Chapter 5 Types of Insurers and Marketing Systems 6) Which of the following statements about a reciprocal

exchange is (are) true?

1) Which of the following statements about stock I. It usually specializes in health insurance.
insurers is true? II. It is an unincorporated mutual insurance company.
A) They issue assessable policies.
A) I only
B) They are not permitted to write property and liability B) II only
insurance. C) both I and II
C) Stockholders bear any losses and share in any
D) neither I nor II
profits.
D) They are owned by their policyholders. 7) Which of the following statements about Lloyd's of
London is true?
2) Which of the following statements about mutual A) Coverage is actually written by syndicates who
insurers is true? belong to Lloyd's of London.
A) They are legally organized as partnerships. B) New individual members or Names who belong to
B) They have a board of directors which is selected by the various syndicates have unlimited legal liability.
state insurance departments. C) It operates as an admitted insurer throughout the
C) They are owned by their stockholders. United States.
D) They may pay dividends to their policyholders. D) It allows underwriters to write coverage without
3) Why are some mutual insurers referred to as meeting stringent financial requirements.
"assessment mutuals"? 8) Temporary evidence of insurance until a policy is
A) They charge low premiums because the loss actually issued is provided by a(n)
exposures of their insureds are thoroughly assessed A) Binder.
before a policy is written. B) Brokerage agreement.
B) They are noted for being very thorough in their C) Pre-approval form.
assessment of investment opportunities. D) Endorsement.
C) They are assessed for state premium taxes only if
they make a profit. 9) Which of the following statements about brokers is
D) They can assess policyholders if premiums are (are) true?
insufficient to pay losses and expenses. I. They legally represent the insured rather than the
insurance company.
4) The corporate structure of mutual insurers is II. They are prohibited from being licensed as agents.
changing rapidly. All of the following are current trends A) I only
EXCEPT B) II only
A) Demutualization of some insurers. C) both I and II
B) Sharp increase in the number of mutual insurance
D) neither I nor II
companies.
C) Increase in company mergers. 10) Neil needs insurance that is unavailable in the state
D) Formation of mutual holding companies. where he lives. To obtain insurance from a non-
admitted insurer, Neil should contact a
5) Which of the following statements is true about A) Surplus lines broker.
fraternal insurers? B) Non-admitted agent.
A) They are a form of stock insurer. C) General agency broker.
B) They specialize in writing life and health insurance. D) Direct writer.
C) They are taxed more heavily than other types of
insurers because of discriminatory marketing practices.
D) They account for the majority of life insurance in
force in the United States.
11) Which of the following statements about life
insurance marketing systems is true?
A) Insurance brokers are not permitted to sell live
insurance.
B) Some exclusive agents who market property and
liability insurance also sell life insurance.
C) Independent insurance agents are not permitted to
market life insurance.
D) Financial institutions such as banks are not permitted
to market life insurance.
12) Which of the following statements about personal
producing general agents is (are) true?
I. They often have the option of recruiting and training
sub-agents.
II. They are independent agents who produce
substantial amounts of life insurance with one insurer.
A) I only
B) II only
C) both I and II
D) neither I nor II
13) Advantages of the direct response system for
marketing life insurance include which of the following?
I. Advertising can be specifically directed to selected
markets.
II. Complex products can be easily sold.
A) I only
B) II only
C) both I and II
D) neither I nor II
14) Which of the following statements about the
exclusive agency system for marketing property and
liability insurance is true?
A) Exclusive agents typically have complete ownership
of policy expirations.
B) A higher commission rate is usually paid on exclusive
agents' renewal business than on new business.
C) Exclusive agents represent several different
insurance companies.
D) New exclusive agents may start as employees and
after a training period become independent
contractors.
15) All of the following statements about the
independent agency system are true EXCEPT
A) Agents are often authorized to adjust small claims.
B) Agents are compensated on the basis of
commissions.
C) The insurer rather than the agent owns the renewal
rights to the business.
D) The agent is an independent business person who
represents several insurers.
16) A property and casualty insurer in which the
salesperson is an employee of the insurer, not an
independent contractor, is called a
A) Fraternal insurance company.
B) Risk retention group.
C) Direct writer.
D) Captive insurance company.
17) Which of the following statements about the sale of
property and liability insurance through the direct
response system is (are) true?
I. Selling expenses are higher because market
segmentation tends to be less precise than with other
marketing methods.
II. It is the most appropriate system for selling complex
products.
A) I only
B) II only
C) both I and II
D) neither I nor II
18) Under one life insurance marketing system,
