Chapter 26 Quiz

Twenty questions to check your grasp of specialty and niche lines. Answers and brief explanations are in the collapsed key at the bottom — try the whole set before you open it.

Multiple choice

1. Despite its name, inland marine insurance primarily covers:

• A. Vessels and cargo on inland rivers and lakes
• B. Property that moves, is mobile, is held for others, or is otherwise outside a fixed building
• C. Only the liability of barge operators
• D. Flood damage to buildings near water

2. The four classic ocean-marine coverages are hull, cargo, freight, and:

• A. Protection & indemnity (P&I)
• B. Business income
• C. Equipment breakdown
• D. Builders' risk

3. Aviation insurance is described as the archetypal _ line:

• A. High-frequency, low-severity
• B. Low-frequency, high-severity
• C. High-frequency, high-severity
• D. Low-frequency, low-severity

4. An aircraft operator's eight-year, claim-free record should be treated with caution mainly because:

• A. Records older than five years are legally inadmissible
• B. Severe aviation losses are rare, so a single operator's loss-free history has very low credibility and the severity tail is unpriced
• C. Aviation claims are always fraudulent
• D. The law of large numbers guarantees a loss in year nine

5. In energy underwriting, the figure that drives capacity and price is not the total insured value but the:

• A. Loss ratio
• B. Expense ratio
• C. Probable maximum loss (PML)
• D. Coinsurance percentage

6. Energy and other large industrial risks are typically written through a structure in which many insurers each take a slice of a layer. This is called a:

• A. Quota-share treaty
• B. Layered/shared program (a tower)
• C. Monopolistic state fund
• D. Straight-through process

7. Crop risk fails the independence assumption of the law of large numbers because:

• A. Farmers commit fraud more than other insureds
• B. A single peril (drought, freeze) damages many farms across a region simultaneously
• C. Crop values cannot be measured
• D. There are too few farms to form a pool

8. In the U.S. MPCI partnership, the federal government (USDA-RMA/FCIC) does all of the following EXCEPT:

• A. Set the policy forms and rates
• B. Subsidize the farmer's premium
• C. Reinsure the catastrophe tail
• D. Sell and service the individual policies through its own agents

9. The defining feature of parametric insurance is that it pays:

• A. The insured's actual, adjusted loss
• B. A pre-agreed amount when a measurable trigger occurs, regardless of actual loss
• C. Only after a multi-year claims investigation
• D. Nothing unless physical damage exceeds 50% of value

10. Basis risk in a parametric policy is the risk that:

• A. The premium base is calculated incorrectly
• B. The trigger and the insured's actual loss diverge
• C. The reinsurer becomes insolvent
• D. Interest rates move against the insurer

11. For a parametric contract to qualify as insurance rather than a wager, the buyer generally must still have:

• A. A perfect credit score
• B. An insurable interest in the triggering event
• C. A reinsurance treaty
• D. A surplus-lines license

12. In a program-business arrangement, a managing general agent (MGA) under a binding-authority agreement:

• A. Only refers risks to the carrier for decision
• B. Selects risks, sets terms, and binds coverage on the carrier's paper
• C. Holds the capital and pays the claims itself
• D. Acts solely as a reinsurer

13. The structural moral hazard in a commission-only MGA program is that:

• A. The carrier underwrites too conservatively
• B. The party making the underwriting decision (the MGA, paid on volume) is not the party that bears the loss (the carrier)
• C. The insured always commits fraud
• D. Reinsurers refuse to participate

14. A delegated-authority program reports a 45% loss ratio in its second year. The most likely reason a disciplined carrier is not reassured is that:

• A. 45% is mathematically impossible
• B. Long-tail losses may not have developed yet; the reported ratio understates the ultimate
• C. The MGA is legally required to report a higher number
• D. Loss ratios below 50% always indicate fraud

15. Which control most directly aligns an MGA's incentives with the carrier's?

• A. Paying the MGA a higher flat commission
• B. Giving the MGA unlimited binding authority
• C. A profit-share or a retained-risk slice so the MGA shares the downside, not just the upside
• D. Removing the requirement for underwriting audits

Short answer

16. State the rule of thumb for deciding whether an exposure belongs on a commercial property form (Chapter 19) or an inland-marine form, and apply it to a crane that moves between job sites.

17. Explain why energy underwriting is "engineering-led" rather than "data-led," and name the document that does the work a loss run cannot.

18. A parametric policy pays \$3M if a magnitude-6.5+ earthquake strikes within a defined zone. A magnitude-6.4 quake devastates the insured. What does the insured collect, and what is the name for this outcome?

19. Explain how the MPCI program inverts the underwriter's normal job, and name one place where competitive craft still lives despite federally set rates and forms.

20. Across aviation, energy, and crop, name the single shared obstacle (relative to the law of large numbers) and give the different device each line uses to cope with it.