Basic Principles Flashcards
An insurance policy is..
A social device (legal contract, or policy) for the transfer of financial risks
Pure/speculative risks
Pure risk: when the insured can only stand to lose should loss occur (ins policies generally cover only pure risks)
Speculative risk: is when there is also an opportunity to gain (profit) should an even occur
Pooling of risks
Is when a large group of people contributes money to a fund out of which their losses can be paid. The larger the group, the better it works financially
The insured
Is the person or organization who is protected by the insurance policy and for whom the insurance company accepts financial risk
The premium
Is the money paid by the insured to the insurance company and exchange it for the insurance policy. The premium must be sufficient to pay commissions and marketing cost; pay administrative costs, and provide a loss reserve
A lapse
Is when a policy is terminated due to nonpayment of premiums
An endorsement
Is a form added to an insurance policy. *It is usually added for an additional premium charge to add additional coverage. Sometimes, however, it can be added to limit (or, restrict) coverage
A peril
Is an actual cause of loss that can be insured against. Ex: Loss caused by a fire. Allied perils: hail, riots, earthquakes)
A hazard
Is the condition or operation in property which either creates or increases the chance of loss by a covered peril. Ex: frayed wires
Risk/exposure
Is the likelihood, probability or degree of uncertainty that a covered peril will cause a loss.
Actuarial tables
They tell the insurance companies how many people are likely to have claims and how much the losses are likely to be (used to calculate premium rates)
A law of large numbers says…
That the more people the insurance company ensures, the more accurate the actuarial tables will be
Insurable interest
Is a financial interest (risk) which the insured must possess at the time of loss.
- property owner
- mortgagee
- lien holder
Indemnity
Is the legal concept of one party (ins company) standing in the place of or making good for another (the insured). Means the same as reimbursement
Transfer of risk
Through ins individuals transfer to ins companies financial risks they cannot individually afford
Indemnify
Reimburse
Both principles of indemnity (reimbursement) and insurable interest (financial interest)
Prohibit the insurance company from reimbursing (indemnifying) and insured or more than the actual amount of loss
Deductible
The purpose of the deductible is to illuminate small claims that the insured can afford and which would cost the ins company to administer
Limits of liability
Are the maximum amounts which the insurance company will pay under each coverage
Aggregate limit
Total limit
Other names: face amount, amount carried
Some policies will pay certain specified expenses in addition to the policy limits of liability
Property insurance – additional coverages – Homeowner policies
casualty insurance – supplemental payments – auto policies
Basic causes of loss
12 named perils- basic perils- fire extended coverage & vandalism coverage. * absolute least amount of coverage used as collateral on a loan
Broad cause of loss
20 named perils. Extra coverage.
Which could be described as named peril coverage?
Both basic and broad
All risk (open peril) (special perils) coverage
Best coverage (top of the line coverage) covers all perils under broad; basic forms of policy plus more. Protects against loss caused by all perils except those specifically excluded.
Direct physical loss
Is a loss where the covered peril is the direct cause of the damage or proximate cause
Indirect (consequential) loss
Is a loss where the covered peril is not the direct cause (immediate or proximate cause) of damage or where the property is mostly indirect value. Most policies either exclude or limited coverage. An endorsement is needed under most policies
The amount paid on the loss is called the
Loss settlement or the adjustment
