Insurance License

What does Fair Credit Reporting Act (FCRA) do?

- Provides financial and moral status of a client - Gives a person recourse if denied due to the credit report being inaccurate. - Protects consumers right to privacy - The insured cannot require the insurer to issue the policy if the report is corrected. - The applicant must be given disclosure at the time of application

***Know the following regarding insurance

- Transfers the risk - Protects against uncertainty - Shares the loss - Reduces anxiety

Distribution Models

-Exclusive or Captive Agency System - deals with the insured through an exclusive or captive agent. Agent represents solely one company or group of companies having common ownership. Insurer retains ownership rights to the business written by the agent. -Direct Writing System - The Producer or Agent is an employee of the insurer. The insurer owns the accounts. the agent may be paid a salary, salary plus bonus, or commission. -Indepedent Agency (Non-Exclusive Agent) - an agent that enters into agency agreements with more than one insurer. It may represent an unlimited number of insurers. Agency retains ownership of the business written. -Career Agency System - agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company. -Direct Mail or Response Company - sells insurance policies directly to the public with licensed employees or contractors. A marketing system utilizing direct mail, newspapers, magazines, radio, television, internet, web sites, call centers and vending machines. - Personal Producing General Agent - does not recruit career agents. Sells insurance for carriers it is contracted with and maintains its own office and staff. Mass Marketing - used to target a specific type of insurance to a large group of individuals. Ex. AARP

Which of the following is true of a hazard? A. It decreases the amount of loss B. It eliminates the chance of loss C. It increases the chance of loss D. It is a cause of loss

C. It increases the chance of loss

Producers responsibility to insurance applicant or insured

- Forward premiums to insurer on a timely basis - Seek and gain knowledge of the applicant's insurance needs - Review and evaluate the applicant's current insurance coverage, limits, and risks - Serve the best interest of the applicant or insured, although producers represent the insurer. - Recommend coverage that best protects the insured from possible loss and not the most profitable coverage from the perspective of the producer

McCarran-Ferguson Act (Deals with the Fraud Act)

- Public Law 15/McCarran-Ferguson Act established the federal government's right to regulate the industry - Federal law does apply to situations involving Fraud and False Statements made in the insurance transaction, which might lead to jeopardizing the financial soundness of an insurance company. - This act makes it a federal offense and penalties can include fine, imprisonment, or both

Types of Hazard

- Physical Hazard - a physical condition that increases the probability of loss; use, condition, or occupancy of property. Ex. Flammable material stored near a furnace. - Moral Hazard - dishonest tendencies that increase the probability of a loss: certain characteristics and behaviors of people. Ex. An insured burns down his/her own house to collect the insurance payout. - Morale Hazard - attitude that increases the probability of a loss. Ex. Indifference of carelessness of leaving one's house of vehicle unlocked.

_______________ manufacturer and sell insurance coverage in the form of policies or contracts of insurance.

Insurers

TF: Domicile has nothing to do with being licensed in a state?

True - being licensed means to be authorized or admitted

An agent has authority to do all of the following, except: A. Represent the insured's interest B. Countersign insurance contracts C. Appoint a solicitor as his or her representative. D. Solicit applicants on the insurer's behalf.

A. Represent the insured's interest

All of the following are elements of an insurable risk, except: A. The loss may be catastrophic B. The loss must be accidental C. There must be a larger number of homogenous units with the same exposure. D. The loss must be measurable.

A. The loss may be catastrophic

Which principle of insurance restores the insured to the same economic condition that existed before the loss? A. Insurability B. Underwriting C. Adhesion D. Indemnity

D. Indemnity

Which of the following terms refers to the risk management technique of assuming the responsibility for a loss? A. Reduction B. Avoidance C. Transfer D. Retention

D. Retention

What's another name for the insured's consideration?

Premium

Gramm-Leach-BLILEY (GLBA, a.k.a the Financial Services Modernization Act of 1999)

This act repealed parts of the Glass-Steagall of 1933 to allow merger of banks, securities companies, and insurance companies. It also established the Financial Privacy Rule and Safeguards Rule for the protection of consumers' privacy. The Financial Privacy rule requires "financial institutions" which include insurers, to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter. The privacy rule must explain: - the information collected about the consumer - Where that information is shared - How that information is used - How that information is protected.

Fraternal Benefit Societies

Usually organized on a non-profit basis, fraternal benefit societies are primarily social organizations that engage in charitable and benevolent activities.

Loss exposure

the condition of being at risk for a loss. Purely by existing, property and people are at risk for loss.

The absence of any of which four elements can void the contract?

- Competent Parties - Legal Purpose - Agreement - Consideration

Producer's responsibility to the Insurer

- Fiduciary duty to the insurer in all respects, espcicallay when handling premiums funds - Must keep premium funds in a trust account separate from other funds and forward to insurer promptly - Must report any material facts that may affect underwriting - Responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer. - Duty to only recommend the purchase of suitable policies.

Insurer Management

-Executives - oversee the operation of the business -Actuarial Department - gather and interpret statistical information used in rate making. An actuary determines the probability of loss and sets premiums rates. -Underwriting Department - Responsible for the selection of risks (persons and property to insure) and rating that determines actual policy premium -Marketing/Sales Department - responsible for advertising and selling -Claims Department - assist the policyholder in the event of a loss.

How many states can a company be domiciled in?

1 state. They are foreign in the 49 other states and alien in any other country.

Which statement defines a peril? A. It is the specific cause of loss B. It is defined as a risk of financial loss C. It is an indirect loss D. It is a condition that may increase a loss

A.

An applicant could purchase an insurance policy to cover losses from all the following except: A. An operation of drug smuggling B. Loss of assets through tort actions brought against the person C. Loss os property through burglary or theft D. Sudden and direct damage to property by natural causes

A. An operation of drug smuggling

In a reinsurance transaction, the company that wishes to transfer all or a portion of the financial risk of loss is known as the _______ company. A. Ceding B. Reciprocal C. Residual D. Participating

A. Ceding - The ceding or primary company is the one looking to transfer some or all of the financial risk of loss it faces over to a reinsurer.

