EXAM FX Pre-licensing CHAP 1, IDAHO

Methods on handling risks

- Avoidance - Retention - Sharing - Reduction - Transfer

Types of risks:

- Pure - insurable because it involves a chance of loss only; - Speculative - not insurable because it involves a chance of gain

All of the following are examples of risk retention except

- premiums

A tornado that destroys property would be an example of which of the following

A peril a loss insured against

Material Misrepresentation

A statement that, if discovered, would alter the underwriting decision of the insurance company.

When risks with higher probability of loss are seeking insurance more often than other risks, this is knows as what?

Adverse selection

According to the Law of Agency, a principal is represented by whom?

Agent or producer

What documentation grants express authority to an agent?

Agents contract with the principal

What are the four elements of an insurance contract?

Agreement (offer and acceptance), consideration, competent parties, and legal purpose

In order for insurance contracts to be legally binding, they must have 4 essential elements:

Agreement — offer and acceptance; Consideration; Competent parties; and Legal purpose.

what type of insurer is formed under the laws of another country?

Alien

What is a warranty in an insurance contract?

An absolutely true statement upon which the validity of the insurance contract is based

in insurance, an offer is usually made when

An applicant submits an application to the insurer

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?

Apparent

which of the following types of agent authority is also called "Percieved Authority"

Apparent, assumption of authority based on actions, words or deeds of the principal.

Question 39 of 44 If an insurer meets the state's financial requirements and is approved to transact business in the state, it is considered what type of insurer?

Authorized or admitted

An individual was involved in a head-on collision while driving home one day. His injuries were not serious, and he recoeverd. However, he decided that in order to never be involved in another accident, he would not trive or ride in a car ever again. Which method of risk managment does this describe?

Avoidance

A insurance contract must contain all of the following to be legally binding EXCEPT

Beneficiaries consent. The four elements needed are : Offer and Acceptance, Consideration, Competent Parties and legal purposes

What document is required for an insurance company to transact insurance?

Certificate of Authority

A producer who fails to seperate premium monies from his own personal funds is guilty of

Commingling

When a change needs to be made on the application for insurance, which is the best method for correcting the information?

Complete a new application or ask the applicant to initial the correction on the original application

What term best describes the act of withholding material information that would be crucial to underwriting decision?

Concealment

Because an insurance policy is a legal contract, it must conform to the state laws governing contracts which require all of the following elements EXCEPT

Conditions

An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated?

Consideration

When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as which of the following?

Consideration

Which of the following is NOT an essential element of an insurance contract?

Counteroffer

Domicile

Domestic - incorporated in this state Foreign - incorporated in another state of territory Alien - incorporated in another country

Insurers are classified according to their domicile. What are the three types of insurers?

Domestic, foreign, and alien

Which of the following are authorities that an agent can hold?

Express and Implied

What are the three types of agent authority?

Express, implied and apparent

The reduction, decrease, or disappearance of value of the person or property insured in a policy is known as what?

Loss

Insurance is a contract that protects the insured from what?

Loss Protects a business, person or entity from loss

An individuals tendancy to be dishonest would be indicative of a

Moral hazard

which of the following is NOT consideration in a policy

The application given to a prospective insured

Peril is most easily defined as

The cause of loss insured against in a insurance policy

Which of the following is NOT a characteristic of insurable risk?

The loss must be due to chance.

In terms of parties to a contract, which of the following does NOT describe a competent party?

The person must have at least completed secondary ed.

Which of the following is an example of a producer's fiduciary duty?

The trust that a clients places in the producer in regard to handling premiums.

When does an insurance policy go into effect?

When the policy is delivered and the premium is paid

Warranty

absolutely true statement upon which the validity of the insurance policy depends.

Insurable risk elements:

Due to chance: chance of loss beyond insured's control Definite and measurable: loss must have definite time, place and amount Predictable: number of losses must be statistically predictable Not catastrophic: there must be limits that the loss can't exceed Large exposure: insurer must be able to predict losses based on the law of large numbers Randomly selected exposure: insurer must have a fair proportion of both good and poor risks

The requirement that agents must account for and promptly remit all insurance funds collected is known as what type of agent responsibility?

Fiduciary

The requirement that agents not commingle insurance monies with their own funds is known as

Fiduciary responsibility

An insurance company is domiciled in California and transacts insurance in Nevada. What is this insurer's classification in Nevada?

Foreign

An insurance company that is formed under the laws of another state is known as what type of insurer?

Foreign

Conditions that increase the chance of a loss are known as what?

Hazards

Events or conditions that increase the chances of an insured loss occurring are referred to as

Hazards, such as lifestyle or existing health, or activities such as scuba diving are hazards.

Which authority is NOT stated in an agent's contract but is required for the agent to conduct business?

IMPLIED

Representations are written or oral statements made by the applicant that are

Immaterial to the actual acceptability of the insurance contract

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost?

Indemnity

What do individuals use to transfer their risk of loss to a larger group?

Insurance

Whom does an insurance agent represent?

