General Insurance

Question 1

Agent/ producer

Answer 1

A legal representative of an insurance company

Question 2

Broker

Answer 2

an insurance producer not appointed by an insurer and is deemed to represent the client
Insurance policy - a contract between a policyowner (and/or insured and an insurance company which agrees to pay the insured or the beneficiary for loss caused
hv specific events

Question 3

Insured

Answer 3

the person covered by the insurance policy. This person may or may not be the policyowner

Question 4

Insurer

Answer 4

the company who issues an insurance policy

Question 5

Policyowner

Answer 5

Policyowner - the person entitled to exercise the rights and privileges in the policy

Question 6

Premium

Answer 6

• the money paid to the insurance company for the insurance policy

Question 7

Reciprocity

Answer 7

Reciprocity/Reciprocal - a mutual interchange of rights and privileges

Question 8

Insurance

Answer 8

is a transfer of risk of loss from an individual or a business entity to an insurance company, which, in turn, spreads the costs
of unexpected losses to many individuals. If there were no insurance mechanism, the cost of a loss would have to be borne solely by
the individual who suffered the loss.

Question 9

Risk

Answer 9

is the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable.

Question 10

Types of risk

Answer 10

Peril and speculative

Question 11

Peril risk

Answer 11

risk refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the
only type of risk that insurance companies are willing to accept.

Perils are the causes of loss insured against in an insurance policy.

Question 12

Speculative

Answer 12

Speculative risk involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks
are not insurable.

Question 13

Hazard

Answer 13

Hazards are conditions or situations that increase the probability of an insured loss occurring. Conditions such as slippery floors, or
congested traffic are hazards and may increase the chance of a loss occurring. Hazards are classified as physical hazards, moral
hazards; or morale hazards.

Question 14

Physical hazard

Answer 14

• Physical hazards are those arising from the material, structural, or operational features of the risk, apart from the persons owning
or managing it.

Question 15

Moral hazard

Answer 15

Moral hazards refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent
claims against an insurer.

Question 16

Morale hazard

Answer 16

Morale hazard refers to an increase in the hazard presented by a risk, arising from the insured’s indifference to loss because of
the existence of insurance. (e.g. I’m not going to bother fixing this. If it breaks my insurance will pay to replace it.)

Question 17

Loss

Answer 17

Loss is defined as the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named
peril. Insurance provides a means to transfer loss.

Question 18

Exposure

Answer 18

Exposure is a unit of measure used to determine rates charged for insurance coverage. In life insurance, all of the following factors are
considered in determining rates:
• The age of the insured;
Medical history;
Occupation; and
• SAy
A large number

Question 19

Homegenous

Answer 19

A large number of units having the same or similar exposure to loss is known as homogeneous. The basis of insurance is sharing risk
among the members of a large homogeneous group with similar exposure to loss.

Question 20

Methods of Handling Risk

Answer 20

Avoidance 
Retention
Sharing 
Reduction 
Transfer

Question 21

Avoidance

Answer 21

One of the methods of dealing with risk is avoidance, which means eliminating exposure to a loss. For example, if a person wanted to
avoid the risk of being killed in an airplane crash, he/she might choose never to fly in an airplane. Risk avoidance is effective, but
seldom practical.

Question 22

Retention

Answer 22

Risk retention is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is
also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays. The
purpose of retention is
1. To reduce expenses and improve cash flow;
2. To increase control of claim reserving and claims settlements; and
3. To fund for losses that cannot be insured.

Question 23

Sharing

Answer 23

Sharing is a method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to
share the losses that occur within that group. A reciprocal insurance exchange is a formal risk-sharing arrangement.

Question 24

Reduction

Answer 24

Reduction
Since we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. Reduction would include
actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps mak
a change in our lifestyles.

Question 25

Transfer

Answer 25

The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common
method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not
eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring.
There are several ways to transfer risk, such as hold harmless agreements and other contractual agreements, but the safest and most
common method is to purchase insurance coverage.

Question 26

Elements of Insurable Risks

Answer 26

Due to chance - A loss that is outside the insured’s control.
• Definite and measurable - A loss that is specific as to the cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.
Statistically predictable - Insurers must be able to estimate the average frequency and severity of future losses and set
appropriate premium rates. (In life and health insurance, the use of mortality tables and morbidity tables allows the insurer to project losses based on statistics.)
• Not catastrophic - Insurers need to be reasonably certain their losses will not exceed specific limits. That is why insurance policies usually exclude coverage for loss caused by war or nuclear events: There is no statistical data that allows for the development of rates that would be necessary to cover losses from events of this nature.
• Randomly selected and large loss exposure - There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location.

