Life & Health Insurance Insurance Regulation and Ethics Questions and Answers — Questions and Answers
Question 1: An agent persuades a policyholder to surrender their existing whole life policy from Company A and purchase a new policy from Company B by falsely claiming the new policy has significantly better cash value accumulation. This illegal practice is known as:
- Rebating
- Twisting (Correct answer)
- Coercion
- Defamation
Correct answer: Twisting
Twisting is the unfair trade practice of making false or misleading comparisons of policies to induce a policyholder to lapse, forfeit, surrender, or exchange their current insurance for another, to their detriment. Rebating involves offering a valuable consideration not specified in the policy as an inducement to purchase. Coercion involves intimidation or force. Defamation is making false statements about another insurer or agent.
Question 2: Which federal law affirmed the right of states to regulate the business of insurance, establishing that continued state regulation is in the public interest?
- The Gramm-Leach-Bliley Act
- The Fair Credit Reporting Act (FCRA)
- The USA PATRIOT Act
- The McCarran-Ferguson Act (Correct answer)
Correct answer: The McCarran-Ferguson Act
The McCarran-Ferguson Act of 1945 is a U.S. federal law that gives states the authority to regulate the business of insurance. It specifies that federal laws will not preempt state insurance laws unless the federal law specifically relates to insurance.
Question 3: An insurer denies a life insurance application based in part on information from a consumer reporting agency. Under the Fair Credit Reporting Act (FCRA), what is the insurer required to do?
- Provide the applicant with a complete copy of the consumer report.
- Inform the applicant that the consumer reporting agency made the final decision.
- Notify the applicant of the adverse action and provide the name and contact information of the consumer reporting agency. (Correct answer)
- Obtain the applicant's written consent before sending the adverse action notice.
Correct answer: Notify the applicant of the adverse action and provide the name and contact information of the consumer reporting agency.
Under the FCRA, when an insurer takes an adverse action based on a consumer report, it must provide the consumer with an adverse action notice. This notice must include the name, address, and phone number of the agency that supplied the report, a statement that the agency did not make the decision, and notice of the consumer's right to obtain a free copy of the report and dispute its accuracy.
Question 4: An agent offers a prospective client a cash payment from their commission as an incentive to purchase a life insurance policy. This is an illegal and unethical practice known as:
- Churning
- Twisting
- Rebating (Correct answer)
- Misrepresentation
Correct answer: Rebating
Rebating is the practice of offering a potential buyer an inducement, such as a portion of the agent's commission or another item of value, that is not specified in the insurance contract to encourage the purchase of a policy. This is illegal in most states as it can lead to unfair discrimination among policyholders.
Question 5: What is the primary function of the National Association of Insurance Commissioners (NAIC)?
- To directly regulate and license insurance companies on a federal level.
- To serve as a standard-setting and regulatory support organization for state insurance regulators. (Correct answer)
- To lobby Congress on behalf of the insurance industry to create favorable laws.
- To underwrite and issue insurance policies for high-risk individuals.
Correct answer: To serve as a standard-setting and regulatory support organization for state insurance regulators.
The NAIC is a support organization created and governed by the chief insurance regulators from all 50 states, the District of Columbia, and five U.S. territories. Its primary role is to establish standards, develop model laws and regulations, conduct peer reviews, and coordinate regulatory oversight to promote consistency and protect consumers. It does not have direct regulatory authority over insurers.
Question 6: An insurance agent has a legal and ethical obligation to act in the best interests of their client, putting the client's needs above their own financial gain. This obligation is known as a(n):
- Fiduciary duty (Correct answer)
- Underwriting authority
- Contractual obligation
- Implied warranty
Correct answer: Fiduciary duty
A fiduciary duty is a legal and ethical obligation that requires a professional, such as an insurance agent, to act in the best interests of their client. This includes providing suitable recommendations, disclosing all material information, and avoiding conflicts of interest.
Life & Health Insurance Insurance Regulation and Ethics Questions and Answers
An agent persuades a policyholder to surrender their existing whole life policy from Company A and purchase a new policy from Company B by falsely claiming the new policy has significantly better cash value accumulation.
This illegal practice is known as: