All HWs

CH 1
Risk And Its Treatment
QUESTION ONE (MCQs)

1- Insurance authors have traditionally defined risk as
A) Any situation in which the probability of loss is one
B) Any situation in which the probability of loss is zero
C) Uncertainty concerning the occurrence of loss
D) the probability of a loss is occurring
Answer
2- Objective risk is defined as

A) the probability of loss
B) The relative variation of actual loss from expected loss
C) Uncertainty based on a person’s mental condition or state of mind
D) The cause of loss
Answer
3- An insurance company estimates its objective risk for 5000 exposures at 20 percent. Assuming
the probability of loss remains the same, what happen to the objective risk if the number of
exposures were to increase 50000?
A) It would decrease to 2 percent
B) It would decrease to 10 percent
C) It would remain the same
D) It would increase to 22 percent
Answer
4- Uncertainty based on a person’s mental condition or state of mind is known as

A) Objective risk
B) Subjective risk
C) Objective probability
D) Subjective probability
Answer
5- An individual`s personal estimate of the chance of loss is
A) An objective probability
B) An objective risk
C) A subjective probability
D) An a priori probability
Answer
6- A peril is
A) A moral hazard
B) The cause of a loss
C) A condition that increases the chance of a loss
D) The probability that a loss will occur
Answer
7- An earthquake is an example of a
A) Moral hazard
B) Peril
C) Physical hazard
D) Objective risk
Answer
8- Dense fog that increases the chance of an automobile accident is an example of

A) Speculative risk
B) Peril
C) Physical hazard
D) Moral hazard
Answer
9- Faking an accident to collect insurance proceeds is an example of a

A) Physical hazard
B) Objective risk
C) Moral hazard
D) Morale hazard
Answer
10- Indifference to loss because of the existence of insurance of insurance is an example of a
A) Physical hazard
B) Objective probability
C) Moral hazard
D) Morale hazard
Answer
11- A pure risk is defined as a situation in which there is

A) Only the possibility of loss or no loss
B) Only the possibility of profit
C) a possibility of neither profit nor loss
D) a possibility of either profit or loss
Answer
12- The premature death of an individual is an example of a

A) pure risk
B) speculative risk
C) fundamental risk
D) physical risk
Answer
13- Which of the following statements about speculative risks is true?

A) They are almost always insurable by private insurers.
B) They are more easily predictable than pure risks
C) Their occurrence may benefit society
D) They involve only a chance of loss
Answer
14- An automobile that could be totaled in a collision is an example of which of the following types
of risk?
I- Speculative risk
II- Fundamental risk
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
15- All of the following are examples of personal risks except
A) Poor risks
B) Unemployment
C) Premature death
D) Flood
Answer
16- Which of the following is reason why premature death may result in economic insecurity?
I- Additional expenses associated with death may be incurred
II- The income of the deceased person’s family may be inadequate to meet its basic
needs
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
17- Which of the following are often consequences of long-term disability?

I- MEDICAL EXPENCES
II- Loss or reduction of employee benefits
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
18- All of the following are examples of direct property losses except
A) The theft of a person’s jewelry
B) The destruction of a firm’s manufacturing plant by an Earthquake
C) The extra expenses incurred by a person to rent a substitute vehicle while a collision
damaged car is being repaired.
D) The vandalism of a person’s automobile
Answer
19- The extra expenses incurred by a business to stay in operation following a fire is an example of
a(n)
A) Fundamental risk
B) Speculative risk
C) Direct loss
D) Indirect loss
Answer
20- Which of the following statements about liability risks is (are) true?
I- Future income and assets can be attached to pay judgments if inadequate insurance
is carried
II- There is an upper limit on the amount of loss
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
21- All of the following are burdens to society because of the presence of risk except
A) The size of an emergency fund must be increased
B) Insurance is unavailable, particularly for pure risks
C) Society is deprived of certain goods and services
D) Mental fear and worry are present
Answer
22- Loss control includes which of the following?

I- loss reduction
II- loss prevention
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
23- Following good health habits can be categorized as

A) Loss prevention
B) Loss retention
C) Noninsurance transfer
D) Personal insurance
Answer
24- For the insured the use of deductible in insurance contracts is an example of
A) Risk transfer
B) Loss control
C) Risk avoidance
D) Risk retention
Answer
25- the use of fire-resistance materials when constructing a building is an example of
A) Risk transfer
B) Loss control
C) Risk avoidance
D) Risk retention
Answer
26- All of the following statements about retention are true except
A) it may be used deliberately if commercial insurance is unavailable
B) it may be used passively because of ignorance
C) its use is most appropriate for low- frequency, high –severity types of risks
D) its use results in cost savings if losses are less than the cost of insurance
Answer
27- All of the following are methods of noninsurance transfer except

A) entering into hold-harmless agreements
B) avoiding dangerous activities
C) selling stock index futures
D) incorporating a business
Answer
28- Osama borrowed money from al Rajhi bank to purchase a fishing boat. He purchased insurance
on the boat. Osama because of the fish prices were low and he did not catch many fish, he had
difficulty to pay loan. Osama intentionally sun boat, collected from his insurer and paid off the
loan balance. This scenario illustrates the problem of
A) adverse selection
B) moral hazard
C) fundamental risk
D) morale hazard
Answer
29- ABC insurance company plans to sell homeowners insurance in Riyadh. ABC expect that 8
homeowners out of every 100, on average, will report claims each year. the variation between
the rate of loss that ABC expects to occur and the rate of loss that actually does occur is called
A) objective probability
B) subjective probability
C) objective risk
D) subjective risk
Answer
30- Al RAGHY Company installed smoke detectors, a sprinkler system, and fire extinguishers in its
new manufacturing facility. These devices are all examples of
A) loss control
B) noninsurance transfer
C) risk avoidance
D) risk retention
Answer
31- Faisal and Tamer started a dry-cleaning business. The business may be successful, or it may fail.
The type of risk that is present when either a profit or loss could occur is called
A) PURE RISK
B) subjective risk
C) fundamental risk
D) speculative risk
Answer
32- Mandatory driver education training by trucking firm is an example of

A) risk avoidance
B) loss prevention
C) risk transfer
D) avoidance
E) None of above
Answer
33- Maradona (a famous football star) has insurance on his house and belongings inside the house.
As a result, he never feels the need to lock the front door. Maradona’s action is called
A) Adverse selection
B) Moral hazard
C) Morale hazard
D) Fortuitous
E) None of the above
Answer
34- using your seatbelt at all times while driving is an example of

A) risk avoidance
B) Loss prevention
C) Risk transfer
D) Loss reduction
Answer
35- Risk retention occurs when:
A) You use a medication and are unaware of its possible side effects
B) You live in a flood plain and carry no flood insurance
C) Your $75000 house is covered by $50000 worth of property insurance
D) You decide not to purchase collision coverage for your 15-year-old car
E) all of the above
Answer
QUESTION TWO (TRUE/FALSE)
1- A hazard is anything that is likely to cause a loss, such as a fire, a windstorm, or an earthquake FALSE
2- Fundamental risks are usually considered to be an individual’s own responsibility and are most
FALSE
appropriately dealt with through loss prevention measures
3- speculative risks are usually accepted voluntary because of their two-dimensional nature FALSE
4- Although virtually all speculative risks can be avoided, it is impossible to avoid all pure risks TRUE
5- The term “Pure risk “describes a situation in which there is no chance of gain, but the possibility
TRUE
of loss or no loss only
6- The term “Pure risk “refers to those situations in which loss is certain, such for example
FALSE
depreciation
7- From the prospective of society, the most attractive approach to dealing with risks is risk
FALSE
avoidance
8- The concept of” expected value "relates the magnitude of a risk to the frequency of loss and
TRUE
severity of loss that might occur.
9- Loss prevention and reduction efforts are directed toward reducing both frequency and severity TRUE
10- Peril is a synonym for hazard FALSE
11- The major of difference between a pure risk and a speculative risk is that the former does not
TRUE
involve the possibility of gain while the latter does
QUESTION THREE (DEFINITIONS)
1- Risk Avoidance: avoidance of activity that may lead to loss
2- Hazard: a condition that creates or increases the chance of loss due to a particular peril
3- Insurance: the most practical method for handling major risks
4- Law of large number: As the number of experiments increases, the actual ratio of outcomes will
converge on the theoretical, or expected, ratio of outcomes
5- Loss control: efforts designated to reduce both frequency and severity of losses
6- Loss preventions: reducing the probability of loss
7- Physical hazard: a physical condition that increases the chance of loss
8- Methods of Handling Risks: individuals and enterprises should accordingly seek methods of
dealing with these risks
9- Risk: uncertainty concerning the occurrence of a loss
10- Peril: the direst cause of a loss

QUESTION FOUR (Fill in)
1- Peril the direst cause of a loss
2- Dry forests is an example of physical hazard
3- Gambling is a good example of a speculative risk
4- General risk affects the entire economy
5- Risk retention means the risks are kept by individuals or organizations

QUESTION FIVE Applied Case
There are several techniques available for managing risk. For each of the following risks, identify an
appropriate technique, or combinations of techniques, that would be appropriate for dealing with
risk.
A) A family head may die prematurely because of heart attack.
B) An individual’s home may be destroyed in hurricane.
C) A new car may be severely damaged in an auto accident.
D) A negligent motorist may be ordered to pay a substantial liability judgment to someone who is
injured in an auto accident.
E) A surgeon may be sued for medical practice.
Solution
A) Loss prevention:
by weight, give up smoking and eat healthy diets.
B) Deliberately Retention:
may retain a small part of the risk of damage to home by purchasing a homeowner's policy with
substantial deductible
C) Collision insurance:
an effective way to deal with this exposure.
D) A catastrophic loss exposure is present:

Auto liability insurance should be purchased to deal with the exposure
E) Professional liability insurance should be purchased to deal with malpractice suits: The
surgeon could also use risk control to reduce the possibility of injuring a patient.
CH 2
Insurance And Risk
QUESTION ONE (MCQs)

1- All of the following are characteristics of insurance except
A) Risk avoidance
B) Pooling of losses
C) Payment of fortuitous losses
D) Indemnification
Answer
2- Which of the following is implied by the pooling of losses?

A) sharing of losses by an entire group
B) inability to predict losses with any degree of accuracy
C) substitution of actual loss for average loss
D) increase of objective risk
Answer
3- According to the law of large numbers, what happens as the number of exposures increase?
A) Actual results will increasingly differ from probable results
B) Actual results will more closely approach probable results
C) Fundamental risk will decrease
D) Objective risk will increase
Answer
4- Characteristics of a fortuitous loss include which of the following?

I- The loss is certain to occur
II- The loss occurs as a result of chance
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
5- From the viewpoint of the insurer, all of the following are characteristics of an insurable risk
except
A) The loss must be accidental
B) The loss must be catastrophic
C) The premium must be economically feasible
D) There must be a large number of exposure units
Answer
6- From the standpoint of the insurer, all of the following are characteristics of an insurable risk
except
A) The loss must be unintentional
B) The chance of loss must be calculable
C) The loss must be indeterminable
D) The loss must be measurable
Answer
7- why is a large number of exposure units generally required before a pure risk is insurable?
A) It prevents the insurer from losing money
B) It eliminates intentional looses
C) It minimizes moral hazard
D) It enables the insurer to predict losses based on the law of large numbers
Answer
8- The requirement that losses should be accidental in order to be insurable results in which of the
following
I- Decrease in moral hazard
II- More accurate prediction of future losses
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
9- Which of the following is implied by the requirement that a loss should be determinable and
measurable to be insurable?
I- The loss must be definite as to place
II- The loss must be definite as to amount
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
10- Methods by which insurers may minimize or avoid catastrophic losses include which of the
following?
I- the use of reinsurance
II- concentrating coverage written in one or a small number of geographic locations
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
11- Which of the following types of risks best meets the requirements for being insurable by private
insurers?
A) Market risks
B) Property risks
C) Financial risks
D) Political risks
Answer
12- Reasons why market, financial, and production risks are often uninsurable include which of the
following?
I- The potential to produce a catastrophic loss is great.
II- The chance of loss cannot be accurately estimated
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
13- Which of the following types of risks is normally uninsurable by private insurers?
A) Personal risks
B) Property risks
C) Liability risks
D) Market risks
Answer
14- Which of the following is a result of adverse selection

A) The insurer’s financial results will be substantially improved.
B) Those persons who are most likely to have losses are also the most likely to seek insurance
at standard rates.
C) It is unnecessary for the insurance company to use underwriting
D) Insurance can be written only by the federal government
Answer
15- The tendency for unhealthy people to seek life or health insurance at standard rates is an
example of
A) Moral hazard
B) Fundamental risk
C) Morale hazard
D) Adverse selection
Answer
16- Which of the following statements regarding insurance and gambling is (are)true?
I- Insurance is used to handle existing pure risks, while gambling creates anew
speculative risk.
II- Insurance usually involves risk avoidance, while gambling typically involves only risk
reduction.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
17- In addition to providing death benefits, life insurers sell which of the following products?
I- Retirement plans
II- Disability income coverage
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
18- Inland marine insurance provides coverage for

A) Goods being shipped on land
B) Ships designed to carry cargo
C) Goods being shipped on ocean going vessels
D) Goods being shipped by bags to foreign countries
Answer
19- All of the following can be classified as causality insurance except

A) marine insurance
B) general liability insurance
C) workers compensation insurance
D) burglary and theft insurance
Answer
20- Which of the following is a form of casualty insurance?

A) fire insurance
C) Inland marine insurance
D) Ocean marine insurance
Answer
21- All of the following are benefits to society that result from insurance except
A) Less worry and fear
B) Elimination of moral hazard
C) Indemnification for loss
D) Loss prevention
Answer
22- Which of the following statements about the insurance industry as a source of investments
funds is (are) true?
I- These funds result in a cost of capital that is lower than it would be in the absence of
insurance
II- These funds tend to promote economic growth and full employment.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
23- All of the following are social costs associated with insurance except
A) The expense of doing business
B) Fraudulent claims
C) Inflated claims
D) Increased cost of capital
Answer
24- A group of farmers in an isolated rural area 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?
A) Pooling of losses
B) Fortuitous losses
C) Risk avoidance
D) Indemnification
Answer
25- XYZ insurance company writes coverage for most perils that can damage property. It. however
does not write flood insurance on property located in the flood plains. which requirements of an
insurable risk might be violated if XYZ INSURANCE COMPANY WROTE FLOOD INSURANCE ON A
LARGE NUMBER OF PROPERTY RISKS LOCATED IN FLOOD PLAINS?
A) There must be a large number of similar exposure units
B) The loss should be catastrophic
C) The chance of loss must be calculable
D) The premium must be economically feasible
Answer
26- Wekiva Insurance Company insures a broad range of risks, including whatever is not covered by
fire, marine, and life insurer. Which term best describe the wide range of risks written by
Wekaia Insurance?
A) Fidelity Insurance
B) Casualty Insurance
C) Social Insurance
D) Marine Insurance
Answer
27- ABC Insurance company specializes in marketing homeowners' insurance. The ABC homeowner's
insurance policy combines Property and casualty insurance in the same contract are called
A) Mono-line policies
B) Multi-year policies
C) Multiple-line policies
D) Manuscript policies
Answer
28- Haitham Al Motary would like to purchase a house. He will pay 10% of the cost of the house as a
down payment and borrow the other 90% from a mortgage lender. The home will serve as
collateral for the loan. The mortgage lender requires Hiatham Al Motary 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?
A) Enhancement of credit
B) Reduction if fear and worry
C) Source of investment funds
D) Incentives for loss prevention
Answer
29- ABC Auto Insurance COMPANY CALCULATED THE AMOUNT THAT IT EXPECTED TO PAY IN CLAIMS
UNDER EACH POLICY SOLD. Rather than selling the coverage for the amount that it expected to
pay in claims per policy, ABC Auto Insurance added an allowance to cover the cost of doing
business, including commissions, premiums taxes and acquisition expenses. This allowance is
called a(n)
A) Policyowner dividend
B) Premium
C) Expense loading
D) Rate credit
Answer
30- XYZ Insurance company estimate that 14 out of every 100 homeowners that it insures will file a
claim each year. Last year XYZ insured 200 homeowners. According to the law of large numbers,
what should happen if XYZ insures 2000 homeowners this year?
A) The total number of claims filed by XYZ policyowners should decrease
B) The total dollar value of claims settle should decrease
C) The average size of loss should decline in value
D) The actual results will more closely approach the expected results
Answer
31- KLM Insurance company wrote a large number of property Insurance policies in an area where
earthquake could occur. When the president of KLM Insurance company was asked if she feared
that a catastrophic earthquake might put the company out of business, she responded, not a
chance. We transferred most of that risk to other Insurance companies. The shifting of part or all
of the insurance originally written by one Insurance company to another Insurance company is
called.
A) Hedging
B) Speculating
C) Reinsurance
D) Loss avoidance
Answer
1- from the standpoint of the individual, insurance is a system in which a small certain cost is
TRUE
substituted for a large uncertain loss
2- Insurance cannot be used to deal with exposures that lack one of the elements of an insurable
FALSE
exposure
3- For the economy as a whole, insurance increase the cost of losses FALSE
4- One of the most important of the elements of an insurable risk is “economically feasible
FALSE
insurability”
5- Insurance is similar to gambling in the sense that both involve the transfer of risk FALSE
6- Sickness can be considered both a peril and hazard TRUE
7- From the perspective of an insurer. adverse selection is uncontrollable phenomenon FALSE
8- Insurance may involve the sharing of losses, or it may involve the transfer of risk TRUE
9- Through the law of large number and a reduction in uncertainty, insurers are able to charge
FALSE
each individual a premium that is less than the expected value of his or her loss
10- Both speculative risks and pure risks are a source of gain for the economy as a whole at least in
FALSE
the long run.
1- Insurance:
A system of handling risks is designed by insurer for reducing risks by combining (pooling) many
losses exposure unites and to agrees to indemnify the insureds' losses in exchange of the
premiums that are paid by insureds (participants in the system)
2- Insurance is a source of investment funds by example:
Due to premiums, which are collected in advance of loss and funds not needed to pay immediate
losses.
For instance: Purchasing new machines and equipment.
3- Health insurance:
This type of insurance covers medical expenses from sickness.
4- Life insurance policies:
Deal with death risk of insured died.
5- Indemnification in insurance:
The insured is restored to his or her approximate financial position prior to the occurrence of the
loss
6- Risk transfer in insurance:
A pure risk is transferred from the insured to the insurer
7- Law of Large Numbers:
The greater the number of exposures, the more closely will the actual results approach the
probable (expected) results that are expected from an infinite number of exposures.
1- Basic Characteristics of Insurance are 4 characteristics, they are: Pooling of losses, Payment of
fortuitous losses, Risk Transfer, indemnification.
2- Characteristics of an Ideally Insurable Risk are: Large number of exposure units, Accidental and
Unintentional, Definite, and Measurable and Important, Not Catastrophe, Determinable and
Calculable, Premium must be economically feasible.
3- The loss must be fortuitous means, Accidental
4- Adverse selection means, the tendency of persons with a higher-than-average chance of loss to
seek insurance at standard rates.
For example: High risk drivers who seek auto insurance at standard rates
5- Hedging means is a technique for transferring the risk of unfavorable price fluctuations to a
speculator by purchasing and selling futures contracts on an organized exchange
6- Marine insurance covers ships or vessels and their cargo, but inland insurance covers goods
being carried on land to and from ocean ports.
7- Casualty insurance refers to insurance that covers whatever is not covered by fire, marine, and
life insurance
8- Aviation insurance provides protection for all types of aircraft and the passengers, besides
cargoes being shipped by these aircrafts.
9- Social insurance Programs are financed entirely or in large part by contributions from employers
and/or employees.
10- Major social insurance programs include old age, Disability and premature death insurance,
Health insurance, Medicare, Unemployment insurance, Workers compensation insurance.
11- Benefits of insurance can be summarized in Reduction of uncertainty and worry, Prevention of
loss, Indemnification for loss, Insurance is a source of investment funds, Enhancement of credit
for persons and firms.
Building in flood zones are difficult to insure by private insurers because the ideal requirements of
an insurable risk are difficult to meet
A) Identify the ideal requirements of an insurable risk

B) Which of the requirements of an insurable risk are met by the flood peril
Solution
A) Catastrophic Losses
B) The number of loss exposure is large, and loss is Fortuitous
Quiz Exam
1- Characteristics of a fortuitous loss include which of the following?

I- The loss is certain to occur
II- The loss occurs as a result of chance
A) I only
B) II only
C) both I and II
D) neither I nor II
2- From the standpoint of the insurer, all of the following are characteristics of an insurable risk
except
A) The loss must be unintentional
B) The chance of loss must be calculable
C) The loss must be indeterminable
D) The loss must be measurable
3- Which of the following is a form of casualty insurance?

A) fire insurance
C) Inland marine insurance
D) Ocean marine insurance
4- A group of farmers in an isolated rural area 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?
A) Pooling of losses
B) Fortuitous losses
C) Risk avoidance
D) Indemnification
5- Hedging means is a technique for transferring the risk of unfavorable price fluctuations to a
speculator by purchasing and selling futures contracts on an organized exchange
6- Define Life insurance Annuities policies that cover for lifetime

Life insurance annuities policies concern the risk of living to an old age. These policies cover
survival risk either for a limited period (for example, up to age of pension) or over lifetime.
CH 3
Introduction to Risk Management
QUESTION ONE (MCQs)
1- Risk management is concerned with

A) The identification and treatment of loss exposures
B) The management of speculative risks only
C) The management of pure risks that are uninsurable
D) The purchase of insurance only
Answer
2- Risk management differs from insurance management in which of the following ways?
I- insurance management is broader concept than risk management
II- Risk management includes all techniques for treating loss exposures
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
3- All of the following are risk management objectives prior to the occurrence of a loss except
A) Economy
B) Continued operations
C) Reduction of anxiety
D) Meeting externally imposed obligations
Answer
4- Preloss objectives of risk management include which of the following?

I- Preparing for potential losses in the most economical way
II- Survival of the firm
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
5- The basic functions of a risk manager include which of the following?
I- Identify potential losses
II- Selecting the appropriate techniques for treating losses
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
6- Sources of information that can be used by a risk manager to identify loss exposures include all
of the following except
A) Risk analysis questionnaires
B) The firm’s price to earnings ratio
C) Physical inspections
D) Reports on past losses
Answer
7- Loss severity is defined as the

A) Probable size of the losses that may occur during some period
B) Probable number of losses that may occur during some period
C) Probability that any particular piece of property may be totally destroyed
D) Probability that a liability judgment may exceed a firm’s net worth
Answer
8- Loss frequency is defined as the

A) Probable size of the losses that may occur during some period
B) Probable number of losses that may occur during some period
C) Probability that any particular piece of property may be totally destroyed
D) Probability that a liability judgment may exceed a firm’s net worth
Answer
9- The worst loss that could possibly happen to a firm is referred to as the
A) Maximum possible loss
B) Maximum probable loss
C) Frequency of loss
D) Severity of loss
Answer
10- The worst loss that likely to happen to a firm is referred to as the
A) Maximum possible loss
B) Maximum probable loss
C) Frequency of loss
D) Severity of loss
Answer
11- All of the following statements about avoidance are true except
A) Certain loss exposures are never acquired
B) Certain loss exposures may be abandoned
C) The chance of loss for certain loss exposures may be reduced to zero
D) It can be used for any loss exposure facing a firm
Answer
12- Abandoning an existing loss exposure is an example of

A) Avoidance
B) Loss control
C) Noninsurance transfer
D) Insurance transfer
Answer
13- Which of the following conditions is (are) appropriate for using retention?
I- Loss are difficult to predict
II- The worst possible loss is not serious
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
14- Which of the following statements about retention levels is (are) true?
I- A common rule of thumb is that a firm’s maximum retention can be equal to 100
percent of its earnings before taxes
II- A financially strong firm can have a higher level than a firm whose financial position
is weak
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
15- All of the following statements about captive insurers are true except
A) they may act as a profit center by insuring parties other than the parent company
B) they are a method for obtaining types of insurance that are unavailable from commercial
insurers
C) they decrease the volatility of a firm’s earnings
D) they make it easier for a firm to have access to reinsurance
Answer
16- Which of the following statements about self-insurance is (are) true?

I- It is a form of planned retention
II- State law usually prohibits its use for workers compensation
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
17- All of the following are potential advantages of retention except

A) Lower expenses
B) Increased cash flow
C) Encouragement of loss prevention
D) Protection from catastrophic losses
Answer
18- A restaurant owner leased its meeting room to a second party. The lease agreement specified
that the second party, rather than the restaurant owner, would be responsible for any liability
arising out of the use of the meeting room and that the restaurant owner would be “held
harmless “for any damages. The restaurant’s use of the hold harmless agreement is an example
of
A) Retention
B) Self-insurance
C) Insurance
D) Noninsurance transfer
Answer
19- All of the following are disadvantages of Noninsurance transfer Except
A) The party to whom the potential loss is transferred may be unable to pay
B) The transfer may fail because the contract language is ambiguous
C) The only potential losses that can transferred are those that are not commercially insurable
D) The transfer may not reduce insurance costs, since an insurer may not give credit for the
transfer
Answer
20- ABC Company retains the first $1 million of each property damage loss and purchase insurance
for that part of any property loss that exceeds $1 million. The insurance for property losses
above $1 million is called
A) Excess insurance
B) Liability insurance
C) Coinsurance
D) Other insurance
Answer
21- Which of the following statements about the use of deductibles is (are) true?
I- They are a form of risk retention
II- They tend to increase the expense of adjusting small claims
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
22- Factors a risk manager must consider in selecting an insurer include which of the following?
I- The availability of risk management services
II- The financial strength of the insurer
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
23- All of the following are disadvantages of using insurance Except

