NC State Insurance Exam

Retrospective rating

A method of rating that uses rates that adjust the policy premium to reflect the current loss experience of the policyholder. Premium adjustments are subject to a minimum and maximum

Underwriter

A person who evaluates and classifies risks to accept or reject them on behalf of the insurer.

Conditional contract

An insurance contract that requires both the insured and the insurer meet certain conditions in order for the contract to be enforceable

Aleatory contract

In this type of contract, there is an unequal exchange of value between parties. (EX. The insured's premium is lesser than what the insurer would pay out in the event of a loss)

Fraternal benefit societies

Primarily social organizations that engage in charitable and benevolent activities that provide life and health insurance to members; membership consists of members of a given faith, lodge, order, or society; usually organized on a non-profit basis.

Residual Markets

These are private coverage sources that operate as a last resort for businesses and individuals who have been rejected by voluntary market insurers. They use a risk sharing plan and insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels

Representations

These are statements made by the applicant on the application and are believed to be true

Insurance companies

These business manufacture and sell insurance coverage in the form of insurance policies or contracts of insurance; known as CARRIERS

Immaterial representations

These representations do not affect the acceptance or rating of the risk

McCarran-Ferguson act of 1945

This case established that the federal government may not regulate insurance in areas that the states have the authority to do so

Law of Agency

This defines the relationship between an insurance company (the principal) and a producer. The principal is responsible for the acts of the producer, and the producer's acts bind the principal

Loss

This event is the unintentional reduction, decrease, or disappearance of value. This is the basis of a claim under the terms of an insurance policy.

Non-admitted (unauthorized) insurer

This insurer has either applied for authorization and was declined or they have not applied. They are NOT permitted to transact insurance in this state

Admitted (authorized) insurer

This insurer is authorized by this state's commissioner of insurance to do business in this state and has received a certificate of authority to do business in this state

Domestic insurer

This insurer is organized in the laws of the state, whether or not it is admitted to do business in this state

Alien insurer

This insurer is organized under the laws of any jurisdiction outside the United States, whether or not it is admitted to do business in this state

Foreign Insurer

This insurer is organized under the laws of any other state, possession, territory, or the District of Columbia, whether or not it is admitted to do business in this state

Misrepresentations

This is a false statement contained within an insurance application. This usually does not void coverage or the policy as long as it is immaterial

Risk Retention Groups (RRG)

This is a group-owned insurer that primarily assumes and spreads the liability-related risks of it's members. They are owned by their policyholders, and are licensed in at least one state. They must be made up of homogeneous unites. Limited to risks with similar liability exposures such as theme parks, go-cart tracks, or water slides

Moral Hazard

This is a hazard that consists of an attitude of indifference toward the risk of loss that increases the probability of a loss occurring

Physical Hazard

This is a hazard that increases the likelihood or probability of loss; may include the use, condition, or occupancy of property. These hazards may often be seen, heard, felt, tasted, or smelled

Estoppel

This is a judicial denial of a contractual right based on prior actions that are contrary to what the contract requires

Fiduciary duty

This is a legal or ethical relationship of trust between two or more parties. The person carrying out this duty prudently takes care of money for another person. They are responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer.

Loss cost rating

This is a method of rating in which a rating organization provides insurers with the portion of a rate that does not include provisions for expenses or profit. This is used on risks for which the insurer may not have enough date to develop the rate, other than for expenses

Manual rating

This is a method of rating in which the use of rates contained in a manual published by the insurer or those of the rating organization of which it is a member

Merit rating

This is a method of rating in which uses rates that reward a policyholder for taking measures to decrease the probability of a loss by the implementation of safety programs, loss control programs, etc.

Schedule rating

This is a method of rating property and liability risks by using charges and credits to modify a class rate based on the nature of the particular risk being rated

Unilateral contract

This is a once-sided contract. Only one party is legally bound to the contractual obligations once the contract is in force. 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 and for any reason without legal obligation.

