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AZ Life & Health Insurance Exam questions with Verified Answers
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AZ Life & Health Insurance Examquestions with Verified Answers
Insurance - -a contract in which one party (the insurance company) agrees
to indemnify (make whole) the insured party against loss, damage or liability
arising from an unknown event. Insurance transfers the risk of loss from an
individual or business entity to an insurance company, which in turn spreads
the costs of unexpected losses to many individuals.
-Exceptions to insurance in AZ - -Private ambulance service contracts or
private fire protection service contracts; Charitable gift annuities; or Collision
damage waivers.
-Risk - -the uncertainty or chance of a loss occurring.
-Types of Risk - -1. Pure risk refers to situations that can only result in a loss
or no change. There is no opportunity for financial gain. Pure risk is the only
type of risk that insurance companies are willing to accept.
2. Speculative risk involves the opportunity for either loss or gain. An
example of speculative risk is gambling. These types of risks are not
insurable.
-Exposure - -a unit of measure used to determine rates charged for
insurance coverage.
-Exposures for Life Insurance - -The age of the insured; Medical history;
Occupation; and Sex.
-Homogenous - -A large number of units having the same or similar
exposure to loss. The basis of insurance is sharing risk among the members
of a large homogeneous group with similar exposure to loss.
-Hazards - -conditions or situations that increase the probability of an
insured loss occurring.
-Types of Hazards - -physical hazards, moral hazards, or morale hazards
-Physical Hazards - -individual characteristics that increase the chances of
the cause of loss. Physical hazards exist because of a physical condition, past
medical history, or a condition at birth, such as blindness.
-Moral Hazards - -tendencies towards increased risk. Moral hazards involve
evaluating the character and reputation of the proposed insured. Ex. past
history of fraudulent claims.
, -Morale Hazards - -similar to moral hazards, except that they arise from a
state of mind that causes indifference to loss, such as carelessness.
-Perils - -the causes of loss insured against in an insurance policy.
1. Life insurance insures against the financial loss caused by the premature
death of the insured;
2. Health insurance insures against the medical expenses and/or loss of
income caused by the insured's sickness or accidental injury;
3. Property insurance insures against the loss of physical property or the loss
of its income-producing abilities;
4. Casualty insurance insures against the loss and/or damage of property
and resulting liabilities.
-Loss - -the reduction, decrease, or disappearance of value of the person or
property insured in a policy, caused by a named peril. Insurance provides a
means to transfer loss.
-Methods of Handling Risk - -Avoidance, Retention, Sharing, Reduction,
Transfer
-Risk Retention - -the planned assumption of risk by an insured through the
use of deductibles, co-payments, or self-insurance. It is also known as self-
insurance when the insured accepts the responsibility for the loss before the
insurance company pays. The purpose of retention is
1. To reduce expenses and improve cash flow;
2. To increase control of claim reserving and claims settlements;
3. To fund for losses that cannot be insured.
-Risk Sharing - -a method of dealing with risk for a group of individual
persons or businesses with the same or similar exposure to loss to share the
losses that occur within that group. A reciprocal insurance exchange is a
formal risk-sharing arrangement.
-Elements/Characteristics of Insurable Risks - -1. Due to chance: a loss that
is outside the insured's control.
2. Definite and measurable: a loss that is specific as to the cause, time, place
and amount. An insurer must be able to determine how much the benefit will
be and when it becomes payable.
3. Statistically predictable: Insurers must be able to estimate the average
frequency and severity of future losses and set appropriate premium rates.
(In life and health insurance, the use of mortality tables and morbidity tables
allows the insurer to project losses based on statistics.)
4. Not catastrophic: Insurers need to be reasonably certain their losses will
not exceed specific limits. That is why insurance policies usually exclude
coverage for loss caused by war or nuclear events: There is no statistical
,data that allows for the development of rates that would be necessary to
cover losses from events of this nature.
5. Randomly selected and large loss exposure: There must be a sufficiently
large pool of the insured that represents a random selection of risks in terms
of age, gender, occupation, health and economic status, and geographic
location.
-Adverse Selection - -the insuring of risks that are more prone to losses
than the average risk.
-Law of Large Numbers - -the larger the number of people with a similar
exposure to loss, the more predictable actual losses will be. This law forms
the basis for statistical prediction of loss upon which insurance rates are
calculated.
-Types of Insurers - -Stock companies, Mutual companies, Fraternal benefit
society, Lloyd's association, Reciprocals, Risk Retention Groups, Captive
Insurance Companies
-Stock companies - -.owned by the stockholders;
.issue non-participating policies;
.pay taxable dividends to stockholders but not policyowners.
-Mutual companies - -.owned by the policyowners;
.issue participating policies;
.Policyowners are entitled to non-taxable dividends, treated as a return of
excess premiums.
-Fraternal Benefit Society - -an organization formed to provide insurance
benefits for members of an affiliated lodge, religious organization, or
fraternal organization with a representative form of government. Fraternals
sell only to their members and are considered charitable institutions, and not
insurers. They are not subject to all of the regulations that apply to the
insurers that offer coverage to the public at large.
-Lloyd's Associations - -Lloyd's association is not an insurance company.
Lloyd's provides support facilities for underwriters or groups of individuals
that accept insurance risk.
-Captive Insurance Companies - -are organized and owned by a corporation
or firm to serve the parent organization's insurance needs at lower rates
than other insurers and without the uncertainties of commercial insurance.
-Reciprocals - -insurance resulting from an interchange of reciprocal
agreements of indemnity among persons known as subscribers, collectively
known as a Reciprocal Insurance Company or Exchange. The company is put
, into effect and administered through an attorney-in-fact common to all
persons. Subscribers agree to become liable for their share of losses and
expenses incurred among all subscribers, and they authorize the attorney-in-
fact to manage and operate the exchange.
-Risk Retention Group - -a liability insurance company owned by its
members. The members are exposed to similar liability risks by virtue of
being in the same business or industry. The purpose of a risk retention group
is to assume and spread all or part of the liability of its group members. A
risk retention group may reinsure another risk retention group's liability as
long as the members of the second group are engaged in the same or similar
business or industry.
-Authorized Insurers - -An admitted or authorized insurer is an insurance
company that has qualified and has received a Certificate of Authority from
the Department of Insurance to transact insurance in the state.
-Domestic, Foreign and Alien Insurers - -A domestic insurer is an insurance
company that is incorporated in this state. A foreign insurer is an insurance
company that is incorporated in another state or territorial possession (such
as Puerto Rico, Guam or American Samoa). An alien insurer is an insurance
company that is incorporated outside the United States.
-Marketing (Distribution) Systems - -Independent Agency System/American
Agency System; Exclusive Agency System/Captive Agents; General Agency
System; Managerial System; Direct Response Marketing System
-Independent Agency System/American Agency System - -.1 independent
agent represents several companies
.Nonexclusive
.Commissions on personal sales
.Business renewal with any company
-Exclusive Agency System/Captive Agents - -.1 agent represents 1 company
.Exclusive
.Commissions on personal sales
.Renewals can only be placed with the appointing
insurer
-General Agency System - -.General agent-entrepreneur represents 1
company
.Exclusive
.Compensation and commissions
.Appoints subagents
-Managerial System - -.Branch manager (supervises agents)
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