Chapter 2: Characteristics of Insurance

Question 1

What act placed a backstop for losses, where the government would pay 90% of losses due to terrorism above a threshold

Answer 1

Terrorism Reform Act of 2002

Question 2

Endorsement vs. Rider

Answer 2

Both modify or change an existing policy.
Endorsement is on a property
Rider is on life or health

Question 3

What are the goals of the NAIC (National Association of Insurance Commissioners)

Answer 3

A) Protect the public
B) Promote competition
C) Promote fair treatment of consumers
D) Promote solvency of insurance companies
E) Support and improve state regulation

Question 4

Insurance Rate Regulation: Prior Approval Law

Answer 4

Insurance companies must file rate increase requests with the State Insurance Commission to be approved or denied or modified

Question 5

Insurance Rate Regulation: File and Use Law

Answer 5

An insurance company can file the rate increase and immediately implement it. The commissioner at a later date may deny in the increase and the company would rebate the added premiums

Question 6

Insurance Rate Regulation: Use and File Law

Answer 6

An insurance company can increase the rate but they must file the increase withing a specific period of time

Question 7

Insurance Rate Regulation: Open Competition

Answer 7

Insurers set their own rates and the state presumes that supply and demand will determine the correct rate for a product

Question 8

Coinsurance Formula

Answer 8

(Amount of Insurance / (Coinsurance Requirement * Replacement Value)) * Loss Amount = - Deductible =

Amount of Insurance: The amount covered by the policy
Coinsurance Requirement: The insurers portion of the coinsurance agreement (the 80 of 80/20)
Replacement Value: The value to replace what is covered in the policy
Loss Amount: The amount lost caused by a peril
Deductible: The deductible amount from the policy

Question 9

If you are in a car accident and you are clearly not at fault, but decide to pursue the claim through your insurer rather than the wrongful parties. Your insurer will pay out you claim but will also try to recover those funds from the wrongful party.

This is an example of what?

Answer 9

The Subrogation Clause

Question 10

Death, a car accident, or a house fire are examples of…

Answer 10

Pure Risk: A chance of loss or no loss (binary)

Question 11

Investing in the stock market or a small business are examples of…

Answer 11

Speculative Risk: Based upon the perception of risk

Question 12

The loss of earnings and employee benefits from losing a job is an example of…

Answer 12

Objective Risk: The measurement of actual loss from expected loss

Question 13

An earthquake or a flood are examples of…

Answer 13

Fundamental Risk: A risk that is difficult for an insurer to insure as it may impact one or many and can lead to severe financial loss

Question 14

The inability to work due to a sickness or injury is an example of…

Answer 14

Particular Risk: A specific risk that effects only one individual

Question 15

The emotional distress felt from the loss of a loved one is an example of…

Answer 15

Nonfinancial Risk: A risk felt from loss other than financial

Question 16

The loss of income when someone dies is an example of…

Answer 16

Financial Risk: A risk from the loss of financial value

Question 17

Definition: The more times something happens, the more likely something is likely to occur, thus demonstrating the underlying probabilities of an observed event.

Answer 17

The law of large numbers

Question 18

What are the 7-Steps to the Risk Management Process

Answer 18

1) Determine objectives
2) Identify risk exposure
3) Evaluate risk probability and severity
4) Determine alternatives for management
5) Select alternatives
6) Implement management plan
7) Review management plan

Question 19

Insurable losses are…

Answer 19

accidental, measurable and determinable, do not pose catastrophic risk to the insurer, and can be insured with a reasonable premium

Question 20

The tendency for those that have higher-than-average risk to seek insurance

Answer 20

Adverse Selection

Question 21

Indemnity

Answer 21

Protected against loss

Question 22

Indemnify

Answer 22

To compensate for loss

Question 23

All Insurance contract must possess specific characteristics

Answer 23

Adhesion: take it or leave it
Aleatory: money exchange will be unequal
Unilateral: Bound to only one person
Conditional: The insured needs to follow through their obligations
Personal: Relationship between insured and insurer

Question 24

Provisions of an Insurance Contract

Answer 24

Definitions: key words, phrases,
Declarations: premiums, amount of insurance, end of initial term period
Description: details of the insured
Exclusions: specifics of what is not covered
Perils: specifics of what is covered
Conditions: duties and rights of insurer and insured

Question 25

Difference between Replacement Cost, Actual Cash Value, Agreed Upon Value

Answer 25

Replacement Cost: Current cost of like kind
Actual Cash Value: Depreciated value
Agreed Upon Value: Agreement between insured and insurer