The_______ department of an insurance company is responsible for providing service to policyholders at the time of a loss. A. Claims B. Executive C. Actuarial D. Underwriting

A. Claims - The Claims division provides service to the policyholders in the event of a loss.

Which of the following is NOT one of the required elements of a legal contract? A. Declarations B. Competent parties C. Legal purpose D. Offer and acceptance

A. Declarations - The declarations are part of the policy structure, (DICE). The elements of a legal contract must have the following: Agreement, which is the Offer and acceptance, Considerations, Competent parties, and Legal Purpose.

The ability of an individual to meet an insurance company's underwriting requirements is known as: A. Insurability B. Standard practice C. Issuable D. Medically approved

A. Insurability

When an individual faces the risk of economic loss in the event of property damage, this indicates which of the following? A. Insurable interest B. Limit of recovery C. Subrogation D. Merit rating

A. Insurable interest

A peril is defined as which of the following? A. It is the specific cause of loss B. It is an indirect loss C. It is a risk of financial loss D. It is a condition that may increase a loss

A. It is the specific cause of a loss

The Principle of Indemnity helps avoid which of the following? A. Overpayment of a claim B. Underinsurance C. Adverse selection D. Loss exposure

A. Overpayment of a claim

A(n) ____________ is responsible for paying the policy's premium and has various rights as specified in the contract. A. Owner B. Applicant C. Producer D. Agency

A. Owner - An owner has all rights in the policy and is responsible for paying the policy's premium on time and in full.

When an insurance company uses another company to cover part of the risk it is called: A. Reinsurance B. Risk prevention C. Risk management D. Adverse selection

A. Reinsurance - Reinsurance is 'Risk Sharing'. Your company is the ceding company, they then cede part or share part of the risk with the reinsurance companies to spread their risk out further in the event of a catastrophic loss.

Self-insurance is an example of which of the following types of risk management? A. Retaining the risk B. Eliminating the risk C. Avoiding the risk D. Pooling the risk

A. Retaining the risk

A hazard is best defined as: A. Something that increases the chance of a loss B. The loss itself C. The possibility of a loss D. A reduction in, decrease in, or disappearance of, value

A. Something that increases the chance of a loss

Dividends issued by stock insurers are paid to: A. Stockholders B. Members C. Policyholders D. Directors

A. Stockholders - Stock insurers issue taxable corporate dividends to stockholders. (Mutual insurers may issue dividends to policyholders.)

When an insurance policy is not clear, the court will usually interpret in favor of the insured because of which characteristic? A. The policy is a contract of adhesion B. The policy is an aleatory contract C. The policy is a conditional contract D. The policy is a bilateral contract

A. The policy is a contract of adhesion - A contract of adhesion is a contract between two parties that is written on a 'take it or leave it' basis. Because the other party has no control over the terms of the contract, any ambiguity is usually construed against the party who drew it up.

Property policies provide coverage only if there is insurable interest at the __________. A. Time of loss B. Time the policy is issued C. Time the claim is to be paid D. Time the application is signed

A. Time of loss

Because only the insurance company makes a promise to pay a future covered claim, the insurance contract is: A. Unilateral B. Aleatory C. Conditional D. Bilateral

A. Unilateral - A unilateral contract is one in which one party (the insurer) makes a promise of performance.

Statements on insurance applications that must represent the absolute truth are: A. Warranties B. Representations C. Material statements D. Guarantees

A. Warranties - Warranteed statements are guaranteed statements, however, there is no such term as guaranteed statements. Representations are statements believed to be true to the best of your knowledge. Material statements pertain to whether the statements made on application are material to the acceptance of risk.

Rates are referred to as which of the following when the insurance company files for approval and then implements the rates? A.File and Use B. Mandatory C. Prior Approval D. Open Competition

A.File and Use - Rates must be filed with the state insurance department, but the insurance company can use the new rates once they are filed.

Which of the following describes the purpose of the Gramm-Leach-Bliley Act? A. Deregulating the trucking industry B. Establishing privacy protection for consumers C. Regulating investment companies D. Enforcement of fraudulent insurance acts

B.

Possibility of loss is called: A. An insurable interest B. A risk C. A hazard D. A peril

B. A risk - Risk, simply defined, is uncertainty concerning a loss. Without the possibility of loss, no such uncertainty exists.

An insurer authorized to do business within this state is considered what type of insurer? A. Alien B. Admitted C. Domestic D. Foreign

B. Admitted

In which of the following would you have an insurable interest? A. The car on which you are still paying B. Both answers C. Neither answer D. The house you own but have rented to a tenant

B. Both answers

In which of the following would you have an insurable interest? A. The house you own but have rented to a tenant B. Both answers C. The car on which you are still paying D. Neither answer

B. Both answers - To have an insurable interest, a party must have a chance of financial loss or a financial interest in the property.

A person who wants to work in the insurance industry, but who has a prior relevant felony conviction must apply for ________ A. Clemency B. Consent to work C. Expungement D. Amnesty

B. Consent to work

The McCarran-Ferguson Act of 1945: A. Established the Federal Insurance Office B. Gave states the authority to regulate insurance C. Established the Interstate Commerce Commission as the primary regulator of insurance D. Reinforced violations of the Sherman Antitrust Act

B. Gave states the authority to regulate insurance

A United States insurance company is considered to be domiciled: A. In any state in which it has an office B. In the state whose laws the company is incorporated under C. In any state where it is a member of the guaranty association D. In any state in which it is an admitted carrier

B. In the state whose laws the company is incorporated under

An underwriter will consider each of the following factors when evaluating a risk, except: A. Hazards B. Rates C. Claim history D. Nature of the risk

B. Rates

A fire sprinkler system installed in a factory is considered which of the following methods of managing risk? A. Retention B. Reduction C. Transfer D. Avoidance

B. Reduction - The fire sprinkler system will minimize the chance and severity of loss, but not entirely prevent it.

Because only the insurance company makes a promise to pay a future covered claim, the insurance contract is: A. Aleatory B. Unilateral C. Conditional D. Bilateral

B. Unilateral - one in which one party (the insurer) makes a promise of performance.

Which of the following is least likely to be a factor when determining the eligibility of a person for property insurance? A. The claims history showing when prior claims occurred and how much was paid to settle the claim B. Whether the premium will be paid in full or billed to the insured C. The nature of the risk, such as the type of building and the number of families living in the building D. Existence of any hazards such as a nearby gas station exposure

B. Whether the premium will be paid in full or billed to the insured Underwriting considers nature of the risk, hazards present, and claims history.

An insurance contract is considered which type of contract because it restores the insured to the same financial condition as before the loss? A. A contract of adhesion B. An aleatory contract C. A contract of indemnity D. A unilateral contract

C. A contract of indemnity

What is the term for a cause of loss, such as the theft of a car? A. Hazard B. Accident C. A peril D. Risk

C. A peril - Property insurance insures against perils. A peril is a cause of potential loss to property such as fire, windstorm, hail, flood, etc.

Paul is an agent for ABC Insurance Company, which has just issued a life insurance policy to Maria. Who is the "principal" in this transaction? A. Paul, the agent B. Maria's beneficiary C. ABC Insurance Company D. Maria, the insured

C. ABC Insurance Company - The principal is part of the Law of Agency. The Law of Agency is a relationship where one party (the agent) represents and acts on behalf of the other party (the principal). The insurance company is the principal.

An insurer that is authorized to do business in a particular state is said to be: A.Domestic B. Foreign C. Admitted D. Non-Admitted

C. Admitted

What is a hazard? A. An example of risk transfer B. Any event that results in a loss C. An increase in the possibility that a loss might occur D. A cause of a loss

C. An increase in the possibility that a loss might occur

A producer using business cards and letterheads that feature an insurance company's logo is an example of _________. A. Agency authority B. Express authority C. Apparent authority D. Implied authority

C. Apparent authority - Using business materials featuring an insurer's logo is an example of apparent authority because it gives the appearance that the producer is authorized to act for that insurer.

The ____________ has the power to issue rules and regulations to help enforce insurance laws. A. Federal Insurance Office B. United States Supreme Court C. Commissioner, Superintendent, or Director D. NAIC

C. Commissioner, Superintendent, or Director

Which of the following applies when two parties rely upon the promises of the other? A. Concept of adhesion B. Parole evidence rule C. Concept of utmost good faith D. Doctrine of estoppel

C. Concept of utmost good faith - The concept of utmost good faith says that both parties will bargain in good faith to form the contract.

All of the following are risk management techniques, except: A. Retention B. Transfer C. Enhancement D. Avoidance

C. Enhancement

A company established in England doing business in Alabama would be considered by Alabama residents to be a(n): A. Alien company B. All of the answers listed C. Foreign company D. Domestic company

C. Foreign

Which of the following described an insurance company doing business in a state other than the one where it is incorporated? A. Alien B. Admitted C. Foreign D. Domestic

C. Foreign

If an insurer is incorporated in Rhode Island, but primarily does business in New York, what type of insurer would it be considered in New York? A. Alien B. Nonadmitted C. Foreign D. Domestic

C. Foreign - An insurer that is incorporated under the laws of another state is considered a foreign insurer.

An agent that enters into agreements with more than one insurer is which of the following? A. Captive B. Direct C. Independent D. Exclusive

C. Independent

Which rating method listed below is established by the underwriter? A. Manual rating B. Retrospective rating C. Judgment rating D. Individual rating

C. Judgment rating - only rating method that is determined by the underwriter. All other rating methods are determined by the actuarial department of the insurance company.

For a claim to be paid, insurable interest for a property or casualty contract must exist at the time of: A. Policy delivery B. Premium payment C. Loss D. Policy issuance

C. Loss

An applicant inaccurately representing information on the application is guilty of: A. Concealment B. Fraud C. Misrepresentation D. Waiver and Estoppel

C. Misrepresentation

The uncertainty of loss from fire, wind, or hail is a type of: A. Physical hazard B. Speculative risk C. Pure risk D. Risk retention

C. Pure risk - There is no chance of gain from exposure to a risk of loss by fire, wind, or hail.

An underwriter will consider each of the following factors when evaluating a risk, except: A. Claim history B. Nature of the risk C. Rates D. Hazards

C. Rates - The underwriter protects the insurer against adverse selection by evaluating the factors likely to contribute to a loss. Rates do not have such an impact.

Which of the following constitutes the acceptance of an offer? A. When the insurer makes a counteroffer B. When the agent assures the applicant he or she will be covered C. When an insurer issues a binder D. When the applicant completes the application

C. The issuance of a binder is indication of the acceptance of an offer.

All of the following are elements of an insurable risk, except: A. There must be a large number of homogenous units with the same exposure B. The loss must be accidental C. The loss may be catastrophic D. The loss must be measurable

C. The loss may be catastrophic

Which of the following has the primary responsibility of determining acceptable risks? A. Adjuster B. Producer C. Underwriter D. Auditor

C. Underwriter

Statements in the application that are guaranteed true, but later found to be false at the time of application, may result in which of the following? A. Nullification of the Warranty B. Establishment of a monetary penalty C. Voidance of the contract D. A waiver of the provisions of the warranty

C. Voidance of the contract

When both parties to a contract must perform certain duties in order to make the contract enforceable, this is known as a(n): A. Contract of adhesion B. Unilateral contract C. Conditional contract D. Aleatory contract

C. conditional contract - requires that both parities perform certain duties

The Fair Credit Reporting Act applies to applicants who are rejected for insurance coverage on the basis of: A. A report from the Medical Information Bureau B. An unfavorable health report C. None of the answers listed D. A credit report

D. A credit report

Ohio Casualty is doing regular business in Indiana. Within the state of Indiana, Ohio Casualty would be considered a(an): A. Non-admitted company B. Domestic company C. Alien company D. Admitted company

D. Admitted company

A company established in England doing business in Alabama would be considered by Alabama residents to be a(n): A. Foreign company B. Domestic company C. All of the answers listed D. Alien company

D. Alien company

When Applicant P fails to disclose all of his motor vehicle violations in an application for automobile insurance, he may be guilty of: A. Estoppel B. Breach of warranty C. Avoidance D. Concealment

D. Concealment

The insurer's promise to pay a covered loss and the insured's payment of the first premium are examples of: A. Legal Purpose B. Acceptance C. Offer D. Consideration

D. Consideration - Consideration is the term used to describe the rights, money, promises or property exchanged between the parties as part of a contract transaction.

Which of the following is not true of the Fair Credit Reporting Act? A. A consumer must be informed whenever insurance was denied due to an adverse report B. A consumer can obtain the information in the reporting agency file C. A consumer is protected from unwelcome personal information collection practices D. Errors in the report can only be changed by court action

D. Errors in the report can only be changed by court action - If a consumer says that certain information is incorrect, the reporting agency must reinvestigate the facts and make changes as necessary.

All of the following are producer responsibilities, EXCEPT: A. Represent the insurer B. Provide quotes and collect premiums C. Solicit and accept applications, and forward them to the insurer D. Issue policies

D. Issue policies - Producers do not issue policies. Insurers issue policies. Producers represent the insurer in soliciting, receiving, and forwarding applications, providing quotes, and collecting premiums.

Risk reduction is a way of __________. A. Assuming the responsibility of the loss B. Transferring the risk to another party C. Avoiding activities that increase the chance of loss D. Minimizing the chance of loss

D. Minimizing the chance of loss

________ is generally an option only for large corporations who may want to limit their risk up to a certain dollar amount, then buy insurance above and beyond that amount. A. Reciprocal insurance B. Mutual insurance C. Risk retention D. Self-insurance

D. Self-insurance - Self-insuring means setting aside funds to assume the risks faced rather than paying premiums to an insurer. To limit potentially large risk exposures, large companies typically self-insure up to a certain dollar amount of risk and buy insurance for the rest.

Under aleatory contracts the exchange of values may be: A. Rescinded B. Waived C. Equal D. Unequal

D. Unequal - An aleatory contract is contingent on particular events, such a covered loss. Under an insurance policy, the insurer's obligation to pay a loss depends on uncertain events, while the insured must pay a fixed premium during the policy period. Thus, the exchange of values is likely to be unequal between any given insurer and insured.

Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)

Deregulated the trucking industry by prohibiting any entity from interfering with a motor carrier's right to set its own rates. Motor carrier and private motor carriers that transport property are required to establish evidence of financial responsibility in the form of insurance, a bond, a guarantee, or qualification as a self-insurer.

Insurance Regulation at the State Level

Insurance industry is regulated primarily at the state level. The legislative branch writes and passes state insurance laws, or statutes, to protect the insuring public. The judicial branch is responsible for interpreting and determining the constitutionality of the statutes. The state's role is to enforce the existing statutes that have been put in place.

Where can an insured find insurance coverage after being rejected by Insurer A due to claims history?

Residual Market

If you have a map to find the exact location or treasure, what type of risk would this be?

Speculative risk

Insurance Regulation at the Federal Level

The McCarran-Ferguson Act of 1945 determined that the federal government can not regulate insurance in areas over which states have the authority to do so. Government insurers step in (as a last resort) when private insurers are unable to provide protection relative to the catastrophic nature or unpredictability of a risk.

Self-Insurer

assume financial risk one's self. Option for large companies who may even reinsure for risks above certain maximum limits

National Association of Insurance Commissioners (NAIC)

consists of all State and territorial insurance commissioners or regulators. Provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators. The association promotes uniformity among states and members may accept or reject recommendations. The NAIC has no legal authority to enact or enforce insurance laws

Federal Insurance Office (FIO)

established by the Dodd-Frank Wall Street Reform and Consumer Protection Act. This office monitors the insurance industry and identifies issues and gaps in the state regulation of insurers. Also monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low- and moderate-income persons. The FIO is not a regulator or supervisor. Insurance is primarily regulated by the individual States.

Lloyds of London

not an insurance company, but consists of groups of underwriters called Syndicates, each of which specializes in insuring a particular type of risk.

Mutual Insurance Company

owned by policyholders(or members). Board of Trustees or Directors directs the company operations and is elected by policy holders.

The concept that the insured should not profit from an insurance transaction is called: A. The principle of indemnity B. The principle of utmost good faith C. The principle of subrogation D. The principle of personal aspect

A. The principle of indemnity

Insurable Interest

All Policies - Insurable interest must exist in every enforceable insurance contract. Depending upon the contract, it must exist a the same time of application or at the time of loss. Requires the potential for an insured to suffer financial or economic hardship in the event of a loss. Life and Health Policies - Insurable interest must exist at the time of application, but not at time of loss. Coverage is determined is based on the possibility of an economic or financial loss due to an accident, sickness, or death of the insured. The amount of insurance that may be purchased varies based on the type of coverage. In some cases, no coverage limit apply. Property - Insurable interest must exist at the time of the loss. Property ownership (or mortgage or lien) is evidence of insurable interest. Casualty - Insurable interest must exist at the time of the loss. Insurable interest usually results from property or contract rights and potential legal liability.

Premium Assumptions

An adequate premium must be charged for the risk based on the same factors used in evaluating the risk. Premium rates are considered inadequate when they do not cover projected losses and expenses; rates must not be excessive or unfairly discriminatory. - Rate - he dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance. - Premium - 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 premuim.

A warranty is defined as which of the following? A. What a reasonable and prudent buyer can expect B. A false statement in the application C. Intentional misrepresentation on the application D. Statement in the application that is guaranteed to be true

D. Statement in the application that is guaranteed to be true.

Financial Rating Services

Independent financial rating services evaluate and rate financial stability of insurance companies. These companies assign rating codes to show financial strength or weakness of each company rated. Ratings are available to the public. Producers are responsible for placing business with insurers that are financially sound. EX. Standard& Poor's, Moody's Investment Services

Elements of Insurable Risks

Predictable - large number of homogeneous units or groups with the same perils. - Law of Large Numbers - As the number of units in a group increases, the more likely it is to predict a particular outcome. - Auto Insurance losses are the easiest type of insurance loss to predict precisely because the number of units insured is so great. Calculable - The chance of loss must be calculable. A statistical expectation of loss is used by insurers to calculate premiums. Measurable - the loss must be measurable (definite and verifiable in terms of amount, cause, place and time) Affordable - the premiums must be affordable Accidental - From the perspective of the insured, the loss must be accidental in nature. Exclusions - Catastrophic perils are not covered; examples include war, nuclear hazard and illegal operations. Hardship - The loss must cause financial hardship

