Key Terms

Question 1

Reserve

Answer 1

Funds held by the company to help fulfill future claims. Minimum reserves are usually set by the state Department of Insurance

Question 2

Multi-line insurer

Answer 2

A multi-line insurer is an insurance company or independent agent that provides a one-stop shop for businesses or individuals seeking coverage for all their insurance needs. For example, many large insurers offer individual policies for automobile, homeowner, long-term care, life and health insurance needs.

Question 3

Stock Companies

Answer 3

For the purpose of insurance, Stock Companies are insurance companies owned and controlled by a group of stockholders whose investment in the company provides a safety margin necessary in issuance of guaranteed, fixed premium, nonparticipating policies.

Question 4

Nonparticipating Plan

Answer 4

A Nonparticipating plan is Insurance under which the insured is not entitled to share in the divisible surplus of the company.

Question 5

Mutual Companies

Answer 5

For the purpose of insurance, mutual companies are insurance companies characterized by having no capital stock; it is owned by its policy owners and usually issues participating insurance.

Question 6

Participating Plan

Answer 6

A Participating Plan of insurance is a plan under which the policy owner receives shares (commonly called dividends) of the divisible surplus of the company.

Question 7

Reinsurer

Answer 7

A Reinsurer is a company that provides financial protection to insurance companies. Reinsurers handle risks that are too large for insurance companies to handle on their own and make it possible for insurers to obtain more business than they would otherwise be able to.

Question 8

Fraternal Benefit Societies

Answer 8

Fraternal Benefit Societies are nonprofit benevolent organization that provides insurance to its members. Producers or agents who only sell within their society, do not receive commission, and stay under a specific premium threshold often have less stringent licensing requirements.

Question 9

Fair Credit Reporting Act

Answer 9

The Fair Credit Reporting Act is a federal law requiring an individual to be informed if she is being investigated by an inspection company. The law also outlines the sharing and impact of such information and requires individuals to be notified prior to being investigated.

Question 10

Buyer’s Guide

Answer 10

A Buyer’s Guide is an informational consumer guide books that explain insurance policies and insurance concepts; in many states, they are required to be given to applicants when certain types of coverages are being considered. Buyer’s Guides are often used with life insurance, long-term care insurance, and annuities.

Question 11

Policy Summary

Answer 11

A Policy Summary is the summary of the terms of an insurance policy, including the conditions, coverage limitations, and premiums. Policy summaries are often used with life insurance, long-term care insurance, and annuities.

Question 12

National Association of Insurance Commissioners (NAIC)

Answer 12

The National Association of Insurance Commissioners (NAIC) is an association of all of the state insurance commissioners active in insurance regulatory problems and in the forming and recommending model legislation and requirements. The NAIC does not directly MAKE laws, as laws are made a the state level. They do work on suggesting standards for states to adopt with the goal of a standardizing the insurance industry throughout the United States of America.

Question 13

State Guaranty Association

Answer 13

The State Guaranty Association is established by each state to support insurers and protect consumers in the case of insurer insolvency, guaranty associations are funded by insurers through assessments. All authorized insurers are legally required to participate in the State Guaranty Association for any state they are authorized to do business in regardless of where their corporate office is.

Question 14

Life Insurance

Answer 14

Life Insurance against loss due to to the death of a particular person (the insured) upon whose death the insurance company agrees to pay a stated sum or income to the beneficiary. In it’s purest form, life insurance states, “we will pay this amount when this person dies.”

Question 15

Term Life Insurance

Answer 15

Term Life Insurance is protection for a set number of years; expiring without value if the insured survives the state period, which may be one or more years. Term Life is designed to provide a temporary protection in case a person dies during a set period of time.

Question 16

Whole Life

Answer 16

Whole Life is permanent level insurance protection for a person’s “whole of life,” from policy issue to the death of the insured. Characterized by level premiums, level benefits, and cash values.

Question 17

Group Life

Answer 17

Group Life is a type of life insurance in which a single contract covers an entire group of people. Most often, the group is an employer-employee group. Those covered under a group life policy may or may not pay a portion of the premium and can usually choose their beneficiary. However, the insured typically does NOT own the policy, the group (employer) owns and controls the policy.

