Arizona Life Insurance Exam - General Insurance Questions and Answers, Exams of Insurance law

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Arizona Life Insurance Exam - General

Insurance questions with correct answers

Agent/Producer - correct answer-Legal representative of an insurance company (classification of producer usually includes agents and brokers, agents are the agents of the insurer) Applicant (proposed insured) - correct answer-Person applying for insurance Broker - correct answer-Insurance producer not appointed by an insurer and is deemed to represent the client Insurance Policy - correct answer-Contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events Insured - correct answer-Person covered by the insurance policy (this person may or may not the policy owner) Insurer (principal) - correct answer-Company who issues an insurance policy Policyowner - correct answer-Person entitled to exercise the rights and privileges in the policy Premium - correct answer-Money paid to the insurance company for the insurance policy Reciprocity/Reciprocal - correct answer-Mutual interchange of rights and privileges Insurance - correct answer-Transfers the risk of loss from an individual or business entity to an insurance company, which in turn spreads the costs of unexpected losses to many individuals Risk - correct answer-Uncertainty or chance of loss occuring

Pure Risk - correct answer-Situations that can only result in a loss or no change (no opportunity for financial gain) (insurable) Speculative Risk - correct answer-Situations with opportunity for either loss or gain (noninsurable) Exposure - correct answer-Unit of measure used to determine rates charged for insurance coverage Factors of Exposure - correct answer-1. Age of Insured

2. Medical History
3. Occupation
4. Sex Homogenous - correct answer-A large number of units having the same or similar exposure to loss Hazard - correct answer-Condition or situation that increases the probability of an insured loss occuring Physical Hazard - correct answer-Individual characteristics that increase the chances of the cause of loss Moral Hazard - correct answer-Tendencies toward increased risk (applicants who lie on an application for insurance or have committed fraud) Morale Hazard - correct answer-Hazards that arise from a state of mind that causes indifference to loss, such as carelessness Peril - correct answer-Cause of loss insured against in an insurance policy Loss - correct answer-The reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril

Life Insurance - correct answer-Insures against the financial loss caused by the premature death of the insured Avoidance - correct answer-Eliminating exposure to a loss Retention - correct answer-Planned assumption of risk by an insured through the use of deductibles, co- payments, or self-insurance Purpose of Retention - correct answer-1. To reduce expenses and improve cash flow

2. To increases control of claim reserving and claims settlements
3. To fund for losses that cannot be insured Sharing - correct answer-Method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group Reduction - correct answer-Lessening the probability or severity of a loss Transfer - correct answer-The most effective way to handle risk so that the loss is borne by another party Elements of Insurable Risk - correct answer-1. Due to Chance
4. Definite and measurable
5. Statistically predictable
6. Not catastrophic
7. Randomly selected and large loss exposure Due to Chance - correct answer-A loss that is outside the insured's control Definite and Measurable - correct answer-A loss that is specific as to the cause, time, place and amount

Statistically predicatable - correct answer-Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates Not catastrophic - correct answer-Insurers need to be reasonable certain their losses will not exceed specific limits (think no payout for acts of war) Randomly selected and large loss exposure - correct answer-There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location Law of Large Numbers - correct answer-States that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be Adverse Selection - correct answer-Insuring of risks that are more prone to losses than the average risk Private Insurers - correct answer-Funded by premiums and private Government Insurers - correct answer-Government programs funded with taxes and serve national and state social purposes Stock Companies - correct answer-Owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses Nonparticipating Policies - correct answer-Policy owners do not share in profits of losses (think stock companies) Mutual Companies - correct answer-Owned by the policyowners and issue participating polies Participating policies - correct answer-Policyowners are entitled to dividends, which, in the case of mutual companies, are a return of excess premiums and are therefore nontaxable

Fraternal Benefit Society - correct answer-Organization formed to provide insurance benefits for members of an affiliated group with a representative form of government (not for profit) Lloyd's - correct answer-Provide support facilites for underwriters or groups of individuals that accept insurance risk only for themselves, not the group (not an insurance company) (mostly property insurance) Reciprocal - correct answer-Insurance resulting from an interchange of reciprocal agreements of indemnity among persons known as subscribers, subscribers agree to become liable for their share of losses and expenses incurred among all subscribers Risk Retention Group - correct answer-Liability insurance company owned by its members, members are exposes to similar liability risk by virtue of bring in the same business of industry Captive Insurers - correct answer-Organized and owned by a corporation or firm to serve the parent organization's insurance needs at lower rates than other insurers and without the uncertainties of commercial insurance Admitted or Authorized - correct answer-Insurer is an insurance company that has qualified and has received a certificate of authority Nonadmitted or nonauthorized - correct answer-An insurance company that has not applied, or has applied and been denied, a certificate of authority (illegal to transact insurance) Certificate of Authority - correct answer-license issues from the state Department of Insurance after meeting an financial requirements set down by the state Location of Incorporation - correct answer-Otherwise known as domocile, where the insurance company is housed Domestic Insurer - correct answer-Insurance company that is incorporated in AZ