A) There is an opportunity cost because premiums must be paid in advance
B) Considerable time and effort must be spent negotiating coverage
C) It results in significant fluctuations in earnings after a loss
D) Attitudes toward loss control may became lax
Answer
24- Which of the following types of loss exposures may be appropriately handled by technique of
insurance?
I- High frequency, loss severity
II- Low frequency, high severity
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
25- Which of the following types of loss exposures are best met by the use of avoidance?
A) low frequency, low severity
B) low frequency, high severity
C) high frequency, low severity
D) high frequency, high severity
Answer
26- low frequency, low severity loss exposures are best handled by
A) avoidance
B) retention
C) insurance
D) loss control
Answer
27- All of the following statements about the administration of a risk management program are true
except
A) The risk manager is an important part of a firm’s management team
B) A risk management policy statement can be used to educate top executives about the risk
management process
C) If a risk management program is properly designed, periodic review of the program is
unnecessary
D) In order to properly identify loss exposures, the risk manager needs the cooperation of other
departments
Answer
28- Mr. Abd Allah was just hired as XYZ Company’s first risk manager. Mr. Abd Allah would like to
employ the risk management process. The first thing Mr. Abd Allah should do is
A) Evaluate potential losses faced by XYZ Company.
B) Formulate a treatment plan for XYZ Company’s loss exposures
C) Identify potential losses faced by XYZ Company
D) Implement and administer a risk management plan for XYZ Company
Answer
29- Tarek decided to review his personal risk management program. His car is 10 years old and Tarek
would receive little from the insurer if the car were stolen or destroyed. Tarek decided to drop
the physical damage insurance on his car. From risk management perspective, dropping the
physical damage insurance on the car is best described as
A) Increasing the use of avoidance in risk management program
B) Increasing the use of noninsurance transfer in the risk management program
C) Increasing the use of retention in the risk management program
D) Increasing the use of loss control in the risk management program
Answer
30- To gain a better understanding of her company’s operations, a risk manager asked a production
manager to draw a picture tracing the steps in the production and distribution of each product
produced by the company. Based on the diagram provided by the production manager, the risk
manager was able to determine crucial points in the production and distribution process that
needed safeguarding. The diagram tracing the steps in the production and distribution process is
calles a(n)
A) Financial statement
B) risk management matrix
C) flowchart
D) risk management audit
Answer
31- In reviewing his company’s operations, a risk manager noticed that all of the company’s finished
goods were housed in a single warehouse. The risk manager feared that if the warehouse was
destroyed, the company would lose all of its finished goods. He recommended that the finished
goods be divided among 3 separate facilities. Dividing the finished goods among 3 facilities
illustrates
A) risk avoidance
B) loss reduction
C) insurance
D) loss prevention
Answer
32- in selecting an insurer, the major consideration should be
A) the company’s attitude toward claims
B) the cost of company’s products
C) Financial stability
D) Competence of the company’s agents
E) The company’s policy on cancellations
Answer
1- Risk retention deserves serious consideration when the maximum loss potential is small TRUE
2- The most important consideration in determining how to deal with a given risk is the potential
TRUE
severity of the loss and one’s ability to bear it
3- Insurance should be considered as a last resort in risk management, and should be used only TRUE
4- When both the potential severity and the probability of loss are high. the most appropriate
FALSE
techniques for dealing with the exposures are avoidance and reduction
5- According to the risk management philosophy. the cause of a loss is more important than its
FALSE
effect
6- In general, the risk manager of organization should be someone outside the firm TRUE
7- The choice of a particular technique to be used in dealing with a given risk should be based on
FALSE
the probability and potential severity of the loss
8- The probability that a loss may or may not occur is the most important factor in deciding what
FALSE
should be done about a risk
9- In the last analysis for risk manager, there are only 2 approaches to dealing with risk: retention
TRUE
and transfer.
10- Risk management and insurance management are synonymous terms FALSE
1- Risk management
A systematic handling process, by which pure risks faced by individual, family or organization can
be identified and evaluated and the choice the appropriate methods for dealing with these risks
by an effective program.
2- Personal risk management
the identification of pure risks faced by an individual or family, and to the selection of the most
appropriate technique for treating such risks.
3- Benefits of Risk Management
A formal risk management enables firm to attain its pre-loss and post-loss objectives more
easily.
A risk management program can reduce a firm’s cost of risk.
Reduction in pure loss exposures allows a firm to enact an enterprise risk management program
to treat both pure and speculative loss exposures.
Society benefits because both direct and indirect losses are reduced.
4- PRE - LOSS Objectives of Risk management
Organization should prepare for probable losses by analysis of the cost safety program in
organization and how much insurance premiums are paid by organization and how much the
other programs for handling losses.
Reduction of anxiety and fear against liability lawsuits, in particular, if the organization is, for
example, a factory for producing foods.
Execution of the legal governmental regulations, for example, installing safety devices inside the
organization i.e., fire alarm. Auto Sprinkler system to reduce the loss if the risk occurs.
5- POST- LOSS Objectives of Risk management
Organization should be continued after the loss that is, survival of the organization by continuing
in the market at least as partial work.
Stability of earnings. This objective may be realized by the first objective, that is, stability of
earning can be maintained if the organization continues to operate.
Maintaining of growth of the organization. This objective can be realized if the firm produced a
new product or merging with other firms.
Maintaining of the social responsibility for organization toward the individuals or community.
This objective may be realized by the previous objectives. That is, if the firm has continued in the
market, the workers and employees will keep their jobs. Moreover, suppliers and creditors will
not effect.
1- Risk Management A systematic handling process, by which pure risks faced by family or
organization can be identified and evaluated and the choice the appropriate methods for dealing
with these risks by an effective program.
2- PRE- LOSS Objectives include:

▪ prepare for probable losses.
▪ Reduction of anxiety and fear.
▪ Execution of the legal governmental regulations
3- POST- LOSS Objectives include:

▪ Organization should be continued after the loss.
▪ Stability of earnings.
▪ Maintaining of growth of the organization.
▪ Maintaining of the social responsibility for organization toward the individuals or
community.
4- The process of risk management involves 6 steps they are:

▪ Determination of Objectives
▪ Identification of Loss Exposure Unites
▪ Evaluation of Loss Exposure Units (Risks)
▪ Consideration of Alternatives and Selecting the Appropriate Method (or Methods) for
Dealing with Risks
▪ Executing the risk management program
▪ Reviewing the risk management program continuously
5- Personal risk management refers

to the identification of pure risks faced by an individual or family, and to the selection of the
most appropriate technique for treating such risks
Given that, you are the risk manager of your family. After your study for the risk management process
in an organization (JEDDAH Spinning Factory), write an essay indicating in, how you can manage your
family's risks.
Solution
1- Determination of Objectives
Initially, risk management objectives should be defined.
2- Identification of Loss Exposure Unites
Thereafter, identifies all major and minor loss exposure units (risks) in the family. the risk
manager should use more important tools to identify the major and minor loss exposure units
(risks in family). These tools include several sources of information that helps to discover all risks
of the family.
3- Evaluation of Loss Exposure Units (Risks)
Once the loss exposure units (the risks) have been identified, the risk manager should evaluate
them. This means measuring the severity of loss and frequency of loss.
4- Consideration of Alternatives and Selecting the Appropriate Method (or Methods) for Dealing
with Risks
After, the risk manager of family has identified and evaluated loss exposure units (risks)
confronting the family, the next step is consideration of alternative approaches that may be
used to deal with loss exposure units (risks) and selecting the appropriate method that should be
used for each risk. The decision of risk manager depends upon the family's objectives, the
frequency and severity of loss.
5- Executing the risk management program
Executing the risk management program means activating all risk management decisions that
have already discussed. Identifying loss exposure units, evaluating their risk, deciding which the
appropriate method for handling them represent stage of planning by risk manager. This step
represents stage of implementing by which the risk manager must implement the risk
management program. Implementation requires knowledge and skill.
6- Reviewing the risk management program continuously
In this step, the risk manager in the factory should engage always in continuous review to keep
the risk management program up to date to make the program effective.
CH 4
Analysis of Insurance Contracts
QUESTION ONE (MCQs)
1- The portion of a property and liability insurance contract that contains information about the
property or activity to be insured is called the
A) declarations
B) insuring agreement
C) exclusions
D) conditions
Answer
2- What information is contained in insuring agreement of an insurance policy?

A) The name of insured
B) A summary of the major promises of the insurer
C) A summary of the obligations of the insured
D) A list of property, losses and perils that are excluded
Answer
3- Which of the following statements about "all-risks” coverage is (are) true?

I- All losses are covered except those losses specifically excluded
II- The burden of proof is on the insured to prove that a loss is covered
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
4- The exclusion of flood in a homeowner's policy is an example of an

A) Excluded loss
B) Excluded condition
C) Excluded property
D) Excluded peril
Answer
5- Exclusions are used in insurance policies for all the following reasons except
A) To reduce moral hazard
B) To waive policy conditions
C) To eliminate coverage for uninsurable perils
D) To eliminate coverage not needed by typical insureds
Answer
6- Reasons why a peril may be considered uninsurable and therefore excluded from insurance
contracts include which of the following?
I- The losses from the occurrence of the peril may be due to a predictable decline in
value
II- The losses from the occurrence of the peril may be incalculable and catastrophic.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
7- The policy provision requiring the filing of proof of loss with the insurer is an example of a(n)
A) declarations
B) policy condition
C) insuring agreement
D) miscellaneous provision
Answer
8- Which of the following statements about the definition of the insured is(are) true?
I- Under some circumstances, a person who is not specifically named may be classified
as an insured
II- Under no circumstances can more than one person be named as an insured
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
9- All of the following statements about endorsements and riders are true except
A) They are usually written
B) They can be used to add or delete policy provisions
C) They normally take precedence over other conflicting policy provisions
D) They are primarily used to circumvent the purpose of legislation requiring specific policy
provisions
Answer
10- Deductibles are used in all of the following types of insurance except
A) Life insurance
B) Health insurance
C) Property insurance
D) Automobile insurance
Answer
11- All of the following are purposes of deductibles except

A) To eliminate small claims
B) To reduce premiums
C) To reduce morale hazard
D) To exclude uninsurable perils
Answer
12- The deductible for automobile collision losses is an example of a(n)

A) Corridor deductible
B) Elimination period
C) Straight deductible
D) Aggregate deductible
Answer
13- Which of the following statements about a calendar- year deductible is (are) true?
I- It requires the insured to pay specified amount of each claim regardless of when the
claim occurs during the year and regardless of any previous claims during year
II- It is used only in policies that cover direct property losses
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
14- A provision in a disability income insurance contract that requires a person to be disabled 90
days before receiving benefits is an example of a(n)
A) Corridor deductible
B) Exclusion period
C) Elimination period
D) Probability period
Answer
15- At what point in time must an insured meet the coinsurance percentage requirement in
property insurance policy in order to avoid becoming a coinsurer?
A) Only at the time of loss
B) Only at the time of policy inception
C) Only at the time of policy application
D) Both at the time of policy inception and at the time of loss
Answer
16- Osman owns a commercial building with a replacement cost of $4 million. The building cis
insured on a replacement cost basis for $3 million under a fire insurance policy that has an 80
percent coinsurance clause. How much will Osman collect if the building sustains a covered fire
loss with a replacement cost of $320,000?
A) $266,667
B) $275,000
C) $300,000
D) $320,000
Answer
17- The primary purpose of coinsurance in property insurance is to

A) Reduce moral hazard
B) Achieve equity in rating
C) Minimize problems in settling claims
D) Eliminate small losses
Answer
18- Which of the following statements about problems arising from the use of a coinsurance clause
is (are) true?
I- The amount of insurance should be periodically evaluated to avoid a coinsurance
penalty because of inflation
II- An agreed value coverage option is one method used to solve the problem of values
that fluctuate throughout the policy term
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
19- Suzan has a major medical policy with a $200 deductible and a 75-25 coinsurance (percentage
participation) clause. If she has eligible medical expenses of $10,000, how much will be paid by
her insurer?
A) $7,300
B) $7,350
C) $7,500
D) $9,800
Answer
20- Purposes of the coinsurance (percentage participation) clause in health insurance contracts
include which of the following?
I- To reduce premiums
II- To exclude coverage for certain medical procedures
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
21- The purpose of other insurance provisions is to

A) Eliminate the need for deductibles
B) Penalize those insureds who carry inadequate amount of insurance
C) Specify who will pay losses if the insurer is bankrupt
D) Preserve the principle of indemnity
Answer
22- Abeer has three fire insurance policies on her office building. The policy from company A is for
$400,000 and the policies from companies B AND C are for $100,000 each. If Abeer has a
$360,000 loss, how much of the loss will be covered by each policy if the policies have pro rata
liability clauses?
A) Each policy: $120,000
B) POLICY A: $160,000; POLICY B and C: $100,000 each
C) POLICY A: $240,000; POLICY B and C: $60,000 each
D) POLICY A: $360,000; POLICY B and C: Nothing
Answer
23- Hasan has 3 liabilities policies that provide for contribution by equal shares in case other
insurance applies to a loss. How much will each policy pay for a $3,000,000 liability judgement if
policy A provides $500,000 of coverage, policy B provides $1000,000 of coverage, and policy C
provides $3,000,000 of coverage?
A) each policy will pay $500,000, and Hasan must assume the remaining $1,500,000
B) policy A will pay $500,000 and policy B and C will pay each $1,000,000 and Hasan must
assume the remaining $500,000
C) policy A will pay nothing, policy B will pay $1,000,000 and policy C will pay $2,000,000
D) policy A will pay $500,000, policy B will pay $1,000,000 and policy C will pay $1,500,000
Answer
24- Helen and John own automobiles on which they carry liability insurance. If Helen has an accident
while driving John’s car, how will each insurer respond to any liability judgment against Helen
A) the insurers will pay the judgement on a pro rata basis
B) John’s insurer will pay on an excess basis if Helen’s insurance is insufficient to cover the
judgment
C) Helen’s insurance will pay on an excess basis if John’s insurance is insufficient to cover the
judgment
D) The policies will pay the judgement on the basis of contribution by equal shares
Answer
25- Mohamed’s property was damaged in an accident. He phoned his agent to see if the loss was
covered under his property insurance policy. The agent said “as long as the loss is not specifically
excluded in the policy, the loss is covered “. Based on the agent’s answer, what type of insuring
agreement appears in the policy?
A) Unconditional coverage
B) Named-perils-only coverage
C) Listed perils-only coverage
D) All-risks coverage
Answer
26- Aaya hit a wall in a parking garage causing a large dent in the right front fender of her car. She
was busy at work and delayed reporting the damage to her insurer for nine months. The insurer
denied the claim, stating “although such a loss is usually covered, you are required under terms
of the contract to provide prompt notification in case of loss” The prompt notification
requirement is an example of a(n)
A) Declaration
B) Definition
C) Insuring agreement
D) Condition
Answer
27- Mark reviewed his homeowner’s policy. He learned that his personal property was insured on
an actual cash value basis. He would like replacement cost coverage on the property. He
contacted his agent who said “I will simply add amendment to your contract that changes the
basis of recovery to replacement cost “The written provision the agent was referring to is called
a(n)
A) Endorsement
B) Coinsurance clause
C) binder
D) deductible
Answer
28- Under the terms of Setaam‘s auto insurance policy .he must pay the first $500 of any physical
damage loss to his vehicle before his insurer will pay anything. What type of deductible is
included in Setaam‘s auto insurance policy?
A) Calendar-year deductible
B) Corridor deductible
C) Straight deductible
D) aggregate deductible
Answer
29- Eman hurt her back and was unable to work. She filed a claim under her disability income
insurance policy. Under terms of the policy, 60 days must pass between the date of the injury
and when the insurer begins to replace lost work earnings. This 60-day period is called a (n)
A) grace period
B) enrollment period
C) probationary period
D) elimination (waiting) period
Answer
30- ABC company insured its building on a replacement cost basis for $700,000 under a property
insurance policy that included an 80 percent coinsurance clause. The building had a replacement
cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its
insurer, assuming no deductible applies?
A) $33,333
B) $35,000
C) $36,000
D) $40,000
Answer
31- XYZ company insured its building on a replacement cost basis for $450,000 under a property
insurance policy that included an 80 percent coinsurance clause. The building had a replacement
cost of $ 500,000 loss. How much will XYZ Company receive from its insurer, assuming no
deductible applies?
A) $42,000
B) $45,000
C) $50,000
D) $56,250
Answer
32- Laura’s major medical insurance policy includes a $500 deductible and an 80-20 coinsurance
clause. She was hospitalized and her covered medical expenses were $10,500. How much of the
$10,500 will be paid by the insurer under Laura’s major medical insurance policy?
A) $7,500
B) $7,900
C) $8,000
D) $10,000
Answer
33- Abdel Kareem purchased liability insurance with a $100,000 limit from insurer A. when insurer A
denied a claim that Abdel Kareem thought should be covered, he bought a second liability
insurance policy with $150,000 limit from insurer B. before he cancelled the policy with insurer
A, a $60,000 loss occurred. If this loss is settled on a pro rata basis, how much must each insurer
pay?
A) Insurer A will pay $10,000 and insurer B will pay $50,000
B) Insurer A will pay $20,000 and insurer B will pay $40,000
C) Insurer A will pay $24,000 and insurer B will pay $36,000
D) Insurer A will pay $40,000 and insurer B will pay $20,000
Answer
34- Kyle borrowed Jane’s car. Kyle has auto liability insurance with a $100,000 limit. Jane has auto
liability insurance with a $50,000 limit. Kyle caused accident while driving Jane’s car. The
resulting damages awarded to the person injured in the accident were $75,000. Assuming Jane’s
coverage is primary, and Kyle’s coverage is excess, how will this claim be settled?
A) Jane’s insurer will pay $50,000 and Kyle’s insurer will pay $25,000
B) Jane’s insurer will pay $37,000 and Kyle’s insurer will pay $37,000
C) Jane’s insurer will pay $25,000 and Kyle’s insurer will pay $50,000
D) Jane’s insurer will pay nothing, and Kyle’s insurer will pay $75,000
Answer
35- Endorsements and riders

