Chapter 1

Question 1

Insurance

Answer 1

Spreads the risk of loss from one person to a large number of persons through the pooling of premiums. The transfer of risk from one party to another through a legal contract; or the transfer of risk through pooling funds.

Question 2

Insurer

Answer 2

Receives the policyowners transfer of risk. Assumes this risk since they receive a premium.

Question 3

Premium

Answer 3

When the transfer of risk is accomplished by purchasing an insurance policy, this is the small fee that the policy owner pays in return for a large quantity of coverage.

Question 4

Reducing premium costs

Answer 4

Premium cost can be reduced when the insured implements loss control measures (i.e. smoke alarms or sprinkler system) to lower the chance of a loss occurring in the first place.

Question 5

Private (Commercial) Insurance Companies

Answer 5

Anything not owned by the federal or state government is typically considered commercial or private insurance companies

Question 6

Monoline insurer

Answer 6

A company that only sells one line of insurance (ex. health insurance).

Question 7

Multi-line insurer

Answer 7

Companies that sell more than one line of insurance.

Question 8

Stock companies

Answer 8

A private organization, organized and incorporated under state laws for the purpose of making a profit for its stockholders (shareholders). Nonparticipating company because policyholders do not participate in dividends. Look to grow their earned surplus or post-tax earnings not paid in dividends. Earnings retained by a company are considered equity and are owned by the shareholders.

Question 9

Mutual Companies

Answer 9

organized and incorporated under state laws, but they have no stock holders. The owners are policyholders. Anyone purchasing from a mutual insurer is both a customer and an owner.

Question 10

Divisible surplus

Answer 10

The amount of earnings paid to policy owners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses, and general business purposes.

Question 11

Mutualization

Answer 11

Stock company converted into a mutual company

Question 12

Demutualization

Answer 12

Mutual companies converted into stock companies

Question 13

Mixed plan

Answer 13

stock insurance company issuing both participating and nonparticipating policies

Question 14

Strong assessment mutual insurers

Answer 14

assessment mutual companies are classified by the way in which they charge premiums

Question 15

Lloyd’s of London

Answer 15

A syndicate of individuals and companies that individual underwrite insurance. Their function is to gather and disseminate underwriting information, help its associate settle claims and disputes, and through its member underwriters, provide coverage that might otherwise be unavailable in certain areas.

Question 16

Reinsurance

Answer 16

An arrangement by which an insurance company transfers a portion of an assumed risk to another insurer. Takes place to limit the loss any one insurer would face should a very large claim become payable.

Question 17

Ceding company

Answer 17

The company transferring the risk to another company.

Question 18

Reinsurer

Answer 18

The company assuming the risk transferred by a ceding company.

Question 19

Net retention (or net line)

Answer 19

The portion of the risk that the ceding insurer retains

Question 20

Treaty reinsurance

Answer 20

an automatic sharing of the risks assumed.

Question 21

Captive insurer

Answer 21

An insurer that is established and owned by a parent firm for the purpose of insuring the parent firm’s loss

Question 22

Self-insurers

Answer 22

rather than transfer risk to an insurance company, a self-insurer establishes a self-funded plan to cover potential losses.

Question 23

domestic insurer

Answer 23

an insurer with its principal or home office in the state where it is authorized

Question 24

foreign insurer

Answer 24

an insurer who is authorized in one state but its charter or principal office is in another state

Question 25

alien insurer

Answer 25

insurers authorized in any state within the US whose principal office is located outside of this country

Question 26

Producer agents

Answer 26

represent a particular company. present insurers’ products and services to the public via active sales and marketing methods. a captive agent would only sell for one company. in a sales transaction, agents represent the insurer and brokers represent the buyer.

Question 27

1945 The McCarran-Ferguson Act

Answer 27

Enacted by Congress, Public Law 15. Made it clear that the states’ continued regulation of insurance was in the public’s best interest. Made possible the application of federal antitrust laws to the extent that the insurance business is not regulated by state law. States then conformed to federal law.

Question 28

1970 Fair Credit Reporting Act

Answer 28

Enacted by the federal government. Attempt to protect an individual’s right to privacy. Requires fair an accurate reporting of information about consumers, including applications for insurance. Insurers must inform applicants about any investigations that are being made upon completion of the application.