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Michigan Property & Casualty Exam
QUESTIONS WITH ANSWERS
FIO - ANSWER>>(Federal Insurance Office) Monitors insurance industry and identifies issues and gaps in the state regulation of insurers. It also monitors access to affordable insurance by underserved communities and consumers.
Insurance Regulation at State Level - ANSWER>>Insurance industry is regulated primarily at the state level. Legislature writes and passes laws, judicial branch interprets them.
Surplus and Excess Insurance - ANSWER>>Insurance available when coverage cannot be obtained from admitted insurers. Cannot be solely utilized to receive lower cost coverage than would be available from an admitted carrier.
Private vs Government Insurers - ANSWER>>Most insurance is written through private insurers, however there are instances where government provides an alternative, usually when there is a lot of risk involved and private insurers have no means to insure. (Gulf Coast)
Residual Markets - ANSWER>>A private coverage source of last resort for businesses and individuals who have been rejected by voluntary market insurers.
Insurance Agents/Producers - ANSWER>>Licensed individuals representing an insurance company when transacting insurance.
Reinsurance Companies - ANSWER>>Insurance company that assumes all or a portion of a risk from a primary or ceding insurance company.
Treaty Agreements - ANSWER>>Reinsurance agreement that covers all risks contained in the subject line(s) of business automatically.
Insurers - ANSWER>>Manufacture and sell insurance coverage by way of insurance policies or contracts.
Facultative Agreements - ANSWER>>Reinsurance agreements that allow ceding and reinsurance companies the opportunity to negotiate coverage for individual risks.
Financial Rating Services - ANSWER>>Independent financial rating services evaluate and rate the financial stability of insurance companies. Assign ratings to show financial strength/weakness.
Insurance Agency - ANSWER>>Independent organizations that recruit, contract with, and support sales agents and producers.
Self Insurer - ANSWER>>Assume the financial risk of one's self. generally on an option for large companies.
interpretations for state regulators. THE NAIC HAS NO LEGAL AUTHORITY, THEY ARE JUST AN INTERPRETATION AND CONSULTATION RESOURCE.
Fraternal Benefit Societies - ANSWER>>Social organizations that engage in charitable and benevolent activities that provide life and health insurance to their members. Membership is generally based off of faith, lodge or order of society.
Risk Retention Groups (RRG) - ANSWER>>Group owned insurer that primarily assumes and spreads the liability related risks of its members. Licensed in at least one state and may insure members in other states. They must have sufficient liquid assets to meet loss obligations. Each member assumes a portion of risks returned.
Lloyds of London - ANSWER>>Group of underwriters called syndicates that each specialize in a particular type of risk. Members are individually liable for each risk they assume.
Stock Insurance Company - ANSWER>>-Owned by stockholders or shareholders -Directors and officers direct company operations and are elected by shareholders -Stockholders receive taxable dividends as return of profit -Dividends are not guaranteed -Generally issue non-participating policies
Reciprocal Insurance Company - ANSWER>>-Group owned insurer whose main activity is risk sharing -Reciprocal insurer is unincorporated and is formed by individuals, firms and business corporations that exchange insurance on one another. -Exchange is affected though an attorney-in-fact
Mutual Insurance Company - ANSWER>>-Owned by policyholders -Trustees and directors run company operations, they are elected by policyholders. -Policyholders receive non-taxable dividends as return of unused premium -Issue participating policies
Executives - ANSWER>>Oversee operations of the business
Actuarial Department - ANSWER>>Gather and interpret stats to determine probability of loss and sets premium rates.
Underwriting Department - ANSWER>>Responsible for selection of risks and determines actual policy premium
Marketing and Sales Department - ANSWER>>Responsible for advertising and selling
Claims Department - ANSWER>>Assists policyholder in event of a loss
Mass Marketing - ANSWER>>Mass marketing is used to target a specific type of insurance to a large group of individuals, such as the American Association of Retired People (AARP)
Law of Agency - ANSWER>>A relationship between two or more parties where one party acts on behalf of the other party, known as the principal or insurer.
Express Authority - ANSWER>>Authority that is written into the producer's agency contract
Implied Authority - ANSWER>>Authority the public assumes the producer has.
Apparent Authority - ANSWER>>Authority created when the producer exceeds the authority expressed in the agency contract.
Producer's Responsibilities to the Insurer - ANSWER>>1) Fiduciary duty to the insurer in all respects, especially when handling premium funds
- Must keep premium funds in a trust account separate from other funds and forward to insure properly
- Must report any material facts that may affect underwriting
- Responsible for soliciting, negotiating, selling and canceling the insurance policies with the insurer
- Duty to only recommend the purchase of suitable policies
Producer's Responsibilities to Insurance Applicant or Insured - ANSWER>>1) Forward premiums to insurer on a timely basis
- Seek and gain knowledge of the applicants insurance needs
- Review and evaluate the applicants current insurance coverage, limits and risks
- Serve the best interests of the applicant or insured, although producers represent the insurer
- Recommend coverage that best protects the insured from possible loss and NOT the most profitable coverage from the perspective of the producer
Broker - ANSWER>>A licensed individual who negotiates insurance contracts with the insurers, on behalf of the applicant. Brokers represent the applicant or the insured's best interest, not the insurer.
