Named PerilP&C producer exam prep

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Drill17 items

Insurers and regulation on the P&C exam

This part sorts insurers by who owns them, where they are chartered and whether the state has licensed them, then turns to the conduct rules for producers: unfair trade practices, the commissioner's powers and a short list of federal laws that starts with the McCarran-Ferguson Act of 1945.

Three ways to sort an insurer

By ownership: stock, mutual, reciprocal, Lloyd's and fraternal, compared in the table below. By domicile: a domestic insurer is chartered in the state where you are selling, a foreign insurer in another state, an alien insurer in another country. Foreign never means overseas; that is alien.

By authorization: an admitted insurer holds a certificate of authority in the state, and the state guaranty association stands behind its policyholders if it fails. A non-admitted insurer holds no certificate there; it can still write business through a surplus lines broker, usually after the risk has been declined in the admitted market, and no guaranty fund backs it. The admitted vs non-admitted insurers page sets the two side by side.

Markets for hard-to-place risks

Residual markets exist because some risks can't find a voluntary buyer: FAIR plans for property in high-risk areas, automobile insurance plans for drivers no insurer will take voluntarily, and joint underwriting associations. Risk retention groups are owned by their members and insure the members' liability under the federal Liability Risk Retention Act; purchasing groups buy liability coverage together from an outside insurer.

Who regulates

States regulate insurance, and Congress confirmed that arrangement in the McCarran-Ferguson Act of 1945. Each state's commissioner (also called director or superintendent) licenses insurers and producers, examines insurers' finances, reviews forms and rates, investigates complaints and can take over a troubled insurer. The NAIC drafts model laws that states may adopt but has no regulatory power of its own. How a license is earned in practice, with state-by-state steps, is on how to get a property and casualty license.

Who owns the insurer

Stock, mutual, reciprocal and Lloyd's compared
PointStockMutualReciprocalLloyd's
Owned byStockholdersPolicyholdersSubscribers who insure one anotherMembers grouped in syndicates
Managed byA board elected by stockholdersA board elected by policyholdersAn attorney-in-factManaging agents for each syndicate
Profits go toStockholdersPolicyholders, as dividends the board declaresSubscribers' accountsThe members
Who carries the riskThe companyThe companyEach subscriber, for a shareEach member, for a share

Fraternal benefit societies write mainly life and health coverage for members of a lodge or society, which puts them outside P&C.

Unfair trade practices that look alike

Misrepresentation
Makes false or misleading statements about a policy's terms or benefits. Deciding detail: the falsehood is about a policy.
Twisting
Uses misrepresentation to move a client to a different insurer. Deciding detail: a rival company's policy replaces it.
Churning
Pushes needless replacement within the same insurer. Deciding detail: same company, fresh commission.
Rebating
Gives the buyer part of the commission or anything of value not stated in the policy. Deciding detail: value changes hands to win the sale.
Defamation
Spreads false statements about an insurer's or agent's finances or character. Deciding detail: the falsehood is about a company or person.
Sliding
Adds coverage the buyer didn't ask for, or calls it required when it isn't. Deciding detail: extra coverage appears on the bill.
Unfair discrimination
Charges different rates or terms within one class and hazard. Deciding detail: same class, different treatment.
Coercion and boycott
Forces a purchase, or refuses to deal as a group. Deciding detail: pressure or a joint refusal.

Insurers, conduct and the commissioner

0 of 17 answered · 0 right

Notes on each optionCommit to an answer first. The notes under the item then open on every option: what rules it in or out, and the one word that splits the runner-up from the key.

  1. Item 01

    Which organization drafts the standardized policy forms, such as HO 00 03 and CG 00 01, that many insurers adopt?

