State Insurance Exam Chapter 2

There are two types of reports insurance underwriters will utilize to obtain credit information about an applicant:

Consumer Reports and Investigative Consumer Reports.

Mass marketing methods. These methods are commonplace today, and include direct response, such as insurance sold:

On television, On radio, By mail, Over the internet, and In vending machines.

On what level is insurance primarily regulated?

a. Insurance is an unregulated industry b. Local level (c.) State level d. Federal level

The _________ is the principal in the agent-insurer relationship.

a. Insured b. Agent (c.) Insurer d. Policyowner

All of the following cases/laws involve disputes of whether the insurance industry should be regulated on a state or federal level EXCEPT:

(a.) The Privacy Act of 1974 b. Public Law 15. c. Paul v. Virginia. d. United States v. South-Eastern Underwriters Association.

Misrepresentations

Intentional misstatements made by the insured. Misrepresentations that are material to the risk may void the contract.

Noninsurance Sponsor (mass marketing)

They issue insurance policies but are not insurers themselves. These include financial institutions including the banking and credit issuing companies.

Jerry is able to bind coverage. This means that he is probably:

a. A life agent b. A life broker c. A life and health insurance agent (d.) A property and casualty agent

National Conference of Insurance Legislators, or NCOIL

is to help state legislators make informed decisions regarding insurance issues, to improve the quality of insurance regulation, and to combat the federal government from encroaching on each state's control of insurance regulations.

Consultants

provide insurance advice to insureds for a fee. Consultants work for insureds, not insurers.

Risk Purchasing Groups

Opposite to risk retention groups. do not retain risk. Risk purchasing groups buy group liability insurance from an outside insurer or from a risk retention group. Risk purchasing groups do not act as insurers, underwrite coverage, nor require members to provide capital. Risk purchasing groups must be registered in each state they offer insurance. An example of a risk purchasing group is the Special Markets Purchasing Group, Inc.

Insurers can be grouped into two main types:

Private and Government. Private insurers offer insurance to people through the individual market. Government insurance redistributes incomes to help people afford costs associated with fundamental risks.

Embezzlement

Producer using insureds money

Mutual insurers are distinct from stock insurers in two primary ways:

They lack capital stock, and Profits are distributed among their members - the policyholders.

DEF insurer is nonadmitted. All of the following are possible explanations for why DEF insurer cannot sell insurance in a state EXCEPT:

a. DEF has been denied licensure. (b.) DEF sells excess and surplus lines insurance. c. DEF has not applied for a license. d. DEF is not licensed.

Which of the following insurers cannot be categorized as commercial?

a. Mutual insurer b. Stock insurer c. Demutualized insurer (d.) BlueCross BlueShield

Daniel was purchasing a life policy from his friend Marcus, an agent for MMC Agency. Even though Daniel had not yet paid a premium, Marcus told him that the policy was in force as of the date that they wrote the contract. Marcus did not have the authority to bind coverage immediately, but the MMC Agency could still be liable. This is an example of:

a. Waiver and estoppel (b.) Apparent authority c. Implied authority d. Expressed authority

Authorized insurers

also referred to as admitted or licensed insurers, are insurers who have received a certificate of authority authorizing them to transact insurance in a particular state for a particular line or lines of insurance.

Mutual insurers

are commercial companies owned by their policyholders. There are no stockholders. Because mutual insurers do not have capital stock, the funds required to start the company must be obtained from an individual or group of people.

Risk Retention Groups

are limited liability companies or member-owned corporations that collectively assume and spread their members' liability risks through self-insurance. All members of a risk retention group must be employed in similar types of businesses so that they have similar liability exposures. Risk retention groups must be licensed in at least one state or district. Upon licensure, risk retention groups act as insurers, where members underwrite coverage, retain their own risk, and issue insurance policies to their members throughout the United States at attractive rates. Risk retention groups require members to provide capital to fund the risk. This encourages each member to avoid excessive and unnecessary claims. Most risk retention groups purchase reinsurance.

Producers

are people who sell, solicit and negotiate insurance. This term encompasses agents and brokers. In some states, solicitors are licensed to work as insurance producers.

Managerial system

branch offices are established in several locations. Instead of a general agent running the agency, the insurer employs a salaried branch manager. The branch manager supervises agents working out of that branch office. The insurer pays the branch manager's salary and pays him a bonus based on the amount and type of insurance sold and number of new agents hired.

Apparent authority

deals with the relationship between the insurer, the agent and the customer. Apparent authority is a situation in which the insurer gives the customer reasonable belief that an agent has the power and authority to bind the principal, even in cases where the agent does not have such authority. The materials provided to an agent by his or her company are considered to be evidence of that agent's apparent authority. The customer may be led to a false impression because of an agent's actions.

Express authority

is the explicit authority granted to the agent by the principal as written in the agency contract.

Social Security

also known as OSADI (Old Age, Survivors' and Disability Insurance), provides disability income, survivor benefits and retirement benefits. Medicare is part of the Social Security program, and provides medical benefits to qualifying people age 65 and older

Brokers

are insurance producers who represent the insured, not the insurer. Brokers work for several different insurers. Brokers' duties are similar to agents' in soliciting coverage, collecting applications and initial premiums, and delivering policies; however, brokers cannot bind insurance.

Distribution systems

are the ways insurance products are marketed and sold to the public. Insurance can be purchased through licensed insurance producers, who are either agents or brokers, or through a number of other ways.

