General Principles of Insurance

Which of the following led to the creation of the New York Insurance Code, setting a precedent for other states to create their own insurance codes? A. U.S. v. South-Eastern Underwriters Association B. The McCarran-Ferguson Act C. The Armstrong Investigation D. Paul v. Virginia

C. The Armstrong Investigation The Armstrong Investigation occurred because of public complaint of insurer abuses. This led to the creation of the New York Insurance Code.

All of the following are marketing arrangements used by insurers EXCEPT A. Independent Agency System. B. Reinsurance System. C. General Agency System. D. Direct Response Marketing System.

B. Reinsurance System. Reinsurance is a method used by insurers to protect against catastrophic losses. The rest are marketing arrangements.

The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called A. Reduction B. Sharing C. Avoidance D. Transfer

C. Avoidance Risk avoidance is elimination of risk of loss by avoiding any exposure to an event that could give rise to such loss.

Installing deadbolt lock on the doors of a home is an example of which method of handling risk? A. Self-insurance B. Reduction C. Avoidance D. Transfer

B. Reduction Steps taken to prevent losses from occurring are called risk reduction.

Who is responsible for advertising, promoting, and distributing an insurer's products to the public? A. Governor B. Insurer C. Insurance Commissioner D. Marketing Department

D. Marketing Department The marketing department is responsible for advertising, promoting, and distributing an insurer's products to the public.

Liability is usually determined by proving A. Negligence B. Loss C. Risk D. Injury

A. Negligence The presence of a loss or risk is not enough to determine liability. Negligence must be proven.

What documentation grants express authority to an agent? A. Agent's contract with the principal B. Agent's insurance license C. Fiduciary Contract D. State Provisions

A. Agent's contract with the principal The principal grants authority to an agent through the agent's contract.

Bodily injury liability includes payments for all of the following EXCEPT A. Pain and suffering. B. Property damages. C. Rehabilitation costs. D. Medical bills.

B. Property damages. Bodily injury liability does not cover property damages.

What is another name for the McCarran-Ferguson Act? A. Public Law 12 B. Public Law 15 C. Public Law 18 D. Public Law 21

C. Public Law 15 Public Law 15 or the McCarran-Ferguson Act became law on March 9, 1945. Congress insisted that it was the right of the federal government to regulate the insurance industry but stated in the McCarran Act that the federal government would not regulate insurance as long as the states did an adequate job of regulating the industry.

An agent is acting ethically in all of the following situations EXCEPT A. Always representing the insured. B. Working within the conditions of his/her contract. C. Representing the insurer, not the insured. D. Keeping customers' best interests in mind.

A. Always representing the insured. An agent will always be deemed to represent the insurer, not the insured. If an agent is working within the conditions of the contract, the insurance company is fully responsible for his/her actions. However, when making a sale, the agent should keep the customers' best interest in mind.

What company produces evaluations of insurer financial status often used by the Insurance Department? A.SEC B. AM Best C. NAIC D. Consumer's guide

B. AM Best AM Best & Company assigns ratings to life, property and casualty insurance companies based upon the financial stability of the insurer.

Which services are associated with Standard & Poor's and AM Best? A. Storing medical information collected by insurance companies B. Rating the financial strength of insurance companies C. Investigating violations of The Fair Credit Reporting Act D. Providing employment histories for investigative consumer reports

B. Rating the financial strength of insurance companies Reports generated by Standard & Poors and AM Best help prospective consumers to judge the financial security of various insurance companies.

How are state Insurance Guaranty Association funded? A. By the department of Insurance B. By NAIC C. By the government D. By their members - authorized insurers

D. By their members - authorized insurers Guaranty Associations are funded by their members: all authorized insurers are required to contribute to a fund to provide for the payment of claims for insolvent insurers.

Which of the following types of agent authority is also called "perceived authority"? A. Implied B. Fiduciary C. Apparent D. Express

C. Apparent Apparent authority (also known as perceived authority) is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created.

Which of the following insurance providers could be considered risk-sharing arrangements? A. Mutual B. Surplus Lines C. Reciprocal D. Stock

Reciprocal When insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal.

The National Conference of Insurance Legislators was created to A. Regulate Insurance rates B. Create federal laws with greater restrictions on insurance C. Help legislators make informed decisions on insurance issues D. Protect legislators' constituents from insurer insolvency

C. Help legislators make informed decisions on insurance issues The National Conference of Insurance Legislators (NCOIL) was created to help legislators make informed decisions on insurance issues affecting their constituents.

