Ch. 1 - General Insurance NOTE CARDS Flashcards
A legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer.
Agent
Another name for agent
Producer
A person applying for insurance.
Applicant
Another name for an applicant.
Proposed insured
An insurance producer not appointed by an insurer and is deemed to represent the client.
Broker
A contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events.
Insurance Policy
The person covered by the insurance policy. This person may or may not be the policyowner.
Insured
The company who issues an insurance policy.
Insurer
Another name for insurer.
Principal
The person entitled to exercise the rights and privileges in the policy.
Policyowner
The money paid to the insurance company for the insurance policy.
Premium
A mutual interchange of rights and privileges.
Reciprocity/Reciprocal
A transfer of risk of loss from an individual or a business entity to an insurance company, which, in turn, spreads the costs of unexpected losses to many individuals
Insurance
Insurance Transactions
Any of the following by mail or others means- solicitation, negotiations, sale, and advising an individual concerning coverage or claims.
The uncertainty or chance of a loss occurring
Risk
Referring to situations that can only result in a loss or no charge (no opportunity for financial gain)
Pure Risk
What type of risk is insurable?
Pure risk
Refers to the opportunity for either loss or gain. Ex. Gambling (Uninsurable risk)
Speculative Risk
A unit of measurement used to determine rates charged for insurance coverage.
Exposure
A large number of units having the same or similar exposure to loss.
Homogeneous
What is the basis of insurance?
Sharing risk between homogeneous group with similar loss exposures.
Conditions/situations that increase the probability of an insured loss occurring.
Hazards
3 types of hazards
- physical
- moral
- morale
What increases the probability of a loss?
Hazards
Section of an insurance policy that indicates the general rules or procedures that the insurer and insured agree to follow under the term of the policy.
Conditions
Individual characteristics that increase the chances of the cause of loss. Ex. Past medical history, birth conditions such as blindness, or physical health condition.
Physical Hazards
Tendencies towards increased risk due to character/reputation of the proposed insured. (People who lie on applications or submit fraudulent claims.)
Moral Hazards
Tendencies towards increased loss due to indifference/carelessness towards loss. (Ex. Physical injuries caused by lack of forethought in actions.)
Morale Hazards
The causes of loss insured against in an insurance policy.
Perils
4 Types of Insurance Against Perils:
- Life Insurance
- Health Insurance
- Property Insurance
- Casualty Insurance
The reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril.
Loss
Uncertainty as to the outcome of an event when two or more possibilities exist.
Risk
What are the five methods for handling risk?
- Risk avoidance
- Risk retention
- Risk sharing
- Risk reduction
- Risk transfer
Eliminating exposure to a loss. Ex: Avoiding dying in a plane crash by never flying
Risk avoidance
Planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance.
Risk retention
When the insured accepts the responsibility for the loss before the insurance company pays.
Self insurance
What is the purpose of risk retention?
To reduce expenses, improve cash flow, increase control of claim reserving/claims settlements, to fund losses that can’t be insured.
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.
Risk sharing
A formal risk-sharing arrangement.
Reciprocal Insurance Exchange
Lessening the possibility or severity of a loss. (Ex. Installing smoke detectors, annual physicals, changes in lifestyle)
Risk reduction
Most effective way to handle risk through the use of transfer (insurance) so that loss is borne by another party.
Risk transfer
What are the 5 elements of an insurable risk?
- Due to chance.
- Definite and measurable.
- Statistically predictable.
- Not catastrophic.
- Randomly selected and large loss exposure.
Outside of the insured’s control.
Due to chance
Loss that specifies the cause, time, place, and amount.
Definite and measurable
Must be able to estimate average frequency and severity of future losses to premium rates
Statistically predictable
Insurers must be certain their losses will not exceed specific limits. Thus why policies do not include loss caused by war or nuclear events
Not catastrophic
Must have a large pool of insured that represents random selection of risk in terms of age, gender, occupation, health, economic status, and location.
Randomly selected and large loss exposure
The insuring of risks that are more prone to losses than the average risk.
Adverse Selection
A principle stating that the larger the number of similar exposure units considered, the more closely the losses reported will equal the underlying probability of loss.
Law of Large Numbers
What is the purpose of the Law of Large Numbers in insurance?
Allows insurance companies to have a general way of setting premiums by comparing similar people, and comparing their losses.
