Life Chapter 1 - Basic Insurance Concepts
A relinquishment of a known right is considered to be? A - Estoppel B - Omission C - Waiver D - Concealment
C - Waiver Rationale - Relinquishment or abandonment of a known right is considered a waiver.
A hazard is best defined as: A - any action from a court that increases the likelihood or size of a loss. B - a possibility of a loss. C - anything that increases the chance of loss or severity of loss due to a peril. D - risk shifted from one to another.
C - anything that increases the chance of loss or severity of loss due to a peril. (Rationale - A Hazard is anything that increases the chance of loss or severity of loss due to a peril.)
Ideally Insurable Risk means: A - a risk that is definite as to cause, time, place and amount B - a risk that is above the normal means of the common people. C - the degree to which a person or their property is at risk for loss. D - the risk is financially within reason and is reasonable to insure.
D - the risk is financially within reason and is reasonable to insure. Rationale - The term ideally insurable risk means that the risk is financially within reason and is reasonable to insure.
Balancing poor risk with preferred risk, with the average or standard risk being in the middle is known as what? A - Distribution of exposures B - Waiver or estoppel C - Reduction in coverage D - Retention
A - Distribution of exposures Rationale - A profitable distribution of risk exposures exists when poor and preferred risk are balanced, with stand risk making them up the middle.
For an insurance contract, utmost good faith means: A - Each party relies upon the truthfulness of the other. B - The contract just involves the policy owner and the insurer. C - Each party is equally responsible for the value of the policy. D - The policy owner will be indemnified in case of loss.
A - Each party relies upon the truthfulness of the other. (Rationale - Utmost good faith means each party has a reasonable expectation that the other party is not attempting to conceal or disguise relevant information and material facts.)
A condition that leads to a loss is known as a: A - Hazard B - Speculative risk C - Peril D - Risk
A - Hazard (Rationale - Hazards are conditions that increase or lead to possibility or severity of a loss.)
Which of the following are the main types of risks? A - Speculative and pure B - Avoidance and Retention C - Sharing and Transfer D - Pure and Transfer
A - Speculative and pure Rationale - There are two main types of risk: pure risk and speculative risk.
What is meant by the term adverse selection? A - The tendency of people with greater than average exposure to loss to purchase insurance. B - Agency marketing practices that promote only the policies that pay the highest commissions C - Underwriting practices that discriminate against applicants in certain geographical areas D - Selling types of insurance to applicants who do not need that particular kind of coverage
A - The tendency of people with greater than average exposure to loss to purchase insurance. Rationale - Adverse selection is when those more likely to have a loss purchase and keep their policies to a greater extent than those less likely to have a loss. This creates a disproportionate amount of losses to the insurer.
Which of the following statements is incorrect concerning warranties? A - Warranties can be either implied or expressed B - Violation of a warranty on the party of either party entitles the other party to rescind C - A risk excluded by a warranty and is not otherwise material does not need to be communicated. D - An implied warranty is must be included in the contract or some document signed by the insured and made part of the contract.
A - Warranties can be either implied or expressed Rationale - An implied warranty is not in writing. It is an expressed warranty that must be included in the contract or some document signed by the insured.
When large numbers of similar risks are combined in a group future claims become more A - predictable B - Measurable C - Uncertain D - Catastrophic
A - predictable (According to the law of large numbers the larger within a group the more predictable the loss.)
An MGA acts as an agent and produces and underwrites gross direct written premium equal to or more than ________% of the policyholder surplus as reported in theinsurers last annual statement A - 2% B - 5% C - 7% D - 10%
B - 5% Rationale - An MGA acts as an agent and produces and underwrites gross direct written premium equal to or more than 5% of the policyholder surplus as reported in the insurers last annual statement.
Alcoholism is an example of a: A - Peril B - Moral hazard C - Speculative risk D - Physical hazard
B - Moral hazard Rationale - Moral hazards concern the persons ethics and habits. Alcoholism and drug addiction are considered to be moral hazards.
The following information does NOT need to be communicated in a contract EXCEPT: A - Known information. B - Information that should be known C - Information the other party deems confidential. D - Information the other party waives.
C - Information the other party deems confidential. Rationale - The following information does not need to be communicated in a contract: a) known information; b) information that should be known; c) information the other party waives.
What is the term that describes balancing preferred risks withpoor risks, and average risks in the middle? A - Adverse selection B - Ideally insurable risk C - Profitable distribution of exposures D - Spread of risk
C - Profitable distribution of exposures (Rationale - Balancing preferred risks with poor risks and average risks in the middle creates a profitable distribution of exposures.)
What are the four major elements of a contract? A - Aleatory, agreement, legal purpose, indemnity B - competent parties, legal purpose, unilateral, contract of adhesion C - agreement, competent parties, legal purpose, consideration D - Indemnity, aleatory, utmost good faith, consideration
C - agreement, competent parties, legal purpose, consideration Rationale - The four major elements of a contract are: agreement, competent parties, legal purpose, and consideration.
Risk is: A - what everybody takes when dealing with insurance. B - the chance that might prove profitable. C - an unknown loss. D - the uncertainty or chance of a loss occurring.
D - the uncertainty or chance of a loss occurring. Rationale - Risk is the uncertainty or chance of a loss occurring.
Insurance is a contract whereby one undertakes to indemnify another against: A - Exposure B - Damage C - Physical hazard D- Uncertainty
B - Damage Rationale - According to the California Code of Insurance, insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.
Regarding the materiality of representations and concealment which is true? A - Materiality has no effect on either of these B - It is determined by the effect of the facts on each party to the contract in determining his or her estimate of the disadvantages of the contract. C - The degree of materiality is determined after a loss is calculated and pai D - It does not apply to health insurance, only property and casualty insurance
B - It is determined by the effect of the facts on each party to the contract in determining his or her estimate of the disadvantages of the contract. Rationale - If not knowing placed either party at a disadvantage then the representation or concealment was material. Keywords - materiality (how is it determined)
The principle used as the basis for establishing probability of losses occurring in the insurance industry is: A - Murphy's law B - Law of large number C - Rating principle D - Rate-making
B - Law of large number Rationale - The greater the number the more predictable the loss. If the insurer takes a large enough number of past losses then it can predict future losses which allows them to set appropriate premiums.
The price of insurance for each exposure is referred to as: A - Unearned premium B - Rate C - Earned premium D - Supplemental rate
B - Rate (Rationale - Rate is the price of insurance for each exposure unit.)
Underwriting is a process of: A - Selecting, reporting and rejecting risks B - Selecting, classifying, rating and determining coverages. C - Selecting and issuing of policies D - Determining and establishing premiums
B - Selecting, classifying, rating and determining coverages. Rationale - Underwriting if the process of risk selection, classification, rating, and determination of coverages.
_________ involves the exchange of a premium for a promise, which means that the insurer is the only party making a legally enforceable promise to pay a claim. . A - Conditional Contract B - Unilateral Contract C - Contract of Adhesion D - Aleatory Contract
B - Unilateral Contract Rationale - A unilateral contract involves the exchange of a premium for a promise, which means that the insurer is the only party making a legally enforceable promise to pay a claim. The insured is not legally responsible to continue paying premiums. A bilateral contract has an exchange of a promise for a promise.
An insurance contract promises to pay benefits based upon a future uncertainty such as death, or illness describes which feature of an insurance contract? A - Unilateral B - Utmost Good Faith C - Aleatory D - Conditional
C - Aleatory Rationale - An aleatory contract is one where the benefit that is to be paid is contingent upon an uncertain future event (claim). An aleatory contract is defined as a mutual agreement in which the effects, in respect to both losses and advantages, depend on an uncertain event.
When can a representation be altered or withdrawn? A - It cannot be withdrawn but can be altered within the 30 day grace period. B - It can be altered or withdrawn while the insurance is being issued. C - It can be altered or withdrawn before the insurance is issued. D - It can be altered or withdrawn after the insurance is issued.
C - It can be altered or withdrawn before the insurance is issued. Rationale - A representation can be altered or withdrawn only before the insurance is issued.
The function of insurance is best described as: A - It protects against out living your financial resources. B - It's a pooling of diverse group of people who are exposed to risks that are not homogenous. C - It spreads financial risk over a large group so as to minimize the loss to any one individual. D - It's a form of legalized gambling.
C - It spreads financial risk over a large group so as to minimize the loss to any one individual. (Rationale - The purpose of insurance is to have losses of a few paid by the contributions of many who are exposed to the same risk.)
Which of the following is false? A - Concealment or false statements about material facts may allow the injured party to rescind the contract, even at B - An immaterial misrepresentation does not void coverage. C - Materiality of concealment is judged different than materiality of a misrepresentation. D - Materiality is determined not by the event but by the influence of the facts on the party to whom communication is due, in form their estimate of the disadvantages of the proposed contract.