A) Are two terms with the same meaning
B) Are used frequently with life insurance contracts
C) Always require additional premium
D) Have no effect on the insurance policy
Answer
36- Insurers typically do not provide coverage for loss due to wear and tear because: -
A) The loss is not fortuitous
B) The loss may be catastrophic
C) Predictability may be Very difficult
D) The coverage would not be indemnification
Answer
37- Which part of the policy provides the insurer’s promise?

a) Insuring agreement
b) Declaration page
c) Promissory note
d) Exclusions
e) Conclusions
Answer
1- A binder is the place where the agent files his copy of the insurance agreement FALSE
2- A legal contract of insurance cannot be written without a signed application FALSE
3- A binding receipt is the receipt issued for a binder FALSE
4- Exclusions may reduce the cost of insurance for the insured TRUE
5- In the case of fire insurance, suspension of coverage is the same as cancellation and may be
FALSE
effectuated under the same circumstances
6- It is impossible to determine what protection is provided by an insurance policy without

TRUE
examining the exceptions and exclusions
7- To maintain coverage, the insured’s only responsibility is to pay premium TRUE
8- It is impossible to buy a policy which insures against all risks TRUE
9- Damage to the insured premises caused by fire fighters in the process of extinguishing a few
will be paid for under the fire insurance policy even though such a source of loss is not TRUE
mentioned in the policy
10- Although a form is not the same thing as a policy, an endorsement is the same as rider TRUE
1- insurance contract (policy)

is a contract between the insurer and the policyholder, which determines the claims which the
insurer is legally required to pay. In exchange for an initial payment, known as the premium, the
insurer promises to pay for loss caused by perils covered under the policy language.
2- the parties of insurance contract

insurer that promises the insured to indemnify loss for a premium paid by them
3- requirements of insurance contract
1- Offer and acceptance

2- Competent parties
3- Legal purpose
4- Consideration
4- the contents of insurance contract

Declaration, Definition, Insuring agreement, Exclusions, Conditions, Miscellaneous Provisions
5- Exclusions of insurance contract

the insurance company determines what it will not do.
6- Difference between Endorsements and Riders

in property and liability insurance, an endorsement. In life and health insurance, a rider
7- The purpose of a deductible in insurance contract

1- Eliminate small claims that are expensive to handle and process
2- Reduce premiums paid by the insured
3- Reduce moral hazard and attitudinal (morale) hazard
8- Difference between Coinsurance and insurance

insurance cover all loss, Coinsurance covers a percentage of it.
9- The purpose of coinsurance
1- The fundamental purpose of coinsurance is to achieve equity in rating
2- A property owner wishing to insure for a total loss would pay an inequitable premium if
other property owners only insured for partial losses
3- If the coinsurance requirement is met, the insured receives a rate discount, and the
policyowner who is underinsured is penalized through application
10- The purposes of coinsurance in health insurance

To reduce premiums and to prevent overutilization of policy benefits
11- The general requirements of insurance contract
1- Offer and acceptance

2- Competent parties
3- Legal purpose
4- Consideration
1- insurance contract is a legal contract. It is similar to other civil legal contracts.
2- insurance contract consists of Declaration, Definition, Insuring agreement, Exclusions,

Conditions, Miscellaneous Provisions.
3- The requirements of insurance contract are Offer and acceptance, Competent parties, Legal
purpose, Consideration.
4- Exclusions of insurance contract are Excluded perils, Excluded losses, Excluded property.
5- Endorsements is In property and liability insurance, but Riders is life and health insurance.
6- The deductible in insurance contract is a common policy provision that require the insured to
pay part of the loss.
7- Coinsurance is a contractual provision that often appears in property insurance contracts
8- The general requirements of insurance contract are Offer and acceptance, Competent parties,
Legal purpose, Consideration.
A) A manufacturing firm incurred the following insured losses, in other given, during the current
policy year
Loss Amount of loss
A $2,500
B $3,500
C $10,000
How much would be company’s insurer pay for each loss if the policy contained the following
type of deductible?
1- $1000 straight deductible
A will pay $1,500
B will pay $2,500
C will pay $9,000
2- $15000 annual aggregate deductible

Insurer will pay only $1,000
B) Explain the coordination of benefits provision that is typically found in the group medical expense
plans.
The coordination of benefits provision in group health insurance is designed to prevent over
insurance and the duplication of benefits if one person is covered under more than one group
health insurance plan.
CH 5
Fundamental Legal Principles of Insurance Contract
QUESTION ONE (MCQs)
1- Fundamental purposes of the principle of indemnity include which of the following?

I- All To reduce physical hazards
II- To prevent the insured from profiting insurance
E) I only
F) II only
G) Both I and II
H) Neither I nor II
Answer
2- Which of the following is a fundamental purpose of the principle of indemnity?

A) To reduce moral hazard
B) To minimize physical hazards
C) To settle property insurance losses on a replacement cost basis
D) To require deductibles in all property insurance policies
Answer
3- Samy’s stereo was destroyed in a fire. The stereo cost $1200 when it was purchased, but
a similar new stereo now $1800. assuming the stereo was 50 percent depreciated, what
is the actual cash value of Samy’ stereo
A) $600
B) $900
C) $1200
D) $1800
Answer
4- All of the following are exceptions to the principle of indemnity except

A) Life insurance
B) Valued policies
C) Replacement cost property insurance
D) Actual cash value property insurance
Answer
5- Under which of the following rules is actual cash value determined by taking into
consideration all relevant factors an expert would use to determine the value of the
property?
A) the circumstantial evidence rule
B) the broad evidence rule
C) the property indemnity rule
D) the objective value rule
Answer
6- a total loss under a valued policy is settled on the basis of the

A) market value of the loss
B) actual value of the basis
C) replacement value of the loss
D) amount of insurance covering the loss
Answer
7- Which of the following statements describes the effect of a property insurance policy
being written on a replacement cost basis?
A) Losses are settled without the applicable deductible
B) Losses are settled without a deduction for depreciation
C) The insurer must replace the damaged or destroyed property in lieu of a cash settlement
D) The policy is converted to a valued policy
Answer
8- Which of the following statements about the principle of insurable interest is (are) true?
III- It makes it difficult to measure the amount of an insured’s loss
IV- It reduces moral hazard
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
9- All of the following will support an insurable interest for purposes of purchasing property
and liability insurance Except
A) Ties of blood and marriage
B) Potential legal liability
C) A creditor- debtor relationship
D) A contract right
Answer
10- Which of the following statements about an insurable interest in life insurance is (are)
true?
I- It is required of any person named as beneficiary
II- It may result from a pecuniary (financial) interest, even if there is no relationship by
marriage or blood
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
11- When must an insurable interest legally exist in life insurance?

A) Only at the time of death
B) Only at the inception of policy
C) Only at the time the beneficiary is paid
D) Both at the time of death and at the inception of policy
Answer
12- When must an insurable interest legally exist in property insurance?

A) Only at the time of loss
B) Only at the inception of policy
C) Only at the time of loss settlement process takes place
D) Both at the time of death and at the inception of policy
Answer
13- Suzan’s office building was damaged by a fire caused by a careless tenant.
After paying Suzan for her loss, the insurance company sued the tenant to recover its
loss. This suit is based on the principle of
A) Indemnity
B) Insurable interest
C) Utmost good faith
D) Subrogation
Answer
14- All of the following are basic purposes of subrogation Except

A) To eliminate adverse selection
B) To hold down the cost of insurance
C) To prevent an insured from collecting twice for the same loss
D) To hold the negligent person responsible for a loss
Answer
15- Which of the following statements about Subrogation is true?
A) It is used primarily for losses paid under life insurance policies
B) It allows the insurer to sue its own insured who is negligent
C) The insured’s rights to collect benefits may be forfeited if insured interferes with the
insurer’s rights after a loss
D) The insurer is required to exercise its subrogation rights
Answer
16- The principle of utmost good faith is supported by all of the following legal doctrines
Except
A) Representations
B) Warranty
C) Subrogation
D) Concealment
Answer
17- What is the legal significance of material concealment by an insurance applicant?

A) The contract is automatically voided from its inception
B) The contract is avoidable at the insurer’s option
C) Loss payments are reduced by the degree of the concealment
D) The insurer is immediately entitled to a higher premium
Answer
18- What is legal significance of a material misrepresentation in an insurance application?

A) The contract is automatically voided from its inception
B) The contract is avoidable at the insurer’s option
C) Loss payments are reduced by the degree of the misrepresentation
D) The insurer is immediately entitled to a higher premium
Answer
19- A false statement made by an applicant for insurance is an example of a

A) Concealment
B) Breach of a warranty
C) Lack of offer and acceptance
D) Misrepresentation
Answer
20- Which of the following statements about insurance warranty is (are) true?
I- It is part of insurance contract
II- Statements made by an insurance applicant are considered warranties rather than
representations.
A) I only
B) II only
C) Both I and II
D) Neither I nor II Answer
21- David, who lives in an apartment in a high – crime area, purchased an expensive car. In
order to obtain physical damage insurance, David promised to park the car in an indoor
garage with 24-security. This agreement, which was incorporated into the insurance
contract, is an example of a
A) Representation
B) Unilateral contract
C) Contract of adhesion
D) Warranty
Answer
22- Which of the following statements about an offer and acceptance for insurance contract
is true?
A) In property insurance the applicant accepts the offer by completing the application and
paying the first premium
B) In life insurance. the agent can usually accept an offer by immediately binding coverage
C) In property insurance, the offer and acceptance are usually in writing but may be oral
D) In life insurance. the offer is merely the promise to pay the first premium Answer
Answer
23- Assuming life insurance applicant who has been given an insurability premium receipt is
found to be insurable, when is the coverage effective?
A) On the date of application or the date of medical examination, whichever is later
B) On the date of application or the date of receipt, whichever is earlier
C) On the date of application or the date of receipt, whichever is later
D) On the date of receipt or the date of medical examination, whichever is earlier
Answer
24- Which of the following statements about consideration in an insurance contract is (are)
true?
I- The insured’s consideration is the completion of the application
II- The insured’s consideration is the promise to do those specified in the policy.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
25- A contract in which the values exchanged are not equal because chance is involved is
called a(n)
A) Contract of adhesion
B) Unilateral contract
C) Conditional contract
D) Aleatory contract
Answer
26- Why are insurance contract said to be contracts of adhesion?

