Insurance Principles and Concepts

Questions and Answers

When must the insurance company inform Jones of his rights under the Fair Credit Reporting Act?

when he completes the application

When must agents inform applicants that a credit report may be performed?

upon application

When must the two disclosures pertaining to the Gramm-Leach-Bliley Act be made?

When the consumer relationship is established; and after disclosure of protected information

Who is subject to the provisions of the Fraud and False Statements Act? (Select all that apply)

Insurance companies Signup and view all the answers

According to the Fair Credit Reporting Act, consumer reports can have which of the following information?

Information concerning an individual's character Signup and view all the answers

Which of the following correctly identifies the two types of reports insurance underwriters use to obtain credit information about an applicant? (Select all that apply)

Investigative consumer reports Signup and view all the answers

In the underwriting of insurance policies, some amount of discrimination is present in many cases, because of differing levels of risk.

True Signup and view all the answers

Making a misleading statement to induce a person to lapse, surrender, or convert an insurance policy is known as?

twisting Signup and view all the answers

The practice of using misrepresentation to induce a policyholder to replace a policy is called?

churning Signup and view all the answers

Defamation occurs when?

An individual or entity makes false, derogatory statements about an insurer's financial condition that are calculated to injure the insurer's business Signup and view all the answers

In the scenario where Don, an insurance agent, offers favorable rates to a church member, which of the following statements is FALSE? (Select all that apply)

The agent is involved in twisting. Signup and view all the answers

In life and health insurance, a person's greatest asset is?

their earning power Signup and view all the answers

What term means the insured's demand for payment of benefits?

claim Signup and view all the answers

Another term which means the same as insurance policy is?

insurance contract Signup and view all the answers

Which of the following correctly identifies the most important principle(s) of insurance?

The law of large numbers, risk pooling and insurable interest Signup and view all the answers

Mathematicians who analyze statistical risk information for insurance companies are called?

Actuaries Signup and view all the answers

Insurance is?

a transfer of uncertainty of loss from the insured to the insurance company Signup and view all the answers

All of the following correctly describe risk pooling?

Each member of the group shares in the losses of the group and is promised a future benefit; Risk pooling allows a large number of people to be insured for a small amount of money; Risk pooling transfers risk from an individual to a group. Signup and view all the answers

Which of the following correctly describes the law of large numbers?

It states that as a group's size increases, it is easier to predict the number of future losses over a specific time period. Signup and view all the answers

The law of large numbers and spreading the uncertainty of loss over a large number of people is?

Insurance Signup and view all the answers

Risk pooling is best described by which of the following?

Combining similar losses from many people so the average loss over the entire group remains relatively constant Signup and view all the answers

Actuaries do all of these things?

They analyze exposure units; They are mathematicians; They analyze risk data. Signup and view all the answers

Another term for insurance company is?

insurer Signup and view all the answers

Which of the following best describes loss?

the unintentional decrease in the value of an asset Signup and view all the answers

Which of the following terms means risk is spread by sharing the possibility of loss over a large number of people?

risk pooling Signup and view all the answers

Risk pooling is characterized by?

Similar and independent risks grouped together, and spreading risk over a large number of people Signup and view all the answers

The _________ is a small amount of money the insured pays to keep an insurance policy in force.

premium Signup and view all the answers

Transferring uncertainty of loss to the insurance company is the definition of?

insurance Signup and view all the answers

Compensates the beneficiaries of the policy for their actual economic losses up to the limiting amount of the insurance policy 'to make whole'. For health insurance the policy agrees to indemnify the insured for accidents, illness or disability.

Indemnity insurance Signup and view all the answers

A limit of liability is?

the total amount the insurer will pay for an insured risk; more often used in the property and casualty lines, but the concept is transferable to health insurance as the lifetime maximum benefits. Signup and view all the answers

Policies may also contain sub-limits, termed inside limits, which?

restrict the dollar amount of certain coverages within a policy, such as a room and board limit of $200 per day. Signup and view all the answers

Is the tendency for poorer than average risks to seek out insurance. Insurers must seek to minimize adverse selection.

Adverse Selection Signup and view all the answers

Is defined as spreading risk from one insurer to one or more other insurers.