individual producers conduct sales interviews at the
workplace with the approval of the management of the
business. There are few direct costs to the employer,
and this marketing system is especially appropriate for
the low-income and middle-income workers. This life
insurance marketing system is called the
A) Direct response system.
B) Worksite marketing.
C) Independent agency system.
D) Personal producing general agency system.
19) Which of the following is characteristic of a typical
mass merchandising plan?
A) Higher commission scales for agents and higher
administrative expenses
B) Payment of premiums through payroll deduction
C) Group rather than individual underwriting
D) Contributions by the employer to the cost of
coverage
20) David is a successful independent insurance agent.
Recently, one of the life insurance companies with
whom he places business offered him a special financial
arrangement. If David meets sales targets, he will
receive large bonuses. He will also be able to recruit and
train sub-agents and receive an over-riding commission
based on the amount of life insurance the sub-agents
sell. Based on this description, David is a(n)
A) Insurance broker.
B) Personal-producing general agent.
C) Direct writer.
D) Multiple life exclusive agent.
21) Sarah owns a property and liability insurance
agency. She is authorized to represent several insurance
companies and she is compensated by commissions.
Sarah's agency owns the expiration rights to the
business she sells. Sarah is a(n)
A) Independent agent.
B) Exclusive agent.
C) Direct writer.
D) Insurance broker.
22) The leaders of a religious group decided to start a
life insurance organization to insure members of the
religious group. The insurer will operate as a nonprofit
organization, thus receiving favorable tax treatment.
The insurer formed will be a
A) Health maintenance organization.
B) Stock insurer.
C) Fraternal insurer.
D) Reciprocal exchange.
23) Scott works in property and liability insurance
marketing. He legally represents insurance purchasers,
rather than insurance companies. Scott is paid a
commission on the insurance placed with insurers. Scott
is a(n)
A) Exclusive agent.
B) Direct writer.
C) Branch manager.
D) Insurance broker.
24) ABC Insurance has always used the exclusive agency
system to market coverages. ABC, however, cannot
afford full-time agents in sparsely-populated areas. To
reach customers in these areas, ABC enters into
agreements with local independent agents. Using more
than one marketing system is called employing a
A) Direct response system.
B) General agency system.
C) Multiple distribution system.
D) Branch office system.
25) Cathy just started a job with XYZ Manufacturing
Company. She attended an orientation and was given a
packet providing information about the various
employee benefits XYZ offers. One item in the packet
was a booklet and application form from an auto
insurer. The insurer offers lower premiums to XYZ
employees. The insurer's plan for selling individually-
underwritten auto insurance to employees of XYZ
Manufacturing Company is called
A) Direct response.
B) Mass merchandising.
C) Personal selling.
D) Multiple marketing.
26) Brian buys and sells investment securities for his
clients. Brian also decided to become a licensed life
insurance agent to better serve his customers. While
Brian's primary focus is buying and selling financial
securities for his clients in exchange for commissions, he
also earns commissions on his life insurance sales. Brian
is a(n)
A) Financial planner.
B) Stock broker.
C) Insurance broker.
D) Personal-producing general agent.
27) ABC Term Life Insurance Company uses an
interesting marketing system—it has no agents. Instead,
the company markets its coverages through television
and radio ads, newspaper inserts, and the Internet. The
type of marketing system that ABC Term Life Insurance
Company uses is called the
A) Mass merchandising system.
B) Mixed marketing system.
C) Direct response system.
D) Worksite marketing system.
28) Big Mutual Insurance Company would like to take
advantage of financial services deregulation by
acquiring a bank and a stock brokerage firm. Big Mutual,
however, would have trouble raising the funds needed
to make these acquisitions under the mutual form of
organization. Big Mutual is planning to switch from the
mutual form of organization to the stock form, and to
issue shares of common stock to raise capital. This
change in organizational structure is called
A) Mutualization.
B) Retrocession.
C) Reinsurance.
D) Demutualization.
29) Jim would like to start a business raising
thoroughbred racehorses. The business would be the
first of its kind in the state where he lives. Obtaining
insurance on the horses is a key concern, and he was
dismayed to learn that none of the insurers authorized
to operate in his state offer this specialty insurance.
What is the name of the intermediary which Jim can use
to place this coverage with an insurer not admitted to
his state?
A) Alien insurer
B) General agent
C) Surplus lines broker
D) Direct writer
30) Some investors decided to start an insurance
company. Each investor contributed $50,000 to raise
the capital required to charter a new company. Each
investor received an ownership interest in the company.
The company will raise additional capital by selling
ownership rights to other investors. Under this type of
organization, the customer and owner functions are
separate. This type of insurer is called a
A) Stock company.
B) Reciprocal exchange.
C) Fraternal company.