Rating services

Each rating service has its own rating system, but most use an A to F letter grading scheme. The Nationally Recognized Statistical Rating Organizations that rate insurers are: A.M. Best, Moody's Investors Service, Standard and Poor's (S&P), Fitch Ratings, Ltd., LACE Financial, and Japan Credit Rating Agency, Ltd.

Historical Perspective

The end result is a general compromise between the federal government and individual states, though some arguments between the two still prevail.

Churning

is the practice of using misrepresentation to induce a policyholder to replace a policy issued by the insurer the producer represents, rather than the policy of a competitor. The objective of churning is to allow the producer to collect a large first-year commission on a new policy.

The Federal Trade Commission (FTC)

wanted to control health insurance advertising and sales literature. However, in 1958 the Supreme Court asserted that the McCarran-Ferguson Act prohibits supervision of the insurance industry by a federal agency. Since then the FTC has tried to control the insurance industry, but has been unsuccessful.

Fair Credit Reporting Act (FCRA)

was passed in 1970 with the purpose of regulating the way credit information is collected and used. The Act requires consumer-reporting agencies to implement policies and procedures to preserve the confidentiality, accuracy, relevance, and appropriate utilization of consumer's private credit information.

When insurance agent Jake uses the insurance company's logo and letterhead for sales presentations and letters to his clients, this is which type of authority?

a. Underlying (b.) Apparent c. Implied d. Express

This employee cannot bind life and health insurance and works for the insurer:

(a.) Agent b. Consultant c. Broker d. Solicitor

An excess and surplus lines insurer is categorized as a(n):

(a.) Unauthorized insurance company b. Authorized insurance company c. Domestic insurer d. Admitted insurer

There is a dollar limit to how much a guaranty association will pay per policy and per insured. Each state has its own set of limits, such as:

$200,000 for life insurance death benefits, $100,000 for life insurance cash surrender and $100,000 for health insurance benefits.

Any written or oral statement that does not accurately describe a policy's benefits, conditions, or coverage is considered a misrepresentation. A misrepresentation is simply a lie.

-Any statement representing a health discount plan (HMO) as a form of insurance is a misrepresentation. -Relating only the benefits and not including a description of conditions or limitations is misrepresenting the policy. -Suggesting a policy is better suited for a prospective applicant than the facts would indicate to a reasonable person is misrepresentation.

Penalties

Persons accessing credit information are subject to civil and criminal action for failure to comply with the Fair Credit Reporting Act. Persons who fail to comply may be subject to pay a criminal penalty of up to $50,000.

ABC insurer is incorporated in Texas. Which of the following is true?

a. ABC insurer is foreign in Texas. b. ABC insurer is domestic in Louisiana. (c.) ABC insurer is alien in Great Britain. d. ABC insurer is domestic and foreign in Texas.

A foreign insurer is:

a. An insurance company conducting business in a foreign country b. An insurance company conducting business in the state in which it is incorporated (c.) An insurance company conducting business in a state in which it wasn't incorporated d. Always unauthorized

An agent's statements made to an insured are considered to be:

a. Apparent authority b. Lingering implied authority (c.) Implied authority d. Expressed authority

The _________ represents the insurer. The __________ represents the insured.

a. Broker, producer (b.) Agent, broker c. Producer, insurer d. Broker, broker

All of the following are OASDI benefits EXCEPT:

a. Disability (b.) Medicaid c. Retirement d. Survivor's

Which of the following is another term for reciprocal exchange?

a. Reinsurer (b.) Insurance exchange c. Risk purchasing group d. Risk retention group

Which of the following best describes an insurer that is a charitable organization providing insurance only to its members?

a. Stock and mutual companies b. Mutual company (c.) Fraternal benefit society d. Stock company

Which of the following is a group of companies that collectively assumes and spreads its own risk?

a. Stock insurer b. Reciprocal exchange (c.) Risk retention group d. Fraternal benefit society

A mutual company pays dividends to:

a. Stockholders (b.) Policyholders c. Insureds d. Debtors

Fiduciary

A person in a position of financial trust and responsibility. Producers are fiduciaries.

Agents are either:

Captive, Exclusive/career agents or Independent agents. Captive agents work for only one insurer. Independent agents work for themselves or for several insurers non-exclusively.

Controlled business.

Coverage written on a producer's or agent's own life or health and on the lives or health of individuals who are relatives or business associates of the producer. Controlled business must be less than 50%.

Other examples of private insurers include:

Fraternal benefit societies, Lloyd's Associations, Risk retention groups, Risk purchasing groups, Reciprocal exchanges, Reinsurers, Assessment insurers and Excess and surplus lines.

Mutualization occurs when:

a. A mutual insurer becomes a stock insurer (b.) A stock insurer becomes a mutual insurer c. A nonprofit insurer becomes a mutual insurer d. A nonprofit insurer becomes a stock insurer

Underwriters

They select, classify and rate risks.

LMO Insurer is incorporated in New Hampshire, conducts business in all of the eastern seaboard states and in Germany. How is LMO Insurer classified in Germany?

a. Excess and surplus lines (b.) Alien c. Foreign d. Domestic

Insurer XYZ has written an agency contract for Yuri to act as an agent. What type of authority is described here?

a. Express (b.) Implied c. Lingering implied d. Apparent

Stock Insurers

also referred to as capital stock insurers, are incorporated commercial companies owned by their stockholders. Stock insurers have a capital fund, surplus and reserves that are financially supported by their stockholders. Each stockholder owns a portion of the insurer, and is a source of capital for the insurer. Stockholders assume the risk of the individuals insured by the stock insurer.

