NC State Insurance Exam
Retrospective rating
A method of rating that uses rates that adjust the policy premium to reflect the current loss experience of the policyholder. Premium adjustments are subject to a minimum and maximum
Underwriter
A person who evaluates and classifies risks to accept or reject them on behalf of the insurer.
Conditional contract
An insurance contract that requires both the insured and the insurer meet certain conditions in order for the contract to be enforceable
Aleatory contract
In this type of contract, there is an unequal exchange of value between parties. (EX. The insured's premium is lesser than what the insurer would pay out in the event of a loss)
Fraternal benefit societies
Primarily social organizations that engage in charitable and benevolent activities that provide life and health insurance to members; membership consists of members of a given faith, lodge, order, or society; usually organized on a non-profit basis.
Residual Markets
These are private coverage sources that operate as a last resort for businesses and individuals who have been rejected by voluntary market insurers. They use a risk sharing plan and insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels
Representations
These are statements made by the applicant on the application and are believed to be true
Insurance companies
These business manufacture and sell insurance coverage in the form of insurance policies or contracts of insurance; known as CARRIERS
Immaterial representations
These representations do not affect the acceptance or rating of the risk
McCarran-Ferguson act of 1945
This case established that the federal government may not regulate insurance in areas that the states have the authority to do so
Law of Agency
This defines the relationship between an insurance company (the principal) and a producer. The principal is responsible for the acts of the producer, and the producer's acts bind the principal
Loss
This event is the unintentional reduction, decrease, or disappearance of value. This is the basis of a claim under the terms of an insurance policy.
Non-admitted (unauthorized) insurer
This insurer has either applied for authorization and was declined or they have not applied. They are NOT permitted to transact insurance in this state
Admitted (authorized) insurer
This insurer is authorized by this state's commissioner of insurance to do business in this state and has received a certificate of authority to do business in this state
Domestic insurer
This insurer is organized in the laws of the state, whether or not it is admitted to do business in this state
Alien insurer
This insurer is organized under the laws of any jurisdiction outside the United States, whether or not it is admitted to do business in this state
Foreign Insurer
This insurer is organized under the laws of any other state, possession, territory, or the District of Columbia, whether or not it is admitted to do business in this state
Misrepresentations
This is a false statement contained within an insurance application. This usually does not void coverage or the policy as long as it is immaterial
Risk Retention Groups (RRG)
This is a group-owned insurer that primarily assumes and spreads the liability-related risks of it's members. They are owned by their policyholders, and are licensed in at least one state. They must be made up of homogeneous unites. Limited to risks with similar liability exposures such as theme parks, go-cart tracks, or water slides
Moral Hazard
This is a hazard that consists of an attitude of indifference toward the risk of loss that increases the probability of a loss occurring
Physical Hazard
This is a hazard that increases the likelihood or probability of loss; may include the use, condition, or occupancy of property. These hazards may often be seen, heard, felt, tasted, or smelled
Estoppel
This is a judicial denial of a contractual right based on prior actions that are contrary to what the contract requires
Fiduciary duty
This is a legal or ethical relationship of trust between two or more parties. The person carrying out this duty prudently takes care of money for another person. They are responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer.
Loss cost rating
This is a method of rating in which a rating organization provides insurers with the portion of a rate that does not include provisions for expenses or profit. This is used on risks for which the insurer may not have enough date to develop the rate, other than for expenses
Manual rating
This is a method of rating in which 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
This is a method of rating in which uses rates that reward a policyholder for taking measures to decrease the probability of a loss by the implementation of safety programs, loss control programs, etc.
Schedule rating
This is 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
Unilateral contract
This is a once-sided contract. Only one party is legally bound to the contractual obligations once the contract is in force. Only the Insurer makes a promise of future performance and only the insurer can be charged with breach of contract. The policyowner can cancel the policy at any time and for any reason without legal obligation.
