Unit 1 - Introduction to Insurance Activities

All of the following statements about a stock insurance company are true except:

1. A stock company has shareholders

2. A stock company is a nonparticipating company

3. A stock company pays dividends to stockholders

4. A stock company is a participating company

4 - they are not a participating company

All of the following are requirements of an insurable pure risk except:

1. The risk must be catastrophic for the insurance company

2. Premiums must be calculable

3. The loss must have been accidental

4. Premiums must be affordable

A - the risk cannot be catastrophic for the insurer

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

A certificate of authority

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?

Foreign

Insurers may be classified according to their financial strength. This includes all the following factors except:

1. Investment performance

2. Operating expenses

3. Loss experience

4. Number of customers

4 - the number of customers is not evaluated

What do insurance companies use to help predict how many losses will occur in a group or class of individuals

The law of large numbers

A flood is an example of a

A peril

An example of a peril is

A tornado damaged the insured’s house

Tiffany leaves her car unlocked when she goes shopping. She figures her car and its contents are insured, so there is no reason to worry. Which type of hazard is this an example of?

Morale

An individual applied for and received insurance. Who is the first party in the contract?

The insured (the customer)

Which of the following is the best example of using reduction as a risk management technique?

1. Purchasing insurance

2. Avoiding an activity

3. Wearing a seat belt in the car

4. Increasing a deductible

3 - wearing a seat belt reduces risk of serious injury

Carl hands out a business card with his company’s logo to all new prospects that he meets at a golf outing. What type of authority is this an example of?

Implied Authority

What type of individual represents only one insurance company?

A captive agent

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

principal

Which type of advertising does not involve an agent and is conducted through the mail, by advertisements in newspapers and magazines, on television and radio, or through the internet?

Direct Response

What is a contract or device for transferring risk from a person, business, or organization to an insurance company

insurance

Which of the following represents a pure risk?

1. the chance your house may burn down

2. a poker game

3. investing in a new business

4. gambling in the stock market

1 - house burning down - this is the only example where there is no chance of a gain

Suzanne regularly leaves her side door unlocked when she leaves for work. One afternoon, a thief entered her apartment and stole all of her jewelry. What was the hazard in this example?

the door being unlocked

Since Jeff lived in a good neighborhood across the street from the fire station, he decides to cancel his fire insurance policy. This is an example of which risk management method?

Retention

Sometimes an individual or business has an exceptionally large or specialized risk that no authorized insurer can or will cover. In this case, the individual or business may call

a non-admitted insurance company

Insurance companies often purchase insurance to cover their own exposure to loss. This is called

Reinsurance

What is NOT an element of an insurable risk?

Catastrophic

A person in a position of financial trust is called

A fiduciary

The authority made explicit in a producer’s written agency agreement with the insurer is known as

Express authority

The ABC insurance company is incorporated in Mexico. While doing business in Texas, it is

an alien insurer

The agent has many responsibilities to the applicant. One involves a trust relationship between the agent and the insured regarding the insured’s finances and confidentiality. In this case, the agent acts in what capacity?

fiduciary

Which one of the following is NOT an agent responsibility?

1. Collecting the initial premium

2. Prepaying the initial premium

3. Explaining the coverage

4. delivering the policy

2 - Prepaying the initial premium

In the insurance business, the insurance company is also known as the

principal

Definition of a hazard

condition that increases the chance of a loss

Which of the following is an example of control (reduction) as a method of handling risk?

1. installing a burglar alarm

2. buying insurance to reduce the risk

3. increasing a deductible

4. reducing coverage

1 - installing an alarm

What type of risk is insurable

Pure risk only

Which type of authority does an insurer give to its agents by means of the agent’s contract?

Express authority

At the national level, the federal government provides all of the following types of insurance Except:

1. war risk insurance

2. flood insurance

3. federal crop insurance

4. unemployment insurance

4 - unemployment insurance - this is provided by the state government

Which of the following is an example of adverse selection

1. a contractor hires a worker who is always on time and does an excellent job

2. An 18 year old male buys a sports car, and the bank requires auto insurance

3. a 26 year old marathon runner applies for health insurance

4. a married couple buys a new house, and the mortgage company requires homeowner’s insurance

2 - the 18 year old buying the sports car has the highest exposure to loss because he is more likely to get in an accident

The person authorized to act on behalf of the other is called an

Agent

Agents have certain responsibilities when dealing with applicant and insureds. All of the following are agent responsibilities except:

1. Collecting the commission from the applicant

2. explaining coverages

3. field underwriting each risk

4. periodically reviewing the insured’s coverage

1. the agent does not collect a commission directly from the applicant.

Self insurance is an example of what type of risk management?

retention

What kind of insurance company is an insurance company owned by its policyowners (insureds)

mutual

Robert and Carolyn live in a busy city and decide that the solution to not getting into a car accident is to avoid riding in or owning a car. Which risk management technique is this

Avoidance

Driving too fast and not wearing a seat belt are examples of

morale hazards

Which hazard can be described as a careless attitude or general indifference on the part of the insured toward the occurence of loss

Morale

Faulty wiring cases a fire that destroys a building. The faulty wiring is considered to be

A hazard

Fire would be an example of

A peril

A group of individuals who agree to share each other’s losses is known as a

Reciprocal company

The law of large numbers states that the

larger the number of risks combines into one group, the less uncertainty there will be as to the amount of loss that will be incurred

The owner of a house left a gasoline can too close to a source of heat in the garage. If the house burns down in a fire because the gasoline exploded, the cause of loss is called

A peril

Are surplus lines insurers placed with a nonadmitted or admitted carrier?

nonadmitted

All of the following statements regarding mutual insurers are correct except:

1. mutual insurers pay dividends to policyholders

2. a mutual insurer is owned by its policyholders

3. mutual insurers do not guarantee dividends

4. a mutual insurer has stock and stockholders

4 - mutual insurers do not have stock or stockholders, this is a stock insurer

Insurance is a contract that

transfers the risk of financial loss from an individual or business to an insurance company

Josephine sells insurance for one company and is an independent contractor, not an employee of the insurer. She is a

captive agent

A car accident is an example of what kind of risk

a pure risk

Susan decides to drive fast in a horrible snowstorm because she knows that if she gets in an accident that her insurance will cover her. This is an example of

a morale hazard

An insured gives a producer the premium for an insurance policy. The producer sends the premium to the insurance company. In this situation, who is the fiduciary?

the producer

In an insurance contract, the second party is

the insurer

at the state level, the government is involved in what type of insurance

unemployment insurance and worker’s compensation

ABC insurance is headquartered in Wisconsin but doing business in Florida. The prospective client is headquartered in Canada. While doing business in Florida, ABC insurance is classified as

A foreign insurer (because they are operating in a state aside from the one they’re incorporated in)

ABC insurance company is licensed to sell insurance in Wisconsin. When a company is licensed in a state, it is considered

An admitted insurer

Which risk management method is used by insurance companies

Transfer