Reinsurance Signup and view all the answers

The insurer that accepts the additional risk is termed the?

reinsurer Signup and view all the answers

The insurer that gives the risk to the reinsurer is termed the?

ceding company or primary insurer Signup and view all the answers

Life insurance is designed to?

protect against the risk of premature death. Signup and view all the answers

Health insurance is designed to?

protect against the severity of financial loss due to illness, disease, short or long-term disability, wages lost while ill or disabled, and medical expenses. Signup and view all the answers

Annuities protect against the risk of?

living longer than expected. Signup and view all the answers

Property insurance protects against the risk of?

damage and destruction to all types of property. Signup and view all the answers

Casualty insurance protects against the risk of?

legal liability for injury, death, disability, damage and destruction of property. Signup and view all the answers

Credit insurance protects against the risk that?

a person in debt, termed debtor, cannot repay the debt to the creditor because of accident, sickness, disability or death. Signup and view all the answers

Variable insurance is comprised of?

variable life and variable annuities. Signup and view all the answers

Variable insurance products invest premium dollars in securities, which carry?

more risk due to price fluctuations. Signup and view all the answers

Requirements of selling variable products are?

a securities license and a life insurance producer license. Signup and view all the answers

Judith's health insurance will pay a maximum of $3 million for all of her claims. Which of the following terms best describes this policy feature?

limit of liability Signup and view all the answers

Which of the following is the consideration an insured pays for insurance coverage?

Premium Signup and view all the answers

Adverse selection is characterized by?

A sick person purchasing health insurance. Signup and view all the answers

Judith is injured in a car accident. She incurs a covered loss of $50,000. She is required to pay $3,000 before the insurer will cover 80% of the covered loss. Which of the following terms best describes the $3,000 Judith must pay?

Deductible Signup and view all the answers

Reinsurance is defined as?

Spreading risk from one insurer to another Signup and view all the answers

JKL Insurer transfers risk to PQR Insurer. JKL Insurer transfers some other risks to GHI Insurer. When JKL Insurer has a loss on risks transferred to both PQR and GHI Insurers, which insurer(s) pays the claims?

JKL, PQR, and GHI Insurers Signup and view all the answers

The total amount an insurer will pay for an insured risk is the definition of?

limit of liability Signup and view all the answers

The term describing the insured's notification to the insurer requesting payment for a covered loss is?

Claim Signup and view all the answers

ABC Insurer transfers risk to DEF Insurer. ABC Insurer decides to transfer some other risks to LMO Insurer. When ABC Insurer needs to submit a claim on risks that were reinsured to DEF Insurer, which insurer(s) pays the claims?

ABC and DEF insurers Signup and view all the answers

The consideration Walter pays for his insurance coverage is called the?

Premium Signup and view all the answers

Stock insurers, also referred to as capital stock insurers, are?

incorporated commercial companies owned by their stockholders. Signup and view all the answers

Mutual insurers are?

commercial companies owned by their policyholders. Signup and view all the answers

Mutual insurers are distinct from stock insurers in two primary ways:

They lack capital stock, and Profits are distributed among their members - the policyholders. Signup and view all the answers

Transformation of a stock insurer into a mutual insurer is termed?

mutualization Signup and view all the answers

Transformation of a mutual insurer into a stock insurer is termed?

demutualization Signup and view all the answers

Dividends paid out from mutual insurers are considered?

a non-taxable return of overcharged premium. Signup and view all the answers

Dividends paid out from stock insurers are simply?

the profits experienced by the company. Signup and view all the answers

Service providers, or noncommercial organizations, are not technically 'insurers' and do not sell insurance. They are better described as?

service organizations that provide prepaid health plans for medical, surgical, and hospital expenses. Signup and view all the answers

HMOs provide the?

medical care and finances required to fund health care services. Signup and view all the answers

PPOs provide?

discounted medical services to members. Signup and view all the answers

Fraternal benefit societies, also known as fraternal insurers or simply fraternals, are?

special types of mutual insurers/nonprofit religious, ethnic or charitable organizations that provide insurance exclusively to their members. Signup and view all the answers

The purpose of social insurance is to?

provide protection against fundamental risks by redistributing income to help people who cannot afford to pay the cost of incurring such losses themselves. Signup and view all the answers

Social Security, also known as OSADI (Old Age, Survivors' and Disability Insurance), provide?

disability income, survivor benefits and retirement benefits. Signup and view all the answers

Medicare is part of the Social Security program, and provides?

medical benefits to qualifying people age 65 and older. Signup and view all the answers

Medicaid provides health care?

to impoverished people. Signup and view all the answers

Authorized insurers, also referred to as admitted or licensed insurers, are insurers who have?

received a certificate of authority authorizing them to transact insurance in a particular state for a particular line or lines of insurance. Signup and view all the answers

An insurer that conducts business in the state it was incorporated is a?

domestic insurer Signup and view all the answers

An insurer that conducts business in a state or district in which it wasn't incorporated is a?

foreign insurer Signup and view all the answers

An insurer that conducts business in a country in which it wasn't incorporated is?

alien insurer Signup and view all the answers

BlueShield pays?

medical and surgical costs Signup and view all the answers

Which type of insurer/organization is in the business of insurance to make a profit?

commercial Signup and view all the answers

What are the two distinct characteristics that distinguish mutual insurers from stock insurers?

