Basic Insurance Concepts and Principles

Question 1

CIC 22 - What is Insurance?

Answer 1

Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event

Question 2

Agency Contract

Answer 2

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

Question 3

Insurer

Answer 3

the principal

Question 4

Agent / Producer

Answer 4

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.

Question 5

Applicant

Answer 5

or proposed insured is a person who requests or seeks insurance from an insurer

Question 6

Beneficiary

Answer 6

the person who receives the benefits from the policy of insurance

Question 7

Death Benefit

Answer 7

the amount paid when a claim is issued against a policy of insurance

Question 8

Insurance Policy

Answer 8

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

Question 9

Insured

Answer 9

the person covered by the policy of insurance who may or may not be the applicant or policyowner

Question 10

Insurer (principal)

Answer 10

the company who issues a policy of insurance

Question 11

Life insurance

Answer 11

a coverage upon a person’s life, and granting, purchasing, or disposing of annuities

Question 12

Policyowner

Answer 12

the person who is entitled to exercise the rights and privileges in the policy and who may or may not be the insured

Question 13

Premium

Answer 13

the money paid to the insurance company for the policy of insurance

Question 14

Broker

Answer 14

an insurance producer not appointed by an insurer and is deemed to represent the client

Question 15

Reciprocity/ Reciprocal

Answer 15

a mutual interchange of rights and privileges

Question 16

Insurance

Answer 16

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

Question 17

Pure risk

Answer 17

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

Question 18

Speculative risk

Answer 18

the opportunity for loss or gain. Such as gambling. This is not insurable

Question 19

Perils

Answer 19

the causes of loss insured against in an insurance policy

Question 20

Types of perils

Answer 20

Life insurance, health insurance, property insurance, casualty insurance

Question 21

Hazards

Answer 21

conditions or situations that increase the probability of an insured loss occurring.

Question 22

Types of hazards

Answer 22

physical hazards, moral hazards, morale hazards

Question 23

Physical hazards

Answer 23

individual characteristics that increase the change of the cause of loss. Physical condition, past medical history, or a condition at birth

Question 24

Moral hazards

Answer 24

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

Question 25

Morale hazards

Answer 25

arise from a state of mind that causes indifference to loss, such as carelessness. Actions taken without forethought may cause physical injuries

Question 26

Legal hazard

Answer 26

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

Question 27

Exposure

Answer 27

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

Question 28

Homogeneous

Answer 28

a large number of units having the same or similar exposure to loss

Question 29

Risk

Answer 29

a chance that a loss will occur; a hazard increases the probability of loss; peril is the cause of loss

Question 30

Critical risk

Answer 30

all exposures in which the possible losses are of the magnitude that would result in financial ruin to the insured, their family, or business

Question 31

Important risk

Answer 31

those exposures in which the losses would lead to major changes in he person’s desired lifestyle or profession

Question 32

unimportant risk

Answer 32

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

Question 33

Risk management techniques

Answer 33

sharing, transfer, avoidance, retention, reduction

Question 34

Sharing risk

Answer 34

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

Question 35

Transfer risk

Answer 35

most effective. insurance is the most common method of transferring risk from an individual or group to an insurance company.

Question 36

Avoidance risk

Answer 36

eliminating exposure to a loss.

Question 37

Retention risk

Answer 37

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.

Question 38

Reduction risk

Answer 38

lessen the possibility or severity of a loss.

Question 39

Indemnity

Answer 39

insureds cannot recover more than their loss

Question 40

Profitable distribution of exposures

Answer 40

balances poor risk and preferred risk with standard risks in the middle, protects insurers from adverse selection