Basic Insurance Concepts and Principles Flashcards
CIC 22 - What is Insurance?
Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event
Agency Contract
a contract that is held between an insurer and an agent / producer, containing the expressed authority given to the agent / producer, and the duties and responsibilities to the principal. An agent who is in violation of the agency contract may be held personally liable to the insurer
Insurer
the principal
Agent / Producer
a person who acts for another person or entity with regard to contractual arrangements with third parties; a legal representative of an insurance company. The classification of producer usually includes agents and brokers; agents are the agent of the insurer. The insurer is the principle.
Applicant
or proposed insured is a person who requests or seeks insurance from an insurer
Beneficiary
the person who receives the benefits from the policy of insurance
Death Benefit
the amount paid when a claim is issued against a policy of insurance
Insurance Policy
a contract between a policyowner (and/or insured) and an insurance company which agrees to pay he insured or the beneficiary for loss caused by specific events
Insured
the person covered by the policy of insurance who may or may not be the applicant or policyowner
Insurer (principal)
the company who issues a policy of insurance
Life insurance
a coverage upon a person’s life, and granting, purchasing, or disposing of annuities
Policyowner
the person who is entitled to exercise the rights and privileges in the policy and who may or may not be the insured
Premium
the money paid to the insurance company for the policy of insurance
Broker
an insurance producer not appointed by an insurer and is deemed to represent the client
Reciprocity/ Reciprocal
a mutual interchange of rights and privileges
Insurance
a transfer of risk of loss from an individual or a business entity to an insurance company that hen spreads the cost of unexpected losses to individuals
Pure risk
situations that can only results in a loss or no change. There is no opportunity for financial gain. This is the only type of risk that insurance companies are willing to accept
Speculative risk
the opportunity for loss or gain. Such as gambling. This is not insurable
Perils
the causes of loss insured against in an insurance policy
Types of perils
Life insurance, health insurance, property insurance, casualty insurance
Hazards
conditions or situations that increase the probability of an insured loss occurring.
Types of hazards
physical hazards, moral hazards, morale hazards
Physical hazards
individual characteristics that increase the change of the cause of loss. Physical condition, past medical history, or a condition at birth
Moral hazards
tendencies towards increased risk. involve evaluating the character and reputation of the proposed insured. Someone who may lie on an application for insurance or submitted fraudulent claims against an insurer
Morale hazards
arise from a state of mind that causes indifference to loss, such as carelessness. Actions taken without forethought may cause physical injuries
Legal hazard
a set of legal or regulatory conditions that affect an insurer’s ability to collect premiums that are commensurate with the exposure to loss that the insurer must bear
Exposure
a unit of measure used to determine rates charged for insurance coverage. The factors considered in determining rates are: age, medical history, occupation, and sex
Homogeneous
a large number of units having the same or similar exposure to loss
Risk
a chance that a loss will occur; a hazard increases the probability of loss; peril is the cause of loss
Critical risk
all exposures in which the possible losses are of the magnitude that would result in financial ruin to the insured, their family, or business
Important risk
those exposures in which the losses would lead to major changes in he person’s desired lifestyle or profession
unimportant risk
those exposures in which the possible losses could be met out of current assets or current income without imposing undue financial strain or lifestyle changes
Risk management techniques
sharing, transfer, avoidance, retention, reduction
Sharing risk
dealing with risk for a group of individuals or businesses with the same or similar exposure to loss to share the losses that occur within that group. a reciprocal insurance exchange is a formal risk-sharing arrangement
Transfer risk
most effective. insurance is the most common method of transferring risk from an individual or group to an insurance company.
Avoidance risk
eliminating exposure to a loss.
Retention risk
planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. Purpose is: to reduce expenses and improve cash flow, to increase control of claim reserving and claims settlements, and to fund for losses that cannot be insured.
Reduction risk
lessen the possibility or severity of a loss.
Indemnity
insureds cannot recover more than their loss
Profitable distribution of exposures
balances poor risk and preferred risk with standard risks in the middle, protects insurers from adverse selection
