General Insurance

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

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

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

Purchase Insurance (The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company.)

The risk of loss may be classified as

Pure risk and speculative risk. (Pure risks involve the probability or possibility of loss with no chance for gain. Pure risks are generally insurable. Speculative risks involve uncertainty as to whether the final outcome will be gain or loss. Speculative risks are generally uninsurable.)

A situation in which a person can only lose or have no change represents

Pure risk. (Pure risk refers to situations that can only result in a loss or no change. Pure risk is the only type of insurance companies are willing to accept.)

In what way can an agent demonstrate a high standard of ethics?

Putting the client's best interests before their own. (The needs of the client(s) are the priority to a highly ethical agent.)

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

Race (Age, medical history, and sex provide sound statistical data for determining the probability of loss. Race, religion, sexual orientation, etc., are some of the factors that cannot be used because there is not sound statistical data to show that they effect the probability of loss; therefore, they are considered to be discriminatory.)

When transacting business in this state an insurer formed under the laws of another country is known as a/an

Alien insurer. (Alien insurer is defined as an insurer formed under the laws of another country.)

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 (Apparent authority (also known as perceived authority) is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created.)

What is a material misrepresentation?

A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance company (A material misrepresentation is a statement that, if discovered, would alter the underwriting decision of the insurance company.)

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

AM Best (AM Best & Company assigns ratings to life, property and casualty insurance companies based upon the financial stability of the insurer.)

Which of the following is the closest term to an authorized insurer?

Admitted (Insurers who meet the state's financial requirements and are approved to transact business in the state are considered authorized or admitted into the state as a legal insurer.)

What documentation grants express authority to an agent?

Agent's contract with the principal (The principal grants authority to an agent through the agent's contract.)

In insurance, an offer is usually made when

An applicant submits an application to the insurer. (In insurance, the offer is usually made by the applicant in the form of the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy.)

what is a foreign insurer?

An insurer with a home office in another state (A domestic insurer's home office is in this state, a foreign insurer's is in another state, and an alien insurer's is in another country.)

If an insurer meets the state's financial requirements and is approved to transact business in the state, it is considered what type of insurer?

Authorized. (Insurers who meet the state's financial requirements and are approved to transact business in the state are considered authorized or admitted into the state as a legal insurer.)

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

Avoidance. (Risk avoidance is elimination of risk of loss by avoiding any exposure to an event that could give rise to such loss.)

To legally transact insurance in this state, an insurer must obtain which of the following?

Certificate of Authority (A Certificate of Authority is required in order to transact insurance.)

A producer who fails to segregate premium monies from his own personal funds is guilty of

Commingling. (It is illegal for insurance producers to commingle premiums collected from the applicants with their own personal funds.)

The proposed insured makes the premium payment on a new insurance policy. If the insured should die, the insurer will pay the death benefit to the beneficiary if the policy is approved. This is an example of what kind of contract?

Conditional (A conditional contract requires both the insurer and policyowner to meet certain conditions before the contract can be executed, unlike other types of policies which put the burden of condition on either the insurer or the policyowner.

An insurance contract requires that both the insured and the insurer meet certain conditions in order for the contract to be enforceable. What contract characteristic does this describe?

Conditional (A conditional contract requires both the insurer and the policyowner to meet certain conditions before the contract can be executed, unlike other types of policies which put the burden of condition on either the insurer or the policyowner.)

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 (Consideration is something of value that each party gives to the other. The consideration on the part of the insured is the payment of premium and the representations made in the application.)

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. Consideration on the part of the insured is the payment of premiums and the health representations made in the application. Consideration on the part of the insurer is the promise to pay in the event of a loss.

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. (Insurance policies are written by the insurer and submitted to the insured on a take- it-or-leave-it basis. The insured does not have any input into the contract, but simply adheres to the contract.)

The authority granted to an agent through the agents contract is referred to as

Express authority. (Express powers are written into the contract between the insurer and the agent.)

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

Direct response marketing (A direct response marketing system effectively bypasses the insurance agent. Business is conducted over the phone, through the mail, or online. This is a perfectly legal approach to selling insurance. It is not mandatory in all situations for the insured to physically sign any documents in order for coverage to go into effect.)

Which of the following best describes an insurance company that has been formed under the laws of the state?

Domestic. (A company is domestic when doing business within the state in which it is incorporated.)

Which of the following is considered to be a morale hazard?

Driving reclessly. Morale hazards arise from a state of mind that causes indifference to loss, such as carelessness.

ABC insurance company receives an incomplete application and issues the policy anyway. Six months later ABC realizes the missing information. What term is used that prevents ABC from forcing the policyowner to answer further questions?

Estoppel (ABC had waived its right to receive answers to the missing information once the policy was issued; therefore, they are estopped from enforcing those waived rights.)

Which of the following entities is not an insurer but an organization formed to provide insurance benefits for members of an affiliated lodge or religious organization?