A) The values exchanged are not equal
B) One party writes the contract, and the other party must accept the contract as written.
C) Only one party makes a legally enforceable promise
D) Conditions are placed on the insurer’s promise to perform
Answer
27- Why does the insured get the benefit of the doubt if an insurance policy contains any
ambiguities or uncertainties?
A) Because insurance contracts are aleatory
B) Because insurance contracts are unilateral
C) Because insurance contracts are conditional
D) Because insurance contracts are contracts of adhesion
Answer
28- Why can an insurer refuse to pay a claim if an insured fails to abide by the policy
provisions?
A) Because insurance contracts are aleatory
B) Because insurance contracts are unilateral
C) Because insurance contracts are conditional
D) Because insurance contracts are contracts of adhesion
Answer
29- Which of the following types of insurance policies can usually be assigned without the
insurer’s consent?
I- Life insurance
II- Property insurance
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
30- What is the practical effect of an insurance policy being a conditional contract
A) The insurer can refuse to pay claims unless the insured has complied with all policy
conditions.
B) The insured can assign the policy only with the insurer’s consent
C) The insurer can sue the insured for failure to pay any premiums
D) The insured gets the benefit of the doubt if a policy contains any ambiguities or
uncertainties
Answer
31- What is the practical effect of an insurance policy being a contract of adhesion?
A) The insurer can refuse to pay claims unless the insured has complied with all policy
conditions.
B) The insured can assign the policy only with the insurer’s consent
C) The insurer can sue the insured for failure to pay any premiums
D) The policy is interpreted in the insured’s favor if a policy contains any ambiguities or
uncertainties
Answer
32- All of the following statements about the rules governing agency relationships are true
Except
A) An agent must be authorized to act on behalf of a principal.
B) An agency agreement may grant certain powers to the agent as well as denying the agent
other powers.
C) The principal is responsible for the acts of agents only if the acts are fraudulent.
D) Knowledge of the agent is presumed to be knowledge of the principal with respect to
matters within the scope of the agency relationship.
Answer
33- The voluntary relinquishment of a legal right is called
A) Subrogation
B) Adhesion
C) Estoppel
D) Waiver
Answer
34- Samy purchased a living room set for $1000 and insured this furniture on an actual cash
value basis. Two years later the living room set was destroyed by a covered peril. At the
time of loss, the property had depreciated in value by 25 percent. The replacement cost
of the furniture at the time of loss was $1200.
Assuming no deductible, how much will Sammy receive from her insurer?
A) $900
B) $950
C) $1000
D) $1200
Answer
35- Osama sold his house to Aaya for $140,000 in cash. Osama “threw in “the insurance on
the house as part of the deal and did not bother telling the insurer that there was a new
owner. Four months after Aaya purchased the home, a windstorm damaged the roof.
Which of the following legal characteristics of insurance contracts could the insurer use
to legally deny payment for damage to the roof?
A) Insurance contracts are unilateral contracts.
B) insurance contracts are contracts of adhesion
C) insurance contracts are lavatory contracts
D) insurance contracts are personal contracts
Answer
36- Sally’s car was damaged when another driver ran a stop sign and hit her car. Sally decided
to collect from her own insurer and to let her insurer recoup the loss payment from the
driver who hit her. What fundamental legal principal upon which insurance is illustrated
in this scenario?
A) The principal of Utmost good faith
B) The principal of Insurable interest
C) The principal of Subrogation
D) The principal of reasonable expectations Answer
Answer
37- When Ben applied for a life insurance policy, he was asked on the application if he
smoked or used tobacco products. Ben answered “No”. in reality, however, Ben smokes
two packs of cigarettes a day. The policy was issued at the “preferred, nonsmoker
premium rate “. If Ben dies six months after the policy is issued, upon what grounds will
the insurer be able to legally deny the claim?
A) Warranty
B) Misrepresentation
C) Waiver
D) Concealment
Answer
38- Shokry’s insurance claim was denied by XYZ Insurance company. When shaker inquired
why the claim was denied, he was told to “Read the exclusion on page 5 of the policy”.
Shaker read the exclusion. In his opinion, the exclusion was poorly worded and every
vague. If a court of law agrees with Shaker’s assessment of the exclusion, Shaker may still
be able to have his claim paid by the insurer because insurance contracts are
A) Personal contracts
B) Unilateral contracts
C) Aleatory contracts
D) Contracts of adhesion
Answer
39- Omar entered into an insurance contract with XYZ insurance Company.
When the agent who sold the coverage witnessed Omar doing something that violated
the terms of the contract, he threatened to sue him to make his comply with the terms of
contract. Which distinct legal characteristic of insurance contracts states that only the
insurer’s promise to perform is legally enforceable?
A) Contracts of adhesion
B) Unilateral contracts
C) Aleatory contracts
D) personal contracts
Answer
40- which of the following does not constitute an insurable an interest?

A) A savings and loan company holding a mortgage on your home.
B) You make an offer to buy your neighbor’s house.
C) Your lease makes you liable for fire damage to your rented premises.
D) You have custody of a valuable painting when the owner is away.
Answer
1- in the case of life insurance contracts, an insurable interest must exist at the
TRUE
inception of the policy
2- When there is a difference of opinion regarding the meaning of a term in an

TRUE
insurance policy, the courts usually favor the insured
3- In most fields of insurance, any misrepresentation by the insured, intentional or

FALSE
otherwise, will normally be sufficient to void the policy
4- The term “actual value “is generally interpreted to mean the actual dollar loss
FALSE
incurred by the insured, measured by his or her original cost of property destroyed
5- Murder of the insured by a beneficiary usually relives the insurer of the obligation to
FALSE
pay policy proceeds
6- the courts have generally ruled that the term "actual cash value” varies from
FALSE
situation to situation and therefore cannot be defined.
7- The doctrine of utmost good faith is applied more rigidly in the field of ocean marine
TRUE
insurance than in other fields of insurance.
8- In the field of life insurance, there is no requirement that an insurance policy be

FALSE
supported by an insurable interest.
9- it is possible for an individual who does not own a piece of property to have an
TRUE
insurable interest in that property.
10- The doctrine of insurable interest was developed to prevent the use of insurance
TRUE
contracts as means of wagering, and to protect against moral hazard.
1- Representations
It is a statement made by an applicant for insurance to supply information to insurance company
for the purpose of inducing it to accept a risk.
2- Warranty
Is that by which the insured undertakes that some particular things shall or shall not be done, or
that some conditions shall be fulfilled.
3- Exceptions of principle of indemnity

1- Valued policy.
2- Valued policy law.
3- Replacement cost insurance
4- Life insurance
4- Principle of subrogation
Substitution of the insurer in place of the insured for the purpose of claiming indemnity
from a third person for a loss covered by insurance.
5- Purposes of subrogation principle

1- It enforces the rule of law and holds the guilty person to pay for the loss.
2- It helps the insurer to partially or fully recover the amount paid to loss.
3- It prevents the insured from profiting from the damages, i.e., obtaining
compensation twice for the same loss.
4- It helps to hold down the insurance rates. With reimbursement from the concerned
third party
6- Waiver, Binder and Estoppel

1- Waiver is defined as the voluntary relinquishment of a known legal right.
2- Estoppel occurs when a representation of fact made by one person to another
person is reasonably relied on by that person to such an extent that it would be
inequitable to allow the first person to deny the truth of the representation.
3- Binder is temporary evidence of insurance until a formal insurance contract can be
drafted.
7- Explain by example, what is the meaning Pro rate share in Principle of contribution in
insurance Insurable interest
method that assigns a proportionate amount of income or losses to shareholders or
members of a company based on their ownership percentages.
8- Purposes of Insurable interest
1- An insurable interest reduces moral hazard.
2- Prevent Gambling.
3- Determine sum insured.
9- The extent of insurable interest

1- In life insurance: The insurable interest must exist only at the inception of the policy
2- In property insurance: The insurable interest must exist at the time of the loss.
1- The concept of utmost good faith principle is implemented by three legal doctrines, they
are Representation, Concealment, and Warranty.
2- the period of principle of utmost good faith is in force at the beginning of insurance with
agent or insurer up to the policy is issued.
3- Representation is a statement made by an applicant for insurance to supply information

to insurance company for the purpose of inducing it to accept a risk, but
Misrepresentation is false statement.
4- Concealment means the deliberate failure of an applicant of insurance to disclose a

material fact to insurance company.
5- Insurable interest means a relationship between the insured and subject matter of
insurance.
6- Insurable interest exists only at the beginning of the policy in life insurance, but at time of
loss in property insurance
7- All insurance contracts are subject to principles of indemnity, subrogation, and

contribution. But personal insurance contracts (i.e. life insurance), are subject to
principles of utmost good faith, insurable interest, and the proximate cause.
8- Principle of indemnity applies most insurance lies except life insurance.
9- The purposes of Principle of indemnity are to avoid intentional loss, To reduce moral
hazard, To prevent the insured from profiting from loss, and To maintain the premium at
low-level.
10- Providing indemnity in property insurance may be Cash payment or Repair of the
destroyed property or Replacement of the subject matter of insurance by another one of
the same standards, age.
11- The main methods by which we can determine actual cash value are
1- Replacement cost less depreciation
2- Fair market value is the price a willing buyer would pay a willing seller in a free
market
3- Broad evidence rule means that the determination of ACV should include all relevant
factors an expert would use to determine the value of the property.
12- Importance of subrogation principle are
1- The insurer is entitled only to the amount it has paid under the policy
2- The insured cannot impair the insurer’s subrogation rights
3- Subrogation does not apply to life insurance and to most individual health insurance
contracts
4- The insurer cannot subrogate against its own insureds (policyholders)
13- the purposes of an insurable interest are

1- An insurable interest reduces moral hazard.
2- Prevent Gambling.
3- Determine sum insured.
14- The formula for calculating contribution in insurance is
Sum insured covering by the company
Proportion of company = Loss X
Amount of total coverage by all companies
15- legal characteristics of insurance contracts are

1- Insurance contract is a contract of adhesion
2- Insurance contract is a unilateral contract
3- Insurance contract is a conditional contract
4- Insurance contract is an aleatory contract
5- Insurance contract is a personal contract
The first Applied case

Mohamed owns a laptop computer that was stolen. The laptop cost $1000 when it was purchased
five years ago. A similar laptop computer today can be purchased for $500. Assuming that laptop
was 50 percent depreciated at the time the theft occurred, what is actual value of the loss?
Solution
Replacement cost = $1,000 - $500 = $500
Depreciation = $500 x 50% = $250
The second Applied case

Osman owns an antique table that has a current market value of $12000. The table is specially
insured for $12000 under a valued policy. The table is totally destroyed when a tornado touches
down and damages Osman’s home. At time of the loss, the table had an estimated market value of
$10,000. How much will Osman collect for the loss? Explain your answer
Solution
Since the sum insured under the value policy is $12,000; Osama will only collect $12,000 regardless
of the actual loss.
The third Applied case
Osama is applying for a health insurance policy. He has a chronic liver ailment and other health
problems. He honestly disclosed the true facts concerning his medical history to the insurance agent.
However, the agent did not include all the facts in the application. Instead, the agent stated that he
was going to cover the material facts in a separate letter to the insurance company’s underwriting
department. However, the agent did not furnish material facts to the insurer and the contract was
issued as standard. A claim occurred shortly thereafter. After investigating the claim, the insurer
denied payment. Osama contends that the company should pay the claim because he answered
honestly all questions that the agent asked.
a) On what basis can insurance company deny payment of the claim?

b) What legal doctrines can Osama use to support his argument that the claim should be paid?
Solution
a) Based on incomplete or inaccurate information, concealment or misrepresentation.
Osama can support his argument using the doctrine of "estoppel" where the company can't deny his
claim because the agent didn’t include the information in the application.
CH 6
Insurance Company Operations
QUESTION ONE (MCQs)

1- The function of an actuary is to
A) Adjust claims
B) Determine premium rates
C) Negotiate reinsurance treaties
D) Invest insurance company assets
Answer
2- Insures obtain data that can be used to determine rates from

A) Pricing pools
B) Insurance advisory organizations
C) Banks
D) Reciprocal exchanges
Answer
3- Which of the following statements about underwriting policy is (are) true?

I- A company must establish an underwriting policy that is consistent with company
objectives
II- underwriting policy is usually very subjective and allows the underwriter
considerable flexibility with respect to lines to be written and forms to be used
A) I only
B) II only
C) Both I and II
D) neither I nor II
Answer
4- All of the following statements about underwriting standards are true Except
A) The basic purpose of underwriting standards is to reduce adverse selection against the
insurer.
B) The underwriter should select only those insureds who are expected to have no losses
C) The underwriter should select a book of business so that there is a proper balance within
each rate classification.
D) Equitable rates should be charged so that each group of policyowners pays its own way in
terms of losses and expenses
Answer
5- The underwriting process begins with the
A) agent
B) desk underwriter
C) inspection report
D) acceptance of application
Answer
6- Common sources of underwriting information for life and health insurance include all of the
following Except
A) The application
B) A physical examination
C) The medical information Bureau
D) The insured’s income tax return
Answer
7- Information contained in an inspection report may include all of the following Except
A) How long the agent has known the applicant
B) The applicant’s marital status
C) The applicant’s police record
D) Whether the applicant has ever declared bankruptcy
Answer
8- Information provided to life insurance underwriters by Medical Insurance Bureau includes which
of the following?
I- The previous underwriting decisions of member companies
II- Health impairments about which member companies have knowledge
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
9- Factors that may result in more restrictive underwriting decisions include which of the
following?
I- Inadequate rates
II- The unavailability of reinsurance on favorable terms
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
10- All of the following are functions of marketing department of an insurance company Except
A) To advertise the insurer’s products.
B) To develop new products
C) To identify production goals
D) To make final underwriting decisions
Answer
11- Which of the following statements about claim settlement is (are) true?
I- The fair payment of claims requires an insurer to adopt a very liberal claims policy.
II- To prevent possible lawsuits, an insurer should provide no personal assistance to a
claimant other than that which is required by contractual obligations
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
12- All of the following statements about adjustors are true Except
A) agents may have the authority to settle claims
B) independent adjustors may be used in a geographic area where the volume of business is
too low for an insurer to have its own adjusters
C) company adjustors are salaried employees who work for one insurer
D) a public adjustor is usually paid a flat fee that is independent of the size of a claim
Answer
13- Which of the following statements about adjustment bureau is (are) true?
I- They are frequently used to settle claims when a large number of losses in a given
geographic locations as a result of a catastrophic event
II- Their major advantage is low cost because of the use of part- tie adjustors.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
14- All of the following statements about the steps in the settlement of a claim are true Except
A) The insurance policy usually has a provision specifically how a notice of loss is made to the
insurance company.
B) One-step in the investigation of a claim is to determine whether the policy was in force
when the loss occurred.
C) The adjuster must file the proof of loss, which is a sworn statement supporting his or her
decision regarding a claim
D) A policy provision may determine how disputes regarding claim settlements are resolved.
Answer
15- All of the following statements about reinsurance are true Except
A) A reinsurer may also purchase reinsurance
B) Reinsurance involves the shifting of all, or part of the insurance originally written by one
insurer to another insurer
C) The insurer transferring business is called the ceding company.
D) The amount of insurance given to a reinsurer is called the net premium.
Answer
16- All of the following are reasons for the use of reinsurance by primary insurer Except
A) To increase the unearned premium reserve
B) To increase underwriting capacity
C) To protect against catastrophic losses
D) To stabilize profits
Answer
17- The unearned premium reserve of an insurer is

A) An asset that represents the investments made with premium income
B) A liability that represents the unearned portion of gross premiums on outstanding policies
C) A liability that represents claims that have been incurred but not yet paid.
D) The portion of the insurer’s net worth that belongs to policyowners
Answer
18- A reinsurer contract that is entered into on a case-by-case basis after an application for
insurance is received by a primary insurer is called
A) Reinsurance pool
B) An automatic treaty
C) A retrocession
D) Facultative reinsurance
Answer
19- Which of the following statements about treaty reinsurance is true?
A) The reinsurer is required to underwrite each individual applicant that is reinsured.
B) The reinsurer must accept all business that falls within the scope of the treaty.
C) The ceding insurer can choose which business falling within the scope of treaty it wishes
reinsure.
D) It protects the reinsurer by requiring the ceding insurer to charge adequate premiums.
Answer
20- Which of the following statements about treaty reinsurance is true?

