Chapter 1: General Insurance

Question 1

Insurance Companies (known as insurers or Carriers)

Answer 1

Manufacture and sell insurance coverage in the form of insurance policies or contracts of insurance

Question 2

Insurance Agencies

Answer 2

Captive or independent organizations that recruit, contract with, train, and support producers

Question 3

Insurance Producers

Answer 3

Licensed individuals representing and appointed by an insurance company when transacting insurance business

Question 4

An insured

Answer 4

The person or entity that is covered by the Insurer, which covers losses due to loss of life, health, property, or liability

Question 5

An Owner

Answer 5

The person responsible for paying the policy’s premium; this person is not necessarily the insured under the policy, but has various rights that are specified in the contract

Question 6

The National Association of Insurance Commissioners (NAIC)

Answer 6

Consists of all state and territorial insurance commissioners or regulators. It provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators. It promotes uniformity among states. Members may accept or reject recommendations. The NAIC has no legal authority to enact or enforce insurance laws.

Question 7

Federal Insurance Office (FIO)

Answer 7

Established by Dodd-Frank Wall Street Reform and Consumer Protection Act. This office monitors the insurance industry and identifies issues and gaps in the state regulation of insurers. It also monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low- and moderate-income persons. The FIO is not a regulator or supervisor. Insurance is primarily regulated by the individual states.

Question 8

Insurance Regulation at the State Level

Answer 8

The insurance industry is regulated primarily at the state level.

• The legislative branch writes and passes state insurance laws, or statutes to protect insuring public.
• The judicial branch is responsible for interpreting and determining the constitutionality of the statutes.
• The role of the state’s executive branch is to enforce existing statutes that have been put in place.
• The Commissioner, Director, or Superintendent of Insurance is typically appointed (or in some jurisdictions elected) by the Governor, and the Commissioner has the power to issue rules and regulations to help enforce these statutes.

Question 9

Insurance Regulation at the Federal Level

Answer 9

The federal government will not regulate the business of insurance in areas which the states have historically had the authority to do do (such as producer and company licensing) unless the states fail to cooperate (McCarran-Ferguson Act of 1945 - in response to the Supreme Court’s decision in U.S. v. South-Eastern Underwriters 1944). Congress created federal agencies to provide regulatory oversight impacting insurance practices.

Question 10

Private vs. Government Insurers

Answer 10

Most insurance is written through private insurers. However, there are instances where government-based insurers step in to offer an insurance alternative when private insurers are unable to provide protection. This is usually related to the catastrophic nature of the risk, capacity to handle the risk, and lack of desire to engage in a line of insurance where experience to evaluate necessary premium intake to offset potential loss is lacking.

Question 11

Stock Insurance Company

Answer 11

A stock company is owned by stockholders or shareholders.

Question 12

Mutual Insurance Company

Answer 12

A mutual company is owned by policyholders (who may be referred to as members). A Board of Trustees or Directors is elected by policyholders and puts in place a management team to carry out the company’s mission.

Question 13

Reciprocal Insurance Company

Answer 13

Group-owned insurer whose main activity is risk sharing. A reciprocal insurer is unincorporated, and is formed by individuals, firms, and business corporations that exchange insurance on one another. Each member is known as a subscriber and each assumes a part of the risk.

The exchange of insurance is affected through an Attorney-in-Fact, who is not required to be licensed in insurance.

Question 14

Lloyd’s of London

Answer 14

Not an insurance company, but consists of groups of underwriters called Syndicates, each of which specializes in insuring a particular type of risk. Lloyd’s provides a meeting place and clerical services for syndicate members who actually transact the business of insurance.

Members are individually liable for each risk they assume, and coverage provided is underwritten by a syndicate manager, such as an attorney-in-fact or individual proprietor.

Question 15

Residual Markets

Answer 15

Last resort private coverage source for businesses and individuals who have been rejected by the voluntary insurance market. Coverage is typically written as Workers’ Compensation, personal auto liability or property insurance on real property.

Include:

• Joint Underwriting Association (Joint Reinsurance)
• Risk Sharing Plan

Question 16

Joint Underwriting Association (Joint Reinsurance)

Answer 16

Requires insurers writing specific coverage lines in a given state to assume their share of profits/losses of the total voluntary market premiums written in that state.

Question 17

Risk Sharing Plan

Answer 17

Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels.

Question 18

Reinsurance Companies and Types

Answer 18

Insurance companies that operate to accept all or a portion of the financial risk or loss from the primary (or “ceding”) insurance company. The risk of loss is shared with one or more insurance companies. All contractual obligations are on the original (primary) company and consumers have no direct contact with reinsurance companies.

Types of Reinsurance Agreements

• Treaty
• Facultative

Question 19

Treaty

Answer 19

Reinsurance agreement that automatically accepts all new risks presented by the ceding insurer (the company seeking or requesting the reinsurance from the reinsurer).