Class rating
This is a rating method in which a rate is charged to a group of policyholders who have similar exposures and experience
Individual rating
This is a rating method in which the rate is based on a rate used for a policyholder because a large enough pool of similar risk sis not available to any other type of rate. It is primarily used for commercial and specialty risks because of the number of unique variables involved
Experience rating
This is a rating method in which the rate is based on the policyholders actual loss history when compared to the loss history of similar risks
"A" rating or Judgement rating
This is a rating method that is an individual rate that does not use loss history as a component and that is derived largely from the underwriters evaluation and best judgement the risk poses to the insurer
Speculative Risk
This is a situation where there is a chance for loss, gain, or neither loss nor gain to occur. Examples include gambling, investing, or starting a new business. This risk cannot be insured
Pure risk
This is a situation where there is no chance for gain The outcome is for either nothing to occur or for a loss to occur. This is the only risk that can be insured
Hazard
This is a specific condition that increases the probability, likelihood, or severity of a loss from a peril. There are three types of these: physical, moral, and morale
Prior approval
This is a step in rate approval in which insurers cannot use rates until approved by the department of insurance, or until a specific time period has expired after the filing
File and Use
This is a step in rate approval in which rates must be FILED with the state insurance regulatory authority and may be USED as soon as they are filed
Mandatory rates
This is a step in rate approval in which states may require mandatory rates to be used indifferent lines of insurance
Contract of insurance
This is an agreement that obligates an insurer to indemnify or compensate an insured when there is destruction, loss, or injury due to something in which the insured has an interest, arising from an unexpected event
Law of Large Numbers
This is an insurance concept stating that as the number of risks in a particular group increase, the more likely it is to predict the number and amount of loss within that group. Auto insurance losses are the easiest type of insurance loss to predict precisely because the number of units insured is so great
Fraud
This is an intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right
National Association of Insurance Commissioners (NAIC)
This is an organization that consists of all state and territorial insurance commissioners or regulators. They provide resources, research, legislative and regulatory recommendations, and interpretations for state insurance regulators.
Insurable event
This is any event, past or present, that may cause loss or damage, or that may create legal liability on the part of the insured
Risk
This is defined as the uncertainty concerning a loss or possibility that a loss will occur. Two types of these
Lloyds Association
This is not an insurance company, but it consists of groups of underwriters called syndicates, each of which specializes in insuring a particular type of risk. Members are individually liable for each risk they assume
Peril
This is the cause or source of a loss
Loss exposure
This is the condition of being at risk for a loss (The chances of being EXPOSED to a loss)
Risk management
This is the determination of what types of protection are required to meet an insured's needs/ a survey of an insured's operations, assets, and exposures that could give rise to a loss
Primary/Ceding insurer
This is the insurer in which the financial risk of loss is being transferred FROM
Reinsurer
This is the insurer in which the financial risk of loss is being transferred to and accepted by
First named insured
This is the person or organization whose name appears first on the dec page. They are granted rights and responsibilities by the policy that are not granted to other insureds
Owner
This is the person responsible for paying the policy's premium. They are not necessarily the insured under the policy, but they do have various rights that are specified in the contract of insurance
Insurance application
This is the primary course of information about the purchaser needed for the insurer to underwrite a risk, and it will become part of the insurance contract
Deposit premium
This 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.
Premium
This is 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 premium
Reinsurance
This is the transfer of all or a portion of assumed risk from one insurance company to another. This action includes the primary or ceding insurer transferring the financial risk of loss to the reinsurer.
Waiver
This is the voluntary surrender of a known right, claim, or privilege. (EX. an insurer's failure to obtain an answer to an unanswered question in its application for insurance prior to issuing the policy. Such a failure waives the insurer's right to contest a claim based on the information it could reasonably obtained.
Concealment
This is the willful holding back or secretion of material facts pertinent to the issuance of insurance or to a claim. This may result in denial of coverage and may void the policy
Insurability
This means that the applicant met the underwriting requirements of the insurer and is therefore able to be issued coverage
Insurable interest
This must exist in every enforceable insurance contract. It requires the potential for an insured to suffer financial or economic hardship in the event of a loss, as well as a valid legal purpose for the contract. Sentimental value alone does not establish insurance interest. This must exist AT THE TIME OF LOSS
Adverse selection
This occurs when people with higher risks prone to losses seek insurance protection more often than people with average, or standard, risks.
Additional insured
This person or organization is not ordinarily protected by a policy but who, through the addition of an endorsement to the policy, is granted status as an insured. This is often a co-owner of a real property
Principle of Indemnity
This principle is designed to restore the insured to the same financial or economic condition that existed prior to the loss, depending on the amount and type of insurance purchased. The insured must not profit from an insurance transaction, but be made 'whole' again
Rate
This refers to the dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance. There are multiple types/methods of this
Domicile
This refers to the jurisdiction where an insurer is formed or incorporated
Admittence
This refers to whether or not an insurer is approved or authorized to write business in this state. The domicile does not impact this
Personal contract
This type of contract is specific to the person insured at the time the contract is formed
Direct Writing System
This type of insurance company is like an exclusive or captive agency, but agents are considered employees of the insurer. The company owns the accounts, and the agent may be paid a salary, salary plus bonus, or commission.
Direct mail or direct response
This type of insurer may sell insurance policies directly to the public via licensed employees or contractors. They use direct mail, newspapers, magazines, radio, television, internet, websites, or call centers and do not have face to face contact with the customer
Monoline policy
This type of policy contains a single type of insurance, such as a policy that only covers property losses or a policy that only covers casualty losses
Package policy
This type of policy contains multiple (at least two) types of insurance and offers advantages that are not offered in a monoline policy, such as voiding coverage gaps. This policies allow the insured to purchase a single policy, which is more affordable.
Risk Reduction
This type of risk management attempts to minimize the chance of loss instead of eliminating the risk. This includes practicing a healthy lifestyle, having preventative medical care, or taking prescribed medications will help reduce the risk of developing long-term medical conditions
Risk sharing
This type of risk management involves the pooling or spreading risk among a large number of persons. Group insurance is an example of this
Risk Transfer
This type of risk management involves transferring the uncertainty of loss from one party to another. Purchasing an insurance contract transfers the financial risk associated with the loss from a consumer to an insurance company
Risk Retention
This type of risk management is assuming full or partial responsibility for a loss. Self-insurance allows for financially retaining the necessary funds to cover a potential loss. It is not practical for most individuals to fully self-insure by choosing higher deductibles as a method of risk retention
Risk Avoidance
This type of risk management is the elimination or risk by not participating in activities that involve a chance of loss.
Independent agency/American agency system
With this type of insurance company, the agency enters into selling agreements with at least on insurer, but an unlimited number of insurers may be represented. The independent contractors are paid a commission based on personal sales and must cover the cost of their own agency operations
exclusive or captive agency
With this type of insurance company, the insured interacts with the insurer through an exclusive or captive agent, representing only one company, or a group of companies that have common ownership. The agent is an independent contractor
facultative reinsurance agreement
a reinsurance agreement that allows the reinsurer an opportunity to reject coverage or charge a higher premium for specific risks
Treaty of reinsurance
a reinsurance agreement that automatically accepts all new risks assumed by the ceding insurer
Elements of a Legal Contract
competent parties, legal purpose, offer and acceptance, and consideration
Elements of an Insurable Risk
large number of homogeneous units with the same perils, the loss must be definite and measurable, the loss must be statistically predictable, and the loss must be accidental in nature and due to uncertainty
Material representations
statements that impact the acceptance of an insurable risk, whether involving the rating of an acceptable risk, or the decision as to whether to accept or decline a risk
Insured
the person or entity that is covered by the insurer
Warranties
these are statements in the application or stipulations in the policy that are guaranteed true in all respects. If these are later discovered untrue or breached (past, present, or future), coverage (and sometimes the contract) is voided
Insurance agencies
these can be either captive or independent organizations; they recruit, contract with, train, and support insurance producers/agents
Insurance executives
these members of insurer management are responsible for overseeing the operation of the business
Financial rating services
these services evaluate and rate the claims-paying ability and financial stability of insurance companies
Executive branch at the state level
this branch is responsible for enforcing the existing statutes that have been put in place
Judicial branch at the state level
this branch is responsible for interpreting and determining the constitutionality of the statutes
Legislative branch at the state level
this branch writes and passes state insurance laws (statutes) the protect the insuring public
Claims department
this department assists the policyholder in the event of a loss
Actuarial department
this department gathers and interprets statistical information used in rate making. This department also determines the probability of loss and sets premium rates
Marketing and sales department
this department is responsible for advertising and selling
Underwriting department
this department is responsible for the selection of risks that determines the actual policy premium
Contract of Adhesion
this is a contract in which one party writes the contract without input from the other party. This is written and prepared on a take-it-or-leave-it-basis without negotiation
Reciprocal insurance company
this type of insurance company is group-owned and their main activity is risk sharing. They are unincorporated and formed by individuals, firms, and business corporations that EXCHANGE business on one another. Members are known as subscribers
Mutual insurance company
this type of insurance company is owned by policyholders. This type of insurer issues participating policies and its policyholders ARE entitled to receive non-taxable dividends, but they are not guarenteed
Stock insurance company
this type of insurance company is owned by stockholders or shareholders. This company issues nonparticipating policies to its policyholders, however STOCKHOLDERS may receive taxable corporate dividends as a share of the company's profit
Nonparticipating policies
this type of policy means that POLICYHOLDERS are not entitled to receive dividends