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ESTIONS 5 AND 5 ANSWERS
TEXAS SURPLUS LINES EXAM PREP
Basic 5 Risk 5 and 5 Loss 5 Factors 5 - 5 ans--✔✔Risk, 5 Loss, 5 Hazards, 5 Perils, 5 Exposure Risk 5 - 5 ans-- ✔✔The 5 chance 5 of 5 loss 5 and 5 uncertainty. 5 The 5 term 5 "risk" 5 also 5 refers 5 to 5 the 5 insured 5 per son, 5 property, 5 or 5 activity. 5 A 5 insured 5 person, 5 property, 5 or 5 activity 5 is 5 also 5 known 5 as 5 a 5 "s ubject." Loss 5 - 5 ans--✔✔A 5 loss 5 is 5 an 5 unwelcome 5 and 5 unplanned 5 reduction 5 in 5 economic 5 value. Direct 5 Loss 5 - 5 ans--✔✔The 5 immediate 5 result 5 of 5 an 5 event 5 caused 5 by 5 a 5 covered 5 peril. Indirect 5 Loss 5 - 5 ans--✔✔Loss 5 that 5 is 5 a 5 result 5 or 5 consequence 5 of 5 a 5 direct 5 loss. Exposure 5 - 5 ans--✔✔The 5 state 5 of 5 being 5 subject 5 to 5 a 5 possible 5 loss Peril 5 - 5 ans--✔✔Destructive 5 events 5 that 5 Insurance 5 guards 5 against. 5 Examples 5 include: Fire Explosion Windstorm 5 (NS, 5 W/H) Flood Theft Collision Hazard 5 - 5 ans-- ✔✔A 5 hazard 5 is 5 a 5 condition 5 that 5 increases 5 the 5 likely 5 occurrence 5 of 5 a 5 peril 5 or 5 the 5 likely 5 severity 5 of 5 a 5 loss. 5 There 5 are 535 types 5 of 5 hazards 5 (MMP): 5 Moral, 5 Morale, 5 and 5 Physical. Moral 5 (Bad 5 Habits) 5 - 5 ans-- ✔✔Moral 5 hazards 5 are 5 the 5 tendencies 5 or 5 traits 5 of 5 an 5 individual 5 that 5 increase 5 the 5 chanc e 5 of 5 a 5 loss. 5 Alcoholism, 5 smoking, 5 and 5 bad 5 credit 5 are 5 examples 5 of 5 moral 5 hazards. Morale 5 (Carelessness) 5 - 5 ans-- ✔✔Morale 5 hazards 5 are 5 also 5 individual 5 tendencies, 5 but 5 they 5 arise 5 from 5 a 5 state 5 of 5 mind
, 5 attitude, 5 or 5 indifference 5 to 5 loss. 5 Not 5 locking 5 one's 5 car 5 or 5 driving 5 recklessly 5 are 5 exam ples 5 of 5 morale 5 hazards. Physical 5 Hazards 5 (Objects) 5 - 5 ans-- ✔✔Physical 5 hazards 5 are 5 physical 5 conditions 5 that 5 increase 5 the 5 chance 5 of 5 loss. 5 For 5 ex ample, 5 potholes 5 on 5 freeways 5 and 5 streets, 5 slippery 5 floors, 5 unsanitary 5 conditions, 5 conge sted 5 traffic, 5 and 5 unguarded 5 premises. Risk 5 Management 5 - 5 ans-- ✔✔People 5 are 5 exposed 5 to 5 risks 5 every 5 day. 5 How 5 they 5 deal 5 with 5 them 5 is 5 called 5 risk 5 ma nagement, 5 a 5 process 5 that 5 uses 5 any 5 combination 5 of 5 five 5 risk 5 management 5 techniques: Avoiding 5 the 5 risk controlling 5 (reducing) 5 the 5 risk Sharing 5 the 5 risk Retaining 5 the 5 risk Transferring 5 the 5 risk Risk 5 Avoidance 5 - 5 ans-- ✔✔One 5 way 5 to 5 manage 5 a 5 risk 5 is 5 simply 5 to 5 avoid 5 it. 5 For 5 example, 5 those 5 who 5 do 5 not 5 o wn 5 a 5 car 5 avoid 5 the 5 risk 5 of 5 having 5 a 5 car 5 being 5 stolen 5 or 5 damaged. Risk 5 Control 5 - 5 ans-- ✔✔If 5 a 5 risk 5 cannot 5 be 5 avoided, 5 it 5 may 5 be 5 controllable 5 through 5 risk 5 prevention 5 or 5 risk 5 r eduction 5 measures. Risk 5 Prevention 5 - 5 ans-- ✔✔Risk 5 prevention 5 measures 5 reduce 5 the 5 likelihood 5 that 5 a 5 loss 5 will 5 occur. 