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173 Cards in this Set
- Front
- Back
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The transfer of the possibility of a loss (risk) to an insurance company, which in turn spreads the costs of unexpected losses to many individuals.
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Insurance
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The uncertainty or chance of loss occuring.
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Risk
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What two types of risk are there?
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Pure and Speculative Risk
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What is Pure risk?
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A situation that can only result in a loss or no change; there is no opportunity for financial gain. This is the only type of risk insurance companies are willing to take.
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What is Speculative risk?
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Situations involving opportunity for loss or gain, i.e. (gambling) Not insurable.
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What is Exposure?
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A unit(s) of measure used to determine rates charged for insurance coverage. In life insurance, the age of the insured, medical history, occupation, and sex are all considered in determining rates.
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What are Hazards?
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Makes it more likely to have a loss. Conditions or situations that increase the probability of an insured loss occurring. Hazards are classified as physical hazards, moral (ethics) hazards, or morale (character or attitude) hazards.
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What are Perils?
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How did the person die. The causes of loss insured against in an insurance policy.
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What is a Loss?
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The reduction, decrease, or disapperance of value of the person or property insured in a policy.
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What are some concepts of risk management?
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Perils
Hazards Risk Exposre Loss |
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What are some methods of handling risk
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Sharing
Transfer Avoidance Retention Reduction |
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What is avoidance?
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A method of dealing with risk; if a person wanted to avoid the risk of being killed in an airplane crash, they might choose never to fly in a plane. John Madden.
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What is transfer?
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The most effective way to handle risk. Insurance is the most common method to change risk from an individual or group to an insurance company. Through the purchasing of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risk bring.
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What is retention?
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Risk management is the planned assumption of risk by an insured through the use of deductibles, or self insurance. ex. car insurance
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What is sharing?
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A method of dealing with risk for a grouf of individuals persons or businessess with the same or similiar exposure to loss who share the losses that occur within that group.
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What is reduction?
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Since we usually cant avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. Actions such as installing smoke detectors or having an annual physical to dectect health problems early are examples.
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What are the elements of insurable risks?
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* The loss must be due to change "outside the insurers
control." * The loss must be definite and measurable "cause, time, place, and amount." * The loss must be predictable * The loss cannot be catastrophic ex. war * The loss exposure to be insured must be large. |
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What is adverse selection?
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Those who need insurance most, are those who are looking for it.
The insuring of risks that are of a poorer class (more prone to losses) than the average risk. Poorer risks or less desirable insureds tend to seek or continue insurance to a greater extent than better risks. |
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What is the law of large numbers?
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The larger the # of people to study, the easier it is to predict the loss.
A principle stating that the larger the larger the number of similar exposure units considered, the more closely the losses reported will equal the underlying probablility of loss. This law forms the basis for statistical prediction of loss upon which rates for insurance are calculated. |
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What is reinsurance?
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Insurance between insurance companies.
A form of insurance, whereby one insurance company, in consideration of a premium paid to it, agrees to return the insurance company to its original state, for part or all of its liabilities from insurance policies that it has issued. |
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What is facultative reinsurance?
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Insurance that is purchased on a case by case basis, or specific policies, between two insurance companies.
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What is reinsurance treaty?
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Insurance that is purchased, and has an automatic agreement between the two insurance companies that they are to accept, and is bound to accept all risks ceded to it. Usually negotiated for a period of a year or longer.
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What are the six concepts of general insurance?
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* Risk management key terms
* Methods of handling risk * Elements of Insurable risks * Adverse Selection * Law of large numbers * Reinsurance |
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What are the 5 types of insurers?
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* Stock companies
* Mutaual companies * Fraternal benefits societies * Reciprocals * Lloyd's Association |
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What is the difference between a stock company and a mutual company?
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A stock company is owned by stockholder, whereas mutal companies are owned by the policy holders.
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How is an insurance company able to protect such a large number of people who could potentially suffer a loss?
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The insurance company spread the cost of unexpected losses to many individuals, and in most situations only a small number insured.
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What is it that the underwriter must protect against when more poor risks than good risks apply for insurance?
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Adverse selection.
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When studying groups, what happens to predictability when the size of the group increases?
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The larger the # of people to study, the easier it is to predict the loss.
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What is a fraternal benefit society?
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A life or health insurance company formed to provide insurance "for members" of an affliliated lodge, religious organization, or fraternal organization, or fraternal organization with a representative form of government. Ex. Luteran Brotherhood are like the Knights of Columbus.
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What is reciprocals?
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An insurance resulting from an interchange of like agreements of indemnity among persons known as subscribers. The company is put into effect through an "attorney-in-fact."
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What is Lloyd's association?
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This is not an insurance company, but functions like one. They provide support facilities for underwriters or groups of individuals that accept insurance risks. These associates are a group of individuals who operate an insurance mechanism using the same principles of individuals liability of insurers as they use,in that each individual underwriter assumes a part of each risk.
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What is the difference between private and government insurers?
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The difference is the government provides insurance in those areas where private insurers either cannot, or will not, write insurance. These programs provided by the government is called social insurance. Ex. Medicare, Social Security, Federal Crop Insurance and National. The major difference between these government programs and private insurance programs is that the government programs are funded with taxes and serve national and state social purposes.
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What is the difference between admitted and nonadmitted insurer?
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Admitted insurer is an insurance company that has "qualified and received" a Certificate of Authority from the Department of Insurance to transact insurance in the state. Whereas, the nonadmitted insurer is an insurance company that has not applied, or has applied and been denied a Certificate of Authority and may not transact insurance.
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In what three ways are insurance companies classified?
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Domestic, Foreign and Alien
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What is a domestic insurer?
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An insurance company that is incorporated in this state.
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What is a foreign insurer?
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An insurance company that is incorporated in another state.
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What is an alien insurer?
