Chapter 1: Insurance Overview

Question 1

What are the three principles of insurance?

Answer 1

Risk Pooling
Law of Large Numbers
Insurable Interest

Question 2

____ _____ spreads risk by sharing the possibility of loss over a large number of people.

Answer 2

Risk Pooling - transfers risk from an individual to a group

Question 3

________ are people who collect and analyze risk data

Answer 3

Actuaries

Question 4

Difference between mortality and morbidity?

Answer 4

Mortality Rate - the rate at which people will die
Morbidity Rate - the rate at which people get sick

Question 5

The law of large numbers?

Answer 5

States that as the group increases in size, it is easier to predict the number of future losses over a certain period of time

Question 6

What is insurable interest?

Answer 6

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

Question 7

When is the ONLY time insurable interest must be shown?

Answer 7

At the time of application

Question 8

What term means “to make whole?”

Answer 8

Indemnity

Question 9

What is the total amount the insurer will pay for an insured risk?

Answer 9

Limit of Liability

Question 10

What is the premium amount established by?

Answer 10

The degree of the risk insured

Question 11

TorF: Deductibles apply to health insurance and are used to reduce premium costs and prevent abuse of a policy by unnecessary claims

Answer 11

True

Question 12

What is the insured’s notificatin to the insurer that a payment is requested for a covered loss?

Answer 12

Claim - applies to all lines of insurance

Question 13

What is the tendency for poorer than average risks to seek out insurance called?

Answer 13

Adverse Selection

Question 14

What is defined as spreading risk from one insurer to one or more other insurers?

Answer 14

Reinsurance - insurers cooperate to prevent bankrupcy

Question 15

TF: During reinsurance, the insurer that accepts the additional risk is called the reinsuree

Answer 15

False - Reinsurer

Question 16

TF: During reinsurance, the insurer that gives risk away to another insurer is called the ceding company or primary insurer

Answer 16

True

Question 17

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

Answer 17

B

Question 18

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

Answer 18

B

Question 19

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

Answer 19

C

Question 20

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.

Answer 20

D

Question 21

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

Answer 21

C

Question 22

Included in the private insurers are two groups of commercial insurers, called?

Answer 22

Stock insurers
Mutual insurers

Question 23

Incorporated commercial companies owned by their stockholrders are called?

Answer 23

Stock Insurers

Question 24

Commercial companies owned by their policyholders are called?

Answer 24

Mutual Insurers

Question 25

TF: Stockholders of a stock insurance company take part in the profits and losses that the insurer experiences.

Answer 25

True

Question 26

What do you call earnings paid out to stockholders of stock insurers?

Answer 26

Dividends

Question 27

Nonparticipating insurers is another name for?

Answer 27

Stock insurers (policyholders do not participate in the profits and losses)

Question 28

Participating insurers is another name for?

Answer 28

Mutual insurers (policyholders participate in the profits)

Question 29

What two ways are mutual insurers different from stock insurers?

Answer 29

Mutual insurers do not have capital stock
Mutual insurers distribute profit among its members - policyholders

Question 30

Transformation of a stock insurer into a mutual insurer is called?

Answer 30

Mutualization

Question 31

Transformation of a mutual insurer into a stock insurer is called?

Answer 31

Demutualization

Question 32

What is one thing mutual and stock insurers have in common?

Answer 32

A board of directors

Question 33

TF: Dividends paid out from mutual insurers are considered a non-taxable return of overcharged premium

Answer 33

True

Question 34

TF: whereas dividends paid out from stock insurers are simply the profits experienced by the company.

Answer 34

True

Question 35

Two common types of Service Providers (also called Noncommercial Organizations)?

Answer 35

Health Maintanance Organizations HMOs
Preferred Provider Organizations PPOs

Question 36

BlueCross is intended to cover _______ costs, while BlueShield is intended to cover _____ and ____ costs.

Answer 36

Hospital, Medical and Surgical

Question 37

TF: HMOs provide the medical care and finances required to fund health care services.

Answer 37

true

Question 38

TF: PPOs provide discounted medical services to its members

Answer 38

True

Question 39

What do you call a special type of mutual insurer, ethnic, or charitable organization that provides insurance exclusively to their members?

Answer 39

Fraternal Benefit Societies, also known as Fraternal insurers or Fraternals

Question 40

TF: Fraternal Benefit Societies are not exempt from federal income tax or state premium taxes.

Answer 40

False, because they are considered a charitable org

Question 41

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?

Answer 41

Admitted, or Authorized Or Licensed Insurer

Question 42

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?

Answer 42

Nonadmitted, or Unauthorized or Non-licensed

Question 43

An insurer that conducts business in the state it was incorporated is?

Answer 43

Domestic Insurer

Question 44

What is any insurer that conducts business in a state or district in which it wasn’t incorporated?

Answer 44

Foreign Insurer

Question 45

What is any insurer that conducts business in a country in which it wasn’t incorporated?

Answer 45

Alien Insurer

Question 46

Consisting of agents and brokers, _________ are people who sell, solicit, and negotiate insurance.

Answer 46

Producers

Question 47

_____ are insurance producers who represent the insurer, not the insured

Answer 47

Agents

Question 48

_____ are insurance produces who represent the insured, not the insurer

Answer 48

Brokers

Question 49

TF: Brokers cannot bind insurance

Answer 49

True

Question 50

______ are licensed salespeople who work for an agent or broker.

Answer 50

Solicitors

Question 51

__________ provide insurance advise to insureds for a fee

Answer 51

Consultants

Question 52

Mutual insurers pay dividends to:
Select one:
a. Shareholders
b. Policy owners
c. They don’t pay dividends.
d. Board of Directors

Answer 52

B

Question 53

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

Answer 53

B

Question 54

Stock insurers pay dividends to:
Select one:
a. Shareholders
b. Board of Directors
c. They don’t pay dividends.
d. Policy owners

Answer 54

A

Question 55

Stock insurers are also called:
Select one:
a. Participating
b. Government insurers
c. Nonparticipating
d. Service providers

Answer 55

C

Question 56

Mutual insurers are also called:
Select one:
a. Nonparticipating
b. Participating
c. Service providers
d. Government insurers

Answer 56

B

Question 57

What are the two major components of the Unfair Trade Practices Act?

Answer 57

Unfair marketing practices
Unfair claims practices

Question 58

Any written or oral statement that does not accurately describe a policy’s benefits, conditions, or coverage is considered?

Answer 58

Misrepresentation

Question 59

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.

Answer 59

Defamation

Question 60

What occurs if a buyer of an insurance policy is given anything of significant value as an inducement to purchase or renew a policy?

Answer 60

Rebating

Question 61

TF: a small token gift under $25 used for advertising is not considered rebating.

Answer 61

True

Question 62

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?

Answer 62

Twisting

Question 63

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?

Answer 63

Churning

Question 64

To make a statement about the solvency of an insurer to deceive others?

Answer 64

False Financial Statements

Question 65

TF: Discrimination is a necessary part of the insurance business

Answer 65

True

Question 66

Who makes distinctions in rates and available policies based on applicants’ ages, predicted expectation of life, health hazards, and similar principles.

Answer 66

Underwriters

Question 67

What is the unequal application of the principles used to approve, rate, set premiums, and issue insurance policies?

Answer 67

“Unfair” Discrimination

Question 68

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.

Answer 68

True to all

Question 69

What generally manipulates through the prospect of something desirable?

Answer 69

coercion

Question 70

What manipulates through the threat of a negative result?

Answer 70

Intimidation

Question 71

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?

Answer 71

Boycott

Question 72

Possible penalties for Unfair marketing or claims practice?

Answer 72

Commisioner may issue a cease and desist order
Failure to comply = fines and loss of license

Question 73

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

Answer 73

A

Question 74

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

Answer 74

B

Question 75

All of the following acts are considered unfair trade practices, EXCEPT:
Select one:
a. Misrepresentation
b. Replacement
c. Rebating
d. Coercion

Answer 75

B

Question 76

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.

Answer 76

A

Question 77

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

Answer 77

A

Question 78

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

Answer 78

C

Question 79

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

Answer 79

C

Question 80

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

Answer 80

C

Question 81

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

Answer 81

C

Question 82

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

Answer 82

B