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TN Life & Health practice questions

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Question 1Tennessee Insurance Laws, Rules, and Regulations

Who appoints the commissioner who heads the Tennessee Department of Commerce and Insurance?

  1. Tennessee voters in a statewide general election
  2. The state's licensed insurers through a membership vote
  3. The Tennessee General Assembly by joint resolution
  4. The Governor of Tennessee Correct answer.

Explanation

The commissioner of commerce and insurance is a cabinet-level official chosen by the governor, not by election or by the legislature. The commissioner directs the department's regulatory divisions, including insurance.

Question 2Tennessee Insurance Laws, Rules, and Regulations

Before an insurer may transact insurance business in Tennessee, it must obtain which of the following from the department?

  1. A certificate of convenience
  2. A letter of credit
  3. A surety bond from the state treasurer
  4. A certificate of authority Correct answer.

Explanation

An insurer must be authorized by the commissioner through a certificate of authority after meeting solvency, capital, and filing requirements. Transacting insurance without that authority is unlawful.

Question 3Tennessee Insurance Laws, Rules, and Regulations

An insurer organized under the laws of a country other than the United States, authorized to do business in Tennessee, is classified as what type of insurer?

  1. Surplus lines
  2. Alien Correct answer.
  3. Foreign
  4. Domestic

Explanation

Insurer classification depends on place of organization: domestic insurers are formed under Tennessee law, foreign insurers under the laws of another U.S. state, and alien insurers under the laws of another country.

Question 4Tennessee Insurance Laws, Rules, and Regulations

What is the minimum age for an individual to be licensed as an insurance producer in Tennessee?

  1. 21
  2. 18 Correct answer.
  3. 16
  4. 17

Explanation

Tennessee requires producer applicants to be at least 18 years old, pass the required examination for each line, and meet character and competency standards.

Question 5Tennessee Insurance Laws, Rules, and Regulations

A producer who lives in and holds a Georgia insurance license wants to sell life insurance to Tennessee residents. Under Tennessee's nonresident licensing rules, the producer generally may do which of the following?

  1. Solicit Tennessee residents under the Georgia license because reciprocity is automatic
  2. Take and pass the Tennessee licensing examination before writing any business
  3. Obtain a Tennessee nonresident license without an exam Correct answer.
  4. Write group life contracts only until a Tennessee license is issued

Explanation

Tennessee issues nonresident licenses on a reciprocal basis, waiving the examination when the producer's home-state license is in good standing. A Tennessee nonresident license must still be obtained before soliciting.

Question 6Tennessee Insurance Laws, Rules, and Regulations

A resident life and health producer in Tennessee must complete how many continuing education hours during each two-year license term?

  1. 36 hours, including 6 hours of ethics
  2. 12 hours, including 1 hour of ethics
  3. 16 hours, including 2 hours of ethics
  4. 24 hours, including 3 hours of ethics Correct answer.

Explanation

Tennessee requires 24 continuing education credit hours per biennial license term, at least 3 of which must be in ethics. Credits must come from approved courses and be reported to the department.

Question 7Tennessee Insurance Laws, Rules, and Regulations

An insurer appoints a newly licensed Tennessee producer. Within what period after executing the agency contract or receiving the first application must the insurer file the appointment with the department?

  1. 30 days Correct answer.
  2. 5 days
  3. 15 days
  4. 10 days

Explanation

The insurer must notify the department of the appointment within 30 days after the agency contract is executed or the first application is submitted. Acting under an appointment that is not on file can subject both parties to penalties.

Question 8Tennessee Insurance Laws, Rules, and Regulations

When an insurer terminates a producer's appointment, the insurer must notify the Tennessee department within what period of the termination's effective date?

  1. 90 days
  2. 30 days Correct answer.
  3. 60 days
  4. 10 days

Explanation

Insurers must report terminations of appointment to the department within 30 days of the effective date. Terminations for cause carry additional reporting obligations and may trigger review of the producer's license.

Question 9Tennessee Insurance Laws, Rules, and Regulations

A licensed Tennessee producer moves and changes both residence and business addresses. The producer must notify the department of the change within how many days?

  1. 30 days Correct answer.
  2. 60 days
  3. 15 days
  4. 10 days

Explanation

Licensees must keep the department informed of address changes within 30 days so that licensing notices and legal service can reach them. Failure to update the record can result in administrative action.