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An insurance company that is incorporated outside the United States.
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Who regularly published guides to insurance companies' financial integrity?
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* AM Best
* Fitch * Standard and Poors * Moody's * Weiss |
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What are six marketing (distribution)systems
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Direct Response Marketing Sys
Independent Agency System General Agency System Managerial System Exclusive Agency System |
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What is an Independent Agency System?
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An agency that represents several companies and is appointed on a "non=exclusive basis." An independent agent earns commission on personal sales and overrides of other agents and owns the expirations of their policies, allowing them to place the renewal business with any company they represent. Ex. State Farm, Farmers
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What is an Exclusive Agency System?
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The agent represents only one insurer and is appoiinted on an exlusive basis. The agent earns commissions on personal sales and overrides of other agents. Business is owned by the insurer and the insured is a customer of the insurer. Therefore, renewals are placed with the insurer only.
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What is a General Agency System?
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An entrepreneur, empowered by the insurer that he or she represents on an exclusive basis to sell life insurance in aspecified territory and to appoint subagents. They may receive compensation for office expenses, advertising and staffing, and will receive commissions on personal sales and overrides on his agents.
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What is Managerial Systems?
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A sales force is supervised by a branch manager who is a salaried employee of the insurer.
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What is Driect Response Marketing Systems?
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A company which advertises its insurance through the mail, internet, television, or through other mass marketing techniques and requires the appplicant to complete the application and return it directly to the insurer by mail or online, therefore bypassing the agent.
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What type of producer rpresents the life insurance company?
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The agent
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A person who acts for another person or entity known as the principal (company) with regards to contractual arrangements with third parties
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Agent/Producer
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The acts of an agent/producer, while acting within the scope of their authority.
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Insurer as principal
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The company who issues a policy of insurance.
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Insurer
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This person will always be deemed to represent the insurer, not the isured. With regards to an insurance contract, any knowledge of the person is presumed to be knowledge of the company. If he is working within the condition of his/her contract, the company is fully responsible. He is responsible to the company when completing applications for insurance, submitting the application to the company for underwriting, and when issued, delivering the policy to to the policyowner and explaining the ocntract. Also, if the insured submits payment to the agent, it is the same as submitting a payment to the company.
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Agent of the Insurer
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The person covered by the policy of insurance. This means anyone that is covered under the policy, whether named or not.
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Insured
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What are the three types of authority?
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Expressed, Implied and Apparent.
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What is expressed authority?
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The authority a principal intends to grant to an agent by means of the agent's contract. It is "written in the contract."
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What is implied authority?
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The day to day duties to carry out the business. The authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal. Ex. making copies or phone calls
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What is apparent authority?
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The apperance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. Ex. When an insurer furnishes an agent with a rate book, application forms, and sales literature, the insurer cannot later deny that such a relationship existed.
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Which type of authority is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business?
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Implied
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What is a fiduciary?
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A person in the position of financial trust who must act in the best interest of all parties involved. This person is legally obligated to perform in an ethical manner. "He or she does not commingle premiums collected with his or her own personal funds."
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The way companies and producers should conduct their business, a "code of ethics' for producers?
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Market Conduct
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What is a contract and its purpose?
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An agreement between two or more parties enforceable by law." In order for it to be legally binding or enforceable by law, it must have certain essential elements.
The purpose must be legal and not against public policy. |
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What are the four essential elements of all legal contracts?
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* Offer and acceptance
* Consideration * Competent parties; and * Legal purpose |
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What is offer and acceptance?
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This is when the applicant submits and application and submits the first premium payment with the application. If the payment is not submitted with application, this is given when the policy is delivered and the applicant pays the first premium.
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What is a counter-offer?
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This is when the original offer is not accepted and this takes it place.
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Describe the concept of consideration on the part of an insured and how it differs from consideration on the part of an insurer?
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The consideration on the part of the insured is the payment of premium and the health representations made in the application. The consideration on the part of the insurer is the promise to pay in event of loss.
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What is consideration?
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The binding force in a contract. The thing of value which each party gives to the other.
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What is competent parties?
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Sane, sober, and 18.
The parties to a contract must be capable of entering into a contract in the eyes of the law. |
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What is legal purpose?
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The part of the contract that is legal and not against public policy.
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What is the elements of a legal contract?
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Consideration
Legal Purpose Offer and Acceptance Competent Parties |
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What is contract of adhesion?
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Non-negoticable,"take it or leave it. This contract is prepared by one of the parties (insurer) amd accepted or rejected by the other party (insured). Insurance policies are not drawn up through negoitations, and an insured has little to say about its provision.
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What is aleatory contract?
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A contract which unequal amounts or values are exchanged. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss.
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What is personal contract?
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Contract between me and the company. An insurance contract is between the insurance company and an individual. Since the company has a right to decide with whom it will and willnot do business, the insured cannot transfer the contract to someone else in most cases without the written consent of the insurer.
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What is unilateral contract?
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This is an one way contract. Only one of the parties to the contract is legally bound to do anything. The insured makes no promised taht can be legally binding; however, an insurer is legally bound to pay losses covered by an policy that is in force.
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What is conditional contract?
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A contract that has certain conditions that must be met by the owner and the company in order for the contract to be executed.
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How does the courts treat ambiguous contracts?
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Because the insurance company has the right to draw up the contract, the courts have held that any ambiguity in a contract should be interpreted in favor of the insured.
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Explain the concept of reasonable coverage expectations?
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Some provisions or coverages must be provided by an insurance policy, even though not specifically stated in the policy. If, because of advertising or sales literature or statements by an agent, an insured could expect this. The court have held they must be provided. If a person order a new car they can expect a steering wheel.
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What is reasonable expectation of coverage?
