.
  3. C) attitudinal hazard.
  4. D) fundamental risk.

Answer:  B

Question Status:  Revised

 

39) Which of the following statements is (are) true concerning private insurance?

  1. Social insurance programs are private insurance programs.
  2. Both individuals and businesses purchase private insurance.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  B

Question Status:  Previous Edition

 

40) Adverse selection occurs

  1. A) when an insurance company loses money on its investments.
  2. B) when individuals intentionally bring about a loss in order to collect from an insurer.
  3. C) when catastrophic losses occur as a result of a natural disaster.
  4. D) when applicants with a higher-than-average chance of loss seek insurance at standard rates.

Answer:  D

Question Status:  New

 

Principles of Risk Management and Insurance, 12e (Rejda)

Chapter 14   Annuities and Individual Retirement Accounts

 

1) Which of the following statements is (are) true with respect to annuities?

  1. Annuities are the opposite of life insurance.
  2. The fundamental purpose of annuities is to replace lost income in case of premature death.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  A

Question Status:  Previous Edition

 

2) When selling life annuities, what risk is the insurer pooling?

  1. A) bad investment performance
  2. B) premature death
  3. C) bad expense experience
  4. D) excessive longevity

Answer:  D

Question Status:  Previous Edition

 

3) Life annuity payments are made up of all of the following EXCEPT

  1. A) return of premiums.
  2. B) interest earnings.
  3. C) unliquidated principal of annuitants who live too long.
  4. D) unliquidated principal of annuitants who die early.

Answer:  C

Question Status:  Previous Edition

 

4) Stan paid an insurance company $50,000 for an annuity when he was 50 years old. At age 62,Stan plans to begin to receive payments from the insurer. Based on the description provided, this annuity can be described as a(n)

  1. A) deferred annuity.
  2. B) life annuity with guaranteed payments.
  3. C) immediate annuity.
  4. D) variable annuity.

Answer:  A

Question Status:  Previous Edition

 

5) Cassie, age 62, paid a life insurer $100,000 in exchange for a life annuity. If Cassie dies before receiving 120 monthly payments from the insurer, the remaining payments will be made to a beneficiary. If Cassie dies after receiving 120 payments, no additional payments are made by the insurer. Cassie has purchased a

  1. A) variable annuity.
  2. B) life annuity with guaranteed payments.
  3. C) installment refund annuity.
  4. D) cash refund annuity.

Answer:  B

Question Status:  Previous Edition

6) Which of the following statements is (are) true with respect to a joint-and-survivor annuity?

  1. Some joint-and-survivor annuities reduce the income payment after the first annuitant dies.
  2. No payments are made after the first annuitant dies.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  A

Question Status:  Previous Edition

 

7) During the funding period, the premiums paid for a variable annuity are used to purchase

  1. A) annuity units.
  2. B) immediate participation shares.
  3. C) mutual fund shares.
  4. D) accumulation units.

Answer:  D

Question Status:  Previous Edition

 

8) Brad funded a life annuity through installment payments. At age 60, he decided to elect an annuity settlement option and to begin to receive payments. Which of the following life income options will provide Brad with the highest monthly income?

  1. A) life annuity (no refund)
  2. B) life income with payments guaranteed for 5 years
  3. C) life income with payments guaranteed for 10 years
  4. D) installment refund annuity

Answer:  A

Question Status:  Previous Edition

 

9) Which of the following statements is (are) true with respect to the cash (lump sum) annuity settlement option?

  1. The taxable portion of the distribution is subject to federal and state income taxes.
  2. The option results in adverse selection against the insurer as those in poor health are more likely to take cash than to annuitize the funds.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  C

Question Status:  Previous Edition

 

10) Which of the following statements is (are) true with respect to variable annuities?

