General Insurance

When doing business in this state, an insurance company that is formed under the laws of another state is known as which type of insurer? A. Domestic B. Alien C. Nonadmitted D. Foreign

Foreign

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. Direct response marketing B. Independent agency marketing C. Illegal D. Insurance telemarketing

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.

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? A. Indemnity B. Consideration C. Reasonable expectations

Indemnity The principle of indemnity stipulates that the insured can only collect for the amount of the loss even if the policy is written with greater benefit limits.

An insured stated on her application for life insurance that she had never had a heart attack, when in fact she had a series of minor heart attacks last year for which she sought medical attention. Which of the following will explain the reason a death benefit claim is denied? A. Waiver B. Utmost Good Faith C. Estoppel D. Material misrepresentation

Material misrepresentation A material misrepresentation will affect whether or not a policy is issued. If the insured had been truthful, it is very likely that the policy would not be issued.

On a participating insurance policy issued by a mutual insurance company, dividends paid to policyholders are A. Paid at a fixed rate every year. B. Taxable as ordinary income. C. Guaranteed. D. Not taxable since the IRS treats them as a return of a portion of the premium paid.

Not taxable since the IRS treats them as a return of a portion of the premium paid. With participating policies, policyowners are entitled to dividends, which, in the case of mutual companies, are nontaxable because they are considered a return of excess premiums.

Which of the following insurance options would be considered a risk- sharing arrangement? A. Reciprocal B. Stock C. Mutual D. Surplus lines

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

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. Transfer B. Avoidance C. Retention D. Reduction

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

For the purpose of insurance, risk is defined as A. The uncertainty or chance of loss. B. The certainty of loss. C. The cause of loss. D. An event that increases the amount of loss.

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

Insurance companies may be classified according to the legal form of their ownership. The type of company organized to return any surplus money to their policyholders is A. A mutual insurer. B. A reciprocal company. C. A fraternal insurer. D. A stock company.

A mutual insurer. Mutual companies are owned and controlled by their policyholders. Any surplus money is returned to the policyholders as dividends.

The proposed insured makes the premium payment on a new insurance policy. If the insured should die, the insurer will pay the death benefit to the beneficiary if the policy is approved. This is an example of what kind of contract? A. Conditional B. Adhesion C. Personal D. Unilateral

Conditional A conditional contract requires both the insurer and policyowner to meet certain conditions before the contract can be executed, unlike other types of policies which put the burden of condition on either the insurer or the policyowner.

When transacting business in this state an insurer formed under the laws of another country is known as a/an A. Admitted insurer. B. Alien insurer. C. Domestic insurer. D. Foreign insurer.

Alien insurer Alien insurer is defined as an insurer formed under the laws of another country.

An applicant knowingly fails to communicate information that would help an underwriter make a sound decision regarding coverage. This is an example of A. Fraud. B. Breach of warranty. C. Concealment. D. Waiver.

Concealment. In insurance, concealment is the withholding of information that will result in an imprecise underwriting decision.

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

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.

The causes of loss insured against in an insurance policy are known as A. Losses B. Risks C. Hazards D. Perils Perils are the causes of loss insured against in an insurance policy.

Perils Perils are the causes of loss insured against in an insurance policy.

Pertaining to insurance, what is the definition of a fiduciary responsibility? A. Offering additional coverage to clients B. Promptly forwarding premiums to the insurance company C. Helping insureds to file claims D. Performing reviews of insured's coverage

Promptly forwarding premiums to the insurance company Fiduciary refers to a position of trust. When an agent is handling the premiums that belong to an insurance company, they are acting in a fiduciary capacity.

Which of the following is the closest term to an authorized insurer? A. Legal B. Admitted C. Certified D. Licensed

Admitted Insurers who meet the state's financial requirements and are approved to transact business in the state are considered authorized or admitted into the state as a legal insurer.

What term best describes the act of withholding material information that would be crucial to an underwriting decision? A. Leading B. Breach of warranty C. Concealment D. Withholding

Concealment Concealment occurs when a person withholds a material fact that is crucial to making a decision. In insurance, this involves withholding information that would be important for making underwriting decisions.

An insured intentionally did not disclose a material fact on an application for insurance. This would be considered A. Coercion. B. Avoidance. C. Misrepresentation. D. Concealment.

Concealment. Concealment is the legal term for the intentional withholding of information of a material fact that is crucial in making a decision. In insurance, concealment is the withholding of information that will result in an imprecise underwriting decision.

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.

Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated? A. Law of masses B. Law of averages C. Law of group evaluation D. Law of large numbers

Law of large numbers The law of large numbers, which states that the larger a group is, the more accurately losses reported will equal the underlying probability of loss, is the basis for statistical prediction of loss upon which rates for insurance are calculated.

