Chapter 1 General Flashcards
(131 cards)
1
Q
Which of the following individuals represents the insurance company when selling an insurance policy?
A
Producer
2
Q
The National Association of Insurance Commissioners (NAIC) consist of what?
A
State and territorial insurance commissioners or regulators. The NAIC provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators. The association promotes uniformity among states and members may accept or reject recommendations. The NAIC has no legal authority to enact or enforce insurance laws.
3
Q
The Federal Insurance Office (FIO) consist of what?
A
his office monitors the insurance industry and identifies issues and gaps in the state regulation of insurers. It also monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low- and moderate-income persons. The FIO is not a regulator or supervisor. Insurance is primarily regulated by the individual States.
4
Q
The Federal Insurance Office (FIO) established by who?
A
Dodd-Frank Wall Street Reform and Consumer Protection Act.
5
Q
Insurance regulated mostly at what level?
A
The insurance industry is regulated primarily at the state level.
6
Q
The McCarran-Ferguson Act of 1945 determined what?
A
Federal government can not regulate insurance in areas over which states have the authority to do so. Congress created federal agencies to provide regulatory oversight impacting insurance practices. Government insurers step in (as a last resort) when private insurers are unable to provide protection relative to the catastrophic nature or unpredictability of a risk.
7
Q
Stock Insurance Company
A
A stock company is owned by stockholders or shareholders. Directors and officers direct the company operations and are elected by stockholders. Stockholders receive taxable corporate dividends as a return of profit when declared by the Directors.
Dividends are not guaranteed
Traditionally, stock insurers issue Non–Participating policies
8
Q
Mutual Insurance Company
A
A mutual company is owned by policyholders (who may be referred to as members). A Board of Trustees or Directors directs the company operations and is elected by policyholders. Policyholders receive non-taxable dividends as a return of unused premium when declared by the directors.
Dividends are not guaranteed
Mutual insurers typically issue Participating policies
9
Q
Self-Insurer
A
To self-insure means to assume the financial risk one’s self. This is generally an option only for large companies who may even reinsure for risks above certain maximum limits.
10
Q
Residual Markets
A
A private coverage source of last resort for businesses and individuals who have been rejected by voluntary market insurers.
Can not be obtained in ordinary market
A Joint Underwriting Association or Joint Reinsurance Pool requires insurers writing specific coverage lines in a given state to assume the profits/losses accruing their share of the total voluntary market premiums written in that state.
Risk Sharing Plan – Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels.
Coverage is typically written as workers’ compensation, personal auto liability or property insurance on real property.
11
Q
Reinsurance Companies
A
An insurance company that assumes all or a portion of a risk for a primary or ceding insurance company; reinsurance transfers risk among insurance companies. The insurer originating the application is the primary or ceding company. The insurer sharing in the risk is the reinsurance company. Consumer inquiries must originate with the ceding company, which then obtains reinsurance.
12
Q
Reinsurance Companies types?
A
Types of Reinsurance:
Treaty Agreements – Reinsurance agreement that covers all risks contained in the subject line(s) of business automatically.
Facultative Agreements – Reinsurance agreement that allows ceding and reinsurance companies the opportunity to negotiate coverage for individual risks.
13
Q
Financial Rating Services
A
Independent financial rating services evaluate and rate the financial stability of insurance companies. These companies assign rating codes to show financial strength or weakness of each company rated. The ratings are available to the public and producers are responsible for placing business with insurers that are financially sound.
Examples of rating services include: A.M. Best Company, Standard & Poor’s, Moody’s Investment Services, Weiss Insurance Rating, and Fitch Ratings.
14
Q
If an insurance company wants to transfer all or part of the risk it has accepted, it would buy which of the following types of insurance?
A
Reinsurance
15
Q
Domicile
A
Domicile refers to the jurisdiction (i.e., state or country) where an insurer is formed or incorporated
16
Q
There are three types of Insurer domiciles:
A
Domestic Insurer – An insurer organized under the laws of this state, whether or not it is admitted to do business in this state.
Foreign Insurer – An insurer not organized under the laws of this state, but in one of the other states or jurisdictions within the United States, whether or not it is admitted to do business in the state or jurisdiction.
Alien Insurer – An insurer organized under the laws of any jurisdiction outside of the United States, whether or not it is admitted to do business in this state.
17
Q
Surplus (Excess) Lines Insurance
A
Surplus Lines insurance finds coverage when the kind or amount of insurance cannot be obtained from admitted insurers. It may not be utilized solely to receive lower cost coverage than would be available from an admitted carrier.
Each State regulates the procurement on Surplus Lines insurance in their State. Non-admitted business must be transacted through a Surplus Lines Broker.
18
Q
Admitted Insurer
A
Transact insurance in a particular state.
Maybe be a domestic foreign, or alien certificate of authority
19
Q
Non-admitted
A
Unauthorized to transact insurance in a particular state. No certificate of authority
20
Q
Which of the following is an insurance company that is organized under the laws of a different state within the United States?
A
Foreign
21
Q
Management
A
Executives – Oversee the operation of the business.
Actuarial Department – Gather and interpret statistical information used in rate making. An actuary determines the probability of loss and sets premium rates.
Underwriting Department – Responsible for the selection of risks (persons and property to insure) and rating that determines actual policy premium.
Marketing/Sales Department – Responsible for advertising and selling.
Claims Department – Assists the policyholder in the event of a loss.
22
Q
Which insurance company department accepts the insurance risk?
A
Underwriting
23
Q
Exclusive or Captive Agency System
A
Deals with the insured through an exclusive or captive agent.
Agent represents solely one company or group of companies having common ownership.
Insurer retains ownership rights to the business written by the agent.
The agent is an employee or a commissioned independent contractor.
Insurer may or may not provide office and agency support services.
24
Q
Direct Writing System
A
Producer or Agent is an employee of the insurer.
Insurer owns the accounts.
The agent may be paid a salary, salary plus bonus, or commission.
25
Independent Agency
An agent or agency that enters into agency agreements with more than one insurer. It may represent an unlimited number of insurers.
Agency retains ownership of the business written.
An independent contractor that is paid a commission and covers the cost of agency operations.
Career Agency System – Agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company.
26
Career Agency System
Agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company.
27
Personal Producing General Agent
Does not recruit career agents.
| Sells insurance for carriers it is contracted with and maintains its own office and staff.
28
Direct Mail or Direct Response Company
Sells insurance policies directly to the public with licensed employees or contractors.
A marketing system utilizing direct mail, newspapers, magazines, radio, television, internet, web sites, call centers and vending machines.
29
Mass Marketing
Mass marketing is used to target a specific type of insurance to a large group of individuals, such as the American Association of Retired People (AARP).
Insurer reduces marketing and underwriting expenses.
30
Law of Agency
The law of agency defines the relationship between two or more parties where one party, the agent/producer, acts on behalf of the other party, known as the principal or insurer. The agent/producer binds the actions and words of the principal.
31
Insurer (Principal)
The insurer is the source of authority from which the producer must abide. The insurer is responsible for all acts of a producer when the producer is acting within the scope of its authority. The producer may be personally liable when their actions exceed the authority of the agency's contract.
32
Express authority
is written into the producer’s agency contract. It details specific activity regarding the producer’s ability to transact business on behalf of the principal. An example would be the producer’s authority to solicit, negotiate, and sell insurance contracts on behalf of the principal. The agent may also have the express authority to bind coverage.
33
Implied authority
is not specifically stated in the contract, but is necessary, reasonable, and usual for the producer to perform stated duties. Since not all duties can be spelled out in the contract, incidental duties are assumed by the agent as appropriate to carry out the express authority granted by the principal. An example would be the use of the company logo on business cards or letterhead, implying the agent has authority to represent the principal when finding new clients in the process of soliciting and selling insurance. This also includes accepting applications and collecting premiums.
34
Producer’s Responsibilities to the Insurer:
Producer’s Responsibilities to the Insurer:
Fiduciary duty to the insurer in all respects, especially when handling premium funds
Must keep premium funds in a trust account separate from other funds and forward to insurer promptly
Must report any material facts that may affect underwriting
Responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer
Duty to only recommend the purchase of suitable policies
35
Producer’s Responsibilities to insurance Applicant or Insured:
Forward premiums to insurer on a timely basis
Seek and gain knowledge of the applicant’s insurance needs
Review and evaluate the applicant’s current insurance coverage, limits and risks
Serve the best interests of the applicant or insured, although producers represent the insurer
Recommend coverage that best protects the insured from possible loss and NOT the most profitable coverage from the perspective of the producer
36
Which of the following types of authority does the public assume an agent has, based on the agent's conduct?