5 For 5 exampl e, 5 shoveling 5 snow 5 off 5 a 5 sidewalk 5 makes 5 it 5 less 5 likely 5 a 5 visitor 5 will 5 slip 5 and 5 fall. Risk 5 Reduction 5 - 5 ans-- ✔✔Risk 5 reduction 5 measures 5 reduce 5 the 5 severity 5 of 5 any 5 loss 5 that 5 does 5 occur. 5 Having 5 fire 5 extinguishers 5 does 5 not 5 keep 5 fires 5 from 5 starting, 5 but 5 when 5 available 5 and 5 used, 5 the y 5 often 5 limit 5 fire 5 damage. Risk 5 Sharing 5 (Pooling) 5 - 5 ans-- ✔✔Sharing 5 the 5 burden 5 of 5 a 5 loss 5 with 5 others 5 is 5 one 5 of 5 the 5 oldest 5 ways 5 to 5 manage 5 risk
. 5 Under 5 a 5 risk- sharing 5 arrangement, 5 groups 5 share 5 the 5 financial 5 burden 5 of 5 a 5 loss 5 suffered 5 by 5 any 5 me mber 5 of 5 the 5 group. 5 Pooling 5 is 5 a 5 modern 5 example 5 of 5 risk 5 sharing. Risk 5 Retention 5 (Doing 5 nothing 5 option) 5 - 5 ans-- ✔✔Risk 5 retention 5 is 5 simply 5 accepting 5 a 5 risk 5 and 5 dealing 5 with 5 a 5 loss 5 using 5 personal 5 fu nds. 5 With 5 Insurance 5 policies, 5 deductibles 5 are 5 a 5 risk 5 retention 5 device. 5 Deductibles 5 shift 5 small 5 losses 5 to 5 the 5 policy-owner, 5 leaving 5 the 5 Insurance 5 to 5 cover 5 more 5 serious 5 losses.
County 5 Mutual 5 - 5 ans-- ✔✔Operate 5 in 5 a 5 limited 5 geographic 5 area. 5 They 5 traditionally 5 sold 5 farm 5 Insurance 5 in 5 a 5 s mall 5 geographical 5 area, 5 many 5 county 5 mutuals 5 today 5 sell 5 a 5 wide 5 array 5 of 5 Insurance 5 pr oducts 5 in 5 broader 5 geographical 5 regions. Reciprocal 5 Insurers 5 (Exchange, 5 Self 5 Insure, 5 Prefunds) 5 - 5 ans-- ✔✔An 5 unincorporated 5 group 5 of 5 members 5 that 5 insure 5 each 5 other 5 by 5 exchanging 5 contra cts 5 of 5 indemnity 5 that 5 obligate 5 them 5 to 5 collectively 5 pay 5 any 5 member's 5 covered 5 loss. 5 Re ciprocal 5 insurance 5 is 5 essentially 5 a 5 form 5 of 5 self-insurance 5 that 5 pre- funds 5 coverage 5 of 5 future 5 losses 5 through 5 the 5 members' 5 premium 5 deposits. Fraternal 5 Benefit 5 Societies 5 (ERV), 5 MEMBERS 5 ONLY 5 - 5 ans-- ✔✔Fraternal 5 benefit 5 societies 5 are 5 organizations 5 of 5 people 5 who 5 share 5 a 5 common 5 ethni c, 5 religious, 5 or 5 vocational 5 affiliation. 5 They 5 may 5 provide 5 insurance 5 to 5 their 5 members 5 thr ough 5 fraternal 5 insurers 5 whose 5 insureds 5 are 5 usually 5 restricted 5 to 5 members 5 of 5 the 5 socie ty. Lloyd's 5 Associations 5 - 5 ans-- ✔✔They 5 are 5 groups 5 of 5 insurers 5 that 5 mainly 5 write 5 fire 5 Insurance 5 and 5 auto 5 physical 5 da mage 5 Insurance. 