  1. The price at which accumulation units can be purchased fluctuates during the funding period.
  2. The value of annuity units fluctuates over time.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  C

Question Status:  Previous Edition

11) Bridget started to fund a variable annuity. Three years later, she experienced financial difficulty. She called her agent and cancelled the contract. The insurer returned all but 4 percent of the account balance. The 4 percent kept by the insurer is a(n)

  1. A) account administration fee.
  2. B) investment management fee.
  3. C) front-end load.
  4. D) surrender charge.

Answer:  D

Question Status:  Previous Edition

 

12) Insurers offering variable annuities charge a number of expenses. One category of expenses is to pay the fund manager and to pay brokerage fees. This expense is the

  1. A) investment management charge.
  2. B) administrative charge.
  3. C) surrender charge.
  4. D) front-end load.

Answer:  A

Question Status:  Previous Edition

 

13) Insurers offering variable annuities charge a number of fees and expenses. One category of fees and expenses is charged to cover the cost of record keeping, paperwork, and periodic reports to annuity owners. This expense is the

  1. A) investment management charge.
  2. B) surrender charge.
  3. C) administrative charge.
  4. D) front-end load.

Answer:  C

Question Status:  Previous Edition

 

14) All of the following statements about variable annuities are true EXCEPT

  1. A) The periodic payments received by the annuitant fluctuate.
  2. B) Variable annuities typically provide a guaranteed death benefit payable to a beneficiary if the annuitant dies prior to retirement.
  3. C) Insurers offering variable annuities charge a variety of fees and expenses.
  4. D) Although the value of annuity units fluctuates, accumulation units have a fixed value.

Answer:  D

Question Status:  Previous Edition

 

15) Which of the following statements is (are) true with respect to an equity-indexed annuity?

  1. The maximum percentage gain is usually capped.
  2. There is no downside protection against loss of principal if the annuity is held to term.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  A

Question Status:  Previous Edition

16) With an equity-indexed annuity, what name is given to the method of crediting excess interest to the annuity?

  1. A) the capitation method
  2. B) the indexing method
  3. C) the distribution method
  4. D) the earnings method

Answer:  B

Question Status:  Previous Edition

 

17) Under an equity-indexed annuity, what name is given to the percentage increase in the stock index that is credited to the contract?

  1. A) the expense rate
  2. B) the exclusion ratio
  3. C) the indexing rate
  4. D) the participation rate

Answer:  D

Question Status:  Previous Edition

 

18) Which of the following statements regarding the taxation of individual annuities is (are) true?

  1. The exclusion ratio is the percentage of the annuity income that is taxable.
  2. After the net cost of the annuity has been paid to the annuitant, the total annuity payment is taxable.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  B

Question Status:  Previous Edition

 

19) Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). What is the exclusion ratio in this case?

  1. A) 33.33 percent
  2. B) 40.00 percent
  3. C) 50.00 percent
  4. D) 66.67 percent

Answer:  C

Question Status:  Previous Edition

 

20) Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). Assume that Juanita receives 12 monthly payments of $500 the first year. How much taxable income must she report?

  1. A) $3,000
  2. B) $4,000
  3. C) $4,500
  4. D) $6,000

Answer:  A

Question Status:  Previous Edition

21) Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). If Juanita is alive 20 years later, how much of the $6,000 received during the year is taxable?

  1. A) nothing
  2. B) $3,000
  3. C) $4,500
  4. D) $6,000

Answer:  D

Question Status:  Previous Edition

 

22) Which of the following statements is (are) true regarding the taxation of distributions from individual annuities?

  1. Individual annuity distributions are never taxable.
  2. Once the annuitant has recovered the premiums he or she paid for the annuity, the entire annuity distribution is taxable.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  B

Question Status:  Previous Edition

 

23) All of the following are permissible IRA investments EXCEPT

  1. A) mutual funds.
  2. B) life insurance.
  3. C) individual stocks.
  4. D) bonds.

Answer:  B

Question Status:  Previous Edition

 

24) Which of the following statements is (are) true regarding the Roth IRA?

  1. Roth IRA contributions are tax deductible.
  2. Roth IRA investment income accumulates income-tax free.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  B

Question Status:  Previous Edition

 

25) Rita is 66 years old.  She earned $20,000 this year working part-time at a store and her modified adjusted gross income was $28,000.  Rita is considering making a $3,000 contribution to her traditional IRA.  Which of the following statements is true regarding this contribution?