Apparent authority
| is demonstrated when the principal’s conduct gives the general appearance that the authority exists.
37
Broker
A licensed individual who negotiates insurance contracts with insurers, on behalf of the applicant. A broker represents the applicant or insured’s interests, not the insurer, and thus does not have legal authority to bind the insurer. A broker’s license is not applicable in all states.
38
The Fair Credit Reporting Act
protects consumer privacy, while ensuring data collected is confidential, accurate, relevant and used for a proper and specific purpose. It also protects the public from overly intrusive information collection practices.
39
Financial Anti-Terrorism Act (The USA Patriot Act)
imposes record keeping and government reporting requirements on banks, financial institutions and non-financial businesses for specific financial transactions and customer financial records (a part of the Bank Secrecy Act).
40
A federal regulation called the ______________________ protects consumer privacy.
The Fair Credit Reporting Act
protects consumer privacy by ensuring that data collected by companies on a person is confidential, accurate, relevant, and used for a proper purpose.
41
Fraud
always involves a false statement and deceit; it can be either a criminal or civil crime. Federal laws prohibit the commission of fraud. In 2001, the NAIC adopted model legislation for the prevention and enforcement of insurance fraud. Subsequently, each of the states enacted its own Fraudulent Insurance Act.
42
Merchant Marine Act of 1920 (the Jones Act)
Because workers’ compensation laws do not apply to seamen, the Jones Act allows insured seamen to make claims for injuries suffered during the course of employment. It also regulates maritime commerce in U.S. waters, transportation of cargo, and the rights of seamen.
43
A fraudulent act
involves a misstatement of material fact by a person who knows or believes that statement to be false. The statement is made to another person who relies on its accuracy to make a decision or to act and is subsequently harmed by relying on the deliberately false statement. State fraudulent insurance acts do not modify the privacy of any individual; they protect producers, brokers, and insurers in the event fraudulent information is provided by consumers.
44
Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)
Deregulated the trucking industry by prohibiting any entity from interfering with a motor carrier’s right to set its own rates. Motor carriers and private motor carriers that transport property are required to establish evidence of financial responsibility in the form of insurance, a bond, a guarantee, or qualification as a self-insurer.
45
Gramm-Leach-Bliley Act (GLBA, a.k.a. the Financial Services Modernization Act of 1999)
his act repealed parts of the Glass-Steagall Act of 1933 to allow the merger of banks, securities companies, and insurance companies. It also established the Financial Privacy Rule and Safeguards Rule for the protection of consumers’ privacy. The Financial Privacy rule requires “financial institutions,” which include insurers, to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter. The privacy notice must explain:
The information collected about the consumer
Where that information is shared
How that information is used
How that information is protected
The notice must also identify the consumer’s right to opt out of the information being shared with unaffiliated parties pursuant to the provisions of the Fair Credit Reporting Act. Should the financial institutions privacy policy change at any point in time, the consumer must be notified again for acceptance.
Each time the privacy notice is re-established, the consumer has the right to opt out again.
46
Terrorism Risk Insurance Act
The Terrorism Risk Insurance Act of 2002 (TRIA) was enacted in direct response to the terrorist attacks on New York City and Washington, D.C. on September 11, 2001. Congress provided temporary financial compensation to insured parties during its crisis of recovery from the terrorist attacks. TRIA was intended to respond to the chaos the 9/11 terrorist attacks caused in the insurance industry as well as to assure that commercial property and liability insurance would continue to be able to provide coverage for the peril of terrorism. It was initially a temporary program that allowed the federal government to share in terrorism losses with private insurers in the event a certified act of terrorism took place.
