Insurance (Chapter 1 &2)

Question 1

Accepting some or all of the potential loss exposure for risks that are low in frequency and severity

Answer 1

Risk Retention (ie. deductibles and co-payments where the insured is sharing in the first dollar of financial loss)

Question 2

Risk management technique used for any risks that are high in frequency and severity

Answer 2

Risk Avoidance

Question 3

The immediate cause and reason for a loss occurring

Answer 3

Peril (ie. accidental death, disability caused by sickness, property loss caused by fire, windstorm, tornado)

Question 4

Specific conditions that increase the likelihood of a loss occurring.

Answer 4

Hazards

Question 5

The potential for loss caused by the character of the insured such as filing a false claim.

Answer 5

Moral Hazard

Question 6

Indifference to risk due to the fact that the insured has insurance.

Answer 6

Morale Hazard (ie. leaving the car running with keys in the ignition while running into gas station)

Question 7

How do insurers prevent morale hazard.

Answer 7

Deductibles or making the insured pay the first dollars of loss

Question 8

Physical condition that increases the likelihood of a loss occurring.

Answer 8

Physical Hazard

Question 9

The more similar the events or exposures, the more likely the actual losses will equal the expected losses

Answer 9

Law of large numbers

Question 10

What elements must be present for an insurance contract to be valid?

Answer 10

1) Mutual Consent
2) Offer and Acceptance
3) Performance or Delivery
4) Lawful Purpose
5) Legal Competency of all parties

Question 11

“What is written prevails.”

Answer 11

Parol Evidence Rule

Question 12

Asserts that the insurer will only compensate the insured to the extent that the insured has suffered an actual financial loss. (The insured cannot make a profit from the insurance.)

Answer 12

Principle of Indemnity

Question 13

Requires that the insured relinquish a claim against a negligent 3rd party if the insurer has already indemnified the insured.

Answer 13

Subrogation Clause

Question 14

Asserts that an insured must suffer a financial loss if a covered peril occurs, otherwise no insurance can be offered.

Answer 14

Principle of Insurable Interest

Question 15

Asserts that an insured must suffer a financial loss if a covered peril occurs, otherwise no insurance can be offered

Answer 15

Principle of Insurable Interest

Question 16

When must an insurable interest exist for a life insurance policy?

Answer 16

Only at the inception of the policy

Question 17

The 3 legal doctrines that are followed during the application and throughout the life of an insurance policy.

Answer 17

1) Representation
2) Warranty
3) Concealment

Question 18

A statement made by the applicant during the insurance application process.

Answer 18

Representation

Question 19

A promise made by the insured that is part of the insurance contract. (ie. promising to install fire alarms, getting the coverage, and then neglecting the promise to install)

Answer 19

Warranty

Question 20

When the insured in intentionally silent regarding a material fact during the application process.

Answer 20

Concealment

Question 21

The insured has no ability to negotiate the terms of the contract - since this is true, if ambiguities are found, the courts will rule in favor of the contract.

Answer 21

Adhesion

Question 22

The dollar amounts exchanged between the insured and the insurer are unequal.

Answer 22

Aleatory

Question 23

Insurance contracts are ___________ in that there is only one promise made, and it is made by the insured to pay the beneficiary in the event of a covered loss.

Answer 23

Unilateral

Question 24

The insured must abide by all of the terms and conditions of the contract if the insured intends to collect under the policy.

Answer 24

Conditional

Question 25

Can any insurance contracts be assigned without the consent of the insurer?

Answer 25

Life insurance, because the contract continues to cover the insured regardless of who owns the policy

Question 26

Specifically outlines the duties, responsibilities, and scope of authority can act upon and thus bind the principal.

Answer 26

Express Authority

Question 27

When a customer walks into an office they will see company logo on door, signs on the wall, and business cards on the desk. What kind of authority is this?

Answer 27

Implied Authority

Question 28

When 3rd party believes implied or express authority exists, but no authority actually exists.

Answer 28

Apparent Authority (ie. if an agent were to keep signs of principal after termination of relationship up leading the customer to a false judgement).

Question 29

Relinquishing a known legal right

Answer 29

Waiver

Question 30

Esai is applying for a health insurance policy which requires that Esai complete an application and physical exam. If she completes the application but never finishes the exam and the insurance company accidentally issues her a policy who is at fault?

Answer 30

The insurance company because by issuing the policy, the insurer waived the physical exam requirement and are liable to pay claims.

Question 31

How long is the suicide clause typically in an insurance contract?

Answer 31

2 years (at that time only premiums are typically returned to beneficiary)

Question 32

Where a person is denied a right he might otherwise be entitled to under the law.

Answer 32

Estoppel

Question 33

Mutual Company Insurers

Answer 33

• Owned by policy holders, not share holders.
• Policy holders elect the Board of Directors for a mutual company
• Profits are returned to policy holders in the form of a dividend (the dividend is not treated as taxable income but is a return of premiums paid.)

Question 34

Legal representatives of an insurer and act on behalf of an insurer. Only permitted to sell policies written by their company.