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This is when coverage must be provided by the insurance company policy, even though its not stated in the policy. Ex. If a person orer a new automobile, even though the order form does not state that it will have a steering wheel, the buyer could reasonable expect a steering wheel to be included.
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What is an indemnity?
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This is a provision in a insurance policy, that in the event of loss an insred is permitted to collect only to the extent of their financial oss and is not allowed to gain financially because of the existence of an insurance contract. Insurance can restore, but not reward for suffering a loss. To make whole financially or return to original state.
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What is utmost good faith?
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This is the insurance contract between the insurer and the insured where each party must be able to rely on the other for valid critical information.
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What is representation?
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This a written response to questions or statements made on an application for insurance upon which the underwriter relies in order to issue a policy. This is something that you believe to be true to the best of your knowledge.
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What is misreprensentation?
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This is a lie or false statement of material facts, given to an insurer with an intent to defraud, which, if were discovered, a policy would not likely be issued, or if issued, could likely be voided.
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What is a warranty?
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This is a statement to the insurer by the insured upon which the validity of the insurance policy depends. The insurance contract is not binding unless the statements are literally true. If this is broken, the insurer is entitled to a return of premium.
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What is a concealment?
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This is a legal term for the intentional withholding of information of a material fact which is crucial in making a decision. In insurance, its the withholding of information that will result in an imprecise underwriting decision.
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What is Fraud?
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The intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or deceive or cheat a party.
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What is a waiver?
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This is the intentional act of relinquishing a known right, claim or privilege.
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What is estoppel?
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This a legal process that can stop you from getting rights back. It can prevent a party to a contract from re-asserting a right or priviledge after that right or priviledge has been waived.
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Barry failed to disclose material facts on an application. Which of the following is correct?
A) He is guilty of coercion B) He is guilty of concealment. C) He is guilty of misrepresentation. D) He is guilty of twisting. |
B) He is guilty of concealment.
Concealment is the legal term for the intentional withholding of information of a material fact which is crucial in making a decision. In insurance,concealment is the withholding of information that will result in an imprecise underwriting decision. |
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What term best describe the act of withholding of material information that would be critical to an underwriting decision?
A) Withholding B) Leading C) Breach of Warranty D) Concealment |
D) Concealment
Concealment is the legal term for the intentional withholding of information of a material fact which is crucial in making a decision. In insurance,concealment is the withholding of information that will result in an imprecise underwriting decision. Example, if someone omitted a ten year smoking history from a health insurance application, this person would be guilty of concealment. |
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Which of the following factors is not considered by an underwriter when determining the premium rate for an individual seeking insurance?
A) Age B) Medical History C) Sex D) Race |
D) Race
Age, medical history, and sex provide sound statistical data for determining the probability of loss. Race, religion, sexual orientation, etc., are some of the factors that cannot be used because there is not sound statistical data to show that they effect the probability of loss; therefore, they are considered to be discrimatory. |
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Candace pays a small$100 premium every month, yet her insurer promises to pay a high percentage of all the medical costs. What element of an insurance contract does this describe, since its an exchange of unequal value?
A) Conditional B) Aleatory C) Good Health D) Inequity |
B) Aleatory
In an aleatory contract, unequal amounts are exchanged between payment and benefits. In this instance, Candace is receiving a large benefit for a small price. |
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According to the law of agency, a principal is represented by a?
A) An insured B) An agent C) An insurer D) A broker |
B) An agent
By definition, an agent is a person who acts for another person or entity known as the principal with regard to contractual arrangements with third parties. |
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Under what conditions would a contract between an insurer and propective insured be legal?
A) The applicant is high on methamphetamines at the time of application. B) The applicant has been convicted of a felony. C) The applicant is drunk at the time of application. D) The applicant is 15-year-old high school student. |
B) The applicant has been convicted of a felony.
When an insurer and insured enter into a contract, both parties must be of legal age and mental competent. It is legal for a person convicted of a felony to buy an insurance contract. An intoxicated person, however, may not be mentally competent, and a 15-year-old-student is considered in most states to be underage. |
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Which of the following would be considered a peril with regards to health insurance?
A) An insured smokes 2 packages of cigarettes a day. B)An insured scuba dives as a hobby. C) An insured suffers a broken arm in an auto accident. D) An insured pilots his own aircraft. |
C) An insured suffers a broken arm in an auto accident.
A broken arm would be classified as a peril; the others would be considered hazards. |
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Which statement regarding Lloyd's association is NOT true?
A) Lloyd's association operate primarily in the life insurance field. B) Most states have laws which prohibit Lloyd's association from forming. C) They are not insurance companies. D) The United States version of Lloyd's is subject to looser regulation than the London version. |
A) Lloyd's association operate primarily in the life insurance field.
Lloyd's association , less strictly-regulated derivatives of Lloyd's of London, operate primarily in the property insurance field. These are not insurance companies; the underwriters assume small portions of each risk. |
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Officers who manage stock insurance companies are
A) Appointed by other company officials. B) Appointed by the Department of Insurance. C) Elected by the stockholders. D) Hired through an application process. |
C) Elected by the stockholders.
Officers who manage stock insurance companies are elected by the stockholders. |
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Betty purchased a life insurance policy 5 year ago. Last year she received a dividend check from the insurance company which was not taxable. This year she did not receive a check from the insurer. From what type of insurer did Betty purchase her policy?
A) Non-profit service organization. B) Stock C) Mutual D) Reciprocal |
C) Mutual
Funds not paid out after paying claims and other operating costs are returned to the policyowners in the form of a dividend. If all funds are paid out, no dividends are paid. |
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When Ruth applied for an insuranc policy, she stated taht she did not smoke cigarettes, and she paid a non-smoker premium rate. Actually Ruth smokes cigarettes on a regular basis. What effect does her statement about not smoking have on her life insurance policy?
