Chapter 1
When transacting business in this state an insurer formed under the laws of another country is known as a/an
Alien insurer
What is reinsurance?
An agreement between a ceding insurer and an assuming insurer
In insurance, an offer is usually made when
An applicant submits an application to the insurer
What is a foreign insurer?
An insurer with a home office in another state
Because an agent is using stationery with the logo of an insurance company, applicants for insurance assume that the agent is authorized to transact on behalf of that insurer. What type of agent authority does this describe?
Apparent Authority
An insurer that holds a Certificate of Authority in the state in which it transacts business is considered a/an
Authorized insurer
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?
Aleatory
Which authority is NOT stated in an agent's contract but is required for the agent to conduct business?
Implied Authority
What do individuals use to transfer their risk of loss to a larger group?
Insurance
Within how many days of requesting an investigative consumer report must an insurer notify the consumer in writing that the report will be obtained?
3 days
The authority granted to an agent through the agent's contact is referred to as
Express Authority
An insurance company is domiciled in Montana and transacts insurance in Wyoming. Which term best describes the insurer's classification in Wyoming?
Foreign
When doing business in this state, an insurance company that is formed under the laws of another state is known as which type of insurer?
Foreign
An insurance company assures its new policyholders that their premium costs will not increase for a period of at least five years. However, due to increasing financial strain, they plan to raise premium costs for all insureds by 10% over the next two years. What term best describes this act?
Fraud
What insurance concept is associated with the names Weiss and Fitch?
Guides describing company financial integrity
Events or conditions that increase the chances of an insured loss occurring are referred to as
Hazards
When would a misrepresentation of the insurance application be considered fraud?
If it is intentional and material
A life insurance policy has a legal purpose if both of which of the following elements exist?
Insurable interest and consent
Insurance is a contract by which one seeks to protect another from
Loss
Under the Fair Credit Reporting Act, individuals rejected for insurance due to information contained in a consumer report
Must be informed of the source of the report
Which of the following best completes this sentence: A mutual assessment insurer is a
Mutual insurance company
What is the major difference between a stock company and a mutual company?
Ownership
The causes of loss insured against in an insurance policy are known as
Perils
Who might receive dividends from a mutual insurer?
Policyholders
What is the term for the entity that an agent represents regarding contractual agreements with third parties?
Principal
What if the most common way to transfer risk?
Purchase insurance
Adverse selection is a concept best described as
Risks with higher probability of loss seeking insurance more often than other risks
The risk of loss may be classified as
Pure risk and speculative risk
In what way can an agent demonstrate a high standard of ethics?
Putting the client's best interests before their own
Which services are associated with Standard and Poor's and AM Best?
Rating the financial strength of insurance companies
Following a career change, an insured 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. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe?
Reduction
The Federal Fair Credit Reporting Act
Regulates consumer reports
What method do insurers use to protect themselves against catastrophic losses?
Reinsurance
In case of a loss, the indemnity provision in insurance policies
Restores an insured person to the same financial state as before the loss
In insurance policies, contract ambiguities are automatically ruled in the favor of the insured. What privilege does the insurer have in order to balance this?
The right to determine the wording of a policy
Examples of risk retention
deductibles copayments self-insurance
The formation and recommendation of model insurance legislation and regulations designed to bring uniformity from state to state is one of the purposes of
the NAIC
Characteristics of an insurable risk
the loss must be due to chance the loss must be measurable the loss must be large
If an insurance company wishes to order a consumer report on an applicant to assist in the underwriting process, and if a notice of insurance information practices has been provided, the report may contain all of the following information:
-credit history -habits -prior insurance
The following are marketing arrangements used by insurers
-general agency system -direct response marketing system -independent agency system
Which of the following allows a terminated employee covered under a group health plan to continue coverage?
COBRA
An insurance producer who by contract is bound to write insurance for only one company is classified as a/an
Captive agent
To legally transact insurance in this state, an insurer must obtain which of the following?
Certificate of Authority
What term best describes the act of withholding material information that would be crucial to an underwriting decison?
Concealment
Because an insurance policy is a legal contract, it must conform to the state laws governing contracts which require all of the following elements EXCEPT
Conditions
An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated?
Consideration
When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as which of the following?
Consideration
Contracts that are prepared by one party and submitted to the other party on a take-it-or-leave-it basis are classified as?
Contracts of adhesion
An insurance company sells an insurance policy over the phone in response to a TV ad. Which of the following best describes this act?
Direct response marketing
Which of the following best describes the aleatory nature of an insurance contract?
Exchange of unequal values
What is the maximum penalty for habitual willfull noncompliance with the Fair Credit Reporting Act?
2500
Federal law makes it illegal for any individual convicted of a crime involving dishonesty or breach of trust to work in the business of insurance affecting interstate commerce
Without receiving written consent from an insurance regulatory authority
In terms of parties in a contract, which of the following describes a competent party?
-person must be of legal age -person must be mentally competent to understand the contract -person must not be under the influence of drugs or alcohol
What is correct regarding false statements by a person engaged in the business of insurance?
-statements made with the intent to deceive are unlawful -omissions of material fact on insurance application are fraud -false statements about financial condition of an insurer are unlawful
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
-there must be a sufficient number of homogenous exposure units to make losses reasonably predictable -the loss produced by the risk must be definite -the loss must not be catastrophic
Welfare benefits include
-workers compensation -day care benefits -health care benefits
Any licensed person whose activities affect interstate commerce and who knowingly makes false material statements related to the business of insurance may be imprisoned for up to
10 years
A tornado destroys property would be an example of which of the following?
A peril
What is a captive producer?
A person who sells many types of policies for only one insurance company
Which of the following best describes an independent producer?
A producer who works for themselves or other agents
Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. What contract characteristic does this describe?
Adhesion
Which of the following is another term for an authorized insurer?
Admitted
An insured pays a $100 premium every month for his insurance coverage, yet the insurer promises to pay $10,000 for a covered loss. What characteristic of an insurance contract does this describe?
Aleatory
What is the term which best describes when a person develops a formal program identifying, evaluating, and funding its losses?
Self-insuring
Events in which a person has both the chance of winning or losing are classified as
Speculative Risk
Which of the following protects consumers against the circulation of inaccurate or obsolete personal or financial information?
The Fair Credit Reporting Act
In comparison to consumer reports, which of the following describes a unique characteristic of investigative consumer reports?
The customer's associates, friends, and neighbors provide the report's data
An insured wants to transfer his personal insurance policy to a friend. Under what conditions would this be possible?
The insured will need a written consent of the insurer.
An individual applies for a life policy. Two years ago he suffered a head injury from an accident, so he cannot remember parts of his past, but is otherwise competent. He has also been hospitalized for drug abuse, but does not remember this when applying for insurance. The insurer issues the policy and learns of his history one year later. What will probably happen?
The policy will not be affected
For the purpose of insurance, risk is defined as
The uncertainty or chance of loss