47
Insurance license applicants and producers:
Applicants who have been convicted of a felony must apply for Consent to Work in the business of insurance—prior to applying for an insurance license
Producers must apply for consent in their resident state
Officers and employees must apply for consent in the state where their home office is located
Prohibited persons (convicted felons) must apply for consent in order to discover if they are permitted or prohibited from the insurance business
Reciprocity – If consent is granted by any state, other states must allow the applicant to work in their states as well
Consent Withdrawal – If conditions of consent are not continually met, the consent may be withdrawn
48
iolent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)
The largest crime bill in U.S. history expands funding to federal agencies such as the FBI, DEA, and INS and includes provisions that address (among other topics) domestic abuse and firearms, gang crimes, immigration, registration of sexually violent offenders, victims of crime, and fraud.
The Act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust. Violations include willfully embezzling money, knowingly making false entries in any book, report or statement of the business, threatening or impeding proper administration of the law in any proceeding involving the business of insurance.
Dishonesty – Deceit, misrepresentation, untruthfulness, falsification
Breach of Trust – Based on fiduciary relationship of parties and the wrongful acts violating the relationship
49
Penalties include
fines and possible prison time.
50
Risk
A condition where the chance, likelihood, probability or potential for a loss exists; Uncertainty concerning a loss.
51
Management –
The determination of what types of protection are required to meet an insured’s needs using:
A survey of the insured’s operations, health, assets and exposures that could give rise to losses
Assessment of potential loss frequency and severity
Physical inspections, applications or medical exams used for underwriting help manage a risk
52
Types of Risk
Speculative Risk – Situations where there is a chance or possibility for loss, no loss or gain (i.e., gambling)
Pure Risk – Situations where there is no chance for gain, only loss. Only pure risks can be insured (For instance, the possibility of damage to property caused by a fire or other natural disaster; or the possibility of financial loss as a result of premature death).
Loss – Reduction, decrease, or disappearance of value. The basis of a claim for damages under the terms of an insurance policy.
Peril – The cause of a loss.
Hazard – A specific condition that increases the probability, likelihood, or severity of a loss from a peril.
53
Three Types of Hazard
Physical Hazard – A physical condition that increases the probability of loss; use, condition, or occupancy of property.
Example: Flammable material stored near a furnace.
2. Moral Hazard – Dishonest tendencies that increase the probability of a loss; certain characteristics and behaviors of people.
Example: An insured burns down his/her own house to collect the insurance payout.
3. Morale Hazard – Attitude that increases the probability of a loss.
Example: Indifference or carelessness of leaving one’s house or vehicle unlocked.
54
Dishonest tendencies that increase the probability of loss is which of the following types of hazard?
Moral
55
What is considered a peril or a hazard.
peril:
Fire, hail, lighting and theft
hazard:
icy parking lot, arson, smoking and bungee jumping
56
Loss Exposure
The condition of being at risk for a loss. Purely by existing, property and people are at risk for loss.
57
Adverse Selection
An imbalance created when risks that are more prone to losses than the average (standard) risk are the only risks seeking insurance within a specific marketplace. For example, only those living in earthquake-prone areas seek to buy earthquake insurance. High-risk exposures tend to seek or continue insurance at a higher participation rate than the average risk exposures do.
58
Managing risk
is the practice of analyzing exposures that create risk and designing programs to minimize the possibility of a loss. The ways of managing risk are:
59
Sharing
Investments of a large number of people may be pooled by use of a corporation or partnership
60
Transfer
Transferring the risk from one party to another, such as from a consumer to an insurance company
Transfer the uncertainty of loss via a contract
61
Avoidance
Elimination of the risk
Avoid the activity that gives rise to the chance of loss
After potential areas of hazards have been identified, it may be found that some exposure to risk can be eliminated, but it is impossible to avoid all risk
62
Reduction
Minimizing the chance of loss, but not preventing the risk. For example, sprinkler systems, burglar alarms, pollution controls and safety guards on machinery.
Pooling or spreading the risk among a large number of persons or entities
63
Retention
Assume the responsibility for loss
Self insure the entire loss or a portion of the loss. Choosing deductibles is a method of risk retention.
It might be economically practical for an insured to not insure each exposure to loss, and instead insure only those risks that threaten financial stability security
64
Retention
Assume the responsibility for loss
Self insure the entire loss or a portion of the loss. Choosing deductibles is a method of risk retention.