Insurance company

Which statement regarding insurable risks is NOT correct

Insureds cannot be randomly selected. Selecting insureds randomly will help the insurer to have a fair proportion of good risks too poor risks.

In the agent/insurer relationship, who is considered the principal?

Insurer

When agents act within the scope of their contract, their actions will be assumed to be the acts of whom?

Insurer

What entities make up the Medical Information Bureau?

Insurers

The insurer may suspectt that a moral hazard exists if the policy holder

Is not honest about his health on an application for insurance. or in the past have submitted fraudulent claims against an insurer.

The reduction, decrease, or disappearance of value of the person or property insured in a policy by a peril insured against is known as

Loss

What are the five characteristics of an ideally insurable risk?

Loss must be 1) due to chance, 2) definite and measurable, 3) statistically predictable, 4) not catastrophic, and 5) Coverage cannot be mandatory.

A person who does not lock the doors or does not repair leaks shows and indifferent attitude, this person represents what type of hazard?

Morale Is indifferent because they know loss will be covered by insurance

An insurance policy paid a nontaxable dividend to the insured one year, and nothing the next. From what type of insurer did the insured purchase the policy?

Mutual

The type of insurance company organized to return any surplus money to its policyholders is known as what?

Mutual company

What are the three types of hazards?

Physical, Moral, Morale

A situation in which a person can only experience a loss and no gain presents what type of risk?

Pure risk

a situation in which a person can only lose or have no change represents

Pure risk

The risk of loss may be classified as

Pure risk and speculative risk. Pure risks involve the probability or possibility of loss with no chance for gain. Pure risks are generally insurable. Speculative risks involve uncertainty as to whether the final outcome will be gain or loss. Speculative risks are generally uninsurable.

In what way can an agent demonstrate a high standard of ethics?

Putting the clients best interest before their own

If a court ordered payment for a loss that was not covered in the policy even if it was clearly worded, it would be an example of which legal concept?

Reasonable expectations

Which of the following insurance option would be considered a risk-sharing arrangement?

Reciprocal. The insureds are sharing the risk of loss with other subscribers of that reciprocal

Installing deadbolt locks on the doors of a home is an example of which method of handling risk?

Reduction

What are the strategies used by underwriters to prevent adverse selection?

Restriction of coverage, refusal to accept a risk, and accepting a risk at a higher rate

What is the best way to handle incomplete insurance applications?

Return the application to the applicant for completion

If an agent fails to obtain the applicant's signature on the insurance application, what must the insurer do?

Send the application back to the applicant for signature

A hazard is defined as:

Something that increases the chance of loss

Wagering on a sporting event is known as what type of risk?

Speculative

Events in which a person has both the chance of winning or losing are classified as

Speculative risk

The insurer organized to return a profit to the stockholders is what type of insurer?

Stock company

Who owns stock companies?

Stockholders

If an applicant does not receive his or her insurance policy, who would be held responsible?

The agent

Whose responsibility is it to determine that all the questions on an insurance application are answered?

The agent's

For the purpose of insurance, risk is defined as

The uncertainty or chance of loss. Risk, or the chance of loss occurring, is the basic reason for buying insurance.

An individual applies for a life policy. Two years ago he suffered a head injury from an accident, so he cannot remember parts of his past, but is otherwise competent. He has also been hospitalized from drug abuse but does not remember this when applying for insurance. The insurer issues the policy and learns his history one year later. What will probably happen?

This policy will not be affected? In insurance, fraud is the intentional misrepresentation of material information that is crucial when deciding whether or not to write a contract for an applicant. If an insurer finds that an application has committed fraud, it can void the contract, provided that the discovery occurs within the first two years of the effective policy date. In this particular instance the application did not commit intentional fraud.

when an individual purchases insurance, what risk management technique is he or she practicing?

Transfer

The insurer must be able to rely on statements in the application, and the insured must be able to rely on the insurer to pay invalid claims. In the forming of an insurance contract, this is referred as

Utmost good faith

Which of the following is a statment that is guaranteed to be true, and if untrue, may breach an insurance contract?

Warranty

When would a misrepresentation on an insurance application be considered fraud?

When it is intentional and material

In insurance, when is the offer usually made on a contract?

When the insurance application is submitted

In forming an insurance contract, when does an acceptance usually occur?

When the insurer approves a prepaid application. OR when an insurers underwritter approves coverage

An insurancer neglects to pay a legitimate claim that is covered under the terms of policy. Which of the following insurance principles has the insurer violated?

consideration

Which of the following are the authorities that an agent can hold

express and implied

A life insurance has a legal purpose if both of which of the following element exist?

insurable interest and consent

Concealment

intentional withholding of information of a material fact that is crucial in making a decision.

An applicant conceals relevant health information on the application. The applicant presents what type of hazard?

moral

Pertaining to insurance, which of the following is an example of a producer's fiduciary responsibility?

promptly forwarding premiums to the insurance company

What type of risk is insurable?

pure

Following a career change, and 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?

reduction

Which of the following is NOT a goal of risk retention?

to minimize the insured's level of liability in the event of loss

Utmost Good faith

will be no fraud, misrepresentation or concealment between the parties. As it pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information.