California Insurance Exam Questions And
Answers
Two methods of determining insurance need:
- Human Life Approach
- Needs Approach
Human Life Value Approach~
- One of two ways of calculating insurance need.
- By discounting estimated future income
- Calculating the amount of life insurance a family will need based on the financial loss that they will
suffer if the insured person were to pass away today
- 10X salary
- Based on age, gender, planned retirement age, occupation, annual wage, employment benefits, as
well as the personal and financial information of the spouse and/or dependent children.
*Needs Approach
Ask yourself:
1. How much will be needed at death to meet obligations.
2. How much future income is needed to sustain the household.
- Focuses on the financial needs of the family
- Considers final expenses
- Considers disability income
- Consideres monthly income
Main list of private insurance companies
- Stock insurers
- Mutual insurers
- Lloyd's of London
- Reinsurers
- Risk retention groups
- Fraternal benefit societies
- Home service insurers
Government supplied insurance
- OASDI (Social Security)
- Medicare
- Medicaid
- Military plans (SGLI & VGLI)
Lloyd's of London
- Take greater risks and charge larger premiums.
- A British insurance and reinsurance marketplace
- Come together to pool and spread risk
Reinsurers
Companies that take part of the risk of insurance companies. (The company that is taking a part of the
risk)
Ceding Company
,The company that is transferring the risk
Risk retention group
A mutual company formed to cover a bunch of people in the same occupation.
Fraternal benefit society
Membership groups that are created for membership to purchase insurance and gain other benefits.
Home service insurers
- Sell low dollar value policies (e.g. $1000/$2000 of face amount)
- Paid for by bank draft of check sent in by mail
Insurance is sold through
Career agents
Brokers
Aka Producers (independent insurance agents)
Agent
- Sells the company's products to the public
- When someone becomes an agent, they become a "field underwriter"
- Develops base for long-term sources of clients by using referrals, occupational, and special-interest
groups to compile lists of prospects.
- Approaches potential clients by utilizing mailings and phone solicitation; making presentations to
groups at company-sponsored gatherings; speaking publicly to community groups on the subject of
financial well-being.
- Determines clients' particular needs and financial situations by scheduling fact-finding
appointments; determining extent of present coverage and investments; ascertaining long-term
goals.
- Develops a coordinated protection plan by calculating and quoting rates for immediate coverage
action and long-term strategy implementation.
- Obtains underwriting approval by completing application for coverage.
- Completes coverage by delivering policy; planning future follow-up visits and evaluations of needs.
- Provides continuing service by providing direct deposit forms; processing changes in beneficiary and
policy loan applications.
- Provides death benefits by delivering policy proceeds; reassessing client needs.
- Updates job knowledge by participating in educational opportunities; reading professional
publications; maintaining personal networks; participating in professional organizations.
- Enhances insurance agency reputation by accepting ownership for accomplishing new and different
requests; exploring opportunities to add value to job accomplishments.
Brokers
- Represents the people and finds a company to insure them
- Assist prospective insureds with developing risk management strategies appropriate to their risk
profiles.
- *Cannot legally bind insurance
- Represents the client in purchasing the insurance product
*Vending Machines~
- Direct selling
- (A method of distribution)
,- Generally limited to travel accident insurance , supplemental health or disability policies, or life
insurance policies with a small face amount.
*Mass marketing~
- A client interacts with an agent by phone or e-mail. Trying to get a number of people at one time to
purchase insurance.
- It reaches insureds who generally have no access to their own brokers or agents.
- It also brings the policies to the insureds usually at lower prices than those charged in one-on-one
sales because it reduces the "middleman" cost of agents.
- *Direct response / direct mail.
- A system that does not use an agent
*Paul vs Virginia
State would be in charge of the insurance industry
*US vs SE Underwriters Association
Federal government in charge of the insurance industry
*McCarran Ferguson Act
Return supervisory power to the states
*Fair Credit Reporting Act
- Provides that the applicant for insurance be informed that a consumer report may be requested
- A federal provision that requires privacy of a client's information
- Designed to promote accuracy, fairness, and privacy of information in the files of every "consumer
reporting agency"
- You must be told if information in your file has been used against you.
