Insurance Regulation and General Insurance Concepts — Property & Casualty Insurance License practice questions

Actual cash value (ACV) is most commonly computed as:

1. The original purchase price the insured paid for the property when new
2. The market value of comparable used items on the date of the covered loss
3. The insured's book value shown on federal or state tax returns filed
4. Replacement cost of the property minus accumulated depreciation on it

Answer: D — Replacement cost of the property minus accumulated depreciation on it

A) True-but-irrelevant — historical cost is not ACV. B) Half-right — fair-market value is one accepted ACV method in some states. C) Look-alike — tax basis is unrelated to insurance valuation. D) Correct — the standard ACV formula is RC minus depreciation.

Under a file and use rate regulation regime, an insurer may:

1. Use a rate only after receiving prior written approval from the commissioner
2. File the rate and begin using it, subject to later disapproval by the state
3. Use any rate without any filing to the state department of insurance at all
4. Change rates only if the insurer is organized as a mutual insurance company

Answer: B — File the rate and begin using it, subject to later disapproval by the state

A) Direction reversal — that is prior approval, a separate regime. B) Correct — file and use permits immediate use subject to review. C) Off-by-one — even open-competition still requires some rate filing. D) True-but-irrelevant — corporate form does not gate rate regulation.

The NAIC's role in U.S. insurance regulation is best described as:

1. A federal agency that licenses insurance companies nationwide directly
2. A standard-setting body of state regulators whose model acts require adoption
3. An industry trade group that lobbies Congress on rates and policy forms
4. A quasi-judicial tribunal that hears producer license appeals from states

Answer: B — A standard-setting body of state regulators whose model acts require adoption

A) Direction reversal — insurance is state-regulated, not federal. B) Correct — model acts are advisory until a legislature adopts them. C) Look-alike — that describes a trade association, not the NAIC. D) Half-right — appeals go to the state commissioner, not the NAIC.

Insurable interest in property insurance must exist:

1. At policy inception only for the property to be insured
2. At the time of loss only for the property to be insured
3. At policy inception and at the time the loss occurs
4. Only when a third party consents to the coverage in writing

Answer: C — At policy inception and at the time the loss occurs

A) Half-right — that is the life-insurance rule, not property. B) Half-right — time-of-loss alone omits the inception requirement. C) Correct — property requires interest at both points in time. D) True-but-irrelevant — third-party consent is not the test.

The National Association of Insurance Commissioners (NAIC) is best described as:

1. A federal regulator with direct rulemaking authority over insurers nationwide
2. A voluntary body of state regulators that develops model laws and guidance
3. An industry trade association that lobbies Congress on insurance issues
4. A quasi-judicial body that hears producer license appeals from state action

Answer: B — A voluntary body of state regulators that develops model laws and guidance

A) Direction reversal — insurance is state-regulated, not federal. B) Correct — NAIC is a coordinating body of state commissioners. C) Look-alike — that describes trade groups, not the NAIC. D) Off-by-one — appeals go through state administrative processes.

Principle of indemnity?

Restore the insured to the pre-loss financial position — no profit from loss. Limits include policy limits, deductibles, and ACV/replacement-cost provisions.

Contribution?

When multiple policies cover the same loss, each contributes proportionally (e.g., by limits). Prevents windfall recovery.

What is insurance?

A risk-transfer mechanism by which the insurer agrees, in exchange for premium, to indemnify the insured for covered losses — pooling risk across many policyholders.

Errors and Omissions (E&O) insurance for producers?

Professional liability covering producers for alleged errors in providing insurance services — failure to procure coverage, inadequate limits, misrepresentation. Essential for licensees.