RMI 200 Exam 2 Chapters 8-10

Question Answer
What are the reasons for Insurance Regulation? Maintain insurer solvency, compensate for inadequate consumer knowledge, ensure reasonable rates, make insurance available
Maintain insurer solvency insurance is a long term promise to pay-protect policyholders- complicated business
Compensate for inadequate consumer knowledge contracts are complicated, coverages are hard to understand, info can be hard to come by and when it is available it can be complicated
Ensure reasonable rates rates need to be adequate but not excessive and not unfairly discriminatory
Make insurance available influence/push market
Methods for regulating insurers Legislation, court decisions, state insurance departments
What areas are regulated? Formation and licensing of insurers, solvency regulation, rate regulation, policy forms, sales practices and consumer protection, taxation of insurers
domestic insurer licensed and domiciled in the state
foreign insurer an out of state insurer that is chartered by another state, but licensed to operate in the state
alien insurer is an insurer that is chartered by a foreign country, but is licensed to operate in the state
admitted assets assets that an insurer can show on its statutory balance sheet in determining its financial condition
Reserves states have regulations/requirements that address the calculation of reserves
policyholder surplus an insurer's policyholder surplus position is carefully monitored by state regulators
risk-based capital- life and health must meet certain RBC standards, hold a certain amount of capital, depends on asset risk
risk-based capital- property and casualty an insurer's RBC depends on asset risk, penalties for falling short of minimum surplus
Investment Oversight/ Regulation prevent insurers from making unsound investments that could threaten the company's solvency and harm the policy holders, types of investments, quality of investments and the concentration of investments are addressed
Dividend oversight/ regulation many states limit the amount of surplus a participating life insurer can accumulate
reports and examinations each insurer must file an annual statement w/ the state insurance department in the states where it does business
Liquidation of insurers supervision, rehabilitation, insolvency, the state insurance department assumes control of insurance companies that they determine to be financially impaired. All states have guaranty funds, guaranty laws, and guaranty associations t
assessment method whereby insurers are assessed is the major method used to raise necessary funds to pay unpaid claims
rate regulation takes a variety of forms across different states, prior approval law, modified approval law, file and use law, use and file law, flex rating law, state made rates, no filing required
Policy forms state insurance commissioners have the authority to approve or disapprove new policy forms before the contracts are sold to the public
Sales practices regulated by the laws concerning the licensing of agents and brokers
Twisting the inducement of a policyholder to drop an existing policy and replace it with a new one that provides little or no economic benefit to the client
rebating the practice of giving an individual a premium reduction or some other financial advantage not stated in the policy as an inducement to purchase the policy
Complaints state insurance departments typically have a complaint division for handling consumer complaints
publications info is provided to consumers on insurance department websites and in brochures
taxation insurers pay numerous local, state, and federal taxes
Optional federal charter proposals would allow insurers to choose either a federal or state charter
Market conduct refers to the marketing practices of insurers and agents that involve interaction with insureds, claimants, or consumers
Indemnity the insurer agrees to pay no more than the actual amount of the loss
two fundamental purposes of indemnity 1) to prevent the insured from profiting from a loss, to reduce moral hazard (dishonest people)
Actual cash value in property insurance, indemnification is based on this
Three main methods to determine actual cash value replacement cost, fair market value, broad evidence rule
Fair market value the price a willing buyer would pay a willing seller in a free market
Broad evidence rule means that the determination of ACV should include all relevant factors
Property insurance different methods apply for different lines of business
Liability insurance insurer pays damages that the insured is legally obligated to pay
Business interruption the amount paid is usually lost profits plus continuing expenses
life insurance when someone dies the fact amount of the policy is paid
Exceptions of ACV a valued policy, valued policy law, face amount, real property, replacement cost insurance
Valued policy pays the face amount of insurance if a total loss occurs
valued policy law requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law
replacement cost insurance there is no deduction for depreciation in determining the amount paid for a loss
Principle of insurable interest purposes prevent gambling, reduce moral hazard, measure of the amount of the insured's loss in property insuance
When must insurable interest exist? Property insurance- at the time of the loss, life insurance- only at the inception of the policy
Insurable interest the insured must be in a position to lose financially
For P & C an insurable interest can be supported by ownership of property, potential legal liability, contractual rights
Principle of subrogation substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance
Purposes of Subrogation 1) to prevent the insured from collecting twice for the same loss, 2) to hold the negligent person responsible for the loss, 3) to hold down insurance rates
