Basic Principles Cont’d Flashcards
The Role of Insurance
- To transfer the risk of financial loss from one party( an individual) to another (insurance company) through a legal contract.
– Also transfer of risk through the pooling or accumulation of funds.
– Insurance spreads the cost of the unexpected financial loss to many individuals.
Premium
Amount to be paid for an insurance policy.
Indemnified
The policy of the insured restores them to the financial position they enjoyed before they’re insured loss.
Most insurance contracts pay off financial losses and reimburse the insured.
Annuity
A series of payments made at equal intervals parentheses (e.g., savings account, monthly mortgage payments, insurance payments, and pension payments).
I knew what he’s provided stream of income by making a series of payments over the certain period of time.
Types of Insurance Companies
classified in broad terms
- Private/commercial
- Government
Private (commercial) Insurance Companies
Commercial insurers are private companies offering many lines of insurance. They are funded through premiums and sell insurance for profit.
Multi-Line Insurers
Companies that sell more than one line of insurance.
Monoline Insurer
The company that only sells one light of insurance.
Government Funded Insurance
Grant programs are funded with taxes and serve national and state social purposes.
Stock Insurance Companies
- Organized and incorporated understate law.
- Nonparticipating, meaning policyholders do NOT participate in the companies profits NOR in electing the companies Board of Directors.
- Owned by the stockholders, who get paid a share of the company’s profit through dividends.
Mutual Insurers
- Also organized and incorporated under state laws.
- Participating, meaning these companies have no stockholders, instead the policyholders on the company. The insured are both customers and owners, having the right to vote for board members and get paid a share of the companiy’s profits through dividends.
Mutualization
The process of a stock company being converted into a mutual company.
Demutualization
The process of a mutual company being converted into a stock company.
Strong Assessment Mutual Insurers
Classified by the way they charge premiums. (Assessment of loss method)
Pure assessment mutual companies operate on the basis of loss-sharing by group members.
 Risk Retention and Risk Purchasing Groups (RRG)
A mutual insurance company formed to insure people in the same business, occupation, or profession.
Group owned liability: assumes and spreads product liability and commercial risks among members.
Primary purpose is to retain or pool risks
Licensed in state of domicile
Owned by policyholders (business owners who are also shareholders).
Reciprocal Insurers
Similar to mutual insurers
Organized on the basis of ownership by their policyholders
It is the policyholders themselves who ensure other policyholders’ risks.
An attorney-in-fact manages reciprocal insurers.
Reinsurers and Retention Limits
Reinsurers are a specialized branch of the insurance industry because they insure insurers.
Reinsurance is an arrangement by which an insurance company transfers a portion of an assumed risk to another insurer.
Ceding company
Company transferring the risk.
Reinsurer
The company assuming the risk.