A) Should she die and the insurer discovered that she was a smoker, the benefit would be reduced to what the correct premium would have purchased. B) It makes the policy voidable. C) If Ruth understood the question to mean, was she smoking at that moment, then it would have no effect. D) It has no effect. |
B) It makes the policy voidable.
If there was a claim against the policy, and the insurer could show that Ruth lied on the application, they could void the policy. Claiming status as a nonsmoker is a warranty and if not true, the applicant is defrauding the insurer out of the correct premium rate. Breach of a warranty makes a policy voidable. |
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Which of the following terms can be defined as a person in an occupation requiring an advanced level of training, knowledge, or skill?
A) Fidiciary B) Professional C) Insured D) Agency |
B) Professional
"Professionalism," can be defined as a person in an occupation requiring an advanced level of training, knowledge, or skill. |
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An isurance agent sells an insurance policy over the phone and collects a commission. Which of the following best describes this act?
A) Illegal B) Insurance telemarketing C) Direct response telemarketing D) Not illegal, provided that the insured sends the company a signed contract after the sale is made. |
C) Direct response telemarketing
A direct response telemarketing system effectively bypasses the insurance agent. Business is conducted over the phone, through the mail, or online. This is a perfectly legal approach to selling insurance. It is not mandatory in all situations for the insured to physically sign any documents in order for coverage to go into effect. |
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Which authority is not stated in an agent's contract but is required for the agent to conduct business?
A) Express B) Implied C) Apparent D) Assumed |
B) Implied
Implied authority is not written in the agent's contract but is required in order for the agent to conduct business. Implied authority exists because not every single detail of an agent's authority can be written in a contract. |
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Gabrielle's health insurance contract requires that both she and her company must meet certain conditions in order for the contract to be enforceable. What kind of contract characteristics is this?
A) Unilateral B) Conditional C) Contingent D) Aleatory |
B) Conditional
A conditional contract requires both the insurer and policyowner to meet certain conditions before the contract is can be executed, unlike other types of policies, which put the burden of condition on either the policyowner or the insurer. |
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Which of the following is not the 'consideration' in a policy?
A) The premium amount paid at the time of application. B) The promise to pay covered losses. C) The application given to a propective insured. D) Something of value exchanged between parties. |
C) The application given to a propective insured.
Consideration is something of value that is transferred betweem two parties to form a legal contract. |
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An insurance company receives an application with some information missing and issues the policy anyway. What is this called?
A) Estoppel B) Subrogation C) Aleatory D) Waiver |
D) Waiver
A court will consider the application as if the unanswered question has not been asked. |
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When both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable, the contract is?
A) Aleatory B) Personal C) Unilateral D) Conditional |
D) Conditional
The contract is formed on the basis that certain conditions are met. |
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Statements made by an applicant for a life insurance policy which are true to the best of one's knowledge are referred to as?
A) Warranties B) Information C) Representations D) Facts |
C) Representations
Representations are statements that the applicant believes to be true, but are not guaranteed. |
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Which of the following statements is an accurate comparison between private and government issurers?
A) Insurance provided by government is called "federal insurance". B) Private insurers offer fewer lines of insurance than government insurers. C) Private insurers provide insurance in areas where the government will not. D) Private insurers may be authorized to transact insurance by state insurance departments. |
D) Private insurers may be authorized to transact insurance by state insurance departments.
Private insurers offer many lines of insurance. Government insurance programs, also known as "social insurance", covers areas that private companies cannot or will not, providing programs like Medicare, Social Security, and National Flood Insurance. Government programs are funded with tax dollars and serve national causes, in contrast to private insurers. |
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Which of the following is not an essential element of an insurance contract?
A) Agreement (offer and acceptance) B) Legal purpose C) Incompetent parties D) Consideration |
C) Incompetent parties
Parties to a contract must have the legal compacity to be bound by the contract. Neither party to the contract can be restricted by minority, insanity, or intoxication. |
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An insurer formed under the laws of another country is known as a/an
A) Stock insurer B) An admitted insurer C) An alien insurer D) A domestic insurer |
C) An alien insurer
"Alien insurer" is defined as a insurer formed under the laws of another country. |
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Any ambiguity in an insurance contract will be interpreted?
A) In the favor of the insured. B) In the favor of the insurer. C) Through arbitration. D) Based on the prudent person rule. |
A) In the favor of the insured.
Insurance policies are contracts of adhesion. The insurer writes the contract and the insured accepts the contract as it is written. When ambiguities exist, courts usually rule in favor of the insured. |
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Which of the following types of insurance companies is an incorporated insurer without capital stock or shares?
A) Fraternal Insurer B) Reciprocal Insurer C) Stock Insurer D) Mutual Insurer |
D) Mutual Insurer
Mutual Insurers are incorporated insurers without capital stock or shares. |
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A morale hazard may exist due to?
A) Past medical history B) Tendency toward alcohol C) Indifference to loss D) Past fraudulent claims against the insurer. |
C) Indifference to loss
Morale hazards arise from a state of mind that causes indifference to loss, such as carelessness. |
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Candice pays a small $100 premium every month, yet her insurer promised to pay a high percentage of all medical cost. What element of an insurance contract does this describe, since it is an exchange of for unequal value?
A) Conditional B) Aleatory C) Good Health D) Inequality |
B) Aleatory
In an aleatory contract, unequal amounts are exchanged between payments and benefits. In this instance, Candice is receiving a large benefit for a small price. |
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An insurance agent's responsibility to an insured, or an applicant for isurance, includes all of the following except?
A) Perform faithfully B) Perform honestly C) Perform professionally D) Represent the client |
D) Represent the client
An agent's license authorizes the licensee to represent the insurer. |
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Which of the following is consideration on the part of the insured?
A) Submitting a Statement of Good Health and premium payment. B) Submitting a Statement of Good Health. C) Premium payment and asking an agent to submit a rider. D) Asking an agent to clarify a rider. |
A) Submitting a Statement of Good Health and premium payment.
