Chapter 1: Insurance Overview Flashcards
What are the three principles of insurance?
Risk Pooling
Law of Large Numbers
Insurable Interest
____ _____ spreads risk by sharing the possibility of loss over a large number of people.
Risk Pooling - transfers risk from an individual to a group
________ are people who collect and analyze risk data
Actuaries
Difference between mortality and morbidity?
Mortality Rate - the rate at which people will die
Morbidity Rate - the rate at which people get sick
The law of large numbers?
States that as the group increases in size, it is easier to predict the number of future losses over a certain period of time
What is insurable interest?
Insurable interest states that an individual must have a valid concern for the continuation of the life or well being of the person insured. The continued livelihood of the insured must have significant value over the insured’s illness or death. Insurable interest must exist in order for a policy to pay benefits. Insurable interest in life insurance policies is present in the following:
The purchaser is also the person insured under the policy
Marriage or blood relationship
Business partners
Creditor-debtor relationship
When is the ONLY time insurable interest must be shown?
At the time of application
What term means “to make whole?”
Indemnity
What is the total amount the insurer will pay for an insured risk?
Limit of Liability
What is the premium amount established by?
The degree of the risk insured
TorF: Deductibles apply to health insurance and are used to reduce premium costs and prevent abuse of a policy by unnecessary claims
True
What is the insured’s notificatin to the insurer that a payment is requested for a covered loss?
Claim - applies to all lines of insurance
What is the tendency for poorer than average risks to seek out insurance called?
Adverse Selection
What is defined as spreading risk from one insurer to one or more other insurers?
Reinsurance - insurers cooperate to prevent bankrupcy
TF: During reinsurance, the insurer that accepts the additional risk is called the reinsuree
False - Reinsurer
TF: During reinsurance, the insurer that gives risk away to another insurer is called the ceding company or primary insurer
True
he consideration an insured pays for insurance coverage is known as a:
Select one:
a. Deductible
b. Premium
c. Limit of liability
d. None of the above
B
The law of large numbers:
Select one:
a. States that an insurer taking on too many risks will incur catastrophic losses
b. States that as a group increases in size, the easier it is to predict the number of future losses over a certain period of time
c. Predicts losses
d. States that poorer than average risks tend to seek out insurance
B
Transferring uncertainty of loss to the insurance company is the definition of:
Select one:
a. Risk pooling
b. The law of large numbers
c. Insurance
d. None of the above
C
Which of the following best describes reinsurance?
Select one:
a. It reduces risk.
b. It makes whole.
c. It includes adverse selection.
d. It spreads risk from one insurer to another.
D
The term describing the insured’s notification to the insurer requesting payment for a covered loss is:
Select one:
a. Limit of liability
b. Premium
c. Claim
d. Deductible
C
Included in the private insurers are two groups of commercial insurers, called?
Stock insurers
Mutual insurers
Incorporated commercial companies owned by their stockholrders are called?
Stock Insurers
Commercial companies owned by their policyholders are called?
Mutual Insurers
TF: Stockholders of a stock insurance company take part in the profits and losses that the insurer experiences.
True
What do you call earnings paid out to stockholders of stock insurers?
Dividends
Nonparticipating insurers is another name for?
Stock insurers (policyholders do not participate in the profits and losses)
Participating insurers is another name for?
Mutual insurers (policyholders participate in the profits)
What two ways are mutual insurers different from stock insurers?
Mutual insurers do not have capital stock
Mutual insurers distribute profit among its members - policyholders
Transformation of a stock insurer into a mutual insurer is called?
Mutualization
Transformation of a mutual insurer into a stock insurer is called?
Demutualization
What is one thing mutual and stock insurers have in common?
A board of directors
TF: Dividends paid out from mutual insurers are considered a non-taxable return of overcharged premium
True
TF: whereas dividends paid out from stock insurers are simply the profits experienced by the company.
True
Two common types of Service Providers (also called Noncommercial Organizations)?
Health Maintanance Organizations HMOs
Preferred Provider Organizations PPOs
BlueCross is intended to cover _______ costs, while BlueShield is intended to cover _____ and ____ costs.
Hospital, Medical and Surgical
TF: HMOs provide the medical care and finances required to fund health care services.
true
TF: PPOs provide discounted medical services to its members
True
What do you call a special type of mutual insurer, ethnic, or charitable organization that provides insurance exclusively to their members?
Fraternal Benefit Societies, also known as Fraternal insurers or Fraternals
TF: Fraternal Benefit Societies are not exempt from federal income tax or state premium taxes.
False, because they are considered a charitable org
Insurers who have received a certificate of authority authorizing them to transact insurance in a particular state for a particular line or lines of insurance?
Admitted, or Authorized Or Licensed Insurer
Insurers who have NOT received a certificate of authority authorizing them to transact insurance in a particular state for a particular line or lines of insurance?
Nonadmitted, or Unauthorized or Non-licensed
An insurer that conducts business in the state it was incorporated is?
Domestic Insurer
What is any insurer that conducts business in a state or district in which it wasn’t incorporated?
Foreign Insurer
What is any insurer that conducts business in a country in which it wasn’t incorporated?
Alien Insurer
Consisting of agents and brokers, _________ are people who sell, solicit, and negotiate insurance.
Producers
_____ are insurance producers who represent the insurer, not the insured
Agents
_____ are insurance produces who represent the insured, not the insurer
Brokers
TF: Brokers cannot bind insurance
True
______ are licensed salespeople who work for an agent or broker.
Solicitors
__________ provide insurance advise to insureds for a fee
Consultants
Mutual insurers pay dividends to:
Select one:
a. Shareholders
b. Policy owners
c. They don’t pay dividends.
d. Board of Directors
B
What must an insurer have to be admitted?
Select one:
a. Authorization from the federal government
b. Certificate of authority
c. Certificate of coverage
d. None of the above
B
Stock insurers pay dividends to:
Select one:
a. Shareholders
b. Board of Directors
c. They don’t pay dividends.
d. Policy owners
A
Stock insurers are also called:
Select one:
a. Participating
b. Government insurers
c. Nonparticipating
d. Service providers
C
Mutual insurers are also called:
Select one:
a. Nonparticipating
b. Participating
c. Service providers
d. Government insurers
B
What are the two major components of the Unfair Trade Practices Act?
Unfair marketing practices
Unfair claims practices
Any written or oral statement that does not accurately describe a policy’s benefits, conditions, or coverage is considered?
Misrepresentation
What is any false, maliciously critical, or derogatory communication – written or oral – that injures another’s reputation, fame, or character? Both individuals and companies can be defamed.
Defamation
What occurs if a buyer of an insurance policy is given anything of significant value as an inducement to purchase or renew a policy?
Rebating
TF: a small token gift under $25 used for advertising is not considered rebating.
True
The unethical act of persuading a policyowner to drop a policy solely for the purpose of selling another policy from another insurer without regard to possible disadvantages to the policyowner?
Twisting
The practice of using misrepresentation to induce a policyholder to replace a policy issued by the insurer the producer represents, rather than the policy of a competitor?
Churning
To make a statement about the solvency of an insurer to deceive others?
False Financial Statements
TF: Discrimination is a necessary part of the insurance business
True
Who makes distinctions in rates and available policies based on applicants’ ages, predicted expectation of life, health hazards, and similar principles.
Underwriters
What is the unequal application of the principles used to approve, rate, set premiums, and issue insurance policies?
“Unfair” Discrimination
TF: It is illegal to do any of the following:
Refuse to insure or to limit the amount of coverage offered to an individual solely because of the individual’s sex, marital status, race, religion, or national origin;
Refuse to insure solely because another insurer has refused to write a policy or has cancelled an existing policy on that person;
Terminate or modify coverage or refuse to renew coverage solely because the applicant or insured is mentally or physically impaired; or
Discriminate against victims of domestic violence.
True to all
What generally manipulates through the prospect of something desirable?
coercion
What manipulates through the threat of a negative result?
Intimidation
What is a form of intimidation in which an individual or group refuses to do business with a company or individual, either to drive them out of business or to force them to act in certain way?
Boycott
Possible penalties for Unfair marketing or claims practice?
Commisioner may issue a cease and desist order
Failure to comply = fines and loss of license
In the underwriting of insurance policies, some amount of discrimination is:
Select one:
a. Present in many cases, because of differing levels of risk
b. Illegal in all cases
c. Forbidden by federal statutes
d. Permissible only when two people of equal risk are charged different rates
A
Leo, a producer, sat down with a prospective client to discuss a long-term care policy. He used a computer program to outline and emphasize his remarks. The visual presentation contained the principal benefits of the policy he was trying to sell. Although he mentioned that it also had, the usual, conditions, he did not include those in his visual presentation or specify what they were. The producer was engaging in:
Select one:
a. Twisting
b. Misrepresentation
c. Coercion
d. Rebating
B
All of the following acts are considered unfair trade practices, EXCEPT:
Select one:
a. Misrepresentation
b. Replacement
c. Rebating
d. Coercion
B
All of the following, if performed frequently enough to indicate a general business practice, are unfair claims settlement practices, EXCEPT:
Select one:
a. Requiring submission of preliminary claim report or a formal proof of loss before paying a claim.
b. Threatening a client in order to discourage their effort to recover a loss.
c. Failing to acknowledge with reasonable promptness communications regarding claims.
d. Knowingly misrepresenting to claimants pertinent facts relating to coverages.
A
Defamation occurs when:
Select one:
a. An individual or entity makes false, derogatory statements about an insurer’s financial condition that are calculated to injure the insurer’s business
b. An individual or entity acts to create a general action that in any way to intimidate an insurer in order to gain a monopoly in business
c. An individual or entity refuses to insure or limit the amount of coverage only because another insurer has cancelled an existing policy on that person
d. An individual or entity takes legal action against an insurer or producer
A
The practice of using misrepresentation to induce a policyholder to replace a policy issued by the insurer the producer represents is called:
Select one:
a. Twisting
b. Misrepresentation
c. Churning
d. Intimidation
C
Mr. Norris, an insured, submits a claim and proof of loss for medical expenses covered by his major medical policy. According to the time-of-payment-of-claims provision, how soon must the company pay the claim?
Select one:
a. Within 90 days
b. Within 30 days
c. Immediately
d. Within 150 days
C
In discussing a potentially lucrative group policy with a business owner who had purchased a business and just moved into the community, an established producer jokingly remarked, “Well, would it sweeten the pot if I could assure you membership in the country club?”The producer added, “I’m on the membership committee and while we’re not accepting new application right now, I’m sure something could be worked out.” These remarks constituted:
Select one:
a. Nothing more than an effort to establish a warm relationship with the potential client
b. Misrepresentation
c. Rebating
d. Intimidation
C
An example of an unfair claim settlement practice would include:
Select one:
a. Denying the payment of a claim because it does not meet the conditions of the insurance contract
b. Delaying the payment of a claim while it is investigated for possible fraud
c. Advising a claimant of the possibility that, should the claimant reject a settlement offer, an arbitration award might be less than the offer
d. Denying the claim because it occurred after the cancellation of the policy
C
Which of the following is considered an unfair claims practice?
Select one:
a. Splitting a commission with a prospect
b. Failing to affirm or deny coverage within a reasonable time after receiving proof of loss
c. Convincing a policyholder to lapse or surrender an existing policy to sell another policy
d. Making any oral or written statement that is false, maliciously critical, or calculated to injure a competing producer
B