5 A 5 member 5 can 5 be 5 either 5 a 5 person 5 or 5 a 5 company, 5 and 5 each 5 member' s 5 liability 5 is 5 limited. 5 Lloyd's 5 Associations 5 play 5 a 5 relatively 5 small 5 role 5 in 5 the 5 U.S. 5 Insura nce 5 market, 5 and 5 most 5 of 5 them 5 are 5 based 5 in 5 Texas. Lloyd's 5 of 5 London 5 - 5 ans-- ✔✔IT 5 IS 5 NOT 5 AN 5 INSURANCE 5 COMPANY. 5 Rather, 5 it 5 is 5 a 5 forum 5 where 5 brokers 5 may 5 find 5 individuals 5 who 5 are 5 willing 5 to 5 help 5 underwrite 5 complex, 5 unique, 5 and 5 large 5 risks. Self-Insurers 5 - 5 ans--✔✔Self-insurers 5 are 5 businesses 5 that 5 are 5 financially 5 able 5 to 5 self- fund 5 certain 5 risks. 5 They 5 set 5 aside 5 funds 5 to 5 pay 5 claims 5 as 5 well 5 as 5 the 5 administrative 5 co sts 5 of 5 running 5 an 5 internal 5 insurance 5 program. Smaller 5 companies 5 band 5 together 5 to 5 form 5 a 5 self- insurance 5 group 5 through 5 which 5 they 5 provide 5 workers 5 compensation 5 benefits 5 to 5 injured 5 employees. 5 These 5 are 5 "shared- risk" 5 pools, 5 and 5 members 5 of 5 the 5 group 5 are 5 responsible 5 for 5 each 5 other's 5 losses. Captive 5 Insurance 5 Companies 5 (Exclusive) 5 - 5 ans--✔✔Single-owner 5 captives 5 (or 5 single- parent 5 captives) 5 are 5 owned 5 by 5 a 5 single 5 company 5 for 5 which 5 they 5 provide 5 insurance. Association 5 captives 5 (also 5 known 5 as 5 group- owned 5 captives) 5 are 5 owned 5 by 5 and 5 cover 5 the 5 risks 5 of 5 a 5 group 5 of 5 organizations. Captive 5 insurers 5 can 5 provide 5 cost 5 savings, 5 cash- flow 5 benefits, 5 and 5 specialized 5 loss 5 prevention 5 and 5 claims 5 services 5 to 5 their 5 owners.
Risk 5 Retention 5 Groups 5 (Member 5 Only) 5 - 5 ans-- ✔✔Created 5 through 5 the 5 federal 5 Risk 5 Retention 5 Act 5 of 519815 (amended 5 in 5 1986), 5 risk 5 r etention 5 groups 5 (RRGs) 5 are 5 a 5 form 5 of 5 captive 5 insurance 5 company 5 that 5 provide 5 their 5 m embers—who 5 are 5 both 5 the 5 insureds 5 and 5 owners 5 of 5 the 5 RRG— with 5 coverage 5 for 5 all 5 types 5 of 5 liability 5 risks 5 except 5 workers 5 compensation. Less 5 Insurance 5 Regulatory Purchasing 5 Groups 5 - 5 ans-- ✔✔Members 5 of 5 a 5 purchasing 5 group 5 must 5 have 5 similar 5 businesses 5 or 5 activities, 5 and 5 o ne 5 purpose 5 of 5 the 5 group 5 must 5 be 5 the 5 purchase 5 of 5 liability 5 insurance 5 on 5 a 5 group 5 basis. Reinsurance 5 Companies 5 (HSB) 5 - 5 ans-- ✔✔A 5 formal 5 agreement 5 in 5 which 5 both 5 the 5 risk 5 and 5 the 5 premium 5 are 5 shared 5 with 5 one 5 or 5 more 5 reinsurance 5 companies. The 5 insurer 5 seeking 5 to 5 transfer 5 some 5 of 5 its 5 risk 5 is 5 known 5 as 5 the 5 ceding 5 company 5 (or 5 c edent). 