The binding force is called 'consideration.' Consideration on the part of the insured is the payment of the premium and the health representation made in the application. Consideraton on the part of the insurer is the promise to pay in the event of a loss. |
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George wants to transfer his personal insurance policy to his friend. Under what condition will this be possible?
A) It is impossible to transfer a policy. B) George will have to surrender his policy to the insurer, and his friend can then ask to buy it. C) George can transfer it to his friend and then notify his insurer of the change. D) George will need the written consent of the insurer. |
D) George will need the written consent of the insurer.
A personal insurance contract is written between an insurance company and an individual, in which the company has the right to decide with whom it will and will not do business. An insured can transfer an isurance contract to another person, but he/she must first obtain the written consent of the insurer. |
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Jim purchased a health insurance policy. After the policy was delivered, Jim noticed that the policy jacket showed a picture of man and woman holding a small child. Who may Jim assume is covered under the policy?
A) Jim and his wife B) The entire family C) Jim Only D) Jim's wife only |
B) The entire family
Courts has held that such an illustration allows a policyholder to assume that the entire family is covered. |
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What is a risk retention group?
A) A purchasing group who are unable to purchase insurance due to the size of the company. B) An insurance organization that most often addresses a commercial casualty concern. C) A group of people classified as having substandard risks. D) A risk retention group addresses adverse selection by selecting insurable risks, and is always regulated by state authorities. |
B) An insurance organization that most often addresses a commercial casualty concern.
An insurance organization typically not regulated as a company by state authorities is a risk retention group, most often addressing a commercial casualty concern. |
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What company produces evaluations of insurer financial status often used by the Insurance Department?
A) NAIC B) Consumer's Guide C) SEC D) AM Best |
D) AM Best
AM Best & Company assign rating to life, property and casualty insurance companies based upon the financial stabilty of the insurer. |
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Which of the following is not a government insurance program?
A) Federal Deposit Insurance Corporation. B) Old-Age, Survivors and Disability Insurance (Social Security. C) Medicare D) Medicaid |
A) Federal Deposit Insurance Corporation.
FDIC is funded by premiums paid on deposits in covered financial institutions. The others are funded in whole or part by taxes. |
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Tim is explaining a life insurance policy to a propective customer Jo. Jo is given clear signs that she is uninterested in buying any of the policies, so he lies about the amount of dividends that she will receive, making the policy more attractive. Jo buys a policy for this reason and later finds out that she has been scammed. Who is legally responsible?
A) Tim B) The insurer C) The state D) The National insurance commission. |
B) The insurer
When an agent acts within the scope of assigned authority, he/she is legally acting on behalf of the insurer. Therefore, the insurer will be held responsible for Tim misrepresenting Jo's policy. |
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Contracts that are prepared by one party and submitted to the other party on a "take it or leave it" basis is classified as?
A) Binding contracts B) Contracts of adhesion C) Unilateral Contract D) Aleatory Contract |
B) Contracts of adhension
Insurance policies are written by the insurer and submitted to the insured on a "take it or leave it" basis. The insured does not have any input into the contract, but simply adheres to the contract. |
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Gary wants to make sure that if he dies before his wife, that his wife has enough money to live on. His death is considered a risk. If he convinces another party to assume this risk, what is this phenomenon called?
A) Insurance B) Transfer C) Sharing D) Liabililty |
B) Transfer
When one entity assumes the risk of another entity, this shift is called a transfer. Gary would transfer the loss incorporated with his death to the insurance company, who would then assume the financial burden assign in the contract. |
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A participating life insurance policy may do which of the following?
A) It may provide group life insurance policy. B) It may dividend to the stockholders. C) It may require 80% participation. D) It may pay dividends to the policy owner. |
D) It may pay dividends to the policy owner.
A participating life insurance policy will pay dividens to the owner based upon actual mortatilty cost, interest earned and costs. |
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Which provision states that if a policy allows for greater compensation than the financialloss incurred, the insured may only receive benefits for the amount lost?
A) Loss-at-cost B) Limited Benefit Provision C) Reasonable Coverage D) Indemnity |
D) Indemnity
Indemnity provision stipulates that insureds can only collect the amountof their loss, in the event their policy would allow for a greater benefit to be collected. For example, if a health insurance policy allows for $2500 for a given surgery, and only $2000 is spent, the insured can only collect $2000. |
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In life insurance, an offer is usually made?
A) When an agent explains a policy to a potential applicant. B) When the application is submitted. C) When the insurer approves the application and receives the initial premium. D) When the agent hands the policy to the policyholder. |
B) When the application is submitted.
In life insurance the offer is usually made by the applicant in the form of the application. Acceptance occurs when the underwriter approves the application, provided it is accompanied by the initial premium. Otherwise, acceptance occurs when the insurer receives payment, after the application has been approved. |
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All of the following are example of risk retention except?
A) Premiums B) Deductibles C) Co-payments D) Self-insurance |
A) Premiums
Retention is planned assumption of risk, or acceptance of responsibility for the loss by an insured through the use of deductibles, copayments,and self-insurance. |
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An insurer neglects to pay a legitimate claim that is covered under the terms of the policy, which of the following terms best describes what the insurer has violated?
A) Consideration B) Good-Faith C) Representation D) Adhesion |
A) Consideration
Consideration is the binding force in a contract. Consideration on the part of the insured is the payment of the premiums and the health representations made in the application. Consideration on the part of the insurer is the promise to pay in the event of loss. |
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A state issued document empowering an insurance company to write contracts of insurance and perform certain business within that state is called?
A) Certificate of authority B) Certificate of title C) Certificate of deposit D) Certificate of convenience |
A) Certificate of authority
Before tranacting insurance business within a state, each insurer must qualify for a certificate of authority. |
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Steve and Pat are legally married and have a unilateral joint life insurance policy. Pat is killed in a car accident, and the insurance company refuses to pay the death benefit. What should Steve do?
A) Nothing. The contract is unilateral, so the insurance company can refuse to pay. B) Appeal the insurance company to consider the case further. C) File claim with the company D) Sue the insurance company |
D) Sue the insurance company
In a unilateral contract, the insured is not legally bound to do anything, but the insurer must provide benefits that are stated in the contract, at the appropriate time. In this case, the insurance company refused to hold it end of the contract, so Steve can legally sue. |
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Which of the following is the basis for a claim against a insurance company?
A) A loss B) A change in occupation C) An event that increases the chance of someone dying D) A misrepresentation to an applicant made by an insurance producer. |
A) A loss
A loss by a peril insured against will give rise to a claim. |
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The mechanism used by individuals to transfer their risk of loss to a larger group of individuals that have similar exposure to loss, is called?
A) Diversification B) Hedging C) Risk taking D) Insurance |
D) Insurance
Insurance is the mechanism whereby an insured is protected against by a specified future contingency or peril of in return for the present payment of premium. Because many other individuals with the same similar risk of loss are paying premiums, funds are available to indemnify those who actually suffer that loss. |
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Which of the following is NOT a characteristic of pure risk?
A) The loss must be definite and measurable B) The loss must be predictable C) The loss must be castastropic D) The loss must be due to chance |
C) The loss must be castastropic
In order to be a characteristic as pure risk, the loss must be due to change, definite, measurable and predictable, but not castastropic. |
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Insurance producers act in a(n) ______________ capacity in the conduct of their business when handling premium funds.
A) Special B) Fiduciary C) Accounting D) Financial |
B) Fiduciary
Money designated as premium belongs to the insurance company. The agent is handling this money in a position of trust. Fiduciary is the term that refers to the handling of money. |
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The ___ an insured group becomes, the more likely the reported loss will equal the statistical probability of loss for the particular class.
A) Larger B) Smaller C) Older D) More active |
A) Larger
According to the law of large numbers, the larger a group becomes, the easier it is to predict losses. Insurers use this law in order to predict certain types of losses and set appropriate premiums. |
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Representations are written or oral statements made by the applicant which ?
A) Are immaterial to the actual acceptability of the insurance contract. B) Are considered true to the best of the applicant's knowledge C) Are guaranteed to be true. D) Are found to be false after further investigation. |
B) Are considered true to the best of the applicant's knowledge
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Cathy is the beneficiary of her husband's life insurance policy. ?Her husband dies at age 45 in a tragic accident. The financial loss incurred by her husband's death exceeds the face amount of the policy. What will Cathy receive?
A) Cathy will receive the maximum amount stated by the policy. B) Cathy will receive the maximum amount stated by the policy, and the rest will be compensated by the State. C) Cathy will only be reimbursed for her premiums. D) Because of her husband's age and the nature of the accident, Cathy will receive benefits for the full financial loss. |
A) Cathy will receive the maximum amount stated by the policy.
If a policyholder's death results in a greater financial loss than the policy's face value, the beneficiary may only receive the face amount of the policy. |
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Following a career change, Fred is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. He has also eliminated most fatty foods from his diet. From an insurance risk management point, this would be considered?
A) Risk avoidance B) Risk retention C) Risk reduction D) Risk transfer |
C) Risk reduction
Fred's change in lifestyle and habits will likely reduce his chances of health problems. |
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Which of the following best describes the concept that the insured pays a small amount of premium for a large amount of risk on the part of the insurance company?
A) Warranty B) Aleatory C) Adhesion D) Subrogation |
B) Aleatory
An insurance contract is an aleatory contract in that it requires a relatively small amount of premium for a large risk. |
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In insurance policies where contract ambiguities are automatically ruled in the favor of the insured, what priviledge does the insurer have to balance this?
A) The right to refute the ruling B) The right to revoke the policy C) The right to raise premiums as a result of the court ruling. D) The right to determine the wording of a policy. |
D) The right to determine the wording of a policy.
In contracts in which only the insurer has the right to determine the wording of a policy, the policyholder will receive benefits denied due to a contract ambiguity. |
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Agents possess several different types of authority. Which type is found in the agent's contract?
A) Assumed B) Expressed C) Apparent D) Implied |
B) Expressed
The agent's contract give the agent expressed authority. |
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Insurers are classified according to the legal form of their ownership. The type of insurer organized to return a profit to the stockholder is?
A) Stock B) Mutual C) Self-insurers D) Reciprocals |
A) Stock
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The risk management technique that is used to prevent a specific loss by not exposing yourself to that activity is called?
A) Reduction B) Sharing C) Avoidance D) Transfer |
C) Avoidance
Risk avoidance is elimination of risk of loss by avoiding any exposure to an event that would give rise to such a loss. |
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Events in which the principal has both the chance of winning or lossing are classified as?
A) Dual risk B) Pure risk C) Retained risk D) Speculative risk |
D) Speculative risk
Speculative risk involves the chances of gain or loss and is not insurable. |
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Bill has a rolex watch that he wears on special occassions. When Bill is not wearing the watch, it is kept in his safe deposit box at the bank. This would be an example of ?
A) Risk avoidance B) Risk transfer C) Risk reduction D) Risk retention |
A) Risk avoidance
By keeping the watch in a secure safe deposit box, Bill is avoiding the chance that the watch may be damaged or stolen. The answer is not risk reduction because the watch is out of his hands completely. If he kept the watch in his bottom drawer of his desk, he would be reducing his risk (since it was still in his hands), but not avoiding it. By removing the watch from his care, he is avoiding damaging or losing the watch. |
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A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person represent which type of hazard?