Question 10Tennessee Insurance Laws, Rules, and Regulations

A Tennessee producer is disciplined by another state's insurance regulator. Within what period must the producer report that administrative action to the Tennessee department?

  1. 10 days
  2. 45 days
  3. 30 days Correct answer.
  4. 15 days

Explanation

Producers must report administrative actions taken by another regulator within 30 days of the final disposition. Failure to report is itself a violation that can support suspension or revocation.

Question 11Tennessee Insurance Laws, Rules, and Regulations

A producer collects an initial premium from an applicant and deposits it into the producer's personal business operating account. How is this practice characterized under Tennessee law?

  1. Acceptable if the producer keeps a separate ledger of premiums received
  2. Permissible for life insurance but not for health insurance
  3. A permissible practice if the premium is forwarded within 30 days
  4. Commingling of fiduciary funds, which is prohibited Correct answer.

Explanation

Premiums collected on an insurer's behalf are held in a fiduciary capacity and must be kept separate from the producer's own funds. Commingling or misappropriating those funds is grounds for license suspension or revocation.

Question 12Tennessee Insurance Laws, Rules, and Regulations

A producer offers to give a prospect part of the commission earned on a new policy as an inducement to buy. This practice is known as:

  1. Rebating Correct answer.
  2. Churning
  3. Twisting
  4. Coercion

Explanation

Rebating is offering anything of value not specified in the policy contract as an inducement to purchase insurance. Tennessee prohibits rebating because it results in unequal treatment of similarly situated insureds.

Question 13Tennessee Insurance Laws, Rules, and Regulations

To persuade a client to surrender an existing policy and buy a new one, a producer falsely tells the client that the current insurer is on the verge of insolvency. This conduct is best described as:

  1. A lawful replacement if a replacement notice is signed
  2. Twisting Correct answer.
  3. Rebating
  4. Coercion

Explanation

Twisting is a misrepresentation or incomplete comparison made to induce a policyholder to lapse, surrender, or replace existing coverage. Signing a replacement notice does not legitimize a false statement used to obtain the sale.

Question 14Tennessee Insurance Laws, Rules, and Regulations

Tennessee limits 'controlled business,' which means the commissioner may deny or revoke a license obtained mainly to do which of the following?

  1. Sell insurance to relatives at the same rates charged to other applicants
  2. Sell only one line of insurance authority
  3. Write more than 50% of annual premium volume with a single insurer
  4. Insure the producer and the producer's own associates Correct answer.

Explanation

A producer license may not be used principally to place coverage on the producer's own life, property, or risks of close associates and employers. Licensing for controlled business is restricted so that licenses serve the insuring public.

Question 15Tennessee Insurance Laws, Rules, and Regulations

A licensed life producer promises to pay part of the commission on a sale to an unlicensed friend who solicited and helped negotiate the sale. How does Tennessee law treat this arrangement?

  1. Permitted up to 25% of the commission
  2. Prohibited as unlawful commission sharing Correct answer.
  3. Permitted if the insurer approves it in writing
  4. Permitted if the friend discloses the arrangement in writing

Explanation

Commissions for soliciting, negotiating, or selling insurance may generally be paid only to licensed producers. Paying an unlicensed person for producing the sale is unlawful and can result in license action for both parties.

Question 16Tennessee Insurance Laws, Rules, and Regulations

How long does the owner of a newly delivered individual life insurance policy in Tennessee have to return it for a full refund of premium?

  1. 30 days
  2. 10 days Correct answer.
  3. 5 days
  4. 3 days

Explanation

Tennessee life policies provide a free-look period of at least 10 days after delivery, during which the owner may return the policy for a full premium refund. The period gives the buyer a chance to review the contract.

Question 17Tennessee Insurance Laws, Rules, and Regulations

Individual life insurance policies delivered in Tennessee must include a grace period for payment of overdue premium of at least:

  1. 7 days
  2. 45 days
  3. 10 days
  4. 30 days Correct answer.

Explanation

Tennessee requires a grace period of at least 30 days for individual life insurance premiums. Coverage remains in force during the grace period, and the insurer may deduct the overdue premium from any benefit payable.

Question 18Tennessee Insurance Laws, Rules, and Regulations

Which policy provision bars an insurer from contesting a life policy for misstatements in the application after the policy has been in force for two years during the insured's lifetime?