The following information may not be included in consumer reports unless the consumer credit report is requested for life insurance policies with a face amount of $150,000 or more:

-Bankruptcies dating back more than 10 years -Civil suits and judgments dating back more than seven years or cases in which the statute of limitations has expired, whichever period is longer -Tax liens dating back more than seven years -Adverse information dating back more than seven years -Reports of a consumer's arrests, indictments or convictions

Consumer Rights

-Consumers have the right to know what is in their credit reports and who has obtained their credit report within the prior year -Consumers have the right to dispute a credit report requiring the credit-reporting agency to perform a reinvestigation.

It is illegal to do any of the following: (unfair Discrimination)

-Refuse to insure or to limit the amount of coverage offered to an individual solely because of the individual's sex, marital status, race, religion, or national origin; -Refuse to insure solely because another insurer has refused to write a policy or has cancelled an existing policy on that person; -Terminate or modify coverage or refuse to renew coverage solely because the applicant or insured is mentally or physically impaired; or -Discriminate against victims of domestic violence.

Following are a list of instances in which insurers should provide notice to applicants and insureds regarding personally identifiable information:

Insurers must provide privacy policy information to individuals when the policy is delivered (at the latest) and annually. When a policy is renewed, notice must be provided by the date of renewal. For policy reinstatements, the insurer must provide notice to the applicant/insured when the reinstatement request is made. For changes to policy benefits, the insurer must provide the insured with a notice when the policy change request is made. For a third party interview regarding an applicant, the insurer must provide the applicant with notice upon collection of information. For an applicant interview, the insurer must provide the applicant with notice when the policy is delivered.

The Unfair Trade Practices Act is divided into two parts:

Unfair marketing practices and Unfair claims practices.

The Fair Credit Reporting Act states that generally, consumer reports cannot contain the following information, EXCEPT:

a. Adverse information about an individual that dates back over seven years b. Tax liens older than seven years (c.) An individual's character d. An individual's criminal history

Which of the following cases/laws best describes the ruling that insurance transactions crossing state lines are not considered interstate commerce?

a. Public Law 15 b. McCarran Ferguson Act (c.) Paul v. Virginia d. United States v. South-Eastern Underwriters Association

The purpose of the Gramm-Leach-Bliley Act is to:

a. Rule that insurance transactions crossing state lines are interstate commerce (b.) Allow financial entities to merge and accommodate greater competition c. Regulate the way credit information is collected and used d. Rule that insurance is primarily regulated on a state-level with minimal federal oversight

Defamation

is any false, maliciously critical, or derogatory communication - written or oral - that injures another's reputation, fame, or character. Both individuals and companies can be defamed.

Intimidation

manipulates through the threat of a negative result. The loss of business and the denial of coverage are examples of intimidation.

Credit reporting agencies

must provide consumers with a way to notify agencies that they do not want their information used. This includes providing consumers with a toll-free number to call. Consumers notifying agencies by phone can request a two-year hold on information; however, if a request is made in writing, the hold on information is permanent unless withdrawn by the consumer.

McCarran-Ferguson Act

was passed by Congress on March 9, 1945. The McCarran-Ferguson Act states that while the federal government has the authority to regulate the insurance industry, it would not exercise its right if the insurance industry were regulated effectively and adequately on the state level.

Defamation occurs when: Select one:

(a.) An individual or entity makes false, derogatory statements about an insurer's financial condition that are calculated to injure the insurer's business b. An individual or entity acts to create a general action that in any way to intimidate an insurer in order to gain a monopoly in business c. An individual or entity refuses to insure or limit the amount of coverage only because another insurer has cancelled an existing policy on that person d. An individual or entity takes legal action against an insurer or producer

Which of the following accurately describes the penalty for violation of the Privacy Act of 1974?

(a.) Maximum of $10,000 for each violation after a cease and desist order has been issued. b. Maximum fine of $50,000 per violation for violations after a cease and desist order has been issued. c. Up to three years in jail with a maximum fine of $5,000 for a person who obtains personal or private information without good reason. d. None of the above

Whoever is engaged in the business of insurance whose activities affect interstate commerce will be punished if they:

-Knowingly, with the intent to deceive, makes any false material statement or report, or -Overvalues land, property or security in connection with any financial reports or documents presented to any insurance regulatory official or agency to examine the affairs of such person, and for the purpose of influencing the actions of such official, agency, or examiner.

All of the following policies and contracts are typically covered by state insurance guaranty associations, EXCEPT: Select one:

a. A whole life insurance policy issued by a mutual insurer b. A term life insurance policy issued by a stock insurer c. An individually-owned annuity (d.) A universal life insurance policy issued by a fraternal benefit society

With regard to an investigative consumer report, consumers must be informed that they have the right to request additional information about the report; such information must be provided to consumers within ____ day(s) if requested. Select one:

a. Ten (b.) Five c. Three d. One

Consumer Reports

are any written, oral, or other communication of information by a consumer reporting agency about a consumer's credit worthiness, character, general reputation, personal characteristics or mode of living which are used to determine a consumer's eligibility for credit, insurance, employment, or other authorized purposes. The person seeking a consumer report on an individual must have a valid business need for the information.