Which of the following insurance providers must be nonprofit and sell insurance only to its members? A.Reciprocal B. Fraternal C. Service D. Mutual

B. Fraternal To be characterized as a fraternal benefit society, the organization must be nonprofit, have a lodge system that includes ritualistic work and maintain a representative form of government with elected officers. Insurance may only be sold to members of the society.

The claims department would be responsible for investigating which of the following? A. Possible contradictions in an insurance contract B. Possible fraudulent claims by an insured C. Possible fraudulent claims by an insurer D. Possible violations of ethic laws

B. Possible fraudulent claims by an insured The claims department may employ or contract with adjusters or other investigators to assist in the evaluation of claims or to seek evidence of false or fraudulent claims.

Which of the following are the authorities that an agent can hold? A. Authorized and admitted B. Primary and secondary C.Express and implied D. Apparent and allowed

C. Express and implied The powers and authorities that an agent holds are express and implied. Apparent authority is the appearance of, or the assumption of, authority based on the actions, words, or deeds of the principal or because of circumstances the principal created.

All of the following are examples of risk retention EXCEPT A. Deductibles B. Copayments C. Self-Insurance D. Premiums

D. Premiums Retention is planned assumption of risk, or acceptance of responsibility for the loss by an insured through the use of deductibles, co-payments, or self-insurance.

What is Surplus Lines Insurance? A. Insurance placed with an unauthorized insurer B. Additional insurance placed on itemized risks C. Any insurance on items worth more than $25,000 D. Insurance in excess of a standard policy's coverage

A. Insurance placed with an unauthorized insurer Insurance obtained from or placed with an unauthorized insurer is surplus lines insurance.

Which of the following is a characteristic of a Reciprocal Insurance Exchange? A. The chief administrator of the insurer is called an "attorney-in-fact". B. Normally write all lines of insurance C. Stock holders share in any profits D. Issues nonassessable policies

A. The chief administrator of the insurer is called an "attorney-in-fact". A "reciprocal" is an unincorporated aggregation of individuals, called subscribers, who exchange insurance risks. If the premiums charged for coverage are not sufficient to pay the losses of the group, subscribers may be assessed an additional premium. A reciprocal is administered by an attorney-in-fact who is empowered to bind each subscriber to assume a share of the losses of the group.

When an individual purchases insurance, what risk management technique is he or she practicing? A. Transfer B. Avoidance C. Sharing D. Retention

A. Transfer Insurance is a TRANSFER of the risk of financial loss from a covered peril from the insured to the insurance company.

What significance did Paul vs. Virginia have on the insurance industry? A. It was decided that insurance required a separate federal regulatory agency from Securities products. B. It was decided that insurance licenses should not be issued by the federal government and should instead be issued by individual states. C. It was decided that insurance was not interstate commerce and could not be regulated by the federal government. D. It was decided that insurance was interstate commerce and should therefore be regulated by the federal government.

C. It was decided that insurance was not interstate commerce and could not be regulated by the federal government. Samuel Paul represented New York insurance companies in his state. Paul challenged the right of the state to regulate insurance by refusing to obtain a license from the state. When he continued to sell insurance without a license, he was arrested and fined. The case was carried all the way to the United States Supreme Court, where it was finally decided in 1869. The Supreme Court stated that insurance was not interstate commerce.

The insurer must be able to rely on the statements in the application, and the insured must be able to rely on the insurer to pay valid claims. In the forming of insurance contract, this is referred to as A. A warranty B. Implied warranty C. Utmost good faith D. Reasonable expectations

C. Utmost good faith The insurer must be able to rely on the statements given by the insured in the application. The insured must be able to rely on the insurer's promise to pay covered losses.

If an insurance premium is paid by the policyowner to the agent, and the agent fails to remit that premium to the insurer, which of the following statements is true? A. The premium will be taken out of the Guaranty Association funds. B. The agent's license will be automatically revoked. C. The policy will lapse since the premium was not received by the insurer. D. The policy will not lapse since payment to the agent is the same as a payment to the insurer.

D. The policy will not lapse since payment to the agent is the same as a payment to the insurer. Since the agent is a representative of the insurer, payment to the agent represents payment to the company. After a hearing, the agent's license could be revoked for engaging in such acts.

Which of the following is NOT a goal of risk retention? A. To reduce expenses and improve cash flow. B. To increase control of claim reserving and claims settlements C. To fund losses that cannot be insured. D. To minimize the insured's level of liability in the event of loss

D. To minimize the insured's level of liability in the event of loss Retention usually results from three basic desires of the insured: A, B, and C.

