Insurance Quiz #4

What is an insurance contract?

- Aleatory: values exchanged are not equal. - Unilateral: only the insurer makes a legally enforceable promise. - Conditional: policy owner must comply with all policy provisions to collect for a covered loss. - Personal: property insurance policy cannot be validly assigned to another party without the insurer's consent. - A contract of adhesion: the insured must accept the entire contract with all of its terms and conditions.

What are some key parts of SMI ( Solvency Modernization Initiative )?

- Capital requirements. - Risk management. - Corporate governance. - Group governance. - Reinsurance. - Statutory accounting and financial reporting.

What did the Dodd-Frank Wall Street Reform and Consumer Protection Act create?

- Financial Stability Oversight Council to identify and treat systemic risk. - Federal Insurance Office (FIO).

What are some reasons for insolvency?

- Inadequate rates. - Inadequate reserves for claims. - Rapid growth and inadequate surplus. - Mismanagement and fraud. - Bad investments. - Problems with affiliates. - Overstatement of assets. - Catastrophe losses. - Failure of reinsurers to pay claims.

What are the principal methods of ensuring solvency are:?

- Minimum capital and surplus requirements. - Risk-based capital standards. - Reserve requirements. - Restrictions on investments. - Review of annual financial statements. - Field examinations. - Early warning system (IRIS ratios). - FAST system analysis.

What can an insurable interest be supported by?

- Ownership of property. - Potential legal liability. - Serving as a secured creditor. - Contractual rights.

When must insurable interest exist?

- Property insurance: at the time of the loss. - Life insurance: only at inception of the policy.

What is the Solvency Modernization Initiative (SMI)?

- Provides for a critical self-examination of insurance solvency regulations in the US. - includes a review of international development.

What three legal doctrines is the principle of utmost good faith supported by?

- Representations. - Concealment. - Warranty.

What are some concerns of regulators regarding market conduct regulation?

- Sale of unsuitable insurance products. - Misrepresentation of coverage. - Excessive sales pressure. - Rates that are excessive or unfairly discriminatory. - Denial of legitimate claims. - Improper termination of policies.

What are practices of market conduct include?

- Sales of insurance policies. - Advertising of insurance products. - Underwriting and rating. - Collection of premiums. - Policy renewals, termination, and changes. - Claims settlement.

What is the coinsurance clause that most health insurance policy contain?

- The clause requires the insured to pay a specified percentage of covered medical expenses in excess of the deductible. - The purposes of coinsurance in health insurance are to reduce premiums and prevent over utilization of policy benefits.

What must a non marine insurer prove to deny a claim based on concealment?

- The concealment fact was known by the insured to be material. - The insured intended to defraud the insurer.

What is the Principle of Subrogation?

- The insurer is entitled only to the amount it has paid under the policy. - The insured cannot impair the insurer's subrogation rights. - Subrogation does not apply to life insurance contracts. - The insurer cannot subrogate against its own insurers.

What do critics of credit-based insurance argue?

- The use of credit data in underwriting or rating discriminates against minorities and other groups. - Credit-based insurance scores may penalize consumers unfairly using business recessions.

What do proponents of credit-based insurance argue:?

- There is a high correlation between an applicant's credit record and future claims experience. - Insurance scores permit insurers to accept more high-risk consumers for whom otherwise an appropriate premium could not be determined. - Most consumers have good credit scores and benefit from credit scoring.

What are some laws that govern the actions of agents and their relationship to insurers?

- There is no presumption of an agency relationship. - An agent must be authorized to represent the principal. - A principal is responsible for the acts of agents acting within the scope of their authority. - Limitations can be placed on the powers of agents.

What is the purpose of the principle of insurable interest?

- To prevent gambling. - To reduce moral hazard. - To measure the amount of the insured's loss.

What is the purpose of Subrogation?

- To prevent the insured from collecting twice for the same loss. - To hold the negligent person responsible for the loss. - To hold down insurance rates.

What is the purpose of the principle of indemnity?

- To prevent the insured from profiting from a loss. - To reduce moral hazard.

Where does an agents authority come from?

1) Express authority. 2) Implied authority. 3) Apparent authority.

What are the three main principal methods used to regulate insurers?

1) Legislation, through both state and federal laws. 2) Court decisions, e.g., interpreting policy provisions. 3) State insurance departments - Regulations and bulletins.

What are four reasons for insurance regulation?

1) Maintain insurer solvency. 2) Compensate for inadequate consumer knowledge. - opportunity to educate consumers. 3) Ensure reasonable rates. 4) Make insurance available.

What four requirements must an insurance contract must meet to be legally enforceable?

1) Offer and acceptance of the terms of the contract. 2) Exchange of Consideration - the value that each party gives to the other. 3) Competent parties, with legal capacity to enter into a binding contract. 4) The contract must exist for a legal purpose.

When can insurable interest in another person's life can be shown?

- Close family ties. - Marriage. - Pecuniary (financial) interest.

What are three main methods to determine actual cash value?

1) Replacement cost less depreciation. 2) Fair market value is the price a willing buyer would pay a willing seller in a free market. 3) Broad evidence rule means that the determination of actual cash value should include all relevant factors an expert would use to determine the value of the property.

What is the purpose of a deductible?

1. Eliminate small claims that are expensive to handle and process 2. Reduce premiums paid by the insured 3. Reduce moral hazard and attitudinal (morale) hazard

What are systemically important financial institutions (SIFIs)?

A financial company that is classified as SIFI receives tougher oversight and is regulated by the Federal Reserve.

What is a valued policy?

A valued policy pays the face amount of insurance if a total loss occurs.

What is the principle of indemnity based on for property insurance?

Actual Cash Value (ACV) of the property at the time of loss.

What is an agent?

An agent is someone who has the authority to act on behalf of a principal (the insurer).

What is the credit-based insurance score derived from?

An applicant's credit history and is combined with other underwriting factors.

What are conditions in an insurance contract?

Are provisions in the policy that qualify or place limitations on the insurer's promise to perform. - If policy conditions are not met, the insurer can refuse to pay the claim.

What are Declarations?

Are statements that provide information about the particular property or activity to be insurers. - Usually on the first page of the policy. - In property insurance, it contains name of the insured, location of property, period of protection, amount of insurance, premium and deductible information.

What is the Financial Modernization Act (1999)?

Changed federal law that earlier prevented banks, insurers, and investment firms from competing outside their core area. - State insurance departments regulate insurers. - State and federal bank agencies regulate banks. - The Securities and Exchange Commission (SEC) regulates the sale of securities. - The Federal Reserve has umbrella authority over bank affiliates that engage in underwriting insurance.

What have courts ruled?

Courts have ruled that any ambiguities or uncertainties in the contract are construed against the insurer.

What is a domestic insurer?

Domiciled in the state ( Am Fam ).

What is contribution by equal shares?

Each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amount of the loss is paid.

What is pro rata liability?

Each insurer's share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property.

What is an Estoppel?

Estoppel is the loss of a legal defense because of previous actions that are now inconsistent with that defense.

What is first named insured?

Has certain additional rights and responsibilities that do not apply to other named insureds. - A policy may cover other parties even though they are not specifically named. - Additional insureds may be added using an endorsement.

What is A coinsurance clause?

In a property insurance contract encourages the insured to insure the property to a states percentage of its insurable value. - If the coinsurance requirement is not met at the time of the loss, the insured must share in the loss as a coinsurer.

What is the coordination of benefits provision?

In group health insurance is designed to prevent over insurance and the duplication of benefits if one person is covered under more than one group health insurance plan.

What is risk-based capital (RBC)?

Insurers must hold a certain amount of capital, depending on the riskiness of their investments and insurance operations. - 125% or higher is preferred. - Depends on asset risk, underwriting risk, interest rate risk, and business risk. - A comparison of the company's total adjusted capital to the amount of required risk-based capital determines whether company or regulatory action is required.

What is a deductible?

Is a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable.

What happened in McCarran-Ferguson Act (1945)?

States that continued regulation and taxation of the insurance industry by the states are in the public interest. - Federal antitrust laws apply to insurance only to the extent that the insurance industry is not regulated by state law.

What is Subrogation?

Subrogation means substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance.

What is the insuring agreement?

Summarizes the major promises of the insurer.

What happened in U.S. v South-Eastern Underwriters Association?

The Court ruled that insurance was interstate commerce when conducted across state lines and was subject to federal antitrust laws.

What happened in Paul v Virginia (1868)?