A) Moral B) Morale C) Legal D) Physical |
B) Morale
A morale hazard is someone who has an indifferent attitude towards an insurance company. He is careless or irresponsible because he knows his loss will be covered by insurance. |
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Leila's insurance has made all the decisions regarding the provisions included in her policy. She finds an objectionable provision and want to negotiate it with her insurer but is not allowed to do so. Her only option is to reject the policy because of the provision or accept the policy anyway. Which contract element does this describe?
A) Dictatoral B) Adhesion C) Unilateral D) Conditional |
B) Adhesion
A contract of adhesion is prepared by only the insurer; the insured's only option is to accept or reject the policy as it is written. |
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Concerning insurance, the definition of fiduciary responsibility is?
A) Being liable for negligence to client's application. B) Commingling premiums collected with agent's personal funds. C) Handling insurer funds in a trust capacity. D) Handling assets or money belonging to others. |
C) Handling insurer funds in a trust capacity.
An agents fiduciary responsibility include handling insurer funds in a trust capacity. |
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When a homeowner purchases insurance on his home, what risk management technique is he practicing?
A) Sharing B) Retention C) Transfer D) Avoidance |
C) Transfer
When insurance is purchased, the insured is, in return for the payment of the premium, transferring the risk of financial loss by certain perils to the insurance company. |
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The risk of loss may be classified as?
A) High risk and low risk B) Pure risk and speculative risk C) Certain risk and uncertain risk D) Name risk and un-name risk |
B) Pure risk and speculative risk
Pure risks involve the probability or possibility of loss with no chance of gain. Pure risks are generally insurable. Speculative risks involve uncertainty as to whether the final outcome will be a gain or loss. Speculative risks are usually uninsurable. |
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The validity of insurance contract is contingent upon the accuracy of the information given by the insured to the insurer. What term best describe this?
A) Reasonable expectation B) The honor system C) Warranty D) Utmost Good Faith |
C) Warranty
The warranty is a statement to the insurer made by the insured upon which the validity of the contract depends. |
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ABC insurance receives an incomplete insurance application and issues a policy anyway. Six month later ABC realizes the missing information. What term is used that prevents ABC from forcing the policy owner to answer further questions?
A) Estoppel B) Adhesion C) Unilaterial D) Consideration |
A) Estoppel
ABC had waived its right to receive answers to the missing information once the policy was issued; therefore, they are estopped from enforcing those waived rights. |
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An agreement that is enforceable by law is known as a(n)
A) Legal contract B) Conditional contract C) Contract of adhesion D) Unilateral contract |
A) Legal contract
Contracts than contain all of the essential elements required by the state are enforceable in a court of law. Because insurance policies meet these requirements, they are enforceable as legal contracts. |
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An individual's tendency to be dishonest would be indicative of a?
A) Morale hazard B) Pure hazard C) Physical hazard D) Moral hazard |
D) Moral hazard
An applicant that is dishonest in completing an application for insurance or submitting fraudulent claims would be deemed uninsurable from an underwriting standpoint. |
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Units with the same or similar exposure to loss are referred to as?
A) Law of large numbers B) Homogeneous C) Catastropic loss exposure D) Insurable risk |
B) Homogeneous
The basis of insurance is sharing risk between a large homogeneous group with similar exposure to loss. |
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Andrea is applying for life insurance. She knows that if she mention her health history of drug abuse and liver failure when writing the application, her chances of getting a policy is low. She therefore omits this information from her application and receives a policy. She ends up in the hospital for her liver condition fifteen months later. Which of the following is true?
A) Because this is not health insurance, Andrea's policy will not be affected. B) Andrea will be forced to pay all medical expenses. C) Andrea's life insurance policy will not be affected after the first year; therefore, there would be no change. D) Andrea life insurance policy would be voided. |
D) Andrea life insurance policy would be voided.
If an insurer discovers that an insured has committed fraud, which is the intentional concealment of information meant to trick an entity into makin or breaking a contract, the insurer can automatically void the policy, provided that the discovery is made within the first 2 years of the effective policy date. |
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Beth's house is partially destroyed by a tornado, what term best describe her property damage?
A) Hazard B) Peril C) Loss D) Risk |
C) Loss
The term "loss" is used to describe the reduction, decrease, or disappearance of value of the person or property insured in a policy. This differs from a "peril", which is a cause of the loss. Therefore, in this scenario, the peril is the tornado, and the loss is the damage that the tornado did to her house. |
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When Jane was hospitalized, the cost of her semi-private room was $535 per day. Jane's health insurance policy stated a limit of $600 for a semi-private room. How much may Jane collect from her insurance policy for her hospital room?
A) $500 per day B) $535 per day C) $600 per day D) $353 per day |
B) $535 per day
Applying the principal of indemnity, the insurer will pay the actual cost of the room, up to the limit stated in the policy, in this case, $535. |
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The insurer may suspect that moral hazard exist if the policyholder?
A) Always drives over the speed limit. B) Was not honest about all aspects regarding his health on application for insurance. C) Frequently depressed D) Has an indifferent view of activities that may be dangerous. |
B) Was not honest about all aspects regarding his health on application for insurance.
Moral hazard refers to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer. |
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Wagering on a sporting event is known as what type of risk?
A) Calculated B) Simple C) Pure D) Speculative |
D) Speculative
With speculative risk a chance to win or a chance to lose exists. Speculative risks are not insurable. |
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For the purpose of insurance, risk is defined as
A) The uncertainty or change of loss B) The certainty of loss C) The cause of loss D) An event that increases the amount of loss. |
A) The uncertainty or change of loss
Risk, or the change of loss occurring, is the basic reason for buying insurance. |
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Which of the following is NOT a responsibility of an insurance agent?