A) Under a surplus share treaty, 100 percent of the ceding insurer’s liability must be transferred
to reinsurer.
B) The use of quota-share treaty increases the ceding insurer’s unearned premium reserve.
C) Under an excess of loss treaty, the reinsurer pays losses in full only if they are less than the
ceding insurer’s retention limit.
D) The use of a reinsurance pool provides the financial capacity to write large amounts of
insurance.
Answer
21- Delta insurance company has a surplus share treaty with Misr Reinsurance. Delta has a retention
limit of $200,000 and nine lines of insurance are ceded to Misr. How much will Misr pay if a
$1,600,000 building insured with Delta suffers an $800,000?
A) $600,000
B) $700,000
C) $720,000
D) $800,000
Answer
22- Huge Insurance Company is a property insurer that is interested in protecting itself against
cumulative losses that exceed $200 million during the year. this protection can be obtained with
A) A quota share treaty
B) A surplus share treaty
C) An excess of loss treaty
D) Facultative reinsurance
Answer
23- All of the following statements about life insurance investments are true Except
A) Funds for these investments are derived primarily from premium income, investment
earning, and maturing investments that must be reinvested.
B) Income from these investments reduce the cost of insurance
C) A primary objective in making these investments is safety of principal
D) The majority of these investments are short-term.
Answer
24- Which of the following statements about the investments of property and liability insurers is
(are) true?
I- Income from these investments is important in offsetting unfavorable underwriting
experience.
II- Because the premium income is continually being received, the investment objective
of liquidity is of little importance.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
25- Functions of an insurance company legal department include which of the following?
I- Lobbing for legislation favorable to the insurance industry
II- Drafting policy provisions
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
26- Abeer is employed by an insurance company. She reviews applications to determine whether
her company should insure the applicant. If insurable, Abeer assigns the applicant to a rating
category based on applicant’s degree of risk. Abeer is a(an)
A) Underwriter
B) Actuary
C) Producer
D) Claims adjustor
Answer
27- Ahmed is a claim adjustor for LMN insurance Company. He is periodically contacted by LMN or
by an insured and told that there has been a loss. The first step in claims process that Ahmed
should follow is to
A) Determine the amount of the loss
B) Attempt to deny the claims regardless of whether he believes the claim is covered
C) Verify that a covered loss has occurred
D) Delay paying the claim if the claim is covered
Answer
28- Little liability insurance Company (LLIC) traditionally has written small liability loss exposures.
Recently, a regional airline approached LLIC to see if the company would be interested in writing
the airline’s liability coverage. Before agreeing to write the overeagerly shopped for reinsurance
that would apply only to the airline coverage. LLIC found a reinsurer and entered into an
agreement an agreement to reinsure the airline’s liability exposure. Under terms of the
agreement, LLIC would retain 25 percent of the premium and pay 25 percent of the losses and
the reinsurer would receive 75 percent of the premium and would pay 75 percent of the losses.
This reinsurance arrangement is best described as
A) Excess of loss
B) Surplus share
C) Quota share
D) Reinsurance pool
Answer
29- Mahmoud studied engineering in college. After graduation, he went to work for an insurance
company. Mahmoud visits properties insured by his company. he conducts inspections on
behave of the insurer and makes recommendations about alarm systems, sprinkler systems,
occupational health and building construction. In what functional area of the insurance company
does Mahmoud work?
A) Underwriting
B) Loss control
C) Data processing and management
D) Claim adjusting
Answer
30- Samy heads the legal staff of a large property and liability insurance company. Samy’s staff is
most likely involved in all of the following activities Except
A) Reviewing policy wording before policies are adopted and marketed.
B) Recouping subrogation recoveries from third parties who injured individuals insured by
Samy‘s company
C) Providing legal advice about marketing, taxation, and insurance law.
D) Reviewing applications to determine if the company should insure the risk.
Answer
31- Mohamed Osman double majored in mathematics and statistics while in college. He also
enrolled in a number of finance courses. After graduation, Mohamed Osman was hired by Misr
Insurance Company. His job is to calculate premiums rates for life insurance coverages.
Mohamed Osman is a(an)
A) Actuary
B) Underwriter
C) Claims adjuster
D) Producer
Answer
32- Al taawania Insurance Company requires insureds who suffer a loss to submit a sworn statement
to substantiate that a loss occurred and to describe the conditions under which the loss
occurred. This sworn statement is called a
A) Binder
B) Proof of loss
C) claims report
D) notice of loss
Answer
33- All of the following are methods that a property and liability company can use to protect against
catastrophic losses Except
A) Sale of catastrophe bonds
B) Purchase of common stock
C) Purchase of reinsurance
D) Purchase of catastrophe insurance options
Answer
34- Which of the following is (are) true with respect to catastrophe bonds?
I- These bonds are issued by U.S. Government.
II- These bonds pay relatively high yields
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer
35- All of the following statements about regulatory objectives of insurance ratemaking are Except
A) One purpose of rate adequacy is to maintain the solvency of insurers
B) Rates are adequate if they are high enough to pay all losses and expenses.
C) Insurers know in advance if the coverages marketed will be profitable, so rate regulation is
not needed
D) Rates are excessive if policyowners are paying substantially more than the actual value of
their protection
Answer
36- All of the following statements about business objectives in designing a rating system are true
Except
A) The rating system should encourage loss control activities.
B) The rating system should be independent of long-run changes in economic conditions
C) The rating system should be simple to understand.
D) The rating system should be stable over short periods so that consumer satisfaction can be
maintained
Answer
37- The unit of measurement used in insurance pricing is called the

A) Unit rate
B) Premium
C) Exposure unit
D) Experience unit
Answer
38- The portion of an insurance premium allocated to expenses, profit, and a margin for
contingencies is called
A) Loading
B) Pure premium
C) Gross premium
D) Experience rate
Answer
39- All of the following statements about class rating are true Except
A) Exposure with similar characteristics is placed in the same underwriting class
B) The rate charged for each class reflects the average loss experience for that class
C) The complexity of class rating makes its use inappropriate for the personal lines market
D) It is based on the assumption that future losses to insureds will be determined by the same
classification factors currently in use
Answer
40- The gross premium for a participating life insurance policy is determined by adding a loading
allowance to the net level premium. This loading allowance includes all of the following Except a
A) Margin for dividends
B) Provision for expenses
C) Margin for contingences
D) Provision for death claims
Answer
1- Public adjusters represent insurance companies in those areas where the insurer does not
FALSE
maintain a staff of adjusters
2- The primary purpose of underwriting is to avoid adverse selection TRUE
3- Class rating is used when the loss producing characteristics of the exposures units to be insured
FALSE
vary widely
4- The agent’s role in underwriting is generally greater in property and liability field than in the
field of life insurance TRUE
5- The gross premium is derived by adding the net premium to the pure premium FALSE
6- the use of the term “underwriter “in reference to an agent is more common in the field of life
insurance than in the field of property and liability TRUE
7- The financial status of the applicant is an important underwriting factor in both property
insurance and life insurance TRUE
8- Public adjusters represent the policyholders in the loss adjustment process TRUE
9- Class rating is the most common approach used in insurance industry today and is used in both
the life insurance industry and in the property and liability field TRUE
10- Judgment rating is used primarily in the life insurance and health insurance FALSE
1- Ratemaking
the pricing of insurance and the calculation of insurance premiums.
2- Difference between insurance pricing and pricing in other industries.
insurance, unlike other industries, the cost of production is not known when insurance contract
is sold and it will not be known until sometime in future, when the policy has expired.
3- Actuary
professional person trained in the technical aspects in insurance and related fields, particularly
in mathematics of insurance, finance, and economy.
4- Underwriting
the process by which insurers decide which loss exposure units to accept or to reject and how
much the premium, if, they accepted.
5- Production in insurance companies
the sales and marketing activities of insurers.
6- Reinsurance
an arrangement by which an insurance company transfer or shift all or a part of its risk
(insurance originally written) under a contract (or contracts) of insurance to another insurance
company.
7- Retrocession
the reinsurer, in turn may reinsure part or all of the risk with another insurer.
8- Facultative reinsurance
an arrangement between the original insurer (the ceding company) and the reinsurer by which
every party retains full decision-making powers with respect to each insurance control.
9- Treaty reinsurance
is an arrangement between the original insurer (the ceding company) and the reinsure by which,
the original insurer is obligated automatically to reinsure any new underlying insurance contract
and the reinsurer is obligated to accept certain responsibilities for specified insurance.
10- the Pro rata method
the ceding company and reinsurer agree to share losses and premiums based on some
proportion.
11- the Excess method
the reinsurer pays only when covered losses exceed a certain level.
12- Quota-share treaty
By virtue of this treaty, both the ceding company and reinsurer agree to share premiums and
losses based on a prespecified percentage.
13- Surplus-share treaty
By virtue of this treaty, the reinsurer agrees to accept amount of insurance in excess of the
ceding insurer's retention limit, up to some maximum.
14- Facultative treaty reinsurance
the ceding company is obligated to reinsure specified contract (like treaty) while the reinsurer
has freedom to decide whether to accept or reject reinsurance on each contract (like the
facultative). Alternatively, this treaty as well, means the ceding company may give the option to
reinsure but the reinsurer should automatically accept all contracts offered for reinsurer.
15- loss ratio
the ratio of incurred losses and loss adjustment expenses to premiums earned.
16- Expense ratio
It is equal to the company’s underwriting expenses divided by written premiums.
17- Insurance company`s combined ratio

the sum of the loss ratio and the expense ratio.
18- Insurance company`s investment income ratio
It is compares net investment income to earned premiums.

1- The premium can be determined based upon rate and exposure units.
2- premiums are determined by multiplying rate by exposure units.
3- Insurance pricing has some basic objectives, some of these objectives by statue. they are
insurance rates must not be excessive and insurance rates must be adequate.
4- Class rates mean that, the loss exposure units to be insured are classified on the basis of certain
characteristics and all of the loss exposures in each classification are subject to the same rate.
5- The premium that the insured pays is called gross premium.
6- The main objective of underwriting process is to select those applicants for insurance that meet
the insurance company's standards of acceptance.
7- Adverse selection means too many of the insurance company's insureds will have losses and the
company may not have enough income to cover all of its costs.
8- To achieve objective of the underwriting three important principle are followed, they are:
Selection of insured according to company's underwriting standards, Proper balance within each
rate classification and Equity among policyholders.
9- Underwriting is based number of principles, they are Attain an underwriting profit, select
prospective insureds according to the company’s underwriting standards, and Provide equity
among the policyholders.
10- The information of the underwriter comes from: The application, The agent’s report, an
inspection report, Physical inspection, A physical examination and attending physician’s report
and medical information bureau report (MIB).
11- Production in insurance companies refers to the sales and marketing activities of insurers.
12- in insurance companies the agents are referred to as Producers.

13- Claim adjusting means the process of investigating, evaluating, and settling claims.
14- The employees who settle the losses are called adjusters.
15- The adjusters include agents, staff, independent adjustor, adjustment bureau, and public
adjuster.
16- the settlement of a claim has four steps, they are: Notice of the loss, Investigation of claim, filling
a proof of loss, and Decision concerning payment.
17- The Major types of claims adjustors include insurance agent, company adjustor, independent
adjustor and public adjustor
18- The ceding company is the company transferring the risk and the reinsurer is the company that
accepts part or all risk.
19- Benefits of reinsurance are increasing the financial stability of insurer, facilitates placing large
exposure unit with one company, helps small insurance companies to stay and to continue in
business, stabilizes profits, and provides financial protection against a catastrophic loss.
20- Kinds of reinsurance are Facultative reinsurance, Treaty reinsurance, and Facultative treaty
reinsurance.
21- Advantages of Treaty reinsurance include automatic and does not need time.
22- Securitization of risk means that an insurable risk is transferred to the capital markets through
the creation of a financial instrument, but Catastrophe bonds means corporate bonds that
permit the issuer of the bond to skip or reduce the interest payments if a catastrophic loss
occurs.
23- Life insurance investments have an important economic and social impact on the nation for
several reasons, they are long-term, reducing the cost of insurance to policyowners, offsetting
unfavourable underwriting experience and In America, laws place restrictions on the types of
assets because of long- term nature of life insurance products
24- Insurance companies also perform other functions. They include Information systems, The
accounting department, the legal department and loss control services.
25- Measurement of the performance of insurance company is illustrated by simple measurements,

they are loss ratio, expense ratio, combined ratio, investment income ratio and operating ratio.

If you are an underwriter for ABC Insurance. You received a life insurance proposal for medical
insurance with premium payment. The prospect disclosed that he had undergone surgery to correct a
cataract. As an underwriter, what would be your decision with respect to the case?
Solution
I should include that he had gone through surgery to correct a cataract in the medical information
bureau report, after that accepting his application and I might need to increase his premium for a
high chance of loss.

Mohamed Osman is a property claims adjustor for a large property insurer. Abeer is a policyholder
who recently notified the company that the roof of her home incurred substantial damage because of a
recent hailstorm. Abeer owns her home and is insured under a standard homeowner's policy with no
special endorsement. What questions should Mohamed Osman ask before the claim is approved for
payment by his company?
Solution
A series of questions should be answered before the claim is approved for example:
• Did the loss occur while the policy was in force?

