What is a contract or device for transferring risk from a person, business, or organization to an insurance company?
A. Insurance
B. Law of large numbers
C. Adhesion
D. Agency
A. Insurance
[insurance is the transfer of risk]
Which of the following represents a pure risk?
a. a poker game
b. gambling in the stock market
c. investing in a new business
d. the neighborhood
D. The neighborhood
pure risk involves the possibility of loss.
speculative risk involves the possibility of loss and 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?
a. the thief
b. the theft itself
c. the door being unlocked
d. the ne
C. the door being unlocked
the hazards leaving the door unlocked. the peril is theft.
Since Jeff lives in a good neighborhood across the street from the fire station, he decided to cancel his fire insurance policy. This is an example of which risk management method?
a. retention
b. avoidance.
c. transfer
d. control
A. retention
By not carrying fire insurance, Jeff is retaining the risk of financial loss from an unexpected fire.
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. a surplus lines insurance company
b. an admitted insurance company
c. an
A. a surplus lines insurance company
Excess or surplus lines are highly specialized insurance coverages.
Insurance companies often purchase insurance to cover their own exposure to loss. This is called
a. self-insurance
b. loss control insurance
c. surplus lines insurance
d. reinsurance
D. reinsurance
reinsurance helps protect insurance companies from catastrophic losses and wild fluctuations in underwriting results.
Which is NOT an element of an insurable risk?
a. catastrophic
b. affordable
c. accidental
d. measurable
A. catastrophic
remember that pure risk have 6 elements (CANHAM). They must be non catastrophic.
A person in a position of financial trust is called
a. a commingler
b. affordable
c. accidental
d. measurable
B. affordable
agents have a fiduciary responsibility to applicants and insureds, and the insurance company
The authority made explicit in a producer's written agency agreement with the insurer is known as
a. express authority
b. implied authority
c. apparent authority
d. agent authority
A. express authority
anything that is actually written in the contract is considered express authority.
The ABC Insurance Company is incorporated in Mexico. While doing business in Texas, it is
a. a domestic insurer
b. a foreign insurer
c. an alien insurer
d. an export insurer
C. an alien insurer
the insurance company is an alien insurer since Mexico is not a part of the United States
An individual applied for auto insurance and obtained coverage from ABC insurance Company. Who is the first party in the contract?
A. the insured (customer)
B. the insurer (insurance company)
C. the agent
D. the insured and agent
A. the insured
If a fire causes damage to a building, the fire is
a. a hazard
b. a peril
c. a risk
d. an exposure
B. a peril
Wearing a seatbelt in a car is an example of which method of managing risk?
a. retain
b. avoid.
c. reduce
d. transfer
C. reduce
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?
A. physical
B. Morale
C. Careless
D. Moral
B. morale
A flood is an example of
A. a peril
B. a moral hazard
C. a speculative risk
D. a physical hazard
a. a peril
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?
a. alien
b. domestic.
c. foreign
d. non admitted
c. foreign
All of the following statements about a stock insurance company are true EXCEPT
a. a stock company pays dividends to stockholders
b. a stock company is a participating company
c. a stock company is a nonparticipating company
d. a stock company has shareho
b. a stock company is a participating company
What do insurance companies use to help predict how many losses will occur in a group or class of individuals?
a. the law of large numbers
b. standard and poor's insurance rating service
c. risk retention groups
d. adverse selection
a. the law of large numbers
States require companies to have a license to sell insurance in the state. The license is called
A. a certificate of authority
b. a reinsurance license
c a producers license
d an admittance license
a. a certificate of authority
All of the following are requirements of an insurable pure risk EXCEPT
A. premiums must be calculable
B. premiums must be affordable
C. the risk must be catastrophic for the insurance company
D. the loss must have been accidental
c the risk must be catastrophic for the insurance company
Insurers may be classified according to their financial strength. This includes all of the following factors EXCEPT
A. number of clients
B. loss experience
C. investment performance
D. operating expenses
a number of clients
Carl hands out a business card with his company's logo to all new prospects that he meets at a golf outing. This is an example of
A. express authority
B. Implied authority
C. Apparent authority
D. agent authority
b. implied authority
Agency is a relationship in which one person is authorized to represent and act for another person or a corporation. In insurance, he insurance agent acts on behalf of
A. the principal
B. the insured
C. the claimant
D. the adjuster
a. the principal
Which of the following 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?
