GENERAL INSURANCE STUDY GUIDE
General Insurance Practice Questions: An insurer formed under the laws of another country is known as a/an
Alien insurer
General Insurance Practice Questions: What is the definition of a Unilateral Contract?
One-sided, only one party makes an enforceable promise
General Insurance Snapshot 3: What are the three types of hazards?
Physical, Moral (ex: thief), and Morale (Mental case, letting things slide and not caring because insurance will take care of it)
General Insurance Practice Questions: When Ted purchased an insurance policy with a large deductible, what risk management technique was he practicing?
Retention
General Insurance Definitions: Beneficiary
The person who receives the benefits form the policy of insurance
General Insurance Definitions: Loss
The reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril
General Insurance Snapshot 1: What is insurance?
The transfer of risk; you pay a premium and the company agrees to accept the risk the transfer of risk from you to the company
General Insurance Practice Questions: The risk management technique that is used to prevent a specific loss by not exposing yourself to that activity is called
avoidance
General Insurance Practice Questions: When a person buys insurance, what method of handling risk has been undertaken?
transfer
General Insurance Practice Questions: Which of the following is NOT an example of the company's location of incorporation?
Authorized
General Insurance Definitions: Stuff Affecting Contracts
-Any ambiguities should be interpreted in favor of the insured -If an agent implies that something will be covered/certain provisions exist in a policy, an insured could reasonably expect coverage -Utmost good faith = there will be no fraud, misrepresentation, or concealment between the parties, and both parties must be able to rely on each other for relevant information
General Insurance Definitions: Reinsurance
A contract under which one insurance company (the reinsurer) indemnifies (reimburses) another insurance company for part or all of its liabilities. The purpose of reinsurance is to protect insurers against catastrophic losses;Insurance companies that insure other insurance companies Ceding Insurer = Company looking for coverage Assuming Insurer = Insurer who insures
General Insurance Practice Questions: A stock insurer is defined as
An insurer with its capital divided into shares and owned by stockholders
General Insurance Practice Questions: With respect to the business of insurance, a hazard is
Any condition or exposure that increases the possibility of loss
General Insurance Snapshot 5: What are the elements of insurable risk?
Can't be catastrophic, must be prepdictable
General Insurance Practice Questions: Because an insurance policy is a contract between the insurer and the insured, it must conform to all of the state laws governing contracts which require all of the following elements EXCEPT
Conditions
General Insurance Definitions: Fraud
Fraud is the intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party
General Insurance Practice Questions: 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
General Insurance Definitions: Representations/Misrepresentations
Representations - Statements believed to be true to the best of one's knowledge, but not guaranteed to be true Misprepresentations - Untrue statements. A MATERIAL misrepresentation is a statement that, if discovered, would alter the underwriting decision of the insurance company. Furthermore, if material representations are INTENTIONAL, they are considered FRAUD.
General Insurance Definitions: Risk & its two types
Risk = uncertainty or chance of a loss occuring 1) Speculative Risk: Situations with the opportunity for loss or gain (ex: gambling). These types of risk are not insurable 1) Pure Risk: Refers to situations that can only result in a loss or no change, no opportunity for financial gain; only risk that insurance companies are willing to accept.
General Insurance Practice Questions: While driving on a busy highway, a person was involved in a collision. he recovered from his injuries, but he decided that in order to never be involved in another accident, he will never drive or ride in a car again. Which method of risk management does this describe?
avoidance
General Insurance Practice Questions: A state issued document empowering an insurance company to become an admitted insurer is called
certificate of authority
General Insurance Practice Questions: Which of the following is NOT a government insurance program?
Federal Deposit Insurance Corporation
General Insurance Practice Questions: Which services are associated with Standard & Poor's and AM Best?
rating the financial strength of insurance companies
General Insurance Definitions: Unilateral Contract
-In a unilateral contract, only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises, however the insurer is legally bound to pay losses covered by a policy in force
General Insurance Practice Questions: Which type of authority is based on the actions, words, or deeds of the principal?
apparent
General Insurance Practice Questions: The causes of loss insured against in an insurance policy are known as
perils
General Insurance Definitions: Avoidance
- eliminating exposure to a loss (ex: never wanting to get in a car crash so never driving again)
General Insurance Definitions: Domestic, foreign, and alien insurance companies
Domestic = Company that is incorporated in the state/domicile Foreign= Company that is incorporated in another state or territorial possession (such as Puerto Rico, Guam, or American Samoa) Alien = Company incorporated outside the United States
General Insurance Snapshot 8: What is the difference between domestic, foreign, and alien insurance companies?
