1. A health insurance issuer offering coverage in the individual market must provide premium rebates if its medical loss ratio (MLR) is less than what percentage?
A. 70%
B. 75%
C. 80% Correct
D. 85%
Explanation
The Affordable Care Act requires health insurers to maintain a minimum Medical Loss Ratio (MLR) of 80% for the individual and small group markets. This means that at least 80% of premium dollars must be spent on clinical services and quality improvement activities. If the MLR falls below this threshold, insurers must provide rebates to enrollees. The 70% and 75% figures are too low, and 85% is the MLR requirement for the large group market, not the individual market.
2. Why is having a large number of similar exposure units important to an insurer?
A. The greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums. Correct
B. The greater the number insured, the more premium is collected to offset fixed costs.
C. The greater the number insured, the more premium is collected to help cover losses.
D. The insured increases its market share with every insured.
Explanation
The Law of Large Numbers is a fundamental principle of insurance. It states that as the number of exposure units (insureds) increases, the actual loss experience will more closely approximate the probable loss experience. This allows insurers to predict losses with greater accuracy, which is essential for setting premiums that are both adequate to cover claims and competitive. While collecting more premium is a result of a larger pool, the primary importance is the predictive accuracy it provides, not just the influx of cash or market share.
3. The California Insurance Code requirements regarding the return of life or annuity contracts issued to seniors
A. applies to group policies.
B. defines seniors as someone 55 years of age or older on the date of purchase of the policy.
C. gives a senior at least 30 days to return specified life and/or annuity contracts for a full refund. Correct
D. mandates a 30 day free look for all applicants.
Explanation
California Insurance Code mandates a 'free look' period for seniors (defined as age 65 or older, not 55) who purchase life insurance or annuities. This provision allows them to return the policy for a full refund within 30 days. This protection is specifically for individual policies, not group policies. While a free look period is common, the 30-day mandate for all applicants is not a universal California law; the senior provision is specific and extended.
4. Each of the following terms is an important characteristic of a Major Medical policy EXCEPT
A. deductible.
B. copayments.
C. coinsurance.
D. capitation fee. Correct
Explanation
Major Medical policies are characterized by cost-sharing mechanisms between the insurer and the insured. These include deductibles (an initial amount the insured pays before coverage begins), copayments (a fixed fee per service), and coinsurance (a percentage of costs the insured pays after the deductible). A capitation fee is a payment method used in managed care, where a provider is paid a fixed amount per patient regardless of the services rendered. It is a reimbursement model for providers, not a cost-sharing feature of an insurance policy from the consumer's perspective.
5. Which tax advantage is available for individual nonqualified annuities?
A. Fully taxable distributions.
B. Deductibility of contributions.
C. Penalty-free early withdrawals.
D. Tax-deferred accumulation of earnings. Correct
Explanation
The primary tax advantage of a nonqualified annuity (funded with after-tax dollars) is the tax-deferred growth of earnings. The investment gains are not taxed until they are distributed. Contributions are not tax-deductible. Distributions are partially taxable (the earnings portion is taxed as ordinary income). Early withdrawals before age 59½ typically incur a 10% penalty tax on the earnings portion.