C - Materiality of concealment is judged different than materiality of a misrepresentation. Rationale - Materiality of a misrepresentation or concealment is determined the same.
Which of the following statements in regards to representations is false? A - Representations are false when the facts fail to correspond with its assertions or stipulations B - A representation can qualify as an implied warranty C - Representations are used to define the truth D - Representations can be altered or withdrawn after issuance of the contract
D - Representations can be altered or withdrawn after issuance of the contract Rationale - Representations are oral or written statements made at the time of application or before policy issuance, therefore they may only be withdrawn or altered before the contract is issued.
What is rescission? A - A written response to questions or statements made on an application for insurance. B - Rescission is the revocation of a contract. C - Rescission is a supplemental agreement attached to and made part of the policy. D - The act of terminating an insurance policy.
D - The act of terminating an insurance policy. Rationale - Rescission is the revocation of a contract.
The law of large numbers is a principal that basically says: A - the larger the amount of information gathered, the more reliable that information will be. B - the larger the number of people in an insurance company, the more stable it is. C - the larger the possibility of a loss, the greater the exposure. D - the more insurance you have, the more protected you are.
A - the larger the amount of information gathered, the more reliable that information will be. Rationale - The law of large numbers is a principle that basically says, the larger the amount of information gathered, the more reliable that information will be.
All of the following describe an MGA EXCEPT: A - Has the power to appoint, supervise, and terminate the appointment of local agents in that territory B - The legal entity which acts on behalf of, or in place of, it's principal. C - Collects premium moneys from producing broker-agents and remits those moneys to those insurers pursuant D - Has the power to accept or decline risks.
B - The legal entity which acts on behalf of, or in place of, it's principal. Rationale - In an agency there is a producer which is the legal entity which acts on behalf of, or in place of, it's principal.
Which of the following becomes part of the contract, is guaranteed to be true, and if untrue, may be grounds for rescinding the policy? A - Consideration B - Warranty C - Facility of payment clause D - Contract of adhesion
B - Warranty Rationale - Warranties are statements guaranteed to be true in all respects.
Insurable interest is best described as: A - The beneficiary, by definition, has an insurable interest in the insured. B - All of these C - The policyowner must expect to suffer a loss when the insured dies or becomes disabled. D - The insured must have a personal or business relationship with the beneficiary.
C - The policyowner must expect to suffer a loss when the insured dies or becomes disabled. (Rationale - Insurable interest requires that the policyowner be expected to benefit from the insured's continuing to live or enjoying good health or to suffer a loss when the insured dies or is disabled. An insurable interest must exist between the applicant and the insured. It does not need to exist between the applicant and the beneficiary.)
A peril is: A - anything that increases the chance of loss or severity of loss. B - a possibility of a loss. C - the actual cause of the loss. D - pure and speculative.
C - the actual cause of the loss. Rationale - A Peril is the actual cause of the loss. Some examples of common perils are fire, wind, hail, collision with another car, theft, etc.
Which of the following is not correct concerning warranties? A - A warranty may be expressed B - A warranty may be implied C - Violation of a material warranty allows the other party to rescind the contract D - An implied warranty must be included in a document signed by the insured and made part of the contract.
D - An implied warranty must be included in a document signed by the insured and made part of the contract. Rationale - An implied warranty is not in writing. An express warranty is in writing and must be in application or some document signed by the insured and made part of the contract.
For an insurance contract to be enforceable, which of the following parties must be considered competent? A - Beneficiary B - All of these C - Insured D - Applicant
D - Applicant Rationale - The applicant must be competent. The insured and beneficiary need not be considered competent if they are not the same person as the applicant.
Which of the following is NOT part of a contract that is enforced by the law? A - Offer and acceptance B - Legal purpose C - Competent parties D - Tort law
D - Tort law Rationale - For a contract to be enforced by the law it must contain these four elements: offer and acceptance, consideration, competent parties, and legal purpose
For insurable interest to exist: A - the insured must be restored to the condition that they were in before the loss occurred. B - the loss needs to be significant enough to cause the insured to struggle financially. C - the insured's loss cannot be catastrophic. D - the insured must establish that they actually own something to be insured.
D - the insured must establish that they actually own something to be insured. Rationale - Insurable interest means that the insured must establish that they actually own something before they can insure it. This means that the insured has the possibility that they will suffer financial loss.