Insurance Exam Chapter 1
Terms in this set (94)
Decribe or define Insurance
(1) It is a social device for handling risk.
(2) To spread and transfer a risk
(3) To give up a small certain loss (premiums) in exchange for a larger uncertain loss (claim)
(4) One party agrees to indemnify (pay) another party for loss caused by designated contingencies
The insurance term for uncertainties concerning financial loss. The possibility that a loss might occur.
What are the two types of risk?
Offers the possibility for gain as well as loss. This type of risk is NOT insurable.
Example of speculative risk
Invest in the stock market
One that exists only as a possibility.
Example of pure risk
Accident or sickness. This type of risk IS insurable
What type of risk is insurable?
a pure risk
What are the methods for managing risk?
Insurance is the most common way. Ways in which people deal with risk is an ARRT:
Avoid the risk
reduce the risk
retain the risk
transfer the risk
Avoid the risk
Not doing the thing that puts the client at risk.
What is an example of avoiding a risk
Never driving a car
Reduce the risk
Reduce the thing that make a loss more likely.
What is an example of reducing a risk
Only drive in good weather or you could stop smoking
Retain the risk
Keep or assume the risk and do not try to pass it on to someone else
What is an example of retaining a risk?
Be willing to pay for your own medical expenses. A deductible is a method of risk retention
Transfer the risk
Risk can be transferred to someone else (the insurance company), through the insurance contract in exchange for the premium. The entire burden is not merely transferred to one party but instead shared between all the insuered who share the same chance and uncertainty of an event occurring
The Law of Large Numbers
The larger the group being studied the more accurate the predictions become. A large number of exposure units must be combined for the law of large numbers to be effective. Exposure unit means the item of property or the person being insured
The applicant for a policy must have a legitimate interest in the preservation of the life to be insured. The person to be insured must give consent to the issuance of the policy by signing the application
Define the concept of insurable interest relationships
Blood, marriage, creditor-debtor relationships, employer-emploee relationships and other economic dependence. Everyone has an insurable interest in himself or herself
When must an insurable interest exist?
In life insurance, it only has to exist when the policy is applied for, (not when the claim occurs)
Difference between Insurance and Gambling
The primary difference is that gambling involves the intentional creation of a risk providing possibilities of loss or gain
In order for a risk to be insurable, what criteria must it meet? In other words what are the Essential ingrediants of insurable risk?
(1) be a member of a LARGE NUMBER OF HOMOGENEOUS UNITS.
(2) Loss must be ascertainable
(3) Loss must be accidental
(4) Loss must create economic hardship
(5) Catastrophic exclusions
What does it mean to be a member of a large number of homogeneous units
When one is a member of a large group of the same type of individuals then past statistics can be used. The known probability of loss provides an accurate premium rate
What is meant by the phrase, "Loss must be ascertainable?
Loss must be provable by knowing such things as; time of loss, place, amount, and cause of loss
What is meant by the phrase, "Loss must be accidental"?
the loss must occur unexpectedly (as in life insurance)
What is meant by the phrase, "Loss must create economic hardship"
the potential for a large loss must exist which would cause the insured an economic hardship
What is meant by the phrase, "Catastrophic exclusions" as it pertains to insurable risks?
Certain types of losses are unpredictable and are therefore uninsurable by most companies as standard risks.
What is an example of a catastrophic exclusion?
What are the different types of Insurers (Carriers)?
(1) Stock companies
(2) Mutual companies
(3) Assessment insurers
(4) Fraternal insurers
(5) The Federal Government as an insurance company
(6) Service organizations
(7) Reciprocal insurers
Who is a stock company owned and controlled by?
Stock companies usually issue
Non-participating policies which is the type that does not provide policy dividends
Stock dividends are
taxable as return on investment
Who are mutual companies owned and controlled by?
Mutual companies usually issue
PARTICIPATING POLICIES which is a type of policy that may pay policy dividends. Policy dividends are NOT taxable because they are considered to be a return of an overcharge in premiums
How are the Board of Directors determined in a mutual company?
Policyholders elect them
What type of policies do Assessment insureres issue?
"Open end" contracts which allow the insurer to charge additional premiums from the policyholders if the amount paid is insufficient to cover claims
they exist as a "lodge" or some type of charitable organization
What is an example of a fraternal insurer?
Woodmen of the World
The Federal Government as an insurance company
There are a number of government insurance programs. Federal, state, and local governments provide "social insurance" to a segment of the population who would otherwise be without disability income, retirement income, or medical care
Blue Cross/Blue Shield is the best known service insurer and operates on a "nonprofit" basis.
A non-profit status exist when?
when profits are returned to subscribers in the form of reduced premiums or expanded benefits.
