Chapter 01 Flashcards
Insurance Companies
Insurers or Carriers
Manufacture and sell insurance
coverage in the form of insurance policies or contracts of insurance
Insurance Agencies
Are captive or independent organizations that recruit, contract with,
train, and support insurance producers
Insurance Producers
Are licensed individuals representing and appointed by an insurance
company when transacting insurance business.
GoHealth is a captive organization.
An Insured
Is the person or entity that is covered by the Insurer, which covers losses due to loss of life, health, property, or liability.
An Owner
Is not necessarily the insured under the policy but is responsible for paying the
policy’s premium and has various rights as specified in the contract.
National Association of Insurance Commissioners
Consists of all state and territorial
insurance commissioners or regulators. It provides resources, research, legislative and regulatory
recommendations and interpretations for state insurance regulators. It also promotes uniformity
among states. Members may accept or reject recommendations. The NAIC has no legal authority
to enact or enforce insurance laws.
Purpose:
federal agencies
provide regulatory oversight impacting insurance practices when states fail to do so
Private vs. Government Insurers
Most insurance is written through private insurers. governmental-based insurers step in to offer an insurance alternative when private insurers are unable to provide protection (Medicare: can be for older Americans, Medicade: the needy, such as children or disabled)
Stock Insurance Company
A stock company is owned by <b>stockholders</b> or shareholders.
Stockholders may receive taxable corporate dividends
Mutual Insurance Company
A mutual company is owned by <b>policyholders</b> (who may be referred to as members).
Policyholders may receive non-taxable
dividends
Reciprocal Insurance Company
A group-owned insurer whose main activity is risk sharing. Lower risk by spreading out.
Individuals, firms, and business corporations that exchange insurance on one another. Each member is known as a subscriber,
And each subscriber assumes a part of the risk of all other subscribers.
Lloyd’s of London
groups of underwriters called
Syndicates.
Lloyd’s provides a meeting place and clerical services for syndicate members
Fraternal Benefit Societies
Non Profit/ Charitable. Consist of churches and other small organizations.
Risk Retention Groups
Do not avoid the risk.
Risk Retention Groups are group-owned insurers that primarily assume and spread the liability related risks of its members.
Must be made up of a large number of homogeneous or similar units.
Theme parks, go-cart tracks, or water
slides.
Residual Markets
A last resort private coverage source for businesses and individuals who have been rejected by the voluntary insurance market.
(Workers’ Compensation, personal auto liability)
Reinsurance Companies
Takes on risk that an insurance company does not want to take on.
Ex. ) Company A takes 500,000 in risk and sells 200,000 of it to a reinsurance company
Reinsurance Types: Treaty
Reinsurance agreement that automatically accepts all new risks presented by the
ceding insurer
Reinsurance Types: Facultative
Reinsurance agreement that allows the reinsurance company an opportunity
to reject coverage for individual risks, or price them higher due to their substandard
(higher risk) nature.
Domicile
Jurisdiction (state or country) where an insurer is formed or incorporated
Domestic Insurer
Insurer organized under the laws of this state
Foreign Insurer
Outside the state
Alien Insurer
Outside of the country
Admitted (Authorized) insurer
is authorized by this State’s Commissioner of Insurance to do business in this State. Certificate of Authority from the State (Commissioners of Insurance)
Non-admitted (Unauthorized) insurer
applied for authorization to do business
in this State and was declined or they have not applied.
Surplus Lines Insurance
(aka Excess lines) Insurance cannot be obtained from admitted insurers so insurance can be placed through non-admitted carriers. Nothing has been admitted for what you are trying to cover
Actuarial Department
Gather and interpret statistical information used in rate making. An actuary determines the probability of loss and sets premium rates.
Underwriting Department
Responsible for the selection of risks (persons or property) to insure and rating that determines policy premiums.
Exclusive or Captive Agency System
- Agent represents solely one company or group of companies having common ownership.
- Insurer retains ownership rights to the business written by the agent
Direct Writing System
r Agent is an employee of the insurer
Law of Agency
Legally act on behalf of a principal, or insurance company.
Relationship between agency and principal.
Express authority
Specifically granted in the agent’s contract.
Acting within rules of a contract
Implied authority
Not specifically stated in the contract, but reasonable and necessary for the producer to carry out specifically stated duties.
Public assumes you have this authority
Apparent authority
Not valid authority. It outside of express thus outside of implied.
(take a premium after a policy has lapsed)
Producer’s Responsibilities to the Insurer
- Must keep premiums in a trust account separate from other funds and forward to insurer promptly (no commingling).
- Must report any material facts that may affect underwriting.
- Duty to only recommend the purchase of suitable policies.**
Producer’s Responsibilities to Insurance Applicant or Insured
- Forward premiums to insurer on a timely basis.
- Recommend coverage that best protects the insured from possible loss and NOT the most
profitable coverage from the perspective of the producer
Broker
licensed individual who negotiates insurance contracts with insurers on <b>behalf of the applicant</b>
Fair Credit Reporting Act - FCRA
- Protects consumer privacy and protects the public from overly intrusive information collection practices.
- When an application is taken, it must inform the applicant a credit report can be obtained.
