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PRMI Exam 2
Insurance Exam 2
50
Finance
Undergraduate 3
11/12/2014

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Cards

Term
The "Why of Government Regulation"
Definition
Efficient markets believe government should simply ensure competition can exist.

Non-efficient markets believe direct intervention (regulation is necessary to correct market failures)
Term
Two Approaches to Government Control
Definition
Anti-trust

Regulation
Term
Anti-Trust
Definition
Concentrates on maintaining competition.
Term
Regulation
Definition
Direct intervention in the decisions of firms will produce results as near as possible to those that would occur in a competitive market
Term
Three Economic Theories of Regulation
Definition
Market Failure Theory
Capture Theory
Public Choice Theory
Term
Market Failure Theory
Definition
Regulators ensure that market failures don't occur at such a rate that it puts insurers out of business. (Too much/little service, at a price that is too high/low)
Term
Capture Theory
Definition
The regulators of the industry become more concerned about the success of the industry than about the consumers
Term
Public Choice Theory
Definition
Favoring certain segments in and out of the industry at the cost of others.
Term
Rationale for Regulation of Insurance
Definition
Vested in the Public Interest Rationale

Destructive Competition Rationale
Term
Vested in the Public Interest Rationale
Definition
Failures in this field can affec persons other than those directly involved in the transaction.

Fiduciary nature of insurance and extensive influence requires regulation
Term
Destructive Competition Rationale
Definition
Competition, if left unregulated can become excessive
Term
Two Goals of Insurance Regulation
Definition
Solvency and Equity

Emerging Goals of Availability and Affordability
Term
Five Forms of Market Regulation
Definition
Unfair Practices (Rebating, Twisting)
Policy Forms
Competence of Agents
Consumer Complaints and Assistance
Privacy and the Gramm Leach Billey Act
Term
Rebating
Definition
Directly or indirectly giving or offering to give any portion of the premium or any other consideration to an insurance buyer as an inducement to purchase insurance
Term
Twisting
Definition
Inducing a policyholder to lapse or cancel a policy of one insurer to replace it with the policy of another insurer in a way that would prejudice the interest of the policyholder.
Term
Policy Forms
Definition
While complicated, are subject to regulatory standards and must be approved by the regulatory authorities to ensure that the insurance-buying public will not be mistreated.
Term
Competence of Agents
Definition
All states require that those who sell insurance have a license
Term
Consumer Complaints and Assistance
Definition
All state insurance departments offer assistance to consumers in resolving disputes
Term
Privacy and the Gramm Leach Bliley Act
Definition
Insurers must notify consumers about their privacy policies and must give them the opportunity to prohibit the sharing of their protected financial information with nonaffiliated third parties
Term
Three General Requirements for Regulation of Rates
Definition
Reasonable
Adequate
Not unfairly discriminatory

*Life insurance rates only regulated indirectly
Term
Adequacy
Definition
the rates, with interest from investments, must be sufficient to pay all losses as they occur and all expenses connected with the production and servicing of the business
Term
5 Approaches to Regulation of Property and Liability Rates
Definition
Prior Approval
No filing (open competition)
File-and-use
Informational Filing
Flex Rating
Term
Prior Approval System
Definition
Insurance companies must obtain approval of its intended rates from the commissioner before they may be used.
Term
No Filing
Definition
Rates are not required to be filed with or approved by the state. However, the company must maintain records of experience and other information in developing the rates and make these available to the commissioner upon request.
Term
File-And-Use
Definition
Insurer must file proposed rate changes, but may use the new rates after a short waiting period. However, the rates may subsequently be disapproved by the commissioner
Term
Informational Filing
Definition
Almost the same as no filing, except for the fact that insurers *must* file for informational purposes
Term
Flex-Rating
Definition
A range is established for insurance rates and insurers are permitted to change their rates within the established range.
Term
4 Arguments by Those Favoring State Regulation
Definition
State authorities are more familiar with local problems.
State authorities are more responsive to local needs.
NAIC already provides uniformity to the extent desirable
Federal system would be superimposed on state system
Term
Most impressive argument favoring state regulation
Definition
Federal regulation would substitute uniformity for the existing diversity of state regulation.
Term
3 causes of Availability Problems
Definition
Absolute supply of insurance is limited by regulatory standards the dictate relationship between insurer surplus and written premiums.

The price of insurance is less than the cost of production.

The cyclical nature of insurance creates periodic shortages
Term
2 causes of Affordability Problems
Definition
The cost of the insurance

The income of the buyer
Term
California Proposition 103
Definition
Go from no file to prior approval system, but essentially mandated a reduction in insurance premiums. Law was challenged in California Supreme Court, decided the rollback was required unless insurer was able to prove that such rates would deprive it of a reasonable rate of return.
Term
Process of Underwriting
Definition
Application containing the insured's statements.
Information from the Agent or Broker
Information from External Agencies
Physical Examinations or Inspections
Term
Application
Definition
Questionnaire filled out by the insured gives the insurer the information needed to decide whether to accept, reject or seek additional information
Term
Information from the Agent/Broker
Definition
Underwriter can place weight on the recommendations of the agent/broker. In certain cases, the underwriter will agree to accept an exposure that does not meet underwriting requirements of the company. This is called accommodation risk
Term
Information from External Agencies
Definition
Underwriters request reports from agencies that specialize in providing information about individuals or organizations. Credit bureaus, cooperative information bureaus within the insurance industry, DMV, etc.
Term
Physical Examinations and Inspections
Definition
Requiring the applicant to undergo medical examination or have the asset inspected.
Term
Pure Premium
Definition
Expected Losses divided by Number of Exposure Units
Term
Gross Rate
Definition
Pure Premium / 1 - Expense Ratio
Term
Two Types of Rates
Definition
Class and Individual
Term
Four Types of Individual Rates
Definition
Judgement Rating
Schedule Rating
Experience Rating
Retrospective Rating
Term
Judgement
Definition
Lacking credible statistics, usually ocean marine applications
Term
Schedule
Definition
Apply schedule of charges and credits to some base rate to determine the appropriate rate for a single exposure unit.
Term
Experience
Definition
Take a base rating, then multiply it by a modification factor: (Actual Loss Ratio - Expected Loss Ratio) / Expected Loss Ratio * Credibility Factor
Term
Retrospective
Definition
self-rated program under which the actual losses during the policy period determine the final premium for the coverage, subject to a maximum and minimum.
Term
Insurance is a contract...
Definition
Of indemnity
Personal Contract (Between a person and the insurer)
Unilateral Contract (Only the insurer is legally bound to do anything)
Conditional Contract
Contract of Adhesion (take it or leave it)
Aleatory Contract (Outcome is affected by chance and the number of dollars given up by contracting parties will be unequal)
Utmost Good Faith (Insured must fully and fairly disclose all facts)
Term
Doctrines related to Good Faith
Definition
Misrepresentation (grounds for recission if material fact - would not have agreed to the same terms had it been known)

Concealment (failure to disclose, must be intentional)

Warranties
Term
Waiver
Definition
The intentional relinquishment of a right
Term
Estoppel
Definition
Prevents an individual from alleging or denying a previously admitted fact
Term
Parol Evidence Rule
Definition
When a contract is written it cannot be modified by oral evidence
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