Insurance Broker Exam

Exclusive agency system (captive agents)

-1 agent representing 1 company -exclusive -commissions on personal sales -renewals can only be placed with the appointing insurer

Managerial system

-branch manager (supervises agents) -salaried -agents can be insurer's employees or independent contractors

Reciprocals

insurance resulting from an interchange of reciprocal agreements of indemnity

What is considered to be a morale hazard?

Reckless driving

Insurance is the transfer of

Risk

Applicant (proposed insured)

a person applying for insurance

Physical hazard

individual characteristics that increase the changes of the cause of loss

Exposure

A unit of measure used to determine rates charged for insurance coverage.

Speculative Risk

Involves the opportunity for either loss of gain. EX: Gambling. NOT INSURABLE.

Which of the following is NOT the consideration in a policy?

The application given to a prospective insured

Not catastrophic

insurers need to be reasonably certain their losses will not exceed specific limits. This is why insurance companies exclude coverage for loss caused by war or nuclear events: there is no statistical data that allows for the development of rates that would be necessary to cover losses from events of this nature

Participating policies

policy that pays dividends

Reduction

an attempt to lessen the possibility or severity of a loss. EX: Installing smoke detectors in your house

In the relationship of agent and insurer...

-an agent represents the insurer, not the insured -any knowledge of the agent is presumed to be knowledge of the insurer -if the agent is working within the conditions of his/her contract, the insurer is fully responsible -when the insured submits payment to the agent, it is the same as submitting payment to the insurer

General agency system

-general agent; represents 1 company -exclusive -compensation and commission -appoints subagents

Independent agency system (American agency system)

-independent; represents several companies -nonexclusive -commissions on personal sales -business renewal with any company

Direct response marketing system

-no agents -company advertises directly to consumers (through mail, internet, television, etc) -consumers apply directly to the company

The insurer may suspect that a moral hazard exists if the policyholder...

...is not honest about his health on an application for insurance

What are the 4 elements of a legal contract

1: Agreement - Offer and acceptance 2: Consideration 3: Competent parties 4: Legal purpose

Agent (producer)

an individual licensed to sell, solicit, or negotiate insurance contracts on behalf of the principal (insurer)

Nonauthorized (nonadmitted)

an insurance company that has not applied, or has applied and been denied, a Certificate of Authority and may NOT transact insurance

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

Alien insurer

an insurance company that is incorporated outside the US

An individual was involved in a head-on collision while driving home one day. His injuries were not serious, and he recovered. However, he decided that in order to never be involved in another accident, he would not drive or ride in a car ever again. Which method of risk management does this describe

Avoidance

The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called

Avoidance

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

An insurance company sells an insurance policy over the phone in response to a TV ad. Which of the following describes this act

Direct response marketing

The requirement that agents not commingle insurance monies with their own funds is known as

Fiduciary responsibility

An insurance company is domicile in Montana and transacts insurance in Wyoming. Which term best describes the insurer's classification in Wyoming?

Foreign

Broker

an insurance producer not appointed by an insurer and is deemed to represent the client

What do individuals use to transfer their risk of loss to a larger group

Insurance

An insurance organization that does not issue insurance policies but provides a meeting place for underwriters to conduct business is known as a

Lloyd's association

Insurance is a contract by which one seeks to protect another from (BLANK)

Loss

Insurance is a contract by which one seeks to protect from

Loss

Fiduciary responsibility

Money collected with respect to an insurance transaction must be held in a position of trust by the agent or broker

An individual's tendency to be dishonest would be indicative of a

Moral hazard

An insured purchased an insurance policy 5 years ago. Last year, she received a dividend check from the insurance company that was not taxable. This year, she did not receive a check from the insurer. From what type of insurer did the insured purchase the policy?

Mutual

Lloyd's Association

Not an insurance company. Provides support facilities for underwriters or groups of individuals that accept insurance risk

Acceptance happens when...

an insurer's underwriter approves the application and issues a policy

Insurer (principal)

The company who issues an insurance policy

Certificate of Authority

shows that the insurer has power to write insurance contracts in that state; issued by the Department of Insurance

Which of the following is the most common way to transfer a risk

Purchase insurance

Which factor is NOT considered by an underwriter when determining the premium rates for an individual seeking insurance?

Race

Which type of insurance is based on mutual agreements among subscribers

Reciprocal insurance

Hazard is best defined as:

Something that increases the risk of loss

Retention

The planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance

Premium

The money paid to the insurance company for the insurance policy

Policy owner

The person entitled to exercise the rights and privileges in the policy

Offer and accept

There must be a definite offer by one party and the other party must accept this offer in its exact terms

Randomly selected large loss exposure

There must be a sufficiently large pool of insured that represents a random selection of risks in terms of age, gender, occupation, health, and economic status and geographic location.

TPA

Third Party Administrator (creates invoices, answers eligibility questions, etc)

Morale hazard

similar to moral hazards except that they arise from a state of mind that causes indifference to loss, such as carelessness

Fiduciary

someone in a position of trust

True or false: it is illegal for insurance producers to comingle premiums from the applicants with their own personal funds

True

Which of the following is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract

Warranty

Insurance policy

a contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured to the beneficiaries for loss caused by specific events

Insurance

a contract in which on party (the insurance company) agrees to indemnify (make whole) the insured party against loss

Reinsurance

a contract under which one insurance company (the reinsurer_ indemnifies another insurance company for part of its liabilities. Protects insurers against catastrophic losses

Homogeneous

a large number of units having the same or similar exposure to loss. The basis of insurance is sharing risk among members of a large homogeneous group with similar exposure to loss.