  1. The reinstatement provision
  2. The misstatement of age provision
  3. The incontestability clause Correct answer.
  4. The entire contract provision

Explanation

The incontestability clause limits the insurer's ability to rescind for material misrepresentation after the contestable period, generally two years. Nonpayment of premium remains a basis for lapse or termination.

Question 19Tennessee Insurance Laws, Rules, and Regulations

A Tennessee life policy limits the insurer's liability when the insured dies by suicide within what period after the policy is issued?

  1. 2 years Correct answer.
  2. 5 years
  3. 6 months
  4. 3 years

Explanation

Tennessee permits a suicide exclusion for a limited period, generally two years from issue, during which the insurer's liability is limited to a refund of premiums. After that period, the full benefit is payable.

Question 20Tennessee Insurance Laws, Rules, and Regulations

If an insurer discovers that the insured's age was understated in a life insurance application, Tennessee law requires the insurer to take which action?

  1. Rescind the policy and refund all premiums paid
  2. Adjust the benefit to what the premium paid would have purchased at the correct age Correct answer.
  3. Pay the full face amount and then bill the beneficiary for the additional premium owed
  4. Increase the death benefit to match the true age of the insured

Explanation

A misstatement of age does not void the contract; the insurer adjusts the amount payable to what the premium actually paid would have purchased at the correct age. The policy stays in force with the corrected benefit.

Question 21Tennessee Insurance Laws, Rules, and Regulations

Insurable interest in a life insurance policy must exist at which point?

  1. At the time of the insured's death
  2. Only when the beneficiary is a family member
  3. At the time the policy is applied for Correct answer.
  4. Continuously from application through death

Explanation

Tennessee requires insurable interest when the contract is made; a policy obtained with a genuine interest remains valid even if the relationship later changes. Requiring interest at the outset prevents wagering on human life.

Question 22Tennessee Insurance Laws, Rules, and Regulations

The Tennessee Life and Health Insurance Guaranty Association protects covered policyholders of an insolvent member insurer up to a maximum death benefit of:

  1. $500,000
  2. $300,000 Correct answer.
  3. $100,000
  4. $1,000,000

Explanation

Tennessee's guaranty association caps life insurance death benefits at $300,000 per insured life, with separate lower limits for cash surrender value and annuity present value. The association does not cover every product or every person.

Question 23Tennessee Insurance Laws, Rules, and Regulations

A Tennessee producer who wishes to sell long-term care insurance must meet which minimum training requirement?

  1. 24 hours initially, then 8 hours every 4 years
  2. 4 hours initially, then 2 hours each year
  3. 16 hours initially, with no refresher requirement
  4. 8 hours initially, then 4 hours every 24 months Correct answer.

Explanation

Tennessee follows the national model requiring an initial eight-hour long-term care training course and four hours of ongoing training every 24 months thereafter. Producers must also complete any additional training required for partnership-qualified policies.

Question 24Tennessee Insurance Laws, Rules, and Regulations

The department may issue a temporary producer license to a designee of a producer who dies or becomes disabled. The temporary license may last no longer than:

  1. 90 days
  2. 180 days Correct answer.
  3. 12 months
  4. 30 days

Explanation

A temporary license may be issued for up to 180 days to allow a surviving spouse, personal representative, or designee to service the existing book of business. It does not authorize writing new business beyond what the statute permits.

Question 25Tennessee Insurance Laws, Rules, and Regulations

Which of the following constitutes an unfair claim settlement practice under Tennessee law?

  1. Denying a claim based on a clear policy exclusion
  2. Investigating a claim that presents questionable facts
  3. Requesting a written proof of loss before paying a claim
  4. Failing to acknowledge and act promptly on claim communications Correct answer.

Explanation

Unfair claim settlement practices include failing to acknowledge and act reasonably promptly on communications about a claim, and failing to conduct a prompt investigation. Reasonable investigation and reliance on policy exclusions are proper.

Question 26Tennessee Insurance Laws, Rules, and Regulations

Who selects the commissioner of the Tennessee Department of Commerce and Insurance?

  1. The state insurance advisory board
  2. The General Assembly meeting in joint session
  3. The voters in a statewide general election
  4. The governor Correct answer.

Explanation

The commissioner of commerce and insurance is a cabinet officer appointed by the governor and serves at the governor's pleasure. The position is not filled by a statewide popular election or by legislative appointment.