Question 18

Consideration

Answer 18

Consideration is the part of an insurance contract setting forth the amount of initial and renewal premiums and frequency of future payments. Consideration is often said to include the initial premium and completed application for insurance. In other words, the applicant is saying, “please CONSIDER me for insurance, here is my initial premium, my completed application, and how much/how often I agree to pay in the future. Please CONSIDER me.”

Question 19

The Insuring Agreement (Insuring Clause, Insurance Provision)

Answer 19

The Insuring Agreement (Insuring Clause, Insurance Provision) is the portion of the insurance policy in which the insurer promises to make payment to or on behalf of the insured. It states the scope and limits of coverage. The insuring agreement is usually contained in a coverage form from which a policy is constructed. In other words, it is the insurance company saying, “We ensure to INSURE you under these conditions for this amount.”

Question 20

Health Insurance

Answer 20

Health Insurance is a general way of describing insurance against loss through sickness or accidental bodily injury. It is also called accident and health, accident and sickness, sickness and accident, or disability insurance. It is important to remember the general term “health insurance” applies to many different types of insurance, not just the medical insurance that pays for doctor and hospital visits.

Question 21

Disability (income) Insurance

Answer 21

Disability (income) insurance is a form of insurance that insures the beneficiary’s earned income against the risk that a disability creates a barrier for a worker to complete the core functions of their work. Although disability insurance is designed to protect one’s income, there are typically rules and regulations in place limiting the benefits of a disability policy to one’s income level, and typically only allowing protection for a portion of their income.

Question 22

Medical Expense

Answer 22

Medical Expense insurance pays benefits for nonsurgical doctors’ fees commonly rendered in a hospital; sometimes pays for home and office calls.

Question 23

Entire Contract

Answer 23

Entire Contract is an insurance policy provision stating that the application and policy contain all provisions and constitute the entire contract.

Question 24

Notice of Claim

Answer 24

Notice of Claim is a policy provision that describes the policy owner’s obligation to provide notification of loss to the insurer within a reasonable period of time. Notice of claim only requires the insurance company be NOTIFIED of a loss, it does not require that proof of the loss is provided.

Question 25

Reinstatement

Answer 25

Reinstatement is the act of putting a lapsed policy back in force by producing satisfactory evidence of insurability and paying any past-due premiums required. Most states have reinstatement laws requiring an insurer to allow for a policy to be reinstated upon request of the policy owner within a specified period of time.

Question 26

Property Insurance

Answer 26

Property Insurance is an insurance policy that provides financial reimbursement to the owner or renter of a structure and its contents, in the event of damage or theft. Simply put, Property Insurance protects the things you own and rent.

Question 27

Casualty (Liability) Insurance

Answer 27

Casualty (liability) Insurance is insurance which broadly encompasses insurance not directly concerned with life insurance, health insurance, or property insurance. Casualty insurance includes vehicle insurance, liability insurance, theft insurance, workers’ compensation insurance, and elevator insurance. Casualty insurance protects you financially in the even that someone sues you.

Question 28

Property and Casualty Insurance

Answer 28

Property and Casualty Insurance are often referred to collectively as property and casualty insurance because the things you own have the potential to harm people in ways that could cause them to sue you. The main kinds of property and casualty insurance include auto insurance, home-owner’s insurance, renter’s insurance and umbrella insurance.

Question 29

Proof of Loss

Answer 29

Proof of Loss is a mandatory health insurance provision stating that the insured must provide a completed claim form to the insurer within days of the date of loss. If the insured wants paid, they must PROVE the loss occurred.

Question 30

Deductible

Answer 30

The Deductible is the amount of expense or loss to be paid by the insured before an insurance policy starts paying benefits. Deductible typically apply to property, casualty, and health insurance.

Question 31

Declaration Page

Answer 31

An insurance Declaration Page is a piece of paper which provides basic information about an insurance policy. Typically, the first page (face) of an insurance policy is the declaration page. The declarations page normally specified the named insured, address, policy period, location of property, policy limits, and other key information.

Question 32

Liquidity

Answer 32

Liquidity indicates a company’s ability to make unpredictable payouts to policyowners.