Insurance Contracts: Characteristics, Definitions and Interpretations (continued)

Reasonable Expectation Doctrine - What a reasonable and prudent policy owner would expect; the reasonable expectations of policy-owners are honored by the Courts although the strict terms of the policy may not support these expectations Representations - Statements made by the applicant on the application that are believed to be true to the best of the knowledge and belief of the applicant; may be withdrawn prior to policy issuance. Misrepresentations - A false statement contained in the application; usually does not void coverage or the policy. If material to the issuance of coverage, meaning the insurer would not have issued coverage had the misrepresentation not been made, coverage does not apply. In some cases, a material misrepresentation may void the policy. Concealment - The willful hiding or obscuring of material facts pertinent to the issuance of insurance (or a claim). Concealment results in denial of coverage and may void the policy. Warranties - Statements in the application or stipulations in the policy that are guaranteed true in all respects. If warranties are later discovered untrue or breached (past, present, or future), coverage (and sometimes the contract) is voided. Fraud - Intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right. Contains 5 elements: - False statements, made intentionally and that pertains to a material face - Disregard for the victim - Victim makes a decision and/or acts based on the belief in, or reliance upon, the false statement. - The victim's decision and/or action results in harm Void contract - An agreement without legal effect because it was made illegally or it was declared void by the courts because it doesn't contain all the elements of a legal contract. Voidable contract - A valid contract that for reasons satisfactory to a court, may be set aside by one of the parties. An example is an insurer may void or revoke coverage for misrepresentation or fraud.

Merchant Marine Act of 1920 (the Jones Act)

Since Workers Comp laws do not apply to seamen, the Jones Act insured seamen to make claims for injuries suffered during the course of employment. It also regulates maritime commerce in U.S. waters, transportation of cargo, and the rights of seamen.

Management

The determination of what types of protection are required to meet an insured's needs using: - a survey of the insured's operations, health, assets and exposures that could give rise to losses - Assessment of potential loss frequency and severity - Physical inspections, applications or medical exams used for underwriting help manage risk

Violent Crime Control and Law Enforcement Act of 1994

The largest crime bill in US history expands funding to federal agencies such as the FBI, DEA, and INS and includes provisions that address (among other topics) domestic abuse and firearms, gang crimes, immigration, registration of sexually violent offenders, victims of crime, and fraud. This act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust. Penalties include fines and possible prison time: Insurance license applicants and producers: - Applicants who have been convicted of a felony must apply for Consent to Work in the business of insurance - prior to applying for an insurance license. - Producers must apply for consent in their resident state. - Officers and employees must apply for consent in the state where their home office is located - Prohibited persons (convicted felons) must apply for consent in order to discover if they are permitted or prohibited from the insurance business. - Reciprocity - If consent is granted by any state, other states must allow the applicant to work in their states as well. - Consent Withdrawal - If conditions of consent are not continually met, the consent may be withdrawn

Producer (agent)

a person or agency appointed by an insurance company to represent it and to present policies on its behalf. Producers posses three types of authority: - Express - authority that is written into the producer's agency contract. Ex. producers binding authority if written in the contract. - Implied - Authority the public assumes the producer has. Ex. business activities of providing quotes, completing applications and accepting premiums on behalf of the insurer. - Apparent - Authority created when the producer exceeds the authority expressed in the agency contract. This occurs when the insurer does nothing to counter the public impression that such authority exists. Ex. producer's acceptance of premiums on a lapsed policy.

Types of Insurers - Insurance Companies or Carriers

- Stock Insurance Company - Mutual Insurance Company - Reciprocal Insurance Company - Lloyds of London - Fraternal Benefit Societies - Risk Retention Groups (RRG) - Self-insurer

Risk

A condition where the chance, likelihood, probability or potential for a loss exists. Uncertainty concerning a loss. Types of Risk: - Speculative Risk - Situations where there is a chance or possibility for loss, no loss or gain (I.e, gambling) - Pure Risk - Situations where there is no chance for gain; the only outcome is for nothing to occur or for a loss to occur. Pure risk can be insured. Examples of pure risk: - the possibility of damage to property caused by a fire or other natural disaster - the possibility of financial loss as a result of death

A producer has each of the following responsibilities to the insurer, except: A. A duty to recommend only high rate policies B. A fiduciary duty C. Forwarding premiums to the insurer on a timely basis D. Reporting material facts that may affect underwriting

A. A duty to recommend only high rate policies

Which of the following types of authority does the public assume an agent has when quoting insurance? A. Implied B. Authorized C. Apparent D. Express

A. Implied

All of the following are producer responsibilities, EXCEPT: A. Issue policies B. Provide quotes and collect premiums C. Represent the insurer D. Solicit and accept applications, and forward them to the insurer

A. Issue policies

Each of the following must be included in an insurable risk, except: A. Large group with dissimilar members B. Calculable chance of loss C. Accidental losses D. Excluded catastrophic perils

A. Large group with dissimilar members

A _______________ insurance company is owned by its policyholders. A. Mutual B. Fraternal Benefits Society C. Reciprocal D. Stock

A. Mutual

Which of the following calculations equals a company's loss ratio? A. Paid losses + loss reserves / total earned premium B. All losses + expenses C. Paid losses + paid expenses / total earned premium D. Losses + total operating expenses / total written premium

A. Paid losses + loss reserves / total earned premium

A potential cause of loss, such as fire, explosion, flood, or theft is considered to be a(n): A. Peril B. Accident C. Hazard D. Occurence

A. Peril

The insurer's promise to pay a covered loss and the insured's payment of the first premium are examples of: A. Offer B. Consideration C. Legal Purpose D. Acceptance

B. Consideration

Which of the following is an insurance company that is organized under the laws of a different state within the United States? A. Authorized. B. Foreign C. Alien D. Domestic

B. Foreign

Each of the following is an element of a legal contract, except: A. Legal Purpose B. Indemnity C. Agreement D. Consideration