Unincorporated groups of people who share in each others losses
Who manages the funds and all operational aspects of reciprocal insurers?
What does it mean to be an "ADMITTED" company?
A company that has applied for and received a certificate of authority (or license) to operate in the state. The company may also be referred to as "Licensed" or "Authorized"
What does it mean to be a "NON-ADMITTED" company?
A company that does not have a certificate of authority to operate in the state. A non-admitted company may also be referred to as "Unlicensed" or "Unauthorized"
Refers to a company that was incorporated in this state
Refers to a company that was incorporated in another state
Refers to a company that was incorporated in another country
A person required to be licensed under the law to sell, solicit, or negotiate insurance and includes all persons or business entities otherwise referred to as agent, broker, or surplus lines broker
Appointed by and represents an insurance company
What is binding authority?
The authority to bind coverage without having to go through an underwriter. Life and Health agent/producers usually do not have binding authority
They represent the buying public, not an insurance company
Operates as a field manager for an insurance company in a specified geographical area (Example: a county, several counties, a state or several states)
works for an insurer as a salaried company employee. His primary job is to assist field managers in hiring and training new agents. He cannot countersign contracts (policies) or receive commissions from the sale of policies
May bind or commit their companies by oral or written agreement
Advises or counsels people in regard to their needs and coverages related to insurance policies or contracts. Does not sell insurance
Explain the Agent/Principal relationship
An agent is one who represents the interests of someone else (the principal) in their dealings with a third party (the client). This is representative of a movie star or athlete who has "an agent", or an insurnace agent representing an insurance company.
What are some important rules involving agents?
(1) Knowledge of the agent is considered to be knowledge of the principal. This is known as "Principle of Agency"
(2) Statements and actions of the agent are considered to be statements and actions of the principal
(3) Payment to the agent is payment to principal
The medical examiner as an agent
The examiner is considered to be an agent of the company and is therefore the responsibility of the company
Powers specifically granted to an agent by contract with the company, usually contained in the agents' contract
Necessary actions that must be taken by an agent to be able to execute his express authority
What is an example of implied authority?
Collecting the first premium
Actions on the part of the agent that were unnecessary but which the company failed to protest or correct
What is an example of apparent authority
Collecting renewal premiums
Presumption of Agency
Involves the companys' obligation to prevent a former agent from acting as if he is still an agent by picking up all material (policies, ratebooks, etc) when the agent leaves the company. If anyone has the materials which makes them look like an agent, the public has the right to believe they are an agent. The principal or company is responsible for their actions
Fiduciary responsibility of an agent
The agent handles the money of others and acts in a capacity of trust
Mixing the insured's premiums and the agent's personal funds
Taking premiums for personal use
Agents who represent more than one company and only receive commissions from the sale of a policy. They usually receive no salary
General agency (exclusive agency)
when it contracts with an insurance company to sell only that companies policies. An override commission is paid to the general agent in addition to the commission paid to the soliciting agent or broker
A method whereby a company markets through direct mail or television, not requiring agents
An insurance company that hires agents as employees. The agents may be paid a salary, commission, or both
An agent represents
To be insurable, a risk must involve the possibility of loss only and not gain, and the applicant must have a legitimate interest in the preservation of the life or property insured. This requirement is called _______________________________________
The insurable interest relationship can be created by
creditors on debtors
The purpose of insurance is to reduce or eliminate the uncertainty of economic loss, it must therefore meet all of the following requirements
An insurance company that is owned and controlled by the policyholders is
The type of risk that is insurable is called
A company incorporated in Canada is known as a/an ____________________ company in Arkansas
In life insurance, insurable interest must exist:
when a policy is issued
Insurance allows people to make financial preparations in advance to protect themselves against uncertainties. The insurance term for uncertainties is:
Which type of company does not pay benefits to the insured?
An insurable interest is
A legitimate interest in preserving the life or property of the insured
Insurance can be described as a _____________________________ for spreading risk among individuals
The person hired by an insurance company to supervise its business and its agents in a specified territory is called
Which of the following denotes a company which accepts the responsibility of replacing a property in which they did not own?
Who is responsible for electing the board of directors in a mutual company?
The "Law of Large Numbers" states that
Prediction becomes more accurate as the number of units considered increase
The type of company that reserves the right to charge policyholders additional premiums if those paid are insufficient to pay claims is called
An "Open End Contract" describes the policy of:
An assessment insurer
The authority of an agent is of three types, what are they?
Express, implied, and apparent
An insurance company which is not authorized to do business in Arkansas is called?
a non-admitted company
What type of insurer uses an "attorney in fact to manage funds and all other operational aspects?
Authority that is granted to an agent when the principle directly authorizes the agent to perform certain acts or duties is called:
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