5 The 5 insurer 5 accepting 5 some 5 of 5 the 5 risk 5 being 5 transferred 5 is 5 known 5 as 5 the 5 rein suring 5 company. 5 The 5 ceding 5 company 5 pays 5 a 5 premium 5 to 5 the 5 reinsurer 5 for 5 its 5 share 5 o f 5 coverage. Other 5 Ways 5 to 5 Classify 5 Insurers 5 - 5 ans--✔✔Commercial 5 versus 5 Government 5 Insurers Admitted 5 versus 5 Nonadmitted 5 Insurers Domestic, 5 Foreign, 5 and 5 Alien 5 Insurers Financial 5 Strength Distribution 5 Systems Federal 5 Government 5 Insurance 5 Programs 5 Include: 5 - 5 ans-- ✔✔Social 5 Security 5 Insurance 5 (formally 5 known 5 as 5 Old- Age, 5 Survivors 5 and 5 Disability 5 Insurance, 5 or 5 OASDI) Medicare 5 (formally 5 known 5 as 5 Supplemental 5 Medical 5 Insurance, 5 or 5 SMI) The 5 National 5 Flood 5 Insurance 5 Program 5 (NFIP) Crop 5 insurance The 5 Federal 5 Deposit 5 Insurance 5 Corporation 5 (FDIC) State 5 Government 5 Insurance 5 Programs 5 Include: 5 - 5 ans--✔✔Workers 5 Compensation Unemployment 5 Insurance State-run 5 Medical 5 Insurance 5 Plans Admitted 5 Insurer 5 - 5 ans-- ✔✔An 5 admitted 5 insurer 5 is 5 a 5 company 5 licensed 5 to 5 do 5 business 5 in 5 the 5 state 5 or 5 country 5 i n 5 which 5 it 5 writes 5 applications. Nonadmitted 5 Insurer 5 - 5 ans--✔✔A 5 non- admitted 5 insurer 5 is 5 an 5 insurance 5 company 5 that 5 is 5 not 5 licensed 5 to 5 do 5 business 5 in 5 a 5 cer tain 5 state 5 but 5 is 5 authorized 5 to 5 sell 5 surplus 5 lines 5 insurance 5 there.
Exclusive 5 Agency 5 System 5 (Captive) 5 - 5 ans-- ✔✔Insurers 5 use 5 exclusive 5 agents 5 to 5 sell 5 their 5 products. 5 Sometimes 5 called 5 captive 5 age nts, 5 exclusive 5 agents 5 represent 5 a 5 single 5 insurance 5 company 5 or, 5 in 5 some 5 cases, 5 a 5 gro up 5 of 5 insurance 5 companies 5 under 5 similar 5 management. Direct 5 Marketing 5 System 5 - 5 ans-- ✔✔Insurers 5 using 5 a 5 direct 5 marketing 5 system 5 sell 5 insurance 5 directly 5 to 5 consumers 5 thro ugh 5 their 5 employees 5 (who 5 must 5 be 5 licensed 5 as 5 producers 5 in 5 the 5 states 5 where 5 their 5 cu stomers 5 reside). 5 Consumer 5 solicitations 5 are 5 made 5 through 5 mass 5 media 5 and 5 social 5 me dia 5 promotions 5 that 5 invite 5 consumers 5 to 5 contact 5 the 5 insurer 5 directly. Insurance 5 Broker 5 (Producer) 5 - 5 ans-- ✔✔Insurance 5 brokers 5 are 5 independent 5 contractors 5 who 5 represent 5 the 5 insurance 5 appli cant 5 or 5 policyholder 5 and 5 typically 5 sell 5 products 5 from 5 more 5 than 5 one 5 insurer. Insurance 5 Agent 5 (Producer) 5 - 5 ans-- ✔✔Insurance 5 agents, 5 legally 5 represent 5 Insurance 5 companies. A 5 special 5 type 5 of 5 broker 5 - 5 ans-- ✔✔Known 5 as 5 a 5 surplus 5 lines 5 broker, 5 places 5 excess 5 and 5 surplus 5 lines 5 insurance 5 cover age 5 with 5 nonadmitted 5 insurers. 