Insurance Lesson 1

Question 1

Types of Risk:

Answer 1

Pure
Speculative
Subjective
Onjective

Question 2

Pure risk:

Answer 2

Loss or no loss

Death, accident, fire

Question 3

Speculative risk:

Answer 3

Profit, loss, no loss

Entrepreneurs, voluntary, not insurable

Question 4

Subjective risk:

Answer 4

Individual’s perception of risk

Question 5

Objective risk:

Answer 5

Measurable & quantifiable

Measures variation of actual loss from expected loss

Question 6

Example Exam Question:
Which is an insurance risk?

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

Answer 6

B

Question 7

Probability of loss:

Answer 7

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

Question 8

Severity:

Answer 8

Actual dollar amount of loss

More important than probabiltiy

Question 9

Law of Large Numbers:

Answer 9

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

Question 10

Perils:

Answer 10

Actual cause of loss

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

Question 11

Hazards:

3 Types

Answer 11

Condition that increases likelihood of loss occurring
Moral
Morale
Physical

Question 12

Moral Hazard:

Answer 12

Character flaw, lead to false claim

Question 13

Morale Hazard:

Answer 13

Indifference by insured person

Question 14

Physical Hazard:

Answer 14

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

Question 15

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 __, __, & __?

Answer 15

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

Question 16

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

Answer 16

D

Question 17

Requisites for insurable risk:

Answer 17

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

Question 18

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

Answer 18

C

Question 19

Elements of a Valid Contract:

Answer 19

COALL
Competence
Offer & Acceptance
Legal consideration
Lawful purpose

Question 20

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

Answer 20

A

Question 21

Principle of Indemnity:

Answer 21

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

Question 22

Subrogation Clause:

Answer 22

Cannot receive compensation for same claim from insurer & third party

Question 23

Principle of Insurable Interest:

Answer 23

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

Question 24

Insurable Interest:
Property & Liability:
Life:

Answer 24

P&L @ inception & time of loss

Life @ inception

Question 25

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

Answer 25

A

Question 26

Void vs Voidable

Answer 26

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

Question 27

Warranty

Answer 27

Promise by insured to insurer | Breach of warranty is grounds for avoidance

Question 28

Representation

Answer 28

Must be material misrepresentation to void insurance contract

Question 29

Concealment

Answer 29

When insured is silent about fact material to the risk

Question 30

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

Answer 30

D

Question 31

Adhesion

Answer 31

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

Question 32

Aleatory

Answer 32

Money exchanged may be unequal

Question 33

Unilateral

Answer 33

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

Question 34

Conditional

Answer 34

Insured must abide by terms & conditions of insurance contract

Question 35

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

Answer 35

D

Question 36

Waiver

Answer 36

Party relinquishes a known right

Question 37

Estoppel

Answer 37

Party is denied assertion of a right

Question 38

Parol Evidence Rule

Answer 38

Contract reflects complete understanding of both parties

Question 39

Reformation

Answer 39

Contract is revised to express original intent of all parties

Question 40

Rescission

Answer 40

Deems contract void from inception

Question 41

General Agent vs Independent Agent vs Broker Representation

Answer 41

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

Question 42

Express Authority

Answer 42

Given through agency or written agreement | Insurer is responsible for acts of agent

Question 43

Implied Authority

Answer 43

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

Question 44

Apparent Authority

Answer 44

Insured believe agent has authority when no authority exists

Question 45

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

Answer 45

D

Question 46

Conditions

Answer 46

Details duties & rights of insured & insurer

Question 47

Declarations

Answer 47

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

Question 48

Exclusions

Answer 48

What will not be covered | May exclude perils, specifics

Question 49

Riders & Endorsements

Answer 49

Written additions, customize,t take precedence

Question 50

Regulation of insurance industry is done at ___ level

Answer 50

State

Question 51

Legislative Branch

Answer 51

Licensing of agents | Enacts laws & requirements for business in particular state

Question 52

Judicial Branch

Answer 52

Rules on constitutionality of laws passed | Render decisions & interpretations regarding policy terms

Question 53

Executive Branch/State Insurance Commissioner

Answer 53

Administers, interprets, enforces insurance laws | Does not make laws

Question 54

Goals of State Insurance Regulation

Answer 54

Protect insured Maintain & promote competition Maintain solvency of insurers

Question 55

Replacement Cost

Answer 55

Current cost of replacing

Question 56

Actual Cash Value

Answer 56

Replacement - Depreciation Can impose financial burden *Most auto policies

Question 57

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

Answer 57

D

Question 58

Agreed Upon Value

Answer 58

Determined jointly by insured & insurer | *Usually art & antiques

Question 59

Deductibles

Answer 59

Amount insured must pay before insurer will make payments | Retain risk

Question 60

Copayments

Answer 60

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

Question 61

Coinsurance

Answer 61

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

Question 62

Superannuation

Answer 62

Outliving of funds | Mitigated by annuities

Question 63

Insurance Rating Agencies & Rating Systems:

Answer 63

``` 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 ```

Question 64

National Association of Insurance Commissioners (NAIC)

Answer 64

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

Question 65

6 Steps of Risk Management:

Answer 65

``` DIEDIE Determine objectives Identify risks Evaluate risks Determine alternatives Implement Evaluate, monitor, review ```

Question 66

Risk Management Guidelines:

Answer 66

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

Question 67

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

Answer 67

A

Question 68

Underwriting Ratings for Insureds

Answer 68

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

Question 69

Factors effecting premiums:

Answer 69

``` Health Family health history Risk factors/high risk activities Credit rating Driving record ```

Question 70

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

Answer 70

D

Question 71

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

Answer 71

D

Question 72

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

Answer 72

B

Question 73

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

Answer 73

D

Question 74

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

Answer 74

A

Question 75

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

Answer 75

B

Question 76

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

Answer 76

A

Question 77

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

Answer 77

B

Question 78

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

Answer 78

C

Question 79

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

Answer 79

C

Question 80

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

Answer 80

C

Question 81

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

Answer 81

B

Question 82

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

Answer 82

B

Question 83

Lesson 1 Review: Insurance regulation is primarily conducted at what level? A. SEC B. State Insurance Commissioner C. Federal Insurance Commissioner D. NAIC

Answer 83

B

Question 84

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

Answer 84

A

Question 85

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

Answer 85

B