Fraternal benefit society. (Fraternal insurers operate on the basis of a lodge or charitable organization, but they may also sell formal insurance plans for the benefit of their members. Reciprocal insurers are also associations that provide insurance for their members, but they are formed only for the purpose of providing insurance.

In insurance transactions, fiduciary responsibility means

Handling insurer funds in a trust capacity. (An agent's fiduciary responsibility includes handling insurer funds in a trust capacity.)

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

Hazards. (conditions such as lifestyle and existing health, or activities such as scuba diving are hazards and may increase the chance of a loss occurring.)

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

Homogeneous. (The basis of insurance is sharing risk between a large homogeneous group with similar exposure to loss.)

When would a misrepresentation on the insurance application be considered fraud?

If it is intentional and material (A misrepresentation would be considered fraud if it is intentional and material. Fraud would be grounds for voiding the contract.)

Which authority is NOT stated in an agent's contract but is required for the agent to conduct business?

Implied (Implied authority is not written in the agent's contract but is required in order for the agent to conduct business. implied authority exists because not every single detail of an agent's authority can be written in a contract.)

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost?

Indemnity (The principle of indemnity stipulates that the insured can only collect for the amount of the loss even if the policy is written with greater benefit limits.)

A life insurance policy has a legal purpose if both of which of the following elements exist?

Insurable interest and consent. (To ensure legal purpose of a life insurance policy, it must have both insurable interest and consent.)

Which statement regarding insurable risks is NOT correct?

Insureds Cannot be randomly selected. (Granting insurance must not be mandatory, selecting insureds randomly will help the insurer to have a fair proportion of good risks to poor risks. All other statements are true.)

All of the following actions by a person could be described as risk avoidance EXCEPT

Investing in the stock market. (Investing in the stock market is not an example of risk avoidance; it creates a possibility of a loss.)

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

Is not honest about his health on an application for insurance. (Moral hazards refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.)

which of the following is true regarding a risk retention group?

It is a liability insurance company owned by its members. A risk retention group (RRG) is a liability insurance company owned by its members. The members are exposed to similar liability risks by virtue of being in the same business or industry.

For the reported 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

Larger. (According to the law of large numbers, the larger a group becomes, the easier it is to predict losses. Insurers use this law in order to predict certain types of losses and set appropriate premiums.)

Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?

Law of numbers (The law of large numbers, which states that the larger the group is, the more accurately losses reported will equal the underlying probability of loss, is the basis for statistical prediction of loss upon which rates for insurance are calculated.)

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. (A Lloyd's association itself does not issue insurance policies or provide insurance protection. Lloyd's associations provide a meeting facility for the individual underwriters to conduct the business of insurance.)

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

Loss (Claims result from losses by a peril insured against in an insurance policy.)

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

Loss. (Insurance will protect a person, business or entity from loss.)

The reduction, decrease, or disappearance of value of the person or property insured in a policy by a peril insured against is known as

Loss. (Loss is the reduction, decrease, or disappearance of value of the person or property insured in a policy by a peril insured against.)

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

Moral Hazard. (An applicant that is dishonest in completing an application for insurance or submitting fraudulent claims would be deemed a moral hazard and could be uninsurable from an underwriting standpoint.

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 (Funds not paid out after paying claims and other operating costs are returned to the policy owners in the form of a dividend. If all funds are paid out, no dividends are paid.)

What is a definition of a unilateral contract?

One-sided: only one party makes an enforceable promise. (An insurance contract is unilateral in that only one of the parties to the contract is legally bound to do anything.)

A participating insurance policy may do which of the following?

Pay dividends to the policyowner. (A participating insurance policy will pay dividends to the owner based upon actual mortality cost, interest earned and costs.)

The causes of loss insured against in an insurance policy are known as

Perils (Perils are the causes of loss insured against in an insurance policy.)

Who might receive dividends from a mutual insurer?

Policyholders A mutual insurer has no stock, and is owned by the policyholders. Since they may receive a dividend (not guaranteed), such policies are known as participating policies. Dividends received by policyholders of a mutual insurer are not taxable.

All of the following are examples of risk retention EXCEPT

Premiums. Retention is a planned assumption of risk, or acceptance of responsibility for the loss by an insured through the use of deductibles, copayments, or self-insurance.

Pertaining to insurance, what is the definition of a fiduciary responsibility?

Promptly forwarding premiums to the insurance company. (Fiduciary refers to a position of trust. When an agent is handling the premiums that belong to an insurance company they are acting in a fiduciary capacity.)

If a court ordered payment for a loss that was not covered in the policy even if it was clearly worded, it would be an example of which legal concept?

Reasonable expectations (If, because of advertising or sales literature or statements by an agent, an insured could reasonably expect the coverage, the courts have held that the insurer must provide that coverage.)

Installing deadbolt locks on the doors of a home is an example of which method of handling risk?

Reduction Steps taken to prevent losses from occuring are called risk reduction.

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 insured's change in lifestyle and habits would likely reduce the chances of health problems.)

What method do insurers use to protect themselves against catastrophic losses?