Domestic = Company that is incorporated in the state/domicile Foreign= Company that is incorporated in another state or territorial possession (such as Puerto Rico, Guam, or American Samoa) Alien = Company incorporated outside the United States
General Insurance Definitions: Warranties
Warranty = absolutely true statement upon which the validity of the insurance policy depends, breah of warranties can be considered grounds for voiding the policy or a return of premium
General Insurance Practice Questions: Insurers are classified according to the legal form of their ownership. The type of insurer organized to return a profit to the policy owners is
mutual
General Insurance Snapshot 7: What is the difference between an admitted and nonadmitted insurer?
- An admitted/authorized insurer is an insurance ompany that has qualified and has recieved a Certificate of Authority from the Department of Insurance to transact insurance in the state -A Nonadmitted/nonauthorized insurer is an insurance company that has not applied, or has applied and been denied, a Certificate of Authority and may not transact insurance -Some nonadmitteds are also not based in state -Ex: construction, medical malpractice -need to show 3 policies that are NY based that turned you down
General Insurance Definitions: Agent/Producer
A person who acts for another person or entity known as the principal with regard to contractual arrangements with third parties; a legal representative of an insurance company - an agent's liability to their customers is administrative. That is, agents are only responsible for the timely and accurate processing of forms, premiums, and paperwork. Agents have no duty to conduct a thorough examination of your business or to make sure you have appropriate coverage. Rather, it is your obligation to make sure you have purchased needed coverage. -represent the INSURANCE COMPANY -BROKERS REP THE CUSTOMER
General Insurance Definitions: Exposure
A unit of measurement used to determine rates charged for insurance coverage. A large number of units having the same or similar exposure to loss are referred to as HOMOGENEOUS.
General Insurance Definitions: Fiduciary Responsibility
- Because an agent handles the funds of the insured and the insurer, he/she has fiduciary responsibility. This means it is illegal for insurance producers to commingle premiums collected from the applicants with their own personal funds
General Insurance Definitions: Conditional Contract
A conditional contract requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations (Ex: the insured must pay the premium and provide proof of loss in order for the insurer to cover a claim)
General Insurance Definitions: Admitted vs. Nonadmitted Insurers
- An admitted/authorized insurer is an insurance ompany that has qualified and has recieved a Certificate of Authority from the Department of Insurance to transact insurance in the state -A Nonadmitted/nonauthorized insurer is an insurance company that has not applied, or has applied and been denied, a Certificate of Authority and may not transact insurance -Some nonadmitteds are also not based in state - EX: construction, medical malpractice -need to show 3 policies that are NY based that turned you down
General Insurance Definitions: Personal Contract
- An insurance contract is a personal contract because it is between the insurance company and an individual - right to decide with whome it will and will not do business, so the insurance company can't change who's on the policy, nobody can transfer contracts, etc -basically everything is on an individual basis
General Insurance Definitions: Agents and General Rules of Agency
- Insurer is the Principal = anything you do as an agent is acting AS the company you represent -An agent (producer) will always represent the insurer, not the insured.
General Insurance Definitions: Reduction
-Lessening the possibility or severity of a loss through actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or making lifestyle changes
General Insurance Snapshot 2: What is risk?
The uncertainty that a loss could happen
General Insurance Practice Questions: An applicant who knowingly fails to communicate a fact that would help an underwriter make a sound decision regarding coverage is guilty of
misrepresentation
General Insurance Practice Questions: The risk of loss may be classified as
Pure risk and speculative risk
General Insurance Definitions: Contract of Adhesion
-Prepared by one fo the parties (insurer) and accepted or rejected by the other party (insured) -Not drawn up through negotiations, basically contracts offered on a "take-it-or-leave-it" basis by an insurer -If the insured sued and had no knowledge then they would win -- basically the point of this contract is that if you take their offer they are obliged to follow through
General Insurance Definitions: Financial Status Rating Services
-Rate the financial strength and stability of an insurance company -Rating based off of financial standing and customer service -*AM Best *Standard and Poor's -Fitch -Moody's -Weiss
General Insurance Definitions: Adverse Selection
-The insuring of risks that are more prone to losses than the average risks. Poorer risks tend to seek insurance or file claims to a greater extent than better risks -Usually people who have already had claims seek policies
General Insurance Definitions: Risk Retention
-The planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance -planned use of high deductible in order to minimize loss
General Insurance Definitions: Three Types of Agent Authority
Express=Authority a principal intends to grant an agent by means of the agent's contract;authority written into the contract; their written contract that tells them exactly what to do and what they can and cannot do Implied= Authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principle; the things the agent does that aren't explicitly written down in order to support the written contract. Ex: If the agency contract doesn't specifically authorize he agent to collect premiums and remit them to the insurer, but the agent routinely does so in the process of solicitation and delivery of policies, the agent has the implied authority to collect and remit premiums. Apparent=the appearance or assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. Example: When an insurer furnishes an agent with a rate book, application forms, and sales literature, the insurer cannot later deny that such a relationship existed
General Insurance Definitions: Law of Large Numbers
The basis of insurance is sharing risk among a large pool of people with a similar exposure to loss (a homogeneous group). The Law of Large Numbers states that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be This law forms the basis for statistical prediction of loss upon which insurance rates are calculated.
General Insurance Practice Questions: The definition of a fiduciary is
An agent/broker who handles insurer funds in a trust capacity
General Insurance Practice Questions: An agent accepts the premium payment 35 days after it's 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?
Apparent
General Insurance Definitions: Different Types of Insurers (4 Types)
1) Stock Companies - Owned by the stockholders, officers are elected, policyowners do not share in profits or losses 2) Mutual Companies - Owned by the policyowners and issue participating policies, nontaxable, *DIVIDENDS ARE NOT GUARANTEED 3) Fraternal Benefit Societies - Only sell insurance to their members, don't need a license (ex: knights of columbus) 4) Lloyd's Associations - Groups of individuals who operate an insurance mechanism in which individual underwriters assume a part of each risk, usually insure weird stuff that other people won't
General Insurance Definitions: Hazard (3 Types)
-Conditions or situations that increase the probability of an insured loss occuring -HAZARDS LEAD TO PERILS 1) Physical Hazards - Hazards that arise from the material, structural, or operational features of the risk, apart from the person's owning or managing it (hole in step, oily rags) 2) Moral Hazards - Those applicants that lie on an application for insurance, or in the past have submitted fraudulent claims against an insurer (burglar, arsonist, criminals) 3) Morale Hazards - Refers to an increase in the hazard presented by a risk arising from the insured's indifference to taking care of something because they already have insurance for it ("Poor state of mind")
General Insurance Definitions: Surplus Lines
-Insurance for which there is no readily available admitted market -Such coverages are marketed through nonadmitted insurers who specialize in offering insurance to the high risk market on an unregulated basis under each state's surplus lines laws
General Insurance Definitions: Peril
-Perils are the Causes of loss that we insure against with an insurance policy (ex:fire, smoke damage)
General Insurance Definitions: Aleatory Contract
-There is an exchange of unequal amounts or values. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss -Ex; A $200 contribution on the part of the insured in exchange for $100,000 benefit from the insurer illustrates an aleatory contract
General Insurance Definitions: Estoppel
A legal process that can be used to prevent a party from reasserting a right or privilege after that right or privilege has been waiver. Estoppel is the legal consequence of a waiver.
General Insurance Definitions: Elements of Insurable Risks
Insurable Risks involve the following losses: 1) Due to Chance (outside the insured's control, ex:fire) 2) Definite and measurable (A loss that is specific as to the cause, time, place, and amount, ex: not a tsunami) 3) *Statistically Predictable (insurers must be able to estimate the average frequency and severity of future losses to set premium rates) 4)*Not Catastrophic 5) Randomly selected and large loss exposure (must be a large enough pool of risks from people of all different ages, genders, occupations, statuses, etc)
General Insurance Definitions: Elements of a Legal Contract
THIS IS CLOC PEOPLE 1) Competent Parties: Legal age (over 14.5 years old), mentally competent enough to understand the contract, and not under the influence of drugs or alcohol 2) Legal purpose = purpose of the contract must be legal and not against public policy 3) Offer and Acceptance - Agreement 4) Consideration - The binding force in any contract, something of value that one party gives to another, the consideration on the part of the insured is the payment of premium and the representations made in the application, the consideration on the part of the insurer is the promise to pay the loss
General Insurance Definitions: Waiver
The voluntary act of relinquishing a legal right, claim, or privilege
General Insurance Practice Questions: Mutual insurance companies possess all of the following attributes EXCEPT
They maintain high levels of capital stock
General Insurance Definitions: Recission
-When an insurance applicant intentionally fails to communicate information that the insurer needs, the insurer has the right to cancel the policy even if the failure to communicate is discovered after the policy has been issured. This act is called recission, and the insurer is said to have rescinded the policy -Upon recission, the client loses any right to file a claim on the policy, and the insurer refunds all money paid
General Insurance Definitions: Sharing
-a method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group -ex: when too expensive to get insurance solo (ex: firework people), everybody pools money in a pot and if they're a claim they draw from there
General Insurance Practice Questions: Which of the following is the basis for a claim against an insurance policy?