    1. AThe NAIC writes model laws and regulations, not policy forms, and it has no regulatory power of its own.
    2. BThe state insurance department approves forms filed in its state but does not draft them.
    3. CThe Federal Insurance Office monitors the industry for the Treasury and writes no policy forms.
    4. DCorrect: ISO, a private advisory organization, drafts standard forms such as the HO-3 and the CGL that member insurers file and use.
  2. Item 02

    In a joint underwriting association (JUA) for a hard-to-place line, losses are:

    1. ACorrect: in a JUA a few servicing insurers handle the policies, but profits and losses are shared by all insurers writing that line in the state.
    2. BJUA losses are not funded by taxpayers; the insurers in the market carry them.
    3. COne insurer bearing the loss describes an assigned risk plan, the usual swap for a JUA.
    4. DServicing agents place and handle business; they do not absorb the pool's losses.
  3. Item 03

    An agent's ad says a mutual insurer's policyholders 'will receive a 10% dividend every year.' This is:

    1. ARebating is giving an inducement outside the policy, while a dividend is a policy feature; the problem here is the false guarantee.
    2. BDefamation means false statements about a competitor's finances or character, and this ad is about the agent's own insurer.
    3. CPaying a dividend last year does not make a promise of future dividends lawful.
    4. DCorrect: mutual dividends are a return of surplus declared by the board and can never be guaranteed, so promising them misrepresents policy benefits.
  4. Item 04

    All of the following are unfair claims settlement practices EXCEPT:

    1. AFailing to acknowledge claim communications promptly is a listed unfair claims practice.
    2. BRefusing to pay without a reasonable investigation is a listed unfair claims practice.
    3. CUsing one coverage as leverage to force settlement of another is a listed unfair claims practice.
    4. DCorrect: requiring sworn proof of loss is a normal policy condition, so enforcing it as written is not unfair.
  5. Item 05

    An insurer that is owned by its policyholders and may return surplus to them as policy dividends is a:

    1. AA Lloyd's syndicate is a group of members who accept risk themselves in the Lloyd's market, not a policyholder-owned insurer.
    2. BA stock insurer is owned by stockholders, who get the profits; its policies are usually nonparticipating.
    3. CCorrect: a mutual insurer is owned by its policyholders and may return surplus to them as non-guaranteed dividends.
    4. DA captive is owned by a parent business to insure the parent's own risks.
  6. Item 06

    An agent persuades a client to drop a policy and buy a new one from the SAME insurer, mainly to earn a new first-year commission. This is:

    1. ARebating is an inducement to buy, such as returning part of the commission, not a replacement.
    2. BSliding is adding coverage the client did not ask for without telling them.
    3. CTwisting is replacement with a DIFFERENT insurer; same-insurer replacement is the tell for churning.
    4. DCorrect: churning is inducing a client to replace a policy with a new one from the same insurer to earn a new commission.
  7. Item 07

    An agent tells prospects that a competing insurer is about to go bankrupt, which is untrue. This is:

    1. AA boycott is refusing to do business with someone to coerce them, not spreading false statements.
    2. BCorrect: defamation is making false statements about an insurer's financial condition or an agent's character to harm them.
    3. CMisrepresentation is a false statement about policy terms or benefits; this lie is about a competitor's solvency, which makes it defamation.
    4. DTwisting requires inducing a replacement, and nothing here involves replacing a policy.
  8. Item 08

    To win a new client, agent Tom offers to pay the client's first month of premium out of his own commission. This is:

    1. ACorrect: rebating is offering anything of value not in the policy, such as paying the premium from the agent's commission, to induce a sale.
    2. BChurning is inducing a replacement with the same insurer to earn a new commission.
    3. CSliding is adding coverage the client did not request.
    4. DTwisting is inducing a replacement with a different insurer through misrepresentation.
  9. Item 09

    Under the McCarran-Ferguson Act, federal antitrust law still applies to insurers for acts of:

    1. ACorrect: the McCarran-Ferguson antitrust exemption never protects boycott, coercion or intimidation.
    2. BSelling across state lines is not itself an antitrust violation and is not the named exception.
    3. CFiling rates with the state is regulated activity the exemption protects.
    4. DSharing loss data through an advisory organization like ISO is state-regulated activity the exemption covers.
  10. Item 10

    Rick obtains an insurance license mainly so he can write policies on his own family, employees and business. Regulators call this:

    1. ARebating is offering an inducement to buy; nothing is being given away here.
    2. BCorrect: controlled business is insurance written on the licensee's own interests or those of family, employer or employees, which many states limit.
    3. CTwisting is misrepresentation to replace a policy with another insurer.
    4. DCommingling is mixing premium funds with personal money.
  11. Item 11