Fair Credit Reporting Act (15 USC 1681-1681d) - ANSWER>>Protects consumer privacy. Ensures data collected is confidential, accurate, relevant and used for proper and specific purpose.
Credit reporting is used to determine the financial and moral status of the applicant, this act is to protect the applicants from overly intrusive information collection practices.
Financial Anti-Terrorism Act (USA Patriot Act) - ANSWER>>Imposes record keeping and government reporting requirements on banks, financial institutions and non-financial businesses for specific financial transactions and customer financial records
Privacy notice must explain: a) the information collected about the consumer b) Where that information is shared c) how that information is used d) how that information is protected
Terrorism Risk Insurance Act - ANSWER>>Result of terror attacks on September 11, 2001. Congress provided temporary financial compensation to insured parties during its crisis of recovery from the terrorist attacks.
TRIA was intended to respond to the chaos the 9/11 terrorist attacks caused in the insurance industry as well as to assure that commercial property and liability insurance would continue to be able to provide coverage for the peril of terrorism.
Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034) - ANSWER>>This act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust.
Risk - ANSWER>>A condition where the chance, likelihood, probability or potential for a loss exists
Management - ANSWER>>The determination of what types of protection are required to meet an insured's needs.
Speculative Risk - ANSWER>>Situations where there is a chance for loss, gain, or neither loss nor gain to occur. An example of speculative risk is gambling. Gambling cannot be insured.
Pure Risk - ANSWER>>Situations where there is no chance for gain; the only outcome is for nothing to occur or for a loss to occur.
Pure risk can be insured. Examples include:
- The possibility of damage to property caused by a fire or other natural disaster
- The possibility of financial loss as a result of death
Loss - ANSWER>>Reduction, decrease, or disappearance of value. The basis of a claim for damages under the terms of an insurance policy.
Peril - ANSWER>>The cause of a loss
Hazard - ANSWER>>A specific condition that increases the probability, likelihood, or severity of a loss from a peril.
Physical Hazard - ANSWER>>A physical condition that increases the probability of loss; use, condition, or occupancy of property.
Ways of managing risk... - ANSWER>>Sharing-Investments of a large number of people may be pooled by use of a corporation or partnership
Transfer-Transferring the risk from one party to another, such as from a consumer to an insurance company
Avoidance-Elimination of the risk. Avoid the activity that gives rise to the chance of loss
Reduction-Minimizing the chance of loss, but not preventing the risk. Example: Burglar alarm
Retention-Assume the responsibility for loss
Insurable risks must include... - ANSWER>>1) Large number of units or groups with the same perils (law of large numbers as the number of units in a group increases, the more likely it is to predict a particular outcome.
- The chance of loss must be calculable
- The loss must be measurable
- The premiums must be affordable
- From the perspective of the insured, the loss must be accidental in nature
- Catastrophic perils are not covered
The Insurance Contract - ANSWER>>A legal contract purchased to indemnify the insured against a loss, damage or liability arising from an unexpected event. Designed to transfer risk from the insured to the insurer.
Principle of Indemnity - ANSWER>>Insured is restored to the same financial or economic condition that existed prior to the loss.
Insured should not profit from an insurance transaction.
Insurability - ANSWER>>The ability of an applicant to meet an insurer's underwriting requirements
Underwriting - ANSWER>>The process of selecting, classifying and rating a risk for the purpose of issuing insurance coverage.
Insurable Events - ANSWER>>Any event, past or present, that may cause loss or damage or create legal liability on the part of the insured.
Insurable Interest - ANSWER>>Requires the potential for an insured to suffer financial or economic hardship in the event of a loss.
Property-Insurable interest must exist at the time of the loss
Casualty-Insurable interest must exist at the time of the loss.
Legal Purpose
Agreement
Consideration
Contract of Adhesion - ANSWER>>One party writes the contract, without input from the other party, and presents it on a take it or leave it basis. No negotiation, just as is.
Aleatory Contract - ANSWER>>The exchange of value is unequal. Insured's premium payment is less than the potential benefit to be received in the event of a loss. Insurers payment in event of loss may be much greater, or much less than insured premium payment.
Valued Contract - ANSWER>>A contract that pays a stated amount in the event of a loss
Indemnity Contract - ANSWER>>An agreement to pay on behalf of another party under specified circumstances, such as when a loss occurs.
Applicant - ANSWER>>Party submitting application for insurance
Application - ANSWER>>A document submitted by an applicant to an insurer with information needed to underwrite.
Endorsement - ANSWER>>A policy form that alters or adds to the provisions of a property and casualty insurance contract.
Personal Contract - ANSWER>>Owner cannot transfer or assign ownership of an insurance policy to another person.
Non-Personal Contract - ANSWER>>Owner may transfer or assign ownership of a life or health insurance policy to another person.
Unilateral Contract - ANSWER>>Only one party is legally bound to the contractual obligations after the premium is paid to the insurer. Only the insurer makes a promos of future performance, and only the insurer can be charged with breach of contract.
Conditional Contract - ANSWER>>Both parties must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has compiled with all the policy's terms and conditions.
Reasonable Expectations Doctrine - ANSWER>>What a reasonable and prudent policy owner would expect; the reasonable expectations of policy owners are honored by the courts although the strict terms of the policy may not support these expectations
