General Insurance Principles

All of the following are insurable risks EXCEPT a the risk of premature death. b the risk of one's home value decreasing due to a drop in market prices. c the risk of incurring dementia requiring long-term medical care. d the risk of becoming ill and requiring hospitalization.

B- Only pure risks (representing the chance of loss but not gain) are insurable. Speculative risks are not. Premature death, illness and disability are recognized as insurable risks.

Which of the following risk management techniques best describes the role of insurance? a risk retention b risk reduction c risk transfer d risk avoidance

C- transferring the loss to a third party—is the basis for most forms of insurance today. Through risk transfer an individual or business transfers the risk of loss to an insurance company in exchange for the payment of a premium.

Which of the following best illustrates risk transfer? a Sheila refuses to drink alcoholic beverages if she expects to drive a car afterwards. b Carol eats a healthy diet and exercises regularly, hoping that doing so will help to keep her healthy. c John refuses to buy life insurance because he figures he has enough money in his savings to pay for his burial when he dies. d Robert purchases life insurance because he figures doing so is far less expensive than trying to save all the money his survivors would need upon his death.

D -Purchasing insurance is a risk transfer technique, because it transfers to a third party (the insurer) the financial risk associated with premature death.

Agents must act in the best interests of applicants and insureds. What does this require them to do? a. avoid replacing insurance policies that applicants already own b. help applicants get rebates for buying policies c. tell applicants about the features and benefits of other insurers' policies so that they can make an informed decision about which policy to buy d. give all important information about a proposed policy

d. Agents must act in the applicant's or insured's best interests at all times. This means that agents must give all important information about a proposed policy. Also, they cannot misrepresent the terms or conditions of a proposed policy.

The Excalibur Insurance Company, headquartered in Iowa, conducts business legally in Nebraska. In Nebraska, Excalibur is a(n) a. nonadmitted insurance company b. domestic insurance company c. alien insurance company d. foreign insurance company

d. A company that does business in states other than the one in which it is domiciled is classified as a foreign company in those states.

All the following are characteristics of a mutual insurance company EXCEPT a. they are owned by stockholders. b. they have minimum capital requirements that must be met before they can conduct business. c. they are governed by a board of directors. d. they may issue dividends.

a. Mutual insurance companies are owned by their policyowners.

Medical expense insurance policies are typically what type of contracts? a. valued contracts b. contracts of indemnity c. presumptive contracts d. value-added contracts

b. A medical expense insurance contract is a contract of indemnity. This means that the benefit cannot exceed the contract owner's actual loss (or the policy's maximum benefit amount, if less). A valued contract, such as a life insurance policy, pays a stated amount regardless of the amount of the loss.

What are statements that are guaranteed to be true called? a. declarations b. warranties c. representations d. petitions

b. Statements that are guaranteed to be true are warranties. However, statements made by insurance applicants on the application are deemed to be representations, not warranties.

Which of the following does NOT provide independent ratings of insurance companies' financial strength and claims-paying abilities? Duff and Phelps Moody's A.M. Best Securities and Exchange Commission

d. A.M. Best, Moody's, Duff and Phelps and Standard & Poor's are all well-known insurance company rating organizations. The SEC (Securities and Exchange Commission) is not an independent insurance company rating organization.

Most insurance policies are personal contracts between the insurer and the policyowner, which cannot be transferred to a new owner. Which of the following is NOT a personal contract? a. medical expense insurance policy b. disability income insurance policy c. life insurance policy d. automobile policy

c- Most insurance policies are personal contracts between the insurer and the policyowner. This means that the policyowner cannot transfer the agreement without the insurer's consent. Life insurance is an exception. The owner of a life insurance policy can do what he or she wants with the policy, such as using it as collateral for a loan or transferring it to a third party.

The contract between the producer and insurer, setting forth certain acts and duties the producer is specifically authorized to perform, is an example of a. Implied authority b. Apparent authority c. Express authority d. Agency authority

c. Express authority is described, in writing, in contracts and related agreements.

Lisa is a producer for an insurance company that sells its products to the general public and which specializes in life insurance policies designed for burial and last expense purposes, generally with face amounts of $10,000 or less, for which she oftentimes collects premiums weekly. Lisa most likely represents a(n) a. home service insurance company b. ordinary life insurance company. c. social insurance provider. d. fraternal insurance company

a. Traditionally called industrial life insurance companies, home service companies specialize in affordable policies with relatively modest face amounts, for which premiums are often collected weekly.

The mathematical concept of probability that helps insurers estimate the statistical likelihood of mortality or morbidity losses at any given age is called the a actuarial principle b law of probability c law of large numbers d underwriting principle

c- Based on the idea that predictions become more accurate as the number of exposures increase, the law of large numbers is the mathematical principle of probability that insurance is based on.

Which statement regarding apparent authority is NOT correct? a. A third party reasonably believes that the agent has it based on the reasonable statements and actions by the insurer and agent. b. The insurer does not intend it. c. The insurer is not liable for an agent's acts when he or she is acting under apparent authority. d. The agent's contract does not create it.

c. Apparent authority is authority that the contract does not create and the insurer does not intend. It appears to belong to the agent based on the agent's reasonable statements and the actions (or inactions) of the insurer. Because apparent authority seems to the customer to belong to the agent, the insurance company may be liable for the agent's acts, even though the insurer did not allow those acts either expressly or by implication.

A producer has a fiduciary responsibility to a. The customer only. b. The insurer only. c. Both the insurer and the customer. d. Neither the insurer nor the customer.

c. Producers have a fiduciary duty to their customers as well as their insurance company, and must act in good faith and with integrity in their dealings with both.

Which of the following statements about utmost good faith in insurance contracts is correct? a. Only the insured and the beneficiary must act in utmost good faith. b. Only the insured must act in utmost good faith. c. Only the insurer must act in utmost good faith. d. Both the insured and insurer must act in utmost good faith.

d. An insurance contract requires that both the insured and the insurer act in utmost good faith. Under this concept, both parties can expect complete, relevant, and accurate information. If one party fails to disclose critical information, the other party usually can void the contract.