Chapters 2-6

Question 1

Agent/Producer

Answer 1

A legal representative of an insurance company. The classification of producer usually includes agents and brokers. Agents are the agents of the insurer

Question 2

Applicant or the proposed insured

Answer 2

A person applying for insurance

Question 3

Beneficiary

Answer 3

A person who receives benefits of an insurance policy

Question 4

Broker

Answer 4

An insurance producer not appointed by an insurer and is deemed to represent the client.

Question 5

Indemnity

Answer 5

Main principle of insurance meaning that the insurer cannot recover more than their loss; the purpose of insurance is to restore the insured to the same position as before the loss.

Question 6

Insurance policy

Answer 6

A contract between a policy owner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for the loss caused by specific events

Question 7

Insured

Answer 7

The person covered by the insurance policy. This person may or may not be the policy owner

Question 8

Insurer (principal)

Answer 8

The company who issues an insurance policy

Question 9

Law of large numbers

Answer 9

The larger the number of people with a similar exposure to loss the more predictable actual losses will be

Question 10

Policyowner

Answer 10

The person entitled to exercise the rights and privileges in the policy

Question 11

Premium

Answer 11

The money paid to the insurance company for the insurance policy

Question 12

Reciprocity/Reciprocal

Answer 12

A mutual interchange of rights and privileges.

Question 13

Insurance

Answer 13

• Transfers the risk of loss from an individual to an insurer
• Based on the principle of indemnity
• Based on the spreading of risk (risk pooling) and the law of large numbers

Question 14

Hazards

Answer 14

Conditions that increase the probability of loss occurring

Question 15

Physical Hazard

Answer 15

A physical condition

Question 16

Moral Hazard

Answer 16

a tendency toward increased risk

Question 17

Morale Hazard

Answer 17

an indifference to loss

Question 18

Risk

Answer 18

Uncertainty regarding financial loss

Question 19

Pure Risk

Answer 19

insurable because it involves a chance of loss only

Question 20

Speculative Risk

Answer 20

not insurable because it involves a chance of gain

Question 21

Methods of handling risk

Answer 21

• Avoidance
• Retention
• Sharing
• Reduction
• Transfer

Question 22

Insurance risk due to chance

Answer 22

chance of loss beyond insured’s control

Question 23

Insurance risk that is definite and measurable

Answer 23

loss must have definite time, place and amount

Question 24

Predictable insurance risk

Answer 24

number of losses must be statistically predictable

Question 25

Insurance risk that is not catastrophic

Answer 25

there must be limits that the loss can't exceed

Question 26

Insurance risk large exposure

Answer 26

insurer must be able to predict losses based on the law of large numbers

Question 27

Randomly selected exposure insurance risk

Answer 27

insurer must have a fair proportion of both good and poor risks

Question 28

Stock Insurer

Answer 28

- Owned by stockholders - Issue nonparticipating policies (nonpar)

Question 29

Mutual insurer

Answer 29

- Owned by policyowners (policyholders) - Issue participating policies (par) - Pay dividends to policyholders which are a refund of excess premiums

Question 30

Fraternal benefit society

Answer 30

- Not for profit organization - Not an insurer - Formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization

Question 31

Express authority

Answer 31

Powers specifically stated in the contract

Question 32

Implied authority

Answer 32

Not specifically stated in the contract, but is assumed necessary to conduct insurance business

Question 33

Apparent authority

Answer 33

The appearance of a relationship between the agent and principal based on words or actions

Question 34

Domicile

Answer 34

- Domestic - incorporated in this state - Foreign - incorporated in another state of territory - Alien - incorporated in another country

Question 35

Authorized/Admitted

Answer 35

- Approved by the Department of Insurance - Has a Certificate of Authority

Question 36

Unauthorized/nonadmitted

Answer 36

-No Certificate of Authority -Cannot transact business in this state

Question 37

Elements of a legal contract

Answer 37

Agreement: offer and acceptance Consideration: premiums and representations on the part of the insured; payment of claims on the part of the insurer Competent parties: of legal age, sound mental capacity, and not under the influence of drugs or alcohol Legal purpose: not against public policy

Question 38

Contract characteristics

Answer 38

Adhesion - one party prepares the contract; the other party must accept it as is Aleatory - exchange of unequal amounts Conditional - certain conditions must be met Personal - between the policyowner and the insurance company Unilateral - only one of the parties to the contract is legally bound to do anything

Question 39

Legal interpretations

Answer 39

Ambiguities in the contract are always resolved in favor of the insured The insured can reasonably expect coverage based on the agent's words and actions Utmost good faith - parties rely on each other for information Material misrepresentations (if intentional), breach of warranties, concealment, fraud - all can void the contract Waiver - voluntary act of relinquishing a legal right; estoppel - consequence of a waiver

Question 40

Retention usually results from three basic desires of the insured

Answer 40

to reduce expenses and improve cash flow, to increase control of claim reserving and claims settlements, and to fund losses that cannot be insured.

Question 41

What is also called “perceived authority?

Answer 41

Apparent authority

Question 42

Adverse selection

Answer 42

there are more risks with higher probability of loss seeking to purchase and maintain insurance than the risks who present lower probability. Underwriters must guard against this.

Question 43

fiduciary capacity

Answer 43

An agent acts in a fiduciary capacity, based upon trust and confidence, when handling the financial affairs of their customers, including the handling of premiums.

Question 44

unilateral contract

Answer 44

the insured is not legally bound to do anything. The insurer, however, must pay losses covered by the policy.

Question 45

Is reinsurance a marketing system?

Answer 45

No, Reinsurance is a method used by insurers to protect against catastrophic losses