Unit 1 Introduction to Insurance

Question 1

____ risks have a possibility of a loss and also the possibility of a gain. Gambling and investing are examples of speculative risks.

Answer 1

Speculative

Question 2

____ risks only involve the possibility of experiencing a loss, not a gain. The chance of being in a car accident is an example of this type of risk.

Answer 2

Pure

Question 3

The potential for accidents and other losses is called ____.

Answer 3

Exposure

Question 4

The cause of a loss is called a ____.

Answer 4

Peril

Question 5

A ____ is anything that increases the chance that a loss will occur.

Answer 5

Hazard

Question 6

____ hazards are physically identifiable factors that increase the chance of loss. If tires on a car are bald the possibility of a car accident increases.

Answer 6

Physical

Question 7

____ hazards arise from an individual’s character.

Answer 7

Moral

Question 8

____ hazards are a state of mind or careless attitude. In common usage, this type of hazard is an unconscious change in a person’s actions or behaviors. An example would be leaving the front door unlocked.

Answer 8

Morale

Question 9

____ - Two or more individuals or businesses agree to pay a portion of any loss incurred by any member of the group. Stockholders in a corporation share the risk.

Answer 9

Sharing

Question 10

____ - This means eliminating a particular risk by not engaging in a certain activity.

Answer 10

Avoidance

Question 11

____ - This means the individual or business will pay for the loss if it occurs.

Answer 11

Retention

Question 12

____ - This refers to lessening the chance that a loss will occur, or lessening the extent of a loss if it occurs.

Answer 12

Reduction

Question 13

Insurance uses the risk management method of ____ to spread a risk of loss among thousand, if not millions, of insureds.

Answer 13

Transfer

Question 14

The ____ is the principle that makes insurance possible. The larger the group, the more accurately losses can be predicted.

Answer 14

Law of Large Numbers

Question 15

Fill out the acronym for the elements of insurable risks: CANHAM

Answer 15

Calculable
Affordable
Non-catastrophic
Homogenous
Accidental
Measurable

Question 16

____ is the tendency for higher-risk individuals to get and keep insurance as compared to individuals that represent an average level of risk.

Answer 16

Adverse Selection

Question 17

____ is like insurance for insurers. It transfers risk from one insurer to another insurer. To reduce the total amount of loss it is liable for, one insurer may pay the other insurer a premium to assume a portion of the risk. The company reducing its risk is called the ____ insurer. The company assuming the risk is called the ____.

Answer 17

Reinsurance
Ceding Insurer
Reinsurer

Question 18

The two ways of doing reinsurance:

1. The reinsurer considers each risk before allowing the transfer from the ceding company. This is called ____ reinsurance.
2. The reinsurer accepts all risks of a certain type from the ceding company. This is called ____.

Answer 18

Facultative Reinsurance
Treaty Reinsurance

Question 19

A ____ insurer is a business formed as a corporation and owned by its stockholders.

Answer 19

Stock Insurer

Question 20

A ____ insurer does not have stock or stockholders. It is owned by its policyholders(customers), also know as policyholders.

Answer 20

Mutual Insurer

Question 21

____ exist for the benefit of their members and offer insurance as one of the benefits of membership.

Answer 21

Fraternal Benefit Societies

Question 22

____ insurers are unincorporated groups of people that agree to insure each other’s losses under a contract. The members of these groups are known as SUBSCRIBERS.

Answer 22

Reciprocal Insurers

Question 23

____ associations are not insurance companies. Rather, they provide a hub for exchanging information among member underwriters who actually transact the insurance business. Members are individually liable and responsible for the contracts of insurance into which they enter. Examples would be hole-in-one insurance and parts of athlete’s body parts.

Answer 23

Lloyd’s Associations

Question 24

A ____ group is an insurer formed for the sole purpose of providing liability insurance for its policyholders. The policyholders must all be members of the same type of business. These are regulated by the state where they are headquartered.

Answer 24

Risk Retention Group

Question 25

____ are formed for the sole purpose of obtaining liability insurance for its members. Unlike risk retention groups, these are not insurers themselves and are not regulated as such; they only purchase insurance on behalf of their members. Members are all in the same industry.

Answer 25

Risk Purchasing Groups

Question 26

____ is a means of retaining, rather than transferring risk. Businesses may develop a formal program for self-insuring all or a portion of certain risks. The business sets aside reserve funds to cover losses in advance and may even have a claims system like an insurance company.

Answer 26

Self-insurance

Question 27

Name the 6 types of federal insurance.

Answer 27

1. War
2. Nuclear energy
3. Flood
4. Federal crop
5. Unemployment
6. Workers comp

Question 28

In its home state, the state in which the insurer was formed and usually headquartered - an insurer is referred to as ____.

Answer 28

Domestic

Question 29

In another stat or US territory, an insurer is referred to as ____.

Answer 29

Foreign

Question 30

An insurer formed under the laws of any country other than the US and its territories is considered an ____ insurer.

Answer 30

Alien

Question 31

States usually require companies to have a license to sell insurance in the state. The license is called a certificate of authority. When a company is licensed, it is called ____ or ____.

Answer 31

Admitted or Authorized

Question 32

Some states allow companies to sell insurance to certain types of risks(called surplus lines) without having to have a license. These companies are then called ____, ____, or ____.

Answer 32

Nonadmitted, Unauthorized, or Nonapproved

Question 33

____ or ____ are individuals that hire, train, and supervise other agents within a specific geographical area. They ear commission on the productions of their agents.

Answer 33

General Agents or Managing General Agents

Question 34

____ are companies whose products are sold by employees, not independent contractors. This type of producer may be compensated by a salary, commission, or both.

Answer 34

Direct-writing Companies

Question 35

In ____ marketing, there is no producer or agent. Policies are sold directly to the public by the insurer. Can be done by mail and ads on TV, etc.

Answer 35

Direct Response

Question 36

Under the ____, contracts made by the agent are considered to be contracts of the principal. When the insurer(principal) provides specific directions and exerts more control over an agent’s job duties, then an agency relationship may exist. The principal is liable for the statements and actions of their agents.

Answer 36

Law of Agency

Question 37

____ authority is the authority made explicit in a producer’s WRITTEN agency agreement. This authority is the wording in the contract that specifically tells the producer what they can and cannot do.

Answer 37

Express Authority

Question 38

____ authority is not written in the agency contract but it is assumed to be granted to an agent in accordance with general business practices. This authority is power that the AGENT BELIEVES HE OR SHE HAS because the power is necessary for the agent to conduct the business of the insurer.

Answer 38

Implied Authority

Question 39

____ is authority that OTHERS BELIEVE THE AGENT HAS.

Answer 39

Apparent Authority

Question 40

An agent must use ____ to make purchase recommendations that are appropriate, or suitable, in light of a client’s particular needs, objectives, and circumstances.

Answer 40

Suitability Considerations

Question 41

Fraternal policies are called ____. Members who have insurance are called ____.

Answer 41

Certificates, Certificate Holders