Question 27Tennessee Insurance Laws, Rules, and Regulations

A producer licensed in good standing in another state applies for a Tennessee nonresident producer license for life insurance.

  1. The applicant's home state must grant reciprocity and the license must be in good standing. Correct answer.
  2. The applicant must complete Tennessee prelicensing education.
  3. The applicant must pass the Tennessee examination for the life line.
  4. The applicant must maintain a Tennessee business address.

Explanation

Tennessee licenses nonresident producers on a reciprocal basis, issuing the license without a Tennessee examination when the applicant holds a valid home-state license and that state extends reciprocity. Prelicensing education and a Tennessee business address are not conditions of nonresident licensure.

Question 28Tennessee Insurance Laws, Rules, and Regulations

Under Tennessee insurance law, the term "transacting insurance" includes which of the following?

  1. Soliciting, negotiating, or making an insurance contract Correct answer.
  2. Only the physical delivery of a policy to a policyholder
  3. Only the collection of premium in an insurer's home office
  4. Only the investigation and payment of claims by an insurer

Explanation

Transacting insurance covers the core activities of solicitating, negotiating, and executing insurance contracts, along with related acts such as advertising and handling premiums. A person engaged in those activities must generally hold a license unless an exemption applies.

Question 29Tennessee Insurance Laws, Rules, and Regulations

A Medicare supplement policy is delivered to a Tennessee purchaser. How long does the policyholder have to return the policy for a full premium refund?

  1. 10 days
  2. 15 days
  3. 20 days
  4. 30 days Correct answer.

Explanation

Medicare supplement policies are required to provide a free-look period of 30 days after delivery, during which the policyholder may return the policy for a full refund of premium. This is longer than the standard free look on ordinary individual life policies.

Question 30Tennessee Insurance Laws, Rules, and Regulations

A producer submits an application for a new life policy that will replace the applicant's existing coverage. Under Tennessee replacement rules, the producer must:

  1. Wait 60 days after the old policy lapses before the new policy can be delivered.
  2. Refund the premium difference between the replaced policy and the new policy.
  3. Obtain the applicant's signed replacement notice and give a copy to the applicant and the replacing insurer. Correct answer.
  4. Obtain the existing insurer's written consent before submitting the application.

Explanation

Replacement rules require the producer to present a notice regarding replacement, obtain the applicant's signature, leave a copy with the applicant, and pass the information along so the replacing insurer can notify the existing insurer. The existing insurer's consent is not required.

Question 31Tennessee Insurance Laws, Rules, and Regulations

Two Tennessee life applicants are the same age, sex, and health class, but the insurer charges one a higher premium based on the applicant's national origin. This pricing is:

  1. Lawful if the difference is disclosed in the policy.
  2. Permitted because an insurer may select the risks it wishes to insure.
  3. An unfair trade practice, because rates must rest on actuarial classification. Correct answer.
  4. Permitted if the insurer files the higher rate schedule with the commissioner.

Explanation

Unfair discrimination occurs when an insurer charges different rates to individuals of the same actuarial class without justification. National origin is not a permissible rating factor, and filing or disclosing the rate does not cure the discrimination.

Question 32Tennessee Insurance Laws, Rules, and Regulations

A bank tells a mortgage applicant that the loan will close only if the applicant buys life insurance through the bank's affiliated agent. This conduct is:

  1. Lawful, because a lender may always require insurance on a borrower.
  2. Permitted, as long as the policy is assigned to the bank as collateral.
  3. Lawful, provided the agent gives the borrower a written disclosure form.
  4. Coercion, which is a prohibited unfair trade practice. Correct answer.

Explanation

A creditor may require insurance as a condition of Credit, but it may not coerce the borrower into buying that insurance from a particular agent or insurer. Tying the loan to a purchase through the bank's affiliate is coercion, an unfair trade practice under Tennessee law.

Question 33Tennessee Insurance Laws, Rules, and Regulations

An agent tells prospects that a competing insurer is "about to be seized by regulators and cannot pay claims," a statement the agent knows to be false. Under Tennessee law this conduct is:

  1. Protected opinion rather than a statement of fact.
  2. Defamation of an insurer and a prohibited trade practice. Correct answer.
  3. An illegal rebate of premium.
  4. Lawful comparative advertising about market conditions.

Explanation

Publishing a false statement that is directly or indirectly critical of an insurer's financial condition, with intent to injure, is defamation of an insurer and an unfair trade practice. Statements about a competitor's solvency are treated as statements of fact, not mere opinion.