Agent/Producer

a legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer

Risk retention

a liability insurance company owned by its members

Which of the following is the basis for a claim against an insurance policy

a loss

Due to Chance

a loss that is outside of the insured's control

Definite and measurable

a loss that is specific as to the cause, time, place, and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable

Sharing

a method of dealing with risk for a group of individual persons or businesses with the same or similar exposures to loss to share the losses that occur within that group

Reciprocity/Reciprocal

a mutual interchange of rights and privileges

A tornado that destroys property would be an example of (BLANK)

a peril

Automatic (AKA treaty)

a predetermined, blanket agreement

Warranty

a statement guaranteed to be truw

Direct response marketing

a system that effectively bypasses the insurance agent. Business is conducted over the phone, through the mail, or online.

Agents is responsible for...

accurately completing applications for insurance, submitting the application to the insurer for underwriting, and delivering the policy to the policyowner

Contract

an agreement between two or more parties enforceable by law.

Implied authority

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. Implied authority is incidental to and derives from express authority since not every single detail of an agents authority can be written out in the written contract.

Hazards

conditions or situations that increase the probability of an insured loss occurring

Loss

defined as the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril

Law of agency

defines the relationship between the principal and the agent/producer; the acts of the agent/producer within the scope of authority are deemed to be acts of the insurer

Agency contract

details the authority an agent has within his/her company. Only actions for which the agent is authorized can bind the principal (insurer)

nonparticipating policy

does not pay dividends

Avoidance

eliminating exposure to a loss EX: a person not going on an airplane to avoid being killed in a plane crash. Avoidance is effective but seldom practical

3 types of agent authority

express, implied, apparent

Social insurance programs

federal and state provided programs including social security, medicare, medicaid, federal crop insurance, and national flood insurance

Fraternal benefits societies

formed to provide insurance for members of an affiliated lodge, religious organization, or fraternal organization

Private insurance

funded by premiums

Government insurance

funded through taxes and serves national and state social purposes

Reciprocals

insurance companies made up of subscribers who are collectively known as a Reciprocal Insurance Company. Administered by appointed Attorney in Fact

Authorized insurer (admitted)

insurance company that has qualified and has received a Certificate of Authority from the Department of Insurance to transact insurance in the state.

Health insurance

insured against the medical expenses and/or loss of income caused by the insured's sickness or accidental injury

Insurance agents represent the...

insurer (principal)

Statistically predictable

insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates

Life insurance

insures against financial loss caused by the premature death of the insured

Casualty insurance

insures against the loss and/or damage of property and resulting liability

Property insurance

insures against the loss of physical property or the loss of its income producing abilities

Foreign insurer

is an insurance company that is incorporated in another state or territorial possession

Responsibilities the agent has for the applicant and insured include...

legally obligated to treat applicants and insureds in an ethical manner. The agent also has a fiduciary responsiblity as they handle the funds of hte insured and the insurer

Insurance is a contract by which one seeks to protect another from

loss

Captive insurer

organized and owned by a corporation or firm to serve the parent organization's insurance needs at lower rates than other insurer's and without the uncertainties of commercial insurance

Mutual insurers

owned by policyowners and issue participating policies

Stock insurer

owned by stockholders who provide capital to operate and establish the company. Issues nonparticipating policies

Insured

person covered by the insurance policy; may or may not be the policy owner

Who might receive dividends from a mutual insurer

policyholders

Pure Risk

refers to situations 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 accept.

Domicile

refers to the location where an insurer is incorporated, not necessarily where the insurer conducts business

Facultative

reinsurance in which each application is underwritten separately

Moral hazard

tendencies towards increased risk. Moral hazards involve evaluating the character and reputation of the proposed insured. Moral hazards refer to those applicants who may lie on an application for insurance or in the past may have submitted fraudulent claims against an insurer

Apparent authority (aka perceived authority)

the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created

Apparent authority (perceived authority)

the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created

In insurance, an offer is usually made when

the applicant submits an application to the insurer

Offer is made when...

the applicant submits the application

Express aurhority

the authority a principal intends to grant to an agent by means of the agents contract. It is the authority that is written in the contract

Consideration

the binding force in any contract

Perils

the causes of loss insured against an insurance policy

Adverse Selection

the insuring of risks that are more prone to losses than the average risk

Law of Numbers

the larger the number of people with similar situations, the more predictable actual losses will be

Transfer

the most effective way to handle risk. Loss is borne by another party

Ceding insurer

the originating company that procures insurance on itself from another insurer

Competent parties

the parties to a contract must be capable of entering into a contract in the eyes of the law. -be of legal age -mentally competent to understand the contract -not under the influence of drugs and alcohol

Consideration on the part of the insured is...

the payment of the premium and the representation made in the application

Consideration on the part of the insurer is...

the promise to pay in the event of a loss

Legal purpose

the purpose of the contract must be legal and not against public policy

Risk

the uncertainty or change of a loss occurring

Insurance companies market their products in different ways

through agents or direct solicitation to the customers

Reinsurance treaty

when an insurer has an automatic reinsurance agreement between itself and the reinsurer in which the reinsurer is bonded to accept all risks ceded to it. Treaties are usually negotiated for a period of a year or longer

Facultative reinsurance

when reinsurance is purchased on a specific policy