A loss
General Insurance Snapshot 12: What does indemnify mean?
Also sometimes referred to as reimbursement - provision that states int he event of loss, an insured or beneficiary is permitted to collect only to the extent of the financial loss and is not allowed to gain financially - restores loss but doesn't benefit the insured ex: if a person has a homeowners policy for $200,000 and their home is destroyed and costs $150,000 to replace, they will receive $150,000 (cost of repair) and not $200,000 (cost of insurance)
General Insurance Snapshot 9: What are the three types of agent authority?
Express=Authority a principal intends to grant an agent by means of the agent's contract;authority written into the contract; their written contract that tells them exactly what to do and what they can and cannot do Implied= Authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principle; the things the agent does that aren't explicitly written down in order to support the written contract. Ex: If the agency contract doesn't specifically authorize he agent to collect premiums and remit them to the insurer, but the agent routinely does so in the process of solicitation and delivery of policies, the agent has the implied authority to collect and remit premiums. Apparent=the appearance or assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. Example: When an insurer furnishes an agent with a rate book, application forms, and sales literature, the insurer cannot later deny that such a relationship existed
General Insurance Practice Questions: Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?
Law of large numbers
General Insurance Practice Questions: Which of the following statements is an accurate comparison between private and government insurers?
Private insurers may be authorized to transact insurance by state insurance departments
General Insurance Practice Questions: The type of risk which insurance companies will insure is called
Pure Risk
General Insurance Snapshot 10: What is a fiduciary?
Someone in a position of trust
General Insurance Snapshot 11: What are the four elements of an insurance contract?
THIS IS CLOC PEOPLE 1) Competent Parties: Legal age (over 14.5 years old), mentally competent enough to understand the contract, and not under the influence of drugs or alcohol 2) Legal purpose = purpose of the contract must be legal and not against public policy 3) Offer and Acceptance - Agreement 4) Consideration - The binding force in any contract, something of value that one party gives to another, the consideration on the part of the insured is the payment of premium and the representations made in the application, the consideration on the part of the insurer is the promise to pay the loss
General Insurance Practice Questions: Peril is most easily defined as
The cause of loss insured against
General Insurance Snapshot 4: What is a peril?
The causes of loss insured against in an insurance policy; hazards cause perils
General Insurance Definitions: Government vs Private Insurers
The government provides insurance in those areas where private insurers either cannot, or will not, write insurance. Those insurance programs provided by the government are commonly called social insurance, such as Medicare, Social Security, Federal Crop Insurance, and National Flood Insurance
General Insurance Snapshot 6: What is the difference between private and government insurers?
The government provides insurance in those areas where private insurers either cannot, or will not, write insurance. Those insurance programs provided by the government are commonly called social insurance, such as Medicare, Social Security, Federal Crop Insurance, and National Flood Insurance
General Insurance Definitions: Concealment
The hiding of a material fact which can result in a policy being voided
General Insurance Definitions: Insurance (what does it do?)
Transfers the risk of loss from an individual or business entity to an insurance company
General Insurance Snapshot 13: What does representation mean and how does it differ from a warranty?
Warranty = absolutely true statement upon which the validity of the insurance policy depends, breah of warranties can be considered grounds for voiding the policy or a return of premium Representations - statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. For insurance purposes, representations are the answers the insured gives to the questions on the insurance application.
General Insurance Practice Questions: An insured purchased an insurance policy 5 years ago. Last year she received a dividend check from the insurance company which was not taxable. This year she did not receive a check from the insurer. From what type of insurer did the insured purchase the policy?
mutual
General Insurance Practice Questions: In insurance policies, the insured is not legally bound to any particular action in the insurance contract, but the insured is legally obligated to pay losses covered by the policy. What contract element does this describe?
unilateral