Insurance License Chapter 1

Handling insurer funds in a trust capacity

In insurance transactions, fiduciary responsibility means

Alien

Incorporated in another country

Randomly selected exposure

Insurer must have a fair proportion of both good and poor risks

Higher number of people in the pool

Losses become more predictable

Not catastrophic

Must be limits loss cannot exceed

Stock Companies

Owned by stockholders Issue nonparticipating policies

Mutual

Owned by stockholders Issue participating policies Pay dividends to policy holders

Risk Retention

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

Considered true to the best of the applicant's knowledge.

Representations are written or oral statements made by the applicant that are

Domicile

State or nation of origin of a company

Law of Large Numbers

States that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be.

Moral Hazard

Tendencies towards increased risk

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

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

Loss

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

Avoidance.

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

Pure and Speculative Risk

The risk of loss may be classified as

Risk

The uncertainty or chance of a loss occurring.

Physical, Moral, Morale

Three groups of Hazards

Insurance

Transfer of risk loss

Express, Implied, Apparent

What are three types of producer authority?

Agents contract with the principal

What documentation grants express authority to an agent?

One-sided: only one party makes an enforceable promise.

What is a definition of a unilateral contract?

Principal

What is the term for the entity that an agent represents regarding contractual agreements with 3rd Parties

Pure Risk

What type of risk is insurable?

Concealment.

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

Conditional

When both parties to a contract must perform certain duties and follow rules of conduct to mate the contract enforceable, the contract is?

Foreign

When doing business in this state, an insurance company that is formed under the laws of another state is known as which type of insurer?

Alien insurer.

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

Implied

Which Authority is not expressed in agents contract but is required for agent to conduct business.

Law of large numbers

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

Stock

Which of the following insurers are owned by stockholders?

Federal Deposit Insurance Corporation (FDIC)

Which of the following is NOT a government health insurance program?

Counteroffer

Which of the following is NOT an essential element of an insurance contract?

Warranty

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

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

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

Admitted

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

Purchase insurance

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

AM Best

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

The applicant has a prior felony conviction

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

Insureds cannot be randomly selected

Which statement regarding insurable risks is NOT correct?

Reciprocal insurance

Which type of insurance is based on mutual agreements among subscribers?

Policyholders

Who might receive dividends from a mutual insurer?

policy holder

Who might receive dividends from a mutual insurer?

Insurance policy

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

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

Due to Chance

a loss that is outside the insured's control

Definite and Measurable

a loss that is specific as to the cause, time, place and amount

Reciprocity/Reciprocal

a mutual interchange of rights and privileges

Applicant or Proposed Insured

a person applying for insurance

Insurance

based on principle of indemnity

Risk Avoidance

eliminating exposure to a loss

Risk Reduction

finding ways to lower your chance of incurring a loss Ex. Smoke Alarms

Foreign

incorporated in another state or territory

Domestic

incorporated in this state

Broker

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

Large exposure

insurer must be able to predict losses based on law of large numbers

Adverse Selection

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

Conditions

lifestyle and existing health or activities such as scuba diving

Risk Transfer

loss is borne to another party Ex. Insurance

Risk Sharing

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

Fraternal Benefit Societies

not for profit organization Benevolent and charitable brotherhood Membership based on religious, national, or ethnic lines Must be a member to receive benefits

Predictable

number of losses must be statistically predictable

Dividends

paid to stock holders in mutual companied not guaranteed Non-taxable refunds of excess premiums

Express

powers specifically stated in the contract

Homogenous

refers to a large number of units having the same or similar exposure to loss

Apparent

the appearance of a relationship between the agent and principal based on words or actions

Insurer (principal)

the company who issues an insurance policy

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

Rating the financial strength of insurance companies

which services are associated with standard and poor's and AM Best?

3 Elements of insurable risk

-Not all risks are insurable -Insurers only insure pure risks -Pure risk must have certain characteristics in order to be insurable

Three purposes of risk retention

1) reduce expenses & improve cash flow 2) increase control of claim reserving & claim settlement 3) To fund for losses that cannot be insured

Pure Risk

A chance of loss or no loss, but no chance of gain.

Pay dividends to the policyowner

A participating insurance policy may do which of the following?

Insured

A person covered by an insurance policy

Morale

A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents what type of hazard?

Commingling.

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

Pure risk.

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

Peril

A tornado that destroys property would be an example of?

Exposure

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

Reinsurance System.

All of the following are marketing arrangements used by insurers EXCEPT

The policy will not be affected

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 otherwise is 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?

Avoidance

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?

Moral hazard.

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

Waiver

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

Aleatory

An insured pays a $100 premium every month for his insurance coverage, yet the insurer promises to pay $10,000 for a covered loss. What characteristic of an insurance contract does this describe?

Authorized/Admitted

Approved by department of insurance Has certificate of authority

Morale Hazard

Arise from a state of mind that causes indifference to loss, such as carelessness

Insurance

Based on spreading risk (risk pooling) and law of large numbers

Peril

Cause of loss insured against in an insurance policy

Due to Chance Definite and Measurable Statistically Predictable Not Catastrophic Randomly Selected & Large loss exposure

Characteristics of insurable risk

Physical Hazards

Characteristics that increase chance of loss

Hazards

Conditions or situations that increase the probability of an insured loss occurring.

In favor of the insured.

Courts will interpret any ambiguity in an insurance contract

Speculative Risk

Events in which a person has a chance of winning or losing?

Hazards.

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

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

Express authority.

Larger.

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

Agreement, Consideration, Competent Parties, Legal Purpose

Four required elements of insurance contract?

When an insurer's underwriter approves coverage

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