A form of insurance whereby one insurance company (the reinsurer) in consideration of a premium paid to it, agrees to indemnify another insurance company (the ceding company) for part or all of its liabilities from insurance policies it has issued. **Protects insurers against catastrophic losses.
Reinsurance
Compensate (someone) for harm or loss.
Indemnify
The originating company that procures insurance on itself from another insurer.
Ceding Insurer
Reinsurer, the other insurer in reinsurance.
Assuming Insurer
When reinsurance is purchased on a specific policy.
Facultative Reinsurance
When an insurer has an automatic reinsurance agreement between itself and the reinsurer in which the reinsurer is bound to accept all risks ceded to it.
Reinsurance Treaty
Any person or company engaged as the principal party the business of entering into insurance contracts
Insurer
How are insurers classified?
- Ownership type
- Authority to transact business
- Home location
- Marketing and distribution system
- Rating/financial strength
What are the different types of insurers?
- Government programs
- Private companies
- Stock companies
- Mutual companies
- Fraternal benefit societies
- Reciprocals
- Risk retention group
- Lloyd’s associations
- Surplus lines
Insurer that is funded with taxes and serve national/state social purposes.
Government program
What are private insurance companies funded by?
Premiums
Owned by stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits/losses.
Stock companies
Insurance policy where policyowners do not share in profits or losses.
Nonparticipating parties
Which type of insurer typically issues nonparticipating policies?
Stock companies
Owned by the policyowners and issue participating policies.
Mutual companies
Insurance policy where policyowners are entitled to dividends, which, in the case mutual of mutual
Participating policies
Generated when the premiums and earnings combined exceed the actual costs of providing coverage, creating a surplus.
Dividends
An organization formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government.
Fraternal Benefit Societies
Insurance resulting from an interchange of reciprocal agreements of indemnity among persons known as subscribers. (Subscribers agree to become liable for their share of losses and expenses incurred among all subscribes and they authorize through attorneys to manage and operate the exchange.)
Reciprocal Insurance Company
A liability insurance company owned by its members whose members are exposed to similar liability risks in similar industries and assume/spread liability to its group members.
Risk Retention Group
Can a Risk Retention Group be a reinsurer?
Yes; A RRG can reinsure another RRG as long as the members of the second group are engaged in similar business/industry.
Support facility provider for underwriters or groups of individuals that accept insurance risk.
Lloyd’s Associations
What type of insurance do Lloyd’s Associations typically insure?
Property insurance
Future unpredictable events
Contingency
A type of coverage that is not readily available on admitted market.
Surplus lines
What type of insurer typically specializes in offering insurance to the high risk market on an unregulated basis under each state’s laws.
Surplus lines
A document that authorizes a company to start conducting business and specifies the kind(s) of insurance a company can transact.
Certificate of Authority
Insurers who meet the state’s financial requirements and are approved to transact business in the state as a legal insurer.
Authorized/Admitted
Insurers who have not been approved to do business in the state. (Only licensed excess and surplus line brokers fall into this category.)
Unauthorized/Nonadmitted
3 Types of Insurance Locations:
- Domestic
- Foreign
- Alien
The location where an insurer is incorporated, not necessarily where the insurer conducts business.
Domicile
An insurance company that is incorporated in this state
Domestic
An insurance company that is incorporated in another state or territorial possession.
Foreign
An insurance company that is incorporated outside the US.
Alien
Based on prior claims of experience, investment earnings, level of reserves, and management.
Financial Strength
Amount of money kept in a separate account to cover debts to policyholders.
Reserves
Important factors to insureds: financial strength and stability of insurance company.
Financial Solvency Status (Independent Rating Services)
Guides to insurance company’s financial integrity are published in what?
- AM Best
- Fitch
- Standard and Poor’s
- Moody’s
- Weiss
Insurance comps market their products in different ways (agents or direct solicitation).
Marketing (Distribution) Systems
5 types of Marketing (Distribution) Systems:
- Independent Agency System/American Agency System
- Exclusive Agency System/Captive Agents
- General Agency System
- Managerial System
- Direct Response Marketing System
Marketing System that:
- 1 agent represents several companies
- Nonexclusive
- Commissions on personal sales
- Business renewal with any company
Independent Agency System/American Agency System
Marketing System that:
- 1 agent represents 1 company
- Exclusive
- Commissions on personal sales
- Renewals can only be placed with the appointing insurer
Exclusive Agency System/Captive Agents
Marketing system that:
- General agent-entrepreneur represents 1 company
- Exclusive
- Compensation and commissions
- Appoints subagents
General Agency System
Marketing system that:
- Branch manager supervises agents
- Salaried
- Agents can be insurer’s employees or independent contractors
Managerial System
Marketing system that:
- No agents
- Company advertises to consumers.
- Consumers apply directly to company
Direct Response Marketing System
An individual licensed to sell, solicit or negotiate insurance contracts on behalf of the principal.
Agent/Producer
Principal
Insurer
The relationship between the principal and the agent/producer; the acts of the agent/producer within the scope of authority are deemed to be the acts of the insurer.
Law of Agency
What are the responsibilities of an insurance agent?
- Completing applications for insurance
- Submitting the application to the insurer for underwriting
- Delivering the policy to the policyowner.
3 types of Agent Authority:
- Express Authority
- Implied Authority
- Apparent Authority
The authority a principal intends to grant to an agent by means of the agent’s contract. (Written in the contract.)
Express Authority
Authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal. (Not written in the contract.)
Implied Authority
The appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. (AKA perceived authority)
Apparent Authority
Another name for apparent authority:
Perceived authority
Someone in a position of trust.
Fiduciary
The way companies and producers should conduct their business. (AKA Code of Ethics for producers)
Market Conduct
Common market conduct regulations include:
- Conflict of interest
- A request of a gift/loan as a condition to complete business
- Supplying confidential info
A person that is engaged in an occupation requiring an advanced level of training, knowledge, or skill; placing the public’s interest above one’s own in all situations.
Professionalism
4 Elements of a Legal Contract:
- Agreement (offer and acceptance)
- Consideration
- Competent Parties
- Legal Purpose.
Contract element where:
- One party must submit a definite offer and the other party must accept the exact terms.
- Applicants make the offer in insurance.
- Underwriters approve the application and issue policies.
Offer and Acceptance
Contract element that is the binding force in a contract that requires something of value to be exchanged for the transfer of risk. The _________ on the part of the insured is the representations made in the application and the payment of premium; the _________ on the part of the insurer is the promise to pay in the event of loss.
Insured provides payment of premium and statements on application.
Insurer provides promise to pay in event of loss.
Consideration
Contract element that ensure that the parties to a contract must be capable of entering into a contract in the eyes of the law (of legal age, mentally competent, and not under the influence).
Competent Parties
Contract element that ensures the purpose of contract must be legal and not against public policy.
Legal Purpose
A contract in which the participating parties agree to exchange UNEQUAL amounts.
Aleatory
One-sided (only one party makes a promise).
Unilateral
Only one party (insurer) prepares a contract, and the other party (insured) accepts it as is.
Adhesion
Prepared by one of the parties (insurer) and accepted/rejected by the other party (insured).
Contract of Adhesion
According to the Contract of Adhesion, how are ambiguities handled?
Ambiguities settled in favor of the insured.
An unequal exchange of amounts or values.
Aleatory Contract:
A contract that exists between an insurance company and an individual.
Personal Contract
A contract where only one of the parties is bound to do anything.
Unilateral Contract
A contract that requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations.
Conditional Contract
In favor of the insured because the insurance companies draws up the contract.
Ambiguities in a Contract of Adhesion
If an agent implies through advertising, sales literature, or statements that provisions exist, coverage is expected even if not directly stated in the contract.
Reasonable Expectations
Compensation to the insured that restores them to the same financial position that they enjoyed prior to the loss. (AKA reimbursement)
Indemnity
What is the purpose of indemnity?
Purpose is to restore to the same financial position, not necessarily profit, from a loss.
A principle that implies that there will be no fraud, misrepresentation, or concealment between the parties.
Utmost Good Faith
Statements believed to be true to the best of one’s knowledge, but they are not guaranteed to be true.
Representations
Untrue statements.
Misrepresentations
A statement that, if discovered, would alter the underwriting decision of the insurance company.
Material Misrepresentation
An absolute true statement upon which the validity of the insurance policy depends.
Warranties
The legal term for the intentional withholding of information of a material fact that is crucial in making a decision.
Concealment
The intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party.
Fraud
The voluntary act of relinquishing a legal right, claim, or privilege.
Waiver
A legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or privilege has been waived.
Estoppel
________ is a legal consequence of a waiver?
Estoppel