  1. A) Rita cannot contribute to her traditional IRA because she is over age 65.
  2. B) Rita can make a $3,000 contribution to her traditional IRA, but it is not tax deductible.
  3. C) Rita can make a $3,000 contribution to her traditional IRA, but it is only partially tax deductible.
  4. D) Rita can make a $3,000 contribution to her traditional IRA, and it is fully tax deductible.

Answer:  D

Question Status:  Previous Edition

26) Daryl, age 42, quit his job. His employer offered a defined contribution pension plan, and the balance in the account was $30,000 when Daryl quit. He can avoid immediate taxation of these funds by

  1. A) taking a lump-sum distribution.
  2. B) using an IRA rollover account.
  3. C) receiving the money through four equal installments.
  4. D) using the funds to purchase common stock issued by the former employer.

Answer:  B

Question Status:  Previous Edition

 

27) Which of the following statements is (are) true with regard to Roth IRAs?

  1. The portion of a Roth IRA distribution that is attributable to investment income is taxable.
  2. There is a maximum income level above which Roth IRA contributions are not allowed.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  B

Question Status:  Previous Edition

 

28) All of the following statements about traditional and Roth IRAs are true EXCEPT

  1. A) Traditional IRA contributions may be fully, partially, or not income tax deductible.
  2. B) Qualified distributions from Roth IRAs are received income tax free.
  3. C) Contributions to Roth IRAs are made with after-tax dollars.
  4. D) Traditional IRAs are exempt from the penalty tax on premature distributions.

Answer:  D

Question Status:  Previous Edition

 

29) Which of the following persons can establish a traditional IRA?

  1. Persons whose only income received is from investments.
  2. Employed persons under age 70.5 who are not active participants in an employer-sponsored retirement plan.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  B

Question Status:  Previous Edition

 

30) Donna is single and earns $30,000 annually. She is covered under her employer’s retirement plan. Donna would like to start a traditional IRA and contribute $3,000 this year. Which of the following describes her ability to establish a traditional IRA and the tax treatment of her contribution?

  1. A) Her contribution is fully tax deductible.
  2. B) Her contribution is partially tax deductible.
  3. C) No portion of the contribution is tax deductible.
  4. D) Donna is not eligible to establish a traditional IRA, so no contribution can be made.

Answer:  A

Question Status:  Previous Edition

31) Which of the following statements about the withdrawal of funds from a traditional IRA is true?

  1. A) Withdrawals of deductible contributions between the ages of 59.5 and 65 are subject to a tax penalty unless they are withdrawn because of specified circumstances such as death or long-term disability.
  2. B) Amounts attributable to nondeductible contributions are fully taxable as ordinary income when received.
  3. C) Withdrawals must begin no later than April 1 of the year following the calendar year in which an individual attains age 70.5.
  4. D) Withdrawals must be taken in the form of an annuity.

Answer:  C

Question Status:  Previous Edition

 

32) All of the following are circumstances under which withdrawals from a traditional IRA may be made prior to age 59.5 without incurring a substantial penalty EXCEPT

  1. A) The withdrawal is in substantially equal installments paid over the individual’s life expectancy.
  2. B) The withdrawal is used to pay living expenses after unemployment insurance benefits cease.
  3. C) The withdrawal is used to pay unreimbursed medical expenses that exceed 7.5 percent of adjusted gross income.
  4. D) The withdrawal is because of income needed due to the individual’s disability.

Answer:  B

Question Status:  Previous Edition

 

33) Which of the following statements regarding individual retirement account s (IRAs) is (are) true?

  1. If an individual’s only income during the year is from investments, he or she cannot make an IRA contribution.
  2. The funds in the IRA can be used to purchase life insurance on the owner.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  A

Question Status:  Previous Edition

 

34) Which of the following statements is (are) true with regard to IRAs?

  1. Contribution limits are higher for workers aged 50 and older.
  2. A spouse who does not work outside of the home may make a fully deductible contribution to a traditional IRA even if his or her spouse is covered by a retirement plan at work.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  C

Question Status:  Previous Edition

35) The fundamental purpose of a variable annuity is

  1. A) to provide funding flexibility to the purchaser.
  2. B) to provide a hedge against inflation.
  3. C) to fund the purchase of cash value life insurance.
  4. D) to guarantee a fixed-dollar benefit throughout retirement.