Question 33

Two types of insurance companies

Answer 33

Private (also called commercial) and government.

Question 34

Private Insurance Companies - Commercial

Answer 34

Private insurers offer many lines of insurance. Some sell primarily life insurance and annuities, while others sell accident and health insurance, or property and casualty insurance. Companies that sell more than one line of insurance are known as multi-line insurers.

Question 35

Stock Companies - Nonparticipating

Answer 35

A stock insurance company is a private organization, organized and incorporated under state laws for the purpose of making a profit for its stock holders. It is structured the same as any corporation. Stockholders may or may not be policyholders. When declared , stock dividends are paid to stock holders. In a stock company, the directors and officers are responsible to the stockholders. A stock company is referred to as a nonparticipating company because policy holders do not participate in dividends resulting from stock ownership.

Question 36

Mutual Companies - Participating

Answer 36

Mutual insurance companies are also organized and incorporated under state laws, but they have no stockholders. Instead, the owners are the policyholders. Anyone purchasing insurance from a mutual insurer is both a customer and an owner. He has the right to vote for members of the board of directors. By issuing participating policies that pay policy dividends, mutual insurers allow their policyowners to share in any company earnings. Essentially, policy dividends represent a “refund” of the portion of premium that remains after the company has set aside the necessary reserves and has made deductions for claims and expenses. Policy dividends can also include a share in the company’s investment, mortality, and operating profits. Surpluses are typically distributed to policyowners on an annual basis. Mutual companies are sometimes referred to as a participating companies because the policyowners participate in dividends. Occasionally, a stock company may be converted into a mutual company through a process called mutualization. Likewise, mutuals can convert to stock companies through a process called demutualization. Stock and mutual companies are often referred to as COMMERCIAL INSURERS. They both can write life, health, property, and casualty insurance.

Question 37

Strong Assessment Mutual/Insurers

Answer 37

Assessment mutual companies are classified by the way in which they charge premiums. A pure assessment mutual company operates on the basis of loss-sharing by group members. No premium is payable in advance; instead, each member is assessed an individual portion of losses that actually occur. An advance premium assessment mutual charges a premium, at the beginning of the policy period. If the original premiums exceed the operating expenses and losses, the surplus is returned to the policyholders as dividends. However, if total premiums are not enough to meet losses, additional assessments are levied against the members. Normally, the amount of assessment that may be levied is limited, either by state law or simply as a provision in the insurer’s by-laws.

Question 38

Reciprocal Insurers

Answer 38

Similar to mutuals, reciprocal insurers are organized on the basis of ownership by their policyholders. However, with a reciprocal, it is the policyholders themselves who insure the risks of the other policyholders. Each policyholder assumes a share of the risk brought to the company by others. Reciprocals are managed by an attorney-at-fact.

Question 39

Lloyd’s of London

Answer 39

Contrary to popular belief, Lloyd’s of London is not an insurer but rather an association of individuals and companies that individually underwrite insurance. Lloyd’s can be compared to the New York Stock Exchange, which provides the arena and facilities for buying ans selling public stock. Lloyd’s function is to gather and disseminate underwriting information, help its associates settle claims and disputes and, through its member underwriters, provide coverage that might otherwise be unavailable in certain areas.

Question 40

Reinsurers

Answer 40

Reinsurers are a specialized branch of the insurance industry because they insure insurers. Reinsurance is an arrangement by which an insurance company transfers a portion of a risk it has assumed to another insurer. Usually, reinsurance takes place to limit the loss any one insurer would face should a very large claim become payable. Another reason for reinsurance is to enable a company to meet certain objectives, such as favorable underwriting or mortality results. The company transferring the risk is called the ceding company; the company assuming the risk is the reinsurer. A common reinsurance contract between two insurance companies is called treaty reinsurance, which involves an automatic sharing of the risks assumed. In a reinsurance agreement, the insurance company that transfers its loss exposure to another insurer is called the primary insurer.

Question 41

Risk Retention Group

Answer 41

A risk retention group (RRG) is a mutual insurance company formed to insure people in the same business, occupation, or profession (e.g., pharmacists, dentists, or engineers).