What is reinsurance? A. An agreement between an insurer and an insured B. An agreement between a ceding insurer an assuming insurer C. An agreement between an originating insurer and a ceding insurer D. An agreement between a domestic insurer and a foreign insurer

B. An agreement between a ceding insurer an assuming insurer The originating company that procures insurance on itself in another insurer is called the ceding insurer. The other insurer is called assuming insurer.

Which of the following is the most common way to transfer risk? A. Lessen the possibility of loss B. Name of beneficiary C. Purchase insurance D. Increase control of claims

C. Purchase insurance The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company.

An insurance producer who by contract is bound to write insurance for only one company is classified as a/an A. Captive agent. B. Solicitor. C. Broker. D. Independent producer.

A. Captive agent. A captive/exclusive agent has agreed, by contract, to produce insurance business only for the insurer they are contracted with.

What method do insurers use to protect themselves against catastrophic losses? A. Reinsurance B. Indemnity C. Pro rata liability D. Risk management

A. Reinsurance Insurers use reinsurance to protect themselves from catastrophic losses. This is a method where the reinsurer indemnifies the ceding insurer for part or all of the losses it sustains related to a policy issued previously.

Which of the following entities or individuals evaluates requests for payment by insureds after a loss has occurred? A. Underwriter B. Insured C. Claims department D. Marketing department

C. Claims department The claims department evaluates requests for payment by insureds after a loss has occurred.

An insurance company sells an insurance policy over the phone in response to a TV ad. Which of the following best describes this act? A. Independent agency marketing B. Illegal C. Insurance Telemarketing D. Direct Response Marketing

D. Direct Response Marketing A direct response marketing system effectively bypasses the insurance agent. Business is conducted over the phone, through the mail, or online. This is a perfectly legal approach to selling insurance. It is not mandatory in all situations for the insured to physically sign any documents in order for coverage to go into effect.

Units with the same or similar exposure to loss are referred to as A. Catastrophic loss exposure B. Insurable Risk C. Law of Large Numbers D. Homogenous

D. Homogenous The basis of insurance is sharing risk between a large homogenous group with similar exposure to loss.

An application does not disclose important medical information on his application. What insurance concept does this violate? A. Utmost good faith B. Unilateral Contract C. Reasonable Expectations D. Competent parties

A. Utmost good faith The concept of utmost good faith entails that the insured and insurer must be able to rely on one another for valid critical information.

What company produces evaluations of insurer financial status often used by the Insurance Department? A. Consumer's guide B. SEC C. AM Best D. NAIC

C. AM Best AM Best & Company assigns ratings to life, property and casualty insurance companies based upon the financial stability of the insurer.

Which of the following entities protects policy owners, insureds, and beneficiaries under insurance contracts when insurers fail to perform contractual obligations due to financial impairment? A. Consumer protection agency B. Insurance Guaranty Association C. Insurance Consumer Protectorate D. Insurance Solvency Association

B. Insurance Guaranty Association Guaranty Associations are created to protect policy owners, insureds, and beneficiaries under life insurance policies, health insurance policies, annuity contracts, and supplements contracts when insurers fail to perform contractual obligations due to financial impairment.

In any case where there is a controversy or dispute between the insurance company and the insured, the soliciting agent is the agent of the A. Applicant. B. Insured. C. Company. D. Beneficiary.

C. Company. An agent's license authorizes them to represent an insurance company, not the insured.

Which of the following is NOT a government-funded insurance program? A. Medicare B. Medicaid C. Federal Deposit Insurance Corporation (FDIC) D. Old-age, Survivors and Disability Insurance (Social Security)

C. Federal Deposit Insurance Corporation (FDIC) FDIC is funded by premiums paid on deposits in covered financial institutions. The others are funded in whole or part by taxes.

What insurance concept is associated with the words "Weiss" and "Fitch"? A. Types of mutual companies B. Index used by stock companies C. Guides describing company financial integrity D. Policy dividends

C. Guides describing company financial integrity Because an insurance company's strength and stability are two very crucial factors in its sustainability, independent rating services have formed to publish regular updates on the financial integrity of different insurance companies. Weiss and Fitch are two of these services, although there are more.

Which of the following is NOT a characteristic of pure risk? A. The loss must be measurable in dollars. B. The loss exposure must be large. C. The loss must be catastrophic. D. The loss must be due to chance.

C. The loss must be catastrophic. In order to be characterized as pure risk, the loss must be due to chance, definite, measurable, and predictable, but not catastrophic.

