2021 - Unit 1 - General Insurance
Which of the following insurance companies are organized and incorporated under state laws but have no stockholders?
MUTUAL INSURERS Mutual insurance companies are organized and incorporated under state laws but have no stockholders. Instead, the owners are the policyholders. Like mutual insurers, reciprocal insurers are also owned by their policy owners; however, the policy owners insure the risks of the other policy owners. Stock insurers are private organizations, organized under state laws for the purpose of making a profit for their stockholders. Lloyd's of London, on the other hand, is an association of individuals and companies that individually underwrite insurance.
Which of the following statements regarding fraternal benefit societies is NOT true?
POLICIES ARE CALLED CONTRACTS Fraternal benefit societies operate under a special state insurance code. Policies are called certificates, and members who own life insurance are called certificate holders.
Whom do independent insurance agents represent?
THE INSURED An independent insurance agent has relationships with multiple insurance companies but represents the insured by comparing coverage and costs to provide the most appropriate insurance.
Which of the following statements regarding direct-writing companies is NOT true?
THE PRODUCER OWNS THE BOOK OF BUSINESS Direct-writing companies employed producers to sell the company's insurance products. These employees are paid a salary, commission, or both. The insurer owns the business the the producers write.
Denicia is appointed by an insurance company to transact insurance on its behalf. She collects her clients' premiums and has them sign paperwork. By what authority can she do so?
IMPLIED Implied authority is not expressly granted but is assumed to have been given in order to transact the principal's business. It is incidental to express authority because not every detail of an agent's authority can be specifically noted.
All of teh following are methods of handling risk EXCEPT
RESISTANCE The different methods for handling risk include sharing, transfer, avoidance, reduction, and retention. Resistance is not a method for handling risk.
An insurance contract is prepared by one party, the insurer, rather than through negotiation between the contracting parties. Which of the following statements explains this characteristic of insurance contracts?
THE INSURANCE CONTRACT IS A CONTRACT OF ADHESION Insurance contracts are contracts of adhesion, meaning that they are prepared by one party, the insurer. They are not negotiated contracts. In effect, the applicant adheres to the terms of the contract when she accepts it.
Who do independent insurance agents represent?
THE INSURED An independent insurance agent has relationships with multiple insurance companies but represents the insured by comparing coverage and costs to provide the most appropriate insurance.
Andrei is a newly licensed insurance agent. In any insurance transaction, his primary duty is to serve
THE INSURER Licensed insurance agents legally represent the insurer in all insurance transactions and in any disputes arising between the insured or beneficiary and the insurer.
Which of the following statements regarding direct-writing companies is NOT true?
THE PRODUCER OWNS THE BOOK OF BUSINESS Direct-writing companies employ producers to sell the company's insurance products. These employees are paid a salary, commission, or both. The insurer owns the business that the producers write.
Which of the following statements regarding insurance is NOT true?
THERE ARE NO PHYSICAL HAZARDS IN LIFE AND HEALTH INSURANCE There are many types of physical hazards in life and health insurance, such as diabetes and heart and lung conditions. These can be identified through tests and medical equipment.
A contract agreement between a ceding insurer and reinsurer to underwrite certain classes of risks is known as a
TREATY REINSURANCE The agreement in which a reinsurer agrees to underwrite a certain class of business submitted by cadging insurers is known as a treaty reinsurance. Underwriting is done for a class or classes of risks, as opposed to on an individual basis.
Individuals who own life insurance and are called certificate holders are members of a
A FRATERNAL BENEFIT SOCIETY Fraternal benefit societies are organized under a lodge system and receive some income tax advantages. Insurance programs are operated under a special section of the state's insurance code. Members who own life insurance are called certificate holders.
Which of the following statements regarding insurance company organization is CORRECT?
A POLICYHOLDER IN A MUTUAL COMPANY MAY RECEIVE A DIVIDEND A stock insurance company is owned by investors, who are called stockholders. I fa dividend is declared, it is given to the stockholders. A mutual insurance company has no stockholders but is owned by its policyholders. If any dividends are distributed, they are given to the policyholders, not to any outside investors.
Which of the following statements regarding representations is CORRECT?
A REPRESENTATION MUST BE MATERIAL FOR THE INSURER TO VOID THE CONTRACT A representation that is determined to be false, but not material, would not void an insurance contract.
