Ch1: Life Insurance: General Insurance
What gives an insurer the authority to operate within this state?
A Certificate of Authority - A Certificate of Authority from the Department or Division of Insurance grants an insurer the right to operate within a state.
Which of the following is an accurate definition of pure risk? - A chance of gain, no chance of loss - A chance of loss or gain exists - A chance of loss or no loss, but no chance of gain - A chance of gain only
A chance of loss or no loss, but no chance of gain - Pure risk is a scenario where there is no possibility of gain. Either a loss will happen, or nothing will happen.
A ____________ agreement is a reinsurance agreement that allows the reinsurance company an opportunity to reject coverage for individual risks, or price them higher due to their substandard (higher risk) nature.
A facultative agreement is a reinsurance agreement that allows the reinsurance company an opportunity to reject coverage for individual risks, or price them higher due to their substandard (higher risk) nature.
Which type of company is owned by its policyholders?
A mutual insurance company is owned by its policyholders. A stock insurance company is owned by stockholders.
According to the Law of Agency, insurers are responsible for the actions of their producers, UNLESS: - A producer acts outside the scope of their authority - A producer works for an independent agency - A producer is a sole proprietor - A producer fails to maintain CE requirements
A producer acts outside the scope of their authority - The insurer is responsible for all acts of its producers provided they are acting within the scope of their authority.
Gambling, such as placing a bet or playing a casino game, involves which type of risk?
A speculative risk has the chance for loss, but also for gain. Speculative risks are never insurable.
A policyowner has the right to cancel the policy at any time, and for any reason, because insurance contracts are ____________.
A unilateral contract is a one-sided contract. Only the insurer is contractually bound. The policyowner can cancel the policy for any reason without legal obligation.
J and his insurance company disagree over some ambiguous language in J's life insurance policy. If the parties end up in court, which principle would direct the court to rule in favor of J?
Adhesion - In a contract of adhesion, ambiguity and questionable wording are interpreted in favor of the party who did NOT write the contract.
An insurer which is formed under the laws of another country is a(n):
Alien insurer - An insurer that is incorporated or organized in another country is called a alien insurer.
If a producer is acting as an agent, whom do they represent?
Always the insurer - Producers that function as an agent always represent the insurance company. (Only a broker may represent the insured.)
A company that is licensed to sell insurance in a particular state is:
An authorized company - An authorized company is one that is licensed to sell insurance in a particular state. It is also considered to be an admitted company.
T owns his own insurance agency and is authorized to represent 12 different insurers. T must be:
An independent agent - An independent agent is not limited as to the number of insurers they represent. A broker represents the consumer, NOT the insurer.
Insurance contracts are aleatory contracts. What does "aleatory" refer to?
An unequal exchange of value - Aleatory refers to the fact that, because of the uncertainty of risk, there will always be an unequal exchange of value between the parties. The insured's premium payments are less than the potential benefit in the event of a loss. But, if a loss never occurs, the total cost of premium payments is greater.
Apparent authority is:
Apparent authority is the demonstrated appearance that authority exists, even when it does not.
The Fair Credit Reporting Act guarantees which of the following? - Information on a credit report is always accurate and unquestionable - Applicants' right to information held about them by any reporting agency - Premium payments are reported in a credit score - An applicant with a strong credit score cannot be denied coverage
Applicants' right to information held about them by any reporting agency - The Fair Credit Reporting Act gives consumers the right to any information held about them by any reporting agency, excluding medical and investigative source information.
Insurable interest for life insurance is necessary only at the time of:
Application - In Life and Health Insurance, insurable interest must exist at the time of application or policy issuance. It is not required at any later point in time.
A producer must be ______ by an insurer in order to act as agent for that insurer.
Appointed - An agent must have an appointment with an insurer in order to represent that insurer. Licenses are granted by the state, not by insurance companies.