Question 20

Facultative

Answer 20

Reinsurance agreement that allows the reinsurance company an opportunity to reject coverage for individual risks, or price them higher due to their substandard (higher risk) nature.

Question 21

Financial Rating Services

Answer 21

Independent financial rating services evaluate and rate the claims-paying ability and financial stability of insurance companies.

Question 22

Domestic Insurer

Answer 22

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

Question 23

Foreign Insurer

Answer 23

An insurer organized under the laws of any other state, possession, territory, or the District of Columbia of the United States, whether or not it is admitted to do business in this state.

Question 24

Alien Insurer

Answer 24

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.

Question 25

Domicile

Answer 25

Refers to the jurisdiction (i.e., state or country) where an insurer is formed or incorporated

Question 26

Admitted vs. Non-admitted

Answer 26

Refers to whether or not an insurer is approved or authorized to write business in this State.

The domicile does not impact whether an insurer may be admitted to do business in this State.

Question 27

Admitted (Authorized)

Answer 27

Insurer is authorized by this State’s Commissioner of Insurance to do business in this State and has received a Certificate of Authority to do business in this State.

Question 28

Non-Admitted (Unauthorized)

Answer 28

Insurer has either applied for authorization to do business in this State ands declined or they have not applied. They do not have a Certificate of Authority to do business in the State.

Question 29

Surplus Lines Insurance

Answer 29

Finds coverage when insurance cannot be obtained from admitted insurers. However, it cannot be utilized solely to receive lower cost coverage than would be available from an admitted carrier.

• Each State regulates the procurement of Surplus Lines insurance in its State.
• Can be placed through non-admitted carriers. Non-admitted business must be transacted through a Surplus Lines Broker or Producer.

Question 30

Executives

Answer 30

Oversee the operation of the business

Question 31

Actuarial Department

Answer 31

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

Question 32

Underwriting Department

Answer 32

Responsible for the evaluating and acceptability of risks of a risk and, once accepted, determines the actual rate to be charged.

Question 33

Marketing/Sales Department

Answer 33

Responsible for advertising and selling

Question 34

Claims Department

Answer 34

Assists the policyholder, insured, or beneficiary in the event of a loss and processes, and pays the amount of the claim in a timely manner, based upon the contractural provisions and the amount insured

Question 35

Distribution Models

Answer 35

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

Question 36

Producer (agent) and Types of Authority

Answer 36

A person or agency appointed by an insurance company to represent it and to sell policies on its behalf. A producer acts with one or more of the following three types of authority:

• Express
• Implied
• Apparent

Question 37

Broker

Answer 37

A licensed individual who negotiates insurance contracts with insurers on behalf of the applicant. A broker represents the applicant or insured’s interests, not the insurer, and does not have legal authority to bind the insurer. broker licenses are not applicable in all states.

Question 38

Applicant Challenge

Answer 38

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

Question 39

Inaccuracies

Answer 39

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

Question 40

Disallowed Information

Answer 40

Report must not include lawsuits over 7 years old or bankruptcies more than 10 years old.

Question 41

Disclosure upon Request

Answer 41

Consumer reporting agencies must provide the information on file if requested.

Question 42

Limited Access to Information

Answer 42

A consumer reporting agency may not provide a credit report to any party that lacks a permissible purpose, such as the evaluation of an application for loan. credit, service, or employment. Permissible purposes also include several business and legal uses.

Question 43

Investigation of Disputed Information

Answer 43

If a consumer’s file contains inaccurate information, the agency must promptly investigate the matter with the source that provided the information. If the investigation fails to resolve the dispute, a statement may be added to the credit file explaining the matter.

Question 44

Correct or Delete Inaccurate Information

Answer 44

A consumer reporting agency must correct or, if necessary, delete from a credit file the information that is found to be inaccurate or can no longer be verified. The consumer reporting agency is not required to remove accurate data from a file unless it is outdated. Adverse information that is more than 7 years old (10 years for bankruptcies) must be removed from the file.

Question 45

Violent Crime Control and Law Enforcement Act of 1994

Answer 45

This 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.

Question 46

Dishonesty

Answer 46

Refers to misrepresentation, untruthfulness, falsification

Question 47

Breach of Trust

Answer 47

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

Question 48

Penalties

Answer 48

Fines and possible prison time

Question 49

Reciprocity

Answer 49

If consent is granted by any state, other states must allow the applicant to work in their states as well.

Question 50

Consent Withdrawal

Answer 50

If conditions of consent are not continually met, the consent may be withdrawn.

Question 51

Applicants convicted of a felony

Answer 51

Must apply for Consent to Work (1033 Waiver) in the business of insurance prior to applying for an insurance license.

Question 52

Risk

Answer 52

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

Question 53

Speculative Risk

Answer 53

Situations where there is a chance for loss, gain, or neither loss or gain to occur.

