Basic Insurance Concepts and Principles

Question 1

Insurance

Answer 1

Transfers the risk of loss from an individual or business entity to an insurance company. Spreads the costs of unexpected losses to many individuals.

Question 2

Person

Answer 2

A legal entity which acts on behalf of itself, accepting legal and civil responsibility for the actions it performs and making contacts in its own name.
They include individual human beings, associations, organizations, partnerships l, and trusts.

Question 3

Insurance

Answer 3

The legal agreement, or contract, whereby the two parties involved agree to the limits of the indemnification, the circumstances under which it will occur and what things of value (consideration) will be exchanged by the parties to contract.

Question 4

Agency Contract

Answer 4

A contact that is held between an insurer and agent/producer, containing the expressed authority given to the agent/producer, and the duties and responsibilities to the principal.

Question 5

Agent/Producer

Answer 5

Person who acts for another person or entity with regard to contractual arrangements with third parties; a legal representative of an insurance company. Insurer is the principal.

Question 6

Applicant or Proposed insured

Answer 6

A person who requests or seeks insurance from an insurer.

Question 7

Beneficiary

Answer 7

The person who receives the benefits from the policy of insurance.

Question 8

Death Benefit (face amount/ face value/ coverage)

Answer 8

The amount paid when a claim is issued against a policy of insurance.

Question 9

Insurance Policy

Answer 9

A contract between a policyowner (and/insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events.

Question 10

Insured

Answer 10

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

Question 11

Insurer (principal)

Answer 11

The company who issues a policy of insurance.

Question 12

Life Insurance

Answer 12

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

Question 13

Policyowner

Answer 13

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

Question 14

Premium

Answer 14

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

Question 15

Risk

Answer 15

The uncertainty or chance of loss occurring.

Question 16

Pure Risk

Answer 16

Situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies are willing to accept.

Question 17

Speculative Risk

Answer 17

Involves the opportunity for either loss or gain. Like gambling. These types of risks are not insurable.

Question 18

Perils

Answer 18

The causes of loss insured against in an insurance policy.

Question 19

Hazards

Answer 19

Conditions or situations that increase the probability of an insured loss occurring. Hazard are classified as physical, moral, or morale.

Question 20

Physical hazard

Answer 20

Individual characteristics that increase the chances of the cause of loss. Physical condition, past medical history, or a condition at birth, as blindness.

Question 21

Moral hazard

Answer 21

Tendencies towards increased risk. Evaluating the character and reputation of the proposed insured. People who may lie on app for insurance, or in the past, have submitted fraudulent claims against insurer.

Question 22

Morale Hazard

Answer 22

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

Question 23

Law of Large Numbers

Answer 23

(A homogeneous group) States that the larger the number of people with a similar exposure to loss, the more predictable actual actual losses will be.

Question 24

Exposure

Answer 24

Is a unit of measure used to determine rates charged for insurance coverage.
These are the factors:
-age of insured
-medical history 
-occupation 
-sex

Question 25

Adverse Selection

Answer 25

The insuring of risks that are more prone to losses than average risk. Poorer risk tend to seek insurance or file claims to a greater extent than better risks.

Question 26

Critical Risk

Answer 26

All exposures in which the possible loses are of the magnitude that would result in financial ruin to the insured, his or her family, and/or to his or her business.

Question 27

Important Risk

Answer 27

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

Question 28

Unimportant Risk

Answer 28

Include 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 29

Sharing

Answer 29

Sharing is a method of dealing with risk for a group of individual persons 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 30

Transfer

Answer 30

The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring.

There are several ways to transfer risk, such as hold harmless agreements and other contractual agreements, but the safest and most common method is to purchase insurance coverage.

Question 31

Avoidance

Answer 31

One of the methods of dealing with risk is avoidance, which means eliminating exposure to a loss. For example, if a person wanted to avoid the risk of being killed in an airplane crash, he/she might choose never to fly in an airplane. Risk avoidance is effective, but seldom practical.

Question 32

Retention

Answer 32

Risk retention is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays. The purpose of retention 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 33

Reduction

Answer 33

Since we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. Reduction would include actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perh

Question 34

Ideally Insurable Risk

Answer 34

The loss must be due to chance (accidental).
The loss must be definite and measurable.
The loss must be statistically predictable.
The loss cannot be catastrophic.
The loss exposure to be insured must involve large homogenous exposure units.
The insurance must not be mandatory.

Question 35

Insurable Interest

Answer 35

To purchase insurance, the policyowner must face the possibility of losing money or something of value in the event of loss. This is called insurable interest. In life insurance, insurable interest must exist between the policyowner and the insured at the time of application; however, once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists.

Question 36

Indemnity

Answer 36

a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract.

Question 37

Utmost Good Faith

Answer 37

The principle of utmost good faith implies that there will be no fraud, misrepresentation or concealment between the parties. As it pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information. The insured is expected to provide accurate information on the application for insurance, and the insurer must clearly and truthfully describe policy features and benefits, and must not conceal or mislead the insured.