Which of the following statements regarding the fiduciary duty of a producer is CORRECT?
ALL PREMIUMS RECEIVED BY AN INSURANCE PRODUCER MUST BE HELD IN TRUST AND CANNOT BE USED FOR PERSONAL MATTERS All premiums, return premiums, or other funds received by a producer in an insurance transactions are considered to be trust funds under the law. The producer operates in a fiduciary capacity and must promptly account for payment of such funds to the proper parties.
Statements made on an application regarding the applicant's medical history or health the require a medical opinion to be confirmed are called
REPRESENTATIONS Representations are statements on an insurance application that the applicant represents to be true to the best of her knowledge and belief. By contracts, a warranty is guaranteed to be true.
An insurance company that holds a certificate of authority in a state may be known as any of the following EXCEPT
ACCEPTED When an insurer is licensed in a state, they are considered to be admitted, authorized, or approved.
Which of the following statements about Llyod's of London is NOT correct?
IT IS AN INSURANCE CARRIER THAT UNDERWRITES INSURANCE Lloyd's of London is not an insurer but an association fo individuals and companies that individually underwrite insurance. It gathers and disseminates underwriting information, helps its associates settle claims and disputes, and, through its member underwriters, provides coverages that might otherwise be unavailable in certain areas. A risk retention group is a mutual company formed to insure people in the same business, occupation, or profession, such as pharmacists, dentists, or engineers.
A mutual insurer is owned by its
POLICYHOLDERS Mutual insurers are owned by their customers, or policyholders.
Insurance agents represent
THE INSURER Insurance brokers represent their clients or insureds.
An incorporated insurer whose capital is divided into shares and owned by its stockholders is
A STOCK INSURER A stock insurer is an incorporated insurer whose capital is divided into shares and owned by its stockholders.
The premium for transferring a risk should be
AFFORDABLE The premium for transferring a risk should be affordable fo rate average customer.
The premium for transferring a risk should be
AFFORDABLE The premium for transferring a risk should be affordable fo the average customer.
The fact that an insurance contract promises to pay benefits contingent on a future uncertainty (such as death or illness) makes it what type of contract?
CONDITIONAL An insurance contract is conditional in that the insurer's promise to pay benefits is dependent on the occurrence of the risk insured against. If the loss does not materialize, no benefits are paid.
Which of the following is NOT a common characteristic of an insurance contract?
LEGAL PURPOSE Legal purpose is 1 of the 4 elements of a legal contract. Adhesion, utmost good faith, and indemnity are 3 of the 7 characteristics of insurance contracts.
Independent rating agencies evaluate all of the following factors of an insurer to assess their financial strength EXCEPT
NUMBER OF AGENTS While not all firms rate the same companies or use the same criteria, the main indicators of financial strength are the insurer's loss experience, reserves, investment performance, management, and operating expenses.
All of the following are methods of handling risk EXCEPT
RESISTANCE The different methods for handling risk include sharing, transfer, avoidance, reductions and retention. Resistance is not a method for handling risk.
Which of the following is a distinctive feature of fraternal life insurance?
SOME POLICIES ARE REFERRED TO AS OPEN CONTRACTS Certificate holders might be assessed additional charges if premiums are not sufficient to pay claims during a given period. Policies with this feature are called open contracts. Stock and mutual insurers do not assess their policy owners.
An insurance company that transactions insurance directly with consumers without the assistance of producers is called
A DIRECT RESPONSE COMPANY Direct response companies sell to consumers without using producers. These companies may use their own employees to sell insurance directly to prospective buyers or do so through the mail or at airport booths.
An insurance company that transacts insurance directly with consumers without the assistance of producers is called
A DIRECT RESPONSE COMPANY Direct response companies sell to consumers without using producers. These companies may use their own employees to sell insurance directly to prospective buyers or do so through the mail or at airport booths.
Filing a fraudulent health insurance claim is an example of
A MORAL HAZARD A moral hazard is a subjective characteristic of the insured that increases the chance of loss. Careless actions or behaviors are example of morale hazards. A peril is the specific event causing a loss. A hazard is any factor that gives rise to a peril.
An insurance company that tis owned by policy holders, who share the insurer's divisible surplus in the form of participating policy dividends, is known as
A MUTUAL INSURANCE COMPANY A mutual insurance company is an incorporated entity owned by its policy owners. Many of these companies sell participating policies that share the divisible surplus of the insurer with the policy owners in the form of policy dividends.
An insurance company that is owned by its policyholders, who share the insurer's divisible surplus in the form of participating policy dividends, is known as
A MUTUAL INSURANCE COMPANY A mutual insurer is an incorporated insurer owned by its policy owners, who hold policies as their evidence of ownership. It is common for mutual companies to sell participating policies, in which the policy owners share the insurer's divisible surplus in the form of policy dividends.
An insurance company that is owned by its policy owners is known as
A MUTUAL LIFE INSURANCE COMPANY A mutual life insurance company is a corporation, but there are no stockholders. Instead, the company is owned by its policy owners, form whom its resources are derived. Its assets and income are held for the benefit of the policy owners, who, as contractual creditors, have the right to vote for directors or trustees.
Dying too soon is an example of
A PERIL A peril is the direct cause of a loss. For example, a married woman who is expecting her first child may purchase insurance to protect her spouse and child in the even that she suffers an accident or early death.
Dying too soon is an example of
A PERIL A peril is the direct cause of a loss. For example, a married woman who is expecting her first child may purchase insurance to protect her spouse and child in the even tithe the suffers an accident or early death.
When a reinsurer considers each risk as a single transaction before assuming it, this is called
FACULTATIVE REINSURANCE Facultative reinsurance is an agreement in which the reinsurer accepts and underwrites risks on a case-by-case basis. The reinsurer does not have to accept and reinsure all risks within a defined class.
The insurance concept of returning consumers to the financial status they enjoyed prior to a loss is known as
INDEMNIFICATION Utmost good faith is an insurance contract characteristic, but indemnification means to return an individual to the financial condition she had prior to a loss. This is why insurance deals in pure risk rather than speculative risk; it is about indemnification, not profit.
Which of the following statements about Lloyd's of London is NOT correct?
IT IS AN INSURANCE CARRIER THAT UNDERWRITES INSURANCE Lloyd's of London is not an insurer but an association of individuals and companies that individually underwrite insurance. It gathers and disseminates underwriting information, helps its associates settle claims and disputes, and, through its member underwriters, provides coverages that might otherwise be unavailable in certain areas. A risk retention group is a mutual company formed to insure people int eh same business, occupation, or profession, such as pharmacists, dentists, or engineers.
Which of the following insurance companies are organized and incorporated under state laws but have no stockholders?
MUTUAL INSURERS Mutual insurance companies are organized and incorporated under state laws but have no stockholders. instead, the owners are the policyholders. Like mutual insurers, reciprocal insurers are also owned by their policyowners; however, the policyowners insure the risks of the other policyowners. Stock insurers are private organizations, organized and incorporated under state laws for the purpose of making a profit for their stockholders. Lloyd's of London, not he other hand, is an association of individuals and companies that individually underwrite insurance.
Which of the following statements regarding mutual insurers is TRUE?
MUTUAL INSURERS ISSUE PARTICIPATING POLICIES Mutual insurers issue participating (or par) policies and are owned by policyholders. The board of directors is elected by the policyholders; however, officers oversee the company's operations. If the company is profitable, it may return excess premiums to its policyholders, which are considered a nontaxable dividend.
Concerning mutual insurers, which of the following statements is CORRECT?
POLICYHOLDERS MAY PARTICIPATE IN DIVIDENDS In a mutual company, there are no stockholders. The ownership rests with the policyholders. Funds not paid out after paying claims and other operating costs are returned to the policy owners in the form of policy dividends.
Concerning mutual insurers, which of the following statements is CORRECT?
POLICYHOLDERS MAY PARTICIPATE IN DIVIDENDS In a mutual company, there are no stockholders. The ownership rests with the policyholders. Funds not paid out after paying claims and other operating costs are returned to the policyowners in the form of policy dividends.
Which of the following describes facultative reinsurance?
THE REINSURER CONSIDERS EACH RISK BEFORE ALLOWING THE TRANSFER TO BE MADE FROM THE CEDING COMPANY A reinsurance company can accept risks in 2 different ways. The fist is facultative reinsurance, whereby the reinsurer considers each risk before allowing the transfer to be completed by the ceding company. Treaty reinsurance is when a reinsurer accepts all risks of a certain type from the ceding company.
If an agent or producer diverts funds belonging to an insurer to her own use, she has committed the illegal act of
THEFT An agent or producer who receives a premium holds it in a fiduciary capacity. The producer is placed in a position of trust by the insured who paid the premium and the insurer to whom the premium is owed. Therefore, a producer who divert these funds for personal use has stolen them.
Which of the following is a promise in exchange for an action?
A UNICLATERAL CONTRACT Insurance contracts are unilateral contracts because only one party - the insurer - makes any kind of enforceable promise. The insurer promises to pay benefits if and when certain events, such as death or disability occur. The insured's act fo paying the premium is given in exchange for this promise. However, the insured is not obligated to make these payments and can let the policy lapse.
In legal terms the voluntary relinquishment of a known right is called
A WAIVER A waiver is a voluntary relinquishment of a known right. If an insurer waives a legal right under an insurance policy, it cannot deny a future claim based on a violation of that right. This is known as estoppel, and the insurer is estopped from denying the claim.
Which of the following is a promise in exchange for an action?
A UNILATERAL CONTRACT Insurance contracts are unilateral contracts because only one party - the insurer - makes nay kind of enforceable promise. The insurer promises to pay benefits if and when certain events, such as death or disability occur. The insured's act of paying the premiums is given in exchange for this promise. However, the insured is not obligated to make these payments and can let the policy lapse.
Brain met with an insurance producer to discuss how much life insurance he would need to support his family in the event of his premature death. Both parties agreed that a $750,000 life insurance policy would be sufficient. When Brian state that he wanted to discuss the matter with his spouse, the producer asked him to sign a general background information form before he left. However, the document was actually an application form the the producer submitted to the insurer. If the insurer then issues a contract, it will be legally unenforceable because
BRIAN DID NOT MAKE A VALID OFFER To be legally enforceable, a contract must be made with a definite, unqualified offer by one party and the acceptance of its exact terms by the other party. Because Brian did not know the the was signing a life insurance application, he did not make a valid offer for the insurance contract.
All of the following are types of hazards in life insurance EXCEPT
DIRECT In life insurance there are 3 types of hazards: physical, moral, and morale.
Denicia is appointed by an insurance company to transact insurance on its behalf. She collects her client's premiums and has them sign paperwork. By what authority can she do so?
IMPLIED Implied authority is not expressly granted but is assumed to have been given in order to transact the principal's business. It is incidental to express authority because not every detail of an agent's authority can be specifically noted.
Which of the following is a distinctive feature of fraternal life insurance?
SOME POLICIES ARE REFERRED TO AS OPEN CONTRACTS Certificate holders might be assessed additional charges if premiums are not sufficient to pay claims during a given period. Policies with this feature are called open contracts. Stock and mutual insurers do not assess their policyowners.
The law of large numbers states that
THE LARGER THE NUMBER OF RISKS COMBINED INTO 1 GROUP, THE LESS UNCERTAINTY THERE WILL BE AS TO THE AMOUNT OF LOSS THAT WILL BE INCURRED The law of large numbers operates under the principle that the larger the number of similar risks combined into 1 group, the less uncertainty there will be as to the amount of loss that group will incur. Those, an insurance company is able to determine in advance the approximate number of claims it will receive in a given period for a given risk and place its business on a non-speculative basis.
An insurance producer in a position of financial trust to both the client and the insurer is best described as
A FIDUCIARY An insurance producer acts in a fiduciary capacity when holding premiums or money collected from a policyholder that is to be paid to an insurance company. Producers are prohibited from misappropriating or convergent such funds to their own use or illegally withholding them. Producers who convert or misappropriate these funds are guilty of theft and can be punished as provided by law.
An insurance producer in a position of financial trust to both the client and the insurer is best described as
A FIDUCIARY An insurance producer acts in a fiduciary capacity when holding premiums or money collected from a policyholder that is to be paid to an insurance company. Producers are prohibited from misappropriating or converting such funds to their own use or illegally withholding them. Producers who convert or misappropriate these funds are guilty of theft and can be punished as provided by law.