Principles of Insurance and General Insurance (Ch. 1)

Events or conditions that increase the chances of an insured loss occurring are referred to as

Hazards

Units with the same or similar exposure to loss are referred to as

Homogenous

An insured 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 for which she sought medical attention. Which of the following will explain the reason a death benefit claim is denied? 1. Material misrepresentation 2. Waiver 3. Utmost Good Faith 4. Estoppel

1. Material misrepresentation

An insurance organization that does not issue insurance policies but provides a meeting place for underwriters to conduct business is known as a 1. Lloyd's association 2. Fraternal society 3. Mutual company 4. Capital stock company

1. Lloyd's association

A participating insurance policy may do which of the following? 1. Pay dividends to the policyowner 2. Provide group coverage 3. Pay dividends to the stockholders 4. Require 80% participation

1. Pay dividends to the policyowner

Which of the following is NOT consideration in a policy? 1. The application given to a prospective insured 2. Something of value exchanged between parties 3. The premium amount paid at the time of application 4. The promise to pay covered losses

1. The application given to a prospective insured

Which of the following is NOT a characteristic of an insurable risk? 1. The loss must be catastrophic 2. The loss must be due to chance 3. The loss must be measurable 4. The loss exposure must be large

1. The loss must be catastrophic

Which of the following is the cloest term to an authorized insurer? 1. Legal 2. Admitted 3. Certified 4. Licensed

2. Admitted

Which of the following best describes the aleatory nature of an insurance contract? 1. Policies are submitted to the insurer on a take-it-or-leave-it basis 2. Exchange of unequal values 3. Only one of the parties being legally bound by the contract 4. Ambiguities are interpreted in favor of the insured

2. Exchange of unequal values

The insurer may suspect that a moral hazard exists if the policyholder 1. Always drivers over the speed limit 2. Is not honest about his health on an application for insurance 3. Is prone to depression 4. Is indifferent to activities that may be dangerous

2. Is not honest about his health on an application for insurance

For the reporting losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become 1. More active 2. Larger 3. Smaller 4. Older

2. Larger

On a participating insurance policy issued by a mutual insurance company, dividends paid to policyholders are 1. Guaranteed 2. Not taxable since the IRS treats them as a return of a portion of the premium paid 3. Paid at a fixed rate every year 4. Taxable as ordinary income

2. Not taxable since the IRS treats them as a return of a portion of the premium paid

Which type of insurance is based on mutual agreement among subscribers? 1. Reinsurance 2. Reciprocal insurance 3. Mutual insurance 4. Limited liability

2. Reciprocal insurance

Peril is most easily defined as 1. Something that increases the chance of loss 2. The cause of loss insured against 3. An unhealthy attitude about safety 4. The chance of a loss occuring

2. The cause of loss insured against

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? 1. The right to raise premiums as a result of court rulings 2. The right to determine the wording of a policy 3. The right to refute the rulings 4. The right to revoke the policy

2. The right to determine the wording of a policy

Which of the following is NOT a goal of risk retention? 1. To fund losses that cannot be insured 2. To minimize the insured's level of liability in the event of loss 3. To reduce expenses and improve cash flow 4. To increase control of claim reserving and claim settlements

2. To minimize the insured's level of liability in the event of loss

An insurance company receives an application with some information missing and issues the policy anyway. What is this called? 1. Aleatory 2. Waiver 3. Estoppel 4. Subrogation

2. Waiver

What is a material misrepresentation? 1. Any misstatement by the producer 2. Concealment 3. A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance company 4. Any misstatement made by the applicant for insurance

3. A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance company

Which authority is NOT stated in an agent's contract but is required for the agent to conduct business? 1. Assumed 2. Expressed 3. Implied 4. Apparant

3. Implied

Which statement regarding insurable risks is NOT correct? 1. The insurable risk needs to be statistically predictable. 2. An insurable risk must involve a loss that is definite as to cause, time, place, and amount. 3. Insureds cannot be randomly selected 4. insurance cannot be mandatory

3. Insureds cannot be randomly selected

Which of the following is true regarding a risk retention group? 1. It is a benefit society formed to provide insurance for members of an affiliated lodge. 2. It is a company owned by the stockholders that provides nonparticipating policies. 3. It is a liability insurance company owned by its members. 4. It provides support for underwriters and is not an insurance company.

3. It is a liability insurance company owned by its members

The reduction, decrease, or disappearance of value of the person or property insured in a policy is known as 1. Hazard 2. Risk 3. Loss 4. Exposure

3. Loss

Who might receive dividends from a mutual insurer? 1. Stockholders 2. Agent 3. Policyholders 4. Subscribers

3. Policyholders

In what way can an agent demonstrate a high standard of ethics? 1. Setting and meeting monthly production goals 2. Recommending qualified retirement plans to each client 3. Putting the client's best interest before their own 4. Making enough commissions to cover personal expenses

3. Putting the client's best interest before their own

All of the following are marketing arrangements used by insurers EXCEPT 1. Direct Response Marketing System 2. Independent Agent System 3. Reinsurance System 4. General Agency System

3. Reinsurance System

Which of the following is an example of a producer's fiduciary duty? 1. A duty to base all transactions upon the principle of Utmost Good Faith 2. The obligation to tell the truth to the best of one's knowledge 3. The trust that a client places in the producer in regard to handling premiums 4. An obligation to state every known fact about the policy the producer is selling

3. The trust that a client places in the producer in regard to handling premiums

Which of the following is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract? 1. Indemnity 2. Representation 3. Warranty 4. Concealment

3. Warranty

What documentation grants express authority to an agent? 1. Agent's insurance license 2. Fiduciary contract 3. State provisions 4. Agent's contract with the principal

4. Agent's contract with the principal

A producer who fails to segregate premium monies from his own personal funds is guilty of 1. Larceny 2. Embezzlement 3. Theft 4. Commingling

4. Commingling

When applying for an individual life insurance policy, an applicant states that he went to the doctor for nausea, but fails to mention that he was also having severe chest pains. This is an example of 1. Misrepresentation 2. Fraud 3. Warranty 4. Concealment

4. Concealment

The authority granted to an agent through the agent's contract is referred to as 1. Apparent authority 2. Implied authority 3. Absolute authority 4. Express authority

4. Express authority

When would a misrepresentation on the insurance application be considered fraud? 1. Never: statements by the applicant are only representations 2. When the application is incomplete 3. Any misrepresentation is considered fraud 4. If it is intentional and material

4. If it is intentional and material

Which insurance principle state that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost? 1. Stop-loss 2. Consideration 3. Reasonable expectations 4. Indemnity

4. Indemnity

The reduction, decrease, or disappearance of value of the person or property insured in a policy is known as what? 1. Exposure 2. Hazard 3. Risk 4. Loss

4. Loss

Which of the following insurance options would be considered a risk-sharing arrangement? 1. Stock 2. Mutual 3. Surplus lines 4. Reciprocal

4. Reciprocal

Adverse selection is a concept best described as 1. Underwriting slanting the odds in favor of the company 2. Poor choices of applicants to be covered 3. Only offering coverage to good risks 4. Risks with higher probability of loss seeking insurance more often than other risks

4. Risks with higher probability of loss seeking insurance more often than other risks

Which of the following produces evaluation of insurers' financial status often by state departments of insurance?

AM Best

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 the insurer. What type of authority does this describe?

Apparant

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 decision?

Concealment