Principle of Utmost Good Faith a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts
Utmost good faith is supported by three legal doctrines representations, concealment, warranty
representations statements made by the applicant for insurance
Concealment the intentional failure of the applicant for insurance to reveal a material fact to the insurer
warranty a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects
To be legally enforceable an insurance contract must meet four requirements 1) Offer and acceptance of the terms of the contract, consideration, competent parties, legal purpose
Consideration the value that each party gives to the other (premium)
Competent parties both parties have legal capacity to enter into a binding contract
Distinct legal characteristics of insurance contracts Aleatory, Unilateral, Conditional
Aleatory values exchanged are not equal but depend on an uncertain event
Unilateral only the insurer makes a legal enforceable promise
Conditional policyholder must comply with all policy provisions to collect for a covered loss
Personal contract cannot be validly assigned to another party without the insurer's consent
Contract of adhesion the insured must accept the entire contract with all of its terms and conditions
Principle of reasonable expectations states that an insured is entitled to coverage under a policy that he or she reasonably expects it to provide
Agent someone who has the authority to act on behalf of a principal (the insurer)
Agents authority comes from three sources 1) express authority, 2) implied authority, 3) apparent authrity
Express authority powers specifically conferred on the agent
Implied authority the authority to perform all incidental acts necessary to fulfill the authority granted in the agency agreement
apparent authority if the agent acts with apparent authority, the principal can be bound unless they do something to reign this in
Waiver if an application is incomplete but is accepted, the insurer cannot deny payment based on the fact that the app was incomplete
Estoppel the loss of a legal defense because of previous actions that are now inconsistent with that defense
Example of estoppel if the agent assures an applicant that a condition does not have to be disclosed then the insurer could be estopped from denying coverage due to the non-disclosure of the condition
Basic parts of an insurance contract 1) declarations, 2) definitions 3) insuring agreements, 4) Exclusions, 5) conditions, 6) miscellaneous provisions
declarations are statements that provide info about the particular property or activity to be insured
definitions contracts contain a page of this with the purpose of clearly defining key words or phrases
insuring agreements the heart of the contract, summarizes the major promises of the insurer
2 basic forms of an insuring agreement in property insurance 1) Named perils coverage policy 2) open perils coverage policy
Named perils only those perils specifically named in the policy are covered
open perils where are losses are covered except those losses specifically excluded
exclusions excluded perils, excluded losses, excluded property
conditions provisions in the policy imposing duties on the insured that qualify or place limitations on the insurer's promise to perform
miscellaneous provisions insurance policies contain a variety of these
why are exclusions necessary? 1) Some perils not commercially insurable, 2) Extraordinary hazards present, 3) Coverage provided by other contracts, 4) Moral hazard problems or difficulty in measuring loss 5) Attitudinal hazard problems 6) Coverage not needed by typical insureds
Named insured person or persons named in the declarations section of the policy
two named insured the first name insured has certain additional rights and responsibilities
endorsement a written provision that adds to, deletes from, or modifies the provisions in the original contract
rider a provision that amends or changes the original policy
Deductible a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable
Purpose of deductibles Eliminate small claims, reduce premiums paid by the insured, reduce moral hazard and attitudinal
Straight deductible the insured must pay a certain number of dollars of loss before the insurer is required to make a payment
aggregate deductible means that all losses that occur during a specified time period, usually a year, are accumulated to satisfy the deductible amount
Calendar- year deductible type of aggregate deductible that is found in basic medical expense and major medical insurance contracts
elimination (waiting) period a stated period of time at the beginning of a loss during which no insurance benefits are paid
Coinsurance clause in a property insurance contract encourages the insured to insure the property to a stated percentage of its insurable value
what is the fundamental purpose of coinsurance to achieve equity in rating
coinsurance clause requires the insured to pay a specified percentage of covered medical expenses in excess of the deductible
Pro rata liability each insurer's share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property
contribution by equal shares each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy
primary and excess insurance provision the primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted
coordination of benefits provision in group health insurance is designed to prevent over- insurance and the duplication of benefits if one person is covered under more than one group health insurance plan
The Birthday rule the plan of the parent w the earlier birthdate responds as primary for dependent child, the other plan is excess.

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