The Supreme Court ruled that insurance was not interstate commerce, and that the states rather than the federal government had the right to regulate the insurance industry.

What is the principle of insurable interest?

The insured must be in a position to lose financially if a covered loss occurs.

What is a straight deductible?

The insured must pay a certain number of dollars of loss before the insurer is required to make a payment. - Auto insurance deductible.

What is the principle of indemnity?

The insurer agrees to pay no more than the actual amount of the loss.

What is primary and excess insurance?

The primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted.

What is the principle of reasonable expectations?

The principle of reasonable expectations states that an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, regardless of policy provisions.

What is the Principle of Utmost Good Faith?

A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts.

What is a life insurance contract in terms of principle of indemnity?

A life insurance contract is a valued policy that pays a stated sum to the beneficiary upon the insured's death.

What is a rider?

Is a provision that amends or changes the original policy.

What is retaliatory tax?

Is a state tax on out-of-state insurers operating within the state's jurisdiction. - Most states have retaliatory tax laws that protect domestic insurers form excessive taxation by other states where they do business.

What is An elimination (waiting) period?

Is a stated period of time at the beginning of a loss during which no insurance benefits are paid.

What is a warranty?

Is a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects. - Statements made by applicants are considered representations, not warranties. - Most courts interpret a breach of warranty liberally. - State statutes allow the insured to recover for a loss unless the breach of warranty actually contributed to the loss.

What is a calendar-year deductible?

Is a type of aggregate deductible that is found in basic medical expense and major medical insurance contracts.

What is an endorsement?

Is a written provision that adds to, deletes from, or modifies the provisions in the original contract.

What is an alien insurer?

Is an insurer that is chartered by a foreign country, but is licensed to operate in the state.

What is a foreign insurer?

Is an out-of-state insurer that is chartered by another state, but licensed to operate in the state. ( State Farm ).

What is a concealment?

Is intentional failure of the applicant for insurance to reveal a material fact to the insurer.

What is named insured?

Is the person or persons named in the declarations section of the policy.

What is "other-insurance provisions"?

Is to prevent profiting from insurance and violating the principle of indemnity.

What is a valued policy law that some states have?

It requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law.

What is market conduct?

Market conduct refers to the marketing practices of insurers and agents that involve interaction with insureds, claimants, or consumers.

What is an aggregate deductible?

Means that all losses that occur during a specified time period, usually a year, are accumulated to satisfy the deductible amount.

What is a non waiver clause?

Places limitations on the power of agents.

What is the purpose of investment regulations?

Prevent insurers from making unsound investments that could threaten the company's solvency and harm the policy owners. - Laws generally place a limit on the proportion of assets in a specific asset category, such as real estate.

What is Rebating?

Rebating practice of giving an individual a premium reduction or some other financial advantage not stated in the policy as an inducement to purchase the policy.

What is replacement cost insurance?

Replacement cost insurance means there is no deduction for depreciation in determining the amount paid for a loss.

What are representations?

Representations are statements made by the applicant for insurance. - A contract is voidable if the representation is material, false, and relied on by the insurer. - Material means that if the insurer knew the true facts, the policy would not have been issued, or would have been issued on different terms. - Reliance means that the insurer relies on the misrepresentation issuing the policy at a specified premium. - An innocent misrepresentation of material fact, if relied on by the insurer, makes the contract voidable.

What is the fundamental purpose of coinsurance?

To achieve equity in rating. - A property owner wishing to insure for a total loss would pay an inequitable premium if other property owners only insure for a partial losses. - If the coinsurance requirement is met, the insured receives a rate discount, and the policy owner who is underinsured is penalized through application of the coinsurance formula.

What is Twisting?

Twisting inducement of a policy owner to drop an existing policy and replace it with a new one that provides little or no economic benefit to the client.

What is a Waiver?

Waiver is defined as the voluntary relinquishment of a known legal right.

What is the Dod-Frank Wall Street Reform and Consumer Act (2010)?

Was enacted to address abuses in the financial services industry. It has numerous provisions designed to: - Reform the financial services industry. - Deal with destabilizing practices of commercial banks, investment firms, mortgage companies and credit-rating agencies. - Provide protection for consumers.

What are Open-perils, or special coverage?

Where all losses are covered expect those losses specifically excluded.

What is Name perils coverage?

Where only those perils specifically named in the policy are covered.