AZ Life and Health Insurance Study Guide (Latest 2024/ 2025 Update) Questions and Verified Answers| 100% Correct
AZ Life and Health Insurance Study Guide
(Latest 2024/ 2025 Update) Questions and
Verified Answers| 100% Correct
Q: Methods of Handling Risk
Answer:
Avoidance, Retention, Sharing, Reduction, Transfer
Q: Risk Retention
Answer:
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
- To reduce expenses and improve cash flow;
- To increase control of claim reserving and claims settlements;
- To fund for losses that cannot be insured.
Q: Risk Sharing
Answer:
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.
Q: Elements/Characteristics of Insurable Risks
Answer: - Due to chance: a loss that is outside the insured’s control.
- 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. - 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.) - 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. - 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.
Q: Adverse Selection
Answer:
the insuring of risks that are more prone to losses than the average risk.
Q: Law of Large Numbers
Answer:
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.
Q: Types of Insurers
Answer:
Stock companies, Mutual companies, Fraternal benefit society, Lloyd’s association, Reciprocals,
Risk Retention Groups, Captive Insurance Companies
Q: Stock companies
Answer:
.owned by the stockholders;
.issue non-participating policies;
.pay taxable dividends to stockholders but not policyowners.
Q: Mutual companies
Answer:
.owned by the policyowners;
.issue participating policies;
.Policyowners are entitled to non-taxable dividends, treated as a return of excess premiums.
Q: Fraternal Benefit Society
Answer:
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.
Q: Lloyd’s Associations
Answer:
Lloyd’s association is not an insurance company. Lloyd’s provides support facilities for
underwriters or groups of individuals that accept insurance risk.
Q: Captive Insurance Companies
Answer:
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.
Q: Reciprocals
Answer:
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.
Q: Risk Retention Group
Answer:
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.
Q: Authorized Insurers
Answer:
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.
Q: Domestic, Foreign and Alien Insurers
Answer:
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.
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Agent/Producer a legal representative of an insurance company
Applicant/Proposed Insured A person applying for insurance
Beneficiary A person who receives the benefits of an insurance policy
Broker An insurance producer not appointed by an insurer and is deemed to represent the client
Indemnity Main principle of insurance, meaning that the insured cannot recover more than their loss; the purpose of insurance is to restore the insured to the same position as before the loss
Insurance Policy A contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events
Insured The person covered by the insurance policy. This person may or may not be the policyowner
Insurer (Principal) The company who issues an insurance policy
Law of Large Numbers The larger the number of people with a similar exposure to loss, the more predictable actual losses will be
Policyowner The person entitled to exercise the rights and privileges in the policy
Premium The money paid to the insurance company for the insurance policy
Reciprocity/Reciprocal A mutual interchange of rights and privileges
Risk The uncertainty or chance of a loss occurring
Pure Risk Situations that can only result in a loss or no change. There is no opportunity for financial gain. This is the only type of risk that insurance companies are willing to accept
Speculative Risk The opportunity for either loss or gain. These types of risks are not insurable
Hazards Conditions or situations that increase the probability of an insured loss occurring
Physical Hazards Those arising from the material, structural, or operational features of the risk, apart from the persons owning or managing it
Moral Hazards Refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer
Morale Hazards Refers to an increase in the hazard presented by a risk, arising from the insured’s indifference to loss because of the existence of insurance
Peril Causes of loss insured against in an insurance policy
Loss The reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril
Exposure A unit of measurement used to determine rates charged for insurance coverage
Avoidance Eliminating exposure to a loss
Retention The planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance
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
Reduction The attempt to lessen the possibility or severity of a loss such as installing smoke detectors, or having an annual physical
Transfer The most effective way to handle risk is to transfer it so that the loss is borne by another party. A way to do this is to purchase insurance
Elements of Insurable Risks Due to chance, definite and measurable, statistically predictable, not catastrophic, randomly selected and large loss exposure
Due to Chance A loss that is outside the insured’s control
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
Statistically Predictable Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates
Not Catastrophic Insurers need to be reasonably certain their losses will not exceed specific limits
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
Stock Companies Owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses
Mutual Companies Owned by the policyowners and issue participating policies
Fraternal Benefit Societies An organization formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government
Lloyd’s Associations Provides support facilities for underwriters or groups of individuals that accept insurance risk
Government Insurers Federal and state governments provide insurance in the areas where private insurance is not available. Government programs include Social Security, Medicare, Medicaid, Federal Crop insurance and National Flood insurance
Private vs. Gov Insurance Government programs are funded with taxes and serve national and state social purposes, while private policies are funded by premiums
Express Authority The authority a principal intends to grant to an agent by means of the agent’s contract
Implied Authority The authority that is not expressed or written into the contact, but which the agent is assumed to have in order to transact business of insurance for the principal
Apparent Authority Also known as perceived authority is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created
Elements of a Legal Contract Agreement (offer and acceptance), consideration, competent parties, and legal purpose
