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CFP July 2022 > Insurance Lesson 1 > Flashcards

Insurance Lesson 1 Flashcards

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1
Q

Types of Risk:

A

Pure
Speculative
Subjective
Onjective

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2
Q

Pure risk:

A

Loss or no loss

Death, accident, fire

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3
Q

Speculative risk:

A

Profit, loss, no loss

Entrepreneurs, voluntary, not insurable

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4
Q

Subjective risk:

A

Individual’s perception of risk

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5
Q

Objective risk:

A

Measurable & quantifiable

Measures variation of actual loss from expected loss

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6
Q

Example Exam Question:
Which is an insurance risk?

A. Objective
B. Pure
C. Subjective
D. Objective

A

B

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7
Q

Probability of loss:

A

Chance of loss occurring
Useful for insurer to quantify cost of claims
Higher probability may result in decline of coverage

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8
Q

Severity:

A

Actual dollar amount of loss

More important than probabiltiy

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9
Q

Law of Large Numbers:

A

More units exposed to similar loss, predictability of loss to entire pool increases
Helps to reduce objective risk

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10
Q

Perils:

A

Actual cause of loss

Ex: fire, wind, tornado, earthquake, burglary, collision

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11
Q

Hazards:

3 Types

A

Condition that increases likelihood of loss occurring
Moral
Morale
Physical

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12
Q

Moral Hazard:

A

Character flaw, lead to false claim

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13
Q

Morale Hazard:

A

Indifference by insured person

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14
Q

Physical Hazard:

A

Tangible condition that increase probability of peril occurring
Ex: icy/wet roads, poor lighting, defective equipment

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15
Q

Adverse Selection:
Tendency of person with __ than average risks to purchase/renew insurance?
Premiums are dependent upon balance between __ & __ risks in the pool?
Managed through __, __, & __?

A

Higher
Favorable & unfavorable
Underwriting, denying insurance on front end, raising premiums on back end

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16
Q

Example Exam Question:
Underwriter responsibility of achieving profit within risk parameters of company. What is greatest challenge?

A. Setting premiums
B. Motivating salespeople
C. Making sure profit margins are correct
D. Managing adverse selection

A

D

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17
Q

Requisites for insurable risk:

A 
CHAD
not Catastrophic for insurer
Homogenous (large number of similar exposure units)
Accidental
measurable & Determinable
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18
Q

Example Exam Question:
Which is not a requisite for insurable risk from insurer’s perspective?

A. Law of large numbers
B. Accidental, measurable, determinable
C. Not catastrophic for insured
D. Premiums must be affordable

A

C

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19
Q

Elements of a Valid Contract:

A 
COALL
Competence
Offer & Acceptance
Legal consideration
Lawful purpose
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20
Q

Example Exam Question:
Signs life insurance contract & gives first month’s premium. Hit by bus leaving office. Will wife be able to collect?

A. Yes, as long as Eric was insurance (no terminal illnesses or life threatening pre-existing conditions)
B. No, policy was not delivered
C. Yes, regardless of whether Eric was insurable
D. No, signing & paying not considered offer & acceptance

A

A

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21
Q

Principle of Indemnity:

A

Insured only entitled to compensation to extent of loss; cannot make a profit

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22
Q

Subrogation Clause:

A

Cannot receive compensation for same claim from insurer & third party

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23
Q

Principle of Insurable Interest:

A

Must have emotional or financial hardship resulting from damage, loss, or destruction

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24
Q

Insurable Interest:
Property & Liability:
Life:

A

P&L @ inception & time of loss

Life @ inception

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25
Q

Example Exam Question:
Mike injured by Tim. Mike collects from insurance & sues Tim. Tim’s insurance also pays Mike for same injuries. Which has been violated?

A. Subrogation
B. Subjective Risk
C. Adverse Selection
D. Adhesion

A

A

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26
Q

Void vs Voidable

A

Void: never valid, not enforceable
Voidable: allows cancelation by one of the parties while other is bound by agreement

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27
Q

Warranty

A

Promise by insured to insurer

Breach of warranty is grounds for avoidance

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28
Q

Representation

A

Must be material misrepresentation to void insurance contract

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29
Q

Concealment

A

When insured is silent about fact material to the risk

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30
Q

Example Exam Question:
42 applying for life insurance. To receive lower premium, says age 34. What will insurance company likely do?

