Insurance Exam - Ch. 1

What are the 4 elements of a contract?

1. Offer & Acceptance 2. Consideration (Value) 3. Competent Parties 4. Legal Purpose

What is it called when one insures risks that are more prone to losses than an average risk? Describes the tendency of an individual with a greater than average chance of a loss to purchase insurance.

Adverse selection

What kind of marketing system is when independent insurance agents sell the products of several companies and are appointed on a non-exclusive basis? An agent earns commissions on personal sales, overrides of other agents, and owns the expirations of the policy he/she sells.

Agency Method (independent agency method)

What kind of contract is one in which the number of dollars or values exchanged are not equal?

Aleatory contract

I live in MD. and buy a policy from SUN Life of Canada. What type of insurer is SUN Life? - Domestic, Foreign, or Alien Insurer

Alien insurer

What kind of insurer is an insurance company that in incorporated (chartered) outside the US? It's incorporated in another country.

Alien insurer

What is an example of Exclusive or Captive Agents?

Allstate / State Farm

Who always represents an insurer (company)?

An agent/producer

I live in MD and buy a policy from New York Life. What type of insurer is NY Life? - Domestic, Foreign, or Alien Insurer?

Foreign insurer

What kind of insurer conducts business outside its state of incorporation, territorial possession (PR), or Washington D.C.? It's incorporated in another state

Foreign insurer

Freemasons, Knights of Columbus, affiliated lodges, religious or fraternal organizations are all examples of what type of insurer?

Fraternal Benefit Societies

What type of insurer exists as social nonprofit organizations, and voluntarily provide insurance only for their members?

Fraternal Benefit Societies

What is an intentional misrepresentation or suppression of facts, made by a person with the sole intent to gain from their acts?

Fraud

What is the most common method of risk transfer?

Purchasing insurance

What type of risk involves the probability/possibility of a loss with no chance for gain? These circumstances can only result in a loss or no change.

Pure Risk (Ex: accidents, sickness, premature deaths)

What type of insurer can be either unincorporated groups of individuals, firms or corporations, commonly termed Subscribers, Reciprocal Insurance Company, or Exchange?

Reciprocal Insurers

What is an attempt to reduce the possibility of death, injury, or the loss of property called?

Reduction/Control

What is another word for sharing?

Reinsurance

What is the agreement between insurance companies under which one insurance company transfers part or all of its risk to another insurer called?

Reinsurance

What is the dividing or sharing of a risk for a business or a group of individuals with the same or similar exposure to a loss called?

Reinsurance

Who issues a Certificate of Authority?

the Department of Insurance

What is another way of saying that answers to questions should be truthful?

"Utmost good faith"

What type of risk is uncertain as to whether the final outcome is a gain or loss? NOT insurable.

Speculative Risk (Ex: Gambling)

What act was designed to improve the confidentiality, usage and accuracy of Credit Reports? It protects consumers from receiving inaccurate or outdated information

Fair Credit Reporting Act (FCRA)

An agent is a _______ who handles insurer funds in a trust capacity

Fiduciary

What is the consideration from the client and the insurance company in a contract? (2)

- From the client: the premium - From the company: the promise to pay in the event of a loss/claim

What exposure units are typically used? (4)

- medical history - sex - age - occupation of insured

Who manages Mutual Companies?

A Board of Trustees

Prior to an insurance company conducting business, it must, by law, have what?

A Certificate of Authority

Who manages stock companies?

A board of directors

Who is first and foremost responsible to an insurer?

A broker/agent

What is an example of a General/Managing General Agent (MGA)?

Mass Mutual

What type of authority is based on actions, words, or deeds, undertaken by an agent/producer on behalf of the principal (company)? When an agent uses material like business cards, signs, rate books & applications

Apparent authority

How are agents appointed?

By one authorized insurance company

How does reinsurance benefit an insurer?

By providing protection against catastrophic losses

What is an intentional suppression and failure to disclose information, facts and circumstances?

Concealment

What kind of contract outlines the duties of the insured & insurer?

Conditional contract

What report contains written information regarding a consumer's character, credit, reputation, habits, and lifestyle?

Consumer Report

What kind of contract is offered on a "take it or leave it" or "accept it or reject it" or "as is" basis?

Contract of Adhesion - cannot be negotiated

What is another word for retention?

Deductible

What kind of marketing system is when the producer/agent is by-passed and an insurer directly contacts the public by use of mail, TV, internet, telephone?

Direct Response Marketing

What kind of insurer conducts business within the state where it is incorporated/chartered?

Domestic insurer

In order for a risk to be insurable, a loss must be ____?

Due to chance. A loss (risk) must be outside the control of an insured

What is a legal right to stop someone from reasserting a right that was previously waived?

Estoppel

What kind of marketing system is when an agent represents only one insurance company and is appointed on an exclusive/captive basis? These agents do NOT own the expirations of the renewal business, and all business is placed w/ an insurer.

Exclusive / Captive Agents

What is the measure of the vulnerability of a loss and is usually expressed in dollars or units?

Exposure

What type of authority is an explicit, definite agreement an insurer grants to a producer? This binding authority is in the form of a written contract.

Express authority

What is an example of Mass Marketing & Direct Response Marketing?

GEICO

What kind of marketing system is when an exclusive agent hires & trains other producers/agents in a specified geographic area?

General/Managing General Agent (MGA)

What are circumstances or conditions that increase the probability that a loss will take place?

Hazards

What type of authority is not formally communicated, but it is assumed by the agent, in order to transact a business, on behalf of the insurance company? It is the ability to act outside the authority granted in an agency agreement and it extends the companies liability

Implied authority

What is it called when an Insured can only receive up to the amount of their loss without financial gain?

Indemnity (reimbursement)

What report contains non-medical information about an applicant's character, personal habits (including interviews with neighbors and friends)?

Investigative Consumer Report - more thoroughly investigated than in the Consumer Report

What type of insurer is best used for special or high risk?

Lloyd's Associations

What type of insurer is a group of individual underwriters that accept or reject risks offered to them?

Lloyd's Associations (Lloyd's of London)

What is an example of a Surplus Lines company?

Lloyd's of London

Insurance is designed to protect individuals from ______?

Loss

What is the unintentional reduction, decrease, or disappearance of value of a person or property insured by a policy?

Loss

Is it mandatory or voluntary for an insurance company that sells insurance to belong to the Property & Casualty Insurance Guaranty Association?

Mandatory

What kind of marketing system is when insurance companies sell through direct-response, vending machines (airports), and franchises?

Mass Marketing

What type of insurer is owned by policyholders?

Mutual Companies

What are the causes of loss?

Perils (Ex: when tornadoes, floods, hurricanes destroy homes)

What kind of contract is between an insurer & an individual?

Personal contract

What are statements on an application that answer questions to the best of one's knowledge that are not guaranteed to be true?

Representations

What is an insurer's right to cancel a policy if an applicant intentionally refuses to provide an insurer with pertinent information regarding their policy?

Rescission

What is it called when an insured has decided to assume the financial responsibility for certain events by the use of copayments or self insurance?

Retention

What type of insurer assumes and spreads the liability exposure to a group member, and provides an alternative risk financing mechanism for their liability?

Risk Retention Groups (RRG)

What type of insurer often covers hospitals, manufacturers, and municipalities against commercial casualties?

Risk Retention Groups (RRG)

What type of insurer develops a formal program identifying, evaluating, and funding its losses?

Self-Insurers

What type of insurer is owned by stockholders to whom earnings are distributed as taxable dividends on their shares, or reinvested by the company?

Stock Companies

What refers to the coverage that must be purchased from an unauthorized company bc it is not available through a licensed company?

Surplus Lines

What helps an insurer predict which types of individuals in the US will die in a given year?

The Law of Large numbers

What organization exchanges information, develops uniformity in regulatory practices, and drafts model regulations for the states?

The National Association of Insurance Commissioners (NAIC)

What organization's main concern is to improve the quality of insurance legislation, and to help State legislators work together?

The National Conference of Insurance Legislators (NCOIL)

Any ambiguity in a contract should be ruled in favor of who?

The insured

What is the purpose of the following Independent Rating Services? AM Best, Standard & Poors, Fitch, Moody's, Weiss

They help determine the financial stability of insurance companies

What kind of contract is one way with one party?

Unilateral contract

What is the release of a known right, claim or privilege?

Waiver

What is a statement that is absolutely true?

Warranty

When does acceptance of a contract occur?

When an underwriter works for an insurance company & the company approves an application