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Insurance > Chapter 1: General Insurance > Flashcards

Chapter 1: General Insurance Flashcards

1
Q

NAIC

A

National Association of Insurance Commissioners

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2
Q

FIO

A

Federal Insurance Office

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3
Q

A group owned insurer whose main activity is risk sharing

A

Reciprocal insurance company

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4
Q

A _____ insurance company is owned by its policyholders

a) Stock
b) Reciprocal
c) Fraternal Benefits Society
d) Mutual

A

d) Mutual

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5
Q

Private coverage source of last resort for businesses and individuals who have been rejected by voluntary market insurers

A

Residual markets

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6
Q

Insurers agree to apportion among them selves those risks that are unable to obtain insurance through normal channels

A

Risk Sharing Plan

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7
Q

Reinsurance agreement that allows ceding and reinsurance companies the opportunity to negotiate coverage for individual risks

A

Facultative Agreements

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8
Q
  • Independent financial rating services evaluate and rate the financial stability of insurance companies
  • Assign rating codes to show financial strength
A

Financial rating services

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9
Q

If an insurance company wants to transfer all or part of the risk it has accepted, it would buy which of the following types of insurance

a) Residual
b) Reinsurance
c) Reciprocal
d) Insurer

A

b) Reinsurance

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10
Q

An insurer organized under the laws of this state, whether or not it is admitted to do business in this state

A

Domestic insurer

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11
Q

An insurer not organized under the laws of this state, but in one of the other states or jurisdictions within the United States, whether or not it is admitted to do business in the state or jurisdiction

A

Foreign insurer

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12
Q

An insurer organized under the laws of any jurisdiction outside of the United States, whether or not it is admitted to do business in this state

A

Alien Insurer

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13
Q

Which of the following is an insurance company that is organized under the laws of another state within the United States?

a) Domestic
b) Alien
c) Foreign
d) Authorized

A

c) Foreign

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14
Q

Oversee the operation of the business

A

Executives

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15
Q

Gather and interpret statistical information used in rate making. Determines the probability of loss and sets premium rates

A

Actuarial department

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16
Q

Responsible for the selection of risks (persons and property to insure and rating that determines actual policy premium)

A

Underwriting department

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17
Q

Responsible for advertising and selling

A

Marketing/Sales department

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18
Q

Assists the policyholder in the event of a loss

A

Claims department

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19
Q

Which insurance company department accepts the insurance risk?

a) Executive
b) Actuarial
c) Claims
d) Underwriting

A

d) Underwriting

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20
Q
  • A relationship between two or more parties where one party (the agent or producer) acts on behalf of the other party, known as the principal insurer
  • The agent or producer binds the actions and words of the principal
A

Law of Agency

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21
Q

Producers 3 types of authority

A
  1. Express
  2. Implied
  3. Apparent
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22
Q

Authority that is written into the producer’s agency contract

A

Express

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23
Q

Authority the public assumes the producer has

A

Implied

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24
Q

Authority created when the producer exceeds the authority expressed in the agency contract

A

Apparent

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25
Q

Which of the following individuals represents the insurance company when selling an insurance policy

a) Producer
b) Broker
c) Adjuster
d) Insurer

A

a) Producer

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26
Q

Which of the following types of authority does the public assume an agent has when quoting insurance?

a) Authorized
b) Express
c) Implied
d) Apparent

A

c) Implied

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27
Q

A producer has each of the following responsibilities to the Insurer, except:

a) A fiduciary duty
b) Forwarding premiums to the insurer on a timely basis
c) Reporting material facts that may affect underwriting
d) A duty to recommend only high rate policies

A

d) A duty to recommend only high rate policies

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28
Q
  • When an application is taken, it must inform the applicant a credit report will be obtained. The purpose of this is to determine the financial and moral status of an applicant
  • Applicant has the right to review the report
A

Fair Credit Reporting Act (15 USC 1681-1681d)

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29
Q

Credit reporting agency must reinvestigate within 6 months, of applicant challenges accuracy

A

Applicant challenge

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30
Q

Agency must forward to applicant inaccurate information given out within previous 2 years

A

Inaccuracies

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31
Q

Report must not include lawsuits over 7 years old or bankruptcies over 14 years old

A

Disallowed information

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32
Q

Imposes record keeping and government reporting requirements on banks, financial institutions and non-financial businesses for specific financial transactions and consumer financial records

A

Financial Anti-Terrorism Act (USA Patriot Act)

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33
Q
  • Misstatement of materiel fact by a person who knows or believes that statement to be false
  • applications and claim forms must contain a disclosure about how false statements and fraud will be treated by the insurer
A

Fraud and False Statements (Fraudulent Insurance Act)

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34
Q

Because Workers’ Comp laws do not apply to seamen, the Jones Act allows insured seamen to make claims for injuries suffered during the course of employment

A

Merchant Marine Act of 1920 (the Jones Act)

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35
Q

Deregulated the trucking industry by prohibiting any entity from interfering with a motor carrier’s right to set its own rates.

A

Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)

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36
Q
  • Repealed parts of the Glass-Steagall Act of 1933 to allow the merger of banks, securities companies, and insurance companies.
  • The Financial Privacy rule requires “financial institutions,” which include insurers, to provide each consumer with a privacy notice
A

Gramm-Leach-Bililey Act (GLBA, a.k.a. the Financial Services Modernization Act of 1999)

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37
Q

Established in the Department of the Treasury. The Secretary of the Treasury administers the Program.

“Act of Terrorism” is defined as any act certified by the Secretary of Treasury, in cooperation with the Secretary of State and Attorney General

Not make payments for any portion of the amount of such losses that exceeds $100 billion (cap on annual liability)

The insurer deductible is 20% of all covered losses

A

Terrorism Risk Insurance Act and its Extensions of 2005 and 2007 (TRIA)

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38
Q

The largest crime bill in U.S. history expands funding to federal agencies such as FBI, DEA, and INS

The act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust

A

Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)

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39
Q

Based on fiduciary relationship of parties and the wrongful acts violating the relationship

A

Breach of Trust

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40
Q

A federal regulation called the __________ protects consumers privacy

a) Consolidated Omnibus Budget Reconciliation Act
b) Fraudulent Insurance Act
c) Privacy Protection Act
d) Fair Credit Reporting Act

A

d. Fair Credit Reporting Act

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41
Q

A condition where the chance, likelihood, probability or potential for a loss exists.

A

Risk

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42
Q

Situations where the chance for loss, gain, or neither loss nor gain occur

A

Speculative risk

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43
Q

Situations where there is no chance for gain; the only outcome is for nothing to occur or for a loss to occur

A

Pure risk

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44
Q

Reduction, decrease, or disappearance of value. The basis of a claim for damages under the terms of an insurance policy

A

Loss

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45
Q

The cause of a loss

A

Peril

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46
Q

A specific condition that increases the probability, likelihood, or severity of a loss from a peril

A

Hazard

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47
Q

A physical condition that increases the probability of loss; use, condition, or occupancy of property

A

Physical hazard

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48
Q

Dishonest tendencies that increase the probability of a loss; certain characteristics and behaviors of people.

A

Moral hazard

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49
Q

Attitude that increases the probability of a loss

A

Morale hazard

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50
Q

The condition of being at risk for a loss. Purely by existing, property and people are at risk for loss

A

Loss exposure

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51
Q

An imbalance created when risks that are more prone to losses than the average (standard) risk are the only risks seeking insurance within a specific marketplace

A

Adverse selection

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52
Q

Investments of a large number of people may be pooled by use of a corporation or partnership

A

Sharing risk

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53
Q

Transferring risk from one party to another, such as from a consumer to an insurance company

A

Transfer risk

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54
Q

Elimination of the risk

A

Avoid risk

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55
Q

Minimizing the chance of loss, but not preventing the risk

A

Reduce risk

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56
Q

Assume the responsibility for loss

ex. choosing deductibles

A

Risk retention

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57
Q

As the number of units in a group increases, the more likely it is to predict a particular outcome

A

Law of Large Numbers

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58
Q

Dishonest tendencies that increase the probability of loss are what types of hazard?

a) Physical
b) Moral
c) Emotional
d) Legal

A

b) Moral

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59
Q

Each of the following must be included in an insurable risk, except:

a) Calculable chance of loss
b) Excluded catastrophic perils
c) Large group with dissimilar members
d) Accidental losses

A

c) Large group with dissimilar members

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60
Q

A legal contact purchased to indemnify the insured against a loss, damage or liability arising from an unexpected event

Exchange of a relatively small and definite expense for the risk of loss that, if it occurs, may be large or small

A

The insurance contract

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61
Q

Insured is restored to the same financial or economic condition that existed prior to the loss

A

Principle of Indemnity

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62
Q

The ability of an applicant to meet an insurer’s underwriting requirements

A

Insurability

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63
Q

The process of selecting, classifying, and rating a risk for the purpose of issuing insurance coverage

A

Underwriting

64
Q

Any event, past or present, that may cause loss or, damage or create legal liability on the part of an insured

A

Insurable events

65
Q

Insurable interest must exist in every enforceable insurance contract. Depending upon the contract, it must exist at the time of application or at the time of loss

A

Insurable interest - All policies

66
Q

Insurable interest must exist at the time of application, but not at time of loss

A

Insurable interest - Life & Health policies

67
Q

Insurable interest must exist at the time of the loss

A

Property and Casualty policies

68
Q

Which principle of insurance restores the insured to the same economic condition that existed before the loss?

a) Indemnity
b) Insurability
c) Adhesion
d) Underwriting

A

a) Indemnity

69
Q

Pertains to the formation and enforcement of contracts

A

Contract law

70
Q

Torts are civil wrongs; they’re not crimes or breaches of contract. They result in injuries or harm that constitute the basis of a claim by a third party

A

Tort law

71
Q

Both parties bargain in good faith when forming and entering into the contract. The two parties rely upon the statements and promises of the other and assume no attempt to conceal or deceive has been made

A

Contract of Utmost Good Faith

72
Q

Prevents the denial of a fact, if the fact was admitted to be true previously

A

Estoppel

73
Q

A contractual agreement that transfers the liability of one party to another party; it is used by landlords, contractors, and others as a way to avoid or reduce risk

A

Hold harmless agreement

74
Q

A written contract may not be altered without the written consent of both parties

A

Parol Evidence Rule

75
Q

Voluntary surrender of a known right, claim or privilege

A

Waiver

76
Q

4 elements of a legal contract

A

1 Competent Parties
2 Legal Purpose
3 Agreement
4 Consideration

77
Q

All parties to a contract; Insurer and Insured must have legal capacity to enter into a contract

A

Competent Parties

78
Q

All parties to a contract must enter it for a legal purpose; public policy cannot be violated by a legal contract

A

Legal Purpose

79
Q

One party must make and communicate an offer to the other part and the second party must accept that offer

A

Agreement

80
Q

Something of value is exchanged; the exchange of an act for a promise
Premium & Promise to pay

A

Consideration

81
Q

One party writes the contract, without input from the other party

A

Contract of Adhesion

82
Q

The exchange of value is unequal

A

Aleatory contract

83
Q

A contract that pays a stated amount in the event of a loss

A

Valued contract

84
Q

An agreement to pay on behalf of another party under specified circumstances such as when a loss occurs

A

Indemnity contract

85
Q

The party submitting an application for insurance

A

Applicant

86
Q

A document submitted by an applicant to an insurer that provides information needed for the insurer to underwrite a risk; becomes part of the insurance contract

A

Application

87
Q

A policy form that alters or adds to the provisions of a property and casualty insurance contract

A

Endorsement

88
Q

Owner cannot transfer or assign ownership of an insurance policy to another person

A

Personal contract

89
Q

Owner may transfer or assign ownership of a life or health insurance policy to another person

A

Non-Personal contract

90
Q

Policy owners may not assign or transfer their rights under an insurance contract without the written consent of the insurer

A

Assignment

91
Q

Insured’s original age on the policy issue date

A

Issue age

92
Q

Insured’s age at any point in time at issuance, renewal or conversion

A

Attained age

93
Q

The date when insurance coverage begins

A

Effective date

94
Q

The date when insurance coverage ends; if not cancelled prior, policy will terminate by end of grace period if premium is not paid

