chapter 1 Basic Principals of Life Insurance Flashcards
Life Insurance is based on
Actuarial or mathematical principles
Health insurance is based on
Scientific Principles
2 basic reason for insurance
- protection against financial loss
2. restores insured back to some condition as before the loss
Pooling of Risks
primary principal of insurance
large numbers contribute to cover losses of a few
Law of large numbers
Larger the number of individual risks combined in a group the more certainty their is in predicting the degree or amount of loss that will be incurred.
Morbidity
sickness
Mortality
death
Speculative Risk
- involves possibility of loss or gain
2. not insurable because their is possibility of gain
Pure Risk
- possibility of loss only, unexpected and outside of control
- insurable
Peril
The cause of a risk
ex. fire
Hazard
Source of the danger, factor behind the peril
4 ways to deter insurance risk levels
- risk avoidance
- risk reduction
- risk retention
- risk transference
Risk Avoidance
Evade risk entirely
ex. if you dont drive you cant wreck
Risk Reduction
Chances of loss are lessened
ex. buy car with alarm, lessens chance of theft
Risk Retention
being aware of risks and taking precautions for financial protection.
ex. deductible on car insurance
Risk Transference
shifting risk responsibility to another in form of insurance contract.
Adverse Selection
Selection against the company. Tendency for those individuals who present less favorable insurance risk to seek or continue insurance to a greater extent than other risks.
3 types of hazards
Physical- cancer etc
moral- bad habits, smoking etc
morale- mental, road rage etc
2 main classifications of insurance providers
- Private insurers
2. Gov’t insurers
Stock insurance companies
owned by stockholders in the company
if they offer participating and non participating policies it is referred to as a mixed plan.
Mutual Insurers
owned by the policyholders
provide insurance to its owners at lowest possible cost
Lloyds of London
Underwrites insurance, not an insurance company
Fraternal Benefit Societies
must be non profit
have a lodge system
offer insurance to ITS members only
Service Providers
Contract for and sell medical and hospital care services.
participants known as subscribers
HMO’s- stress preventative healthcare and screenings
2 main classifications of Agents
- Captive Agents
2. Independent Agents
Captive Agents
work for only 1 insurer and sell only their products
Independent Agents
represent several insurers and sell multiple products
3 types of Agency Systems
- Career agency system
- Personal producing general agency system
- Independent agency system
McCarran Ferguson Act
Determined that insurance regulated by state law was “in the publics best interest”
exempted insurance industry from federal anti-trust legislation
The Fair Credit Reporting Act
consumers have a right to be informed when their credit is checked
Domestic Insurer
practicing in state it is incorporated in
Foreign Insurer
licensed and practicing in a state other than the one in which it is incorporated
Alien Insurer
Licensed and practicing in another country other than US and is practicing in the US
Standards and ethical behavior of those licensed to conduct insurance business
- Selling to needs
2. Suitability or recommended products
Agent Records
Subject to scrutiny at any time by Commissioner of insurance regulation.
Twisting
External policy replacement.
getting client to drop coverage to get similar coverage with another company
Churning
Internal policy replacement
TRUE of FALSE
Agent bears the burden of proving policy replacement is in the clients best interest
True
Career Agency System
represented by agencies committed to the ongoing recruitment and development of career agents
Financial Services Modernization Act
1999 Act eliminating restriction on financial institutions, insurance companies, commercial banks, and retail brokerages from entering each others line of business
HMO
Health Maintenance Organization
Home Service Insurer
small policies, paid weekly, collected at policy owners home
NAHU
National Association of Healthcare Underwriters
NAIC
National Association of Insurance Commissioners
PPO
Preferred Provider Organization
PPGA
Personal Producing General Agency System
Rebating
Returning part or all of commission or anything of value to get the client to go with you.
Reciprocal Insurer
policy holders insure the risk of other policy holders
Reinsurance
acceptance by one or more additional insurers
Risk Retention Groups
mutual insurer that provides coverage to people of came groups.
Self Insurance
financed entirely through the means of the policy holder
State Guaranty Associations
established by states to support insurers.
U.S. vs Southeastern Underwriters Association
1944, stated insurance is a form of interstate commerce and should be regulated by federal gov’t