• Does the policy cover the peril that caused the loss?
• Does the policy cover the property destroyed or damaged in the loss?
The third Applied case

Delta insurance is a property insurer that entered into a surplus – share reinsurance treaty with Ever
safe Re. Delta has a retention limit of $200,000 on any single building, and up to nine lines of
insurance may be ceded to Ever safe Re. A building valued at $1,600,000 is insured with Delta.
Shortly, after the policy was issued, a severe windstorm caused a $800,000 loss to the building
a- How much of the loss will Delta pay?
b- How much of the loss will Ever safe Re pay?
c- What is the maximum amount of insurance that Delta can write on a single building under
reinsurance agreement? Explain your answer.
Solution
Delta (insurance company) 200000/1600000 = 0.125
Ever safe Re (reinsurance company) 1400000/1600000 = 0.875
a- "delta" will pay = 800000 x 0.125 = 100000

b- "Ever safe" will pay = 800000 x 0.875 = 700000
c- "delta" has a retention limit of 200000 on any single building up to (9 lines) so the max amount
would be (200000 x 9 = 1800000).
CH 8
Auto insurance
QUESTION ONE (MCQs)

1- Which of the following statements about the liability limits of the PAP is (are) true?
I- The policy is written with split limits of liability
II- Prejudgment interest is considered part of the damage award and is subject to the
policy limit of liability.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
2- Which of the following statements about the payment of defense costs by the PAP is (are) true?
I- They are paid in addition to the policy limits
II- They are payable even after the limit of liability is exhausted.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
3- All of the following are covered autos under the liability section of the PAP Except
A) A nonowned van that is driven by the insured on a regular basis
B) A trailer owned by the named insured
C) A borrowed auto used by the insured as a substitute for a covered auto that has been stolen.
D) A newly acquired auto that replaces a vehicle previously described in the policy.
Answer
4- All of the following are insured persons under the liability coverage of the PAP Except
A) A friend to whom the named insured loans a covered auto.
B) The employer of the named insured fir actions resulting from the named insured’s use of a
covered auto
C) The spouse of the named insured whether or not a member of the same household.
D) A relative of the named insured if a member of the same household
Answer
5- Which of the following persons is (are) covered for liability insurance under the PAP?
I- A family member who drives a covered auto
II- A family member who drives the auto of a friend
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
6- All of the following are covered as supplementary payments under the liability section of the
PAP Except
A) The cost of an appeal bond in a lawsuit
B) The cost of a bail bond for a traffic violation when no accident is involved.
C) Interest that accrues on a liability judgment covered by the policy
D) Reasonable expenses incurred by the insured to testify at a trial involving a lawsuit covered
by the policy
Answer
7- Which of the following situations would be covered by the liability section of ab unendorsed PAP
if the insured is legally liable?
A) The insured injured a pedestrian while “trying out “a friend’s new motorcycle.
B) The insured backs into and damages the garage door of his rented house.
C) A friend’s furniture is damaged when the insured has an accident while helping the friend
move
D) The insured damages a parked car while driving a dump truck for his or her employer
Answer
8- In purchasing automobile insurance, which of the following coverages should be considered

essential?
A) Liability coverage
B) Medical payments coverage
C) Uninsured motorist coverage
D) Underinsured motorist coverage
E) They are all essential.
Answer
9- Comprehensive coverage under the PAP pays for damage to the insured auto caused by all of
the following except
A) Hail
B) Collision with a bird or animal
C) Flood
D) Upset earthquake
Answer
10- The definition of “uninsured motorist” under the Uninsured Motorist coverage of the PAP
includes
A) An automobile being operated without liability insurance
B) A hit0and-run driver
C) An automobile insured by a company that becomes insolvent
D) All of the above
Answer
11- What is purpose of the of the extended nonowned liability coverage endorsement to the PAP?
A) To provide liability coverage for an insured\s employer when an insured uses his or her auto
for business purposes.
B) To provide liability coverage for an insured who occasionally operates a nonowned auto.
C) To provide liability coverage for anyone who loans a covered auto to another driver
D) To provide liability coverage for an insured who operates a nonowned auto on a regular
basis.
Answer
12- Which of the following situations would be covered under the liability section of PAP?
I- An attendant at a parking lot is sued by a pedestrian who is injured when the
attendant has an accident while parking the covered auto.
II- The daughter of the named insured is sued after she has an accident when a new
friend, she just met at a campus hangout lets her drive his car
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
13- John occasionally borrows the car of his friend, Sophie. Sophie has the car insured for $300,000
of liability insurance under a PAP. John is also a covered person under his mother’s PAP which
provides $500,000 of liability insurance. If john has an accident while using Sophie’s car and is
found to be legally liable in the amount of $400.000, how much will be paid by each policy?
A) Sophie’s policy will pay $150000, and mother’s policy will pay $250,000
B) Sophie’s policy will pay $300,000 and mother’s policy will pay nothing
C) Sophie’s policy will pay $300,000 and mother’s policy will pay $100,000
D) The mother’s policy will pay the entire judgment.
Answer
14- Which the following statements about medical payments coverage of the PAP is true?
A) The amount of the benefit typically is $100,000
B) Covered expenses must be incurred within six months of the accident
C) Covered expenses include the cost of funeral services
D) The benefit limit in the policy applies on a per-accident basis rather than a per-person basis.
Answer
15- All of the following are covered persons under the payment's coverage of the PAP Except
A) A family member of the named insured if struck by an auto while crossing the street
B) A pedestrian struck by the named insured’s auto
C) the named insured who is injured while occupying a friend’s auto
D) a friend who is injured while occupying a friend’s auto
Answer
16- Samir has a PAP, which provides medical payments coverage. Under which of the following
circumstances would injure person be eligible for benefits under Samir’s policy?
I- A friend is injured while Samir is driving a nonowned auto
II- A hitchhiker riding with Samir’s is injured when the son wrecks Samir’s auto
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
17- All of the following are exclusions under the medical payment's coverage of the PAP Except
A) Injuries incurred while riding a motorcycle
B) Injuries incurred while an auto is being used without the presumption that permission would
have been granted to use the auto
C) Injuries incurred in a private passenger auto while it is used in a share-the-expense carpool.
D) Injuries incurred during the course of employment if workers compensation benefits are
available.
Answer
18- Which the following statements about the uninsured motorist coverage of the PAP is true?
A) All the coverage applies only to property damage
B) The coverage applies only if the uninsured motorist is legally liable
C) Unless higher amounts are purchased, the maximum benefit is normally limited to $1000
D) A covered person’s only recourse is to sue the insurer if there is a disagreement over the
amount of damages
Answer
19- Which the following persons is (are) insured persons under the uninsured motorist coverage of
the PAP?
I- A pedestrian struck by a covered auto if he or she has no insurance to pay medical
expenses
II- The spouse of a named insured who is killed by an uninsured motorist
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
20- All of the following are considered to be uninsured vehicles for purposes of the uninsured
motorist's coverage of the PAP Except
A) A vehicle owned by an individual that is insured, but for less than the amount required the
state’s financial responsibility law
B) A hit-and-run vehicle, the ownership of which cannot be determined
C) An uninsured vehicle owned by another family member
D) A vehicle insured by a company that becomes insolvent before a claim can be paid
Answer
21- joyce was seriously injured by an uninsured drunk driver while she has riding in a friend’s car.
Joyce and her friend each have a PAP with an uninsured motorist's limit of $50,000. How much
will be paid by each policy if it is determined that Joyce has bodily injury of $70,000?
A) Each policy will pay $35,000
B) Joyce’s policy will pay $50,000 and friend’s policy will pay nothing.
C) Joyce’s policy will pay $50,000 and friend’s policy will pay 20,000.
D) The friend’s policy will pay $50,000 and Joyce’s policy will pay 20,000.
Answer
22- All of the following statements about part D (coverage for damage to your auto) of the PAP are
true Except
A) Coverage may be purchased with or without collision insurance.
B) Losses are paid regardless of fault
C) Coverage applies to a nonowned auto occasionally driven by an insured
D) A newly acquired auto is covered only if the named insured asks the company to insure it
within 48 hours of acquisition.
Answer
23- Which of the following is considered to be a collision loss under part D (coverage of damage to
your auto) of PAP?
A) The covered auto collides with a deer.
B) The covered auto is wrecked by a thief after it is stolen
C) The covered auto is damaged when it slid off an icy road and hit a fence.
D) The covered auto is damaged when struck by a rock thrown by children
Answer
24- Ian has an auto that is covered for collision losses subject to a $100 deductible. Kate’s auto also
has collision coverage, but her deductible is $500. Which of the following statements describes
how a $2000 collision loss will be paid if it occurs when Ian borrows Kate’s car because his car is
in the shop for repairs?
A) Ian’s policy will pay $1500, and Kat’s policy will pay nothing
B) Ian’s policy will pay $1900, and Kat’s policy will pay nothing
C) Kat’s policy will pay $1900, and Ian’s policy will pay nothing
D) Kat’s policy will pay $1500, and Ian’s policy will $400
Answer
25- All of the following losses are excluded under Part D (coverage for damage to your auto) of an
unendorsed PAP Except
A) Damage by vandals to a portable car telephone
B) The theft of a compact disk player that was permanently installed in auto
C) The damage caused to a car’s engine by freezing when the named insured forgot to add
antifreeze
D) The damage by fire a radar detector that overheated
Answer
26- The insurance company’s options for settling a collision loss to a covered auto under the PAP
include which of the following?
I- Pay the loss in money
II- Repair or replace the damaged auto
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
27- Duties of an insured after a collision loss covered under the PAP include which of the following?
I- Take reasonable steps to protect the vehicle from further damage
II- Admit fault if the insured believes he or she caused the collision
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
28- All of the following statements about the termination provisions of the PAP are true Except
A) The insured can cancel the policy for any reason.
B) The insurer can cancel a newly written policy for any reason if it has been in force for less
than 60 days.
C) The insurer can cancel the policy after it has been in force for less than 60 days only if the
insured has three or more traffic violations
D) The insurer can refuse to renew the policy at its annual anniversary date as long as proper
notice is given prior to the end of the policy period.
Answer
29- The miscellaneous type of Vehicle Endorsement to the PAP can be used to insure all of the
following vehicles Except
A) Motor homes
B) Golf carts
C) Snowmobiles
D) Motorcycles
Answer
30- Which of the following statements about the Miscellaneous Type Vehicle Endorsement to the
PAP is (are) true?
I- It provides bodily injury liability coverage for any vehicle rented by the insured
II- To lower premiums when a motorcycle is insured, bodily injury to passengers can be
excluded
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Answer
31- Aly fell asleep while driving late at night. He crossed the center line and hit a car that was
approaching from the other direction. The following losses occurred
▪ The driver of other car suffered $30,000 in bodily injuries
▪ Aly’s incurred $5000 in damages
▪ Aly’s incurred $5000 in medical expenses
▪ The car that Aly hit was a total loss
Which of Aly’s Personal Auto Policy (PAP) coverage will cover the other driver’s medical
expenses?
A) bodily injury liability

B) collision coverage
C) medical payments coverage
D) property damage liability
Answer
Which of Aly’s Personal Auto Policy (PAP) coverage will cover the damage to Aly’s car?
A) Bodily injury liability

B) Collision coverage
C) Medical payments coverage
D) Property damage liability
Answer
Which of Aly’s Personal Auto Policy (PAP) coverage will cover Aly’s medical expenses?

Answer
Which of Aly’s Personal Auto Policy (PAP) coverage will cover the damage to the car that Aly hit?

Answer
35- Sarah purchased a Personal Auto Policy (PAP) with limits of 50/100/25. Sarah ran a stop sign and
hit a van. The van sustained $15,000 in damages. The following bodily injuries were suffered by
passengers in van. Passenger #1, 15,000; Passenger #2, 60,000; and Passenger #3, 10,000. Sarah
sustained $ 5000 in medical expenses, and Sarah’s car sustained $10,000 in damages. How much
will Sarah’s insurer pay under Part A: liability coverage?
A) $90,000
B) $100,000
C) $115,000
D) $125,000
Answer
36- Soher purchased a Personal Auto Policy (PAP). Her car was rear-ended by driver who fled the
scene. Soher suffered severe whiplash, migraine headaches, and lower back pain resulting from
the accident. She was unable to work. Which of the following coverages will cover Shore’s lost
work earnings?
A) Medical payments
B) Uninsured motorists
C) Underinsured motorists
D) Bodily injury liability
Answer
37- Mohamed purchased a Personal Auto Policy (PAP), including collision and other-than- collision
coverage. All of the e following losses are excluded under this physical damage coverage Except
A) Mohamed wrecked his car while using it a taxicab
B) Thieves took Mohamed’s radar detector from his car
C) A flash flood washed Mohamed’s car off the road and damaged it
D) The new tires Mohamed had on the car were defective and wore out after two months
Answer
38- Angie was injured when her car was struck by a driver who ran a red light. The other driver
carried only the minimum amount of liability coverage necessary to be considered financially
responsible in the state. Angie’s injuries were $15,000 above the minimum per-person bodily
injury limit. There is a coverage that can be added to the PAP that applies when a negligent
driver carries at least minimum amount of liability insurance required by state, but the limits
carried are less than the insured’s actual damages for bodily injury. This coverage is called
A) Medical payments coverage
B) Uninsured motorists' coverage
C) Bodily injury liability coverage
D) Underinsured motorists' coverage
Answer
39- Abd Allah was involved in an accident. He believes the damage to his auto is$6000. His insurer
believes the damage is only $3500. Which PAP is designed to handle disputes between the
insurer and insured over the amount of the loss?
A) Other insurance provision
B) Agreed amount endorsement
C) Coinsurance provision
D) Appraisal provision
Answer
40- Which of the following losses would be paid under the collision coverage of the Personal Auto
Policy?
A) The car is stolen, and the thief collides with a bridge
B) The car collides with a deer
C) Bricks fall from a truck the insured is following and hit the car
D) The insured misjudges a curve and “rolls” the car
Answer
1- Liability coverage under the PAP applies to persons operating the covered automobile with
permission TRUE
2- The PAP is suspended if the insured intentionally violates the law while operating the covered
auto FALSE
3- Medical payments coverage of the PAP covers the named insured and relatives if struck by an
auto while they are pedestrians TRUE
4- While liability coverage of the PAP applies to the named insured while operating a nonowned
automobile, resident relatives do not enjoy such coverage. FALSE
5- If you borrow a friend’s car, the coverage of your PAP will apply as excess insurance in the event
of a loss TRUE
6- Trailers owned by the named insured are automatically covered under the liability section of the
PAP regardless of whether or not they have been listed TRUE
7- Osama’s PAP will apply as excess coverage to an auto which his employer furnishes for business
use by Osama FALSE
8- Although the PAP provides some coverage for the business use of nonowned automobiles,
special exclusions apply to automobiles used in the automobile business. TRUE
9- Newly acquired replacement automobiles are automatically covered under the PAP without
notice to the insurer, except with respect to physical damage coverage on the new auto TRUE
10- Trailers are automatically covered under both the liability section and the physical damage
section of the PAP regardless of whether or not they are listed in the policy FALSE
11- Coverage on motorcycles and motorscooters may be provided under the PAP, but with special
endorsement to tailor the coverage to the exposure TRUE
12- When the PAP is written to provide coverage on a motorcycle, coverage applies to a temporary
substitute vehicle, but not to other nonowned motorcycles TRUE
13- The extended Liability Coverage endorsement to the PAP extends coverage to autos furnished
for the regular use of a named individual. TRUE
1- Define PAP policy
is the automobile insurance contract purchased by most individuals. It is complicated of all

insurance contracts because it is a package policy where provides a coverage against three types
of losses (legal liability – damage to or loss of automobile itself - injury of the insured or
members of the insured`s family).
2- What are Declarations in PAP policy

