Chapter 1 Basic Principles

Question 1

Actuarial department

Answer 1

The actuarial department calculates policy rates, reserves, and dividends.

Question 2

Alien Insurer

Answer 2

An Alien Insurer in the United States is an insurer whose principal office and domiciled location is outside the country.

Question 3

Admitted Insurer

Answer 3

is an insurer who has received a certificate of authority from a state’s department of insurance authorizing them to conduct insurance business in that state.

Question 4

Broker

Answer 4

A Broker represents themselves and the insured (i.e., the client or customer).

Question 5

Captive Insurer

Answer 5

issuer established and owned by a parent firm for the purpose of insuring the parent firm’s loss exposure.

Question 6

Certificate of Authority

Answer 6

a license issued to an insurer by a department of insurance (or equivalent state agency), which authorizes that company to conduct insurance business in that particular state.

Question 7

Claims Department

Answer 7

is responsible for processing, investigating, and paying claims.

Question 8

Divisible Surplus

Answer 8

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

Question 9

Domestic Insurer

Answer 9

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

Question 10

Foreign Insurer

Answer 10

an insurer with its principal office or domicile location in a state different from the state it is transacting insurance business.

Question 11

Fraternal Benefit Society

Answer 11

are nonprofit benevolent organizations that provide insurance to its members.

Question 12

Industrial Insurer

Answer 12

make up a specialized branch of the industry, primarily providing policies with small face amounts with weekly premiums. Other names for industrial insurers include home service or debit insurers.

Question 13

Insurance

Answer 13

he transfer of risk through the pooling or accumulation of funds.

Question 14

Insured

Answer 14

the customer receiving insurance protection under an insurance policy.

Question 15

Insurer

Answer 15

The insurer is the insurance company.

Question 16

Lloyds of London

Answer 16

Lloyds of London is NOT an insurer, but a group of individuals and companies that underwrite unusual insurance.

Question 17

Multi-line Insurer

Answer 17

an insurance company or independent agent that provides a one-stop-shop for businesses or individuals seeking coverage for all their insurance needs. For example, many large insurers offer individual policies for automobile, homeowner, long-term care, life, and health insurance needs.

Question 18

Mutual Insurance Company

Answer 18

are insurance companies characterized by having no capital stock, being owned by its policy owners, and usually issue participating insurance.

Question 19

Non-admitted Insurer

Answer 19

A non-admitted or unauthorized insurer is an insurer who has not received a certificate of authority from a state’s department of insurance authorizing them to conduct insurance business in that state.

Question 20

Nonparticipating policy

Answer 20

typically issued by stock companies, do not allow policyowners to participate in dividends or electing the board of directors.

Question 21

Participating Plan

Answer 21

is an insurance policy under which the policyowners share in the company’s earnings through receipt of dividends and also elect the company’s board of directors.

Question 22

Private (Commercial) Insurer

Answer 22

are companies owned by private citizens or groups that offer one or more insurance lines. Commercial insurers are NOT government-owned.

Question 23

Reciprocal Insurer

Answer 23

is an unincorporated organization in which all members insure one another.

Question 24

Reinsurance

Answer 24

is the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage.

Question 25

Reinsurer

Answer 25

a company that provides financial protection to insurance companies. Reinsurers handle risks that are too large for insurance companies to handle on their own and make it possible for insurers to obtain more business than they would otherwise be able to.

Question 26

Risk Retention Group

Answer 26

a group-owned liability insurer which assumes and spread product liability and other forms of commercial liability risks among its members.

Question 27

Self-Insurers

Answer 27

establishes a self-funded plan to cover potential losses instead of transferring the risk to an insurance company.

Question 28

Stock Insurance Company

Answer 28

owned and controlled by a group of stockholders (or shareholders) whose investment in the company provides the safety margin necessary in the issuance of guaranteed, fixed premium, nonparticipating policies.

Question 29

Surplus Lines Insurance

Answer 29

is nontraditional insurance only available from a surplus lines insurer. They offer coverage for substandard or unusual risks not available through private or commercial carriers.

Question 30

Underwriting Department

Answer 30

is the department within an insurance company responsible for reviewing applications, approving or declining applications, and assigning risk classifications.