Question 42

Fraternal Benefit Societies

Answer 42

Insurance is also issued by fraternal benefit societies, which have existed in the United States for more than a century. Fraternal societies, noted primarily for their social, charitable, and benevolent activities, have memberships based on religious, national, or ethnic lines. Fraternal first began offering insurance to meet the needs of their poorer members, funding the benefits on a pure assessment basis. Today, few fraternal rely on an assessment system, most having adopted the same advanced funding approach other insurers use. To be characterized as a fraternal benefit society, the organization must be NONPROFIT, have a lodge system that includes ritualistic work, and maintain a representative form of the government with elected officers. Fraternal must be formed for reasons other than obtaining insurance. Most fraternal today issue group and annuities with many of the same provisions found in policies issued by commercial insurers.

Question 43

Industrial Insurer

Answer 43

Insurance is also sold through a special branch of the industry known as home service or debit insurers. These companies specialize in a particular type of insurance called industrial insurance, which is characterized by relatively small face amounts (usually $1k to $2k) with premiums paid weekly.

Question 44

Service Providers

Answer 44

Service Providers offer benefits to subscribers in return for the payment of a premium. Benefits are in the form of services provided by the hospitals and physicians participating in the plan. They sell medical and hospital care services, not insurance. These services are packaged into various plans, and those who purchase these plans are known as subscribers. Another type of service provider is the health maintenance organization (HMO). HMOs offer a wider range of health care services to member subscribers. For a fixed periodic premium paid in advance of any treatment, subscribers are entitled to the services of certain physicians and hospitals contracted to work with the HMO. Unlike commercial insurers, HMOs provide financing for health care plus the health care itself. HMOs are known for stressing preventative health care and early treatment programs. A third type of service provider is the preferred provider organization (PPO). Under the usual PPO arrangement, a group desiring health care services (e.g., an employer or a union) will obtain price discounts or special services from certain select health care providers in exchange for referring its employees or members to them. PPOs can be organized by employers or by the health care providers themselves. The contract between the employer and the health care professional, whether physician or a hospital, spells out the kind of services to be provided. Insurance companies can also contract with PPOs to offer services to insurers.

Question 45

Government as Insurer

Answer 45

Federal and State governments are also insurers, providing what are commonly called social insurance programs. Ranging from crop insurance to bank and savings and loan deposit insurance, these programs have far-reaching effects. Millions of people rely on these plans. The major difference between the two is that the government programs are funded with taxes and serve national and state social purposes. Social insurance programs include the following: Old-Age, Survivors and Disability Insurance (OASDI), commonly known as social security…. Social security hospital insurance (HI) and Supplemental Health Insurance (SMI), commonly known as Medicare…. Medicaid

Question 46

Self-Insurers

Answer 46

Through self insurance is not a method of transferring risk, it is an important concept to understand. Rather than transfer risk to an insurance company, a self-insurer establishes its own reserves to cover potential losses. Self-insurance is often used by large companies for funding pension plans and some health insurance plans. Many times a self-insurer will look to an insurance company to provide insurance above a certain maximum level of loss. The self-insurer will bear the amount of loss below that maximum amount.

Question 47

1970 Fair Credit Reporting Act

Answer 47

Requires fair and accurate reporting of information about consumers, including applications for insurance. Insurers MUST inform applicants about any investigations that are being made.

Question 48

The ethical agent answers these questions when selling:

Answer 48

1. What are the client’s needs?
2. What product can help meet those needs?
3. Does the client understand the product and its provisions?
4. Does the client have the capability, financially and otherwise, to manage the product?
5. Is this product in the client’s best interest?

Question 49

National Association of Insurance Commissioners (NAIC)

Answer 49

All state insurance commissioners or directors are members of the National Association of Insurance Commissioners (NAIC). They have 4 broad objectives:

1. To encourage uniformity in state insurance laws and regulations.
2. To assist in the administration of those laws and regulations by promoting efficiency.
3. To protect the interests of policyowners and consumers.
4. To preserve state regulation of the insurance business.

Question 50

Advertising Code

Answer 50

The code specifies certain words and phrases that are considered misleading and are not to be used in advertising of any kind.

