Unit 1 Life Insurance Exam

Insurance

transfer of risk

Risk

uncertainty/possibility of a loss

Types of Risks

• Speculative risk - chance of loss or gain. Not insurable.

• Pure risk chance of loss only. Insurance companies will insure

Exposure

risks for which the insurance company would be liable

Peril

a cause of loss

Hazard

something that causes an increase in the chance of loss

Physical Hazard

the hazard can be seen

Moral Hazard

a belief that intentionally causing a loss is acceptable

Morale Hazard

carelessness

STARR

• Sharing

• Transfer

• Avoidance

• Retention

• Reduction

Insurance

risk transfer

Contract (policy)

an agreement between the insured and the insurer

• 1st Party - insured (customer)

• 2nd Party - insurer (insurance company)

Law of Large Numbers

larger the group; the more accurate losses can be predicted

CANHAM Risks

• Calculable

• Affordable

• Non-catastrophic

• Homogenous

• Accidental

• Measurable

Adverse selection

risks that have a greater than average chance of loss

Reinsurance

an insurance company (the ceding company) paying another insurance company (reinsurer) to take some of the companies risk of catastrophic loss

Facultative

the reinsurer evaluates each risk before allowing the transfer

Treaty

the reinsurer accepts the transfer according to an agreement called a treaty

Stock Insurer

• Publically owned by stockholders/shareholders

• If the company makes money, a taxable dividend from the profits may be paid to the stockholders/shareholders

• Issues non-par policies

Mutual Insurer

• Owned by the policyholders (customers)

• If the company is profitable, can return excess premium to its policyholders - nontaxable dividend

• Issues participating policies

Fraternal Insurer

• Provides insurance and other benefits

• Must be a member of the society to get the benefits

Reciprocal Insurer

• Unincorporated

• Members are assessed the amount they have to pay if a loss to any member of the group occurs

• Run by an attorney-in-fact

Self-Insurance

a business that pays its own claims

Residual Market

insurance from the state or federal government

Domestic

state where company is incorporated

Foreign

any state or U.S. territory other than the state where incorporated

Alien

incorporated in any country other than USA

Certificate of Authority

state license for an insurance company

Admitted or Authorized

state requires the insurance company to have a Certificate of Authority

Non-admitted

unauthorized - insurance company not required to have a Certificate of Authority from the state

Financial strength rating

a report card of the company

Methods of Marketing

• Independent

• Exclusive or Captive

• General Agents or Managing General Agents

• Direct-writing companies

• Direct Response - no agent/producer involved

Agency

the insurance agent acts on behalf of the principal (insurance company)

Express Agent Authority

what the agents written contract with the company says

Implied Agent Authority

not written but are the things agents normally do to sell insurance

Apparent Agent Authority

things the agent does that a reasonable person would assume as authority, based on the agent’s action and statements

Fiduciary-Trust

• Promptly send premiums to insurer

• Knowledge of products

• Comply with laws and regulations

• No commingling

Adhesion

• Policy written by the insurance company

• If not clear - court will take the side of the insured

Aleatory

not equal value - small premium for a large amount of coverage

Unilateral

only ONE promise made

• Insurance company PROMISES to pay for a covered loss

• Insured does NOT promise to pay the premium

Personal

contract between the insurance company and the insured - cannot be changed to someone else

Conditional

insured must pay the premium for coverage and file a claim if a loss occurs

Indemnity

pay for the loss but with no gain

Representation

believed to be true

Misrepresentation

information given that is not ture - however, the correct information would not affect the insurance companies decision - insured mistakenly gives one number of their address wrong - doesn’t void coverage

Material misrepresentation

information give that is not true - this information DOES affect the insurers decision - insured has a conviction for driving while intoxicated - would void coverage

Warranty

promise

• may be made by the insured - if promise is broke - insured may have no coverage

• guaranteed to be true

Concealment

failure to disclose

• if intentional, and the information is important - coverage could be voided

• if NOT intentional - coverage cannot be voided

Fraud

intentional act to cheat another

Waiver

voluntarily giving up a right

Estoppel

actions reasonably relied on by one party can’t be denied by the party that accepted same previously

Fraud and False Statements

• Fine and/or imprisonment (10-15 years)

• Embezzlement included

If a fire causes damage to a building, the fire is a

1. hazard

2. peril

3. risk

4. exposure

Peril

Wearing a seat belt in a car is an example of which method of managing risk?

1. retian

2. avoid

3. reduce

4. transfer

Reduce

An insurance company incorporated in Wisconsin and conducting business in Wisconsin is known as a domestic company. What kind of company are they considered if they do business in Minnesota?

1. alien

2. domestic

3. foreign

4. nonadmitted

If an insurance company incorporated in Wisconsin does business in Minnesota, they are considered a foreign company in Minnesota.

Insurance companies use actuarial tables to help predict how many losses will occur in a group or class of individuals.

1. the law of large numbers

2. standard and poor’s insurance rating service

3. risk retention group

4. adverse selection

the law of large numbers

States require companies to have a license to sell insurance in the state. The license is called

1. a certificate of authority

2. a reinsurance license

3. a producers

4. license

5. an admittance license

a certificate of authority

Agency is a relationship in which one person is authorized to represent and act for another person or for a corporation. In insurance agent acts on behalf of the

1. principal

2. insured

3. claimant

4. adjuster

principal

which of the following types of advertising does not involved an agent and is conducted through the mail, by advertisements in newspapers and magazines, on television and radio or through the internet?

1. direct writing

2. captive agency system

3. direct response

4. cold calling

direct response

which of the following individuals represent only one insurance company?

1. an independent agent

2. a general agent

3. a captive agent

4. a managing general agent

a captive agent

Jill is filling out an insurance application with information that she believes to be true. This information that she is providing is considered a

1. representation

2. misrepresentation

3. material misrepresentation

4. warranty

representation

A guarantee that something is true is a

1. representation

2. misrepresentation

3. material misrepresentation

4. warranty

warranty