CU Regulatory and Ethical Frameworks 2 — Questions and Answers
Question 1: Under the McCarran-Ferguson Act, which entity has primary regulatory authority over insurance?
- Federal government
- State governments (Correct answer)
- The NAIC
- The Federal Reserve
Correct answer: State governments
The McCarran-Ferguson Act of 1945 grants states the primary authority to regulate insurance, limiting federal oversight.
Question 2: An underwriter who accepts a gift from a broker in exchange for favorable policy terms is most likely violating which ethical principle?
- Confidentiality
- Conflict of interest (Correct answer)
- Duty of care
- Utmost good faith
Correct answer: Conflict of interest
Accepting gifts for favorable decisions creates a conflict of interest, compromising the underwriter's objectivity and impartiality.
Question 3: Which of the following best describes a 'file-and-use' rate regulation system?
- Rates must be approved before use
- Rates are filed with regulators and can be used immediately (Correct answer)
- Rates require no regulatory filing
- Rates are set by the NAIC
Correct answer: Rates are filed with regulators and can be used immediately
In a file-and-use system, insurers submit rates to regulators and may implement them immediately without waiting for approval.
Question 4: The principle of 'utmost good faith' (uberrimae fidei) in insurance requires that:
- The insurer pay all claims promptly
- Both parties disclose all material facts fully and honestly (Correct answer)
- The insured must accept all policy terms without negotiation
- Underwriters guarantee coverage in all circumstances
Correct answer: Both parties disclose all material facts fully and honestly
Utmost good faith obligates both the insurer and insured to disclose all material information relevant to the insurance contract.
Question 5: Which regulatory document outlines an insurer's obligations regarding the fair treatment of policyholders in claims handling?
- Unfair Trade Practices Act (Correct answer)
- Insurance Holding Company Act
- Risk-Based Capital guidelines
- Lloyd's Franchise Board rules
Correct answer: Unfair Trade Practices Act
The Unfair Trade Practices Act, adopted by most states, sets standards for fair claims settlement and prohibits deceptive practices.
Question 6: When an underwriter applies different premium rates to similar risks based solely on the applicant's race, this is an example of:
- Adverse selection
- Unfair discrimination (Correct answer)
- Risk classification
- Redlining mitigation
Correct answer: Unfair discrimination
Charging different rates based on race rather than actuarially justified risk factors constitutes unfair discrimination, which is illegal.
Question 7: Which term describes the practice where insurers refuse to write coverage in specific geographic areas regardless of individual risk quality?
- Adverse selection
- Redlining (Correct answer)
- Declination
- Ceding
Correct answer: Redlining
Redlining is the illegal practice of denying coverage to entire neighborhoods or geographic areas based on demographic characteristics rather than individual risk assessment.
CU Regulatory and Ethical Frameworks 2
Under the McCarran-Ferguson Act, which entity has primary regulatory authority over insurance?