Class rating

This is a rating method in which a rate is charged to a group of policyholders who have similar exposures and experience

Individual rating

This is a rating method in which the rate is based on a rate used for a policyholder because a large enough pool of similar risk sis not available to any other type of rate. It is primarily used for commercial and specialty risks because of the number of unique variables involved

Experience rating

This is a rating method in which the rate is based on the policyholders actual loss history when compared to the loss history of similar risks

"A" rating or Judgement rating

This is a rating method that is an individual rate that does not use loss history as a component and that is derived largely from the underwriters evaluation and best judgement the risk poses to the insurer

Speculative Risk

This is a situation where there is a chance for loss, gain, or neither loss nor gain to occur. Examples include gambling, investing, or starting a new business. This risk cannot be insured

Pure risk

This is a situation where there is no chance for gain The outcome is for either nothing to occur or for a loss to occur. This is the only risk that can be insured

Hazard

This is a specific condition that increases the probability, likelihood, or severity of a loss from a peril. There are three types of these: physical, moral, and morale

Prior approval

This is a step in rate approval in which insurers cannot use rates until approved by the department of insurance, or until a specific time period has expired after the filing

File and Use

This is a step in rate approval in which rates must be FILED with the state insurance regulatory authority and may be USED as soon as they are filed

Mandatory rates

This is a step in rate approval in which states may require mandatory rates to be used indifferent lines of insurance

Contract of insurance

This is an agreement that obligates an insurer to indemnify or compensate an insured when there is destruction, loss, or injury due to something in which the insured has an interest, arising from an unexpected event

Law of Large Numbers

This is an insurance concept stating that as the number of risks in a particular group increase, the more likely it is to predict the number and amount of loss within that group. Auto insurance losses are the easiest type of insurance loss to predict precisely because the number of units insured is so great

Fraud

This is an intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right

National Association of Insurance Commissioners (NAIC)

This is an organization that consists of all state and territorial insurance commissioners or regulators. They provide resources, research, legislative and regulatory recommendations, and interpretations for state insurance regulators.

Insurable event

This is any event, past or present, that may cause loss or damage, or that may create legal liability on the part of the insured

Risk

This is defined as the uncertainty concerning a loss or possibility that a loss will occur. Two types of these

Lloyds Association

This is not an insurance company, but it consists of groups of underwriters called syndicates, each of which specializes in insuring a particular type of risk. Members are individually liable for each risk they assume

Peril

This is the cause or source of a loss

Loss exposure

This is the condition of being at risk for a loss (The chances of being EXPOSED to a loss)

Risk management

This is the determination of what types of protection are required to meet an insured's needs/ a survey of an insured's operations, assets, and exposures that could give rise to a loss

Primary/Ceding insurer

This is the insurer in which the financial risk of loss is being transferred FROM

Reinsurer

This is the insurer in which the financial risk of loss is being transferred to and accepted by

First named insured

This is the person or organization whose name appears first on the dec page. They are granted rights and responsibilities by the policy that are not granted to other insureds

Owner

This is the person responsible for paying the policy's premium. They are not necessarily the insured under the policy, but they do have various rights that are specified in the contract of insurance

Insurance application

This is the primary course of information about the purchaser needed for the insurer to underwrite a risk, and it will become part of the insurance contract

Deposit premium

This is the required initial premium paid into the policy that is subject to adjustment. A premium audit will be used to determine the actual premium based on the risk exposures.

Premium

This is the total cost for the amount of insurance purchased. For instance, $50,000 of coverage = $5 rate X 50 (per $1,000 of insurance) for a $250 premium

Reinsurance

This is the transfer of all or a portion of assumed risk from one insurance company to another. This action includes the primary or ceding insurer transferring the financial risk of loss to the reinsurer.

Waiver

This is the voluntary surrender of a known right, claim, or privilege. (EX. an insurer's failure to obtain an answer to an unanswered question in its application for insurance prior to issuing the policy. Such a failure waives the insurer's right to contest a claim based on the information it could reasonably obtained.

Concealment

This is the willful holding back or secretion of material facts pertinent to the issuance of insurance or to a claim. This may result in denial of coverage and may void the policy

Insurability

This means that the applicant met the underwriting requirements of the insurer and is therefore able to be issued coverage

Insurable interest

This must exist in every enforceable insurance contract. It requires the potential for an insured to suffer financial or economic hardship in the event of a loss, as well as a valid legal purpose for the contract. Sentimental value alone does not establish insurance interest. This must exist AT THE TIME OF LOSS

Adverse selection

This occurs when people with higher risks prone to losses seek insurance protection more often than people with average, or standard, risks.

Additional insured

This person or organization is not ordinarily protected by a policy but who, through the addition of an endorsement to the policy, is granted status as an insured. This is often a co-owner of a real property

Principle of Indemnity

This principle is designed to restore the insured to the same financial or economic condition that existed prior to the loss, depending on the amount and type of insurance purchased. The insured must not profit from an insurance transaction, but be made 'whole' again

Rate

This refers to the dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance. There are multiple types/methods of this

Domicile

This refers to the jurisdiction where an insurer is formed or incorporated

Admittence

This refers to whether or not an insurer is approved or authorized to write business in this state. The domicile does not impact this

Personal contract

This type of contract is specific to the person insured at the time the contract is formed

Direct Writing System

This type of insurance company is like an exclusive or captive agency, but agents are considered employees of the insurer. The company owns the accounts, and the agent may be paid a salary, salary plus bonus, or commission.

Direct mail or direct response

This type of insurer may sell insurance policies directly to the public via licensed employees or contractors. They use direct mail, newspapers, magazines, radio, television, internet, websites, or call centers and do not have face to face contact with the customer

Monoline policy

This type of policy contains a single type of insurance, such as a policy that only covers property losses or a policy that only covers casualty losses

Package policy

This type of policy contains multiple (at least two) types of insurance and offers advantages that are not offered in a monoline policy, such as voiding coverage gaps. This policies allow the insured to purchase a single policy, which is more affordable.

Risk Reduction

This type of risk management attempts to minimize the chance of loss instead of eliminating the risk. This includes practicing a healthy lifestyle, having preventative medical care, or taking prescribed medications will help reduce the risk of developing long-term medical conditions

Risk sharing

This type of risk management involves the pooling or spreading risk among a large number of persons. Group insurance is an example of this

Risk Transfer

This type of risk management involves transferring the uncertainty of loss from one party to another. Purchasing an insurance contract transfers the financial risk associated with the loss from a consumer to an insurance company

Risk Retention

This type of risk management is assuming full or partial responsibility for a loss. Self-insurance allows for financially retaining the necessary funds to cover a potential loss. It is not practical for most individuals to fully self-insure by choosing higher deductibles as a method of risk retention

Risk Avoidance

This type of risk management is the elimination or risk by not participating in activities that involve a chance of loss.

Independent agency/American agency system

With this type of insurance company, the agency enters into selling agreements with at least on insurer, but an unlimited number of insurers may be represented. The independent contractors are paid a commission based on personal sales and must cover the cost of their own agency operations

exclusive or captive agency

With this type of insurance company, the insured interacts with the insurer through an exclusive or captive agent, representing only one company, or a group of companies that have common ownership. The agent is an independent contractor

facultative reinsurance agreement

a reinsurance agreement that allows the reinsurer an opportunity to reject coverage or charge a higher premium for specific risks

Treaty of reinsurance

a reinsurance agreement that automatically accepts all new risks assumed by the ceding insurer

Elements of a Legal Contract

competent parties, legal purpose, offer and acceptance, and consideration

Elements of an Insurable Risk

large number of homogeneous units with the same perils, the loss must be definite and measurable, the loss must be statistically predictable, and the loss must be accidental in nature and due to uncertainty

Material representations

statements that impact the acceptance of an insurable risk, whether involving the rating of an acceptable risk, or the decision as to whether to accept or decline a risk

Insured

the person or entity that is covered by the insurer

Warranties

these are statements in the application or stipulations in the policy that are guaranteed true in all respects. If these are later discovered untrue or breached (past, present, or future), coverage (and sometimes the contract) is voided

Insurance agencies

these can be either captive or independent organizations; they recruit, contract with, train, and support insurance producers/agents

Insurance executives

these members of insurer management are responsible for overseeing the operation of the business

Financial rating services

these services evaluate and rate the claims-paying ability and financial stability of insurance companies

Executive branch at the state level

this branch is responsible for enforcing the existing statutes that have been put in place

Judicial branch at the state level

this branch is responsible for interpreting and determining the constitutionality of the statutes

Legislative branch at the state level

this branch writes and passes state insurance laws (statutes) the protect the insuring public

Claims department

this department assists the policyholder in the event of a loss

Actuarial department

this department gathers and interprets statistical information used in rate making. This department also determines the probability of loss and sets premium rates

Marketing and sales department

this department is responsible for advertising and selling

Underwriting department

this department is responsible for the selection of risks that determines the actual policy premium

Contract of Adhesion

this is a contract in which one party writes the contract without input from the other party. This is written and prepared on a take-it-or-leave-it-basis without negotiation

Reciprocal insurance company

this type of insurance company is group-owned and their main activity is risk sharing. They are unincorporated and formed by individuals, firms, and business corporations that EXCHANGE business on one another. Members are known as subscribers

Mutual insurance company

this type of insurance company is owned by policyholders. This type of insurer issues participating policies and its policyholders ARE entitled to receive non-taxable dividends, but they are not guarenteed

Stock insurance company

this type of insurance company is owned by stockholders or shareholders. This company issues nonparticipating policies to its policyholders, however STOCKHOLDERS may receive taxable corporate dividends as a share of the company's profit

Nonparticipating policies

this type of policy means that POLICYHOLDERS are not entitled to receive dividends