All of the following are elements of a contract, EXCEPT: - Authority - Offer and acceptance - Legal purpose - Consideration
Authority - Enforceable contracts must include: offer and acceptance, consideration (exchange of value), competent parties, and legal purpose. Authority is not considered one of the elements of a legal contract.
Why is an insurance policy considered a contract of adhesion?
Because one party prepares the contract with little or no input from the other party - A contract of adhesion is one which is prepared by one party and presented to the other party on a "take-it-or-leave-it" basis. The other party must either adhere to the contract, or reject it.
Which of the following best describes a conditional contract? - Both parties must perform specified duties in order for the contract to be enforceable - The exchange of values may be unequal - Written by only one party - Only one party is legally bound to contractual obligations
Both parties must perform specified duties in order for the contract to be enforceable - A conditional contract is one in which both parties must perform certain duties in order for the contract to be enforceable.
A person who negotiates insurance contracts with insurers on behalf of an applicant is known as a(n):
Broker - Agents/producers are deemed to be representatives of the insurer, while a broker is deemed to be a representative of the applicant/insured.
In a reinsurance transaction, the company that wishes to transfer all or a portion of the financial risk of loss is known as the _______ company.
Ceding - The ceding or primary company is the one looking to transfer some or all of the financial risk of loss it faces over to a reinsurer.
The ____________ has the power to issue rules and regulations to help enforce insurance laws.
Commissioner, Superintendent, or Director - The chief insurance regulatory official of each state, which may be called the Director, Superintendent, or Commissioner, has the power to issue rules and regulations to help enforce insurance laws.
A legal contract must be between _________ in order to be valid.
Competent parties - All parties involved must be considered legally competent in order to form a valid legal contract.
A person who wants to work in the insurance industry, but who has a prior relevant felony conviction must apply for ________
Consent to work - Applicants who have been convicted of any felony involving dishonesty/breach of trust must apply for Consent to Work 1033 waiver prior to applying for an insurance license.
In a legal sense, an insurance premium is the insured's _______.
Consideration - The premium paid by the insured represents their consideration. Consideration is something of value exchanged under the terms of a contract, and is a required element of a legal contract.
What is the correct term for a contract written by one party without input from or negotiation with the other party?
Contract of Adhesion - Insurance contracts are contracts of adhesion, meaning that one party (the insurer) writes the contract without input from the other party (the insured). The other party must adhere to the contract on a "take-it-or-leave-it" basis.
_________ refers to the jurisdiction where an insurer was formed or incorporated.
Domicile - Domicile refers to the jurisdiction either state or country where an insurer was formed or incorporated.
Which of the following is NOT an actual marketing and distribution model? - Captive Agency - Direct Writing System - Exclusive Writing System - Independent Agency
Exclusive Writing System - The Captive Agency System, General Agency System, Independent Agency System, Direct Writers, and Direct Mail/Response are the marketing and distribution systems used by insurers.
The State's __________ branch enforces the existing statutes that have been put in place.
Executive - The State's executive branch enforces the existing statutes that have been put in place.
Which type of producer authority is specifically stated in the producer's contract?
Express - Express authority is the authority stated or written in the producer's or agent's contract.
What is the specific industry term for a legal and ethical relationship of trust regarding another party's money?
Fiduciary duty - Producers have a fiduciary duty to the insurer--for example, they are responsible for submitting collected premiums in a timely manner.
Insurers that are incorporated in another state, but doing business in this state, are considered:
Foreign - An insurer operating in this state but incorporated in another state is referred to as foreign.
______ are primarily social organizations that engage in charitable and benevolent activities consisting of members of a given faith, lodge, or order, and are usually organized as non-profits.
Fraternal Benefit Societies - This question describes a Fraternal Benefit Society.
Deliberate deception with intent to gain is the definition of:
Fraud is an intentional deception in order to induce another to part with something of value or surrender a legal right.
The McCarran-Ferguson Act of 1945:
Gave states the authority to regulate insurance - The McCarran-Ferguson Act of 1945 gives states the authority to regulate insurance without interference from federal regulation, unless federal law specifically provides otherwise.
