Property And Casualty Insurance License State Regulations and Ethics 2 — Questions and Answers
Question 1: What is 'churning' in insurance?
- An agent convincing a client to repeatedly replace policies to generate commissions (Correct answer)
- An insurer changing rates frequently throughout the year
- Processing a high volume of small claims
- Frequently changing reinsurance arrangements
Correct answer: An agent convincing a client to repeatedly replace policies to generate commissions
Churning involves replacing an existing policy with a new policy from the same insurer primarily to generate new commissions for the agent, often to the detriment of the policyholder.
Question 2: What does 'unfair claims settlement practices' law prohibit?
- Only outright claim denial without investigation
- A range of insurer behaviors including unreasonable delays, failure to investigate, and misrepresentation of policy terms (Correct answer)
- Only fraudulent claim submissions by insureds
- Insurers from requiring proof of loss
Correct answer: A range of insurer behaviors including unreasonable delays, failure to investigate, and misrepresentation of policy terms
Unfair claims settlement practices laws (based on the NAIC model) prohibit insurers from engaging in specified improper claim handling behaviors, including low-ball offers, delays, and misrepresentation.
Question 3: What is 'market conduct examination'?
- A review of an insurer's investment portfolio
- A regulatory review of how an insurer treats its policyholders in areas like underwriting, rating, and claims (Correct answer)
- A financial audit of an insurer's reserves
- An examination of an agent's sales conduct by their employer
Correct answer: A regulatory review of how an insurer treats its policyholders in areas like underwriting, rating, and claims
Market conduct exams are conducted by state insurance departments to ensure that insurers are complying with laws and regulations in their day-to-day interactions with policyholders.
Question 4: What is an 'admitted' (authorized) insurer?
- An insurer that has admitted to paying all pending claims
- An insurer that has received a license from the state to sell insurance within that state (Correct answer)
- An insurer admitted to the NYSE
- An insurer approved by the federal government
Correct answer: An insurer that has received a license from the state to sell insurance within that state
An admitted insurer is licensed by the state insurance department, must file rates and forms for approval, and is subject to the state guaranty fund.
Question 5: What does it mean for an insurance policy to be a 'contract of adhesion'?
- Both parties negotiated and drafted the policy terms
- The policy is drafted by the insurer and the insured must accept it as-is with no ability to negotiate terms (Correct answer)
- The policy adheres to all state minimum coverage requirements
- The policy cannot be cancelled by either party
Correct answer: The policy is drafted by the insurer and the insured must accept it as-is with no ability to negotiate terms
Insurance policies are contracts of adhesion because the insurer prepares standardized terms that the insured must accept or reject without negotiation.
Question 6: What is the primary purpose of the 'Free Look' period in insurance?
- To allow agents to review applications before submission
- To give new policyholders a period (typically 10–30 days) to review the policy and receive a full refund if they cancel (Correct answer)
- To provide a grace period for late premium payments
- To allow the insurer to inspect covered property before binding
Correct answer: To give new policyholders a period (typically 10–30 days) to review the policy and receive a full refund if they cancel
The free look period gives new policyholders time to review the policy and cancel for a full premium refund if unsatisfied, protecting consumers from high-pressure sales tactics.
Property And Casualty Insurance License State Regulations and Ethics 2
What is 'churning' in insurance?