    Under 18 U.S.C. § 1033, a person convicted of a felony involving dishonesty or breach of trust may work in the insurance business only if:

    1. AA conviction in another state still counts; Section 1033 is a federal law.
    2. BA fidelity bond protects an employer from theft, but it does not satisfy the statute.
    3. CCorrect: Section 1033 allows such a person to engage in the business of insurance only with the written consent of the state insurance regulator.
    4. DThere is no automatic waiting period that lifts the bar; only written consent does.
  12. Item 12

    Agent Bob wants to pay part of his commission to an unlicensed friend who referred a new client. Under typical state law, this is:

    1. ACorrect: as a general rule, commission may be shared only with persons licensed for that line of insurance, and the client's consent does not change that.
    2. BThe client's consent cannot make it lawful to split commission with an unlicensed person.
    3. CEarning commission for producing a client is itself licensed activity, so 'he sold no insurance' does not save the payment.
    4. DA dollar cutoff is not part of the general rule; whether any small referral fee is allowed is a matter of each state's law.
  13. Item 13

    Lloyd's of London is best described as:

    1. ALloyd's is not policyholder-owned; that describes a mutual.
    2. BLloyd's has no shareholders owning an insurance company; that describes a stock insurer.
    3. CCorrect: Lloyd's is a marketplace where members, organized into syndicates, underwrite risks and are liable for their own share.
    4. DA reciprocal run by an attorney-in-fact is a different structure in which subscribers insure one another.
  14. Item 14

    Which action is BEYOND the authority of a state insurance commissioner?

    1. ACorrect: only a court can impose a prison sentence; the commissioner enforces the code administratively.
    2. BFining insurers for violations is within the commissioner's administrative power.
    3. CSuspending a producer's license is within the commissioner's licensing authority.
    4. DHolding hearings and issuing subpoenas is a standard power of the commissioner.
  15. Item 15

    Which federal law declares that the business of insurance is regulated primarily by the states?

    1. AThe Fair Credit Reporting Act governs consumer reports, not who regulates insurance.
    2. BCorrect: the McCarran-Ferguson Act (1945) leaves the regulation of insurance primarily to the states.
    3. CThe Violent Crime Control Act (18 U.S.C. 1033) makes certain insurance crimes federal offenses; it does not allocate regulatory authority.
    4. DGramm-Leach-Bliley deals with financial privacy notices and affiliations, not state primacy.
  16. Item 16

    A financially troubled insurer might still be saved. The commissioner takes control and tries to restore it to sound condition. This is called:

    1. ACorrect: in rehabilitation the commissioner, under court order, takes control of an impaired insurer to restore it to sound condition.
    2. BReinsurance transfers risk between insurers; it is not a regulatory takeover.
    3. CDemutualization converts a mutual into a stock company.
    4. DLiquidation is for an insurer that cannot be saved: its assets are sold and claims are paid.
  17. Item 17

    When an insurer terminates an agent's appointment, it generally must:

    1. ACorrect: appointments are filed with the state, so an insurer ending one must notify the insurance department.
    2. BThe insurer can end an appointment without the agent's consent.
    3. CEnding an appointment does not revoke the agent's license, which stays valid for other insurers.
    4. DLicensing fees are paid to the state, and nothing requires the insurer to refund them.
Mixed practice test · Timed mock

Domicile, insolvency and the producer's duties

Is a foreign insurer one from overseas?

No. Foreign means chartered in another U.S. state; alien means chartered outside the country. A company is domestic in its home state and foreign in every other state where it writes.

What protects policyholders if an admitted insurer fails?

The state guaranty association pays covered claims up to limits set by state law, funded by the admitted insurers in that state. Coverage placed with a surplus lines insurer has no such backstop.

Does a producer need an appointment as well as a license?

Generally yes. The license lets you act as a producer in the state; an appointment ties you to a particular insurer. Timing and fees differ by state, so check the steps on the licensing guide.

What does fiduciary duty mean for an agent?

Premiums collected for an insurer are held in trust. Mixing them with personal money (commingling) or spending them (misappropriation) breaches that duty and puts the license at risk.

Insurer types and conduct rules

Sort stock from mutual and twisting from churning wherever you are: the iPad and iPhone version adds further regulation questions.

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