Fundamentals to Insurance| 404 QUESTIONS| WITH COMPLETE SOLUTIONS
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Course
Fundamentals to Insurance
Institution
Georgia State University
List the 5 functions of insurance:
1) Spread of risk
2) Basis of credit system
3) Eliminate worry and develop entrepreneurship
4) Loss reduction and prevention (road safety, alarms, etc.)
5) Employment opportunity
Definition of insurance (3 parts)
1) insurance provides a means of shift...
fundamentals to insurance| 404 questions| with complete solutions
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Georgia State University
Fundamentals to Insurance
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Fundamentals to Insurance| 404 QUESTIONS| WITH
COMPLETE SOLUTIONS
List the 5 functions of insurance: Correct Answer: 1) Spread of risk
2) Basis of credit system
3) Eliminate worry and develop entrepreneurship
4) Loss reduction and prevention (road safety, alarms, etc.)
5) Employment opportunity
Definition of insurance (3 parts) Correct Answer: 1) insurance provides a means of shifting ones
financial responsibility from a loss to another party
ii) payment will be made only in the event of the happening of a certain risk or peril
iii) the amount of the payment is restricted to the amount required to indemnify the insured
5 points of insurance Correct Answer: 1) Shift financial responsibility for a loss
2) payment made only in the event of a loss
3) Payment restricted to amount to indemnify (no more, no less)
4) Cover loss to which object of insurance may be exposed (accidental and future)
5) Indemnify in form of money or other thing of value (rebuild/repair)
3 types of property and casualty insurance Correct Answer: Auto, property (home and business),
and liability (injury or damage to a third party)
What are the 2 major types of insurers and provide an example for each Correct Answer: Private
(stock profit or mutual policy holder), or government (ICBC, employment insurance)
What is the difference between mutual companies and stock companies? Correct Answer: Stock
- main purpose is to derive a profit, ownerships in the hand of the company's shareholder. Money
to operate comes from private funds and public sales of stock
Mutual - main purpose is to provide insurance at the lowest cost possible, corporation owned by
policy holders, money made goes to policyholders
What is known as the major function of insurance? Correct Answer: Spread of the losses of the
few among the many
Where is the definition of insurance usually found Correct Answer: The Insurance Act
Define peril Correct Answer: Cause of loss
Define risk Correct Answer: Chance of loss to which the object of insurance is exposed
At what point in time is indemnity calculated? Correct Answer: Moments before the loss
What two factors regarding losses must be present for them to be insured? Correct Answer:
Future and accidental
,Who retains the option to repair or replace damaged property rather than pay cash settlements?
Correct Answer: Insurer
Main purpose of stock companies? Correct Answer: Profit maximization
Identify the two main distribution methods used by insurers for their products Correct Answer:
Direct writers (work for one insurance company) and independent brokers (work for multiple
insurance companies - can offer multiple options for insurance, not limited)
Major function of insurance is to: Correct Answer: Share losses of the few among the many
Does insurance allow payment to be in another form than money? Correct Answer: Yes,
replacement or repair
Chapter 2 - Insurance Contracts Correct Answer:
There are 4 ways changes can be made to a policy. What are the 4 ways? Correct Answer: 1)
Rider (adding additional coverage)
2) Floater (provides coverage for items not on the insured premise)
3) Endorsement (acknowledges changes in the actual contract)
4) Separate policy (additional coverage, but no change in the original contract - new policy
altogether)
4 ways to deal with risk Correct Answer: 1) Avoidance (don't buy the car in the first place)
2) Controlling (car alarms)
3) Retention (increase in deductible or putting money aside)
4) Transfer (buying insurance)
3 categories of risk insurance Correct Answer: Personal (health, anything directly affecting
you), property (house, care), and liability (3rd party)
Define contract Correct Answer: An agreement between two or more parties, enforceable at law
What are the 2 kinds of risk? Which one is not insurable? Correct Answer: Pure risk (no chance
for profit gain, insurable), and speculative (chance for profit or loss, for example gambling or
starting a new business, not insurable)
Identify four options people have when dealing with risk Correct Answer: Avoidance, risk
control, retention, transfer
What type of risk control reduces loss frequency? Correct Answer: Loss prevention
Which method of dealing with losses and risk is most practical? Correct Answer: Insurance
What type of risk is insurable? Correct Answer: Pure risk
,Identify 5 elements that must be present in all contracts Correct Answer: Agreement (offer and
unconditional acceptance), consideration (exchange of something of value), legality of object
(not illegal), legal capacity of the parties (not children, not mentally incompetent), genuine
intention (no inducement, needs to be intended)
What is consideration? Correct Answer: Exchange of something of value
3 unique elements of insurance contracts Correct Answer: Insurable interest (insured person
derives a financial or other kind of benefit), indemnity (no more no less), utmost good faith
(honest, trust each other)
What are binders? Correct Answer: Temporary insurance placed by brokers on behalf of clients,
written or oral commitment by the broker to provide a contract of insurance on the subject matter
under discussion
How are endorsements different than riders? Correct Answer: Endorsements are extra sheets or
slips of paper that change the terms of an existing contract. Riders add additional coverage to
those already in place - to have a rider you must endorse the contract
Who would not have insurable interest?