D) Mutual company.
31) RST Insurance is an interesting company. It doesn't
have any agents. Instead, the company sells insurance
through radio ads, telemarketers, and newspaper and
magazine inserts. This distribution method is called
A) Reciprocal exchange.
B) Direct response system.
C) Mass merchandising.
D) Multiple distribution system.
32) Which of the following statements about Blue Cross
and Blue Shield plans is (are) true?
I. Blue Cross and Blue Shield plans can be organized on a
nonprofit basis or on a for-profit basis.
II. Blue Cross provides coverage for hospital services;
Blue Shield provides coverage for physicians' and
surgeons' fees.
A) I only
B) II only
C) both I and II
D) neither I nor II
33) Which of the following statements is (are) true with
respect to the financial services industry?
I. The number of life insurers operating in the industry
continues to increase at a rapid rate.
II. The Financial Modernization Act of 1999 permits
financial institutions to compete in other financial
markets outside their core business area.
A) I only
B) II only
C) both I and II
D) neither I nor II
34) The financial services field is currently experiencing 38) A personal lines insurance company initiating
consolidation and convergence. If both of these trends banking and investment services for its policy owners
continue, in the future we should observe demonstrates which financial services industry trend?
A) Fewer financial institutions offering a narrower range A) Convergence
of financial services products. B) Demutualization
B) Fewer financial institutions offering a wider range of C) Mass merchandising
financial services products. D) Consolidation
C) More financial institutions offering a narrower range
of financial services products. 39) In 2008, Liberty Mutual Insurance Company
D) More financial institutions offering a wider range of acquired Safeco Insurance Company. This acquisition
demonstrates which financial services industry trend?
financial services products.
A) Convergence
35) All of the following are reasons why mutual B) Demutualization
insurance companies convert to stock insurance C) Mass merchandising
companies EXCEPT D) Consolidation
A) Stock companies can offer stock options to attract
and retain key personnel. 40) Marcy advises her clients on investments, taxes,
B) Stock companies can raise new capital more easily. wealth management, estate issues, budgeting, and
C) Stock companies are exempt from state insurance insurance. Marcy is also a licensed life insurance agent.
When Marcy sells life insurance to a client, the
regulation.
D) Stock companies offer greater flexibility to expand distribution channel used is a(n)
through acquisitions. A) Stock broker.
B) Financial planner.
36) R.I.P. Company manufactures herbicide and C) Financial institution.
pesticide. The company had difficulty finding affordable D) Independent agent.
liability insurance. R.I.P. established its own insurance
company based in Bermuda for the purpose of insuring 41) Which of the following statements is (are) true
regarding insurance agents and insurance brokers?
R.I.P.'s loss exposures. The company that R.I.P. formed
is called a I. A property and liability insurance agent has the
A) Captive insurer. authority to bind the insurer for certain types of
B) Reciprocal insurer. coverage.
C) Fraternal insurer. II. A licensed broker who is not a licensed agent has the
D) Holding company. legal authority to bind an insurer.
A) I only
37) Which of the following statements is (are) true B) II only
about savings bank life insurance (SBLI)? C) both I and II
I. Each depositor at the savings bank receives life D) neither I nor II
insurance equal to his or her savings account balance.
II. The goal of SBLI is to provide low-cost life insurance
to consumers.
A) I only
B) II only
C) both I and II
D) neither I nor II
42) Big Life Insurance Company purchased Regional
Bank. Regional Bank has 27 branches in four states. Big
Life Insurance Company required one employee at each
bank branch to become a licensed life insurance agent
and to sell Big Life Insurance Company annuities and life
insurance products. This distribution channel is an
example of the
A) Career agent distribution system.
B) Direct response distribution system.
C) Financial institution distribution system.
D) Worksite marketing distribution system.

43) The bar at the local franchise of a national chain

continued to serve a drunk customer. The customer left
the bar and tried to drive home. The drunk driver hit
and killed three people who were riding bicycles. The
legal representatives of those who were killed filed a
multi-million dollar lawsuit against the national chain.
As jury awards in the city where the incident occurred
tend to be high, insurers marketing liquor liability
insurance refused to issue new coverage until the case
was resolved. Because no admitted insurers were
willing to offer the coverage, liquor liability in this case
is considered a(n)
A) residual line.
B) Mandatory coverage.
C) Orphan policy.
D) Surplus line.

44) Peggy is an independent insurance agent who places

substantial amounts of business with XYZ Insurance
Company. XYZ pays Peggy a bonus when she meets a
sales goal. XYZ also allows Peggy to recruit and train
sub-agents. She receives additional commissions based
on the sales generated by the sub-agents. Based on this
description, we can conclude that Peggy is a
A) Direct writer.
B) Personal producing general agent.
C) Multiple line exclusive agent.
D) Broker.