- You can find out what is in your file.
- You can dispute inaccurate information with the CRA.
- Inaccurate information must be corrected or deleted.
- You can dispute inaccurate items with the source of the information.
- It is not required that the CRA name be disclosed if you are denied coverage
- Outdated information may not be reported.
- Access to your file is limited.
- Your consent is required for reports that are provided to employers, or reports that contain medical
information.
- You may choose to exclude your name from CRA lists for unsolicited credit and insurance offers.
- You may seek damages from violators.
Financial Services Modernization Act of 1999
Banks can do insurance and insurance companies can do banking
1933 Class Steagall Act
Required banks to remain in banking and not do insurance and insurance companies to remain in
insurance and not do banking.
Pooling the risk
Distributing the risk over a large number of people.
, *Law of large numbers
Having a large number of people in a pool helps to correctly predict the outcome.
Speculative risk
Hoping for a gain
Pure risk
Covering for losses. No gain. So it's insurable.
Underwriters
Determine if prospective clients fall into the normal category or if they are more risky in one category
or another.
- They classify risks and determine which categories the insured should be placed
- Adhesion: categories have been decided and approved in advance by the state in conjunction with
the insurance company.
- Categories of risks: Preferred (best premium rate), Standard, Substandard (most expensive)
Peril
The actual incident happening
Hazard
- What causes the incident to happen. (e.g. your thoughts, actions, habits?)
- 3 types
Physical Hazard
- Has to do with the body.
- Is the body going to live a normal length of time?
- Are there negatives due to health issues, hobbies, or profession?
*Moral Hazard
- Issues resulting from weakness of human behavior
- Does the person follow rules and laws of society?
- Dealing with the difference between right and wrong
*Morale Hazard
- Focus on hobbies and jobs
- Jump out of airplanes?
- Attitude towards the item insured and to act carelessly about it
4 Treatments of Risk
- Avoidance
- Reduction
- Retention
- Transference
*Risk Avoidance
Answers
Two methods of determining insurance need:
- Human Life Approach
- Needs Approach
Human Life Value Approach~
- One of two ways of calculating insurance need.
- By discounting estimated future income
- Calculating the amount of life insurance a family will need based on the financial loss that they will
suffer if the insured person were to pass away today
- 10X salary
- Based on age, gender, planned retirement age, occupation, annual wage, employment benefits, as
well as the personal and financial information of the spouse and/or dependent children.
*Needs Approach
Ask yourself:
1. How much will be needed at death to meet obligations.
2. How much future income is needed to sustain the household.
- Focuses on the financial needs of the family
- Considers final expenses
- Considers disability income
- Consideres monthly income
Main list of private insurance companies
- Stock insurers
- Mutual insurers
- Lloyd's of London
- Reinsurers
- Risk retention groups
- Fraternal benefit societies
- Home service insurers
Government supplied insurance
- OASDI (Social Security)
- Medicare
- Medicaid
- Military plans (SGLI & VGLI)
Lloyd's of London
- Take greater risks and charge larger premiums.
- A British insurance and reinsurance marketplace
- Come together to pool and spread risk
Reinsurers
Companies that take part of the risk of insurance companies. (The company that is taking a part of the
risk)
Ceding Company
,The company that is transferring the risk
Risk retention group
A mutual company formed to cover a bunch of people in the same occupation.
Fraternal benefit society
Membership groups that are created for membership to purchase insurance and gain other benefits.
Home service insurers
- Sell low dollar value policies (e.g. $1000/$2000 of face amount)
- Paid for by bank draft of check sent in by mail
Insurance is sold through
Career agents
Brokers
Aka Producers (independent insurance agents)
Agent
- Sells the company's products to the public
- When someone becomes an agent, they become a "field underwriter"
- Develops base for long-term sources of clients by using referrals, occupational, and special-interest
groups to compile lists of prospects.
- Approaches potential clients by utilizing mailings and phone solicitation; making presentations to
groups at company-sponsored gatherings; speaking publicly to community groups on the subject of
financial well-being.