Question 27

Adverse selection

Answer 27

Insurance companies strive to protect themselves from adverse selection, the insuring of risks that are more prone to losses than the
average risk. Poorer risks tend to seek insurance or file claims to a greater extent than better risks.
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Question 28

Law of large

Answer 28

The basis of insurance is sharing risk among a large pool of people with a similar exposure to loss (a homogeneous group). The law of
large numbers states that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be.
This law forms the basis for statistical prediction of loss upon which insurance rates are calculated.

Question 29

Availability of insurance

Answer 29

Insurance is available from both private companies and the government. The major difference between government and private
insurance is that the government programs are funded with taxes and serve national and state social purposes, while private policies
are funded by premiums.
Private insurance companies can be classified in a variety of ways:
• Ownership;
Authority to transact business;
• Location (domicile);
• Marketing and distribution systems; or
• Rating (financial strength).

Question 30

Types of Insurers

Answer 30

Stock companies
Mutual companies

Fraternal Benefit Societies

Question 31

Fraternal Benefit Societies

Answer 31

A fraternal benefit society is an organization formed to provide insurance benefits for members of an affiliated lodge, religious
organization, or fraternal organization with a representative form of government. Fraternals sell only to their members and are
considered charitable institutions, and not insurers. They are not subject to all of the regulations that apply to the insurers that offer
coverage to the public at large.

Question 32

Stock companies

Answer 32

are owned by the stockholders who provide the capital necessary to establish and operate the insurance company
and who share in any profits or losses. Officers are elected by the stockholders and manage stock insurance companies. Traditionally,
stock companies issue nonparticipating policies, in which policyowners do not share in profits or losses.

Question 33

Mutual companies

Answer 33

Mutual Companies
Mutual companies are owned by the policyowners and issue participating policies. With participating policies, policyowners are
entitled to dividends, which, in the case of mutual companies, are a return of excess premiums and are, therefore, nontaxable.
Dividends are generated when the premiums and the earnings combined exceed the actual costs of providing coverage, creating a
surplus. Dividends are not guaranteed.
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Question 34

Private vs. Government Insurers

Answer 34

Federal and state governments provide insurance in the areas where private insurance is not available, called social insurance
programs. Government insurance programs include Social Security, Medicare, Medicaid, Federal Crop insurance and National Flood
insurance.
The major difference between government programs and private insurance programs is that the government programs are funded
with taxes and serve national and state social purposes, while private policies are funded by premiums.

Question 35

3. Admitted vs. Nonadmitted Insurers

Answer 35

Before insurers may transact business in a specific state, they must apply for and be granted a license or Certificate of Authority, from
the state department of insurance and meet any financial (capital and surplus) requirements set by the state. Insurers who meet the
state’s financial requirements and are approved to transact business in the state are considered authorized or admitted into the state
as a legal insurer. Those insurers who have not been approved to do business in the state are considered unauthorized or
nonadmitted. Most states have laws that prohibit unauthorized insurers from conducting business in the state, except through
licensed excess and surplus lines brokers.
Know This! Insurers must obtain a Certificate of Authority prior to transacting business in this state.

Question 36

Domestic, Foreign and Alien Insurers

Answer 36

Insurance companies are classified according to the location of incorporation (domicile). Regardless of where an insurance company
is incorporated, it must obtain a Certificate of Authority before transacting insurance within the state.
Know This! A domicile refers to the location where an insurer is incorporated, not necessarily where the insurer conducts business.
A domestic insurer is an insurance company that is incorporated in this state. In most cases, the company’s home office is in the state
in which it was formed - the company’s domicile. For instance, a company chartered in Pennsylvania would be considered a
Pennsylvania domestic company.
A foreign insurer is an insurance company that is incorporated in another state, the District of Columbia, or a territorial possession.
Currently, the United States has 5 major U.S. territories: American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and virgin island

Question 37

Financial Status (Independent Rating Services)

Answer 37

The financial strength and stability of an insurance company are two vitally important factors to potential insureds. The financial
strength of an insurance company is based on prior claims experience, investment earnings, level of reserves (amount of money kept
in a separate account to cover debts to policyholders), and management, to name a few. Guides to insurance companies’ financial
integrity are published regularly by the following various independent rating services:
• AM Best
Fitch
• Standard and Poor’s
Moody’s
• Weiss

Question 38

Reinsurance

Answer 38

Reinsurance is a contract under which one insurance company (the reinsurer) indemnifies another insurance company for part or all
of its liabilities. The purpose of reinsurance is to protect insurers against catastrophic losses. The originating company that procures
insurance on itself from another insurer is called the ceding insurer (because it cedes, or gives, the risk to the reinsurer). The other
insurer is called the assuming insurer, or reinsurer.
When reinsurance is purchased on a specific policy, it is classified as facultative reinsurance. When an insurer has an automatic
reinsurance agreement between itself and the reinsurer in which the reinsurer is bound to accept all risks ceded to it, it is classified as
a reinsurance treaty. Treaties are usually negotiated for a period of a year or longer.

