Basic Concepts - Section 1 Flashcards
Definition of Insurance
Contract to indemnify from a contingent o unknown event. Transfer of risk.
What is risk?
the uncertainty that a loss will happen
What are the two types of risk?
Pure and Speculative risk
What is pure risk?
No possible gain or profit is involved. Only type of risk insurance companies are willing to accept.
What is speculative risk?
The possible opportunity for loss or gain. Speculative risk is NOT insurable.
*Insuring speculative risks would allow the public to use insurance to make a profit. NOT ENFORCEABLE.
What is STARR?
5 methods of handling risks
What are the 5 methods of handling risks (STARR)
- Sharing: When risk is too large, they may be more than one primary insurer
- Transfer: When risk shifted to another
- Avoid/Avoidance: Person may avoid participating in certain activities. Ex- removing a trampoline.
- Reduce/Reduction: When the insured takes steps to prevent the chances of a loss (fire sprinklers, smoke alarms)
- Retain/Retention: Occurs when a person has the money to cover a loss and doesn’t buy insurance. Self insuring is a form of risk retention.
What does the word peril mean?
the actual “cause of loss”
What are the 4 types of hazards?
- Moral Hazard
- Morale Hazard
- Physical Hazard
- Legal Hazard
What is a Moral Hazard?
Dishonesty, liar, fraud (lying on application, exaggerating a loss to receive more money, fraudulent claims.)
What is a Morale Hazard?
Irresponsibility, carelessness (reckless driving)
What is a Physical Hazard?
Anything that poses a risk & can be seen, heard, touches, tasted or smelled.
(weak limbs, worn-out branches)
What is a Legal Hazard?
Chance of a certain risk ending up in court creates a legal hazard
(Gym: if people are injured due to faulty gym equipment)
Risk EQUALS
Chance
Peril EQUALS
Cause
Hazard Equals
Increases chance
What is the law of large numbers?
The greater the number of exposure units (cars, homes). The more predictable the loss. Used to establish appropriate rates, benefits the insured.
What is Exposure Unit?
Measure used to establish rate
Loss
Any reduction in quantity, quality, or value of something
Loss exposure
Possibility of loss
Property loss exposure
damage to insured’s property
Liability Loss exposure
Harm caused to others
Personal loss exposure
Individuals/families
Personnel loss exposure
Key employee
Financial Loss
is NOT a loss exposure - it is a consequence of all of them
Ideally insurable risks
must be unintentional; creates for the insured an economic hardship; requires large grouping of like/similar/homogeneous units; measurable in money and definable in time, place, cause; must EXCLUDE catastrophic losses.
What is considered an insurable event?
any unknown loss, whether past or future, which may damnify (cause injury to) a person having an insurable interest or create a liability against him; ma be insured against, except gambling and lotteries.
Insurable Interest
means ownership in property & casualty; Life & health is based on relationships
property & casualty: it is proven twice; at application and again at claim
life & disability: it is only proven once: at application
property & casualty: insured ‘s recovery is limited to their insurable interest, policy limit and indemnification provision
What is the principle of indemnity?
To restore someone to the same financial condition with no intent of loss or gain (to make whole). Should not profit. Cannot collect more than 100% of actual loss. Policy provisions such as insurable interest and subrogation support this principal. It is the basic principle behind insurance.
What is Underwriting?
process of selection, classification and rating. Underwriters do risk selection and rating, determine coverage limitations or restrictions, and accept decline the risk. Proper selection is the purpose; the goal of good underwriting is to achieve profitable distributions.
Two types of insurers:
Private or Government
Types of private insurers are:
Stock insurer aka nonparticipating - owned by stockholders, issues taxable dividends.
Mutual Insurer aka participating insurer - owned by policyholders, issues non-taxable dividends to the policyholders.
Reciprocal aka inter-insurance exchange - subscribers exchange insurance on one another. Managed by an attorney in fact.
Fraternal organizations - organized on the basis of a lodge, society , or order. Sells to members only.
Adverse Selection
The tendency of poorer risks (high risks) to seek and maintain insurance to a greater extent than better risks. When an underwriter reject, places restrictions or limitations, or charges a higher premium, this is known as an adverse underwriting decision. They do this to make the higher risk fall in the normal range of exposure
Benefits of Insurance
Reduces financial uncertainty and anxiety; provides payment for covered loss; source of investment funds (insurer’s invest premiums). Retention is not a benefit of insurance because it means you self-insured.