Question 34Tennessee Insurance Laws, Rules, and Regulations

A Tennessee business entity applies for an insurance producer license. Tennessee requires the entity to:

  1. Designate an individually licensed producer who is responsible for the entity's compliance. Correct answer.
  2. Employ at least five individually licensed producers.
  3. Be owned entirely by individually licensed producers.
  4. Post a surety bond equal to one year of commissions.

Explanation

Tennessee licenses business entities as insurance producers, but the entity must designate a licensed individual producer who is accountable for the entity's compliance with insurance law. Ownership of the entity and the size of its staff are not licensing conditions.

Question 35Tennessee Insurance Laws, Rules, and Regulations

For purposes of Tennessee small employer group health insurance rules, a small employer generally has:

  1. 5 to 100 eligible employees
  2. 10 to 250 eligible employees
  3. 1 to 25 eligible employees
  4. 2 to 50 eligible employees Correct answer.

Explanation

Tennessee defines a small employer for group health purposes as one that employed an average of at least 2 but not more than 50 eligible employees on business days during the preceding calendar year. Employers in this range are subject to the state's small employer rating and availability rules.

Question 36Tennessee Insurance Laws, Rules, and Regulations

Before the commissioner revokes a producer's license, the producer is entitled to:

  1. Notice of the charges and an opportunity for a hearing Correct answer.
  2. A 12-month stay during which the license remains in force
  3. Reimbursement of attorney fees if the producer prevails
  4. A jury trial in chancery court

Explanation

A license may not be revoked without due process, which means the commissioner must give the licensee notice of the charges and a hearing at which the licensee can respond. The commissioner's final order is then subject to judicial review.

Question 37Tennessee Insurance Laws, Rules, and Regulations

An insurer organized under the laws of another state wants to issue life policies to Tennessee residents. Before doing so, the insurer must:

  1. Obtain a certificate of authority from the commissioner. Correct answer.
  2. Register only with the secretary of state as a foreign corporation.
  3. Obtain the commissioner's approval of each individual policy form.
  4. Join the Tennessee Life and Health Insurance Guaranty Association.

Explanation

A foreign or alien insurer must hold a certificate of authority from the Tennessee commissioner before it may transact insurance in the state. Transacting without that authority constitutes unauthorized insurance and subjects the insurer to enforcement action.

Question 38Tennessee Insurance Laws, Rules, and Regulations

A Tennessee surplus lines broker places coverage with a nonadmitted insurer. The broker must:

  1. Place the coverage only with an insurer domiciled in Tennessee
  2. Charge exactly the premium an admitted insurer would have charged
  3. Obtain the commissioner's written approval before each individual placement
  4. Search the admitted market diligently and disclose that guaranty fund protection does not apply Correct answer.

Explanation

Surplus lines placement requires a diligent effort to obtain coverage from authorized insurers and a written disclosure, signed by the insured, that the nonadmitted insurer is not protected by the state guaranty association. Prior approval of each placement by the commissioner is not required.

Question 39Tennessee Insurance Laws, Rules, and Regulations

The commissioner determines that a domestic life insurer is insolvent and cannot meet its obligations. What action may the commissioner take?

  1. Sell the insurer's in-force policies to another carrier without any court proceeding
  2. Cancel the policies and order the insurer to refund all premiums paid
  3. Transfer the insurer's obligations to the guaranty association by private agreement
  4. Petition a court for an order of rehabilitation or liquidation Correct answer.

Explanation

When a domestic insurer is insolvent, the commissioner seeks a court order placing the insurer in rehabilitation or liquidation and takes control of its assets. Covered policyholders then look to the Tennessee guaranty association, within statutory limits, for covered claims.

Question 40Tennessee Insurance Laws, Rules, and Regulations

A Tennessee producer advertises under the name "State of Tennessee Insurance Bureau," suggesting a government affiliation that does not exist. This advertising is:

  1. Allowed if the producer sells only Medicare-related products
  2. Permitted if the producer's license number appears in the advertisement
  3. Prohibited, because it misleadingly implies a government connection Correct answer.
  4. Permitted, because trade names used by producers are not regulated

Explanation

An advertisement that uses a name implying that the producer is affiliated with or endorsed by a government agency is misleading and is a prohibited trade practice. Including a license number does not cure the false impression of official status.

