RMIN 4000 Edmunds Exam 2 Questions
and Answers 100% Verified
major types of private insurers - ANSWER-Stock, Mutual, and Lloyd's of London
stock insurers - ANSWER-corporation owned by stockholders.
objective is to earn profit for stockholders by increasing the value of the stock and
paying dividends
Mutual insurers - ANSWER-a corporation owned by policyholders. profits are distributed
to policyholders by dividends or rate reductions
types of mutual insurers - ANSWER-advance premium mutual, assessment mutual, and
fraternal insurer
assessment mutual - ANSWER-insurer has the right to assess policyholders an
additional amount if the insurer's financial operations are unfavorable
advance premium mutual - ANSWER-insurer does not issue assessable policies
fraternal insurer - ANSWER-a mutual insurer that provides life and health insurance to
members of a social or religious organization
Lloyd's of London - ANSWER-The world's leading insurance market that provides
services and physical facilities for its members to write specialized lines of insurance.
They underwrite insurance for syndicates.
Is Lloyd's of London an insurer? - ANSWER-No
Lloyd's of London brokers - ANSWER-represent policyholders to arrange coverage with
syndicates
syndicates - ANSWER-offer insurance contracts in the market
who makes up a syndicate? - ANSWER-members, managing agents, and underwriters
insurance agent - ANSWER-Someone who legally represents the principal (insurance
company) and has the authority to act on the principal's behalf
Is the principal responsible for acts of an agent? - ANSWER-Yes, when the agent is
acting within the scope of authority
Agent Binding Authority - ANSWER-provide temporary insurance until the policy is
actually written (typically with P&C, NOT life
brokers - ANSWER-someone who legally represents the insured, places appropriate
coverage, is paid commission from insurer, and
importance of large brokerage firms - ANSWER-very important for commercial P&C,
have knowledge of specialized markets, and provide risk management and loss-control
services
surplus lines broker - ANSWER-"Wholesalers" who work with retail Agents and Brokers,
licensed to place business with a "non admitted" insurer
surplus lines - ANSWER-any type of insurance for which there is no available market in
the state
non-admitted insurer - ANSWER-an insurer not licensed to do business in the state
independent agency distribution - ANSWER-represent several unrelated insurers,
agency owns expirations and renewal rights
exclusive agency system - ANSWER-the agent represents only one insurer or group of
insurers under common ownership. agents do not own expirations or renewal rights to
policies
direct writer system - ANSWER-an insurer in which the salesperson is an employee of
the insurer, not an independent contractor. employees paid on "salary plus"
direct response system - ANSWER-Insurer sells directly to the consumer by television
or some other media
what are some methods to sell individual insurance policies to - ANSWER-employer
groups, labor unions, trade associations, college and university alumni, and others
groups like AARP or AAA
group insurance marketing - ANSWER-Products are sold through group representatives
employees who receive a salary and incentive payments based on sales (can pay for
insurance by payroll deduction)
what are the major insurance company operations? - ANSWER-ratemaking,
underwriting, production, claims settlement, reinsurance, and investments
ratemaking - ANSWER-the pricing of insurance and the calculation of insurance
premiums
Exposure Units - ANSWER-Unit of measurement used in pricing (cars-years)
Gross Premium - ANSWER-Gross Rate multiplied by number of exposure units (GR *
#exposure units)
What are the P&C ranking methods? - ANSWER-Class (Manual) rating, merit rating,
and judgement method
Class (manual) Rating - ANSWER-pure premium method and loss ratio method
Pure premium method - ANSWER-Rates developed based on past experience.
Formula=(Incurred loss + LAE) / # exposure units
Loss Ratio Method - ANSWER-Modifies the existing rates by comparing the actual cost
ratio to the expected loss ratio. Loss ratio = (incurred loss + LAE) / earned premium
merit rating - ANSWER-Rates are adjusted upward or downward based on experience,
3 Types: Schedule, Experience, and Retrospective
judgement method - ANSWER-Rates are determined by the judgement of the
underwriter (When data is limited)
what are the largest reinsurance brokers? - ANSWER-Aon, Marsh / Guy Carpenter, and
Willis
balance sheet assets - ANSWER-Mostly financial investments vs. real property
(buildings or factories) & production equipment
balance sheet liabilities - ANSWER-loss reserves (open claims, incurred but not
reported losses, etc.) and unearned premiums (paid in advance but premium hasn't
been earned yet
policyholders' surplus - ANSWER-Total assets - total liabilities
income statement revenues - ANSWER-premiums and investment income
income statement expenses - ANSWER-claims and claim adjusting expenses,
underwriting, selling/general/admin. expenses, and taxes
loss ratio - ANSWER-ratio of incurred losses and loss adjustment expenses to
premiums earned (incurred + LAE : premiums earned)
combined ratio - ANSWER-loss ratio + expense ratio
overall operating ratio - ANSWER-combined ratio - investment income ratio
National Association of Insurance Commissioners (NAIC) - ANSWER-Standard setting
and regulatory support organization created and governed by chief insurance regulators
from 50 states, D.C., and U.S. territories (GA - John King)
McCarran-Ferguson Act (1945) - ANSWER-Established that insurance should be
regulated and taxed by the states. Antitrust laws don't apply to insurance usually which
encourages competition
Financial Modernization Act (1999) - ANSWER-Insurers can have banking operations
and banks can have insurance operations, leading to several mergers and eventually
2008 financial crisis
Dodd-Frank Wall Street Reform and Consumer Protection (2010) - ANSWER-
Established general federal oversight of the insurance industry with FSOC (Financial
Stability Oversight Council)
What does the FSOC do? - ANSWER-They have the authority to treat systemic risk and
classify non-bank financial institutions as "systemically important financial institutions"
(SIFIs), which receive tougher financial oversight and regulated by federal reserve
what are the goals of insurance regulation? - ANSWER-maintain insurer solvency,
educate consumers, ensure reasonable rates, and make insurance available
Why do regulators care about solvency? - ANSWER-Insurance contracts are worthless
if the insurer goes bankrupt
why is regulating consumers' education important? - ANSWER-to prevent unethical
insurers or agents from taking advantage of consumers since it is complex and difficult
to compare insurance coverages and costs
why is it important to ensure reasonable rates? - ANSWER-to prevent
excessive/unsubstantiated rate increases and ensure premiums are sufficient to pay
losses
what are some ways insurance is made available - ANSWER-restricting the market exit
of insurers and the FAIR plans (fair access to insurance requirements)
What areas of insurance are regulated? - ANSWER-formation and licensing of insurers,
solvency regulation, rate regulation, policy forms, sales practices and consumer
protection, and taxation of insurers
domestic insurer - ANSWER-domiciled in the state
foreign insurer - ANSWER-chartered (domiciled) in another state, but licensed to
operate in the state
principle of reasonable expectations - ANSWER-an insured is entitled to coverage
under a policy that he or she reasonably expects it to provide, regardless of policy
provisions
law of agency - ANSWER-agents must represent the principal and limitations can be
placed on power of agents
waiver - ANSWER-the voluntary relinquishment of a known legal right
estoppel - ANSWER-loss of a legal defense because of previous actions that are now
inconsistent with that defense
what does waiver and estoppel do to insurers? - ANSWER-They may require an insurer
to pay a claim that it ordinarily would not have to pay