Answer:  B

Question Status:  Previous Edition

 

36) An immediate life annuity offers all of the following benefits EXCEPT

  1. A) Interest income can be earned during the long deferral period until annuity payments begin.
  2. B) Simplicity for the purchaser as he or she does not have to manage investment funds.
  3. C) Security for the purchaser as stable lifetime income that cannot be outlived is provided.
  4. D) The principal is safe as the funds are guaranteed by the assets of the insurer.

Answer:  A

Question Status:  Previous Edition

 

37) Which of the following statements is (are) true with regard to the inflation-indexed annuity option?

  1. The initial monthly payment is lower than the initial payment a fixed annuity would have provided if purchased at the same age.
  2. Periodic payments to the annuitant are adjusted for inflation.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  C

Question Status:  Previous Edition

 

38) Which of the following statements about converting a traditional IRA to a Roth IRA is (are) true?

  1. Such conversions can be done with no income tax consequences.
  2. Qualified distributions from a Roth IRA after a conversion are received tax-free.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  B

Question Status:  Previous Edition

 

39) Which of the following statements is/are true concerning the joint and survivor annuity settlement option?

  1. Under this option, payments begin after the first annuitant dies.
  2. This settlement option is often selected by married couples.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  B

Question Status:  New

40) Which of the following statements is true concerning traditional and Roth IRAs?

  1. A) The investment income portion of Roth IRA distributions must be reported as taxable income.
  2. B) Roth IRA contributions are tax deductible.
  3. C) There are minimum distribution requirements for traditional IRAs.
  4. D) There are no limits on the tax deductibility of traditional IRA contributions once the account owner has reached age 50.

Answer:  C

Question Status:  New

 

41) Which of the following statements is true with regard to the adequacy of IRA funds during retirement?

  1. To assure lifetime income, the IRA funds can be used to purchase a life annuity.
  2. The duration of IRA benefit payments depends on the rate of return earned on the invested assets after retirement and the withdrawal rate.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) Neither I nor II

Answer:  C

Question Status:  New

 

 

Principles of Risk Management and Insurance, 12e (Rejda)

Chapter 26   Commercial Liability Insurance

 

1) The phrase “general liability” is used to refer to the legal liability of a business arising from all of the following EXCEPT

  1. A) employees injured on the job.
  2. B) defective products.
  3. C) liability assumed by contract.
  4. D) completed operations.

Answer:  A

Question Status:  Previous Edition

 

2) Liability arising out of work performed by independent contractors is referred to as

  1. A) contractual liability.
  2. B) contingent liability.
  3. C) care, custody, and control liability.
  4. D) customer’s liability.

Answer:  B

Question Status:  Previous Edition

 

3) A customer was injured when a furnace exploded following its faulty installation by a heating and cooling business. For the heating and cooling business, this is an example of

  1. A) contingent liability.
  2. B) completed operations liability.
  3. C) products liability.
  4. D) contractual liability.

Answer:  B

Question Status:  Previous Edition

 

4) Section I of the Commercial General Liability (CGL) Policy provides coverage for all of the following exposures EXCEPT

  1. A) bodily injury liability.
  2. B) advertising injury liability.
  3. C) medical payments.
  4. D) automobile liability.

Answer:  D

Question Status:  Previous Edition

 

5) Which of the following exposures is covered under a Commercial General Liability Policy with no endorsements?

  1. A) liability arising out of seepage of pollutants
  2. B) employment-related practices liability
  3. C) personal injury liability
  4. D) aircraft liability

Answer:  C

Question Status:  Previous Edition

6) Bay Gallery has a Commercial General Liability Policy with no endorsements. All of the following claims would be covered under the policy EXCEPT

  1. A) An artist sued the gallery for slander after an employee of the gallery said the artist’s work looks like it was painted by an intoxicated monkey.
  2. B) A customer is injured when a painting falls from the wall and strikes the customer.
  3. C) A customer is injured after falling on a slippery floor at the gallery.
  4. D) A painting owned by a private collector on loan to the gallery was damaged by a gallery employee.

