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Recap of Chapter One

  1. The State Commissioner, Director, or Superintendent of Insurance serves as the chief insurance regulator and has the authority to issue rules and regulations necessary to enforce state insurance laws. (1.1)

  2. A stock insurance company is owned by its shareholders and typically issues nonparticipating policies. Shareholders may receive taxable corporate dividends when declared by the board of directors. (1.2)

  3. A mutual insurance company is owned by its policyholders and generally issues participating policies. Policyholders may receive dividends, which are typically treated as a return of divisible surplus rather than taxable corporate profit. (1.2)

  4. Reinsurance is the transfer of risk from one insurance company to another. The reinsurer assumes part or all of the risk originally accepted by the ceding (primary) insurer. (1.3)

  5. Domicile refers to the state or country in which an insurer is incorporated. A domestic insurer is incorporated in the state where it operates; a foreign insurer is incorporated in another U.S. state; and an alien insurer is incorporated in a country outside the United States. (1.4)

  6. An admitted insurer is authorized to conduct insurance business in a particular state and has been granted a Certificate of Authority by the state's Department of Insurance. (1.4)

  7. The underwriting department is responsible for evaluating and selecting risks and determining the appropriate premium rate for the coverage issued. (1.5)

  8. Under the Direct Writing System, the agent is typically an employee of the insurer, and the insurer owns the book of business. Under the Independent Agency System, the producer contracts with multiple insurers, is appointed by more than one company, and retains ownership of the book of business. (1.5)

  9. The Law of Agency defines the relationship in which a principal authorizes an agent to act on its behalf in conducting insurance business. Actions taken by the agent within the scope of authority are legally binding on the principal. (1.6)

  10. Express authority is specifically granted in the agency contract; implied authority is reasonably necessary to carry out express authority; and apparent authority exists when a third party reasonably believes the agent has authority due to the insurer's actions or inactions. (1.6)

  11. The Fair Credit Reporting Act (FCRA) protects consumer privacy by requiring that information collected by insurers be confidential, accurate, relevant, and used only for legitimate purposes. (1.7)

  12. Risk is the possibility or probability that a loss may occur. (1.8)

  13. A peril is the direct cause of a loss. (1.8)

  14. A hazard is a condition that increases the likelihood or severity of a loss. The three types of hazards are physical, moral, and morale. (1.8)

  15. The principle of indemnity provides that the insured should be restored to the same financial condition that existed prior to the loss and should not profit from the occurrence. (1.9)

  16. In property and casualty insurance, insurable interest must exist at the time of loss. In life insurance, insurable interest must exist at the time of application and policy issuance. (1.9)

  17. An insurance contract is a contract of adhesion because it is drafted by the insurer and presented to the insured on a “take-it-or-leave-it” basis. (1.10)

  18. Common underwriting factors used to determine premium include age, gender, tobacco use, medical history, hazardous hobbies, and hazardous occupations. (1.11)