Offer and Acceptance There must be a definite offer by one party, and the other party must accept this offer in its exact terms. In insurance, the applicant makes the offer when submitting the application, and acceptance takes place when an insurer’s underwriter approves the application and issues a policy
Consideration Something of value that each party gives to the other
Competent Parties The parties to a contract must be capable of entering into a contract in the eyes of the law
Legal Purpose The purpose of the contract must be legal and not against public policy
Aleatory Exchange of unequal values
Unilateral One-sided (only one party makes a promise
Adhesion Only one party (insurer) prepares a contract, and the other party (insured) accepts it as it is
Conditional Contract Requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations
Indemnity A provision in an insurance policy that states that in the event of a loss, an insured is permitted to collect only to the extent of the financial loss
Utmost Good Faith Implies that there will be no fraud, misrepresentation, or concealment between the parties
Representations Statements believed to be true to the best of one’s knowledge, but they are not guaranteed to be true
Warranty An absolutely true statement upon which the validity of the insurance policy depends
Concealment The legal term for the intentional withholding of information of a material fact that is crucial in making a decision
Recission When an insurance applicant intentionally fails to communicate information that the insurer needs, the insurer has the right to cancel the policy even if the failure is discovered after the policy was issued
Fraud The intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract
Waiver The voluntary act of relinquishing a legal right, claim, or privilege
Estoppel A legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right has been waived
Depreciation reduction in value, particularly due to wear and tear
Earned Premium The portion of premium paid in advance that now belongs to the insurer for providing coverage for a specified period of time
Exposure Units Used as a measure of the rating units or the premium base of a risk (exposure units multiplied by the rate results in the premium)
Implied Warranty A legal term meaning that a product is suitable for its intended purpose and that it fits an ordinary buyer’s expectations
Inception The date at which the insurance policy goes into effect
Negligence The failure to use the care that a reasonable, prudent person would under the same or similar circumstances
Obsolescence Depreciation in the value of a property due to becoming outdated
Statute A written law passed by a legislative body
Insurable Interest The financial interest in property to be insured. This exists at the time of loss
Underwriting The process of reviewing applications for insurance and the information on the application. It is a risk selection process
Loss Ratio (Incurred losses + loss adjusting expense) / earned premium
Geographic Redlining The practice of refusing to serve a particular area solely because of its location or because it is served by a volunteer fire department
Insurance Risk/Credit Score A point system used by insurance underwriters to predict risk and possibility of claims, and determine charges for premiums
Rates The amount charged for a particular amount of coverage
Class/Manual Rating The practice of computing a price per unit of insurance that applies to all applicants possessing a given set of characteristics
Judgement Rating Used when credible statistics are lacking or when the exposure units are so varied that it is impossible to construct a class
Schedule Rating Rates are developed by applying a schedule or charges and credits to some base rate to determine the appropriate rate for an individual exposure
Experience Rating The insured’s own past loss experience enters into the determination of the final premium
Retrospective Rating A self-rating plan under which the actual losses during the policy period determine the final premium, subject to a minimum and maximum premium
Merit Rating The insured’s premium is based not on the actual loss record, but on other factors that indicate the probability that loss will occur
Loss Costs A rating method developed by ISO that provides an insurer with that portion of a rate that does not include provisions of expenses or profit
Components Factors that determine rates including loss reserves, loss adjusting expenses, operating expenses, and profts
Elements of a Negligent Act Legal duty, standard of care, unbroken chain of events, and actual loss or damage
Legal Duty It must be shown that the defendant had a legal duty to act or not to act
Standard of Care The defendant must have used a standard of care that breaches that legal duty. Standard of care implies acting as a reasonable person would act
Proximate Cause An act or event considered a natural and reasonably foreseeable cause of the damage or event that occurs and damages property or injures a plaintiff
Comparative Negligence The other party’s negligence or fault will not necessarily defeat the claim, but will be used to mitigate the damages payable to the other party
Contributory Negligence The injured party must be completely free of fault in order to collect
Intervening Cause Any event in an accident that happened after the insured’s negligent act and contributed to or enhanced an injury of another person or property damage
Types of Compensatory Damages Special damages and general damages
Special Damages Specific out-of-pocket expenses for medical, miscellaneous expenses, and loss of wages
Punitive Damages A form of punishment for extreme outrageous behavior, gross negligence, or willful intent
Absolute Liability Imposed upon a person or company engaged in hazardous or potentially dangerous business, who, by negligence or by an omission, causes harm or injury to another person or property
Strict Liability A person or business that manufactures or sells a product makes an implied warranty that the product is safe. The business is then liable for defective products, regardless of fault or negligence
Vicarious Liability Legal doctrine under which a party can be held liable for the wrongful actions of another party
Named Peril Describes the breadth of coverage provided under an insurance policy form that lists specific covered perils
Open Peril Describes the breadth of coverage provided under an insurance policy form that insures against any risk of loss that is not specifically exclulded
Direct Loss Direct physical damage to buildings and/or personal property
Consequential/Indirect Loss Losses considered a result of direct loss. Such losses usually result from the time it takes to repair or replace damaged property