Under the Fair Credit Reporting Act, which of the following statements is correct? - The reporting company can provide confidential information to anyone requesting it - If an individual is denied coverage, they can request a copy of the report - The Act is designed to protect reporting agencies from the public - The reporting agency has no responsibility to investigate inaccurate information
If an individual is denied coverage, they can request a copy of the report - The FCRA is designed to protect the public and requires the reporting agency to investigate disputed information. The applicant has the right to request a copy of the report from the reporting agency. This act protects confidential information.
Which of the following is NOT a hazard category used in insurance underwriting? - Incidental - Moral - Physical - Morale
Incidental - For insurance underwriting purposes, the three categories of hazards are physical, moral, and morale.
Which of the following is NOT one of the essential elements of any legal contract? - Indemnity - Legal Purpose - Offer and Acceptance - Competent Parties
Indemnity - The essential elements of a contract are offer and acceptance, consideration, competent parties, and legal purpose.
Which of the following manufactures and issues insurance policies and contracts?
Insurance companies - Insurers issue insurance policies or contracts.
___________ manufacture and sell insurance coverage in the form of policies or contracts of insurance.
Insurers - Insurers manufacture and sell insurance policies through agencies and producers to applicant/insureds.
If a court is presented with a contract of adhesion that contains unclear or ambiguous language, the court will:
Interpret the contract in favor of the party that did not write it - If legal questions arise over ambiguity and unclear language in a contract of adhesion, the court will find in favor of the party that did not write it.
All of the following are producer responsibilities, EXCEPT: - Provide quotes and collect premiums - Issue policies - Solicit and accept applications, and forward them to the insurer - Represent the insurer
Issue policies - Producers do not issue policies. Insurers issue policies. Producers represent the insurer in soliciting, receiving, and forwarding applications, providing quotes, and collecting premiums.
Generally speaking, all of the following are true of insurance, EXCEPT: - It eliminates risk - It indemnifies loss - It can reduce risk - It transfers risk
It eliminates risk - Insurance is a way of transferring risk. No form of insurance can totally eliminate risk.
_____________ consists of groups of underwriters called syndicates, each of which specializes in insuring a particular type of risk.
Lloyds of London - Lloyd's of London is not an insurance company, but consists of groups of underwriters called syndicates, each of which specializes in insuring a particular type of risk.
The difference between a misrepresentation and a material misrepresentation is:
Material misrepresentations are issues that affect policy issuance - A misrepresentation is any false or misleading statement made by the applicant on the application. A material misrepresentation is a false or misleading statement that would have affected whether the policy was issued at all, and may void the policy.
Insurance coverages that cannot be obtained from any authorized insurers in a state:
May be purchased from an unauthorized insurer as surplus lines - Surplus lines are insurance coverages that cannot be purchased form any authorized insurer in a state. They are considered to be an authorized non-admitted company that specializes in higher risk insurance.
Risk reduction is a way of __________.
Minimizing the chance of loss - Risk reduction is minimizing, but not preventing, the chance of loss.
An applicant accidentally including inaccurate information in the insurance application is guilty of:
Misrepresentation is a false statement contained in the application. Fraud is an intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right. Concealment is the willful holding back or secretion of material facts pertinent to the issuance of insurance or a claim. Estoppel applies to the insurer, not the applicant.
Members of the ___________ include state and territorial insurance commissioners or regulators.
National Association of Insurance Commissioners (NAIC) - The NAIC is made up of all the state and territorial commissioners or regulators.
An insurer NOT authorized to do business within this state is considered what type of insurer?
Non-Admitted - An insurer NOT authorized to do business in this state is referred to as "non-admitted." Foreign, domestic, and alien refer to where an insurer is domiciled. Domicile is not the same as admittance.
A company owned by stockholders that does NOT pay dividends to policyholders is considered:
Nonparticipating - Stockholder owned companies normally do not pay dividends to policyholders, therefore they DO NOT Participate with policyholders with dividends. They can in some cases decide to offer dividends to policyholders, in those instances they would be considered participating.
