Introduction to the Insurance Industry

Question 1

Functions of Insurance Marketers Broker

Answer 1

• Represents the insured

* Works with many insurers

Question 2

Agent

Answer 2

• Represents the insurer
• Binds the principal/insurer
• Passes legal liability to insurer

Question 3

Producer’s License

Answer 3

• Many states now use this form of licensing
• Avoids the necessity to distinguish between
agents and brokers

Question 4

General Agent

Answer 4

• Independent businessperson
• Sells life insurance in specified territories
• Appoints subagents

Question 5

Independent Agent

Answer 5

• Represents several companies

Question 6

Captive Agent

Answer 6

• Represents only one organization

Question 7

Career Agent

Answer 7

• One primary company, often licenses with many

companies

Question 8

Special Agent

Answer 8

• Salaried liaison between property and liability
insurers and their agents
• Monitors quality of insurance written

Question 9

Surplus-line or excess-line

broker or agent

Answer 9

• Handles insurance that must be purchased from a

non-admitted insurer

Question 10

Solicitor

Answer 10

• Finds insurance prospects
• Liaison between prospects and those who can
bind an insurer or issue policies

Question 11

Legal Obligations/Agency Relationships
Related to function When an Agent
• Authority to bind the insurer

Answer 11

• Exists, thus creates legal obligation for Principal/insurer

Question 12

Legal Obligations/Agency Relationships
Related to function When an Agent
• Relationship to the insured

Answer 12

• Contract with insured creates legal obligation for Principal/insurer

Question 13

Legal Obligations/Agency Relationships
Related to function When an Agent
• Relationship to the insurer

Answer 13

• Represents the insurer, thus creates a legal obligation for principal/insurer

Question 14

Legal Obligations/Agency Relationships
Related to function When a Broker
• Authority to bind the insurer

Answer 14

• Does not exist, thus broker can only create a legal obligation for self

Question 15

Legal Obligations/Agency Relationships
Related to function When a Broker
• Relationship to the insured

Answer 15

• Represents the insured, thus representations create a legal obligation for self

Question 16

Legal Obligations/Agency Relationships
Related to function When a Broker
• Relationship to the insurer

Answer 16

• Does not exist, thus broker creates legal obligations for self

Question 17

Types of Agency Authority Express

Answer 17

• Specifically conferred on the agent

Question 18

Types of Agency Authority Implied

Answer 18

• Not expressly granted, but assumed
to have in order to transact business
(e.g., collecting premiums)

Question 19

Types of Agency Authority Apparent

Answer 19

• ostensible authority; the appearance of, or assumption of
authority, based on the agent’s actions (e.g., it appears that
the agent is acting within the scope of his/her authority).

Question 20

Implied and Apparent authority are occasionally
used interchangeably (and incorrectly)

Answer 20

• for exam purposes, know the difference

* To remember: Apparent authority involves appearances.

Question 21

Roles of the Insurance Adjuster

Note: Public adjuster works
for the insured. All other
adjusters work for the insurer.

Answer 21

1. Investigate losses
2. Determine liability
3. Determine amount of
   payment to be made
4. Be fair

Question 22

Which of the following are roles of the adjuster in
adjusting losses?

I. to investigate whether there was a loss covered
by the policy
II. to choose the arbitrator who will determine the
amount of loss
III. to determine the amount of payment to be
made
IV. to classify the loss as standard or substandard

Answer 22

a. I only
b. II only
c. I and III only
d. II and III only
e. II and IV only

Question 23

Insurance Policy Provisions or Options Concerning Loss Adjustment For the Insured

Answer 23

• Notice of loss (notify the insurer)
• Protection of property
• Inventory
• Evidence
• Proof of loss (submit form)
• Assistance and cooperation
• Appraisal
• Settlement option

Question 24

Insurance Policy Provisions or Options Concerning Loss Adjustment For the Insurer

Answer 24

• Repair
• Replace
• Restore
• Abandonment and salvage
• Pair or set options
• Actual cash value
• Replacement cost minus depreciation
• Equitable remedies

Question 25

Calculations for Coinsurance Concepts re: Property Coverage for The Amount of insurance required

Answer 25

Full Replacement Cost X Coinsurance percentage= The amount of insurance required

Question 26

Calculations for Coinsurance Concepts re: Property Coverage for The Amount paid on claim

Answer 26

[Insurance Carried/insurance required* X Loss] minus deductible= Amount paid on claim *The required amount is based on the current value of the property multiplied by 80%

Question 27

Coinsurance Calculations for Medical Expenses | Up to the Stop-Loss Limit for the Insured

Answer 27

Deductible + (Covered Expenses X Coinsurance Percentage*) = Amount paid by insured *The coinsurance percentage only applies to covered expenses up to the amount of the stop-loss limit beyond the deductible. Coinsurance %: * is the smaller amount (20%); is the larger amount (e.g., 80% of the 80/20 split).