Question 39

Agent and general angency rules

Answer 39

An agent/producer is an individual licensed to sell, solicit or negotiate insurance contracts on behalf of the principal (insurer). The law
of agency defines the relationship between the principal and the agent/producer: the acts of the agent/producer within the scope of
authority are deemed to be the acts of the insurer.
In this relationship, it is a given that
• An agent represents the insurer, not the insured;
• Any knowledge of the agent is presumed to be knowledge of the insurer;
• If the agent is working within the conditions of his/her contract, the insurer is fully responsible; and
• When the insured submits payment to the agent, it is the same as submitting a payment to the insurer.
The agent is responsible for accurately completing applications for insurance, submitting the application to the insurer for
underwriting, and delivering the policy to the policyowner.
Know This! Insurance agents represent the insurer (principal). “Who is your pal? The principal!”

Question 40

Authority and power of agents

Answer 40

The agency contract details the authority an agent has within his/her company. Contractually, only those actions that the agent is
authorized to perform can bind the principal (insurer). In reality, an agent’s authority is much broader. There are 3 types of agent
authority: express, implied, and apparent.

Question 41

Express authority

Answer 41

Express authority is the authority a principal intends to grant to an agent by means of the agent’s contract. It is the authority that is
written in the contract.

Question 42

Implied authority

Answer 42

Implied authority is authority that is not expressed or written into the contract, but which the agent is assumed to have in order to
transact the business of insurance for the principal. Implied authority is incidental to and derives from express authority since not
every single detail of an agent’s authority can be spelled out in the written contract.
Example:
If the agency contract does not specifically authorize the agent to collect premiums and remit them to the insurer, but the agent
routinely does so in the process of solicitation and delivery of policies, the agent has the implied authority to collect and remit
premiums.

Question 43

Apparent authority

Answer 43

Apparent
Apparent authority (also known as perceived authority) is the appearance or the assumption of authority based on the actions, words,
or deeds of the principal or because of circumstances the principal created. For example, if an agent uses insurer’s stationery when
soliciting coverage, an applicant may believe that the agent is authorized to transact insurance on behalf of the insurer.

Question 44

Responsibility for applicant and insured

Answer 44

Although the agents act for the insurer, they are legally obligated to treat applicants and insureds in an ethical manner. Because an
agent handles the funds of the insured and the insurer, he/she has fiduciary responsibility. A fiduciary is someone in a position of trust.
More specifically, it is illegal for insurance producers to commingle premiums collected from the applicants with their own personal
funds.
Market conduct describes the way companies and producers should conduct their business. It is a Code of Ethics for producers.
Producers must adhere to certain established procedures, and failure to comply will result in penalties. Some of the market conduct
regulations include, but are not limited to, the following:
• Conflict of interest;
• A request of a gift or loan as a condition to complete business; and
• Supplying confidential information.
Producers are required to perform in a professional manner at all times. Professionalism means that a person is engaged in an
occupation requiring an advanced level of training, knowledge, or skill. Being professional means placing the public’s interest above
one’s own in all situations. Any deviation could result in a penalty.

Question 45

Contracts

Answer 45

A contract is an agreement between two or more parties enforceable by law. Because of unique aspects of insurance transactions,
the general law of contracts had to be modified to fit the needs of insurance.
1. Elements of a Legal Contract
In order for insurance contracts to be legally binding, they must have 4 essential elements:
1. Agreement - offer and acceptange;
2. Consideration;
3. Competent parties; and
4. Legal purpose

Question 46

Offer and acceptance

Answer 46

Offer and Acceptance
There must be a definite offer by one party, and the other party must accept this offer in its exact terms. In insurance, the applicant
usually makes the offer when submitting the application. Acceptance takes place when an insurer’s underwriter approves the
application and issues a policy.

Question 47

Consideration

Answer 47

The binding force in any contract is the consideration. Consideration is something of value that each party gives to the other. The
consideration on the part of the insured is the payment of premium and the representations made in the application. The
consideration on the part of the insurer is the promise to pay in the event of loss.
Know This! Insurer’s consideration is the promise to pay for losses; insured’s consideration is the payment of premium and
statements on the application.

Question 48

Competent parties and legal purpose

Answer 48

Competent Parties
The parties to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties
be of legal age (14 1/2 in New York), mentally competent to understand the contract, and not under the influence of drugs or alcohol.
Legal Purpose
The purpose of the contract must be legal and not against public policy. To ensure legal purpose of a Life Insurance policy, for
example, it must have both: insurable interest and consent. A contract without a legal purpose is considered void, and cannot be
enforced by any party.

