CPCU 520 / 2016/ second half midterm

1. The strategic management process involves three interdependent stages. Which of the
following is NOT one of these stages? 10.3
a. Formulation
b. Implementation
c. Evaluation
d. Data gathering

2. The process insures use to calculate insurance rates, which are a premium component is: 7.5
a. General damages
b. Rate making
c. Trending
d. Rate Components

3. Which of the following is NOT a function of the reinsurance process? 8.4

a. Increase large line capacity
b. Provide catastrophe protection
c. Stabilize loss experience
d. Improve ability to develop rates

4. The activities that provide the framework for handing all types of claims is as follows: 6.22
a. Acknowledging claims, setting reserves, contacting insureds, investigating claims,
determine cause of loss, liability and loss payment
b. Claims reporting, setting reserves, contacting insureds, investigating claims,
determine cause of loss, liability and loss payment
c. Claims reporting, contacting insureds, setting reserves, determine cause of loss,
investigating claims liability and loss payment
d. Acknowledging claims, contacting insureds, investigating claims, setting reserves,
determining cause of loss, liability and loss payment

5. Which of the following is NOT a goal of information technology: 9.3

a. Gaining competitive advantage
b. Optimizing insured’s operations and resources
c. Providing information to support strategy and decision making
d. Facilitating governance, risk, and compliance initiatives

6. Reinsurance can be purchased from three sources. Which of the following is not a valid
source of reinsurance? 8.10
a. Professional reinsurer
b. Excess of loss reinsurer
c. Direct writing reinsurer
d. Reinsurance intermediary

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7. Which of the following is not a characteristic of ideal rates? 7.5
a. Stable
b. Responsive
c. Promote risk control
d. Promote appropriate UW strategies

8. Which is NOT true concerning the primary function of the claim function? 6.3
a. Complying with the contractual promise
b. Supporting the insurer’s financial goals
c. Responding to first party and third party claimants
d. Supporting the underwriting decisions on new risk submissions

9. The skills, technologies, applications, and practices used to improve decision making insights
and reinforce information integrity are called? 9.4
a. Business intelligence
b. Niche market
c. Insurance services
d. Actuarial data mining

10. Which of the following is NOT a goal of an insurance company’s risk control process? 5.3
a. Earning a profit
b. Meeting customer needs
c. Fulfilling duty to society
d. Complying with federal requirements Legal
Requirements not federal)

11. Agreement in advance to cede to reinsurance is called? 8.14

a. Treaty reinsurance
b. Facultative reinsurance
c. Pool reinsurance
d. Quota share reinsurance

12. Customer, underwriting, and claims information are examples of what level of information
needs? 9 .13.
a. Operational
b. Managerial-
c. Strategic
d. ERM
13. The organizational area that uses claims incurred loss data to develop loss development
leading to rating is: 6.6
a. Actuarial
b. Statistical Accounting
c. Accounts receivable
d. Premium Accounting

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14. A type of pro rata reinsurance in which the primary insurer and the reinsurer share the
amounts of insurance, policy premiums, and losses using a fixed percentage is called? 8.18
a. Variable scale reinsurance
b. Sliding scale reinsurance
c. Profit sharing reinsurance
d. Quota share reinsurance

15. Which of the following is NOT a component of insurance rates? 7.7

a. Amount needed to pay future claims and loss adjustment expenses
b. Amount needed to ensure an underwriting profit
c. Amount needed to pay future expenses
d. Amount for profit and contingencies

16. Which of the following is NOT a factor that should be considered in the design of a
reinsurance program? 8.3
a. Provide cat protection
b. Stabilizes loss experience
c. Improves capacity
d. Impacts claims response to loss

17. Which of the following are examples of risk control services provided by insurers? 5.5
a. Conducing physical surveys, providing training, developing safety management
programs
b. Conducing telephonic surveys, providing machine guides, developing safety
management programs
c. Conducing audits, providing customer training, developing business continuity
training
d. Conducting audits, providing posting notices, conducing surprise audits

18. The amount that is included in an insurance rate to cover the insurer’s expense and that
might include loss adjustment expenses is called? 7.8
a. Underwriting expense
b. Loss adjustment expense
c. Expense provision
d. Pure premium