Mutual insurers lack capital stock and profits are distributed among the members. Signup and view all the answers

Mutual companies pay dividends to which of the following in order to return overcharged premiums?

policyholders Signup and view all the answers

Fraternal benefit societies are described by all of the following?

They provide insurance to their members; They can be religion-based; They include ethnic or charitable organizations. Signup and view all the answers

PQR only sells accident and health insurance policies, covering hospital, medical and surgical costs. PQR operates on a not-for-profit basis. Based on the information provided, PQR Insurer CANNOT be a?

Stock insurer Signup and view all the answers

All of the following are providers of government insurance?

TRICARE, Medicaid, Social security, and Medicare Signup and view all the answers

Which of the following statements best describes the taxation of insurance issued by fraternals?

Fraternals are exempt from federal income tax and state premium tax. Signup and view all the answers

Which of the following insurers pays dividends?

Stock and mutual companies Signup and view all the answers

Service providers provide prepaid health care plans and?

HMOs are included in these providers; PPOs are included in these providers; Members are called subscribers. Signup and view all the answers

A nonparticipating insurer is?

A stock insurer Signup and view all the answers

Noncommercial organizations offer strictly?

Health insurance Signup and view all the answers

A person who is guilty of a fraudulent act may be subject to the following penalties?

Civil fine up to $50,000 and imprisonment up to 10 years Signup and view all the answers

All of the following may not be included in a consumer report, unless the consumer credit report is requested for a life insurance policy with a face amount of $150,000 or more, EXCEPT?

Civil suits and judgments dating back more than seven years; Bankruptcies dating back more than 10 years; Tax liens dating back more than seven years; Adverse information dating back more than three years. Signup and view all the answers

What is the purpose of the Fair Credit Reporting Act?

to regulate the way credit information is collected and used. Signup and view all the answers

The Fair Credit Reporting Act states that generally, consumer reports cannot contain the following information, EXCEPT?

Adverse information about an individual that dates back over seven years; Tax liens older than seven years; An individual's criminal history; An individual's character. Signup and view all the answers

With regard to an investigative consumer report, consumers must be informed that they have the right to request additional information about the report; such information must be provided to consumers within ____ day(s) if requested.

5 days Signup and view all the answers

With respect to life and health insurance guaranty associations, what are agents prohibited from doing?

Using the existence of the life and health guaranty association as an inducement to selling an insurance contract Signup and view all the answers

An agent is guilty of committing fraud. What must the person obtain in order to transact insurance?

Waiver of consent from the state insurance department Signup and view all the answers

The purpose of the Gramm-Leach-Bliley Act is to?

Allow financial entities to merge and accommodate greater competition. Signup and view all the answers

When an insurer requests an investigative consumer report on an applicant, which of the following is true?

The report includes information regarding the applicant's general reputation and personal characteristics. Signup and view all the answers

All of the following policies and contracts are typically covered by state insurance guaranty associations, EXCEPT?

A whole life insurance policy issued by a mutual insurer; A term life insurance policy issued by a stock insurer; An individually-owned annuity; A universal life insurance policy issued by a fraternal benefit society. Signup and view all the answers

What governmental agency operates the Fair Credit Reporting Act?

Federal Trade Commission Signup and view all the answers

The information on a person's credit report is cleared after how many years?

7 years Signup and view all the answers

Investigative consumer reports cannot be performed unless the consumer has been notified in writing of the report within ______ day(s) of when the report was initially requested.

3 Signup and view all the answers

Bob has a second mortgage with XYZ bank, and Shirley has one checking and two savings accounts with ABC bank. Shirley decides to cash one of her paychecks at XYZ bank because she doesn't have time to stop at her bank. Which of the following is true under the Gramm-Leach-Bliley Act?

Bob is a customer of XYZ bank and Shirley is a consumer of XYZ bank. Signup and view all the answers

An insurer requests an investigative consumer report on an applicant. All of the following are true, EXCEPT?

