Insurance Chapter 4 Flashcards
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Questions and Answers

What is the purpose of level premiums?

  • To increase premiums based on policyholder age
  • To solve the problem of increasing premiums (correct)
  • To provide a fixed premium for the entire policy duration
  • To reduce the cost of mortality in later years

    • What is premium mode?

    The frequency with which a policy premium will be paid

    How is the loss ratio calculated?

    By dividing losses by total premiums received

    When the combined loss and expense ratio exceeds 100%, an underwriting profit has occurred.

    <p>False</p> Signup and view all the answers

    What is the purpose of reserves in insurance?

    <p>To set aside a portion of every premium against future claims and obligations</p> Signup and view all the answers

    What is underwriting?

    <p>The process of selection, classification, and rating of risks.</p> Signup and view all the answers

    What happens after a prospect agrees to purchase an insurance contract?

    <p>The underwriting process begins, the application is submitted, and the policy is issued or declined.</p> Signup and view all the answers

    Who is referred to as the applicant in insurance?

    <p>The individual who fills out the application and applies for the insurance.</p> Signup and view all the answers

    What is a policyowner?

    <p>The individual who pays the premium and accepts the policy.</p> Signup and view all the answers

    Who is insured under an insurance policy?

    <p>The individual whose life is covered by the policy.</p> Signup and view all the answers

    What is a beneficiary in the context of insurance?

    <p>The individual or individuals designated to receive the benefits of the policy.</p> Signup and view all the answers

    What does third-party ownership mean?

    <p>A situation where the policy is owned by someone other than the insured.</p> Signup and view all the answers

    What is the main job of an underwriter?

    <p>To select risks that can be insured at a reasonable price and reject others.</p> Signup and view all the answers

    What is the process of underwriting?

    <p>Reviewing the background information and medical history of the applicant.</p> Signup and view all the answers

    What is adverse selection?

    <p>When the group of risks insured is more likely to experience loss than the average group.</p> Signup and view all the answers

    List some sources of underwriting information.

    <p>Insurance application, medical exams, attending physician's statement, consumer reports, MIB reports.</p> Signup and view all the answers

    What is the importance of the application in insurance?

    <p>It is a vital document attached to the insurance contract.</p> Signup and view all the answers

    What are the two parts of most insurance applications?

    <p>Part I—General Information and Part II—Medical Information.</p> Signup and view all the answers

    What might Part II of an insurance application require?

    <p>Medical history, current physical condition, and questions about drug and alcohol use.</p> Signup and view all the answers

    What does a medical examination in the underwriting process entail?

    <p>A doctor's assessment required for high amounts of insurance applied for.</p> Signup and view all the answers

    What must insurers do if they require AIDS-related testing?

    <p>Obtain the applicant's written consent and keep results confidential.</p> Signup and view all the answers

    What does an agent's statement include?

    <p>Agent's knowledge about the proposed insured's financial status and character.</p> Signup and view all the answers

    What is required for inspection reports in underwriting?

    <p>An independent report covering the applicant's financial and moral information.</p> Signup and view all the answers

    What is an investigative consumer report?

    <p>Information obtained through investigation about a consumer's character and habits.</p> Signup and view all the answers

    What does the Medical Information Bureau (MIB) do?

    <p>Maintains medical information on applicants for life and health insurance.</p> Signup and view all the answers

    What is the National Do Not Call Registry?

    <p>A registry managed by various federal and state officials to restrict unwanted calls.</p> Signup and view all the answers

    What does HIPAA impose on health care providers?

    <p>Requirements regarding the disclosure of insureds' health information.</p> Signup and view all the answers

    What is field underwriting?

    <p>The process where an agent initiates the insurance application process.</p> Signup and view all the answers

    What signatures are required to complete a life insurance application?

    <p>Applicant, proposed insured (if different), and the agent soliciting the insurance.</p> Signup and view all the answers

    What happens to incomplete applications sent to the underwriting department?

    <p>They are returned to the agent for completion.</p> Signup and view all the answers

    What is necessary for an insurer to avoid unfair discrimination?

    <p>Using actuarially sound principles in assessing risks and premiums.</p> Signup and view all the answers

    What is a declined risk in insurance?

    <p>A risk that an insurer has decided not to insure.</p> Signup and view all the answers

    What is the final step in the underwriting process?

    <p>Rating of the risk or the determination of the premium.</p> Signup and view all the answers

    What factors are used in determining insurance rates?

    <p>Mortality, interest, and expenses.</p> Signup and view all the answers

    What is a mortality table?

    <p>A table based on statistics about mortality by age and sex.</p> Signup and view all the answers

    How is the mortality rate defined?

