CU Regulatory and Ethical Frameworks 3 — Questions and Answers
Question 1: The NAIC's primary role in U.S. insurance regulation is to:
- Directly regulate insurance companies at the federal level
- Set binding national insurance law
- Develop model laws and coordinate state regulatory activities (Correct answer)
- License all insurance agents nationally
Correct answer: Develop model laws and coordinate state regulatory activities
The NAIC is a standard-setting and regulatory support organization that creates model laws for state adoption and promotes regulatory consistency.
Question 2: An underwriter discovers mid-term that an insured has materially misrepresented facts on the application. The insurer's most appropriate remedy is typically:
- Immediately canceling the policy
- Voiding the policy ab initio (Correct answer)
- Increasing the premium retroactively
- Referring the matter to the state legislature
Correct answer: Voiding the policy ab initio
Material misrepresentation allows the insurer to void the policy from inception (ab initio) as though it never existed.
Question 3: Which of the following scenarios best illustrates the concept of 'adverse selection' in underwriting?
- An insurer charging lower rates for safer drivers
- High-risk individuals disproportionately seeking insurance coverage (Correct answer)
- An agent recommending appropriate coverage amounts
- An insurer diversifying its portfolio across multiple lines
Correct answer: High-risk individuals disproportionately seeking insurance coverage
Adverse selection occurs when those with higher-than-average risk are more likely to purchase insurance, distorting the risk pool.
Question 4: Risk-Based Capital (RBC) requirements are designed primarily to ensure that insurers:
- Offer competitive premium rates
- Maintain sufficient capital relative to their risk exposure (Correct answer)
- Achieve profitability targets set by regulators
- Limit their reinsurance purchases
Correct answer: Maintain sufficient capital relative to their risk exposure
RBC requirements mandate that insurers hold capital proportional to the risks they underwrite, protecting policyholders from insolvency.
Question 5: Under professional ethics standards, an underwriter who learns of a colleague committing fraud should first:
- Ignore it to maintain workplace relationships
- Report it through appropriate internal compliance channels (Correct answer)
- Confront the colleague publicly
- Alert competing insurers
Correct answer: Report it through appropriate internal compliance channels
Professional ethics require reporting suspected fraud through established internal channels such as compliance, legal, or management.
Question 6: The 'prior approval' rate regulation system differs from 'file-and-use' in that:
- No filing is required under prior approval
- Rates cannot be used until regulators formally approve them (Correct answer)
- Prior approval only applies to life insurance
- File-and-use requires a longer waiting period
Correct answer: Rates cannot be used until regulators formally approve them
Under prior approval, insurers must obtain explicit regulatory approval before implementing new rates, unlike file-and-use where immediate implementation is allowed.
Question 7: Which ethical duty requires underwriters to keep applicant and insured information private and share it only as legally permitted?
- Duty of loyalty
- Duty of confidentiality (Correct answer)
- Duty of disclosure
- Duty of indemnity
Correct answer: Duty of confidentiality
The duty of confidentiality obligates underwriters to protect sensitive applicant data and only disclose it under legally authorized circumstances.
CU Regulatory and Ethical Frameworks 3
The NAIC's primary role in U.S. insurance regulation is to: