Chapter 1

Question 1

What is the definition of Insurer?

Answer 1

(Insurance Company or Carriers)-manufacture and sell insurance with insurance policies and contracts

Question 2

What are Insurance Agencies?

Answer 2

Independent organizations that recruit, contract with, and support sales agents and producers

Question 3

What are insurance agents or producers?

Answer 3

Licensed individuals that represent insurance company when transacting insurance

Question 4

What is an insured?

Answer 4

Person or entity that purchases insurance for protection from loss of life, health, property or liability

Question 5

NAIC

Answer 5

National Association of Insurance Companies–consists of all state and territorial insurance commissioners or regulators.

• provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators
• promotes uniformity among states
• no legal authority to enact or enforce insurance laws

Question 6

FIO

Answer 6

Federal Insurance Office–Dodd-Frank Wall Street Reform and Consumer Protection Act

• Monitors insurance industry and identifies issues and gaps in state regulation of insurers
• Monitors access to affordable insurance by traditionally undeserved communities (minorities, low-moderate income, etc.)

Question 7

Insurance Regulations (State and Federal levels)

Answer 7

State—Primarily regulated at state level–State Commissioner, Director or Superintendent of Insurance-Governor appoints
—–Legislative-writes and passes insurance laws
—–Judicial-Interprets and determines constitutionality of statues
—–Executive-enforces existing statues
Federal—Cannot regulate where states have authority
——Federal agencies-provide regulatory oversite
——Government insurers step in as last resort (usually catastrophic in nature) when primary insurers are unable to

Question 8

Stock Insurance Company

Answer 8

Owned by shareholders
Non-participating policies (shareholders do not have policies with this insurer)
TAXABLE Dividends paid return of profit (directors determine eligibility)
Dividends are not guaranteed

Question 9

Mutual Insurance Company

Answer 9

Owned by policy holders (members)
Board of Trustees or Directors elected by policy holders
NON-TAXABLE dividends return unused premium
Dividends are not guaranteed
Participating Policies (members have policies with insurer)

Question 10

Reciprocal Insurance Companies

Answer 10

Group owned whose main activity is risk sharing
unincorporated, formed by individuals, firms and business corporations that exchange insurance with each other
Members are known as subscribers
Each subscribers assumes part of the risk
Attorney-In-Fact-affected exchange of insurance

Question 11

Lloyds of London

Answer 11

Not an insurance company
Members form groups of underwriters called Syndicates, each specializing in a particular risk
provides meeting places and clerical services to syndicate members who transact business of insurance
Coverage provided is underwritten by syndicate manager (Attorney-In-Fact or individual proprietor)

Question 12

Fraternal Benefit Societies

Answer 12

Social organizations that engage in charitable and benevolent activities (provides health and life insurance to members)
Membership usually consists of members of a given faith, lodge, order or society
Organized as non-profit

Question 13

Risk Retention Groups (RRGs)

Answer 13

group-owned insurer assumes and spreads liability related risks of its members
Licensed in at least 1 state, and may insure members in other states
Owned by policyholders
large group of homogenous or similar units
Membership limited (theme parks, go cart tracks, or water slides
Must have sufficient liquid assets to meet loss obligations
Each member assumes a portion of the risks insured

Question 14

Self-Insurer

Answer 14

Assumes the financial risk of one’s self

Generally only large companies who may even reinsure for risks above certain max limits

Question 15

Residual Markets

Answer 15

• Private coverage source last resort for businesses and individuals who have been rejected by voluntary market insurers
• Joint Underwriting Association or Joint Reinsurance Pool to assume profits/losses accruing their share of total voluntary market premiums written in that state
• Risk Sharing Plan–insurers agree to divide risks that are unable to be covered normally
• Coverage typically written as Workers Comp, personal auto liability and property insurance on real property

Question 16

Reinsurance Companies

Answer 16

Assumes all or portion of a risk from primary (ceding) company
Transfers risk among other insurance companies
Consumer inquiries MUST come from ceding company

Question 17

Reinsurance Types

Answer 17

Treaty Agreements–covers all risk contained in the subject line(s) of business automatically
Facultative Agreements—allows ceding and reinsurance companies to negotiate coverage for individual risk

Question 18

Financial Rating Companies

Answer 18

evaluate and rate financial stability of insurance companies
assign rating codes (strength/weakness of company)–available to public
Producers must place business with financially sound insurance companies
EXAMPLES–A.M. Best Company, Standard & Poor’s, Moody’s Investment Services, Weiss Insurance Rating, Fitch Ratings

Question 19

Domicile

Answer 19

3-Types–Domestic, Foreign and Alien
Domestic–Home state that insurers is founded in (in US and territories)
Foreign—All other states and territories (US)
Alien—Any other country

Question 20

Admitted (authorized)

Answer 20

Allowed to transact insurance business in state with Certificate of Authority
Domicile does not impact this

Question 21

Non-Admitted (Unauthorized)

Answer 21

Either applied for and denied or have not applied with state
NOT authorized to transact insurance business within the state
–Can have surplus or excess lines placed through non-admitted carriers

Question 22

Surplus and Excess Lines

Answer 22

Find coverage when insurance cannot be obtained through admitted carriers
each state regulated procurement of Surplus Lines
NON-admitted MUST be transacted through Surplus Lines Brokers or Producers

Question 23

Management of Insurance

Answer 23

Executives–Oversee operation of business
Actuarial Department-gathers and interprets statistical data used in rate making-determines probability of loss and sets premium rates
Underwriting Department-responsible for risk selection, and rates that determine premium
Marketing/Sales Department-Advertising and selling
Claims Department-Assists insureds with loss events

Question 24

Distribution Models

Answer 24

Exclusive/Captive Agency System
Direct Writing Systems
Independent Agent 
Career Agency System
Personal Producing General Agent
Direct Mail/Direct Response Company
Mass Marketing

Question 25

Law of Agency

Answer 25

relationship between 2 or more parties where one party (agent or producer) acts on behalf of the other party (principal or insurer)
Agent binds actions and words of principal

Question 26

Insurer (Principal)

Answer 26

Source of authority that the producer must abide
responsible for all acts of producer (acting within their scope)
Producer personally liable when actions exceed authority of the agency’s contract

Question 27

Producer (Agent)

Answer 27

Appointed by insurance company to represent it and to present policies on its behalf
3 TYPES of Authority
Express—-Written in contract specifically
Implied—–Not specifically written in contract, but within scope of practice of the agent (using letterheads etc)
Apparent—-Public thinks the agent can do, even if they cannot, and insurer does not correct it

Question 28

Producers Responsibilities

Answer 28

Insurer—Fiduciary duty, keep premium funds in a trust separate from other expenses and forward ASAP to the insurer, report any facts that affect underwriting, soliciting, negotiating, selling and cancelling insurance policies with insurer, only recommend suitable policies
Insured/Applicant—forward premiums to insurer timely basis, seek and gain knowledge of applicants needs, review and evaluate applicants current coverage, limits and risk, SERVE the best interest of applicant/insured even though they represent the insurer, recommend coverage thats best for insureds needs not most profitable

Question 29

Broker

Answer 29

Licensed individual that negotiates contracts with insurers, on behalf of applicant, represents applicants/insureds interest (does NOT have legal authority to bind), brokers license is not applicable in all states

Question 30

FCRA

Answer 30

Fair Credit Reporting Act–protects consumer privacy, must inform applicant credit report will be pulled, applicant has the right to see report

• Applicant challenge-must reinvestigate in 6 months if challenged
• Inaccuracies-agency must forward to applicant inaccurate information given out within 2 years