Fundamentals of Insurance and Risk Management Exam Questions and Correct Answers (Rated A+)

Fundamentals of Insurance and Risk Management Exam Questions and Correct Answers (Rated A+) What is insurance? - Answers Insurance is the transfer of risk. Risk is transferred from insured to insurer. Example: Insured is the customer; Insurer is the insurance company. What is risk? - Answers Risk is an unknown outcome or uncertainty of loss. With pure risk, there is only a chance of loss, no chance of gain. Only pure risk can be insured. (Ex. Natural disasters) With speculative risk you may gain or may lose. Speculative risk cannot be insured. (Ex. Investments) What is Hazard? - Answers Anything that increases the risk. There are 3 types of hazards. Physical Hazard - Answers Something that is visible and that can increase the possibility of a loss. (Icy Road) Moral Hazard - Answers Morals or habits of an insured that may increase the chance of a loss. (Dishonesty) Morale - Answers The insured's indifferences to a loss. (Careless Behavior) What is a peril? - Answers The cause of a loss. Examples include; theft, fire, vandalism, natural disasters, etc. What is a loss? - Answers Damage to property. Direct Loss - Answers This is the immediate damage to property itself such as a building destroyed by fire or a car that is totaled in an accident. Indirect Loss - Answers Expense or loss of use, resulting from a direct loss. It includes expenses incurred or loss of income due to the inability to use the property. Example, if a business suffers a fire, the indirect loss would be the loss of revenue during the time it cannot operate. What is indemnity? - Answers It means to restore the insured to the same financial position as before the loss. Example: Insurance pays for the damage to your vehicle, it doesn't buy you a new car. Preventing a profit from insurance. What are Limits of Liability? - Answers The maximum amount that an insurance company agrees to pay for a covered loss under an insurance policy. Limits of Liability (Auto) - Answers In an auto policy the limit of liability is the maximum amount the insurer (Insurance company) will pay on behalf of the insured (Policyholder). The Limits of Liability in the state of Texas are $30,000 Bodily Injury / $60,000 Per Accident / $25,000 Property Damage. What is a deductible? - Answers An amount the insured is responsible for paying in the event of a loss before the insurance kicks in. Why have a deductible? To prevent fraud. What is an extension of Coverage? - Answers Additional protections beyond standard policy terms. (Ex. Coverage for additional insureds). What is subrogation? - Answers The insurance company's right to recover costs from a third party responsible for the loss. (Ex. Your insurance company paid your claim for an accident that was not your fault, now your insurance company will go after the insurance company or individual who was at fault to collect payment from them). What is an accident? - Answers An unexpected and unintended event causing a loss or injury. What is the Fair Credit Reporting Act (FCRA)? - Answers A federal law that protects consumers. Requires agents advise consumers before checking credit. It also ensures accurate credit reporting. If a consumer is denied credit, he can request a copy of his credit report from the reporting agency. They can also challenge any inaccurate information in the report. Implied/Expressed Authority - Answers Expressed Authority- The authority given to an agent through the agency agreement (in writing). Clearly defined powers granted to an agent. Implied Authority - Answers Powers assumed necessary to carry out expressed authority. Authority not given in written in writing, but which is understood. What is an insurable interest? - Answers The policyholder's financial stake in the insured item. Declarations/Schedule of benefits - Answers Include: The property covered, The parties to the policy (Insured, Insurer, Lienholder/Mortgagee), The policy number, The policy term (Effective and Expiration dates), The limits of liability, The premium amount, The deductible amount. Insuring Agreement - Answers Defines the insurer's promise to pay for covered losses. States what coverages are provided. Conditions - Answers Duties and obligations of the insured and insurer outlined in the policy. Ex. Insured's duties in the event of a loss, Subrogation rights, Mortgagee's rights. Exclusions - Answers Specific conditions or circumstances that are not covered by the policy. Ex. Drivers may be excluded, Certain perils may be excluded, Standard exclusions include intentional acts, mechanical breakdown, wear and tear. Definition of the insured - Answers Clarifies who is covered under the policy (individuals, entities). What are the duties of the Insured after a loss? - Answers Notify the insurance company as soon as possible of a loss. Cooperate with the insurance company's investigation. Make property available for inspection. Protect the property from further damage. Provide a complete inventory list of damaged property. Submit a sworn Proof of Loss. What is Proof of Loss? - Answers A sworn statement of the facts. A formal statement provided to the insurer detailing the claim. What is an appraisal? - Answers Process to resolve disputes over the value of the loss. Texas Commissioner of Insurance - Answers Regulates the insurance market, ensures compliance, examines records and penalties for violations. The Texas Commissioner of Insurance is the head of the Texas Department of Insurance. Appointed by the governor. The term is for 2 years. Powers and Duties of the Texas Commissioner - Answers Enforces and oversees insurance laws, issues licenses to agents, issues certificates of authority to insurers. Approves insurance policy forms, APPROVES INSURANCE RATES. The commissioner will examine every insurance company's financial records as often as necessary. Certificate of Authority - Answers To sell insurance in Texas every insurance company must obtain a Certificate of Authority from the Texas Department of Insurance. The insurance company is then admitted and authorized to sell insurance in Texas. Transacting Insurance - Answers Engaging in activities related to insurance policies. You must have an insurance license to transact insurance. It includes but is not limited to: Taking an insurance application, selling/soliciting insurance, collecting premiums, receiving or delivering an insurance policy, examining a risk, performing any act, directly and indirectly, related to an insurance policy. Foreign, Domestic, Alien - Answers An insurance company may be incorporated or domiciled in one state but sell insurance in other states. Foreign - Answers Domiciled in a different state. Domestic - Answers Domiciled in same state where it sells insurance. Alien - Answers Domiciled in a different country. Stock companies - Answers Owned by stockholders, and issue shares of stock to raise money. Foreign Insurer - Answers Domiciled in a different state. Domestic Insurer - Answers Domiciled in the same state of operation. Alien Insurer - Answers Domiciled in a different country. Stock Company - Answers Owned by stockholders, aims for profit. Mutual Company - Answers Owned by policyholders, shares surplus profits. Agent Licensing Requirements - Answers Must be 18, pass exam, and be a citizen.