A

Lapse date

95
Q

Only one party is legally bound to the contractual obligations after the premium is paid to the insurer.
-insured can cancel @ any time. insurer can not

A

Unilateral Contract

96
Q

Both parties must perform certain duties

A

Conditional Contract

97
Q

What a reasonable and prudent policy owner would expect;

A

Reasonable Expectations Doctrine

98
Q

A false statement contained in the application; usually does not void coverage or the policy.
-not deliberate

A

Misrepresentations

99
Q

The willful hiding or obscuring of material facts pertinent to the issuance of insurance (or a claim). Concealment results in denial of coverage and may void the policy.

A

Concealment

100
Q

Statements in the application or stipulations in the policy that are guaranteed true in all respects.

A

Warranties

101
Q

Intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right. Contains 5 elements:

  1. False statement, made intentionally and that pertains to a material fact.
  2. Disregard for the victim
  3. Victim believes the false statement
  4. Victim makes a decision and/or acts based on the belief in, or reliance upon, the false statement
  5. The victim’s decision and/or action results in harm
A

Fraud

102
Q

An agreement without legal effect because it was made illegally or it was declared void by the courts because it doesn’t contain all the elements of a legal contract

A

Void contract

103
Q

A valid contract that for reasons satisfactory to a court, may be set aside by one of the parties. An example is an insurer may void or revoke coverage for misrepresentation or fraud

A

Voidable contract

104
Q

Each of the following is an element of a legal contract, except:

a. Consideration
b. Legal Purpose
c. Agreement
d. Indemnity

A

d. indemnity

105
Q

A warranty is defined as which of the following?

a. Intentional misrepresentation on the application
b. Statement in the application that is guaranteed to be true
c. A false statement in the application
d. What a reasonable and prudent buyer can expect

A

b. statements in the application that are guaranteed to be true

106
Q
  • The selection of risks to be insured. Also determines the classification, and premium rate if a risk is accepted by the insurer
  • Protects the insurer against adverse selection
A

Underwriter

107
Q

Underwriting factors:

A
  1. nature of the risk
  2. hazards that are present
  3. claims history
108
Q

A rate charged to a group of policyholders who have similar exposures and experience.

A

Class rating

109
Q

A rate based on the policyholder’s actual loss history when compared to the loss history of similar risks

A

Experience rating

110
Q

A rate used for a policyholder because a large enough pool of similar risks is not available to any other type of rate.

A

Individual rating

111
Q

An individual rate that doesn’t use loss history as a component and that is derived largely from the underwriter’s evaluation and best judgment the risk poses to the insurer

A

“A” rating or Judgment rating

112
Q

A rating organization provides insurers with the portion of a rate that does not include provisions for expenses or profit

A

Loss cost rating

113
Q

The use of rates contained in a manual published by the insurer or those of the rating organization of which it is a member

A

Manual rating

114
Q

The use of rates that rewards a policyholder that takes measures to decrease the probability of loss by the implementation of safety programs, loss control programs, etc.

A

Merit rating

115
Q

The use of rates that adjust the policy premium to reflect the current loss experience of the policyholder. Premium adjustments are subject to minimums and maximums

A

Retrospective rating

116
Q

Required initial premium paid into the policy that is subject to adjustment. A premium audit will be used to determine the actual premium based on risk exposures

A

Deposit premium

117
Q

A method of rating property and liability risks by using charges and credits to modify a class rate based on the nature of the particular risk being rated

A

Schedule rating

118
Q

Rates must be filed with the state insurance regulatory authority (Department of Insurance) and may be used as soon as they are filed

A

File and Use

119
Q

Insurers cannot use rates until approved by the Department of Insurance, or until a specific time period has expired after the filing

A

Prior Approval

120
Q

Some states require that mandatory rates be used for certain lines of insurance

A

Mandatory rates

121
Q

A state relies on competition between insurers to produce fair and adequate rates

A

Open competition

122
Q

The net premiums plus interest reflects possible future contract obligations. An accounting measurement of an insurer’s future obligation to its policyholders

A

Loss reserves

123
Q

A loss reserve established for each claim, when reported

A

Case reserve method

124
Q

A loss reserve established based on average settlements of particular claim types

A

Average value method

125
Q

A loss reserve formula based upon the expected losses for a particular class or line

A

Loss ratio method

126
Q

A loss reserve based upon the estimated length of an insured’s or claimant’s life or expected disability

A

Tabular method

127
Q

Determined by dividing Paid Losses + Loss Reserves by Total Earned Premiums

A

Loss ratio

128
Q

Determined by dividing an insurer’s Total Operating Expenses by Written Premiums

A

Expense ratio

129
Q

Sum of the loss ratio and expense ratio

A

Combined ratio

130
Q

What level is insurance primarily regulated

A

State level

131
Q

McCarran-Ferguson Act of 1945

A

Federal government con not regulate insurance in areas over which states have the authority to do so

132
Q

Company owned by stockholders or shareholders

A

Stock Insurance Company

133
Q

Company owned by policyholder (who may be referred to as members)

A

Mutual Insurance Company

134
Q

A group-owned insurer whose main activity is risk sharing

A

Reciprocal Insurance Company

135
Q

Not an insurance company, but consists of groups of underwriters called Syndicates

A

Lloyds of London

136
Q

Social organizations that engage in charitable and benevolent activities that provide life and health insurance to their members

A

Fraternal Benefit Societies

137
Q

Group-owned insurer that primarily assumes and spreads the liability related risks of its members

A

Risk Retention Groups

138
Q

Assume the financial risk of one’s self

A

Self-Insurer

139
Q
  • Assumes all or portion of a risk from a primary or ceding insurance company
  • Transfers risk among insurance companies
A

Reinsurance Companies

140
Q

Reinsurance agreement that covers all risks contained in the subject line(s) of business automatically

A

Treaty Agreements

141
Q

Insurer is authorized by this State’s Commissioner of Insurance to do business in this State

A

Admitted (Authorized)

142
Q

Insurer has either applied of authorization to do business in this state and was declined or they have not applied

A

Non-admitted (Unauthorized)

143
Q

Finds coverage when insurance cannot be obtained form admitted insuers

A

Surplus lines insurance

144
Q

Agent represents solely one company or group of companies

A

Exclusive or Captive Agency System

145
Q
  • Producer or agent is an employee of the insurer

- Insurer owns the accounts

A

Direct Writing System

146
Q
  • An agent or agency that enters into agency agreements wit more than one insurer. It may represent an unlimited number of insurers
  • Agency retain ownership of the business
A

Independent Agency

147
Q

Agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company

A

Career Agency System

148
Q

Sells insurance for carriers it is contracted with and maintains its own office and staff

A

Personal Producing General Agent

149
Q

A marketing system utilizing direct mail, newspapers, radio, etc.

A

Direct Mail or Direct Response Company

150
Q

Target a specific type of insurance

A

Mass Marketing

151
Q

Producer’s responsibilities to the Insurer

A

Fiduciary duty especially when handling premium funds

152
Q

Producer’s responsibilities to the Insurance Applicant or Insured

A
  1. forward premiums on timely basis
  2. seek the applicant’s insurance needs
  3. review and evaluate the applicant’s current coverage
  4. serve the best interests of the applicant or insured
  5. recommend coverage that best protects the insured
153
Q

Licensed individual who negotiates insurance contracts with insurers

A

Broker

154
Q

Deceit, misrepresentation, untruthfulness, falsification

A

Dishonesty

155
Q

Each of the following is a factor considered by an underwriter, except:

a. hazards
b. marital status
c. claims history
d. outside factors

A

b) marital status is not an underwriting factor, but the nature of the risk is also considered

156
Q

Which of the following calculations equals a company’s loss ratio?

a. all losses + expenses
b. paid losses + loss reserves ÷ total earned premium
c. losses + total operating expenses ÷ total written premium
d. paid losses + paid expenses ÷ total earned premium

A

b) the loss ratio is calculated by paid losses and reserves divided by the total earned premium and used to determine the expected losses for a line of business

Insurance (6 decks)

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