New Jersey Life Producer Law Practice Test

What is an example of a reason an insurer might be declared insolvent?

1. Poor investment decisions

2. Excessive market competition

3. Acquisition of new policies

4. High customer satisfaction rates

The correct answer is: Poor investment decisions

An insurer might be declared insolvent primarily due to poor investment decisions. This situation can arise when an insurance company makes highly risky or unwise investments that do not yield sufficient returns. If the investments fail, the insurer may not maintain enough reserves to cover its liabilities, leading to insolvency. This scenario places the insurer in a position where it cannot meet the claims made by policyholders, ultimately jeopardizing the financial stability of the company. The other options do not directly contribute to insolvency. Excessive market competition might affect profitability but isn’t a direct cause of being unable to pay claims. Similarly, acquiring new policies typically indicates growth rather than financial distress. High customer satisfaction rates generally suggest a well-functioning insurer that can attract and retain business, which would support financial stability rather than lead to insolvency.