General Concepts

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 proposed insured

Answer 2

a person applying for insurance

Question 3

Beneficiary

Answer 3

a person who receives the 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 insured 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 policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for 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 policyowner

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 is a transfer of ____ __ ____ from an individual or a business entity to an insurance company

Answer 13

risk of loss

Question 14

Risk

Answer 14

the uncertainty or chance of a loss occurring

Question 15

Pure risk

Answer 15

situations that can only result in a loss or no change. There is no opportunity for financial gain.

Question 16

Speculative risk

Answer 16

the opportunity for either loss or gain. (gambling)

Question 17

Only ____ risk are insurable

Answer 17

Pure

Question 18

Hazards

Answer 18

conditions or situations that increase the probability of an insured loss occurring. Hazards are classified as physical hazards, moral hazards, or morale hazards.

Question 19

Physical hazards

Answer 19

individual characteristics that increase the chances of the cause of loss. Physical hazards exist because of a physical condition, past medical history, or a condition at birth, such as blindness.

Question 20

Moral hazards

Answer 20

tendencies towards increased risk.

Question 21

Morale hazards

Answer 21

similar to moral hazards, except that they arise from a state of mind that causes indifference to loss, such as carelessness.

Question 22

Perils

Answer 22

the causes of loss insured against in an insurance policy.

Question 23

Loss

Answer 23

the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril.

Question 24

A ____ is a chance that a loss will occur; a ______ increases the probability of loss; a ____ is the cause of loss.

Answer 24

Risk, Hazard, Peril

Question 25

Sharing

Answer 25

a method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group.

Question 26

The most effective way to handle risk is to ________ it so that the loss is borne by another party.

Answer 26

Transfer (ex: insurance)

Question 27

Avoidance

Answer 27

eliminating exposure to a loss.

Question 28

Risk retention

Answer 28

the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance.

Question 29

The purpose of retention is

Answer 29

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

Question 30

Reduction

Answer 30

attempt to lessen the possibility or severity of a loss.

Question 31

Due to chance

Answer 31

A loss that is outside the insured’s control.

Question 32

Definite and measurable

Answer 32

A loss that is specific as to the cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.

Question 33

Statistically predictable

Answer 33

Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates.

Question 34

Not catastrophic

Answer 34

Insurers need to be reasonably certain their losses will not exceed specific limits.

Question 35

The major difference between government and private insurance

Answer 35

government programs are funded with taxes and serve national and state social purposes, while private policies are funded by premiums.

Question 36

Randomly selected and large loss exposure

Answer 36

There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location.

Question 37

Private insurance companies can be classified in a variety of ways: (5)

Answer 37

Ownership; Authority to transact business; Location (domicile); Marketing and distribution systems; or Rating (financial strength).

Question 38

Stock companies

Answer 38

owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses. (usually nonparticipating)

Question 39

Mutual companies

Answer 39

owned by the policyowners and issue participating policies.

Question 40

Insurers must obtain a _______ __ _________ prior to transacting business in this state.

Answer 40

Certificate of Authority

Question 41

A ______ refers to the location where an insurer is incorporated, not necessarily where the insurer conducts business.

Answer 41

Domicile

Question 42

An _____ insurer is an insurance company that is incorporated outside the United States.

Answer 42

Alien