    <p>The number of deaths per 1,000 people.</p> Signup and view all the answers

    What does morbidity refer to?

    <p>The likelihood that a person will suffer an accident or require medical care.</p> Signup and view all the answers

    What is a claim frequency rate?

    <p>It measures how frequently claims occur among a particular population.</p> Signup and view all the answers

    What is an aggregate claim?

    <p>The total claim amount calculated by multiplying claim frequency rate and average claim amount.</p> Signup and view all the answers

    How do insurance companies use interest in premium calculations?

    <p>They invest premiums to earn interest, which lowers the premium rate.</p> Signup and view all the answers

    What are expenses in the context of insurance premiums?

    <p>Costs associated with mortality and operating expenses.</p> Signup and view all the answers

    What is a net premium?

    <p>The premium without expense loading.</p> Signup and view all the answers

    What constitutes loading in insurance?

    <p>Acquisition costs, general overhead, contingency funds, and claim payments.</p> Signup and view all the answers

    What are acquisition costs?

    <p>Costs incurred in putting the policy on the books.</p> Signup and view all the answers

    What is general overhead loading?

    <p>Consideration of salaries and costs associated with managing the insurance company.</p> Signup and view all the answers

    What is meant by loading for contingency funds?

    <p>A provision in premiums to account for unforeseen future events.</p> Signup and view all the answers

    What is involved in the immediate payment of claims?

    <p>Assuming all claims will be paid throughout the year for accurate premium estimation.</p> Signup and view all the answers

    What is the gross annual premium?

    <p>The amount the policyowner actually pays for the policy.</p> Signup and view all the answers

    Study Notes

    Underwriting Process

    • Underwriting involves selection, classification, and rating of risks to assess if a risk is acceptable.
    • The underwriting process progresses after agreement to purchase insurance: application submission, policy issuance, and delivery to the policyholder.
    • Key roles in underwriting include the applicant (person applying for insurance) and the policyowner (who pays premiums and accepts the policy).

    Essential Definitions

    • Insured: Individual covered by the insurance policy.
    • Beneficiary: Individual named to receive policy benefits, usually aligns with the applicant and policyowner.
    • Third-party ownership: Scenario where the policy is owned by someone other than the insured, common in business insurance.

    Underwriter's Role

    • An underwriter identifies acceptable risks for the insurance company, protecting against adverse selection, ensuring a profitable risk distribution.
    • Information sources for underwriting include insurance applications, medical histories, physician statements, consumer reports, MIB, and credit reports.

    Application Components

    • Parts of Application:
      • Part I: General information (name, address, birthdate, etc.)
      • Part II: Medical history, current condition, and risky activities.
    • Signature requirements include those of the applicant, proposed insured (if different), and agent.

    Information Validation

    • Underwriters may seek additional information through Attending Physician's Statements (APS).
    • Medical exams may be required if the insurance amount is significant and are conducted at the insurer's expense.

    Privacy and Confidentiality

    • HIPAA regulations govern the confidentiality of health information, protecting patient information during the insurance process.
    • Insurers cannot inquire about sexual preference but may ask about AIDS if relevant to insurability.

    Financial Considerations in Underwriting

    • Insurers assess mortality/morbidity, interest, and expenses to determine insurance rates.
    • Mortality tables help estimate death rates to inform premium costs, while aggregate claims reflect total cost predictions for health insurance.

    Premium Structures

    • Loading: Additional costs to cover acquisition, overhead, contingencies, and immediate claims.
    • Gross Premium: Total cost for the policy, factoring in mortality risk, interest, and expenses.
    • Premium modes vary in payment frequency (annual, semi-annual, quarterly, monthly), affecting total costs due to interest and administrative expenses.

    Loss Analysis

    • Loss ratios are calculated to evaluate the performance of insurance policies by relating losses to total premiums received, influencing underwriting practices and renewal decisions.### Expense Ratio
    • Calculated by dividing an insurer’s operating expenses (including commissions) by total premiums.
    • A combined loss and expense ratio of 100% indicates the insurer breaks even.
    • A combined ratio over 100% signifies an underwriting loss.
    • A combined ratio under 100% reflects an underwriting profit or gain.

    Reserves

    • Legally required portion of premiums must be reserved for future claims and contractual obligations.
    • Reserves represent an insurer’s liabilities to policyholders.
    • The reserve amount, along with interest and future premiums, should match all contractual obligations.
    • Surplus is defined as the amount by which an insurer’s assets exceed its liabilities.
    • Policy dividends are distributed from the insurer's surplus.

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    Description

    Explore key terms and concepts in insurance with these flashcards focusing on underwriting and the insurance contract process. Perfect for students delving into insurance studies or professionals seeking a refresher on essential terminology.

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