Reinsurance (Insurers use reinsurance to protect themselves from catastrophic losses. This is a method where the reinsurer indemnifies the ceding insurer for part or all of the losses it sustains related to a policy issued previously.)

All of the following are marketing arrangements used by insurers EXCEPT

Reinsurance System. (Reinsurance is a method used by insurers to protect against catastrophic losses. The rest are marketing arrangements.)

In case of a loss, the indemnity provision in insurance policies

Restores an insured person to the same financial state as before the loss. Indemnity (sometimes referred to as reimbursement) is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract.

Insurance is the transfer of

Risk. (Insurance is the transfer of financial responsibility associated with a potential of a loss (risk) to an insurance company.)

Adverse selection is a concept best described as

Risks with higher probability of loss seeking insurance more often than other risks. Adverse selection means that there are more risks with higher probability of loss seeking to purchase and maintain insurance than the risks who present lower probability. Underwriters must guard against this.

Events in which a person has both the chance of winning or losing are classified as

Speculative risk. (Speculative risk involves the chance of gain or loss and is not insurable.)

Which of the following would qualify as a competent party in an insurance contract?

The applicant has a prior felony conviction. (When an insurer and insured enter into a contract, both parties must be of legal age and mentally competent. It is legal for a person convicted of a felony to buy an insurance contract. An intoxicated person, however, may not be mentally competent, a 12-year-old student is considered to be underage in most states and a person under mind-impairing medication most likely would not be mentally competent.)

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

The application given to a prospective insured Consideration is something of value that is transferred between the two parties to form a legal contract.

Which of the following is a characteristic of a Reciprocal Insurance Exchange?

The chief administrator of the insurer is called an "attornery-in-fact". (A "Reciprocal" is an unincorporated aggregation of individuals, called subscribers, who exchange insurance risks. If the premiums charged for coverage are not sufficient to pay the losses of the group, subscribers may be assessed an additional premium. A reciprocal is administered by an attorney-in-fact who is empowered to bind each subscriber to assume a share of the losses of the group.

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. (A personal insurance contract is written between an insurance company and an individual, and the company has a right to decide with whom it will and will not do business. An insured can transfer an insurance contract to another person, but he or she must first obtain the written consent of the insurer.)

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 EXCEPT

The loss may be intentional. (To insure intentional losses would be against public policy.)

Which of the following is NOT a characteristic of an insurable risk?

The loss must be catastrophic. (In order to be characterized as pure risk, the loss must be due to chance, definite, measurable, and predictable, but not catastrophic.)

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. (In insurance, fraud is the intentional misrepresentation of material information that is crucial when deciding whether or not to write a contract for an applicant. If an insurer finds that an applicant has committed fraud, it can void the contract, provided that the discovery occurs within the first two years of the effective policy date. In this particular instance the applicant did not commit intentional fraud.)

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 the policy (In contracts in which only the insurer has the right to determine the wording of a policy, the policyholder will receive benefits denied due to contract ambiguity.)

In only one party to an insurance contract has made a legally enforceable promise, what kind of contract is it?

Unilateral (In a unilateral contract, only one of the parties to the contract is legally bound to do anything.)

which of the following is an example of a producer's fiduciary duty?

The trust that a client places in the producer in regard to handling premiums. (An agent acts in a fiduciary capacity, based upon trust and confidence, when handling the financial affairs of their customers, including the handling of premiums.)

For the purpose of insurance, risk is defined as

The uncertainty or chance of loss. (Risk, or the chance of loss occurring, is the basic reason for buying insurance.)

Which of the following is NOT a goal of risk retention?

To minimize the insured's level of liability in the event of loss. (Retention usually results from three basic desires of the insured: to reduce expenses and improve cash flow, to increase control of claim reserving and claims settlements, and to fund losses that cannot be insured.)

If only one party to an insurance contract has made a legally enforceable promise, what kind of contract is it?

Unilateral (In a unilateral contract, only one of the parties to the contract is legally bound to do anything.)

In insurance policies, the insured is not legally bound to any particular action in the insurance contact, but the insurer is legally obligated to pay losses covered by the policy. What contract element does this describe?

Unilateral (In a unilateral contract, the insured is not legally bound to do anything. The insurer, however, must pay losses covered by the policy.

The insurer must be able to rely on the statements in the application, and the insured must be able to rely on the insurer to pay valid claims. In the forming of an insurance contract, this is referred to as

Utmost good faith. (The insurer must be able to rely on the statements given by the insured in the application. The insured must be able to rely on the insurer's promise to pay covered losses.)

An insurance company receives an application with some information missing and issues the policy anyway. What is this called?

Waiver (In insurance policies, a waiver is giving up one's known right or privilege.)

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

Warranty. (A warranty in insurance is a statement guaranteed to be true. When an applicant is applying for an insurance contract, the statements he or she makes are generally not warranties but representations. Representations are statements that are true to the best of the applicant's knowledge.)

In forming an insurance contract, when does acceptance usually occur?

When an insurer's underwriter approves coverage (In insurance, the offer is usually made by the applicant in the form of the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy.)