- Determines clients' particular needs and financial situations by scheduling fact-finding
appointments; determining extent of present coverage and investments; ascertaining long-term
goals.
- Develops a coordinated protection plan by calculating and quoting rates for immediate coverage
action and long-term strategy implementation.
- Obtains underwriting approval by completing application for coverage.
- Completes coverage by delivering policy; planning future follow-up visits and evaluations of needs.
- Provides continuing service by providing direct deposit forms; processing changes in beneficiary and
policy loan applications.
- Provides death benefits by delivering policy proceeds; reassessing client needs.
- Updates job knowledge by participating in educational opportunities; reading professional
publications; maintaining personal networks; participating in professional organizations.
- Enhances insurance agency reputation by accepting ownership for accomplishing new and different
requests; exploring opportunities to add value to job accomplishments.
Brokers
- Represents the people and finds a company to insure them
- Assist prospective insureds with developing risk management strategies appropriate to their risk
profiles.
- *Cannot legally bind insurance
- Represents the client in purchasing the insurance product
*Vending Machines~
- Direct selling
- (A method of distribution)
,- Generally limited to travel accident insurance , supplemental health or disability policies, or life
insurance policies with a small face amount.
*Mass marketing~
- A client interacts with an agent by phone or e-mail. Trying to get a number of people at one time to
purchase insurance.
- It reaches insureds who generally have no access to their own brokers or agents.
- It also brings the policies to the insureds usually at lower prices than those charged in one-on-one
sales because it reduces the "middleman" cost of agents.
- *Direct response / direct mail.
- A system that does not use an agent
*Paul vs Virginia
State would be in charge of the insurance industry
*US vs SE Underwriters Association
Federal government in charge of the insurance industry
*McCarran Ferguson Act
Return supervisory power to the states
*Fair Credit Reporting Act
- Provides that the applicant for insurance be informed that a consumer report may be requested
- A federal provision that requires privacy of a client's information
- Designed to promote accuracy, fairness, and privacy of information in the files of every "consumer
reporting agency"
- You must be told if information in your file has been used against you.
- You can find out what is in your file.
- You can dispute inaccurate information with the CRA.
- Inaccurate information must be corrected or deleted.
- You can dispute inaccurate items with the source of the information.
- It is not required that the CRA name be disclosed if you are denied coverage
- Outdated information may not be reported.
- Access to your file is limited.
- Your consent is required for reports that are provided to employers, or reports that contain medical
information.
- You may choose to exclude your name from CRA lists for unsolicited credit and insurance offers.
- You may seek damages from violators.
Financial Services Modernization Act of 1999
Banks can do insurance and insurance companies can do banking
1933 Class Steagall Act
Required banks to remain in banking and not do insurance and insurance companies to remain in
insurance and not do banking.
Pooling the risk
Distributing the risk over a large number of people.
, *Law of large numbers
Having a large number of people in a pool helps to correctly predict the outcome.
Speculative risk
Hoping for a gain
Pure risk
Covering for losses. No gain. So it's insurable.
Underwriters
Determine if prospective clients fall into the normal category or if they are more risky in one category
or another.
- They classify risks and determine which categories the insured should be placed
- Adhesion: categories have been decided and approved in advance by the state in conjunction with
the insurance company.
- Categories of risks: Preferred (best premium rate), Standard, Substandard (most expensive)
Peril
The actual incident happening
Hazard
- What causes the incident to happen. (e.g. your thoughts, actions, habits?)
- 3 types
Physical Hazard
- Has to do with the body.
- Is the body going to live a normal length of time?
- Are there negatives due to health issues, hobbies, or profession?
*Moral Hazard
- Issues resulting from weakness of human behavior
- Does the person follow rules and laws of society?
- Dealing with the difference between right and wrong
*Morale Hazard
- Focus on hobbies and jobs
- Jump out of airplanes?
- Attitude towards the item insured and to act carelessly about it
4 Treatments of Risk
- Avoidance
- Reduction
- Retention
- Transference
*Risk Avoidance