Answer:  D

Question Status:  Previous Edition

 

7) Which of the following losses would be covered under a Commercial General Liability Policy that has no endorsements?

  1. The named insured rented a building and an employee of the named insured negligently started a fire at the rented building.
  2. The cost to recall defective products
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  A

Question Status:  Revised

 

8) Which of the following is covered under an unendorsed Commercial General Liability Policy?

  1. False arrest of a customer wrongly accused of shoplifting.
  2. Publication of material which violates an individual’s right to privacy.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  C

Question Status:  Previous Edition

 

9) In addition to the named insured, all of the following are insureds under the Commercial General Liability Policy EXCEPT

  1. A) suppliers of products to the named insured’s business.
  2. B) the insured’s employees while acting within the scope of their employment.
  3. C) the manager of the insured’s real estate.
  4. D) partners of the named insured.

Answer:  A

Question Status:  Previous Edition

10) Which of the following is (are) covered under a claims-made policy?

  1. Claims arising out of occurrences which take place during the policy period, regardless of when the claim is made
  2. Claims first reported during the policy period, provided the event occurred after any retroactive date stated in the policy
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  B

Question Status:  Previous Edition

 

11) A provision included in a claims-made commercial general liability policy provides coverage for claims filed after the policy has expired. This provision is called a(n)

  1. A) extended reporting period provision.
  2. B) agreed amount endorsement.
  3. C) retroactive date provision.
  4. D) per-occurrence limit clause.

Answer:  A

Question Status:  Previous Edition

 

12) Which of the following statements about workers compensation insurance is (are) true?

  1. Under the workers compensation part of the policy, the insurer agrees to pay the benefits required by the workers compensation law of any state listed in the policy declarations.
  2. The employers liability part of the policy provides workers compensation benefits when employees are working in states other than those listed in the policy declarations.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  A

Question Status:  Previous Edition

 

13) All of the following are reasons for an employer to purchase employers liability insurance EXCEPT

  1. A) to cover the suits of injured employees of small employers in states where workers compensation is not mandatory for small employers.
  2. B) to cover suits arising from injuries or diseases which are not covered under workers compensation laws.
  3. C) to cover third-party over cases that arise from injuries to an employee.
  4. D) to cover suits by employees who seek damages for discriminatory labor practices.

Answer:  D

Question Status:  Previous Edition

14) An employee of Nelson Manufacturing was injured by a defective machine Nelson purchased from Clark Corporation. The employee’s tort action against Clark was successful.  Clark, in turn, sued Nelson, alleging that Nelson failed to provide proper operating instructions to the employee. This claim (Clark vs. Nelson) is covered under Part Two of Nelson’s worker compensation and employer liability policy. Such claims are called

  1. A) third-party over cases.
  2. B) absolute liability cases.
  3. C) joint and several liability cases.
  4. D) mass tort cases.

Answer:  A

Question Status:  Previous Edition

 

15) All of the following are coverage options under the physical damage coverage in the Business Auto Coverage Form EXCEPT

  1. A) comprehensive coverage.
  2. B) specified causes-of-loss coverage.
  3. C) collision coverage.
  4. D) property damage liability coverage.

Answer:  D

Question Status:  Previous Edition

 

16) Which of the following statements about the liability coverage of the Business Auto Coverage Form is (are) true?

  1. The insurer agrees to defend the insured and pay all legal defense costs arising out of an accident involving a covered auto.
  2. The insured is covered for property damage and bodily injury arising out of the use of a covered auto.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  C

Question Status:  Previous Edition

 

17) The purpose of adding garagekeepers legal liability coverage to the Garage Coverage Form is to

  1. A) eliminate the care, custody, and control exclusion under the policy.
  2. B) eliminate the contractual liability exclusion under the policy.
  3. C) add workers compensation coverage for persons working in the garage business.
  4. D) add comprehensive and collision coverage for vehicles held for sale.

Answer:  A

Question Status:  Previous Edition

 

18) All of the following statements about aviation insurance are true EXCEPT

  1. A) Physical damage coverage can be written on an “all-risks” basis.
  2. B) Liability coverage also applies to bodily injury arising out of the premises where the aircraft is stored.
  3. C) Liability coverage applies to liability assumed by contract.
  4. D) Aviation insurance is a highly-specialized market with relatively few insurers.