All of the following are responsibilities the producer owes to the applicant, EXCEPT: - Forwarding premium on to the insurer on a timely basis - Evaluating the applicant's current coverage and risks - Understanding the applicant's insurance needs - Only offering policies with the lowest possible premium
Only offering policies with the lowest possible premium - The cheapest policy may not necessarily be suitable, it might not meet the applicant's true need for coverage.
A(n) ____________ is responsible for paying the policy's premium and has various rights as specified in the contract.
Owner - An owner has all rights in the policy and is responsible for paying the policy's premium on time and in full.
The three types of hazards are:
Physical, moral, and morale - Physical, moral, and morale are the three types of hazard.
All of the following are types of insurers, except: - Reciprocal insurers - Mutual insurers - Stock insurers - Proprietary insurers
Proprietary insurers - Proprietary insurer is not a type of insurer.
Which of the following statements about rates and premiums is not correct? - A premium is the total cost for the amount of insurance purchased - Rates are considered inadequate when they do not cover projected losses and expenses - Rates may only be excessive if the insurer is making up for lost reserves - The rate is the amount charged for a particular unit of insurance
Rates may only be excessive if the insurer is making up for lost reserves - Rates may not be excessive or unfairly discriminatory for any reason, and they should not be inadequate. Rates are considered inadequate when they fail to cover estimated losses and expenses.
An unincorporated organization that is formed by individuals, firms, and business corporations that exchange insurance on one another and whose members are known as subscribers is called a:
Reciprocal Insurance Company - A Reciprocal Insurance Company is a group-owned insurer whose main activity is sharing risk. Each subscriber assumes part of the risk and may be called upon to pay additional premiums if losses are greater than expected.
Which of the following is not true about a reciprocal insurance company? - It allows individuals and corporations to exchange insurance on one another's risks - Reciprocal companies may only transact liability insurance - If funds are insufficient to pay claims, the subscribers are assessed for additional premium - Each subscriber assumes a share of the risk of all other subscribers
Reciprocal companies may only transact liability insurance - Reciprocal insurers are unincorporated, group-owned insurers wherein an aggregation of individuals, firms, businesses, and corporations can exchange insurance on one another's risks. In other words, each subscriber assumes a part of the risk of all other subscribers as a means of risk sharing. Reciprocals are not restricted on the type of insurance they transact, unlike risk retention groups, which may only transact liability insurance.
When an insurer cedes part of an insured's coverage to another insurance company, retaining only part of the risk for itself, the insurer is engaging in:
Reinsurance - Reinsurance is how insurance companies spread out their risk. Particularly larger risks. This is referred to as Risk Sharing or Reinsurance. An insurer retains part of the risk and cedes the remaining risk to one or more insurers with a reinsurance agreement.
The transfer of some or all of the financial risk of loss from one insurer to another insurer or insurers is best described as:
Reinsurance is a device used by insurers to reduce their direct loss exposure for certain risks.
Statements made on the application by the applicant that are believed to be true to the best of the applicant's knowledge are called:
Representations - Statements made on the application by the applicant are known as representations. Representations are believed to be true to the best of the applicant's knowledge. Warranties are statements that are guaranteed to be true.
Which of the following statements is TRUE? - An aleatory contract is written by only one party - Waiver is the denial of a right based on prior actions - Concealment is intentional deceit with intent to gain - Representations are not guaranteed to be true
Representations are not guaranteed to be true - Intentional deceit with intent to gain is fraud, not concealment. An aleatory contract has an unequal exchange of values. Representations true to the best of the person's knowledge (they are not guaranteed).
Which of the following statements is TRUE? - Representations are not guaranteed to be true - Waiver is the denial of a right based on prior actions - An aleatory contract is written by only one party - Concealment is intentional deceit with intent to gain
Representations are not guaranteed to be true - Intentional deceit with intent to gain is fraud, not concealment. An aleatory contract has an unequal exchange of values. Representations true to the best of the person's knowledge (they are not guaranteed).
