Insurance License Chapter 1
Handling insurer funds in a trust capacity
In insurance transactions, fiduciary responsibility means
Alien
Incorporated in another country
Randomly selected exposure
Insurer must have a fair proportion of both good and poor risks
Higher number of people in the pool
Losses become more predictable
Not catastrophic
Must be limits loss cannot exceed
Stock Companies
Owned by stockholders Issue nonparticipating policies
Mutual
Owned by stockholders Issue participating policies Pay dividends to policy holders
Risk Retention
Planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance.
Considered true to the best of the applicant's knowledge.
Representations are written or oral statements made by the applicant that are
Domicile
State or nation of origin of a company
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.
Moral Hazard
Tendencies towards increased risk
Is not honest about his health on an application for insurance.
The insurer may suspect that a moral hazard exists if the policyholder
Loss
The reduction, decrease, or disappearance of value of the person or property insured in a policy, by a peril insured against.
Avoidance.
The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called
Pure and Speculative Risk
The risk of loss may be classified as
Risk
The uncertainty or chance of a loss occurring.
Physical, Moral, Morale
Three groups of Hazards
Insurance
Transfer of risk loss
Express, Implied, Apparent
What are three types of producer authority?
Agents contract with the principal
What documentation grants express authority to an agent?
One-sided: only one party makes an enforceable promise.
What is a definition of a unilateral contract?
Principal
What is the term for the entity that an agent represents regarding contractual agreements with 3rd Parties
Pure Risk
What type of risk is insurable?
Concealment.
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
Conditional
When both parties to a contract must perform certain duties and follow rules of conduct to mate the contract enforceable, the contract is?
Foreign
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?
Alien insurer.
When transacting business in this state an insurer formed under the laws of another country is known as a/an
Implied
Which Authority is not expressed in agents contract but is required for agent to conduct business.
Law of large numbers
Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?
Stock
Which of the following insurers are owned by stockholders?
Federal Deposit Insurance Corporation (FDIC)
Which of the following is NOT a government health insurance program?
Counteroffer
Which of the following is NOT an essential element of an insurance contract?
Warranty
Which of the following is a statement that is guaranteed to be, and if untrue, may breach an insurance contract?
The trust that a client places in the producer in regard to handling premiums.
Which of the following is an example of a producer's fiduciary duty?
Admitted
Which of the following is the closest term to an authorized insurer?
Purchase insurance
Which of the following is the most common way to transfer risk?
AM Best
Which of the following produces evaluations of insurers financial status often used by states departments of insurance?
The applicant has a prior felony conviction
Which of the following would qualify as a competent party in an insurance contract?
Insureds cannot be randomly selected
Which statement regarding insurable risks is NOT correct?
Reciprocal insurance
Which type of insurance is based on mutual agreements among subscribers?
Policyholders
Who might receive dividends from a mutual insurer?
policy holder
Who might receive dividends from a mutual insurer?
Insurance policy
a contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events
Agent/Producer
a legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer
Due to Chance
a loss that is outside the insured's control
Definite and Measurable
a loss that is specific as to the cause, time, place and amount
Reciprocity/Reciprocal
a mutual interchange of rights and privileges
Applicant or Proposed Insured
a person applying for insurance
Insurance
based on principle of indemnity
Risk Avoidance
eliminating exposure to a loss
Risk Reduction
finding ways to lower your chance of incurring a loss Ex. Smoke Alarms
Foreign
incorporated in another state or territory
Domestic
incorporated in this state
Broker
insurance producer not appointed by an insurer and is deemed to represent the client
Large exposure
insurer must be able to predict losses based on law of large numbers
Adverse Selection
insuring of risks that are more prone to losses than the average risk
Conditions
lifestyle and existing health or activities such as scuba diving
Risk Transfer
loss is borne to another party Ex. Insurance
Risk Sharing
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
Fraternal Benefit Societies
not for profit organization Benevolent and charitable brotherhood Membership based on religious, national, or ethnic lines Must be a member to receive benefits
Predictable
number of losses must be statistically predictable
Dividends
paid to stock holders in mutual companied not guaranteed Non-taxable refunds of excess premiums
Express
powers specifically stated in the contract
Homogenous
refers to a large number of units having the same or similar exposure to loss
Apparent
the appearance of a relationship between the agent and principal based on words or actions
Insurer (principal)
the company who issues an insurance policy
Premium
the money paid to the insurance company for the insurance policy
Policy Owner
the person entitled to exercise the rights and privileges in the policy
Rating the financial strength of insurance companies
which services are associated with standard and poor's and AM Best?
3 Elements of insurable risk
-Not all risks are insurable -Insurers only insure pure risks -Pure risk must have certain characteristics in order to be insurable
Three purposes of risk retention
1) reduce expenses & improve cash flow 2) increase control of claim reserving & claim settlement 3) To fund for losses that cannot be insured
Pure Risk
A chance of loss or no loss, but no chance of gain.
Pay dividends to the policyowner
A participating insurance policy may do which of the following?
Insured
A person covered by an insurance policy
Morale
A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents what type of hazard?
Commingling.
A producer who fails to separate premium monies from his own personal funds is guilty of
Pure risk.
A situation in which a person can only lose or have no change represents
Peril
A tornado that destroys property would be an example of?
Exposure
A unit of measure used to determine rates charged for insurance coverage.
Reinsurance System.
All of the following are marketing arrangements used by insurers EXCEPT
The policy will not be affected
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 otherwise is competent. He has also been hospitalized for drug abuse, but does not remember this when applying for insurance. The insurer issues the policy and learns of his history one year later. What will probably happen?
Avoidance
An individual was involved in a head-on collision while driving home one day. His injuries were not serious, and he recovered. However, he decided that in order to never be involved in another accident, he would not drive or ride in a car ever again. Which method of risk management does this describe?
Moral hazard.
An individual's tendency to be dishonest would be indicative of a
Waiver
An insurance company receives an application with some information missing and issues the policy anyway. What is this called?
Aleatory
An insured pays a $100 premium every month for his insurance coverage, yet the insurer promises to pay $10,000 for a covered loss. What characteristic of an insurance contract does this describe?
Authorized/Admitted
Approved by department of insurance Has certificate of authority
Morale Hazard
Arise from a state of mind that causes indifference to loss, such as carelessness
Insurance
Based on spreading risk (risk pooling) and law of large numbers
Peril
Cause of loss insured against in an insurance policy
Due to Chance Definite and Measurable Statistically Predictable Not Catastrophic Randomly Selected & Large loss exposure
Characteristics of insurable risk
Physical Hazards
Characteristics that increase chance of loss
Hazards
Conditions or situations that increase the probability of an insured loss occurring.
In favor of the insured.
Courts will interpret any ambiguity in an insurance contract
Speculative Risk
Events in which a person has a chance of winning or losing?
Hazards.
Events or conditions that increase the chances of an insured loss occurring are referred to as
The authority granted to an agent through the agent's contract is referred to as
Express authority.
Larger.
For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become
Agreement, Consideration, Competent Parties, Legal Purpose
Four required elements of insurance contract?
When an insurer's underwriter approves coverage
In forming an insurance contract, when does acceptance usually occur?