Business partner
Heir or beneficiary
Bailee
Mortgagee Correct Answer: Heir or beneficiary
Property with a high degree of mobility associated with it is generally insured under a: Correct
Answer: Floater
Chapter 3 - The Role of Government in Insurance Correct Answer:
What is solvency, how is it different than insolvency? Correct Answer: Solvency is when
insurers are capable of fulfilling their financial obligations. If they are unable to meet these
obligations, they are insolvent
What 3 things does the basic fire policy cover? Correct Answer: Fire (hostile), lightning, and
explosion due to natural gas, coal and manufactured gas
Define fiduciary Correct Answer: One who handles other people's money insurers and brokers
are both fiduciaries
3 conditions (rules) of removal coverage change - 3 conditions when someone needs to move
their insured property Correct Answer: 1) Removed to protect from future or further loss
2) Amount of coverage is whatever is left over
3) Up to 7 days of coverage maximum (or expiry of policy, whichever is first)
, What are the 6 contents of insurance policies legislated? (first page of policy - declaration)
Correct Answer: 1) Parties to the contract
2) Policy period (policy takes effect art 12:01Am local time at the address of the name insured)
3) Loss payable (mortgagee)
4) Type of coverage and amount
5) Rate and premium
6) Subject matter (what is being insured)
What is the fiduciary responsibility of insurers? When is the full premium earned? Correct
Answer: To clients. Premium not fully earned until expiry of policy
What is the role of the property and casualty insurance compensation corporation (PACICC)
what up to what monetary value will they pay out if required? Correct Answer: PACICC
provides insurers protection in case of insolvency (bankruptcy). They will pay up to $250,000 for
single claim or 70% in premiums
Why must unearned premiums be held in trust by the insurance company? Correct Answer: In
order to refund to the clients when they cancel prior to expiry (pro rata)
3 components of the removal clause: Correct Answer: 1) Coverage provided when property is
removed to protect it from further loss
2) Coverage amounts are the remaining coverage after loss at named location
3) Coverage provided for 7 days or the unexpired term of policy, whichever is less
Right of subrogation Correct Answer: Right of insurer to go after 3rd parties for damage they
had to pay to client in claim
What are 2 kinds of fires and which type is insurable? Correct Answer: Friendly and hostile,
only hostile is insurable
Is what situations may a new party benefit from a policy of insurance? ie. not named on the
policy itself (4) Correct Answer: Authorized assignment in the bankruptcy act, change in title
due to succession (inheritance), operation of law, or death
What methods may insurers use to cancel fire policies? (to provide notice) Correct Answer: 15
days notice by registered letter, 5 days notice when personally delivered
Solvency refers to Correct Answer: Ability of an insurer to pay insured losses
What is a major fiduciary responsibility placed on brokers by law? Correct Answer: Unearned
commissions must be held in trust to refund to the insured in the event the policy is cancelled
prior to expiry date
When does insurance coverage commence? Correct Answer: 12:01 am standard time at the
address of name insured
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