A) Underwriting the contract B) Deliverling the contract C) Explaining policy provisions D) Submitting the application to the insurer |
A) Underwriting the contract
The agent is responsibilty for submitting the application to an insurer, who then performs the underwriting and decides whether a policy will be issued. At the point, the agent then delivers the policy to the policyowner, explains the policy, and collects the premium payment if it not yet been paid. |
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Carolyn Fine stated on her application for life insurance that she had never had a heart attack, when in fact she had a series of minor heart attacks last year. Which of the following If it was applicable, would cause a death benefit claim to be denied?
A) Estoppel B) Warranty C) Waiver D) Utmost Good Faith A) |
B) Warranty
A warranty is a statement to an insurer by the insured upon which the validity of the insurance policy depends. The insurance contract is not binding unless warranty statements are literally true. The result of a warranty breach is return of premium. |
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Which of the following is the most common way to transfer risk?
A) Name a beneficiary B) Purchase insurance C) Increase control of claim D) Lessen the possibility of loss |
B) Purchase insurance
The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. |
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Because an insurance policy is a contract between the insurer and the insured, it must conform to the state laws governing contract which require all of the following elements Except?
A) Conditions B) Competent parties C) Legal purpose D) Offer and acceptance |
A) Conditions
Conditions are part of the policy structure. Consideration is an essential part of a contract. |
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What insurance concept is associated with the words "Weiss" and "Fitch"?
A) Types of mutual funds B) Index used by stock markets C) Guides describing companies financial integrity D) Policy dividends |
C) Guides describing companies financial integrity
Because an isurance companies strength and stability are two very crucial factors in its substainability, independent rating services have formed to publish regular updates on the financial integrity of different insurance companies. Weiss and Fitch are two of these services, although there are more. |
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Which statement regarding insurable risk is Not correct?
A) Insurance cannot cover damages caused by acts of war. B) The insurable risk need to be statisically predictable. C) An insurable risk must involve a loss that is definete as to cause, time, place, and amount. D) Insured's cannot be randomly selected. |
D) Insured's cannot be randomly selected.
Granting insurance must not be mandatory, selecting insureds randomly will help the insurer to have a fair proportion of good risk to poor risks. All other statements are true. |
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Which of the following insurance providers would be considered a risk sharing arrangement?
A) Stock insurer B) Mutual insurer C) Surplus line insurer D) Reciprocal insurer |
D) Reciprocal insurer
When insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal. |
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If a life insurance premium is paid by the policyowner to the agent, and the agent fail to remit that premium to the insurer, which of the following statement is true?
A) The premium will be taken out of the Life Guaranty Association funds. B) The agent's license will automatically be revoked C) The policy will lapse since the premium was not received by the insurer. D) The policy will not lapse since payment to the agent is the same as payment to the insurer. |
D) The policy will not lapse since payment to the agent is the same as payment to the insurer.
Since the agent is a representative of the insurer, payment to the agent represents payment to the company. AFTER a hearing, the agent's license could be revoked for engaging in such acts. |
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In any case where there is a controversy or dispute between the insurance company and the insured, the soliciting agent is the agent of the?
A) Applicant B) Insured C) Company D) Beneficiary |
C) Company
An agent's license authorizes them to represent the company, not the insured. |
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How is expressed authority conveyed onto an agent?
A) Agent's contract B) Agent certification C) Expressed authority can only be held by an insurer, but because agents act on behalf of the insurer, agents indirectly have express authority . D) State provisions |
A) Agent's contract
The principal grants authority to an agent through the agent's contract. |
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A contract under which the parties exchange unequal amounts of money or consideration are classified as?
A) Conditional B) Non-binding C) Aleatory D) Unilateral |
C) Aleatory
In an aleatory contract, the amount of premium paid by the insured is much less than the potential loss assumed by the insurer. |
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Which of the following types of insurance companies is an incorporated insurer without capital stock or shares?
A) Stock Insurer B) Mutual Insurer C) Fraternal Insurer D) Mutual Insurer |
B) Mutual Insurer
Mutual Insurer are incorporated insurers without capital stock or shares |
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Not all losses are insurable, and there are certain requirements that must be met before a risk is a proper subject for insurance. These requirements include all of the following Except?
A) The loss may be intentional B) The loss may not be catastropic C) There must be a significantly large number of homogeneous exposure units to make losses reasonably predictable. D) The loss produced by the risk must be definete. |
A) The loss may be intentional
To insure intentional losses would be against public policy. |
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When an insurance company agrees to automatically assume a portion of the risk written by another insurance company, it is known as a(n)?
A) Insuring agreement B) Reciprocal agreement C) Reinsurance treaty D) Co-insurance agreement |
C) Reinsurance treaty
Insurers limit their ex[pser to catastropic losses by purchasing insurance from a reinsurance company. A reinsurance agreement whereby the reinsurer automatically assumes the risks ceded to it is a reinsurance treaty. |
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An insurance organization that does not issue insurance policies but provides a meeting place for individuals, known as underwriters, to conduct business is known as?
A) Fraternal society B) Mutual companies C) Capital stock companies D) Lloyd's association |
D) Lloyd's association
A Lloyd's association itself does not issue insurance policies or provide insurance protection. Lloyd's association provides a meeting facility for the individual underwriters to conduct the business of the insurance. |
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Which of the following is a characteristic of a Reciprocal Insurance Exchange?
A) Stock holders share in any profits B) Issues nonassessable policies C) The chief administrator of the insurer is called an "attorney-in-fact". D) Normally writes all lines of insurance. |
C) The chief administrator of the insurer is called an "attorney-in-fact".
A "reciprocal" is an unincorporated aggregation of individuals, called subscribers, who exchange insurance risks. If the premiums charged for coverage are not sufficient to pay the losses of the group, subscribers may be assessed an additional premium. A reciprocal is administered by an attorney-in-fact who is empowered to bind each subscriber to assume a share of the losses of the group. |
