Liberty Mutual Insurance Chapter 1 General Insurance

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

(Hazards) Conditions such as lifestyle and existing health, or activities such as scuba diving are hazards and may increase the chance of a loss occurring

Something of value exchanged between the insurer and the insured is considered an

Consideration

An insurance company sells an insurance policy over the phone in response to a TV ad. Which of the following best describes this act?

Direct response Marketing

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

Fiduciary responsibilities

• What is the major difference between a stock company and a mutual company

Ownership, Mutual companies are owned by policy holders while stock companies are owned by stockholders

Which of the following is a characteristic of a reciprocal insurance exchange?

The chief administrator of the insurer is called an "attorney-in-fact"

For the purpose of insurance, risk is defined as.

The uncertainty or chance of loss

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

(A Peril,) A peril is the cause of loss insured against in an insurance policy

• What is reinsurance?

(An agreement between a ceding insurer an assuming insurer)- The originating company that procures insurance on itself in another insurer is called the ceding insurer. The other insurer is called assuming insurer.

• An insurance contract must contain all of the following to be considered legally binding EXCEPT

(Beneficiary's consent,) The four essential elements of all legal contracts are offer and acceptance, consideration competent parties, and legal purpose.

• The authority granted to an agent through the agent's contract is referred to as?

(Express authority,) Express powers are written into the contract between the insurer and the agent

•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?

(Larger) According to the law of numbers, the larger the group becomes, the easier it is to predict losses. Insurers use this lay in order to predict certain types of losses and set appropriate premiums

• 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 foreign insurer is one that is formed under the laws of another state a nonadmitted or unauthorized insurer is an insurance company that has not applied for , or has applied and been denied a certificate of authority and may not transact insurance

• A state issued document empowering an insurance company to become an admitted insurer is called?

o (Certificate of authority) Before transacting insurance business within a state, each insurer must qualify for and receive a certificate of authority. Only then can it be considered an admitted insurer.

• 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

o (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 both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable, the contract is

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

• An insurance organization that does not issue insurance policies but provides a meeting place for underwriters to conduct business is known as a s

o (Lloyd's association) It itself does not issue insurance policies or provide insurance protection. Lloyd's associations provide a meeting facility for the individual underwriters to conduct the business of insurance.

• On a participating insurance policy issued by a mutual insurance company, dividends paid to policy holders are

o (Not taxable since the IRS treats them as a return of a portion of the premium paid,) Policy owners are entitled to dividends, which in the case of mutual companies, are nontaxable because they are considered a return of excess premiums

• Adverse selection is a concept best described as?

o (Risks with higher probability of loss seeking insurance more often than other risks.) 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 best describes the concept that the insured pays a small amount of premium for a large amount of risk on the part of the insurance company?

o Aleatory

• Hazard is best defined as

o Something that increases the risk of a loss

• Which of the following is a characteristic of a reciprocal insurance exchange?

o (The chief administrator of the insurer is called "attorney-In-fact") A reciprocal is an unincorporated aggregation of individuals, called subscribers, who exchange insurance risks. If the premiums charged for coverage are not sufficient to pay the losses of the group, subscribers may be assessed an additional premium. A reciprocal is administered by an attorney-in-fact who is empowered to bind each subscriber to assume a share of the losses of the group.

• An agent tries to sell insurance over the phone to an applicant who appears to be confused, but is eventually able to give enough information for the application to be completed. After the policy was issued, the agent talked to the insured's family, and they explained that the insured was recovering from a surgery and might have been under the influence of medication at the time of application. Which of the following is true?

o (The policy may be voided if it can be proven that the applicant was not capable of making a buying decision at the time of application.) When an insurer and insured enter into a contract, both parties must be legal age and mentally competent.

• 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 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?

o (The policy will not be affected), 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 applicant 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 applicant did not commit intentional fraud.