Unit 1 - Intro

Question 1

What is risk?

Answer 1

possibility that a loss will occur

Question 2

What is Insurance?

Answer 2

a contract that transfers the risk of financial loss from an individual / business to an insurance company

Question 3

List the two types of risk

Answer 3

1. Speculative risk - risk that create a gain or a loss
2. Pure risk - risk that can only create a loss. Insurance provides coverage for pure risk.

Question 4

What is exposure?

Answer 4

the potential for accidents and other losses, for which an insurance company will be liable.

The higher the exposure, the higher the insurance premium.

Question 5

What is a peril?

Answer 5

The cause of a loss.

Insurance policies cover perils.

Question 6

What is a loss?

Answer 6

(1) the unintended, unforeseen damage to property
(2) injury
(3) amount paid

Question 7

List the two types of losses.

Answer 7

(1) Direct loss - physical loss to property with no intervening cause.
(2) Indirect loss - consequential loss as a result from a direct loss. (e.g. loss of rental income from fire)

Question 8

What is a hazard?

Answer 8

Anything that increases the chance that a loss will occur.

Hazards do not cause losses (a peril does that)…but they make a loss more likely to occur.

Question 9

List the three types of hazards.

Answer 9

(1) Physical - physically identifiable factors that increase the chance of a loss.
(2) Moral - arise from a person’s character (e.g. dishonesty)
(3) Morale - arise from a person’s careless attitude / unconscious change in people’s actions and behaviors

Question 10

List the methods of handling risk.

Answer 10

STARR

Sharing - two or more individuals or businesses agree to pay a portion of the losses.

Transfer - insurer agrees to pay if an insured has a loss

Avoidance - eliminate the risk by not engaging in a certain activity

Retention - individual or business will self insure and pay for the losses themselves

Reduction - lessen the chance of loss or lessen the extent of a loss if it occurs

Question 11

Name the parties to an insurance contract / policy.

Answer 11

(1) Insured (customer)
(2) Insurer (insurance company)

Question 12

What is the law of large numbers?

Answer 12

the larger the group, the more accurately losses can be predicted

This principle is what makes insurance possible.

Question 13

List the elements of insurable risk.

Answer 13

Only pure risks with certain characteristics are insurable: (CANHAM)

Calculable - premiums must be calculable based on prior loss statistics

Affordable - premiums must be affordable to customer

Non-catastrophic - risk must not be catastrophic for the insurance company. (note: the peril of war is excluded in most policies)

Homogenous - risk must be similar in nature so the same factors affect the chance of loss

Accidental - must be an accident / not intentional

Measurable - a definite time and place and measureable loss

Question 14

What is adverse selection?

Answer 14

tendency for higher risk individuals to get and keep insurance as compared to individuals that represent an average level of risk.

• Not wanted by insurers
• The reason why insurers go through underwriters before accepting policies.
• High risk = higher rate to insure or flat out refusal to insure.

Question 15

What is reinsurance?

Answer 15

insurance for insurers. Helps insurance companies to spread their risk.

ceding insurer = the company reducing their risk

reinsurer = the company assuming the risk fo the ceding insurer

Question 16

List the two ways that reinsurers insure other insurance companies.

Answer 16

(1) Faculative reinsurance = reinsurer considers each risk before allowing the tranfer from the ceding company.
(2) Treaty reinsurance - reinsurer accepts all risks of a certain type from a ceding company

Question 17

List the 9 types of insurers.

Answer 17

(1) Stock Insurers
(2) Mutual Insurers
(3) Fraternal Benefit Societies
(4) Reciprocal Insurers
(5) Lloyd’s Associations
(6) Risk Retention Groups
(7) Risk Purchasing Groups
(8) Self-Insurers

Question 18

What is a stock insurer?

Answer 18

Corporation owned by stockholders. Dividends from insurance operation may be distributed to shareholders, but double taxed. Policies issued from Stock Insurers are non-participating (or non-par) policies.

Question 19

What is a mutual insurer?

Answer 19

• Does not have stock or stockholders
• Owned by policyholders
• Dividend is not guaranteed.
• Dividend paid to policyholder
• Dividend is not taxable - considered a refund of premium.
• Issue participating policies.

Question 20

What is a Fraternal Benefit Society?

Answer 20

Provides insurance and other benefits.

Must be a member to get the benefits.

Fraternal policies are called certificates and members who have insurance are called certificate holders.

Certificate holders may be assessed additional charges if premiums are not sufficient to pay claims during a given period. (called open contracts)

Question 21

What is a reciprocal insurer?

Answer 21

unincorporated groups of people that agree to insure each other’s losses under a contract.

Administration, underwriting, sales promotion, claims handling are handled by an attorney in fact, overseen by an advisory committee of subscribers.

Members are assessed if a loss occurs to any member of the group.

Question 22

What is a Lloyd’s Association?

Answer 22

• Insurance provided by individuals underwriters, not companies
• Insure unusual risks (e.g. hole in one contest, athlete’s arm, celebrity’s hair).
• Most need to be sold by surplus lines intermediaries because they are only licensed in a few states.

Question 23

What is a risk retention group?

Answer 23

• an insurer formed for hte sold purpose of providing liability insurance for its policyholders.
• must be members of the same business
• regulated by the state

Question 24

What is a risk purchasing group?

Answer 24

• a group of businesses from the same industry that join together to buy liability insurance from an insurance company.

Question 25

What is a self-insurer?

Answer 25

• a business that pays its own claims;
• reserve funds to cover losses
• retains risk, rather than transfers it

Question 26

What types of insurance does the federal government provide?

Answer 26

• war risk insurance
• nuclear energy liability insurance
• flood insurance
• federal crop insurance

Question 27

What types of insurance does the state provide?

Answer 27

• Unemployment insurance
• Workers compensation

Question 28

Define a domestic insurer

Answer 28

Insurer’s state of formation. If headquarters are in the same state of formation.

The insurer’s home state is called its state of “domicile”.

Question 29

What is a foreign insurer?

Answer 29

An insurer whose headquarters is outside it’s state of formation (domicile), but still inside the US. or US territory.

Question 30

What is an alien insurer

Answer 30

An insurer formed under the laws of any country outside the US or US territories.

Question 31

What is it called when an insurance company is licensed by a state?

Answer 31

They are admitted or authorized. This means they can sell, place and service most insurance contracts.

Question 32

What is a surplus line?

Answer 32

• Also called an excess and surplus line - for exceptionally large or specialized risk that no authorized insurer can or will cover.
• Nonadmitted, unauthorized or nonapproved insurance companies that are able to sell insurance in certain states, for certain types of risks.
• Must be on a state’s approved list of surplus line insurers
• Cannot be sold solely for a cheaper rate than licensed / admitted insurers
• Gaming, casinos, entertainment, mining and skyscrapers are examples of exposures requiring surplus line insurance

Question 33

What is a certificate of authority?

Answer 33

A state license for an insurance company

Question 34

What are financial ratings of insurers?

Answer 34

• A report card of the company
• Ratings from: AM Best, S&P, Moodys, Duff & Phelps, Weiss

Question 35

List the four types of insurance agents

Answer 35

1. Independent insurance agents - individuals that sell insurance. Are 1099. Own the renewals of the policies they sell.
2. Captive (exclusive) agents - individuals that represent only one insurer. Are 1099. Insurer owns the renewals of the policies they sell.
3. General agents or managing general agents - hire, train and supervise other agents within a geographical area. Get a cut of the commissions their agents earn.
4. Direct writing companies - companies whose products are sold by W2 employees. Insurer owns the renewals of the sold policies.

Question 36

What is direct response marketing?

Answer 36

There is no producer or agent. Policies are sold directly to the public.

Examples include: Direct mail, magazines, television, internet, radio

Question 37

What is the law of agency?

Answer 37

Agency is a relationship where one person is authorized to represent and act for another person, or corporation.

Under the law of agency, contracts created by the agent (the one authorized to represent) are considered to be contracts of the principal (the one being represented).

In this case, the insurance agent is the agent and the insurer is the principal.

Question 38

List the three types of authority in the law of agency.

Answer 38

1. Express authority - authority made explicit in a producer’s written agency agreement with the insurer.
2. Implied authority - not written in the agency contract, but assumed to be granted to an agent in accordance with general business practices.
3. Apparent authority - authority that others might believe the agent has. Insurer may still be bound by the actions of their agents with apparent authority, because it creates a presumption of agency.

Question 39

What is fiduciary?

Answer 39

• a person in a position of financial trust.
• has knowledge of products
• complies with laws and regulations
• does not commingle funds

Question 40

What is commingling?

Answer 40

illegal act of mixing personal funds with insured’s funds