Examples include gambling, investing, or starting a new business. This type of risk cannot be insured.

Question 54

Pure Risk

Answer 54

Situations where there is no chance for gain; the only outcome is for nothing to occur or for a loss to occur. This is the only risk that can be insured. Examples include the possibility of:

• Damage to property caused by a fire or other natural disaster
• Financial loss as a result of injury, illness, or death

Question 55

Loss

Answer 55

Reduction, decrease, or disappearance of value. A loss is the basis of a claim under terms of an insurance policy.

Question 56

Peril

Answer 56

The cause of source of a loss, such as fire, windstorm, embezzlement, disease, death.

Question 57

Hazard

Answer 57

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

Question 58

STARR

Answer 58

S - Sharing
T - Transfer
A - Avoidance
R - Reduction
R - Retention

Question 59

Insurable Interest

Answer 59

Must exist in every enforceable insurance contract. Insurance interest requires the potential for an insured to suffer financial or economic hardship in the event of a loss, as well as a valid legal purpose for the contract.

Question 60

Underwriting Factors

Answer 60

• Age
• Gender
• Tobacco use
• Medical history and preexisting conditions
• Hazardous hobbies and occupations

Question 61

Contract of Adhesion

Answer 61

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

One party (insurer) prepares the contract and presents it to the other party (applicant) on a “take-it-or-leave-it” basis, without negotiation. Any doubt or ambiguity found in the document is construed in favor of the party that did not write it (insured).

Question 62

Aleatory Contract

Answer 62

The exchange of value is UNEQUAL. The insured’s premium payment is less than the potential benefit to be received in the event of a loss. The insurer’s payment in the event of a loss may be much greater, or much less (e.g., $0 in the event of a loss doesn’t occur), than the insured’s premium payment.

Question 63

Personal Contract

Answer 63

A contract between the insurance company and an INDIVIDUAL. Personal contracts are specific to the person insured at the time the contract is formed. The owner and insured CANNOT be changed without the consent of the insurance company. A property and casualty insurance contract is personal since it cannot be assigned. Life insurance is NOT a personal contract. The policy can be assigned - or a new owner may be named as long as the insurer is notified of the change.

Question 64

Unilateral Contract

Answer 64

Only ONE party is legally bound to the contractual obligations after the premium is paid to the insurer. Only the INSURER makes a promise of future performance, and only the INSURER can be charged with breach of contract. The policyowner can cancel the policy at any time and for any reason. The policyowner is not required to continue paying future premiums.

Question 65

Conditional Contract

Answer 65

BOTH parties must perform certain duties of conduct to make the contract enforceable. The insurer must pay claims if the insured has complied with all of the policies terms and conditions. Without premiums being paid on time and in full, the insurer is not obligated to pay the claim if the policy lapses.

Question 66

Principal of Indemnity

Answer 66

The insured is restored to the same financial or economic condition that existed prior to the loss, depending on the amount and type of insurance purchased. The insured should not profit from an insurance transaction.

Question 67

Utmost Good Faith

Answer 67

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.

Question 68

Representations

Answer 68

Statements made by the applicant on the application are considered representations NOT warranties. The representations are statements that are believed to be true to the best of the knowledge and belief of the applicant/insured at the time of application.

Question 69

Material vs. Immaterial Representations

Answer 69

Statements that impact the acceptance of an insurable risk - whether involving the rating of an acceptable risk, or the decision as to whether to accept or decline a risk - are considered to be material. Immaterial representations do not affect the acceptance rating of the risk.

Question 70

Misrepresentations

Answer 70

A FALSE statement contained in the application; it usually does not void coverage or the policy, if it is immaterial. If the statement is material to the issuance of coverage, meaning the insurer would not have issued a policy had the misrepresentation not bee made, or premiums charged would have been higher, or coverage limited, coverage does not apply. A material misrepresentation may void the policy.

Question 71

Warranties

Answer 71

Statements in the application or stipulations in the policy that are GUARANTEED true in all respects. If warranties are later discovered untrue or breached (past, present or future), coverage (and sometimes the contract) is voided

Question 72

Concealment

Answer 72

The willful holding back or secretion of material facts pertinent to the issuance of insurance (or a claim). Concealment may result in denial of coverage and may void the policy.

Question 73

Fraud

Answer 73

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 pertaining 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

Question 74

Waiver

Answer 74

Voluntary surrender of a known right, claim or privilege; An example would be an insurer’s failure to obtain an answer to an unanswered question in its application for insurance prior to issuing the policy. Such failure WAIVES the insurer’s right to contest a claim based on the information it could reasonably have obtained. IT may also be in cases in which the insurer accepts an overdue premium that keeps the policy in-force.

Question 75

Estoppel

Answer 75

Judicial denial of a contractual right based on prior actions that are contrary to what the contract requires.