Question 41General Insurance Concepts

For a life insurance policy, when must insurable interest exist?

  1. At the time a beneficiary files a claim
  2. At the time of the insured's death
  3. At the time the policy is applied for Correct answer.
  4. At both the time of application and the time of death

Explanation

Insurable interest in life insurance is measured at the time the policy is applied for and issued; it does not have to continue until the insured dies. Property insurance takes the opposite approach and tests insurable interest at the time of loss.

Question 42General Insurance Concepts

Which statement best describes the principle of indemnity?

  1. The insured is restored to roughly the same financial position as before the loss Correct answer.
  2. The insured receives an extra amount that includes compensation for inconvenience and delay
  3. The insurer pays the policy face amount regardless of the size of the actual loss sustained
  4. The insured may collect the full amount from every insurer that covers the loss and keep the excess

Explanation

Indemnity means the insured is made whole financially, no better and no worse off than before the loss. It is the reason overlapping policies do not produce a profit for the insured.

Question 43General Insurance Concepts

An insurance contract is aleatory because:

  1. Both parties exchange items of equal value at the same time
  2. Its terms are drafted by the insurer and offered on a take-it-or-leave-it basis
  3. Only the insurer makes a legally enforceable promise
  4. The amounts exchanged by the parties may be unequal and depend on chance Correct answer.

Explanation

Aleatory refers to the unequal exchange of value between the parties, which depends on whether and when a loss occurs. A small premium may buy a very large benefit, or no benefit at all.

Question 44General Insurance Concepts

An insurance policy is considered a contract of adhesion because:

  1. Both parties sit down and negotiate the terms equally
  2. The insured's promise is conditioned on the payment of premium
  3. The insurer drafts the policy and the applicant must accept it as written Correct answer.
  4. Coverage depends on the insured performing certain duties before it applies

Explanation

In a contract of adhesion one party writes the terms and the other party takes them or leaves them. Because the insurer controls the wording, ambiguities are generally construed against the insurer.

Question 45General Insurance Concepts

Which of the following is an example of a pure risk?

  1. Opening a new business
  2. Gambling at a casino
  3. Investing in the stock market
  4. Owning a home that could be damaged by fire Correct answer.

Explanation

A pure risk involves only the possibility of loss or no loss, never gain, which is why it is insurable. Speculative risks carry the chance of profit and are generally not insured.

Question 46General Insurance Concepts

Which term describes a condition that increases the likelihood or severity of a loss?

  1. Hazard Correct answer.
  2. Peril
  3. Exposure
  4. Risk

Explanation

A hazard is a condition that raises the chance of a loss occurring or makes a loss worse, such as oily rags in a garage. The peril itself is the cause of the loss, such as fire.

Question 47General Insurance Concepts

Which type of insurer is owned by its policyholders?

  1. Captive insurer
  2. Stock insurer
  3. Mutual insurer Correct answer.
  4. Lloyd's association

Explanation

A mutual insurer is owned by its policyholders, who may receive dividends or pay assessments depending on the structure. A stock insurer, by contrast, is owned by shareholders.

Question 48General Insurance Concepts

An insurer incorporated in Ohio writes business in Tennessee. From Tennessee's perspective, this insurer is:

  1. An unauthorized insurer
  2. A domestic insurer
  3. An alien insurer
  4. A foreign insurer Correct answer.

Explanation

An insurer is a domestic company in the state where it is chartered and a foreign company everywhere else in the United States. The alien designation applies to insurers chartered outside the country.

Question 49General Insurance Concepts

An insured's auto insurer pays a $6,000 collision claim caused by another driver, then pursues the at-fault driver to recover the money. This right is known as:

  1. Indemnification
  2. Contribution
  3. Subrogation Correct answer.
  4. Coinsurance

Explanation

Subrogation lets the insurer step into the insured's shoes and pursue the party who caused the loss once a claim has been paid. It supports the indemnity principle by preventing the insured from collecting twice.

Question 50General Insurance Concepts

An insurer tightens its underwriting rules because applicants with serious health conditions are buying coverage at standard rates. This situation is best described as:

  1. Law of large numbers
  2. Risk pooling
  3. Adverse selection Correct answer.
  4. Moral hazard

Explanation

Adverse selection occurs when the people most likely to suffer a loss are the most eager to buy coverage. Insurers counter it through underwriting, exclusions, and waiting periods.