Answer 34

Agent

Question 35

Temporary insurance coverage until the insurance company issues the permanent policy.

Answer 35

Temporary Binder

Question 36

Legal representatives of the insured and act in the best interest of the insured. These individuals may sell insurance policies from any one of a number of different insurance companies.

Answer 36

Broker

Question 37

Means by which an insurance company transfers some or all of its risks to another insurance company.

Answer 37

Reinsurance

Question 38

This section of an insurance policy describes exactly which property or person is being covered.

Answer 38

Declarations section

Question 39

This section of an insurance policy describes exactly what is being insured.

Answer 39

Description Section

Question 40

What is the peril covered for a term life insurance policy?

Answer 40

Death of the insured within the term period

Question 41

Identifies the amount of time after the due date of the premium that the policy will stay in force. Policy will lapse after this time if premium is not paid.

Answer 41

Grace period (Typical grace period is 31-60 days).

Question 42

If there are conflicting terms between the policy and the rider or endorsement, what language prevails ?

Answer 42

The Rider or endorsement language

Question 43

Tendency of those that most need the insurance to seek it while those with the least perceived risk avoid paying the premiums by not buying insurance.

Answer 43

Adverse Selection

Question 44

Process of classifying applicants into risk pools, selecting insureds, and determining a premium.

Answer 44

Underwriting

Question 45

Loss sharing arrangements whereby the insured pays a flat dollar amount or percentage of the loss in excess of the deductible.

Answer 45

Copayments

Question 46

In property insurance, this encourages insureds to cover their property to at least a stated percentage on their properties value or else suffer a financial penalty.

Answer 46

Coinsurance

Question 47

What is the coinsurance formula?

Answer 47

(Amount of Insurance Carried) / (Amount of Insurance Required) X Covered Loss - Deductible = Amount Insurer Pays

Question 48

Will the insurer ever pay more than what is lost?

Answer 48

No, the maximum amount the insurer will pay is up to the covered loss or the Face Value of the policy or policy limits, less any deductible, even though the coinsurance formula may result in a percentage greater than 100%

Question 49

How do insurance policies generally value and pay losses (ie. 3 valuation methods)

Answer 49

1) Actual Cash Value
2) Replacement Cost
3) Appraised or agreed upon value

Question 50

Represents the replacement cost less the depreciated value of the property

Answer 50

Actual Cash Value

Question 51

Represents the amount to repair or replace property, without any deduction for depreciation.

Answer 51

Replacement Cost

Question 52

Legislatures job in regard to insurance regulation…

Answer 52

1) Pass laws to regulate how insurance companies conduct business in their state
2) Controls how insurance agents are licensed
3) Protects consumer rights by passing consumer protection laws

Question 53

Judicial Branch’s job in regard to insurance regulation…

Answer 53

1) Rules on the constitutionality of laws passed by the legislative branch and the executive branch
2) Provides oversight to other branches (Legislative and Executive) as well as the insurance industry

Question 54

Role of the Executive Brach (a.k.a State Insurance Commissioner)

Answer 54

1) Enforcing the legislatures laws and regulations
2) Licensing of insurance agents
3) Reviewing Rate Increases
4) Auditing Insurance Companies

Question 55

What are the goals of the NAIC?

Answer 55

1) Protect the public
2) Promote Competition
3) Promote fair treatment of insurance consumers
4) Promote the solvency of insurance companies
5) Support and improve state regulation of insurance

Question 56

To promote solvency and avoid insurers from not being able to pay claims, life and health insurance companies are subject to ___________?

Answer 56

(RBC) Risk Based Capital tests: measures how much capital invested and riskiness of investments

Question 57

An insurance company must file the rate increase request with the State’s Insurance Commissioner office and the request will either be approved, disapproved, or modified.

Answer 57

Prior Approval Law

Question 58

Permit an insurance company to file the rate increase with the state insurance commissioners office and immediately implement the increase. The state insurance commissioner may later deny the rate increase in which case the insurance company must rebate the premiums paid under the denied rate.

Answer 58

File and use law

Question 59

Permits an insurer to increase rates, but they must file the rate increase within a specific time period as determined by state law.

Answer 59

Use and File Law

Question 60

This Law allows insurers to set their own rates, and the state presumes that supply and demand will determine the appropriate rates for various insurance products. (State assumes this will best promote efficient pricing).

Answer 60

Open Competition

Question 61

Measures the number of losses expected to occur.

Answer 61

Frequency

Question 62

Measures the potential size in dollars of the loss.

Answer 62

Severity

Question 63

The insured and the insurer must be forthcoming with all relevant facts about the insured risk and coverage provided for that risk

Answer 63

Utmost Good Faith

Question 64

The insured must be subject to emotional or financial hardship resulting from the loss.

Answer 64

Insurable Interest

Question 65

What will be the result if you misstate your age on a life insurance policy?

Answer 65

The death benefit will be recalculated upon your death based on your actual age when the policy was issued

Question 66

When must an insurable interest exist for a life insurance claim?

Answer 66

At policy inception only

Question 67

When must an insurable interest exist for a property insurance claim?

Answer 67

At the point of inception and time of loss