The applicant can request further information about the report, which must be provided to the applicant within five business days; The applicant must be notified in writing about the report; The report includes information regarding the applicant's general reputation and personal characteristics; The credit report includes information about the applicant's account balances. Signup and view all the answers

Study Notes

Earning Power in Insurance

A person's greatest asset in life and health insurance is their earning power.

Claims and Policies

A claim refers to the insured's formal request for payment of benefits.
An insurance contract is another term for an insurance policy.

Key Principles of Insurance

Important principles include:
- Law of large numbers: Predicts future losses as group size increases.
- Risk pooling: Individual risks are combined to share losses among a group.
- Insurable interest: The insured must have a legitimate interest in the insured risk.

Role of Actuaries

Actuaries are mathematicians who evaluate statistical risk data for insurance companies.

Definition of Insurance

Insurance is characterized as a transfer of uncertainty of loss from the insured to the insurer.

Understanding Risk Pooling

Risk pooling involves the sharing of losses among group members, allowing for mass insurance coverage at a low cost.
It helps in predicting losses and maintaining steady average losses within the group.

Loss and Liability

Loss is defined as an unintentional decrease in the value of an asset.
A limit of liability is the maximum amount payable by the insurer for a covered risk, applicable in property, casualty, and health insurance.

Types of Insurance

Indemnity insurance compensates beneficiaries for actual economic losses up to the policy limit.
Life insurance protects against risks related to premature death, covering various final expenses.
Health insurance protects against financial loss due to illness or disability, covering medical expenses.
Annuities provide guaranteed income in the event of living longer than expected.
Property insurance protects against damage and destruction of property.
Casualty insurance addresses liability for harms to others or their property.
Credit insurance safeguards against repayment risks due to reasons like death or disability.

Insurance Company Types

Stock insurers are owned by shareholders and have a capital fund.
Mutual insurers are owned by policyholders and do not have stockholders; profits can be distributed among members.
Fraternal benefit societies are nonprofit organizations providing insurance to members, often based on religious or ethnic affiliations.

Government Insurance

Administered programs such as Social Security, Medicare, and Medicaid provide essential health and financial protections to specific populations.
The purpose of social insurance is to offer protection against fundamental risks through income redistribution.

Regulatory Framework

The Gramm-Leach-Bliley Act enables financial institution mergers to enhance competitiveness.
The Fair Credit Reporting Act governs the collection and usage of credit information.
Adverse Selection refers to the tendency of high-risk individuals to seek insurance, which insurers attempt to mitigate.

Insurance Practices

Agents must inform applicants of potential credit checks and their rights under relevant acts during the application process.
Consumer reports must exclude certain outdated negative information unless related to significant insurance policies.

Penalties and Enforcement

Fraudulent acts in insurance can lead to heavy civil fines and criminal imprisonment.
Insurance actuaries must comply with various regulations, including the provisions of the Fraud and False Statements Act.

Summary of Policies and Reinsurance

Reinsurance involves spreading risk between insurers to manage their risk exposure effectively.
Deductibles are amounts policyholders must pay before coverage begins, impacting their out-of-pocket costs.### Investigative Consumer Reports and Consumer Reports
Investigative consumer reports involve detailed assessments of an individual's background, including credit history, character, and reputation.
Consumer reports provide a summary of an individual's credit history and are typically used by lenders and insurers to evaluate risk.

Underwriting of Insurance Policies

Discrimination exists in insurance underwriting due to varying risk levels among individuals.
Differing levels of risk affect policy rates, leading to potential unfair treatment of certain applicants.

Twisting

Twisting refers to making misleading statements to persuade individuals to surrender, lapse, or convert their insurance policies.
This unethical practice is intended to benefit the agent or insurer at the expense of the policyholder.

Churning

Churning involves using misrepresentations to convince a policyholder to replace their existing policy with a new one from the same insurer.
This practice is often detrimental to the policyholder, who may incur unnecessary costs or lose benefits.

Defamation in Insurance

Defamation occurs when false and derogatory statements about an insurer's financial status are made, harming the insurer's business.
Such statements must be intentional and aimed at damaging the insurer's reputation to qualify as defamation.

Case Study: Don the Insurance Agent

Don offered a favorable insurance rate to a community member based on personal connections rather than her financial situation.
While Don acted with compassion, he engaged in unfair discrimination and broke legal regulations.
The assertion that Don was involved in twisting in this scenario is false.

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Description

This quiz covers essential principles of insurance, including earning power, claims, and the role of actuaries. Learn about risk pooling, the law of large numbers, and the definition of insurance. Test your understanding of these critical concepts in the insurance industry.