B. Indemnity

Dishonest tendencies that increase the probability of loss is which of the following types of hazards? A. Physical B. Moral C. Legal D. Morale

B. Moral

An alarm system installed in a home is considered which of the following ways to manage risk? A. Transfer B. Reduction C. Retention D. Avoidance

B. Reduction

Apparent authority is: A. Created when the producer acts outside their contract B. The demonstrated general appearance that authority exist C. Granted by a producer's insurance license D. Specifically written into the producer's contract

B. The demonstrated general appearance that authority exist

Each of the following is a factor used by an underwriter, except: A. Hazards B. Claims history C. Outside factors D. Marital status

D. Marital status

Which insurance company department accepts the insurance risk? A. Actuarial B. Executive C. Claims D. Underwriting

D. Underwriting

Financial Anti-Terrorism Act (USA Patriot Act)

Imposes record keeping and government reporting requirements on banks, financial institutions and non-financial businesses for specific financial transactions and customer financial records (a part of the Bank Secrecy Act)

Premium Calculation

Multiple the units of exposure X the rate. If the rate is $2.25 per square foot, then the annual premium for a 10,000 square foot building would be $22,500

The Principle of Indemnity helps avoid which of the following? A. Adverse selection B. Overpayment of a claim C. Underinsurance D. Loss exposure

Overpayment of claim

Stock Insurance Company

Owned by stockholders or shareholders. Directors and officers direct the company operations and are elected by stockholders.

The Reasonable Expectations Doctrine states that:

The reasonable expectations of policy-owners will be honored even if the strict terms of the policy do not support these expectations.

C. The insured is restored to the same financial condition as prior to the loss, with no loss or gain.

Which of the following best describes the Principle of Indemnity? A. The insured compensates the insurer for any expenses it incurs in adjusting the loss. B. The insured position is not improved after sustaining a loss. C. The insured is restored to the same financial condition as prior to the loss, with no loss or gain. D. The insured is restored to a financial condition as good as, or better than, the insured was before the loss.

Reciprocal Insurance Company

a group-owned insurer whose main activity is risk sharing. They are unincorporated, and formed by individuals, firms, and business corporations that exchange insurance on one another.

Broker

a licensed individual who negotiates insurance contracts with insurers, on behalf of the applicant. A broker represents the applicant or insured's interest, not the insurer, and thus does not have legal authority to bind the insurer. A broker's license is not applicable in all states.

Law of Agency

a relationship between two or more parties where on party (the agent or producer) acts on behalf of the other party, known as the principal or insurer. The agent or producer binds the actions and words of the principal.

Terrorism Risk Insurance (TRIA)

enacted in direct response to the terrorist attacks on New York city and Washington D.C. on 9/11. Congress provided temporary financial compensation to insured parties during its crisis of recovery from the terrorist attacks.

Residual Markets

private coverage source of last resort for businesses and individuals who have been rejected by voluntary market insurers.

(CLAC) Four Elements of a Legal Contract

1. Competent Parties - All parties to a contract; Insurer and Insured must have legal capacity to enter into a contract. Those without legal capacity include: Minors - The insurer may be held responsible for its obligations, however, in most cases a minor cannot enter into a contract. Exceptions do exist, such as for the purchase of auto insurance. The mentally incompetent or incapacitated Persons under influence of drugs or alcohol 2. Legal Purpose - All parties to a contract must enter it for a legal purpose; public policy cannot be violated by a legal contract. All parties to a contract must enter it in a good faith. 3, Agreement - one party must make and communicate an offer to the other party and the second party must accept that offer. Offer - the offer for entering an insurance contract is the application submitted by the applicant. Acceptance - The acceptance of an insurance contact takes place when the insurance company agrees to issue insurance. A counteroffer by the insurance company is not acceptance until the applicant accepts the counteroffer. 4. Consideration - Something of value is exchanged; the exchange of an act for a promise. The consideration made by the applicant is the premium payment. The consideration made by the insurer is its promise to pay for covered losses.

Which of the following might be considered a physical hazard? A. Dishonesty on the part of an insured B. The storage of flammables near a furnace C. The insured's attitude that good housekeeping is not important D. The storage of flammables in a fireproof container

B. The storage of flammables near a furnace

Rating Types/ Methods

Class Rating - A rate charged to a group of policyholders who have similar exposure and experience. - A Class Rate system is the most common approach and is the key element in premium calculation. - Class rates apply to all members of a large group of similar risks. - When class rates are printed in a rate manual, they are sometimes referred to as manual rates. Experience Rating - A rate based on the policyholder's actual loss history when compared to the loss history of similar risks Individual Rating - A rate used for policyholders because a large enough pool of similar risks is not available to any other type of rate. Primarily used for commercial and speciality risks because of the number of unique variables involved. "A" Rating or Judgement Rating - An individual rate that doesn't use loss history as a component and that is derived largely from the underwriter's evaluation and best judgement the risk poses to the insurer. ***Only method where the underwriter rates the policy. In all other rating methods, actuaries determine the rates. Loss Cost Rating - A rating organization provides insurers with the portion of a rate that does not include provisions for expenses or profit. - The expense and profit components to develop the final rate must be added by individual insurers based upon their projections. - Loss cost rating is used on risks for which the insurer may not have enough data to develop the rate, other than for expenses and profit. Manual Rating - 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 - The use of rates that rewards a policyholder that takes measures to decrease the probability of loss by the implementation of safety programs, loss control programs, etc. Retrospective Rating - The use of rates that adjust the policy premium to reflect the current loss experience of the policyholder. Premium adjustments are subject to minimums and maximums. Deposit Premium 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. Schedule Rating - 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.

General Contract Terms

Contract Law - Pertains to the formation and enforcement of contracts Contract of Utmost Good Faith - Both parties bargain in good faith when forming and entering into the contract. The two parties rely upon the statements and promises of the other and assume no attempt to conceal or deceive has been made. Estoppel - A legal defense tool used when someone reneges on or contradicts a previous statement or claim. Estoppel prevents someone from arguing something contrary to a claim made of act performed by that person previously. Conceptually, it is meant to prevent people from being unjustly wronged by the inconsistencies of another person's words or actions. Hold Harmless Agreement - A contractual agreement that transfers the liability of one party to another party; it is used by landlords, contractors, and others as a way to avoid or reduce risk. Parol Evidence Rule - A written contract may not be altered without the written consent of both parties. Waiver - Voluntary surrender of a known right, claim or privilege.

Insurance Contracts: Characteristics, Definitions and Interpretations

Contract of Adhesion - one party writes the contract, without input from the other party. One party (insurer) prepares the contract and presents it to the other party (applicant) on a "take-it-or-leave-it" basis, without negotiation. Any doubt or ambiguity found in the document is construed in favor of the party that did not write it (insured). Aleatory Contract - The exchange of value is unequal. Insured's premium payment is less than the potential benefit to be received in the event of a loss. Valued Contract - A contract that pays a stated amount in the event of a loss. (Most insurance policies are NOT valued contracts unless they are endorsed) Indemnity Contract - An agreement to pay on behalf of another party under specified circumstanced, such as when a loss occurs. Applicant - The party submitting an application for insurance Endorsement - A policy form that alters or adds to the provisions of a property and casualty insurance contract. Personal Contract - Owner cannot transfer or assign ownership of an insurance policy (property and causalty) to another person. Non-Personal Contract - Owner may transfer or assign ownership of a life or health insurance policy to another person. Assignment - Policy owners may not assign or transfer their rights under an insurance contract without written consent of the insurer. Issue Age - Insured's original age on the policy issue date. Attained Age - Insured's age at any point in time at issuance, renewal or conversion. Effective or Issue Date - The due when insurance coverage begins. Lapse Date - The date when insurance coverage ends; if not cancelled prior, policy will terminate by end of grace period if premium is not paid. Unilateral Contract - Only one party is legally bound to the contractual obligations after the premium is paid to the insurer. Only the insurer makes a promise of future performance, and only the insurer can be charged with breach of contract. Conditional Contract - Both parties must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has complied with all the policy's terms and conditions.

Which of the following is not true about insurance? A. Risk is transferred to the insurer B. Declining to own a business is an example of risk avoidance C. The insured may retain part of the risk through deductibles D. Insurance covers intentional as well as unintentional losses.

D. Insurance covers intentional as well as unintentional losses.

A federal regulation called the _______________ protects consumer privacy

Fair Credit Reporting Act

Rate Approval

File and Use - Rates must be filed with the state insurance regulatory authority (Department of Insurance) and may be used as soon as they are filed. Prior Approval - Insurers cannot use rates until approved by the Department of Insurance, or until specific time period has expired after the filing. Mandatory Rates - Some states require that mandatory rates be used for certain lines of insurance. Open Competition - A state relies on competition between insurers to produce fair and adequate rates. Loss Reserves - The net premiums plus interest reflects possible future contract obligations. An accounting measurement of an insurer's future obligation to its policyholders. - Case Reserve Method - A loss reserve established for each claim, when reported - Average Value Method - A loss reserve established based on average settlements of particular claim types - Loss Ratio Method - A loss revenue formula based upon the expected losses for a particular class or line. - Tabular Method - A loss reserve based upon the estimated length of an insured's or claimant's life or expected disability. Financial Ratios: - Loss Ratio - Determined by dividing the sum of Paid Losses + Loss Reserves by Total Earned Premiums - Expense Ratio - Determined by dividing an insurer's Total Operating Expenses by Written Premiums - Combined Ratio - Sum of the loss ratio and expense ratio Underwriting Measurement: - Premiums can only be established by the insurance company after balancing all accounting from the past - This is where the loss ratio and the expense ratio play an intricate part of this process.

Fraud and False Statements

Fraud always involves a false statement and deceit; it can be either a criminal or civil crime. Federal laws prohibit the commission of crime. If a person engages in the business of insurance whose activities affect interstate commerce willfully embezzles, misappropriates funds/property, knowingly and with the intent to deceive makes a false material statement or purposely overstates the security of an insurer, the following penalties apply: - Fine of no more than $50,000, imprisonment for up to 10 years, or both - If violation jeopardizes the safety and soundness of an insurer and was a significant cause of the insurer being placed in conservation, rehabilitation, or liquidation by an appropriate court, imprisonment can be for up to 15 years - If the amount embezzled or misappropriated does not exceed $5,000, violates will be fined up to $50,000 or imprisoned for up to 1 year, or both If a person uses threats, force or attempts to impede/obstruct the administration of the law during any proceeding involving the business of insurance before any insurance regulatory official, he/she will be fined up to $50,000 or imprisoned up to 10 years, or both. Any individual convicted of a felony involving dishonesty or a breach of trust, who then willfully engages or permits an individual to engage in the business of insurance, and whose activities effect interstate commerce, will be fined up to $50,000 or imprisoned up to 5 years, or both.

Insurance Concepts

Insurance Contract: - a legal contract purchased to indemnify the insured against a loss, damage or liability arising from an unexpected event. - The exchange of a relatively small and definite expense for the risk of loss that, if it occurs, may be large or small. - A contract designed to transfer risk from the insured to the insurer. Principal of Indemnity: - Insured is restored to the same financial or economic condition that existed prior to the loss - Insured should not profit from an insurance transaction Insurability - The ability of an applicant to meet an insurer's underwriting requirements. Underwriting - The process of selecting, classifying, and rating a risk for the purpose of issuing insurance coverage. Evaluating a risk is the primary function of an underwriter. Insurable Events - Any event, past or present, that may cause loss or, damage or create legal liability on the part of an insured.

Risk sharing plan

Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels. Ex. Workers Comp, personal auto liability or property insurance on real property

Managing Risk

Managing risk is the practice of analyzing exposures that create risk and designing programs to minimize the possibility of a loss. Ways to Manage Risk: - Sharing - Investments of a large number of people may be pooled by use of a corporation or partnership. Pooling or spreading the risk among a large number of persons or entities. - Transfer - Transferring the risk from one party to another, such as from a consumer to an insurance company. Transfer the uncertainty of loss via a contract - Avoidance - Elimination of the risk. Avoid the activity that gives rise to the chance of loss. After potential areas of hazards have been identified, it may be found that some exposure to risk can be eliminated, but it is impossible to avoid all risk - Reduction - Minimizing the chance of loss, but not preventing the risk. Example: Sprinkler systems, burglar alarms, pollution controls and safety guards on machines. - Retention - Assume the responsibility for loss. Self insure the entire loss or a portion of the loss. Choosing deductibles is a method of risk retention. It might be economically practical for an insured to not insure each exposure to loss and instead insure only those risks that threaten financial stability security.

If an insurance company wants to transfer all of part of the risk it has accepted, it would buy which of the following types of insurance? A. Reciprocal B. Insurer C. Reinsurance D. Residual

Reinsurance

Financial Structure

The Department or Division regulates the organization and ownership, capital and surplus requirements, reserves, accounting, investments, annual statements, rehabilitation of impaired insurers, and the liquidation of insurers when necessary. Major concern is providing protection against insolvency of an insurer. -Investments - insurance regulations require that all investments be approved by the insurer's Board of Directors. Investment must be fairly stable -Annual Statement - every insurer authorized to transact business in this state must file a financial report with the Department or Division annually. -Examination of Insurers - department or division conducts examinations on every insurer in this state. -Rehabilitation and Liquidation - regardless of the regulations and controls, a few insurers find themselves in financial difficulty. Department or Division will step in and attempt to help the insurer become solvent again.

Peril

The cause of a loss

Tort Law

Torts are civil wrongs; they're not crimes or breaches of contract. They result in injuries or harm that constitute the basis of a claim by a third party.

The reinsurance agreement that automatically accepts all new risks presented by the company seeking or requesting reinsurance from the reinsurer is known as what type of agreement

Treaty

TF: A broker always represents the insured. An agent always represents the insurer.

True

TF: Insurance is designed to provide protection against pure risk

True

Insurer Underwriting

Underwriter - Primary responsibility is the selection of risks to be insured. They also determine the classification, and premium rate if a risk is accepted by the insurer. Underwriting protects the insurer against adverse selection and risks that are more likely than average to suffer losses. Underwriting Factors: - nature of the risk - Hazards that are present - Claims history - Other factors that depend upon the type of risk being insured.

Hazard

a specific condition that increases the probability, likelihood, or severity of a loss from a peril

Adverse Selection

an imbalance created when risks that are more prone to losses than the average (standard) risk are the only risks seeking insurance within a specific marketplace. Example: Only those living in earthquake-prone areas seek to buy earthquake insurance. High-risk exposures tend to seek or continue at a higher participation rate than the average risk exposures do.

Reinsurance Companies (risk sharing)

an insurance company that assumes all or portion of a risk from a primary or ceding insurance company. Reinsurance transfers risk among insurance companies. The insurer requesting reinsurance is the primary or ceding company. The insurer sharing in the risk is the reinsurance company. Consumer inquiries must originate with the ceding company, which then obtains reinsurance.

Surplus (excess) Lines of Insurance

finds coverage when the kind or amount of insurance cannot be obtained from admitted insurers. - It may not be utilized solely to receive lower cost coverage than would be available from an admitted carrier. - Each State regulates the procurement on Surplus Lines insurance in their state - Non-admitted business must be transacted through a Surplus Lines Broker.

Risk Retention Groups

group-owned insurers that primarily assume and spread the liability related risks of their members. Owned by policyholders and licensed in at least one state. They may insure individuals in other states. Group must be made up of a large number of homogeneous or similar units and membership is limited to risks with exposure to similar liability needs, such as theme parks, go cart tracks, or waterslides. The Group also must have sufficient liquid assets to meet loss obligations and each member assumes a portion of the risks insured.

Fair Credit Reporting Act

protects consumer privacy, while ensuring data collected is confidential, accurate, relevant and used for a proper and specific purpose. It also protects the public from overly intrusive information collection practices. Applicants must be informed that a credit report will be obtained for the purposes of determining financial and moral status of an applicant. Applicants have the right to review the report: - Applicant Challenge - Credit reporting agency must reinvestigate within 6 months, if applicant challenges accuracy. - Inaccuracies - Agency must forward to applicant inaccurate information given out within previous 2 years - Disallowed Information - Report must not include lawsuits over 7 years old or bankruptcies over 10 years old

Loss

reduction, decrease, or disappearance of value. The basis of a claim for damages under the terms of an insurance policy.

Insurer Domicile

refers to the jurisdiction where an insurer is formed or incorporated. -Domestic - an insurer organized under the laws of this state, whether or not it is admitted to do business in this state. 1 state only, where the company is incorporated -Foreign - An insurer not organized under the laws of this state, but in one of the other states or jurisdictions within the US, whether or not it is admitted to do business in the state or jurisdiction. 49 other states. -Alien - An insurer organized under the laws of any jurisdiction outside of the US, whether or not it is admitted to do business in this state.

Admitted/Non-admitted

refers to whether or not an insurer is approved or authorized to write business in this State. The domicile does not impact whether an insurer may be admitted to do business in this State. Admitted (Authorized) - insurer is authorized by this State's Commissioner of Insurance to do business in this State. It has received a Certificate of Authority to do business in this State. Non-admitted (Unauthorized) - insurer has either applied for authorization to do business in this state and was declined or they have not applied. They are not authorized to transact insurance in this state. Surplus and Excess lines - insurance can be placed through non-admitted carriers.

Facultative agreement

reinsurance agreement that allows ceding and reinsurance companies the opportunity to negotiate coverage for individuals risks.

Treaty agreements

reinsurance agreement that covers all risks contained in the subject lines of business automatically

The Principle of Insurance

spreading out the result of a financial loss created by an individual's death or property damage, so the cost for each individual is small. Insurance is the substitution of a small certain expense for a large uncertain loss. It also transfers the risk, protects against uncertainty, shares the loss, and reduces anxiety.

Insurer (Principal)

the insurer is the source of authority from which the producer must abide; and it is responsible for all acts of a producer, but only when the producer is acting within the scope of his/her authority. However, a producer may be personally liable when his/her actions exceed the authority of the agency's contract.