Question 51

Unfair Trade Practices Ad

Answer 51

This act gives chief financial officers the power to investigate insurance companies and producers, to issue cease and desist orders, and to impose penalties on violators.

Question 52

State Guaranty Associations

Answer 52

Supports insurers and to protect consumers if an insurer becomes insolvent. Should an insurer be financially unable to pay its claims, the state guaranty association will step in and cover the consumers’ unpaid claims.

Question 53

Claims settlement practices

Answer 53

Claim settlement practices of insurers are regulated by State insurance departments.

Question 54

Do Not Call Registry

Answer 54

Allows consumers to include their phone numbers on the list to which solicitation calls cannot be made by telemarketers. Calls made on behalf of charities, political organizations, and surveys are exempt.

Question 55

Rating Services

Answer 55

The financial strength and stability of an insurance company are two vitally important factors to potential insurance buyers and to insurance companies. Guides to insurance companies’ financial integrity and claims-paying ability are published regularly by rating services, such as A.M. Best, Fitch Ratings, Standard & Poor’s, Moody’s, and Fitch’s.

Question 56

Basic Insurance Principles

Answer 56

We are exposed to many perils. The purpose of insurance is to provide economic protection again losses caused by change, such as death, illness, or accident. This protection is provided through an insurance policy, which is simply a device for accumulating funds to meet these uncertain losses. The policy is legally binding contract that sets forth the company’s promise an obligations as follows:
-Whereby, for a set amount of money (the premium), one party (the insurer) agrees to pay the other party (the insured or the insured’s beneficiary) a set sum (the benefit) upon the occurrence of some event.

Question 57

Insurance is based on two fundamental principles:

Answer 57

The spreading of pooling of risks (also known as “loss sharing”) and the law of large numbers.

Question 58

Risk Pooling

Answer 58

Risk pooling, also known as loss sharing, spreads risk by sharing the possibility of loss over a large number of people. It transfers risk from an individual to a group.

Question 59

Law of Large Numbers

Answer 59

Given a large enough pool of risks, an insurer can predict with reasonable accuracy the number of claims it will face at any given time.

Question 60

Risk

Answer 60

Risk can be defined as uncertainty regarding loss. Property loss, such as the destruction of a home due to a fire, is an example of risk. Negligence or carelessness can give rise to liability risk if there is potential injury to an individual or damage to property.

Question 61

Peril

Answer 61

Something that can cause a financial loss, such as an earthquake or tornado. Perils can also be referred to as the accident itself.

Question 62

Loss

Answer 62

The unintentional decrease in the value of an asset due to a peril.

Question 63

Loss Exposure

Answer 63

Any situation that presents the possibility of a loss

Question 64

Homogeneous Exposure Units

Answer 64

Similar objects of insurance that are exposed to the same group of perils

Question 65

Risks can be divided into two classes:

Answer 65

Speculative Risks and Pure Risks

Question 66

Speculative Risks

Answer 66

Involved the chance of both loss and gain. Gambling at a casino or investing in the stock market are examples of speculative risks. There is a chance for gain and chance for loss. Therefore, speculative risks are not insurable.

Question 67

Pure Risks

Answer 67

Pure risks involve only the chance of loss; there is never a possibility of gain or profit. The risk associated with the chance of injury from an accident is an example of pure risk. There is no opportunity for gain if the event does not occur-only the opportunity for loss if it does occur. Only pure risks are insurable.

Question 68

Risk Management

Answer 68

The process of analyzing exposures that create risk and designing programs to handle them is called risk management.

Question 69

Principle of Indemnity

Answer 69

Involves making an insured whole by restoring them to the same condition as before a loss.

Question 70

Adverse Selection

Answer 70

Insurers must minimize adverse selection, which defined as the tendency for poorer that average risks to seek out insurance. For example, a person who takes 12 prescriptions is a poor risk. If an insurer cannot compensate poor risks with better than average risks, then its loss experience will increase and its ability to pay claims may be compromised.

Question 71

Reinsurance

Answer 71

One way insurers deal with catastrophic loss is through reinsurance, which is defined as spreading risk form one insurer to one or more other insurers.

Question 72

Hazard

Answer 72

A condition or situation that creates or increases the chance of loss is called a hazard.