Pretext interviews

are interviews in which the interviewer assumes a false identity or refuses to disclose their true identity and interviews a person without disclosing the true purpose of the interview. A Pretext interview is forbidden by law except in cases where there is substantial evidence of fraud, criminal activity or misrepresentation.

Insurance Industry

is primarily regulated on a state-by-state basis with minimal federal oversight. Each state has its own department or division of insurance headed by a Commissioner/Superintendent/Director. Since insurance has an impact on interstate commerce, a few federal laws have been enacted to oversee the operation of the insurance industry.

personal producing general agency (PPGA)

system, agents work for an independent agency selling policies from several insurance companies. Unlike the career agency system, agents are not employees of the insurance company. Instead, they work for the PPGA. In other words, while career general agents (CGA) primarily recruit and train, PPGAs primarily sell.

Paul v. Virginia case of 1869

the U.S. Supreme Court ruled that insurance transactions crossing state lines are not interstate commerce. This was an important case because insurance transactions legally fell under the regulation of state and local law instead of federal law.This legislation lasted for 75 years until 1944 with the United States v. South-Eastern Underwriters Association case.

Demutualization

Transformation of a mutual insurer into a stock insurer.

The law of agency

states that the acts of an insurance agent are deemed the acts of the insurer.

Two common types of service providers are:

HMOs- Health Maintenance Organizations, and PPOs- Preferred Provider Organizations.

Janice has received a contract from the agency she plans to work for. The contract defines the agreement in very explicit terms. Signing the contract will allow her to represent the agency. This is an example of:

a. Implied authority (b.) Express authority c. Apparent authority d. Presumptive authority

All of the following are false statements regarding authority of insurers, EXCEPT:

a. Unauthorized insurers are admitted and hold a certificate of authority. (b.) A license, called a certificate of authority, must be held by all insurers intending to transact insurance in a jurisdiction unless they are exempt as excess and surplus lines insurers. c. All life and health insurance companies are admitted insurers. d. Property and casualty insurers are also called excess and surplus lines insurers, and hold a certificate of authority to act as nonadmitted insurers in a jurisdiction.

Career Agency System

agents, working as employees of the insurer, sell the insurance company's products to the public, while brokers represent prospective insureds. General agents earn commissions on the policies they sell and on those sold by other agents they manage. In contrast to independent agents, the insurer owns policies sold by captive agents, so the insured is the insurer's customer.

Agents

is defined as an individual who works on behalf of another individual or entity, called the principal, in dealing with the contractual agreements of third parties. In the insurance industry, the insurer is the principal.

Home service insurance

is industrial insurance sold by home service or debit insurance companies. Face amounts are small, usually $1,000 to $5,000. Premiums are paid weekly or monthly.

Errors and Omissions (E&O) or professional liability insurance coverage.

the insurance company will defend the producer against lawsuits the policy covers, regardless of whether the suits are unwarranted or for just cause.

Agents who own the policies they sell and can work for multiple insurers are known as:

a. Captive agents b. Exclusive agents (c.) Independent agents d. Managing general agents

Medicare

provides health care to impoverished people. The government also provides military, federal and state employees with a variety of life and health insurance programs including: Servicemen's Group Life Insurance, CHAMPUS, and TRICARE.

While insurance is primarily regulated in a state-by-state basis, what is the purpose of federal insurance laws?

(a.) To oversee the operation of the insurance industry as a whole. b. To regulate other government agencies involved with the insurance industry. c. To assure that all states have mandatory seat belt laws. d. None of the Above

United States Vs. Southeastern Underwriters Association

In 1942 the U.S. attorney general accused the South-Eastern Underwriters Association of committing a restraint of business, a violation of the Sherman Antitrust Act. The court decision of Paul v. Virginia was overruled in 1944 with United States v. South-Eastern Underwriters Association, which ruled that insurance transactions crossing state lines are interstate commerce and are subject to federal regulation.

SEC Intervention

In the 1950s the issue arose of how variable annuities would be regulated: by states or as securities products through the Securities and Exchange Commission. The Supreme Court ruled that variable products (variable life and annuities) are securities and would be regulated as such.

Listed below are the 12 exemptions upon which an individual's written consent is not required in order to release personally identifiable information:

On a "need to know" basis within an agency Disclosures required by the Freedom of Information Act For routine uses within an agency For the Bureau of the Census to perform a census or survey If used strictly for statistical research or reporting record To the National Archives and Records Administration as a record which has sufficient historical or other value A request made by law enforcement For circumstances affecting the health or safety of an individual To Congress To a general accounting office Court-ordered To a consumer reporting agency (debt collection)

Guaranty Associations

State life and health guaranty associations provide a safety net for all member life, health and annuities insurers in a particular state. Guaranty associations protect insureds in the event of insurer insolvency, or inability to pay claims. Guaranty associations protect the insurer, which in turn protects the insured. All life, health and annuities insurers within a state are required to be members of the state guaranty association, unless exempt (i.e., fraternal benefit societies and nonprofit insurers).

Gramm-Leach-Bliley Act (GLBA), Financial Services Modernization Act of 1999

The Financial Services Modernization Act was passed in 1999 with the purpose of allowing financial entities, such as banks, to merge and create greater competition. This law repealed the Glass-Steagall Act, giving insurers the ability to merge with banks, and either financial institution to perform the duties of both. Regardless, its respective state insurance department regulates any entity acting as an insurer. The GLBA defines a consumer as an individual who obtains financial products or services that are to be used primarily for personal, family, or household purposes from a financial institution. Customer is a consumer who has an ongoing relationship with a financial institution.

The National Association of Insurance Commissioners (NAIC)

The National Association of Insurance Commissioners (NAIC) is a membership association of state insurance commissioners. The purpose of the organization is to advance the uniformity of regulation between states in insurance matters without encouraging the imposition of federal regulation. The NAIC does not have legal authority, but has done much to promote the standardization of insurance laws and regulations among the states including the model laws for individual accident and sickness policy provisions, standard valuation laws, and nonforfeiture benefits.

Under which of the following laws does an applicant for a life insurance policy have the right to question the validity of information contained in a consumer report?

a. McCarran Ferguson Act/ Public Law 15 (b.) Fair Credit Reporting Act c. Fraud and False Statements Act d. Gramm-Leach-Bliley Act/ Financial Services Modernization Act of 1999

A person who is guilty of a fraudulent act may be subject to the following penalties:

a. Misdemeanor b. Only a civil fine up to $10,000 c. Civil fine up to $10,000 and imprisonment for 20 years (d.) Civil fine up to $50,000 and imprisonment up to 10 years

Fraternal benefit societies are described by all of the following, EXCEPT:

a. They provide insurance to their members. b. They can be religion-based. c. They include ethnic or charitable organizations. (d.) They include stock and mutual companies.

All of the following are exemptions under the Privacy Act of 1974 upon which an individual's written consent is not required in order to release personally identifiable information, EXCEPT

a. To a general accounting office. b. For routine uses within an agency. (c.) For a consumer poll. d. For circumstances affecting the health or safety of an individual.

The practice of using misrepresentation to induce a policyholder to replace a policy issued by the insurer the producer represents is called: Select one:

a. Twisting b. Misrepresentation (c.) Churning d. Intimidation

Coercion

generally manipulates through the prospect of something desirable. An agent's subtly suggested offer to recommend the prospective client for membership in a selective club if the person purchases a particular policy is coercive, for instance.

Unfair discrimination

is the unequal application of the principles used to approve, rate, set premiums, and issue insurance policies. Every state has laws prohibiting unfair discrimination in insurance. In general, they state that no insurance producer may unfairly discriminate between individuals of the same class and equal expectation of life in the rates charged for the policy or between individuals of the same class and of the same hazard in the amount of premium rates, in any manner whatsoever.

Fraud and False Statements legislation

is to provide punishment for people who willfully engage in insurance fraud or make false statements that affect insurance business and interstate commerce. Commissioners, insurers, agents, and employees of insurers are subject to the provisions of the act.

Privacy Act of 1974

was enacted to establish a code of fair information practices dictating how personally identifiable information of individuals is handled by federal agencies, and prevent invasions of privacy. The Privacy Act mandates federal agencies to provide the public with a notice of their systems of records, or a federal agency's set of records in which individual's information is identified by name or another form of identifier, such as a Social Security number. The Privacy Act forbids disclosure of information from a system of records without the individual's written consent.

What are the two distinct characteristics that distinguish mutual insurers from stock insurers?

(a.) Mutual insurers lack capital stock and profits are distributed among the members. b. Mutual insurers are not governed by a board of directors and are owned by stockholders. c. Mutual insurers have capital stock and are owned by stockholders. d. Mutual insurers do not have policyholders and have capital stock.

Excess and surplus lines insurers

(also referred to as unauthorized insurers or nonadmitted) exist to insure risks that traditional insurers will not insure due to the nature or amount of coverage of the risk. Excess and surplus lines insurers provide insurance for risks that authorized insurers cannot insure or do not have a market to insure. Excess and surplus lines insurers are not subject to the rate and form laws that standard market insurers are subject to, which means the insurer can offer flexible coverage without needing to file rates and forms with the state insurance department.

Lloyd's Associations

are loosely grouped as private insurers, even though they are not technically insurance companies. Lloyd's are better described as a market where individuals and groups gather to exchange insurance, much like stock exchanges provide a place to buy, sell and trade stocks. Lloyd's are corporations that advertise and market the financial services of an association of underwriters. (Lloyd's of London)

Which of the following is best described as an insurance marketplace where people gather to exchange insurance?

(a.) Lloyd's association b. Risk retention group c. Noncommercial insurer d. None of the Above

Key differences between private and government insurers:

-Private insurance purchased by individuals must be fully funded. Private insurers must have liquid capital to pay claims. Private insurance is funded by premiums. Government insurance is not fully funded, relying on subsidies and loans. -Government insurance is based on statutes (laws) whereas; private insurance is based on contractual rights. -Government insurance is established to benefit a social need and provide coverage that private insurers cannot afford or refuse to issue. -government insurance focuses on sufficient benefits for all participating people; whereas, private insurance focuses on equitable coverage for buyers. -participation in the private insurance industry is voluntary, while participation in government insurance is compulsory.

Domestic Insurer

An insurer that conducts business in the state it was incorporated

Government Insurance

is also known as social insurance. The purpose of social insurance is to provide protection against fundamental risks by redistributing income to help people who cannot afford to pay the cost of incurring such losses themselves. Government insurance also provides insurance protection for catastrophic risks that private insurers will not cover. There are several types of government insurance. In terms of life and health insurance, most people are familiar with Social Security and Medicare.

Market conduct

is used by the insurance industry as a type of ethical code describing how insurers and producers handle business. Market conduct establishes policies and procedures that producers must use as a guide for advertising and selling insurance.

Which of the following ruled that insurance transactions are not interstate commerce and thus fall under state regulation is known as:

(a.) Paul v. Virginia b. Privacy Act of 1974 c. McCarran Ferguson Act d. United States v. South-Eastern Underwriters Association

In the underwriting of insurance policies, some amount of discrimination is:

(a.) Present in many cases, because of differing levels of risk b. Illegal in all cases c. Forbidden by federal statutes d. Permissible only when two people of equal risk are charged different rates

All of the following, if performed frequently enough to indicate a general business practice, are unfair claims settlement practices, EXCEPT:

(a.) Requiring submission of preliminary claim report and formal proof of loss before paying a claim. b. Threatening a client in order to discourage their effort to recover a loss. c. Failing to acknowledge with reasonable promptness communications regarding claims. d. Knowingly misrepresenting to claimants pertinent facts relating to coverages.

Unfair or Improper Claims Practices Any of the following acts, if committed without just cause and performed frequently, constitute improper and unfair claims practices:

-Knowingly misrepresenting to claimants pertinent facts relating to coverages; -Failing to acknowledge with reasonable promptness communications regarding claims; -Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed and filed; -Failing to adopt reasonable standards for prompt investigation and settlement of claims; -Not attempting in good faith to effect prompt, fair, and equitable settlement of claims; -Offering to settle claims for an amount less than the amount otherwise reasonably due or payable; -Delaying the investigation or payment of a claim by requiring an insured, claimant, or the physician of either to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information; -Threatening a client in order to discourage their effort to recover a loss; -Trying to reduce a claim by having a policy of appealing arbitration awards that are in favor of insureds; -Any other practice which constitutes an unreasonable delay in paying or an unreasonable failure to pay or settle claims in full.

In a conversation with an older family friend, an insurance agent, Sly, inquired with what company she had a Medicare supplement policy. When she told him, the agent was silent. Concerned by his silence, the woman asked if the company was a reliable company. The producer asked, "Have you received any financial statements regarding their solvency?" This producer was:

a. Acting appropriately by refusing to comment personally on the competing insurance company b. Engaging in misrepresentation (c.) Engaging in defamation d. Engaging in churning

An agent is guilty of committing fraud. What must the person obtain in order to transact insurance?

a. Certificate of authority from the state insurance department b. Waiver license (c.) Waiver of consent from the state insurance department d. Exception to transact from the Supreme Court

All of the following may not be included in a consumer report, unless the consumer credit report is requested for a life insurance policy with a face amount of $150,000 or more, EXCEPT:

a. Civil suits and judgments dating back more than seven years b. Bankruptcies dating back more than 10 years (c.) Adverse information dating back more than three years d. Tax liens dating back more than seven years

An example of an unfair claim settlement practice would include: Select one:

a. Denying the payment of a claim because it does not meet the conditions of the insurance contract b. Delaying the payment of a claim while it is investigated for possible fraud (c.) Advising a claimant of the possibility that, should the claimant reject a settlement offer, an arbitration award might be less than the offer d. Denying the claim because it occurred after the cancellation of the policy

With respect to life and health insurance guaranty associations, what are agents prohibited from doing? Select one:

a. Informing clients about the existence of the life and health insurance guaranty association (b.) Using the existence of the life and health guaranty association as an inducement to selling an insurance contract c. Letting prospective insureds know if an insurer or policy is covered by the guaranty association d. All of the above

All of the following acts are considered unfair trade practices, EXCEPT:

a. Misrepresentation (b.) Replacement c. Rebating d. Coercion

In discussing a potentially lucrative group policy with a business owner who had purchased a business and just moved into the community, an established producer jokingly remarked, "Well, would it sweeten the pot if I could assure you membership in the country club?"The producer added, "I'm on the membership committee and while we're not accepting new application right now, I'm sure something could be worked out." These remarks constituted:

a. Nothing more than an effort to establish a warm relationship with the potential client b. Misrepresentation (c.) Rebating d. Intimidation

Which of the following cases/laws overruled the court decision of Paul v. Virginia stating that insurance transactions crossing state lines are interstate commerce and subject to federal regulation?

a. Privacy Act of 1974 (b.) United States v. South-Eastern Underwriters Association c. Public Law 15 d. Paul v. Virginia

Which court ruling in 1944 was a response to the court case in 1869 which ruled that insurance transactions crossing state lines are not interstate commerce?

a. Privacy Act of 1974 b. Public Law 15 c. Paul v. Virginia (d.) United States v. South-Eastern Underwriters Association

Insurance departments in each state began forming after the passing of what law/court ruling?

a. South-Eastern Underwriters Association. b. Paul v. Virginia. (c.) McCarran Ferguson Act. d. Privacy Act of 1974

Which of the following is considered an unfair claims practice?

a. Splitting a commission with a prospect (b.) Failing to affirm or deny coverage within a reasonable time after receiving proof of loss c. Convincing a policyholder to lapse or surrender an existing policy to sell another policy d. Making any oral or written statement that is false, maliciously critical, or calculated to injure a competing producer

When an insurer requests an investigative consumer report on an applicant, which of the following is true? Select one:

a. The applicant can request further information about the report that must be provided to the applicant within 30 business days. (b.) The report includes information regarding the applicant's general reputation and personal characteristics. c. The credit report includes information about the applicant's account balances. d. The applicant must only be notified by phone about the report.