Foreign Insurer - correct answer-Insurance company that is incorporated within the USA but not necessarily in AZ Alien Insurer - correct answer-Insurance company that is incorporated outside the USA Independent Agency System/American Agency System - correct answer-- 1 independent agent represents several companies

• Nonexclusive
• Commissions on personal sales
• Business renewal with any company Exclusive Agency System/Captive Agents - correct answer-- 1 agent represents 1 company
• Exclusive
• Commissions on personal sales
• Renewals can only be placed with the appointing insurer General Agency System - correct answer-- General agent-entrepreneur represents 1 company
• Exclusive
• Compensation and commissions
• Appoints subagents Managerial System - correct answer-- Branch manager (supervises agents)
• Salaried
• Agents can be insurer's employees or independent contractors Direct Response Marketing System - correct answer-- No agents
• Company advertises directly to consumers
• Consumers apply directly to the company

Reinsurance - correct answer-Contract under which one insurance company indemnifies another insurance company for part or all of its liabilities Ceding Insurer - correct answer-The originating company that procures insurance on itself from another insurer Assuming Insurer - correct answer-The reinsurer, insuring the other company Facultative Reinsurance - correct answer-When reinsurance is purchased on a specific policy Reinsurance Treaty (Automatic Reinsurance) - correct answer-An insurer has an automatic reinsurance agreement between itself and the reinsurer in which this reinsurer is bound to accept all risks ceded to it (usually negotiated for a year or more) Law of Agency - correct answer-Defines the relationship between the principal and the agent/producer within the scope of authority (the agent represents the insurer) Agent Responsibilites - correct answer-- An agent represents the insurer, not the insured

• Any knowledge of the agent is presume to be knowledge of the insurer
• If the agent is working within the conditions of his/her contract, the insurer is fully responsible
• When the insured submits payment to the agent, it is the same as submitting a payment to the insurer Express Authority - correct answer-The authority a principal intends to grant to an agent by means of the agent's contract (written) Implied Authority - correct answer-The authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business Apparent Authority (perceived authority) - correct answer-Appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances that principal created

Fiduciary Responsibility - correct answer-Agents are legally obligated to treat applicants and insureds in an ethical manner (it is illegal to commingle premiums) Contract - correct answer-Agreement between two or more parties enforceable by law Elements of a Legal Contract - correct answer-- Agreement (offer and acceptance)

• Consideration
• Competent Parties
• Legal Purpose Agreement - correct answer-There must be a definite offer by one party and the other party must accept this offer in its exact terms Offer - correct answer-Applicant submits the application for insurance Acceptance - correct answer-Insurer's underwriter approves the application and issues a policy Consideration - correct answer-Something of value that each party gives to the other (paying premiums and paying in the event of a loss) Competent Parties - correct answer-Capable of entering into a contract in the eyes of the law (legal age, mentally competent, not drunk or high) Legal Purpose - correct answer-The purpose the contract cannot be against public policy (policyowner must have insurable interest and consent from the insured) Personal Contract - correct answer-Contract between the insurance company and an individual (the insured cannot be changed to someone else without the written consent of the insurer) (life insurance is an exception because the policyowner can transfer ownership to another person, if the insurer is notified in writing) Aleatory - correct answer-Contracts where there is an exchange of unequal amounts or values

Unilateral Contract - correct answer-Only one of the parties to the contract is legally bound to do anything (the insured makes no legally binding promises, but the insurer does (to pay losses)) Contract of Adhesion - correct answer-Contract prepared by one of the parties (insurer) and accepted or rejected by the other party (insured) (take-it-or-leave-it basis for insureds) Conditional Contract - correct answer-Contract that requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed and before each party fulfills its obligations (insured must pay the premium) Ambiguities in a Contract - correct answer-Should be interpreted in favor of the insured Reasonable Expectations - correct answer-If an agent implies some coverage, the insured could reasonably expect coverage Indemnity/Reimbursement - correct answer-A provision in an insurance policy that states that in the event of a loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract Utmost Good Faith - correct answer-Implies there will be no fraud, misrepresentation or concealment between the parties Representations - correct answer-Statements believe to be true to the best of one's knowledge, but they are not guaranteed to be true Misrepresentations - correct answer-Untrue statements that can void the contract Material Misrepresentation - correct answer-Statement that, if discovered, would alter the underwriting decision of the insurance company (if intentional, considered fraud) Warranty - correct answer-100% true statement upon which the validity of the insurance policy depends

Concealment - correct answer-Legal term for the intentional withholding of information of a material fact that is crucial in making a decision (can void a policy) Fraud - correct answer-Intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract Waiver - correct answer-Voluntary act of relinquishing a legal right, claim or privilege Estoppel - correct answer-Legal process that can be used to prevent a party to a contract from re- asserting a right or privilege after that right or privilege has been waived