It might be economically practical for an insured to not insure each exposure to loss, and instead insure only those risks that threaten financial stability security
65
Insurable risks must include:
Large number of homogenous units or groups with the same perils.
Law of Large Numbers – As the number of units in a group increases, the more likely it is to predict a particular outcome.
Auto insurance losses are the easiest type of insurance loss to predict precisely because the number of units insured is so great.
The chance of loss must be calculable. A statistical expectation of loss is used by insurers to calculate premiums.
The loss must be measurable (definite and verifiable in terms of amount, cause, place and time).
The premiums must be affordable.
From the perspective of the insured, the loss must be accidental in nature.
Catastrophic perils are not covered; examples include war, nuclear hazard and illegal operations.
66
Each of the following must be included in an insurable risk, except:
An insurable risk must also include a large number of groups with the same perils, affordable premiums, and the loss must be measurable..
large group different risk
67
The Insurance Contract
A legal contract purchased to indemnify the insured against a loss, damage, or liability arising from an unexpected event.
The exchange of a relatively small and definite expense for the risk of loss that, if it occurs, may be large or small.
A contract designed to transfer risk from the insured to the insurer.
68
Principle of Indemnity
Insured is restored to the same financial or economic condition that existed prior to the loss.
Insured should not profit from an insurance transaction.
69
Insurability –
The ability of an applicant to meet an insurer’s underwriting requirements.
70
Underwriting –
The process of selecting, classifying, and rating a risk for the purpose of issuing insurance coverage.
71
Insurable Events
any event, past or present, that may cause loss, or damage, or create legal liability on the part of an insured.
72
Insurable Interest:
| All Policies
Insurable interest must exist in every enforceable insurance contract. Depending upon the contract, it must exist at the time of application or at the time of loss.
Requires the potential for an insured to suffer financial or economic hardship in the event of a loss.
73
Life & Health Policies
Insurable interest must exist at the time of application, but not at the time of loss.
Coverage is determined based on the possibility of an economic or financial loss due to an accident, sickness, or death of the insured.
The amount of insurance that may be purchased varies based on the type of coverage. In some cases, no coverage limit apply.
74
Property
```
nsurable interest must exist at the time of the loss.
Property ownership (or mortgage or lien) is evidence of insurable interest.
```
75
Casualty
Insurable interest must exist at the time of the loss.
| Insurable interest usually results from property or contract rights and potential legal liability.
76
Which principle of insurance restores the insured to the same economic condition that existed before the loss?
Indemnity
| An insured should not profit from an insurance loss.
77
Contract Law
Pertains to the formation and enforcement of contracts.
78
Tort Law
Torts are civil wrongs; they’re not crimes or breaches of contract. They result in injuries or harm that constitute the basis of a claim by a third party.
79
Contract of Utmost Good Faith
Both parties bargain in good faith when forming and entering into the contract. The two parties rely upon the statements and promises of the other and assume no attempt to conceal or deceive has been made.
80
Estoppel
Prevents the denial of a fact, if the fact was admitted to be true previously.
81
Hold Harmless Agreement
A contractual agreement that transfers the liability of one party to another party; it is used by landlords, contractors, and others as a way to avoid or reduce risk.
82
Parol Evidence Rule
A written contract may not be altered without the written consent of both parties.
83
Waiver
Voluntary surrender of a known right, claim or privilege.
84
How many elements of a legal contract is there?
Competent parties, legal purpose, agreement and consideration
85
Competent Parties
All parties to a contract. Insurer and Insured must have legal capacity to enter into a contract.
Those without legal capacity include:
Minors – The insurer may be held responsible for its obligations, however, in most cases a minor cannot enter into a contract. Exceptions do exist, such as for the purchase of auto insurance.
The mentally incompetent or incapacitated.
Persons under influence of drugs or alcohol.
86
2. Legal Purpose
All parties to a contract must enter it for a legal purpose; public policy cannot be violated by a legal contract.
All parties to a contract must enter it in good faith.
87
3. Agreement
One party must make and communicate an offer to the other party and the second party must accept that offer.
Offer – The offer for entering an insurance contract is the application submitted by the applicant.
