Chapter 1: General Insurance Flashcards
NAIC
National Association of Insurance Commissioners
FIO
Federal Insurance Office
A group owned insurer whose main activity is risk sharing
Reciprocal insurance company
A _____ insurance company is owned by its policyholders
a) Stock
b) Reciprocal
c) Fraternal Benefits Society
d) Mutual
d) Mutual
Private coverage source of last resort for businesses and individuals who have been rejected by voluntary market insurers
Residual markets
Insurers agree to apportion among them selves those risks that are unable to obtain insurance through normal channels
Risk Sharing Plan
Reinsurance agreement that allows ceding and reinsurance companies the opportunity to negotiate coverage for individual risks
Facultative Agreements
- Independent financial rating services evaluate and rate the financial stability of insurance companies
- Assign rating codes to show financial strength
Financial rating services
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
b) Reinsurance
An insurer organized under the laws of this state, whether or not it is admitted to do business in this state
Domestic insurer
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
Foreign insurer
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
Alien Insurer
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
c) Foreign
Oversee the operation of the business
Executives
Gather and interpret statistical information used in rate making. Determines the probability of loss and sets premium rates
Actuarial department
Responsible for the selection of risks (persons and property to insure and rating that determines actual policy premium)
Underwriting department
Responsible for advertising and selling
Marketing/Sales department
Assists the policyholder in the event of a loss
Claims department
Which insurance company department accepts the insurance risk?
a) Executive
b) Actuarial
c) Claims
d) Underwriting
d) Underwriting
- 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
Law of Agency
Producers 3 types of authority
- Express
- Implied
- Apparent
Authority that is written into the producer’s agency contract
Express
Authority the public assumes the producer has
Implied
Authority created when the producer exceeds the authority expressed in the agency contract
Apparent
Which of the following individuals represents the insurance company when selling an insurance policy
a) Producer
b) Broker
c) Adjuster
d) Insurer
a) Producer
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
c) Implied
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
d) A duty to recommend only high rate policies
- 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
Fair Credit Reporting Act (15 USC 1681-1681d)
Credit reporting agency must reinvestigate within 6 months, of applicant challenges accuracy
Applicant challenge
Agency must forward to applicant inaccurate information given out within previous 2 years
Inaccuracies
Report must not include lawsuits over 7 years old or bankruptcies over 14 years old
Disallowed information
Imposes record keeping and government reporting requirements on banks, financial institutions and non-financial businesses for specific financial transactions and consumer financial records
Financial Anti-Terrorism Act (USA Patriot Act)
- 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
Fraud and False Statements (Fraudulent Insurance Act)
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
Merchant Marine Act of 1920 (the Jones Act)
Deregulated the trucking industry by prohibiting any entity from interfering with a motor carrier’s right to set its own rates.
Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)
- 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
Gramm-Leach-Bililey Act (GLBA, a.k.a. the Financial Services Modernization Act of 1999)
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
Terrorism Risk Insurance Act and its Extensions of 2005 and 2007 (TRIA)
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
Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)
Based on fiduciary relationship of parties and the wrongful acts violating the relationship
Breach of Trust
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
d. Fair Credit Reporting Act
A condition where the chance, likelihood, probability or potential for a loss exists.
Risk
Situations where the chance for loss, gain, or neither loss nor gain occur
Speculative risk
Situations where there is no chance for gain; the only outcome is for nothing to occur or for a loss to occur
Pure risk
Reduction, decrease, or disappearance of value. The basis of a claim for damages under the terms of an insurance policy
Loss
The cause of a loss
Peril
A specific condition that increases the probability, likelihood, or severity of a loss from a peril
Hazard
A physical condition that increases the probability of loss; use, condition, or occupancy of property
Physical hazard
Dishonest tendencies that increase the probability of a loss; certain characteristics and behaviors of people.
Moral hazard
Attitude that increases the probability of a loss
Morale hazard
The condition of being at risk for a loss. Purely by existing, property and people are at risk for loss
Loss exposure
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
Adverse selection
Investments of a large number of people may be pooled by use of a corporation or partnership
Sharing risk
Transferring risk from one party to another, such as from a consumer to an insurance company
Transfer risk
Elimination of the risk
Avoid risk
Minimizing the chance of loss, but not preventing the risk
Reduce risk
Assume the responsibility for loss
ex. choosing deductibles
Risk retention
As the number of units in a group increases, the more likely it is to predict a particular outcome
Law of Large Numbers
Dishonest tendencies that increase the probability of loss are what types of hazard?
a) Physical
b) Moral
c) Emotional
d) Legal
b) Moral
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
c) Large group with dissimilar members
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
The insurance contract
Insured is restored to the same financial or economic condition that existed prior to the loss
Principle of Indemnity
The ability of an applicant to meet an insurer’s underwriting requirements
Insurability
The process of selecting, classifying, and rating a risk for the purpose of issuing insurance coverage
Underwriting
Any event, past or present, that may cause loss or, damage or create legal liability on the part of an insured
Insurable events
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
Insurable interest - All policies
Insurable interest must exist at the time of application, but not at time of loss
Insurable interest - Life & Health policies
Insurable interest must exist at the time of the loss
Property and Casualty policies
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) Indemnity
Pertains to the formation and enforcement of contracts
Contract law
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
Tort law
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
Contract of Utmost Good Faith
Prevents the denial of a fact, if the fact was admitted to be true previously
Estoppel
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
Hold harmless agreement
A written contract may not be altered without the written consent of both parties
Parol Evidence Rule
Voluntary surrender of a known right, claim or privilege
Waiver
4 elements of a legal contract
1 Competent Parties
2 Legal Purpose
3 Agreement
4 Consideration
All parties to a contract; Insurer and Insured must have legal capacity to enter into a contract
Competent Parties
All parties to a contract must enter it for a legal purpose; public policy cannot be violated by a legal contract
Legal Purpose
One party must make and communicate an offer to the other part and the second party must accept that offer
Agreement
Something of value is exchanged; the exchange of an act for a promise
Premium & Promise to pay
Consideration
One party writes the contract, without input from the other party
Contract of Adhesion
The exchange of value is unequal
Aleatory contract
A contract that pays a stated amount in the event of a loss
Valued contract
An agreement to pay on behalf of another party under specified circumstances such as when a loss occurs
Indemnity contract
The party submitting an application for insurance
Applicant
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
Application
A policy form that alters or adds to the provisions of a property and casualty insurance contract
Endorsement
Owner cannot transfer or assign ownership of an insurance policy to another person
Personal contract
Owner may transfer or assign ownership of a life or health insurance policy to another person
Non-Personal contract
Policy owners may not assign or transfer their rights under an insurance contract without the written consent of the insurer
Assignment
Insured’s original age on the policy issue date
Issue age
Insured’s age at any point in time at issuance, renewal or conversion
Attained age
The date when insurance coverage begins
Effective date
The date when insurance coverage ends; if not cancelled prior, policy will terminate by end of grace period if premium is not paid
Lapse date
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
Unilateral Contract
Both parties must perform certain duties
Conditional Contract
What a reasonable and prudent policy owner would expect;
Reasonable Expectations Doctrine
A false statement contained in the application; usually does not void coverage or the policy.
-not deliberate
Misrepresentations
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.
Concealment
Statements in the application or stipulations in the policy that are guaranteed true in all respects.
Warranties
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:
- False statement, made intentionally and that pertains to a material fact.
- Disregard for the victim
- Victim believes the false statement
- Victim makes a decision and/or acts based on the belief in, or reliance upon, the false statement
- The victim’s decision and/or action results in harm
Fraud
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
Void contract
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
Voidable contract
Each of the following is an element of a legal contract, except:
a. Consideration
b. Legal Purpose
c. Agreement
d. Indemnity
d. indemnity
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
b. statements in the application that are guaranteed to be true
- 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
Underwriter
Underwriting factors:
- nature of the risk
- hazards that are present
- claims history
A rate charged to a group of policyholders who have similar exposures and experience.
