Professional Documents
Culture Documents
Characteristics of
Insurance
DISCUSSION QUESTIONS
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Define a peril.
A peril is the proximate or actual cause of a loss. Common perils include accidental
death, disability caused by sickness or accident, and property losses caused by fire,
windstorm, tornado, earthquake, burglary, and collision.
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DISCUSSION QUESTIONS
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Describe the law of large numbers and why it is useful for insurance companies.
The law of large numbers is a principle that states that actual outcomes will approach the mean probability as
the sample size increases. The law of large numbers is useful for insurance companies because the larger the
insured pool, the more likely actual losses will approach the probability of losses occurring, therefore reducing
forecasting error. This results in insurance premiums that are efficient in terms of cost to the insured.
9.
DISCUSSION QUESTIONS
15. Explain the differences between the principal of indemnity and a subrogation clause.
The principle of indemnity asserts that an insurer will only compensate the insured to the extent the insured
has suffered an actual financial loss. The insured cannot make a profit from insurance. The principle of
indemnity does not assert that an insured will recoup 100 percent of any loss, as most policies will have
deductibles and limits on the amount of losses covered.
A subrogation clause in an insurance policy requires that the insured relinquish a claim against a negligent
third party, if the insurer has already indemnified the insured. A subrogation clause entitles the insurer to seek
a claim against a negligent third party, for any claims paid to the insured.
16. When must an insurable interest exist for property, liability, and life insurance?
An insurable interest for property and liability insurance must exist both at the inception of the policy and at
the time of loss. An insurable interest for life insurance need only exist at the inception of the policy.
17. Define representation, warranty, and concealment.
A representation is a statement made by the applicant during the insurance application process. A representation can be an oral statement or information disclosed on an insurance application such as age, gender, occupation, marital status and family medical history.
A warranty is a promise made by the insured that is part of the insurance contract. The warranty can be a
promise to perform or take a certain action.
Concealment is when the insured is intentionally silent regarding a material fact during the application process. The insurer has the right to void an insurance contract based on material concealments by the insured.
18. List unique characteristics of insurance contracts.
Insurance contracts are contracts of adhesion, which is a take it or leave it contract.
Insurance contracts are aleatory in nature, which means the dollar amounts exchanged are uneven.
Insurance contracts are unilateral in that there is only one promise made and its made by the insurer to pay
in the event of a loss.
Insurance contracts are conditional in that the insured must abide by all the terms and conditions of the
contract if the insured intends to collect under the policy.
Property insurance polices are a contract between the insurer and the insured, therefore the policy cannot
be assigned to a third party without the consent of the insured.
Life insurance contracts can be assigned without consent of the insurer because the contract is still between
the insurance company and the insured.
19. Describe the differences between express, implied, and apparent authority.
Express authority is given to an agent through a formal written document.
Implied authority is the authority that a third party relies upon when dealing with an agent based upon the
position held by the agent. When a customer walks into an insurance agents office, the customer will see
the company logo on the front door, signs on the wall of the agents office with the companys logo and
business cards on the agents desk.
Apparent authority is when the third party believes implied or express authority exists, but no authority
actually exists.
DISCUSSION QUESTIONS
MULTIPLE-CHOICE PROBLEMS
1.
The risk that individuals of higher than average risk will seek out or purchase insurance policies is
called?
a. Peril.
b. Hazard.
c. Law of Large Numbers.
d. Adverse Selection.
The correct answer is d.
The underwriter attempts to manage adverse selection and minimize policy issuance to less desirable applicants.
2.
What type of hazard results from the indifference that a person has to the potential loss because he or
she has insurance?
a. Peril.
b. Physical Hazard.
c. Moral Hazard.
d. Morale Hazard.
The correct answer is d.
Moral hazard is a character flaw or dishonesty such as burning your own house down. Morale hazard is the
indifference a person has towards loss because of insurance such as leaving the keys in your car and the car running.
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MULTIPLE-CHOICE PROBLEMS
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When the insured is silent to a fact that is material to the risk being insured, what has occurred?
a. Breach of Warranty.
b. Misrepresentation.
c. Concealment.
d. Breach of Indemnity.
The correct answer is c.
A breach of warranty is when the insured does not do something that they agreed to do such as agreeing to
install a home alarm security system when a house is being built, then failing to do so. A misrepresentation is a
statement the insured makes that is not true.
10. Jennifer is applying for life insurance, with her two children as the beneficiary. Jennifer has always been
told she looks young for her age and although she is 58, she stated that she is 28 on her life insurance
application. What would the insurer be most likely to do if Jennifers beneficiaries attempt to collect on
the life insurance policy?
a. Void the policy.
b. Require payment on premiums for a 58 year old insured.
c. Recalculate the face value of the policy based on actual premiums paid.
d. Bring a lawsuit against the estate.
The correct answer is c.
The insurance company will simply calculate how much coverage she could have purchased based upon her
real age and actual premiums paid.
11. Which of the following statements regarding the characteristics of an insurance contract is false?
a. They are a contract of adhesion, which means the insured must accept it or leave it.
b. They are aleatory contracts, which means amounts exchanged may be unequal.
c. They are unilateral, meaning there is only one promise, which is a promise by the insured to
pay the premium.
d. The contracts are conditional, which means the terms are under the condition that
premiums are paid.
The correct answer is c.
The promise is by the insurer to pay if a loss occurs.
MULTIPLE-CHOICE PROBLEMS
12. Joe walks into his insurance agents office and notices his agents name on a business card and the
insurers name on letterhead. If an agency agreement exists, what type of authority does Joe believe his
agent has to enter into an insurance contract?
a. Express Authority.
b. Implied Authority.
c. Apparent Authority.
d. None of the Above.
The correct answer is b.
Implied Authority includes the visual aids: business cards, letterhead and signs on the door. Apparent authority is based upon the agents business card, letter head and insurance company sign on the door but in fact, no
authority actually exists. The key difference between apparent and implied authority is that with apparent
authority, none actually exists. Express authority is the agency agreement between the insurance agent and
insurance company.
13. Donna owns a house with a replacement cost of $500,000. She purchases $300,000 of insurance with a
coinsurance requirement of 80% and a $500 deductible. If Donnas house is hit by a hurricane and she
suffers a $150,000 loss, what will the insurer pay?
a. $74,500.
b. $112,000.
c. $119,500.
d. $149,500.
The correct answer is b.
(AMT Purchased coinsurance) x loss
[$300,000($500,000 x 0.80)] x $150,000 = $112,500 - $500 deductible = $112,000.
14. Insurance regulation is primarily conducted by?
a. The Securities and Exchange Commission.
b. The State Insurance Commissioner.
c. The Federal Insurance Commission.
d. The FDIC.
The correct answer is b.
The NAIC (National Association of Insurance Commissioners) issue model legislation for state legislatures to
implement but the end result is that each state passes its own laws and regulations.
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MULTIPLE-CHOICE PROBLEMS
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