Life & Health Insurance Practice Test
Insurance Insurance Regulation Practice Questions
Insurance Regulation makes up 4 of every 50 questions on a Tigertest Insurance practice test. Here are 10 of the 16 questions on it, each with the answer and the reason.
Updated by the Tigertest team. General portion only, on the NAIC model and standard prelicensing texts. Your state portion is separate.
1. Under the McCarran-Ferguson Act of 1945, primary responsibility for regulating the business of insurance belongs to:
- A.The NAIC
- B.The individual states
- C.The Securities and Exchange Commission
- D.The federal government
Answer: B. McCarran-Ferguson declared that state regulation of insurance is in the public interest, so each state's insurance department and commissioner license insurers and producers and enforce the insurance code. The NAIC only drafts model laws and has no enforcement power, and federal law reaches insurance only where a federal statute specifically addresses it.
2. An insurer incorporated in Bermuda wants to sell life insurance policies to residents of Florida. In Florida, this company is classified as:
- A.A domestic insurer
- B.A fraternal insurer
- C.A foreign insurer
- D.An alien insurer
Answer: D. An alien insurer is organized under the laws of another country. A foreign insurer is one incorporated in a different U.S. state, which is the tempting choice but applies only to companies formed within the United States.
3. An insurer incorporated in Ohio has received a certificate of authority from Texas and sells policies there. In Texas, it is considered:
- A.A foreign, admitted insurer
- B.A domestic, admitted insurer
- C.An alien, non-admitted insurer
- D.A foreign, non-admitted insurer
Answer: A. A company formed in another state is foreign, and one holding a certificate of authority is admitted (authorized) to transact business in that state. Non-admitted would apply only if it lacked a certificate of authority, and it is domestic only in Ohio.
4. Which statement best describes the role of the National Association of Insurance Commissioners (NAIC)?
- A.It approves policy forms for every state
- B.It issues producer licenses valid in every state
- C.It develops model laws that states may adopt
- D.It enforces federal insurance laws
Answer: C. The NAIC is an association of state insurance commissioners that drafts model laws and regulations to promote uniformity, but it has no power to license or enforce. Licensing producers and approving policy forms remain the job of each state's insurance department.
5. A producer receives a client's premium check and deposits it in her personal checking account until she has time to forward it. This is:
- A.Twisting, because funds were diverted
- B.Acceptable if the funds are forwarded within 30 days
- C.Commingling, a breach of fiduciary duty
- D.Rebating, because the client benefits
Answer: C. A producer handles premiums as a fiduciary and must keep them separate from personal funds; mixing them is commingling, which can lead to license discipline. No grace window makes depositing premiums in a personal account acceptable.
6. An agent's written contract does not mention it, but the agent collects initial premiums and delivers policies because those tasks are needed to do the job. This is:
- A.Implied authority
- B.Express authority
- C.Apparent authority
- D.Fiduciary authority
Answer: A. Implied authority is authority not written in the agency contract but needed to carry out the express duties. Express authority is what the contract states in writing, and apparent authority arises when the insurer's conduct leads the public to reasonably believe the agent has authority.
7. Maria shops her client's needs among many insurers and, when placing the business, legally represents the client rather than any insurer. Maria is acting as:
- A.A general agent
- B.A captive agent
- C.An independent agent
- D.A broker
Answer: D. A broker represents the insured or applicant, while an agent, whether captive or independent, represents the insurers that appointed him. An independent agent can also place business with many insurers, but he still legally represents those insurers, not the client.
8. A producer persuades a client to drop a whole life policy and buy a new one from a different insurer by misrepresenting the old policy's terms. This is:
- A.Rebating
- B.Twisting
- C.Sliding
- D.Churning
Answer: B. Twisting is inducing a policyowner to lapse or replace a policy with another insurer's policy through misrepresentation or an incomplete comparison. Churning is similar but involves replacing policies within the same insurer, often to generate new commissions.
9. To close a sale, an agent offers to give the applicant half of the first-year commission, a benefit not stated in the policy. This is:
- A.Defamation
- B.Rebating
- C.Twisting
- D.Coercion
Answer: B. Offering any valuable inducement not specified in the policy, such as part of the commission, to buy insurance is rebating, which is illegal in most states. Twisting involves replacing an existing policy through misrepresentation, which did not happen here.
10. A lender tells a loan applicant the loan will be approved only if he buys credit life insurance from the lender's affiliated insurer. This practice is:
- A.Rebating
- B.Unfair discrimination
- C.Twisting
- D.Coercion
Answer: D. Requiring a person to buy insurance from a particular insurer or agent as a condition of a loan or other transaction is coercion (a tie-in). Unfair discrimination means treating people of the same class and life expectancy differently, such as charging them different rates, which is not what happened here.
Practice all 16 insurance regulation questions, and the rest of the 200-question bank, in the free Insurance training sets. Questions you miss come back until you have mastered them.
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