19. Accurate data is important for financial reporting as it provides investors, members or other
stakeholders with financial information in a uniform manor. The accounting principles for
insurance company reporting is: 9.10
a. Generally accepted accounting principles
b. Uniform statistical coding
c. General accounting & auditing process
d. Standard acceptable accounting principles

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20. The use of securities or financial instruments, such as stocks, bonds and commodities, to
finance an insurer’s exposure to catastrophic loss is called? 8.25
a. Catastrophic stop loss
b. Pool
c. Syndicate
d. Securitization of risk

21. The claim department must interact effectively with outside contacts. Which of the
following is NOT a common contact for claims representatives? 6.6
a. Claimants
b. Consumer advocates
c. Lawyers
d. Insureds

22. Which of the following is NOT a source of reinsurance? 8.11-.12

a. Pools
b. Treaty reinsurance
c. Professional and trade associations
d. Professional reinsurers

23. Risk control activities provide support to other insurer functions. Which of the following is
NOT an area where cooperation between risk control and the other function? 5.16
a. Technical support for underwriting
b. Reducing claim payments
c. Marketing support as risk is more likely retained
d. Statistics for actuarial and reporting

24. Estimation of losses, delays in data collection and use, changes in the cost of claims and
insurer’s projected expenses are factors that affect? 7.9
a. Investment income
b. Underwriting profit
c. Rate making
d. Claims processing

25. Which of the following is NOT a common type of business information systems employed by
most insurance companies? 8.17
a. Electronic filing system
b. Transaction processing systems
c. Database management systems
d. Document management systems
26. Reinsurance obtained based on specific policy characteristics and exposures is called which
one of the following? 8.17
a. Pro rata insurance
b. Quota share
c. Treaty
d. Facultative
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27. Common roles associated with the claims process include all but which of the following? 6.11
a. Actuaries
b. Independent adjusters
c. Staff claims representatives
d. Third party administrators

28. Which of the following is NOT a method for development of rates? 7.14
a. Pure premium method
b. Loss ratio method
c. Judgment method
d. Average value method

29. Determining correct premium, acquiring rate making data, and meeting regulatory
requirements are reasons why insurance companies conduct: 5.20
a. Claims reviews
b. Loss control surveys
c. Premium Auditing
d. Market conduct exams

30. Growth plans, insurer size, geographic spread and management’s tolerance to risk are
examples of : 8.27
a. Factors affect reinsurance needs
b. Factors affecting growth initiatives
c. Factors impacting marketing plans
d. Factors impacting adverse selection of risks

31. This method of ratemaking uses the comparison of two loss ratios to indicate if the rate
needs to be adjusted upward or downward. Which of the following is the correct formula
for the Loss Ratio Ratemaking Method? 7.17
a. Actual Loss Ratio- Expected loss ratio
Actual loss ratio
b. Expected loss ratio- actual loss ratio
Expected loss ratio
c. Actual Loss Ratio- Expected loss ratio
Expected loss ratio
d. Expected loss ratio- actual loss ratio
Actual loss ratio

32. Security risks are an important aspect of an insurance company’s information systems.
Which of the following is NOT an example of a security risk and appropriate responses to
the risk? 9.29
a. Accessing personal information- passwords
b. Viruses from internet anti-scan programs
c. Employee sabotage- requiring revised passwords every 90 days
d. Disgruntled ex- employee- revoking access
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33. A factor that provides for differences in expected loss, individual company expense,
underwriting profit and contingencies, is called? 7.18
a. Expense provision
b. Loss cost multiplier
c. Territory factor
d. Operating expense

34. Growth plans, types of insurance sold, insurer size, structure, and financial strength, are
examples of factors impacting : 8.27
a. Reinsurance needs
b. Ratemaking
c. ERM structure
d. Risk control

35. Which of the following is NOT part of the premium auditing process? 5.24
a. Reviewing the books and records of the insured
b. Determining correct class codes and payroll
c. Providing documentation to the insured and company
d. Determining morale and moral hazards

36. Common reporting used for the claims process includes all but which of the following? 6.18
a. Reserves above a threshold
b. Claims in litigation
c. Claims closed without payout
d. All reserve changes

37. Which of the following represents the steps of the ratemaking process? 7.37
a. Collect data, adjust data, calculate indicated rate changes, prepare rate filings
b. Adjust data, calculate indicated rate changes, prepare rate filings
c. Collect data, adjust data, prepare filings, develop individual territory factors,
d. Analysis of claims, collect data, adjust data, calculate indicated rate changes

38. Factors affecting reinsurance limit selection include all but which of the following? 8.33
a. Maximum policy limit
b. Loss adjustment expenses
c. Clash cover
d. Claims ratio

39. Which of the following is NOT how insurers use the technology systems to optimize decision
making, customer service, and daily transactions: 9.17
a. Transaction processing systems
b. Innovative marketing support
c. Customer-focused collection and safety systems
d. Electronic and mobile commerce

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40. Premium audits must be accurate. Why is audit accuracy important for the insured? 5.31
a. Impacts experience mods
b. Improves cash flow
c. Requirement for claims process
d. Meets insurers legal requirements

41. Ratemaking can vary widely by type of insurance. Which of the following are the major
factors associated with the various lines of insurance that impact rate making? 7.24
a. Credibility, loss costs, expense constants
b. Experience period, trending, large loss limitations
c. Trending, credibility, and decreased limit factors
d. Experience rating, policy term, credibility

42. Property reserving, accurate evaluation of insured’s liability, proper releases taken, and
good negotiation skills are examples of: 6.14
a. Actuarial rate making
b. Underwriting
c. Claims handling
d. Auditing

43. A method of setting reserves based on the claims circumstances and the claim
representative’s experience in handling similar claims is the: 6.24
a. Roundtable method
b. Expert system method
c. Formula method
d. Individual case method

44. The primary purpose of loss reserves includes all but which of the following? 7.28
a. Meet statutory requirements
b. Provide a complete picture of financial status
c. Set aside premium for future losses
d. Develop UW profit figures

45. Common types of investigations used by claims professionals includes all but which of the
following? 6.26
a. Medical investigations
b. Insured management assessment
c. Prior claim investigation
d. Claimant investigations

46. The process by which an insurer, can, after it has paid a loss, recover the amount paid from
another party is called: 6.27
a. Reservation of rights
b. Subrogation
c. Coinsurance
d. Mediation

47. Which of the following is NOT a function of the actuarial department? 7.3-.4
a. Book reinsurance
b. Develop factors applied to loss costs
c. Estimation of unpaid liabilities
d. Data mining
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 48. Factor applied in ratemaking to adjust for the predictive value of loss data and used to
minimize the variations in the rates that result from purely change variations in losses is
called? 7.26
a. Catastrophe model
b. Credibility factor
c. Risk Charge
d. On- level factor

49. The insurer that assumes some or all of the potential costs of insured loss exposures of the
primary insurer, is a: 8.3
a. Reinsurer
b. Contractor
c. Treaty
d. Large line capacity policy

50. A type of unsecured debt instrument, issued only by insurers, that has characteristics of
both conventional equity and debt securities and is classified as policy holders’ surplus
rather than a liability on the insurer’s statutory balance sheet is called? 8.26
a. Strike price
b. Surplus note
c. Per loss occurrence
d. Finite risk

51. The strategic management process involves three independent stages. Which of the
following is NOT a stage in the process? 10.3
a. Strategy data mining
b. Strategy formulation
c. Strategy implementation
d. Strategy evaluation

Case

1. As an actuary for O & V insurance company, you are tasked with developing rates for the auto
line of business. Using the pure premium method, develop rates using the following data: 7.15-
16

Insured losses: $10M UW Expenses $2M

Earned car years: 10,000 Profit & Contingencies 5%

The pure premium component for the rates is:

A. $10,000
B. $1,000
C. $100
D. $10

(10 M/10,000)

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 2. The pure premium component for the expenses is

a. $2,000
b. $200
c. $20
d. $2

2M/10,000

3. Using this data, what is the appropriate rate for the auto book of business? (rounded)

a. $1100
b. $1140
c. $1200
d. $1263

Pure Premium = Expenses per exposure unit

1-profit or 1- 5%

Calculations:

1000 + 200 = 1200

1200 / 1.00-.05

1200 / .95 = 1263