CIA CIA Insurance Market & Industry Practices 2 — Questions and Answers
Question 1: What does 'moral hazard' mean in insurance industry terminology?
- The risk that a natural disaster will damage property
- The tendency of insured parties to take greater risks or be less careful because they are protected by insurance (Correct answer)
- The ethical obligation of insurers to pay valid claims promptly
- The risk associated with insuring high-value collectibles
Correct answer: The tendency of insured parties to take greater risks or be less careful because they are protected by insurance
Moral hazard refers to the increased risk-taking behavior or reduced care that can result from having insurance coverage in place.
Question 2: A 'policy limit' in a property insurance contract defines:
- The minimum claim amount the insurer will consider
- The maximum dollar amount the insurer will pay for a covered loss under the policy (Correct answer)
- The number of claims allowed per year
- The geographic boundary for covered property
Correct answer: The maximum dollar amount the insurer will pay for a covered loss under the policy
The policy limit is the maximum amount the insurance company is obligated to pay for any single covered loss or during the policy period.
Question 3: Which US regulatory body oversees insurance company solvency at the state level and sets model regulations?
- Securities and Exchange Commission (SEC)
- National Association of Insurance Commissioners (NAIC) (Correct answer)
- Consumer Financial Protection Bureau (CFPB)
- Federal Insurance Office (FIO)
Correct answer: National Association of Insurance Commissioners (NAIC)
The NAIC is the standard-setting and regulatory support organization for state insurance regulators, coordinating solvency oversight and model laws across all US states.
Question 4: What is an 'insurance endorsement' (also called a rider)?
- A formal complaint filed against an insurer with the state
- A written amendment that modifies the terms, coverage, or conditions of an existing insurance policy (Correct answer)
- A certificate proving the agent's license is current
- A premium payment receipt issued by the insurer
Correct answer: A written amendment that modifies the terms, coverage, or conditions of an existing insurance policy
An endorsement is a written modification attached to an insurance policy that adds, removes, or alters coverage provisions.
Question 5: In US commercial property insurance, 'coinsurance' clauses penalize policyholders for:
- Filing fraudulent claims
- Insuring property for less than a required minimum percentage of its full value (Correct answer)
- Using non-licensed contractors for repairs
- Late submission of proof of loss documents
Correct answer: Insuring property for less than a required minimum percentage of its full value
A coinsurance clause requires the insured to carry coverage up to a specified percentage (often 80%) of the property's full value, or face a proportional reduction in claim payments.
Question 6: What distinguishes a 'claims-made' policy from an 'occurrence' policy in US liability insurance?
- Claims-made covers losses anywhere in the world; occurrence is US-only
- Claims-made covers claims filed during the policy period; occurrence covers events that happen during the policy period regardless of when claimed (Correct answer)
- Occurrence policies require a deductible; claims-made do not
- Claims-made policies apply only to auto liability
Correct answer: Claims-made covers claims filed during the policy period; occurrence covers events that happen during the policy period regardless of when claimed
Under a claims-made policy, coverage applies only if the claim is made while the policy is active; an occurrence policy covers any event that occurs during the policy period even if the claim is filed years later.
CIA CIA Insurance Market & Industry Practices 2
What does 'moral hazard' mean in insurance industry terminology?