Question 28

Coinsurance Calculations for Medical Expenses | Up to the Stop-Loss Limit for the Insurer

Answer 28

(Covered expenses* - Deductible) x Coinsurance Percentage**= Amount paid by insurer * Expenses above the combined stop-loss limit and deductible are paid by the insurance company at 100% * Coinsurance %: is the smaller amount (20%); is **the larger amount (e.g., 80% of the 80/20 split).

Question 29

Coinsurance Penalty: Joe Smith owns a building with a replacement cost of $100,000. He has $75,000 of insurance on the building with a $500 deductible. His policy has an 80% coinsurance clause. Joe filed a claim because a fire caused $15,000 worth of damage. Approximately how much will the insurance company pay?

Answer 29

a. $15,000 b. $14,500 c. $13,594 d. $13,563

Question 30

Criteria for Selecting an Insurance Agent

Answer 30

* Competence and inclination to service * Experience in area in question (specialty) * Reputation * Education

Question 31

Criteria Used to Select an Insurer

Answer 31

• Financial strength and integrity o rating agencies (A.M. Best) • Types of insurance policies available: o policy forms (life, P&C) o participating vs. nonparticipating • Business trends • Reinsurance o procedures o companies used • Primary business • Underwriting o philosophy o experience * Claims service * Ownership * Cost considerations • Financial ratios o NAIC Watchlist o RBC ratios • Investment portfolio

Question 32

Regulating the Insurance Business

Answer 32

• State Regulation o Legislative, Judicial, Executive (Administrative) • Indirect Federal Regulation o IRC, SEC, ERISA, COBRA, HIPAA • NAIC (National Association of Insurance Commissioners) o not a regulatory body (but very powerful) o creates model laws o NAIC Watch List • RBC ratios

Question 33

Selecting an Insurer Which of the following are primary criteria that should be considered when selecting an insurer? I. a favorable rating from several rating companies II. the number of agents employed III. favorable risk-based capital ratios IV. the fact it is not on the NAIC’s Watchlist

Answer 33

a. I and II only b. III and IV only c. I, III, and IV only d. II, III, and IV only e. I, II, III, and IV

Question 34

Agency Authority Daryl Jackson is an agent for the Accountable Insurance Company (AIC). During the most recent year, the company instructed its agents not to write fire insurance policies on day care centers. However, when Day Care Center of America applied for a policy, Daryl bound the coverage. The Day Care Center of America was destroyed by a fire a month later. What is the obligation of AIC in this situation? Consider carefully the supporting rationale in selecting your answer.

Answer 34

a. AIC is required to pay because Daryl had express authority to bind the company. b. AIC is required to pay because Daryl had an ostensible authority (i.e., apparent) to do what the public reasonably believed he could do. c. AIC is not required to pay because Daryl is the agent of the insured. d. AIC is not required to pay because Daryl failed to disclose his full knowledge of the situation.

Question 35

Health Insurance Coinsurance Cathy Kiley has a comprehensive major medical policy with a $200 deductible and 80% coinsurance to a $5,000 stop-loss limit. Cathy recently became ill and had covered medical bills totaling $3,850. What amount will the insurer pay in this situation?

Answer 35

a. $930 b. $970 c. $2,880 d. $2,920 e. $3,650

Question 36

Duties of Insureds Which one of the following is not a provision frequently contained in the sections of insurance policies that deal with the insured’s duties relating to loss settlement?

Answer 36

a. evidence b. notice of loss c. protection of damaged property d. negotiation of settlement with third party e. proof of loss

Question 37

Which of the following statements about the risk-based capital (RBC) ratios of insurance companies are true? I. They adjust an insurer’s capital base to reflect risk. II. They consider the risk with respect to an insurer’s assets, the risk of adverse insurance experience, the interest rate risk with respect to the insurer’s business, and all other business and other relevant risks as set forth in the RBC instructions. III. The RBC ratios of individual companies are available to the general public. IV. They can be used by insurance companies in publications to promote their financial strength.

Answer 37

a. I and III only b. III and IV only c. I, II, and III only d. I and II only

Question 38

Can an Broker bind the Insurer

Answer 38

no

Question 39

What differences do the Brokers have in comparison to the Agent

Answer 39

The broker has none of the agents authority.