An insurance company receives an application with some information missing and issues the policy anyway. What is this called? A. Subrogation B. Aleatory C. Waiver D. Estoppel

C. Waiver A court will consider the application as if the unanswered question had not been asked.

Which authority is NOT stated in an agent's contract but is required for the agent to conduct business? A. Apparent B. Assumed C. Express D. Implied

D. Implied Implied authority is not written in the agent's contract but is required in order for the agent to conduct business. Implied authority exists because not every single detail of an agent's authority can be written in a contract.

When agents are acting within the scope of their contract, their actions will be assumed to be the acts of the A.Policyowner. B. Department of Insurance. C. Insured. D. Insurer.

D. Insurer. While acting under the authority of the contract given by the insurer, the acts of an agent/producer are considered to be the acts of the insurer.

All of the following actions by a person could be described as risk avoidance EXCEPT A. Refusing to scuba dive B. Never flying in an airplane C. Not driving after being in an accident D. Investing in the stock market

D. Investing in the stock market Investing in the stock market is not an example of risk avoidance; it creates possibility of a loss.

What is the term which best describes when a person develops a formal program identifying, evaluating, and funding its losses? A. Lloyd's Association B. Purchasing group C. Mutual holding company D. Self-insuring

D. Self-insuring Self-insuring is when a person or entity, as an alternative to the purchase of insurance from an insurance company, develops a formal program identifying, evaluating and funding its losses. It is frequently used for workers compensation where losses are fairly predictable and states have established regulations for self-insurance.

An individual as involved in a head-on collision while driving home one day. His injuries were not serious, and he recovered. However, he decided that in order to never be involved in another accident, he would not drive or ride in a car ever again. What method of risk management does this describe? A. Reduction B. Sharing C. Retention D. Avoidance

D. Avoidance Avoidance is a method of risk management by which a person tries to eliminate risk of loss by avoiding any exposure to an event that could give rise to such loss. Risk avoidance is effective but seldom practical.

Following a career change, an insured is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe? A. Avoidance B. Retention C. Reduction D. Transfer

C. Reduction The insured's change in lifestyle and habits would likely reduce the chances of health problems.

An insurance agent's responsibilities include all of the following EXCEPT A.Represent the insurer. B.Perform professionally. C. Represent the client. D. Perform faithfully.

C. Represent the client. An agent's license authorizes the licensee to represent the insurer, not the client.

Which of the following is true regarding a risk retention group? A. It provides support for underwriters and is not an insurance company. B. It is benefit society formed to provide insurance for members of an affiliated lodge. C. It is a company owned by the stockholders that provides non-participating policies D. It is a liability insurance company owned by its members

D. It is a liability insurance company owned by its members A risk retention group (RRG) is a liability insurance company owned by its members. The members are exposed to similar liability risks by virtue of being in the same business or industry.

Because an agent is using stationery with the logo of an insurance company, applicants for insurance assume that the agent is authorized to transact on behalf of that insurer. What type of agent authority does this describe? A. Express B. Implied C. Assumed D. Apparent

D. Apparent Apparent authority (also known as perceived authority) is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created.

Which of the following is NOT considered by an underwriter when determining the premium rates for an individual seeking insurance? A. Age B. Medical History C. Sex D. Race

D. Race Age, medical history, and sex provide sound statistical data for determining the probability of loss. Race, religion, sexual orientation, etc., are some of the factors that cannot be used because there is not sound statistical data to show that they effect the probability of loss; therefore they are considered to be discriminatory.

US vs South-Eastern Underwriters Association was decided in 1944. To what extent does the Supreme Court's decision still apply to insurance today? A. It still stands in full. Insurance is considered to be interstate commerce and is therefore subject to regulation by the federal government. B. It still stands in full. Insurance and Securities are still regulated by two distinct agencies. C. The decision has changed. Insurance and Securities are now regulated by different federal agencies. D. It has changed. Insurance is not considered to be interstate commerce and is therefore not subject to regulation by the federal government.

A. It still stands in full. Insurance is considered to be interstate commerce and is therefore subject to regulation by the federal government. In 1942, the Attorney General of the United States filed a brief on the Sherman Act against the South-Eastern Underwriters Association, a cooperative rating bureau, alleging that the bureau constituted a combination in restraint of trade. In 1944, the Supreme Court reversed its decision of Paul vs. Virginia, stating that insurance is interstate commerce and is therefore subject to regulation by the federal government. This decision stands today.

Through what branch(es) of the government is insurance currently regulated? A. Legislative B. Judicial C. Executive D. All of the above

D. All of the above