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

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.

Which of the following is NOT true regarding a Certificate of Authority? A. It is issued to group insurance participants. B. It may be necessary for transacting business in a specific state. C. It is equivalent to an insurance license. D. It is issued by the state department of insurance.

It is issued to group insurance participants. Before insurers may transact business in a specific state, they must apply for a license or Certificate of Authority from the state department of insurance and meet any financial (capital and surplus) requirements set down by the state.

After issuing a policy, an insurance company discovers that the policyholder concealed information on the application. The insurance company wants to cancel the policy and give back the money the policyholder has paid. This is an example of A. Rescission. B. Refund. C. Contestability. D. Renewal.

Rescission Rescission is when a company wants to cancel a policy and returns funds paid.

Which of the following is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract? A. Indemnity B. Representation C. Warranty D. Concealment

Warranty A warranty in insurance is a statement guaranteed to be true. When an applicant is applying for an insurance contract, the statements he or she makes are generally not warranties but representations. Representations are statements that are true to the best of the applicant's knowledge.

The requirement that agents not commingle insurance monies with their own funds is known as A. Accepted accounting principal. B. Fiduciary responsibility C. Premium accountability. D. Express authority.

Fiduciary responsibility Money collected with respect to an insurance transaction must be held in a position of trust by the agent or broker.

Which of the following produces evaluations of insurers' financial status often used by state departments of insurance? A. SEC B. AM Best C. NAIC D. Consumer's guide

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

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.

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

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

What is a material misrepresentation? A. Any misstatement made by an applicant for insurance B. Any misstatement by the producer C. Concealment D. A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance.

A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance. A material misrepresentation is a statement that, if discovered, would alter the underwriting decision of the insurance company.

Events or conditions that increase the chances of an insured loss occurring are referred to as A. Hazards. B. Exposures. C. Risks. D. Perils.

Hazards Hazards are conditions or situations that increase the probability of an insured loss occurring.

A producer who fails to segregate premium monies from his own personal funds is guilty of A. Theft. B. Commingling. C. Larceny. D. Embezzlement.

Commingling. It is illegal for insurance producers to commingle premiums collected from the applicants with their own personal funds.

Adverse selection is a concept best described as A. Risks with higher probability of loss seeking insurance more often than other risk. B. Underwriters slanting the odds in favor of the company. C. Poor choices of applicants to be covered. D. Only offering coverage to good risks.

Adverse selection Adverse selection means that there are more risks with higher probability of loss seeking to purchase and maintain insurance than the risks who present lower probability. Underwriters must guard against this.

Which of the following is an example of a producer's fiduciary duty? A. The trust that a client places in the producer in regard to handling premiums. B. An obligation to state every known fact about the policy the producer is selling. C. A duty to base all transactions upon the principle of Utmost Good Faith. D. The obligation to tell the truth to the best of one's knowledge

The trust that a client places in the producer in regard to handling premiums. An agent acts in a fiduciary capacity, based upon trust and confidence, when handling the financial affairs of their customers, including the handling of premiums.

Who might receive dividends from a mutual insurer? A. Stockholders B. Agents C. Policyholders D. Subscribers

Policyholders A mutual insurer has no stock, and is owned by the policyholders. Since they may receive a dividend (not guaranteed), such policies are known as participating policies. Dividends received by policyholders of a mutual insurer are not taxable.

Which of the following best describes the aleatory nature of an insurance contract? A. Ambiguities are interpreted in favor of the insured B. Policies are submitted to the insurer on a take-it-or-leave-it basis C. Exchange of unequal values D. Only one of the parties being legally bound by the contract

Exchange of unequal values An aleatory contract is a contract in which unequal amounts or values are exchanged. The amount of premium the insured pays is much less than the potential loss assumed by the insurer.

A life insurance policy has a legal purpose if both of which of the following elements exist? A. Underwriting and reciprocity B. Offer and counteroffer C. Policyowners and named beneficiaries D. Insurable interest and consent

Insurable interest and consent To ensure legal purpose of a life insurance policy, it must have both insurable interest and consent.

When both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable, the contract is A. Aleatory. B. Personal. C. Unilateral. D. Conditional.

Conditional. The contract is formed on the basis that certain conditions are met.

Something of value exchanged between the insurer and the insured is considered an A. Legal capacity. B. Consideration. C. Offer. D. Acceptance. Consideration is something of value that each party to an insurance contract gives to the other.

Consideration Consideration is something of value that each party to an insurance contract gives to the other.