A. direct writing
B. captive agency system
C. direct re
c. direct response
Which of the following individuals represent only one insurance company
a. an independent agent
b. a general agent
c. a captive agent
d. a managing general agent
c. a captive agent
Insurance
transfer of risk from a person or business to an insurer
Risk
uncertainty/possibility of a loss
Types of risk
Speculative Risk - chance of loss or gain not insurable
Pure Risk - chance of loss only; insurance companies will insure
Exposure
Possibility that a loss will occur
Examples:
-auto accident
-luggage lost on a trip
-pet biting a mailman
-employee hurt on the job
-house fire
Peril
a cause of loss
Example:
-House burns down, peril is the fire
Direct
Physical loss
*Indirect - consequence of the direct loss
Hazard
Increases the chance of loss
Physical Hazard
The hazard can be seen
Moral Hazard
dishonesty that intentionally causing a loss is acceptable
Morale Hazard
carelessness or indifference to a loss, which increases the frequency or severity of a loss
STARR!
Method of handling risk
Sharing
Transfer
Avoidance
Retention
Reduction
Contract (policy)
an agreement between the insured and the insurer
1st Party �insured (customer)
2nd Party�insurer (insurance company)
Law of Large Numbers
The larger the group, the more accurately future losses can be predicted
CANHAM
Calculable
Affordable
Non-catastrophic
Homogeneous
Accidental
Measurable
Adverse Selection
risks that have a greater than average chance of loss
-not wanted by insurers
-tendency for high risk individuals to get and keep insurance
-why insurers go through the underwriting process
-high risk = higher rate or refusal to insure
Reinsurance
an insurance company (the ceding company) paying another insurance company (reinsurer) to take some of the company's risk
-reinsurers help spread the insurer's risk
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
-Owned by stockholders
-Dividend is not guaranteed
-Dividend is paid to stockholder
-Dividend is taxable to stockholders
-Issues non-participating policies
Mutual Insurer
-owned by policyholders (customers)
-dividend is not guaranteed
-dividend is paid to policyholder
-dividend is not taxable; considered refund of premium
-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 required to pay an assessed amount if a loss to any member of the group occurs
Managed by an attorney-in-fact
Lloyd's Association
insurance provided by individual underwriters not companies
-insurers unusual risk
-hole in one contest
-athletes arm
-celebrity's hair
Risk Retention Group
-liability insurance created for policyholders from the same industry
-for example, a car dealers risk retention group in which only car dealers can be policyholders
Risk Purchasing Group
a group of businesses from the same industry joining together to buy liability insurance from an insurance company.
rpg is not the insurance company
Self-insurance
-A business that pays its own claims
-Reserves funds to cover losses
-Retains risk rather than transfers
federal government provides residual market insurance
insurance from the state or federal government
-war risk insurance
-nuclear energy insurance
-flood insurance
-federal crop insurance
-unemployment insurance (state level)
-workers compensation (state level)
insurance company location
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 the USA
Certificate of Authority
state license for an insurance company
Admitted or Authorized Insurer
state requires the insurance company to have a certificate of authority
Non-admitted or unauthorized
insurance company not required to have a certificate of authority from the state
Surplus Lines
- Insurance sold by unauthorized/nonadmitted insurers; if on the state's approved list of surplus insurers
- Can only be sold to certain high risk insureds
- Cannot be sold solely for a cheaper rate than licensed/admitted insurers
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)
Agent's Authority
-express - what the agents written contract with the company says
-implied - not written; activities an agent normally does to sell insurance
apparent - activities an agent does that is reasonable person would assume as authority based on the agents actio
Fiduciary Trust
- Promptly sends premiums to insurer
- Has knowledge of products
- Complies with laws and regulations
- Does not commingle funds