Statements made by the applicant on a life insurance application are considered to be:
Representations are statements that are believed to be true to the best of your knowledge. A statement made by the applicant on an insurance application is considered a representation.
The ____________ market is a private source of coverage of last resort for individuals or businesses that have been rejected by voluntary market insurers.
Residual - The residual marketplace is a source of coverage of last resort for those who have been rejected by the voluntary marketplace insurers.
The risk management technique of an insured who continues to have responsibility for a loss is known as:
Retention - When the risk is retained, the insured party continues to have responsibility for covering the loss, as with self-insurance or a deductible. It is the opposite of risk transfer, which is when another party becomes responsible for the risk.
A producer or agent is authorized to do all of the following, EXCEPT: - Rewrite policy provisions - Solicit new business - Forward applications to the company - Deliver contracts from the company
Rewrite policy provisions - A life/health producer or agent is not authorized to change policy provisions.
This organization is licensed in one state and may insure members in other states consisting of a large number of similar units with similar risk exposures such as theme parks, go-cart tracks, or water slides is known as a(n) _________.
Risk Retention Group - A risk retention group is a group owned insurer that primarily assumes and spreads the liability of related risks of its members with each member assuming a portion of the risks insured.
The process of analyzing risk exposures and designing programs to handle them is known as:
Risk management is concerned with reducing the potential losses from known risks by eliminating hazardous conditions and increasing awareness of the risks.
The Underwriting Department of an insurer is charged with the responsibility of:
Risk selection - Underwriting is responsible for risk selection, classification, and rating.
________ is generally an option only for large corporations who may want to limit their risk up to a certain dollar amount, then buy insurance above and beyond that amount.
Self-insurance - Self-insuring means setting aside funds to assume the risks faced rather than paying premiums to an insurer. To limit potentially large risk exposures, large companies typically self-insure up to a certain dollar amount of risk and buy insurance for the rest.
It is the _________ who issues a Certificate of Authority enabling an insurer to conduct insurance business within a particular state.
State insurance Commissioner or Director - In order for an insurer to operate as an admitted or authorized insurer, the insurer must hold a Certificate of Authority issued by the State Insurance Commissioner, Superintendent, or Director.
Lloyd's of London is not an insurance company, but consists of groups of underwriters called _________, each of which specializes in insuring a particular type of risk.
Syndicates - Lloyd's of London is not an insurance company, but consists of groups of underwriters called syndicates, each of which specializes in insuring a particular type of risk.
The_______ department of an insurance company is responsible for providing service to policyholders at the time of a loss.
The Claims division provides service to the policyholders in the event of a loss.
The National Association of Insurance Commissioners (NAIC):
The NAIC does not have legal authority over insurance regulation, but promotes uniformity in the interpretation of insurance legislation and regulation.
The Fair Credit Reporting Act gives which of the following the legal right to review a consumer report used to underwrite an applicant? - The applicant - The applicant's intended beneficiary - The producer - The applicant's spouse
The applicant - The applicant has the right to review the report.
For the most part, the highest authority for insurance regulation is:
The individual states - States have the authority to regulate insurance without interference from federal regulation, unless federal law specifically provides otherwise.
The relationship of a person who acts on behalf of a company whereby the person's actions can bind the company is known as:
The law of agency - The law of agency states the principal is responsible for acts of their agents.
Which of the following is NOT an essential element of an insurable risk? - The loss must be intentional - The loss must be measurable - The chance of loss must be calculable - A large number of similar or same type units facing the same perils
The loss must be intentional - Intentional losses are excluded. The loss must be accidental.
Which of the following would be considered a speculative risk? - The possibility you will die on the job at a young age - The possibility your car is totaled in an auto accident - The possibility the painting you bought might be a long-lost masterpiece - The possibility you will become disabled
The possibility the painting you bought might be a long-lost masterpiece - A speculative risk is one in which there is a chance for either loss or gain. All of the other choices describe pure risk, where there is no chance of gain, only a chance of loss.
The ________ department of an insurance company advertises and sells policies to the public.
The question describes the function of the Marketing or Sales department.
Risk may be defined as:
The uncertainty of loss - Risk is the chance of loss. It must be uncertain. A hazard increases the likelihood of a loss occurring. A peril is a cause of a loss.
An insurance contract is an aleatory contract. This means:
The values exchanged by the parties are of unequal value - An aleatory contract is a contract in which unequal values exchanged.
When two parties rely upon the statements and promises of the other and assume no attempt to conceal or deceive was made, this means the contract was entered into on the basis of:
This is the definition of "utmost good faith"--one of the characteristics of an insurance contract.
How would an insurance agent most likely use a financial rating service?
To evaluate the financial stability of an insurance company - Producers are responsible for placing business with insurers that are financially sound. Rating services evaluate the financial stability of an insurer.
An insurance contract ___________.
Transfers risk from the insured to the insurer - Insurance transfers risk from the insured to the insurer. Having insurance coverage doesn't decrease the likelihood of loss.
The reinsurance agreement that automatically accepts all new risks presented by the company seeking or requesting reinsurance from the reinsurer is known as a ____________ agreement.
Treaty - Treaty is one of the two types of reinsurance agreements which automatically accepts all new risks presented by the ceding company.
Which of the following has the primary responsibility of determining acceptable risks?
Underwriter - The selection of risk is the primary responsibility of the underwriter, who protects the insurer by selecting risks that fall into the normal range of expected losses.
Which term refers to a contract in which only one party is legally bound to contractual obligations after the premium is paid?
Unilateral Contract - A unilateral contract is a one-sided contract. Only the insurer makes a promise of future performance, and only the insurer can be charged with breach of contract. The policyowner can cancel the policy at any time without legal obligation.
When it comes to life insurance, insurable interest on one's own life is:
Unlimited - The insurable interest on one's own life is generally regarded as unlimited.
If an applicant fails to present all material facts, or a producer fails to fully describe the terms of the contract, which principle has been violated?
Utmost Good Faith - The principle of utmost good faith requires each party to disclose any information that could influence the other party's decision. It assumes no party has withheld critical information.
J has been insured with XYZ Insurance Company for many years. J's policy includes an accidental death benefit if death occurs within 90 days of an accident. J has an accident, and dies 91 days later. XYZ Company chooses to pay the accidental death benefit even though they are not legally bound to do so. This is an example of:
Waiver - Waiver is the voluntary surrender of a legal right or privilege. When an insurer decides not to enforce a contract condition, they are "waiving" their right to enforce it.
If an insurer accepts an overdue premium payment and continues the policy uninterrupted, this is an example of:
Waiver is the voluntary surrender of a known right. The insurer had the right to cancel the policy, but chose to waive that right by accepting the late payment.
What is the correct insurance term for a statement that is guaranteed to be true?
Warranty - Warranties are statements guaranteed to be true. Representations are statements made to the best of one's knowledge.
An insurer issues a policy as "other than applied for," requiring an additional premium of $100. When would an agreement come into being?
When the applicant accepts delivery of the policy and pays the additional premium - This is how a counteroffer is accepted.
An applicant completes the application and submits it to the insurer along with a premium check. When is the applicant's offer considered accepted?
When the insurer issues a policy - An application accompanied by a premium check is a legal offer. Policy issuance is a legal acceptance. In other words, the offer is not accepted until the insurer issues a policy.
You can purchase a life insurance policy on all of the following persons, EXCEPT: - Yourself - Your neighbor - Your spouse - Your business partner
Your neighbor - Insurable interest (meaning, the potential for financial hardship in the event of loss) is a required element of any valid insurance contract. Insurable interest is not present between you and your neighbor.