Question 49

Characteristics of a insurance contract

Answer 49

In addition to required elements, insurance contracts have unique characteristics that distinguish them from other types of legal
contracts. It is important to understand these features and how they affect parties to an insurance contract.
Know This!
Aleatory = unequa/values;
Unilateral = one-sided (only one party makes a promise)
Adhesion = only one party (insurer) prepares a contract, and the other party (insured) accepts it as is

Question 50

Contract of adhesion

Answer 50

A contract of adhesion is prepared by one of the parties (insurer) and accepted or rejected by the other party (insured). Insurance
policies are not drawn up through negotiations, and an insured has little to say about its provisions. In other words, insurance
contracts are offered on a take-it-or-leave-it basis by an insurer. Any ambiguities in the contract will be settled in favor of the insured.

Question 51

Aleatory contract

Answer 51

Insurance contracts are aleatory, which means there is an exchange of unequal amounts or values. The premium paid by the insured is
small in relation to the amount that will be paid by the insurer in the event of loss.

Question 52

Personal contract

Answer 52

In general, an insurance contract is a personal contract because it is between the insurance company and an individual. Because the
company has a right to decide with whom it will and will not do business, the insured cannot be changed to someone else without the
written consent of the insurer, nor can the owner transfer the contract to another person without the insurer’s approval. Life
insurance is an exception to this rule: A policyowner can transfer (or assign) ownership to another person. However, the insurer must
still be notified in writing.

Question 53

Unilateral

Answer 53

In a unilateral contract, only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding
promises. However, an insurer is legally bound to pay losses covered by a policy in force.

Question 54

Conditional contract

Answer 54

As the name implies, a conditional contract requires that certain conditions must be met by the policyowner and the company in
order for the contract to be executed, and before each party fulfills its obligations. For example, the insured must pay the premium
and provide proof of loss in order for the insurer to cover a claim.

Question 55

Indemnity

Answer 55

Indemnity (sometimes referred to as reimbursement) is a provision in an insurance policy that states that in the event of loss, an
insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of
the existence of an insurance contract. The purpose of insurance is to restore, but not let an insured or a beneficiary profit from the
loss.
Life and Health Example:
Brenda has a health insurance policy for $20,000. After she was hospitalized, her medical expenses added up to $15,000. The
insurance policy will reimburse Brenda only for $15,000 (the amount of the loss), and not for $20,000 (the total amount

Question 56

Utmost good faith

Answer 56

The principle of utmost good faith implies that there will be no fraud, misrepresentation or concealment between the parties. As it
pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information. The insured is
expected to provide accurate information on the application for insurance, and the insurer must clearly and truthfully describe policy
features and benefits, and must not conceal or mislead the insured.

Question 57

Ambiguities in a contract of adhesion

Answer 57

Because only the insurance company has the right to draw up a contract, and the insured has to adhere to the contract as issued, the
courts have held that any ambiguity in the contract should be interpreted in favor of the insured.

Question 58

Representation

Answer 58

Representations are statements believed to be true to the best of one’s knowledge, but they are not guaranteed to be true. For
insurance purposes, representations are the answers the insured gives to the questions on the insurance application.
Untrue statements on the application are considered misrepresentations and could void the contract. A material misrepresentation is
a statement that, if discovered, would alter the underwriting decision of the insurance company. Furthermore, if material
misrepresentations are intentional, they are considered fraud.

Question 59

Warranties

Answer 59

A warranty is an absolutely true statement upon which the validity of the insurance policy depends. Breach of warranties can be
considered grounds for voiding the policy or a return of premium. Because of such a strict definition, statements made by applicants
for life and health insurance policies, for example, are usually not considered warranties, except in cases of fraud.

Question 60

Rescission

Answer 60

When an insurance applicant intentionally fails to communicate information that the insurer needs, the insurer has the right to cancel
the policy even if the failure to communicate is discovered after the policy has been issued. This act is called rescission, and the
insurer is said to have rescinded the policy.

Question 61

Concealment

Answer 61

Concealment
Concealment is the legal term for the intentional withholding of information of a material fact that is crucial in making a decision. In
insurance, concealment is the withholding of information by the applicant that will result in an imprecise underwriting decision.
Concealment may void a policy.

Question 62

Fraud

Answer 62

Fraud is the intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or
refrain from making a contract, or to deceive or cheat a party. Fraud is grounds for voiding an insurance contract.

Question 63

Waiver

Answer 63

Waiver is the voluntary act of relinquishing a legal right, claim or privilege.

Question 64

Estoppel

Answer 64

Estoppel is a legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or
privilege has been waived. Estoppel is a legal consequence of a waiver.