Self funding
Requires a large amount of assets, loss must be known and predictable. Self-insuring allows benefits to be tailored to the group. Death benefits cannot be self funded.
Deductibles
self-insuring (retaining a portion) of the risk. Form of risk retention. Lowering deductible would cause an increasing in claims and premiums. Raising the deductible would cause a decrease in claims and premium.
Reinsurance
an insurer transfers (cedes) all or part of the risk to anther insurer (reinsurer). The original insurer is now known as the primary insurer. Reinsurance spreads the risk, lessens catastrophic losses, lessens problems with unearned premiums, avoids capacity problems, and safely insures large risk.
there are how many classes of insurance
22
classes are also known as lines of insurance
Class of fire includes homeowners, commercial property, and basically any property policies
class of life includes annuities
class of disability includes all accident and health products
Identify what miscellaneous insurance includes:
insurance against loss from damage done directly or indirectly by lightning, windstorm, tornado, earthquake.
Insurance that indemnifies media producers against loss
Insurance that is not included in a specific class of insurance
What is contract law?
formation and enforcement of contracts: Breach of contract, which entitles the inured party to damages, attorney fees, and costs.
Tort law
establishes who did the harm and therefore obligated to pay
excludes: breach of contract and criminal acts.
Intentional tort
assault, libel, slander, false arrest
Unintentional tort
= negligence
Elements or an enforceable contract (ACCL)
Agreement, Consideration, Competent parties, Legal purpose
Agreement =
offer and acceptance
applicant makes an offer by completing an application and submitting it with the premium
Consideration =
exchange of values
Competent parties =
legal capacity
Legal purpose =
Activity must be legal
Features/characteristics of insurance contract
adhesion, unilateral, utmost good faith, conditional, personal, and aleatory
Adhesion
take it or leave it, no negotiation on the insured’s part
vague/ambiguous: courts will rule in favor of insured.
Unilateral
Only one side (insurer) is legally bound to contractual obligations (promise)
Conditional
The contract conditions must be met before the insurer’s promise is fulfilled
Personal
means the contract is between the insured and insurer. The contract cannot be assigned without insurer’s written consent
Aleatory
performance depends upon an uncertain future event (claim). it also means an unequal exchange of money
Indemnity
to restore. The amount paid will be determined a the time of loss. An indemnity health plan requires you submit your own claim form. In health insurance, an indemnity payment is a stated amount regardless of an actual expense
Fraud
to intentionally or knowingly deceive for unlawful gain. Claim forms state that if a fraudulent claim is submitted, the person is guilty of a crime and subject to fines and imprisonment.
Concealment
not communicating, failing to disclose, withholding information that should be communicated to the other party.
Material concealment
whether intentional or unintentional, allows the injured party to rescind (void the contract). If there is no inquiry, then there is no concealment. Materiality of concealment is judged the same as representation (not knowing places the other party at a disadvantage)). Neither party is bound to communicate information that the other party already knows. Neither party is bound to communicate, even upon inquiry, their own judgement or opinion upon the matters in questions.
Warranties
express (in writing) or implied (not in writing). Statements that are guaranteed to be true in all respects. Express warranties must be in some document signed and made part of the contract. Warranties can relate to past, present, future or any or all of these
WAIVER
Legal abandonment/relinquishment of a known right
Materiality
means that not knowing the information placed the person at a disadvantage. it is based on the influence of the facts, not an event, whether it is a representation or concealment.
Representation
oral or written statement. it is a statement to the best of one’s knowledge or belief and is given a time of application or before issuance.
- Can only be altered or withdrawn before issuance of the policy, not afterward a representation to the future can qualify as a promise and representation can qualify as as an implied warranty.
Misrepresentation
oral or written statement that is false. False means the facts do not correspond with assertions or stipulation. If the misrepresentation is material (matters) the injured party can rescind the contract.
- leading a client to expect a dividend is a prohibited misrepresentation.
twisting
a producer conceals, misrepresents, or makes a misleading comparison that INDUCES the insured to drop what they have and buy from them. This is a misdemeanor
CIC required 6 policy specifications
Parties involved risk to be insured interest in the property risk insured against policy period premium
Rescission
= voiding - requires material concealment, misrepresentation, or breach of warranty