Acceptance – The acceptance of an insurance contract takes place when the insurance company agrees to issue insurance. A counteroffer by the insurance company is not acceptance until the applicant accepts the counteroffer.
88
4. Consideration
Something of value is exchanged; the exchange of an act for a promise.
The consideration made by the applicant is the premium payment.
The consideration made by the insurer is its promise to pay for covered losses.
89
Each of the following is an element of a legal contract, except:
Indemnity
The fourth element of a legal contract is a competent party or someone that has the legal capacity to enter into a legal contract.
90
Contract of Adhesion
One party writes the contract, without input from the other party; one party (insurer) prepares the contract and presents it to the other party (applicant) on a “take-it-or-leave-it” basis, without negotiation. Any doubt or ambiguity found in the document is construed in favor of the party that did not write it (insured).
91
Aleatory
The exchange of value is unequal. Insured’s premium payment is less than the potential benefit to be received in the event of a loss. The insurer’s payment in the event of a loss may be much greater, or much less (e.g., $0 in the event a loss doesn’t occur), than the insured’s premium payment.
92
Valued Contract
A contract that pays a stated amount in the event of a loss (most insurance policies are NOT valued contracts unless they are endorsed).
93
Indemnity Contract –
An agreement to pay on behalf of another party under specified circumstances, such as when a loss occurs.
94
Applicant
The party submitting an application for insurance.
95
Application –
A document submitted by an applicant to an insurer that provides information needed for the insurer to underwrite a risk; becomes part of the insurance contract. Most applications require statements on the application to be true to the best knowledge and belief of the applicant.
96
Unilateral Contract –
Only one party is legally bound to the contractual obligations after the premium is paid to the insurer. Only the insurer makes a promise of future performance, and only the insurer can be charged with breach of contract.
97
Conditional Contract –
Both parties must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has complied with all the policy’s terms and conditions.
98
Fraud –
Intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right. Contains 5 elements:
False statement, made intentionally and that pertains to a material fact
Disregard for the victim
Victim believes the false statement
Victim makes a decision and/or acts based on the belief in, or reliance upon, the false statement
The victim’s decision and/or action results in harm
99
Void Contract
An agreement without legal effect because it was made illegally or it was declared void by the courts because it doesn’t contain all the elements of a legal contract.
100
Voidable Contract
A valid contract that for reasons satisfactory to a court, may be set aside by one of the parties. An example is an insurer may void or revoke coverage for misrepresentation or fraud.
101
Concealment
The willful holding back or secretion of material facts pertinent to the issuance of insurance (or a claim), even if the applicant or insured was not about the subject. Concealment results in denial of coverage and may void the policy.
102
Warranties –
statement's in the application or stipulations in the policy that are guaranteed true in all respects. If warranties are later discovered untrue or breached (past, present or future), coverage (and sometimes the contract) is voided.
103
Misrepresentations
false statement contained in the application; usually does not void coverage or the policy. If material to the issuance of coverage, meaning the insurer would not have issued coverage had the misrepresentation not been made, coverage does not apply. In some cases, a material misrepresentation may void the policy.
104
Representations
Statements made by the applicant on the application that are believed to be true to the best of the knowledge and belief of the applicant; may be withdrawn prior to policy issuance.
105
Reasonable Expectations Doctrine –
What a reasonable and prudent policy owner would expect; the reasonable expectations of policyowners are honored by the Courts although the strict terms of the policy may not support these expectations.
106
A warranty is defined as which of the following
Statement in the application that is guaranteed to be true
107
Match term
Conditional
Both parties must perform certain duties and follow rules of conduct to make the contract enforceable
```
Contract of Adhesion
One party (Insurer) prepares the contract and it is not negotiable
```
Unilateral
Only one party is legally bound to the contractual obligations after the premium is paid to the Insurer
Principle of Indemnity
The Insured is to be restored to the original financial position they held prior to the loss
108
Match the term with its definition
Concealment
Failure to provide or willful hiding of material facts pertinent to the issuance of a policy
Representation
A statement made on the application that is believed to be true to one’s knowledge
Fraud
The intentional misrepresentation, deceit, or concealment of known material facts by a person with the intention of causing injury to another
Misrepresentation
A false statement on the application that renders the contract void if material to acceptance of the risk
Warranty
A statement that is guaranteed to be true and coverage may hinge on the truthfulness of that statement
109
Underwriter
Underwriting protects the insurer against adverse selection and risks that are more likely than average to suffer losses. The underwriter’s primary responsibility is the selection of risks to be insured. The underwriter also determines the classification, and premium rate if a risk is accepted by the insurer.