Class rating
A rate based on the policyholder’s actual loss history when compared to the loss history of similar risks
Experience rating
A rate used for a policyholder because a large enough pool of similar risks is not available to any other type of rate.
Individual rating
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” rating or Judgment rating
A rating organization provides insurers with the portion of a rate that does not include provisions for expenses or profit
Loss cost rating
The use of rates contained in a manual published by the insurer or those of the rating organization of which it is a member
Manual rating
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.
Merit rating
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
Retrospective rating
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
Deposit premium
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
Schedule rating
Rates must be filed with the state insurance regulatory authority (Department of Insurance) and may be used as soon as they are filed
File and Use
Insurers cannot use rates until approved by the Department of Insurance, or until a specific time period has expired after the filing
Prior Approval
Some states require that mandatory rates be used for certain lines of insurance
Mandatory rates
A state relies on competition between insurers to produce fair and adequate rates
Open competition
The net premiums plus interest reflects possible future contract obligations. An accounting measurement of an insurer’s future obligation to its policyholders
Loss reserves
A loss reserve established for each claim, when reported
Case reserve method
A loss reserve established based on average settlements of particular claim types
Average value method
A loss reserve formula based upon the expected losses for a particular class or line
Loss ratio method
A loss reserve based upon the estimated length of an insured’s or claimant’s life or expected disability
Tabular method
Determined by dividing Paid Losses + Loss Reserves by Total Earned Premiums
Loss ratio
Determined by dividing an insurer’s Total Operating Expenses by Written Premiums
Expense ratio
Sum of the loss ratio and expense ratio
Combined ratio
What level is insurance primarily regulated
State level
McCarran-Ferguson Act of 1945
Federal government con not regulate insurance in areas over which states have the authority to do so
Company owned by stockholders or shareholders
Stock Insurance Company
Company owned by policyholder (who may be referred to as members)
Mutual Insurance Company
A group-owned insurer whose main activity is risk sharing
Reciprocal Insurance Company
Not an insurance company, but consists of groups of underwriters called Syndicates
Lloyds of London
Social organizations that engage in charitable and benevolent activities that provide life and health insurance to their members
Fraternal Benefit Societies
Group-owned insurer that primarily assumes and spreads the liability related risks of its members
Risk Retention Groups
Assume the financial risk of one’s self
Self-Insurer
- Assumes all or portion of a risk from a primary or ceding insurance company
- Transfers risk among insurance companies
Reinsurance Companies
Reinsurance agreement that covers all risks contained in the subject line(s) of business automatically
Treaty Agreements
Insurer is authorized by this State’s Commissioner of Insurance to do business in this State
Admitted (Authorized)
Insurer has either applied of authorization to do business in this state and was declined or they have not applied
Non-admitted (Unauthorized)
Finds coverage when insurance cannot be obtained form admitted insuers
Surplus lines insurance
Agent represents solely one company or group of companies
Exclusive or Captive Agency System
- Producer or agent is an employee of the insurer
- Insurer owns the accounts
Direct Writing System
- 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
Independent Agency
Agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company
Career Agency System
Sells insurance for carriers it is contracted with and maintains its own office and staff
Personal Producing General Agent
A marketing system utilizing direct mail, newspapers, radio, etc.
Direct Mail or Direct Response Company
Target a specific type of insurance
Mass Marketing
Producer’s responsibilities to the Insurer
Fiduciary duty especially when handling premium funds
Producer’s responsibilities to the Insurance Applicant or Insured
- forward premiums on timely basis
- seek the applicant’s insurance needs
- review and evaluate the applicant’s current coverage
- serve the best interests of the applicant or insured
- recommend coverage that best protects the insured
Licensed individual who negotiates insurance contracts with insurers
Broker
Deceit, misrepresentation, untruthfulness, falsification
Dishonesty
Each of the following is a factor considered by an underwriter, except:
a. hazards
b. marital status
c. claims history
d. outside factors
b) marital status is not an underwriting factor, but the nature of the risk is also considered
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
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