1- Liability Coverage
2- Medical Payments Coverages
3- Uninsured Motorists Coverage
4- Coverage for Damage to Your Auto (your Car)
5- Duties After an Accident or Loss
6- General Provisions
3- What is Liability coverage in PAP policy
It is the most important part of the PAP. It means third party coverage, that is, a payment will be
paid to a third party rather than the insured.
4- Exclusions to the coverage in part A of PAP policy

1- Intentional injury or damage
2- Property owned or transported
3- Property rented, used, or in the insured’s care
4- Bodily injury to an employee
5- Use as a public livery or conveyance
6- Vehicles used in the auto business
7- Vehicles with fewer than four wheels
8- Vehicle furnished for the insured’s regular use
9- Racing vehicle
5- What are the insured persons under Uninsured Motorists coverage in part C of PAP?
1- The named insured and family members if they are injured by Uninsured Motorists
2- Another person while occupying a covered auto
3- Any person legally entitled to recover damages
6- What are The Exclusions to the coverage in part C of PAP policy
1- An insured is injured in, or by, a vehicle owned by the named insured, but not insured under
the policy
2- There is primary coverage under another policy
3- The vehicle is used as a public livery or conveyance
4- When workers compensation benefits are applicable
5- The vehicle is used without a reasonable belief of permission
7- What are Coverages for Damage to Your Automobile if you have PAP policy
1- Collision coverage
2- Other than collision coverage (also called comprehensive)
8- What are Exclusions to the coverage in part D of PAP policy

1- Use the vehicle as a public livery or conveyance
2- Damage from wear and tear, freezing, and mechanical or electrical breakdown
3- Radioactive contamination or war
4- Certain electronic equipment
5- Tapes, records, and disks
6- Government destruction or confiscation
7- Trailer, camper body, or motor home
8- Racing vehicle or rental car
9- What are Obligations that should be done if the insured has an accident or loss? In other words,
after an accident, the insured is required to perform certain duties, what are these?
1- Promptly notify the insurance company or agent
2- Cooperate with the insurer in the investigation
3- Send the insurer copies of any legal notices received in connection with an accident
4- Take a physical examination at the insurer`s expense, if required
5- You must submit a proof of loss at the insurer`s request.
10- Explain the General Provisions of PAP policy
This section (part F) contains a lot of provisions, some of them can be illustrated as follows:
1- Policy Period and Territory
The PAP policy provide coverage just only inside U.S.A and, US territories, Puerto Rico, and
Canada. Outside U.S.A, you are not covered
2- Termination of PAP
An important provision applies to termination of insurance by either the insured or insurer.
There are parts to this provision:
A- Cancellation provision: The named insured can cancel at any time by returning the policy
to the insurer or providing written notice. As well, the insurer has the right of
cancellation.
B- Nonrenewal: if an insurer decides to discontinue coverage, the insured must be given
notice at least 20 days before the end of the policy period.
C- Automatic termination: a policy is automatically terminated if the insured does not
accept the insurer’s offer to renew.
11- Did PAP policy cover motorcycles, mopeds, motorscooters and similar vehicles?
The PAP excludes coverage for motorcycles, mopeds, motorscooters and similar vehicles.
However, a miscellaneous-type vehicle endorsement can be added to the PAP to insure
motorcycles, mopeds, motorscooters, golf carts, motor homes, dune buggies and similar vehicles
-- etc.
1- Automobile insurance coverage is classified into four coverages, they are Automobile liability,
automobile medical payments coverage, automobile damage coverage, uninsured motorist
coverage
2- PAP is complicated of all insurance contracts because it is a package police where provides a
coverage against three types of losses, they are legal liability, injury, and damage
3- PAP is eligible to auto owned by an individual and not eligible to auto owned by partnerships
4- Autos covered by the PAP policy include Any auto shown in the declarations, A newly acquired
auto (pickup or van) if it is acquired by the named insured during the policy period, A trailer
owned by the named insured, and A temporary substitute vehicle, which is a nonowned auto or
trailer used temporarily because of mechanical breakdown, repair, servicing, loss, or destruction
of a covered vehicle.
5- Contents of Personal Automobile Policy (PAP) are liability coverage, medical payments, general
provision , duties after accident or loss
6- Uninsured Motorists Coverage in PAP policy means pays for the bodily injury
7- Exclusions to the coverage in part D of PAP policy include Use the vehicle as a public livery or
conveyance, Damage from wear and tear, freezing, mechanical or electrical breakdown,
Radioactive contamination or war Certain electronic equipment Tapes, records, disks,
Government destruction or confiscation, Trailer, camper body, or motor home, Racing vehicle or
rental car
8- after an accident, the insured is required to perform certain duties, they are Promptly notify the
insurance company or agent, Cooperate with the insurer in the investigation, Send the insurer
copies of any legal notices received in connection with an accident, Take a physical examination
at the insurer`s expense, if required, and You must submit a proof of loss at the insurer`s
request.
9- Some Other Vehicles may be insured under PAP such as motorcycles, mopeds, motorscooters
and similar vehicles. but Some points should be added to the PAP, they are The liability coverage
does not apply to a nonowned vehicle, A passenger hazard exclusion can be elected, which
excludes liability for bodily injury to any passenger on a motorcycle, and The amount paid for
any physical damage losses to the motorcycles is limited to the lowest of 1- The stated amount
shown in the endorsement 2- The actual cash value, or 3- The amount necessary to repair or
replace the property.

Fred has a PAP with the following coverages
- Liability coverages: $ 100,000/$300,000/$50,000
- Medical payments coverage: $5000 each person
- Uninsured motorists' coverage: $25000 each person
- Collision loss: $25 deductible
- Other-than-collision loss: $1000 deductible
With respect to each of the following situations, indicate whether the loss is covered and the amount
payable, if any, under the policy. Assume that each situation is a separate event
a- Fred ‘s son aged 16 is driving a family car, runs a red light, and kills a pedestrian. The family of
the deceased pedestrian sues, and damages are awarded in the amount of $ 500,000
b- Fred borrows a friend’s car to go to the supermarket. He fails to stop at a red light and
negligently smashes into another motorist. The other driver’s car, valued at $15,000, is destroyed.
In addition, repairs to the friend’s car $5000
c- Fred's daughter, heather, attends college in another state and drives a family auto. Heather lets
her boyfriend drive the car and he negligently injures another motorist. The boyfriend is sued for
$50,000
d- Fred’s wife is driving a family car in a snowstorm. She loses control of the car on an icy street
and smashes into a foundation of a house. The property damage to the house is $30,000. The
damage to the family car is $8000. Fred’s wife has medical expenses of $5000
e- Fred is walking across a street and, is struck by a motorist who fails to stop. He has bodily injuries
in the amount of $15,000
f- Fred’s car is being repaired for faulty brakes. While road testing the car, a mechanic injures
another motorist and is sued for $50,000
g- Fred’s car hits a cow crossing a highway. The cost of repairing the car is $2500
h- A thief breaks a car window and steals a camera and golf clubs looked in the car. It will cost $400
to replace the damaged window. The stolen property is valued at $500
i- Fred’s wife goes shopping at a supermarket. When she returns, she finds that another driver who
did not leave a name has damaged the left rear fender. the cost of repairing the car is $2000
j- Fred works for a construction company. While driving a large cement truck, he negligently
injures another motorist. The injured motorist sues Fred for $25000
k- Fred’s son drives a family car on a date. He gets drunk, and his girlfriend drives him home. The
girlfriend negligently injures another motorist, who has bodily injuries in the amount of $20,000
l- Fred’s car was damaged when another car in the adjacent lane skidded and collided into it. Fred
sustained serious injuries and his car was extensively damaged. Fred’s medical bill amounted to
$40,000 and the car’s repair cost was $60,000. The other car’s liability coverage was
$25,000/100,000/50,000.
Solution
a- (a) Covered. Fred is covered as a member of the family. The maximum amount paid would be
$100,000.
b- (b) Covered. Damage to the other car is covered under property damage liability for $15,000.
Collision coverage, if any, on the friend’s car would be primary, and Fred’s policy would be
excess. If there is no collision coverage on the friend’s car, Fred’s policy would be primary and
would pay $4750.
c- (c) If the boyfriend can establish a reasonable belief that permission would have been granted,
he would have coverage under Fred’s policy, and $50,000 would be paid if he were legally liable.
d- (d) Covered. Property damage to the house in the amount of $30,000 would be paid. The
amount paid for damage to the family car is $7750. The wife’s medical expenses in the amount
of $5000 are also paid.
e- (e) Covered. Under the uninsured motorist’s coverage, Fred would recover $15,000.
f- (f) Not covered. The mechanic is not covered under Fred’s policy. If a person is employed or
engaged in the automobile business, liability arising out of operation of vehicles in the
automobile business is excluded. However, the exclusion does not apply to the operation of any
covered auto by the named insured, family member, or partner.
g- (g) Covered. This loss is covered under Part D (coverage for damage to your auto). Loss caused
by contact with a bird or animal is considered to be other-than-a-collision loss. The amount paid
would be $2400.
h- (h) The broken window is covered as other-than-a-collision loss; the amount paid is $300. The
theft of the camera and golf clubs is not covered under the PAP.
i- (i) Covered. This is considered to be a collision loss. The amount paid is $1750.
j- (j) Not covered. Liability coverage for commercial vehicles and large trucks used in a business,
such as a large cement truck, is excluded under the liability section of the PAP.
k- (k) Covered. From the facts, it appears that the girlfriend can establish a reasonable belief that
permission to drive the automobile would have been given. However, the amount paid would be
only $100,000.
l- (l) Fred’s claim is payable in such manner:
Third Party Insurer Fred’s Insurer

Repair cost: $50,000 $10,000
Bodily injury: $25,000 $15,000
Patrick has a PAP with liability limits of $50,000/$100,000/$25,000. Patrick failed to stop at a red
light and hit a van. The van sustained damages of 415,000. Three passengers in the van were injured
and incurred the following bodily injuries:
Passenger A $15,000
Passenger B $60,000
Passenger C $10,000
Patrick was also injured and incurred medical bills of $10,000. His car sustained damages of $10,000.
Because of his injury, Patrick was unable to work and lost $5000 in wages. How much will Patrick’s
insurer pay under the liability coverage (Part A0 section of his PAP? Explain your answer.
Solution
Patrick ran a red light and is legally liable for the property damage to the van and bodily injuries to
the passengers. The liability coverage (Part A) pays a maximum of $90,000 as illustrated by the
following:
Property damage to the van $15,000

Bodily injury to Passenger A $15,000
Bodily injury to Passenger B $50,000 (limit per person under the policy)
Bodily injury to Passenger C $10,000
The liability coverage under Patrick’s policy will not cover his medical bills, lost earnings, or physical
damage to his car. If he has Medical Payments Coverage, his medical bills would be covered up to
the policy limits. If he has Coverage for Damage to Your Auto, the physical damage loss would be
covered less any deductible

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CH 1

Risk And Its Treatment

QUESTION ONE (MCQs)

2- Objective risk is defined as

4- Uncertainty based on a person’s mental condition or state of mind is known as

8- Dense fog that increases the chance of an automobile accident is an example of

9- Faking an accident to collect insurance proceeds is an example of a

11- A pure risk is defined as a situation in which there is

12- The premature death of an individual is an example of a

13- Which of the following statements about speculative risks is true?

17- Which of the following are often consequences of long-term disability?

22- Loss control includes which of the following?

23- Following good health habits can be categorized as

27- All of the following are methods of noninsurance transfer except

32- Mandatory driver education training by trucking firm is an example of

34- using your seatbelt at all times while driving is an example of

10- Peril is a synonym for hazard FALSE

1- Risk Avoidance: avoidance of activity that may lead to loss

3- Insurance: the most practical method for handling major risks

6- Loss preventions: reducing the probability of loss

7- Physical hazard: a physical condition that increases the chance of loss

9- Risk: uncertainty concerning the occurrence of a loss

10- Peril: the direst cause of a loss

1- Peril the direst cause of a loss

2- Dry forests is an example of physical hazard

3- Gambling is a good example of a speculative risk

4- General risk affects the entire economy

5- Risk retention means the risks are kept by individuals or organizations

D) A catastrophic loss exposure is present:

QUESTION ONE (MCQs)

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

4- Characteristics of a fortuitous loss include which of the following?

14- Which of the following is a result of adverse selection

18- Inland marine insurance provides coverage for

19- All of the following can be classified as causality insurance except

20- Which of the following is a form of casualty insurance?

6- Sickness can be considered both a peril and hazard TRUE

7- From the perspective of an insurer. adverse selection is uncontrollable phenomenon FALSE

2- Insurance is a source of investment funds by example:

For instance: Purchasing new machines and equipment.

This type of insurance covers medical expenses from sickness.

4- Life insurance policies:

Deal with death risk of insured died.

6- Risk transfer in insurance:

A pure risk is transferred from the insured to the insurer

7- Law of Large Numbers:

3- The loss must be fortuitous means, Accidental

A) Identify the ideal requirements of an insurable risk

1- Characteristics of a fortuitous loss include which of the following?

3- Which of the following is a form of casualty insurance?

6- Define Life insurance Annuities policies that cover for lifetime

QUESTION ONE (MCQs)

1- Risk management is concerned with

4- Preloss objectives of risk management include which of the following?

7- Loss severity is defined as the

8- Loss frequency is defined as the

12- Abandoning an existing loss exposure is an example of

16- Which of the following statements about self-insurance is (are) true?

17- All of the following are potential advantages of retention except

23- All of the following are disadvantages of using insurance Except