The goal of an underwriter is to select risks that fall into the normal range of expected losses. The producer is the field underwriter; the line and staff underwriters are employed by the insurer.
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Underwriting Factors
Nature of the risk
Hazards that are present
Claims history
Other factors that depend upon the type of risk being insured
111
Each of the following is a factor used by an underwriter, except:
Marital status
112
Premium Assumptions
An adequate premium must be charged for the risk based on the same factors used in evaluating the risk. Premium rates are considered inadequate when they do not cover projected losses and expenses; rates must not be excessive or unfairly discriminatory.
Rate – The dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance
Premium – The total cost for the amount of insurance purchased
For instance, $50,000 of coverage = $5 rate x 50 (per $1,000 of insurance) for a $250 premium
113
Class Rating
A rate charged to a group of policyholders who have similar exposures and experience.
114
Individual Rating
A rate used for a policyholder because a large enough pool of similar risks is not available to any other type of rate. It is primarily used for commercial and specialty risks because of the number of unique variables involved.
115
Experience Rating
A rate based on the policyholder’s actual loss history when compared to the loss history of similar risks.
116
"A" Rating or Judgment Rating
An individual rate that doesn’t use loss history as a component and that is derived largely from the underwriter’s evaluation and best judgment the risk poses to the insurer.
117
Loss Cost Rating
A rating organization provides insurers with the portion of a rate that does not include provisions for expenses or profit.
The expense and profit components to develop the final rate must be added by individual insurers based upon their projections
Loss cost rating is used on risks for which the insurer may not have enough data to develop the rate, other than for expenses and profit
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Manual Rating –
The use of rates contained in a manual published by the insurer or those of the rating organization of which it is a member.
119
Merit Rating
he use of rates that rewards a policyholder that takes measures to decrease the probability of loss by the implementation of safety programs, loss control programs, etc.
120
Retrospective Rating
The use of rates that adjust the policy premium to reflect the current loss experience of the policyholder. Premium adjustments are subject to minimums and maximums.
Deposit Premium is the required initial premium paid into the policy that is subject to adjustment. A premium audit will be used to determine the actual premium based on the risk exposures
121
Schedule Rating –
A method of rating property and liability risks by using charges and credits to modify a class rate based on the nature of the particular risk being rated.
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File and Use
Rates must be filed with the state insurance regulatory authority (Department of Insurance) and may be used as soon as they are filed.
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Prior Approval
Insurers cannot use rates until approved by the Department of Insurance, or until a specific time period has expired after the filing.
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Mandatory Rates –
some states require that mandatory rates be used for certain lines of insurance.
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Open Competition –
A state relies on competition between insurers to produce fair and adequate rates.
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Loss Reserves
The net premiums plus interest reflects possible future contract obligations. An accounting measurement of an insurer’s future obligation to its policyholders.
Case Reserve Method – A loss reserve established for each claim, when reported.
Average Value Method – A loss reserve established based on average settlements of particular claim types.
Loss Ratio Method – A loss reserve formula based upon the expected losses for a particular class or line.
Tabular Method – A loss reserve based upon the estimated length of an insured’s or claimant's life or expected disability.
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Financial Ratios:
Loss Ratio – Determined by dividing the sum of Paid Losses + Loss Reserves by Total Earned Premiums.
Expense Ratio – Determined by dividing an insurer’s Total Operating Expenses by Written Premiums.
Combined Ratio – Sum of the loss ratio and expense ratio.
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Which of the following calculations equals a company’s loss ratio?
Paid losses + loss reserves ÷ total earned premium
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An agent is described as what?
A producer who has a contract with an insurer to represent that insurer in the sale of its products
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Under the FAIR CREDIT REPORTING ACT, which is correct?
If an individual is denied coverage they can request a copy of the report
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An agent has authority to do all expect?
Represent the insureds interest
