Principles of Risk Management and Insurance, 11e (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
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2) The right of the states to regulate the business of insurance was first established by A) the South-Eastern Underwriters Association case. B) Paul v. Virginia.
C) the Financial Modernization Act. D) the Sherman Act. Answer: B
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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
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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
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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
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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
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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
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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
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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
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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
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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 can invest an unlimited amount of their assets in common stocks. A) I only B) II only
C) both I and II D) neither I nor II Answer: A
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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
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13) Which of the following statements about state insurance guaranty funds is (are) true? I. They limit the amount that policyowners 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
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14) Under one type of rate regulation, insurers are not required to file their rates with the state insurance department. 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
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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
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16) By misrepresenting the true facts, Gretchen was able to convince a client to drop a life
insurance policy with another company and to purchase a 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
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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
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18) Advantages cited by proponents of federal regulation of insurance include all of the following EXCEPT A) greater efficiency.
B) greater opportunity for innovation. C) uniformity of laws.
D) more competent regulators. Answer: B
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19) Advantages cited by proponents of state regulation of insurance include all of the following EXCEPT
A) uniformity of laws by the NAIC. B) greater opportunity for innovation. C) greater responsiveness to local needs. D) centralization of political power. Answer: D
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20) Shortcomings of state regulation of insurance found by Congressional committees and the General Accounting Office include all of the following EXCEPT A) inadequate protection of consumers.
B) inadequate market conduct examinations. C) inability to respond to unique local needs.
D) regulator's over-responsiveness to the insurance industry. Answer: C
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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
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22) The principal methods of ensuring insurer solvency include all of the following EXCEPT A) Security and Exchange Commission oversight of investments. B) risk-based capital standards. C) field examinations.
D) review of required annual financial statements. Answer: A
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