A. Avoid the contract
B. Void the contract
C. Refund premiums & rent claim be beneficiaries
D. Pay beneficiaries lesser face value based on premiums paid & actual age

A

D

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31
Q

Adhesion

A

Take it or leave it; no negotiations; ambiguities in favor of insured

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32
Q

Aleatory

A

Money exchanged may be unequal

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33
Q

Unilateral

A

Only one promise is made by insurer (pay in event of loss)

Insured not obligated to pay premiums - if not paid, no promise by insurer

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34
Q

Conditional

A

Insured must abide by terms & conditions of insurance contract

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35
Q

Example Exam Question:
House slid down hill after heavy rain storm & is total loss. Insurance contract states “earthquake is general exclusion”. Which is likely to win in court & why?

A. Insurance because stated exclusion
B. Insurance because homeowner’s policies do not cover mudslides
C. Randy because aleatory principle
D. Randy because contract is adhesive

A

D

36
Q

Waiver

A

Party relinquishes a known right

37
Q

Estoppel

A

Party is denied assertion of a right

38
Q

Parol Evidence Rule

A

Contract reflects complete understanding of both parties

39
Q

Reformation

A

Contract is revised to express original intent of all parties

40
Q

Rescission

A

Deems contract void from inception

41
Q

General Agent vs Independent Agent vs Broker Representation

A

General: represents 1 insurer
Independent: represents multiple unrelated insurers
Broker: represents policy owner

42
Q

Express Authority

A

Given through agency or written agreement

Insurer is responsible for acts of agent

43
Q

Implied Authority

A

Authority public perceives & valid agency agreement exists
Actual delivering of contract & accepting premium
Insurer responsible even if client is mislead

44
Q

Apparent Authority

A

Insured believe agent has authority when no authority exists

45
Q

Example Exam Question:
Scott to take insurance exam. Boss gifts business cards. Misses exam. Take insurance application from Carlos & gets check for first year premium. Carlos dies by lightning strike. Which is correct?

A. Carlos’ Bene will collect $10M because of explicit authority & check was given to agent
B. Policy not issued because Scott not licensed
C. Carlos’ Bene will not receive anything because check while issued was given to unlicensed agent
D. Presuming Carlos meets normal underwriting standards, Bene will collect $10M under apparent authority

A

D

46
Q

Conditions

A

Details duties & rights of insured & insurer

47
Q

Declarations

A

Includes name of insured, descriptions, amounts, term, inception/termination dates

48
Q

Exclusions

A

What will not be covered

May exclude perils, specifics

49
Q

Riders & Endorsements

A

Written additions, customize,t take precedence

50
Q

Regulation of insurance industry is done at ___ level

A

State

51
Q

Legislative Branch

A

Licensing of agents

Enacts laws & requirements for business in particular state

52
Q

Judicial Branch

A

Rules on constitutionality of laws passed

Render decisions & interpretations regarding policy terms

53
Q

Executive Branch/State Insurance Commissioner

A

Administers, interprets, enforces insurance laws

Does not make laws

54
Q

Goals of State Insurance Regulation

A

Protect insured
Maintain & promote competition
Maintain solvency of insurers

55
Q

Replacement Cost

A

Current cost of replacing

56
Q

Actual Cash Value

A

Replacement - Depreciation
Can impose financial burden
*Most auto policies

57
Q

Example Exam Question:
Purchase theater system $10,000 2 years ago. Replacement cost is $8,000. Destroyed in fire. 40% depreciated. How much will Brandon receive under Actual Cash Value?

A. $2,000
B. $2,700
C. $3,200
D. $4,800

A

D

58
Q

Agreed Upon Value

A

Determined jointly by insured & insurer

*Usually art & antiques

59
Q

Deductibles

A

Amount insured must pay before insurer will make payments

Retain risk

60
Q

Copayments

A

Addition to deductibles
Portion of losses incurred
% of expenses above deductible

61
Q

Coinsurance

A

Requires insured to cover stated percentage of property value
If meet coinsurance requirement, pay lesser of: face value, replacement cost, or actual expenditures
If below coinsurance requirement, pay greater of actual cash value or formula
(Face value/coinsurance) x loss - deductible

62
Q

Superannuation

A

Outliving of funds

Mitigated by annuities

63
Q

Insurance Rating Agencies & Rating Systems:

A 
AM Best’s:
Highest: A++ to A/A-
Lowest: C/C- to D
Moody’s:
Highest: Aaa to Aa1/Aa2
Lowest: B1/B2/B3 to Caa
Standard & Poor’s:
Highest: AAA to BBB
Lowest: BB and lower CC
64
Q

National Association of Insurance Commissioners (NAIC)

A

Financial ratio analysis
No regulatory power
Involved in accrediting state offices
Issues “model legislation”

65
Q

6 Steps of Risk Management:

A 
DIEDIE
Determine objectives
Identify risks
Evaluate risks
Determine alternatives
Implement
Evaluate, monitor, review
66
Q

Risk Management Guidelines:

A

Avoid: most serious
Transfer: risk high, frequency low
Retention/Reduction: risk low, frequency high (too expensive to insure)

67
Q

Example Exam Question:
Which does not match action:

A. Avoidance: hard hat on construction site
B. Reduction: installing sprinkler system in building
C. Transfer: auto insurance
D. Retention: health insurance policy deductibles

A

A

68
Q

Underwriting Ratings for Insureds

A

Preferred: lowest premiums, insured exceed requirements
Standard: average
Rated: will accept for greater premium
Decline: will not insure

69
Q

Factors effecting premiums:

A 
Health
Family health history 
Risk factors/high risk activities
Credit rating
Driving record
70
Q

Lesson 1 Review:
Tendency for higher than average risk individuals to seek out/purchase insurance policies is:

A. Peril
B. Hazard
C. Law of large numbers
D. Adverse selection

A

D

71
Q

Lesson 1 Review:
What type of hazard results from indifference person had to potential loss because insurance?

A. Peril
B. Physical
C. Moral
D. Morale

A

D

72
Q

Lesson 1 Review:
Which is correct regarding peril & hazard?

A. Hazard is proximate or actual cause of loss
B. Peril is proximate or actual cause of loss
C. Peril is condition that creates or increases likelihood of loss occurring
D. None of the above

A

B

73
Q

Lesson 1 Review:
Which is not a requisite for insurable risk?

A. Large number of homogenous exposure units must exist
B. Insured losses must be accidental from insured’s standpoint
C. Insured losses must be measurable & determinable
D. Loss must not pose catastrophic risk for insured

A

D

74
Q

Lesson 1 Review:
Principle of indemnity is:

A. Person entitled to compensation only to extent financial loss has been suffered
B. Cannot indemnify self from both insurance company & negligent 3rd party for same claim
C. Insured must be subject to emotional/financial hardship resulting from loss
D. Insured & insurer must be forthcoming with all relevant facts about insured risk & coverage for that risk

A

A

75
Q

Lesson 1 Review:
Subrogation clause is:

A. Person entitled to compensation only to extent financial loss has been suffered
B. Cannot indemnify self from both insurance company & negligent 3rd party for same claim
C. Insured must be subject to emotional/financial hardship resulting from loss
D. Insured & insurer must be forthcoming with all relevant facts about insured risk & coverage for that risk

A

B

76
Q

Lesson 1 Review:
When must insurable interest exist for property insurance claim?

A. At inception & time of loss
B. Policy inception only
C. Time of loss
D. Either inception or time of loss

A

A

77
Q

Lesson 1 Review:
When must insurable interest exist for life insurance claim?

A. At inception & time of loss
B. Policy inception only
C. Time of loss
D. Either inception or time of loss

A

B

78
Q

Lesson 1 Review:
When insured is spent to fact that is material to risk being insured, what has occurred?

A. Breach of warranty
B. Misrepresentation
C. Concealment
D. Breach of indemnity

A

C

79
Q

Lesson 1 Review:
58 applying for life insurance. Stated 28 on application. What happens if bene’s try to collect on policy?

A. Void the policy
B. Require payment on premiums for 58 year old insured
C. Recalculate face value based on actual premiums paid
D. Bring lawsuit against estate

A

C

80
Q

Lesson 1 Review:
Which is false?

A. Adhesion: insured must take it or leave it
B. Aleatory: amounts exchanged may be unequal
C. Unilateral: only 1 promise which is by insured to pay premium
D. Conditional: terms are under condition that premiums paid

A

C

81
Q

Lesson 1 Review:
Sees agents name on business card & letterhead. If agent has valid agency agreement, what authority to believe his agent has to enter into insurance contract?

A. Express
B. Implied
C. Apparent
D. None

A

B

82
Q

Lesson 1 Review:
House with FMV $500,000. $300,000 insurance. Coinsurance requirement of 80%. If house hit by tornado & $150,000 loss, what will insurer pay?

A. $75,000
B. $112,500
C. $150,000
D. $250,000

A

B

83
Q

Lesson 1 Review:
Insurance regulation is primarily conducted at what level?

A. SEC
B. State Insurance Commissioner
C. Federal Insurance Commissioner
D. NAIC

A

B

84
Q

Lesson 1 Review:
Which regarding loss frequency is true?

A. Expected number of losses that will occur within a given period
B. Potential size or amount of loss
C. Measure of total amount of losses incurred by insurer
D. Measure of variability between actual & expected loss

A

A

85
Q

Lesson 1 Review:
Which regarding loss severity is true?

A. Expected number of losses within a given period
B. Potential size or amount of loss
C. Both
D. Neither

A

B

CFP July 2022 (24 decks)

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