Basic Insurance Concepts And Principles Flashcards
Insurable Interest
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.
Life Insurance Insurable Interest Identified in these two ways
- 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.
- 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.
Indemnity
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.
Underwriter
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
Underwriters can require
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
Adverse Selection
Tendency of those who are mist in need of insurance to apply. Underwriters protect insurers of this by eliminating high risk applicants.
Spread of Risk
The way insurance companies manage and attempt to distribute its risks in a profitable way.
Risk Management Concepts: Avoidance
Some risks are not worth the trouble for some insurers because they carry to much loss exposure.
Risk Management Concepts: Reduction
Reduce the likelihood or the severity of the loss exposure. Installing a sprinkler system would limit the loss if a fire should occur.
Risk Management concepts: Retention
Instead of buying Insurance, some people retain the risk and the loss themselves. Retention is Self Insurance
Risk Management Concepts: Transfer
A “hold harmless” agreement transfers the risk from one person to someone else. This method is what people do when they purchase insurance.
Risk management: Sharing
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.
Company Underwriting Risks may be rated by:
Class
Insured’s Experience
Underwriter’s Experience
Field Underwriting
The screening process that every agent goes through when evaluating and qualifying prospects
When Risk is classified the applicants get put into three categories:
Preferred Risk
Standard Risk
Sub-Standard Risk: these can still be insured at times with special exclusions or increased rates
Pre and Post Selection Goals
Is to accurately rate the risk before the policy is issued, rather than “post-claim”
Post Claim Underwriting
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)
Deductible
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
Retention Limit
The amount of risk an insurer would normally accept on a given contract
Reinsurance
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.
Treaty
An agreement where the ceding company transfers all excess risk, up to the limits of the agreement, to a reinsurer
Facultative
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
Reinsurance Continued
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.
Insurer
Insurance company or carrier that by contracts indemnifies losses