- Applicant can challenge inaccuracies
Gramm-Leach-Bliley Act (the Financial Services Modernization Act of 1999)
To provide each consumer with a privacy notice at the time the consumer relationship is established
The privacy notice must explain:
■ The information collected about the consumer
■ Where that information is shared
■ How that information is used
■ How that information is protected
Violent Crime Control and Law Enforcement Act of 1994
- a felony for a person to engage in the business of insurance after being convicted
of a state or federal felony crime involving dishonesty or breach of trust. - Applicants who have been convicted of a felony must apply for Consent to Work
- Reciprocity – If consent is granted by any state, other states must allow the applicant to
work in their states as well. - Consent Withdrawal – If conditions of consent are not continually met, the consent may
be withdrawn.
Risk
A condition where the chance, likelihood, probability or potential for a loss exists
Speculative Risk
– Situations where there is a chance for loss, gain, or neither loss nor gain to occur. (investing)
Speculative risk <b>cannot be insured</b>, cannot insure when there is a chance for gain
Pure Risk
– Situations where there is no chance for gain; the only outcome is for nothing to occur or for a loss to occur.
Loss
Reduction, decrease, or disappearance of value.
Peril
The cause or source of a loss (fire, windstorm, embezzlement, disease, death)
Hazard
A specific condition that increases the probability, likelihood, or severity of a loss from
a peril.
* Smoking,
Hazard Type: Physical
physical condition that increases the likelihood or probability of loss.
Example: Flammable material
stored near a furnace.
Hazard Type: Moral Hazard
Intent: Dishonest tendencies that increase
the probability of a loss.
Example: An insured burns down
his/her own house to collect the
insurance payout.
Hazard Type: Morale
Neglect: An attitude of indifference toward
the risk of loss that increases the
probability of a loss occurring.
Example: Driving too fast for
conditions, not wearing a seat
belt
Loss Exposure
The condition of being at risk of loss. Simply by existing
Adverse Selection
Risks that are hard to insure but are the only risks seeking insurance within a specific marketplace. For example, only those living in earthquake-prone areas seek to buy earthquake insurance
Managing Risk: Sharing
Pooling or spreading the risk among a large number of persons or entities.
Managing Risk: Transfer
Transferring the risk from one party to another, such as from a consumer to an insurance company.
Managing Risk: Avoidance
Avoid the activity that gives rise to the chance of loss. After potential areas of hazards have been identified, it may be found that some
exposure to risk can be eliminated, but it is impossible to avoid all risk.
Managing Risk: Reduction
Minimizing the chance of loss, but not preventing the risk. Preventative Care
Managing Risk: Retention
Self-insure the entire loss or a portion of the loss. Choosing deductibles is a method of risk retention.
Insurable Risks must Include:
■ Large number of homogeneous units or groups with the same perils.
■ The chance of loss must be calculable.
■ The loss must be measurable
■ loss must be accidental in nature.
Law of Large Numbers
– As the number of units in a group increases, the easier it is to <b>predict</b> a particular outcome.
Principal of Indemnity
Restore to prior position before loss
Insured should not profit from an insurance transaction
Insurability
– The ability of an applicant to meet an insurer’s underwriting requirements
Insurable Events
Any event, past or present, which may cause loss or damage, or create legal
liability on the part of an insured.
Insurable Interest
Insurable interest must exist at the time of application,
Four Elements of a Legal Contract: . Competent Parties
All parties to a contract, such as the insurer and policyowner, must have legal capacity to
enter into a contract.
Exclude:
□ Minors
□ The mentally incompetent or incapacitated.
□ Persons under influence of drugs or alcohol.
Four Elements of a Legal Contract: Legal Purpose
All parties to a contract must enter it for a legal purpose
Four Elements of a Legal Contract: Agreement
One party must make and communicate an offer to the other party and the
second party must accept that offer
Four Elements of a Legal Contract: Consideration
■ Something of value is exchanged by each of the parties to the contract; the exchange of
money (first premium only) for a promise (the guarantees within the contract).
Parol Evidence Rule
A written contract may not be altered without the written consent of both parties.
Subrogation
Occurs when a claim is paid by the insurer who has the contract and the right to take legal action against a negligent third party who may have caused the loss. Life policies have no right of subrogation.
Contract of Adhesion
One party writes the contract, without input from the other party. One party (insurer) prepares the contract and presents it to the other party (applicant) on a “take-it-orleave-it” basis, without negotiation.
Aleatory Contract
The exchange of value is unequal. Insured’s premium payment is less than
the potential benefit to be received in the event of a loss. The insurer’s payment in the event of a
loss may be much greater,
Personal Contract
– A contract between the insurance company and an individual. Personal
contract are specific to the person insured at the time the contract is formed.
Unilateral Contract
Only one party is legally bound to the contractual obligations after the premium is paid to the insurer.
Conditional Contract
Both parties must perform certain duties and follow rules of conduct to make the contract enforceable.
Utmost Good Faith
No ill intent. s bargain in good faith when forming and entering into the contract.
Representations
Statements made by the applicant
Material vs. Immaterial Representations
Material will effect the contract
Warranties
Statements in the application or stipulations that are guaranteed true
in all respects.
Waiver
Voluntary surrender of a known right, claim or privilege.
Fraud
Intentional deception of the truth; Disregard for the victim; Victim makes a decision and/or acts based on the belief in, or reliance upon, the false
statement; The victim’s decision and/or action results in harm.
Estoppel
Estop a person from making assertions or from going back on his or her word. President has been established and must continue
Underwriting Factors
■ Age
■ Gender
■ Tobacco use
■ Medical history and pre-existing conditions
■ Hazardous hobbies and occupations
(NOT marital status for health insurance)