5 Surplus 5 lines 5 brokers 5 usually 5 deal 5 with 5 the 5 applicant's 5 broker 5 or 5 agent 5 and 5 do 5 not 5 deal 5 directly 5 with 5 the 5 insurance 5 buyer. 5 Surplus 5 lines 5 broke rs 5 provide 5 insurance 5 coverages 5 that 5 otherwise 5 would 5 not 5 be 5 available 5 in 5 a 5 customer's 5 state. Commissioner 5 Duties 5 (AKA 5 Director/Superintendent) 5 - 5 ans-- ✔✔Has 5 the 5 authority 5 to 5 conduct 5 hearings, 5 stop 5 insurers 5 and 5 producers 5 from 5 engaging 5 in 5 unfair 5 or 5 unethical 5 activity, 5 or 5 suspend 5 an 5 insurer's 5 or 5 producer's 5 license 5 to 5 transac t 5 business. TDI 5 - 5 ans--✔✔Insurer 5 licensing 5 requirements Solvency 5 regulation Investment 5 regulation Rate 5 regulation Policy 5 form 5 regulation Market 5 conduct 5 regulation Insurance 5 contracts 5 are: 5 - 5 ans--✔✔Contracts 5 of 5 Adhesion Aleatory Personal Unilateral Conditional
Contracts 5 of 5 Adhesion 5 (Take 5 it 5 or 5 leave 5 it) 5 - 5 ans-- ✔✔A 5 contract 5 of 5 adhesion 5 is 5 one 5 that 5 is 5 drafted 5 by 5 one 5 party 5 (the 5 insurer) 5 which 5 the 5 other 5 party 5 (the 5 policyholder) 5 must 5 accept 5 as-is. Aleatory 5 Contracts 5 (Unequal 5 Exchange) 5 - 5 ans-- ✔✔Insurance 5 contracts 5 are 5 different; 5 they 5 are 5 aleatory 5 contracts 5 that 5 involve 5 an 5 exch ange 5 of 5 potentially 5 unequal 5 values. 5 In 5 an 5 insurance 5 contract, 5 a 5 policyholder 5 may 5 recei ve 5 a 5 benefit 5 that 5 is 5 entirely 5 out 5 of 5 proportion 5 to 5 the 5 consideration 5 (premium) 5 given. Personal 5 Contracts 5 - 5 ans-- ✔✔Property 5 and 5 casualty 5 insurance 5 policies 5 are 5 personal 5 contracts 5 between 5 the 5 insur er 5 and 5 the 5 policy- owner. 5 An 5 insurer 5 agrees 5 to 5 financially 5 protect 5 the 5 person 5 who 5 owns 5 the 5 building, 5 not 5 the 5 covered 5 building. 5 In 5 deciding 5 whether 5 to 5 accept 5 an 5 application 5 for 5 property 5 insura nce, 5 the 5 insurer 5 evaluates 5 the 5 applicant 5 as 5 well 5 as 5 the 5 property 5 to 5 be 5 covered. Unilateral 5 Contracts 5 (Enforceable 5 Promise) 5 - 5 ans-- ✔✔Insurance 5 contracts 5 are 5 unilateral. 5 In 5 a 5 unilateral 5 contract, 5 only 5 one 5 party 5 makes 5 a n 5 enforceable 5 promise. 5 With 5 an 5 insurance 5 policy, 5 only 5 the 5 insurer 5 makes 5 a 5 promise 5 th at 5 can 5 be 5 enforced. 5 It 5 promises 5 to 5 pay 5 benefits 5 if 5 an 5 insured 5 loss 5 occurs. Conditional 5 Contracts 5 - 5 ans-- ✔✔The 5 insurer's 5 promise 5 to 5 pay 5 benefits 5 is 5 conditional 5 on 5 specified 5 events 5 occurring, 5 including: Making 5 premium 5 payments 5 when 5 due Reporting 5 losses 5 promptly Cooperating 5 with 5 the 5 insurer 5 in 5 settling 5 any 5 loss Warranty 5 - 5 ans--✔✔True 5 and 5 will 5 remain 5 true