Answer:  C

Question Status:  Previous Edition

19) Which of the following statements is (are) true concerning the self-insured retention (SIR) under a commercial umbrella liability policy?

  1. The SIR applies to claims covered by the umbrella policy but not by any underlying insurance.
  2. The SIR only applies to those claims for which the underlying policy has paid first, and the umbrella policy is paying on an excess basis.
  3. A) I only
  4. B) II only
  5. C) Both I and II
  6. D) Neither I nor II

Answer:  A

Question Status:  Previous Edition

 

20) Which of the following statements about the typical commercial umbrella policy is (are) true?

  1. The policy is designed to cover only those loss exposures specifically excluded by the underlying insurance contracts.
  2. The policy is excess over the required underlying coverages.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  B

Question Status:  Previous Edition

 

21) Which of the following losses is generally covered under a commercial umbrella policy?

  1. A) liability arising out of workers compensation laws
  2. B) liability arising out of pollution
  3. C) liability arising out of use of a business auto.
  4. D) the cost of recalling defective products

Answer:  C

Question Status:  Previous Edition

 

22) All of the following statements about liability coverage under the Businessowners Policy are true EXCEPT

  1. A) Liability arising out of personal injury is covered as part of the insuring agreement.
  2. B) Medical payments coverage is provided.
  3. C) Employees acting within the scope of their employment are excluded from coverage.
  4. D) Coverage is included for the legal costs of defending the insured.

Answer:  C

Question Status:  Previous Edition

 

23) All of the following are covered under the liability coverage of a businessowners policy EXCEPT

  1. A) personal injury liability
  2. B) bodily injury liability
  3. C) advertising liability
  4. D) professional liability

Answer:  D

Question Status:  Previous Edition

24) Which of the following statements about physicians, surgeons, and dentists liability insurance is true?

  1. A) Liability coverage is restricted to accidental acts.
  2. B) The policy eliminates the need for medical practitioners to purchase general liability insurance.
  3. C) The insurer must obtain the consent of medical practitioners before the insurer can settle claims.
  4. D) The policy covers the physician for the negligent acts of an employee.

Answer:  D

Question Status:  Previous Edition

 

25) Which of the following statements about errors and omissions insurance is (are) true?

  1. It is purchased by professionals to protect against claims arising for negligent acts, errors, and omissions.
  2. It is designed to meet the needs of stock brokers, attorneys, engineers, architects and other professionals who give advice to clients.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  C

Question Status:  Previous Edition

 

26) A-1 Electrical Service is an electrical contractor that employs 14 electricians. A-1 faces many loss exposures. One general liability exposure arises out of faulty work that A-1 electricians may perform for customers at their homes or businesses. This liability exposure is known as

  1. A) premises and operations liability.
  2. B) products liability.
  3. C) completed operations liability.
  4. D) contingent liability.

Answer:  C

Question Status:  Previous Edition

 

27) Executives of a Fortune 500 firm blocked an acquisition attempt by a larger company. When the stockholders learned they could have made large profits had the acquisition not been blocked, they filed a lawsuit against the executives of the firm. What type of liability insurance protects the executives of the organization against such suits?

  1. A) dram shop liability insurance
  2. B) directors and officers liability insurance
  3. C) employers liability insurance
  4. D) employment related practices liability insurance

Answer:  B

Question Status:  Previous Edition

28) ABC Company purchased an ISO Commercial General Liability Policy. The agent who sold ABC the coverage noted that the coverage trigger in this policy was different from the trigger in the previous policy. The new policy covers only those claims which are first reported during the policy period, provided the event occurred after a retroactive date. This type of policy is known as

  1. A) extended reporting coverage.
  2. B) claims-made coverage.
  3. C) accident only coverage.
  4. D) occurrence coverage.

Answer:  B

Question Status:  Previous Edition

 

29) HRC Company purchased an unendorsed ISO Commercial General Liability (CGL) policy. All of the following claims would be covered under the CGL policy EXCEPT

  1. A) workers compensation liability.
  2. B) property damage liability.
  3. C) personal and advertising injury liability.
  4. D) bodily injury liability.

Answer:  A

Question Status:  Previous Edition

 

30) Ted Thomas is risk manager of XYZ Company. He is concerned his company might be sued by current or former employees alleging wrongful termination, failure to promote, racial or gender discrimination, or sexual harassment. What type of liability insurance can Ted purchase to cover these types of claims?

  1. A) workers compensation insurance
  2. B) employer liability insurance
  3. C) employment-related practices liability insurance
  4. D) directors and officers liability insurance

Answer:  C

Question Status:  Previous Edition

 

31) Medical malpractice insurance written on a claims-made basis can leave a surgeon vulnerable to malpractice claims if the surgeon retires, changes insurers, or drops coverage. A provision can be added to the claims-made form that protects the surgeon for future claims arising from incidents that occurred while the claims-made policy was in force. This provision is called a(n)

  1. A) cut-through endorsement.
  2. B) drop-down endorsement.
  3. C) agreed amount endorsement.
  4. D) extended reporting period endorsement.

Answer:  D

Question Status:  Previous Edition

 

32) Which of the following statements is true concerning the ISO employment-related practices liability form?

  1. A) coverage is provided without a co-payment provision
  2. B) legal defense costs are included as part of the policy limit
  3. C) wrongful termination is excluded from coverage
  4. D) liability to employees is excluded from coverage

Answer:  B

Question Status:  Previous Edition

33) Jenkins Company purchased a commercial umbrella policy with a $10 million limit and a $100,000 self-insured retention. The insurer required Jenkins Company to carry a $1 million per-occurrence limit on its general liability policy and a $1 million per-occurrence limit on its business auto policy. Jenkins purchased these required limits. A Jenkins driver was negligent while operating a company vehicle and killed another motorist. The court ruled that Jenkins must pay $5 million. How much of this amount will be paid by the umbrella policy?

  1. A) $1.0 million
  2. B) $3.9 million
  3. C) $4.0 million
  4. D) $5.0 million

Answer:  C

Question Status:  Previous Edition

 

34) David Florrell started a public accounting firm. David is concerned that accountants on his staff may give incorrect accounting advice, and the accounting firm may be sued. What type of liability insurance should David purchase to protect against such claims?

  1. A) errors and omissions insurance
  2. B) directors and officers liability insurance
  3. C) general liability insurance
  4. D) employers liability insurance

Answer:  A

Question Status:  Previous Edition

 

35) Holiday DeCor Company is insured by a commercial general liability policy (CGL). Holiday DeCor rented a storage facility for one month to store some excess inventory. While visiting the storage facility, a Holiday DeCor employee discarded a cigarette. The resulting fire severely damaged the storage facility. Which statement is true regarding coverage of this damage under the CGL?

  1. A) There is no coverage as the damage occurred at a rented premises.
  2. B) There is no coverage because property damage liability is excluded.
  3. C) The damage is covered under the fire legal liability coverage.
  4. D) There is no coverage because an employee of Holiday DeCor caused the loss.

Answer:  C

Question Status:  Previous Edition

 

36) Which of the following statements is (are) true with respect to the treatment of legal defense costs under the ISO Commercial General Liability policy?

  1. Legal defense costs usually are counted against the policy limit.
  2. Once the insurer has paid out the applicable limit of liability, the insurer’s duty to defend ends.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  B

Question Status:  Previous Edition

37) Which of the following statements concerning directors and officers liability insurance (D&O) is true?

  1. D&O policies usually cover the personal liability of directors and officers.
  2. D&O policies exclude coverage for claims brought by employees and by stockholders.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer:  A

Question Status:  Previous Edition

 

38) Jennifer was just asked to serve on the Board of an insurance company. Jennifer is concerned that if the company is mismanaged, the policyowners, stockholders, and employees might sue the management team. What type of liability insurance will protect Jennifer from such claims if she accepts a position on the insurance company’s Board?

  1. A) commercial general liability insurance
  2. B) employment-related practices liability insurance
  3. C) workers compensation and employer liability insurance
  4. D) directors and officers liability insurance

Answer:  D

Question Status:  Previous Edition

 

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