Key Terms & Definitions

Question 1

Actuarial Department

Answer 1

The actuarial department calculates policy rates, reserves, and dividends.The department, within an insurance company, that determines the reserves needed for liabilities

Question 2

Alien Insurer

Answer 2

An Alien Insurer in the United States is an insurer whose principal office and domiciled location is outside the country, or an insurer domiciled in and licensed under the laws of a country outside a given jurisdiction.

Question 3

Admitted Insurer

Answer 3

An admitted or authorized insurer is an insurer who has received a certificate of authority from a state’s department of insurance authorizing them to conduct insurance business in that state. They are also called a standard market carrier, is an insurance company that has been approved by a state’s department of insurance.

Question 4

Insurance Broker

Answer 4

A Broker represents themselves and the insured (i.e., the client or customer). An insurance broker is an intermediary who sells, solicits, or negotiates insurance on behalf of a client for compensation

Question 5

Captive Insurer

Answer 5

A Captive Insurer is an issuer established and owned by a parent firm for the purpose of insuring the parent firm’s loss exposure. A Captive Insurer is an issuer established and owned by a parent firm for the purpose of insuring the parent firm’s loss exposure.

Question 6

Certificate of Authority

Answer 6

A Certificate of Authority is a license issued to an insurer by a department of insurance (or equivalent state agency), which authorizes that company to conduct insurance business in that particular state.

Question 7

Claims Department

Answer 7

The claims department is responsible for processing, investigating, and paying claims. The claims department at an insurance company is the section that manages the settling and adjusting of claims. This department is an essential part of any insurance company’s operations and is one of its core functions. A well-run claims department is key to any profitable and well-run insurance company.

Question 8

Divisible Surplus

Answer 8

Divisible surplus is the amount of earnings paid to policyowners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses, and general business purposes, he part of the annual surplus fund of an insurance company which is available for payment in the form of dividends to policyholders.

Question 9

Domestic Insurer

Answer 9

A domestic insurer is an insurance company that has gotten its license to operate in a particular state by following the statutory laws and requirements of that state and building its headquarters there. An insurer from another state may also become a domestic insurer by transferring its headquarters to the state in which it wishes to be a domestic insurer.

Question 10

Foreign Insurer

Answer 10

A Foreign Insurer is an insurer with its principal office or domicile location in a state different from the state it is transacting insurance business.

Question 11

Fraternal Benefit Society

Answer 11

Fraternal Benefit Societies are nonprofit benevolent organizations that provide insurance to its members. A fraternal benefit society is a membership organization that is legally required to offer life, health and related insurance products to its members, be not-for-profit, and carry out charitable and other programs for the benefit of its members and the public.

Question 12

Industrial Insurer

Answer 12

Industrial Insurers make up a specialized branch of the industry, primarily providing policies with small face amounts with weekly premiums. Other names for industrial insurers include home service or debit insurers.

Question 13

Insurance

Answer 13

The transfer of risk through the pooling or accumulation of funds. a practice or arrangement. A thing providing protection against a possible eventuality by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium.

Question 13

Insurance

Answer 13

The transfer of risk through the pooling or accumulation of funds. a practice or arrangement. A thing providing protection against a possible eventuality by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium.

Question 14

Lloyds of London

Answer 14

Lloyds of London is NOT an insurer, but a group of individuals and companies that underwrite unusual insurance. Lloyd’s is the world’s leading insurance market providing specialist insurance services to businesses in over 200 countries and territories. Lloyd’s of London, generally known simply as Lloyd’s, is an insurance and reinsurance market located in London, England. Unlike most of its competitors in the industry, it is not an insurance company; rather, Lloyd’s is a corporate body governed by the Lloyd’s Act 1871 and subsequent Acts of Parliament

Question 15

Mutual Insurance Company

Answer 15

Mutual Insurance Companies are insurance companies characterized by having no capital stock, being owned by its policy owners, and usually issue participating insurance. A mutual insurance company is owned by policyholders. Its sole purpose is to provide insurance coverage for its members and policyholders

Question 16

Non Admitted Insurer

Answer 16

A non-admitted or unauthorized insurer is an insurer who has not received a certificate of authority from a state’s department of insurance authorizing them to conduct insurance business in that state. Non-admitted insurance companies are not backed/approved by the state, which means: The company is likely not in compliance with the state’s insurance laws and regulations. Claims to the company may not be paid if the insurer goes insolvent.

Question 17

Nonparticipating policy:

Answer 17

A nonparticipating insurance policy, typically issued by stock companies, do not allow policyowners to participate in dividends or electing the board of directors. In non-participating policies, the profits are not shared and no dividends are paid to the policyholders. This type of policy is also known as a without-profit or non-par policy. Non-Guaranteed Payments. The bonuses or dividends are usually paid out annually.

Question 18

Participating Plan

Answer 18

A participating plan is an insurance policy under which the policyowners share in the company’s earnings through receipt of dividends and also elect the company’s board of directors. A participating policy enables you, as a policyholder, to share the profits of the insurance company. These profits are shared in the form of bonuses or dividends. It is also known as a with-profit policy. In non-participating policies, the profits are not shared and no dividends are paid to the policyholders

Question 19

Private (Commercial) Insurer

Answer 19

Private or commercial insurance companies are companies owned by private citizens or groups that offer one or more insurance lines. Commercial insurers are NOT government-owned

Question 20

Reciprocal Insurer

Answer 20

A Reciprocal Insurer is an unincorporated organization in which all members insure one another. Reciprocal insurance exchanges are a form of insurance organization in which individuals and businesses exchange insurance contracts and spread the risks associated with those contracts among themselves. Policyholders of a reciprocal insurance exchange are referred to as subscribers.

Question 21

Reinsurance

Answer 21

Reinsurance is the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage, Reinsurance is also known as insurance for insurers or stop-loss insurance. Reinsurance is the practice whereby insurers transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim

Question 22

Reinsurer

Answer 22

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. What Is a Reinsurer? The term reinsurer refers to 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 23

Risk Retention Group

Answer 23

A Risk Retention Group is a group-owned liability insurer which assumes and spread product liability and other forms of commercial liability risks among its members., said another way Risk Retention Groups (RRGs) are liability insurance companies owned by its members. RRGs allow businesses with similar insurance needs to pool their risks and form an insurance company that they operate under state regulated guidelines.

Question 24

Self- Insurer

Answer 24

A self-insurer establishes a self-funded plan to cover potential losses instead of transferring the risk to an insurance company. Self-insurance involves setting aside your own money to pay for a possible loss instead of purchasing insurance and expecting an insurance company to reimburse you. With self-insurance, you pay for a cost such as a medical procedure, water damage, theft, or a fender bender out of your own pocket rather than filing a claim under your policy with an insurance company

Question 25

Stock Insurance Company

Answer 25

A stock insurance company is a corporation owned by its stockholders or shareholders, and its objective is to make a profit for them. Policyholders do not directly share in the profits or losses of the company.

Question 26

Surplus Lines Insurance

Answer 26

Surplus Lines Insurance is nontraditional insurance only available form a surplus lines insurer. They offer coverage for substandard or unusual risks not available through private or commercial carriers. Surplus lines insurance protects against a financial risk that is too high for a regular insurance company to take on. Surplus line insurance can be used by companies or purchased individually. Unlike normal insurance, this insurance can be bought from an insurer not licensed in the insured’s state. However, the surplus lines insurer requires a license in the state where it is based.

Question 27

Underwriting Department

Answer 27

The underwriting department is the department within an insurance company responsible for reviewing applications, approving or declining applications, and assigning risk classifications. The underwriting department of an insurance company decides which risks the company should take, and how much money they need to charge for those risks to be worthwhile. Insurance companies, after all, are essentially in the business of taking calculated risks.

Each new insurance policy an insurer sells represents a new risk.

Upon issuing a new policy to a customer, the insurance company must pay all claims that customer makes, within the scope of the policy’s coverage. That’s why it’s called a risk: if the insurance company pays one customer more in claim settlements than they collected in premium payments, the company has lost money. That’s normal and unavoidable in many cases; helping customers cover major and unexpected losses is the whole point of insurance, after all.

However, if it happens too often, eventually the company will run out of money (due to a poor loss ratio) and go out of business. That’s why underwriting exists: to help the company take the right kinds of risks, and make sure they’re earning enough money to cover the risks that they do take.

Question 28

Adhesion

Answer 28

A contract of adhesion describes a contract that has been prepared by one party (the insurance company) with no negotiation between the applicant and insurer. The applicant adheres to the terms of the contract on a “take it or leave it” basis when accepted.

Question 29

Agent

Answer 29

An agent represents themselves and the insurer at the time of application

Question 30

Aleatory (Contract)

Answer 30

An aleatory contract presents the potential for an unequal exchange of value or consideration between both parties. Aleatory contracts are conditioned upon the occurrence of an event

Question 31

Apparent Authority

Answer 31

Apparent Authority is the appearance of the insurer providing the agent authority to perform unspecified tasks based on the agent-insurer relationship.

Question 32

Insurance Broker

Answer 32

An Broker represents themselves and the insured (i.e., the client or customer) at the time of application.

Question 33

Competent Party

Answer 33

A competent party is one who is capable of understanding the contract being agreed to. All parties must be of legal competence, meaning they must be of legal age, mentally capable of understanding the terms and not influenced by drugs or alcohol.

Question 34

Concealment

Answer 34

Concealment is the failure of the applicant to disclose a known material fact when applying for insurance.

Question 35

Conditional Policy

Answer 35

A conditional policy describes the insurer’s promise to pay benefits depends on the occurrence of an event covered by the contract.

Question 36

Consideration

Answer 36

Consideration is the part of an insurance contract setting forth the amount of initial and renewal premiums and frequency of future payments. his is the premium or the future premiums that you have to pay to your insurance company. For insurers, consideration also refers to the money paid out to you should you file an insurance claim. This means that each party to the contract must provide some value to the relationship.

Question 37

Applicants

Answer 37

provide the insurer with a completed application and initial premium as consideration for insurance.

Question 38

Estoppel

Answer 38

Estoppel is the legal impediment to one party denying the consequences of its own actions or deeds if such actions or deeds result in another party acting in a specific manner or if certain conclusions are drawn.

Question 39

Express Authority

Answer 39

Express authority is the explicit authority granted to the agent by the insurer, as written in the agency contract.

Question 40

Fiduciary

Answer 40

The responsibility an insurance producer has to account for all premiums collected and provide sound financial advice to clients. A fiduciary is in a position of trust with regards to the funds of their clients and the insurer. A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. Typically, a fiduciary prudently takes care of money or other assets for another person

Question 41

Fraud

Answer 41

Fraud includes the deliberate knowledge of or intentional deceit to make false statements to be compensated by an insurance company.

Question 42

Implied Authority

Answer 42

Implied Authority of Contract is a legal term. In contract law, it is the implied ability of an individual to make a legally binding contract on behalf of an organization, by way of uniform or interaction with the public on behalf of that organization. or Implied Authority — actions of an agent that may extend beyond the rights and powers explicitly provided in the agency contract. If these actions result in no response from the insurer, authority is extended as if these fall within the agency contract.

Question 43

Indemnity Contract

Answer 43

Contracts of indemnity attempt to return the insured to their original financial position. or Indemnity is one party’s promise to compensate another for potential losses or damages. Indemnification is the act of compensating another party after a loss has occurred. In an indemnity contract, the indemnitee is protected from liability and the indemnitor holds the indemnitee harmless.

Question 44

Insurable Interest

Answer 44

Insurable interest is the financial, economic, and emotional impact associated with a person experiencing a specified loss. A person has an insurable interest in a loss if they have more to gain by not suffering the loss. or Insurable interest is the financial, economic, and emotional impact associated with a person experiencing a specified loss. A person has an insurable interest in a loss if they have more to gain by not suffering the loss.

Question 45

Insurance Policy

Answer 45

An insurance policy is a written contract in which one party promises to indemnify another against loss that arises from an unknown event. or the insurance policy is a contract between the insurer and the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as the premium, the insurer promises to pay for loss caused by perils covered under the policy language

Question 46

Legal Purpose

Answer 46

Legal purpose means an insurance contract must be legal in nature and not in opposition to public policy.

Question 47

Material Misrepresentation

Answer 47

A material misrepresentation is a false statement made by an applicant that would influence an insurer in determining whether or not to accept the risk. In an insurance contract, a material misrepresentation occurs when the insured makes an untrue statement that: 1) is material to the acceptance of the risk; and 2) would have changed the rate at which insurance would have been provided or would have changed the insurer’s decision to issue the contract.

Question 48

Parol Evidence Rule

Answer 48

Parol evidence rule involves parties put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by parol (oral) evidence.

Question 49

Policy Rider Endorsement

Answer 49

A policy rider or endorsement is an amendment added to an insurance contract that overrides terms in the original policy; endorsements may add or remove coverages, change deductibles, or revise any other policy feature. An insurance endorsement/rider is an amendment to an existing insurance contract that changes the terms of the original policy. An endorsement/rider can be issued at the time of purchase, mid-term or at renewal time. Insurance premiums may be affected and adjusted as a result.

Question 50

Reasonable Expectation

Answer 50

Reasonable expectations means the insured is entitled to coverage under a policy that any sensible and prudent person would expect it to provide. Reasonable expectation doctrine is a principle applied in insurance law which states whenever there is an ambiguity in an insurance-policy, it is resolved in favor of the insured’s reasonable expectations. Usually an ambiguity arises when there are plausible, competing interpretations of a policy term.

Question 51

Representations

Answer 51

Representations are statements made by the applicant that they consider to be true and accurate to the best of the applicant’s belief. a statement made in an application for insurance that the prospective insured represents as being correct to the best of his or her knowledge.

Question 52

Unilateral

Answer 52

Unilateral contracts mean only one party, the insurer, makes any kind of enforceable promise.

Question 53

Utmost Good Faith

Answer 53

Utmost good faith involves the belief that both the policyowner and the insurer must know all material facts and relevant information, and as such, they will provide each other with all material facts and relevant information. Uberrima fides is a Latin phrase meaning “utmost good faith”. It is the name of a legal doctrine which governs insurance contracts. This means that all parties to an insurance contract must deal in good faith, making a full declaration of all material facts in the insurance proposal.

Question 54

Valued Contract

Answer 54

A valued contract pays a stated sum regardless of the actual loss incurred. Life insurance contracts are valued contracts. A valued contract is an insurance policy in which the insurer is obligated to pay a pre-specified amount to the insured in the event of a loss, regardless of the actual value of the loss. The pre-specified amount for valued contracts is typically the full value of the policy.

Question 55

Voidable Contract

Answer 55

A voidable contract is an agreement that, for a reason satisfactory to the court, may be set aside by one of the parties in the contract. A voidable contract, in the context of insurance, is a valid insurance contract that can be rendered void. In contrast to a void contract, it has the same legal effect and force as a valid contract.

Question 56

Waiver

Answer 56

A waiver is the voluntary giving up of a legal, given right.

Question 57

Warranty

Answer 57

A warranty is a statement made by the applicant that is guaranteed to be true in every respect. It becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract.