Basic Insurance Concepts And Principles

Question 1

Insurable Interest

Answer 1

The inherent or acquired right one has to be compensated(restored to the condition one was in before the loss) in the event of a loss to an event, person or property
Has three components: Legitimate financial interest, potential for economic hardship, no possible gain or profit.

Question 2

Life Insurance Insurable Interest Identified in these two ways

Answer 2

1. Financial Relationship: Someone who provides financial support for another or a bank that lends someone money, are examples of financial relationships that could hold Insurable interest.
2. Strong Love and Affection generated by blood or marriage: Insurable Interest must exist between the owner of the contract and the life being insured. Spouses, insuring each other, children insuring their parents.

Question 3

Indemnity

Answer 3

To restore someone to the approximate financial condition they were in prior to incurring a loss. “Restoration” may be cash payments, repair, or replacement of the damaged insured item.

Question 4

Underwriter

Answer 4

Technician who evaluates risks and determines if that risk is within the scope of the insurer’s underwriting guidelines. Underwriters select the rate and issue the insurance if it meets the insurer’s guidelines

Question 5

Underwriters can require

Answer 5

Review of application, Ohysical Inspections of property to reveal any hazards, DMV records, review of credit reports.
Life Insurance: Same things but may also require medical examination, physician’s statements, MIB Group Inc Information, Responses to questionnaires, telephone interviews with applicant

Question 6

Adverse Selection

Answer 6

Tendency of those who are mist in need of insurance to apply. Underwriters protect insurers of this by eliminating high risk applicants.

Question 7

Spread of Risk

Answer 7

The way insurance companies manage and attempt to distribute its risks in a profitable way.

Question 8

Risk Management Concepts: Avoidance

Answer 8

Some risks are not worth the trouble for some insurers because they carry to much loss exposure.

Question 9

Risk Management Concepts: Reduction

Answer 9

Reduce the likelihood or the severity of the loss exposure. Installing a sprinkler system would limit the loss if a fire should occur.

Question 10

Risk Management concepts: Retention

Answer 10

Instead of buying Insurance, some people retain the risk and the loss themselves. Retention is Self Insurance

Question 11

Risk Management Concepts: Transfer

Answer 11

A “hold harmless” agreement transfers the risk from one person to someone else. This method is what people do when they purchase insurance.

Question 12

Risk management: Sharing

Answer 12

By having five to Six different insurers share a risk, a total loss could still occur. But the loss exposure would be shared by the entire group. This concept is used in the area of larger risks.

Question 13

Company Underwriting Risks may be rated by:

Answer 13

Class
Insured’s Experience
Underwriter’s Experience

Question 14

Field Underwriting

Answer 14

The screening process that every agent goes through when evaluating and qualifying prospects

Question 15

When Risk is classified the applicants get put into three categories:

Answer 15

Preferred Risk
Standard Risk
Sub-Standard Risk: these can still be insured at times with special exclusions or increased rates

Question 16

Pre and Post Selection Goals

Answer 16

Is to accurately rate the risk before the policy is issued, rather than “post-claim”

Question 17

Post Claim Underwriting

Answer 17

The rescission, cancellation or limiting of a policy because the insurance company did not complete underwriting and/or answer all reasonable questions before writing a policy( it is illegal for any insurer to engage in post-claim underwriting)

Question 18

Deductible

Answer 18

An amount of money that must be paid, or Time that must pass before an insurer will provide benefits after a loss. The higher of this, the lower the premium

Question 19

Retention Limit

Answer 19

The amount of risk an insurer would normally accept on a given contract

Question 20

Reinsurance

Answer 20

When the insurer it ceding company shares the risk with another insurer. This is used when an insurance company is asked to take a risk that is greater than its retention limit.

Question 21

Treaty

Answer 21

An agreement where the ceding company transfers all excess risk, up to the limits of the agreement, to a reinsurer

Question 22

Facultative

Answer 22

When an insurance company has no agreements or has used them all, this can assume the excess risk and facilitate the issuing of the policy

Question 23

Reinsurance Continued

Answer 23

The ceding company(primary insurer) transfers all its risk to the reinsurance company(another insurer) but retains the responsibility of paying any losses to the insured.

Question 24

Insurer

Answer 24

Insurance company or carrier that by contracts indemnifies losses

Question 25

Risk

Answer 25

The uncertainty of loss, and its present whenever two or more possibilities exist

Question 26

Pure Risk

Answer 26

CHANCE OF LOSS ONLY

With no chance of gain or profit. (Death, sickness, and likelihood of needing medical care)

Question 27

Speculative Risk

Answer 27

CHANCE OF LOSS AND CHANCE OF GAIN

(Lottery ticket, stock market, etc)

Question 28

Perils

Answer 28

POTENTIAL CAUSES OF LOSS

(Fire, death, lightening, floods)

Question 29

Hazard

Answer 29

These increase likelihood or severity of loss. There are 4 types

Question 30

Physical hazard

Answer 30

Can usually be seen, touched, tasted or smelled.

(Bad breaks, poor health, non sturdy roofing)

Question 31

Moral hazards

Answer 31

Risks an insurance company incurs when assuming an applicant trustworthy

(Dishonesty, addictions, etc)

Question 32

Morale

Answer 32

When a person is indifferent to his/her actions

(Speeding/drunk driving)

Question 33

Legal Hazards

Answer 33

Court actions that increase likelihood of loss. Usually associated with liability insurance(lawsuits)

Question 34

Law of Large Numbers

Answer 34

Helps predict the probability of loss when it is applied to the risks associated with perils that could occur for a large group of similar insured entities over long period of time

Question 35

Loss Exposure

Answer 35

Potential for incurring a loss. Major guideline for determining cost of insurance.

Question 36

Ideally Insurable Risk

Answer 36

One that presents only a chance of loss with no potential for gain

Question 37

Insurable Events

Answer 37

Events that may be insured

Any contingent or unknown event past or future

For insurance to be legal, the owner/insured must have an Insurable interest in the event/people