What is the purpose of the Fair Credit Reporting Act? Select one:

a. To rule that insurance transactions crossing state lines are not treated as interstate commerce b. To rule that insurance transactions crossing state lines are interstate commerce c. To rule that insurance is primarily regulated on a state-level with minimal federal oversight (d.) To regulate the way credit information is collected and used

Leo, a producer, sat down with a prospective client to discuss a long-term care policy. He used a computer program to outline and emphasize his remarks. The visual presentation contained the principal benefits of the policy he was trying to sell. Although he mentioned that it also had, the usual, conditions, he did not include those in his visual presentation or specify what they were. The producer was engaging in:

a. Twisting (b.) Misrepresentation c. Coercion d. Rebating

Consumer reporting agencies

compile and maintain credit information about consumers nationwide, and issue credit reports to third parties who have a valid business need for the information. Consumers have the right to request removal of their name and address from lists provided to consumer reporting agencies for any consumer report that was not commenced by a credit or insurance transaction of the consumer.

Investigative Consumer Reports

contain information on a consumer's character, general reputation, personal characteristics, or mode of living, but are obtained through personal interviews with neighbors, friends, or associates of the consumer. Investigative consumer reports do not use credit information from creditors, credit records, or credit reporting agencies. Investigative consumer reports cannot be performed unless the consumer has been notified in writing of the report within three days of when the report was initially requested.

Boycott

is a form of intimidation in which an individual or group refuses to do business with a company or individual, either to drive them out of business or to force them to act in certain way.

Discrimination

is a necessary part of the insurance business. Underwriters must make distinctions in rates and available policies based on applicants' ages, predicted expectation of life, health hazards, and similar principles. In other words, they must consider the nature of the risk, the expense of conducting business, the propriety of the plan of insurance, and similar principles.

The National Association of Insurance and Financial Advisors, or NAIFA

is an association that works for the best interest of policyholders and seeks to broaden the opportunity and advancement of the individual agent. NAIFA represents the interest of insurance professionals and advocates for a positive legislative and regulatory environment, enhanced business and professional skills and the promotion of ethical conduct of insurance professionals.

Twisting

is the unethical act of persuading a policyowner to drop a policy solely for the purpose of selling another policy without regard to possible disadvantages to the policyowner. By definition, twisting involves some kind of misrepresentation - or "twisting" of the truth - by the producer to convince the policyowner to switch insurance companies. Often, it involves encouraging an insured to lapse on their current policy and to take out another.

Rebating

occurs if a buyer of an insurance policy is given anything of significant value as an inducement to purchase or renew a policy. Any inducement in the sale of insurance that is not specified in the insurance contract itself is a rebate. For instance, splitting a commission with a prospect is not a part of the insurance contract and, therefore, constitutes a rebate. Rebates include not only cash, but also personal services or items of value.

Franchise marketing (mass marketing)

where insurance is sold to a small group or association and each insured receives their own individual policy.

Alien Insurer

is any insurer that conducts business in a country in which it wasn't incorporated.

Mutualization

Transformation of a stock insurer into a mutual insurer.

Unauthorized Insurers

also referred to as non-licensed or nonadmitted insurers, are not allowed to transact insurance business in a particular state, with the exception of excess and surplus lines insurers. Unauthorized insurers do not have licensure because they have not yet applied, have applied and been denied licensure, or are excess and surplus lines insurers. Even though excess and surplus lines insurers are considered unauthorized insurers in a state, they are permitted to conduct insurance business in that state.

Which of the following insurers/organizations are not technically insurance companies?

(a.) Noncommercial organizations b. Commercial insurers c. Stock insurers d. Mutual insurers

Dividends

A return of overcharged premium, which is not taxable.

BlueCross BlueShield

The most familiar of the service insurers is BlueCross BlueShield. Unlike stock or mutual insurers, noncommercial organizations are nonprofit entities offering strictly health insurance coverage. BlueCross health plans are intended for hospital costs. BlueShield health plans are for medical and surgical costs.

ABC company pays its stockholders dividends. ABC undergoes a change in company ownership and begins to pays its policyholders dividends, instead of its stockholders. What is the term that describes the transformation that ABC company has undergone?

a. Demutualization (b.) Mutualization c. Transfer to a noncommercial insurer d. Transfer to a nonprofit insurer

Fraternal Benefit Society

also known as fraternal insurers or simply fraternals, are special types of mutual insurers/nonprofit religious, ethnic or charitable organizations that provide insurance exclusively to their members. People who are members of a fraternal benefit society tend to be the members of a fraternal organization or lodge. The lodge system has a representative form of government. Fraternal benefit societies are exempt from federal income tax and state premium tax because they are categorized as charitable organizations. Fraternal benefit societies are mostly involved in life and health insurance. An example of a fraternal benefit society is the Modern Woodmen of America.

Reciprocal exchanges

also referred to as interinsurance exchanges or simply reciprocals, are unincorporated groups of individuals. Each individual member, called a subscriber, provides insurance for other members through indemnity contracts. Each subscriber acts as both the insurer and the insured. A separate account is set up for each subscriber to which premiums are paid and losses are assessed. Each subscriber's loss is shared among all subscribers in the reciprocal. An attorney-in-fact functions as the administrator of the reciprocal exchange by underwriting coverage, handling premiums, plan membership, sales and claims. Examples of reciprocal exchanges are USAA and Farmers Insurance Group.

Independent insurance agents

are appointed to work for several insurers non-exclusively. They may also work for themselves or under other insurance agents. Independent insurance agents have control and ownership over their clients' accounts. This means they may place clients' business with a different insurer when policies are up for renewal. Independent insurance agents earn commissions on the sales they make, and overrides on sales made by agents they manage.

Solicitors

are licensed salespeople who work for an agent or broker. Solicitors perform the duties of brokers; however, like brokers, they cannot bind coverage.

Service providers or noncommercial organizations

are not technically "insurers" and do not sell insurance. They are better described as service organizations that provide prepaid health plans for medical, surgical, and hospital expenses. Service providers sell medical services to members, who are termed subscribers. The insured is not reimbursed for the medical services received. Instead, the service organization pays benefits directly to the health care providers the subscribers' use.

Assessment insurers

assess policyholders a premium when losses are incurred. Some assessment insurers only collect premiums when losses are incurred, while others collect advance premiums and additional premiums, as necessary, if losses cannot be sufficiently covered by the advance premium.

Foreign Insurer

is any insurer that conducts business in a state or district in which it wasn't incorporated.

All of the following statements regarding unauthorized insurers are true, EXCEPT:

(a.) Excess and surplus lines insurers must apply for a certificate of authority to become admitted. b. Unauthorized insurers are insurers that are unlicensed because they have not yet applied for a certificate of authority, have applied and been denied licensure, or are excess and surplus lines insurers. c. All excess and surplus lines insurers are unauthorized. d. Unauthorized insurers are also referred to as nonadmitted insurers, and do not hold a certificate of authority.

Agents are appointed to work on behalf of:

(a.) Insurance companies b. Insureds c. Beneficiaries d. None of the above

Participating Insurers

Insurers that issue dividends to their policyholders. (mutual insurers)

The primary similarities between risk retention groups and risk purchasing groups include:

The rules for membership within the group, The types of exposure the group is subject to, and The coverage available.

A domestic insurer is:

a. An insurance company conducting business in a foreign country. (b.) An insurance company conducting business in the state in which it is incorporated. c. An insurance company conducting business in a state in which it wasn't incorporated. d. Always unauthorized

There are three types of private insurers. Which of the following is a true statement about the different insurers?

a. An insurer that conducts business in states other than the state in which it was incorporated is an alien insurer. (b.) An insurer that conducts business in countries that it was not incorporated in is an alien insurer. c. An insurer that conducts business in countries that it was not incorporated in is a foreign insurer. d. An insurer that conducts business in a foreign country is a domestic insurer.

Implied authority

is not specifically expressed by the principal to the agent in the agency contract, but is implicit in the agent's duties. Implied authority is authority that the agent is presumed to have as part of their ability to transact insurance.

Private Insurers

offer insurance to people through the individual market. In most cases, private insurance is sold on a voluntary basis; however, some forms of insurance offered through private insurers are compulsory.

PPO's

provide discounted medical services to members. A group wishing to provide health care services to its members forms a PPO. The PPO receives a special discounted rate by using certain medical practitioners, hospitals and clinics. In exchange, the PPO will refer members to these medical professionals. An insurance company may contract with a PPO to provide medical services to insureds.

HMO's

provide the medical care and finances required to fund health care services. Subscribers obtain medical care through hospitals and physicians that have contracted with the HMO.

A nonparticipating insurer is:

(a.) A stock insurer b. A mutual insurer c. BlueCross BlueShield d. A noncommercial organization

Which of the following terms means the ways insurance products are marketed and sold to the public?

(a.) Distribution system b. Premium c. Contract d. Insurable interest

The primary types of agency systems are:

Career Agency System; Personal Producing General Agency System; Independent Agency System; Managerial System; and Mass Marketing.

There are various types of private insurers, including:

Stock insurers (commercial), Mutual insurers (commercial), Noncommercial organizations, Fraternal benefit societies, Lloyd's Associations, Risk retention groups, Risk purchasing groups, Reciprocal exchanges, Reinsurers, Assessment insurers and Excess and surplus lines.

Included in the private insurers are two groups of commercial insurers:

Stock insurers, and Mutual insurers.

A reciprocal exchange is characterized by which of the following?

a. It cannot be administered by an attorney-in-fact. (b.) It consists of an unincorporated group of individuals. c. It is the same as a mutual insurer. d. The insured acts only as an insured.

Which of the following statements is true pertaining situations involving errors and/or omissions?

a. Producer should document all conversations. b. Producer can purchase Errors and Omissions coverage. c. The insurer will defend the producer against lawsuits the policy covers. (d.) All of the above

A market where individuals and groups of people gather to exchange insurance is a:

a. Risk retention group b. Noncommerical insurer c. Lloyd's of London (d.) Lloyd's association

All of the following are false regarding stock insurers, EXCEPT:

a. Stock insurers do not have a capital fund and are financially supported by policyholders. b. Stock insurers do not pay dividends to stockholders, instead policyholders receive dividends as a return of overcharged premium. (c.) Stock insurers are managed by a board of directors, who are chosen by the company stockholders. d. A stock insurer may transform into a mutual insurer via the process of demutualization.

BlueCross pays:

a. Surgical costs b. Medical costs (c.) Hospital costs d. Surgical, medical and hospital costs