Representations are written or oral statements made by the applicant that are A. Found to be false after further investigation. B. Immaterial to the actual acceptability of the insurance contract. C. Considered true to the best of the applicant's knowledge. D. Guaranteed to be true.

Considered true to the best of the applicant's knowledge. Representations are statements made by an applicant that they believe to be true.

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

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.

In insurance policies, contract ambiguities are automatically ruled in the favor of the insured. What privilege does the insurer have in order to balance this? A. The right to raise premiums as a result of court rulings B. The right to determine the wording of a policy C. The right to refute the rulings D. The right to revoke the policy

The right to determine the wording of a policy In contracts in which only the insurer has the right to determine the wording of a policy, the policyholder will receive benefits denied due to a contract ambiguity.

With respect to the business of insurance, a hazard is A. The risk taken when performing something dangerous. B. The tendency of poorer risks to seek insurance more often than better risks. C. The basic reason for an insured to purchase insurance. D. Any condition or exposure that increases the possibility of loss.

Any condition or exposure that increases the possibility of loss. A hazard is any condition or exposure that increases the possibility of loss occurring. Hazards are generally classified as either physical, moral, or morale.

Not all losses are insurable, and there are certain requirements that must be met before a risk is a proper subject for insurance. These requirements include all of the following EXCEPT A. The loss must not be catastrophic. B. There must be a sufficient number of homogeneous exposure units to make losses reasonably predictable. C. The loss produced by the risk must be definite. D. The loss may be intentional.

The loss may be intentional. To insure intentional losses would be against public policy.

In order for an insurer to legally transact insurance, it must obtain which of the following? A. Authorization of Power B. Certificate of Authority C. Power of Authority D. Director's Decree A Certificate of Authority is required in order to transact insurance.

Certificate of Authority A Certificate of Authority is required in order to transact insurance.

In what way can an agent demonstrate a high standard of ethics? A. Setting and meeting monthly production goals B. Recommending qualified retirement plans to each client C. Putting the client's best interests before their own D. Making enough commissions to cover personal expenses

Putting the client's best interests before their own The needs of the client(s) are the priority to a highly ethical agent.

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 an insurance contract, this is referred to as A. Reasonable expectations. B. A warranty. C. Implied warranty. D. Utmost good faith.

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.

An agent accepts the premium payment 35 days after it is due, telling the insured that there will not be a problem keeping the policy in force. This is an example of what type of agent authority? A. Assumed B. Apparent C. Express D. Implied

Apparent An agent who accepts a premium after the end of the grace period appears to the client to have the authority to prevent the policy from lapsing. In fact, the agent has no such power.

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

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

Which of the following is an example of apparent authority of an agent appointed by an insurer? A. The agent has business cards and stationery printed. B. The agent puts up a sign with the insurer's logo without express permission. C. The agent accepts a premium payment after the end of the grace period. D. The agent accepts a premium payment during the grace period.

The agent accepts a premium payment after the end of the grace period. An agent who accepts a premium after the end of the grace period appears to the client to have the authority to prevent the policy from lapsing. In fact, the agent has no such power. The power to use business cards, stationery and signage may be either express (written) or implied (not written), but in either case it is allowed.

An insurer has made all of the decisions regarding the provisions included in the insured's policy. The insured finds an objectionable provision and wants to negotiate it with the insurer but is not allowed to do so. Her only options are to reject the policy or accept it as is. Which contract feature does this describe? A. Conditional B. Personal C. Adhesion D. Unilateral

Adhesion A contract of adhesion is prepared by only the insurer; the insured's only option is to accept or reject the policy as it is written.

In insurance policies, the insured is not legally bound to any particular action in the insurance contract, but the insurer is legally obligated to pay losses covered by the policy. What contract element does this describe? A. Conditional B. Unilateral C. Unidirectional D. Aleatory

Aleatory In a unilateral contract, the insured is not legally bound to do anything. The insurer, however, must pay losses covered by the policy.

Which of the following best describes rescission? A. An insurer cancels a policy after it has been issued and refunds all paid premium B. An insurer cancels a policy after an insured files a suspicious claim. C. An insured agrees to cancel a policy for the return of the most recent premium paid. D. An insured allows a policy to lapse.

An insurer cancels a policy after it has been issued and refunds all paid premium When an insurer rescinds a policy after it has been issued and refunds all premiums paid, this is rescission.

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

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.

Units with the same or similar exposure to loss are referred to as A. Law of large numbers. B. Homogeneous. C. Catastrophic loss exposure. D. Insurable risks.

Homogeneous. The basis of insurance is sharing risk between a large homogeneous group with similar exposure to loss.

Which of the following is the basis for a claim against an insurance policy? A. Material change B. Hazard C. Misrepresentation D. Loss

Loss Claims result from losses by a peril insured against in an insurance policy.

In insurance, an offer is usually made when A. The completed application is submitted. B. The insurer approves the application and receives the initial premium. C. The agent hands the policy to the policyholder. D. An agent explains a policy to a potential applicant.

The completed application is submitted. In insurance, the offer is usually made by the applicant in the form of the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy.

Which of the following must an insurer obtain in order to transact insurance within a given state? A. Producer's certificate B. Business entity license C. Insurer's license D. Certificate of authority

Certificate of authority All insurers (domestic, foreign, or alien) must obtain a certificate of authority before transacting insurance within a given state.

When applying for an individual life insurance policy, an applicant states that he went to the doctor for nausea, but fails to mention that he was also having severe chest pains. This is an example of A. Concealment. B. Misrepresentation. C. Fraud. D. Warranty.

Concealment. Concealment occurs when a person withholds a material fact that is crucial to making a decision. In insurance, this involves withholding information that would be crucial to underwriting decisions.

When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as which of the following? A. Consideration B. Legal purpose C. Contract of adhesion D. Acceptance

Consideration Consideration is something of value that each party gives to the other. The consideration on the part of the insured is the payment of premium and the representations made in the application.

The authority granted to an agent through the agent's contract is referred to as A. Express authority. B. Apparent authority. C. Implied authority. D. Absolute authority.

Express authority Express powers are written into the contract between the insurer and the agent.

What is a definition of a unilateral contract? A. Two or more parties go into a contract understanding there may be an unequal exchange of value B. One author: the company wrote the contract; the insured must accept it as written. C. If one party makes a condition, the other party can counteroffer. D. One-sided: only one party makes an enforceable promise

One-sided: only one party makes an enforceable promise An insurance contract is unilateral in that only one of the parties to the contract is legally bound to do anything.

What is the major difference between a stock company and a mutual company? A. Ownership B. Amount of death benefit C. Number of producers D. Types of whole life policies

Ownership Mutual companies are owned by policyholders, while stock companies are owned by stockholders.

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

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

Which of the following statements is an accurate comparison between private and government insurers? A. Private insurers may be authorized to transact insurance by state insurance departments. B. Insurance provided by the government is called federal insurance. C. Private insurers offer fewer lines of insurance than government insurers. D. Private insurers provide insurance in areas where the government will not.

Private insurers may be authorized to transact insurance by state insurance departments. Private insurers offer many lines of insurance. Government insurance programs, also known as social insurance, cover areas that private companies cannot or will not, providing programs like Medicare, Social Security, and National Flood Insurance. Government programs are funded with tax dollars and serve national causes, in contrast with private insurers.

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

To minimize the insured's level of liability in the event of loss Retention usually results from three basic desires of the insured: to reduce expenses and improve cash flow, to increase control of claim reserving and claims settlements, and to fund losses that cannot be insured.

An agent sells insurance over the phone. One of his applicants is heavily drunk when she applies for and then almost instantly receives her policy. Which of the following is true? A. The policy is legal; only mental retardation and psychiatric illness qualify as limiting factors. B. The policy is not legal if it can be proven that the applicant was drunk during the application process. C. The contract is legal, since the agent, acting on behalf of the insurer, granted her the policy. D. The policy is legal; it would only be illegal if the agent had been drunk.

The policy is not legal if it can be proven that the applicant was drunk during the application process. When an insurer and insured enter into a contract, both parties must be of legal age and mentally competent. Being heavily drunk impairs mental competency; therefore if it can be proven that the applicant was drunk during the application and acceptance process, her policy would not be legal.

An agent sells insurance over the phone. One of his applicants is heavily drunk when she applies for and then almost instantly receives her policy. Which of the following is true? A. The policy is not legal if it can be proven that the applicant was drunk during the application process. B. The contract is legal, since the agent, acting on behalf of the insurer, granted her the policy. C. The policy is legal; it would only be illegal if the agent had been drunk. D. The policy is legal; only mental retardation and psychiatric illness qualify as limiting factors.

The policy is not legal if it can be proven that the applicant was drunk during the application process. When an insurer and insured enter into a contract, both parties must be of legal age and mentally competent. Being heavily drunk impairs mental competency; therefore, if it can be proven that the applicant was drunk during the application and acceptance process, her policy would not be legal.

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

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

If only one party to an insurance contract has made a legally enforceable promise, what kind of contract is it? A. Unilateral B. Adhesion C. Conditional D. A legal (but unethical) contract

Unilateral In a unilateral contract, only one of the parties to the contract is legally bound to do anything.