Chapter 1: General Insurance Flashcards
What is insurance?
The transferring of risk of loss from an individual or a business entity to an insurance company. “Insureds losses are transferred over to the insurer”.
What is risk?
The uncertainty or chance of a loss occurring.
What is a peril?
Causes of loss
Based on the principle of indemity
Insurance
Based on the spreading of risk (risk pooling) and the law of large numbers
Insurance
3 types of hazards
- Physical
- Moral
- Morale
Give rise to a peril
Hazards
This type of hazards are individual characteristics that increase the chances of the causes of loss. Ex. Past medical history, physical conditions or condition at birth such as blindness.
Physical Hazard
Tendencies towards increased risks. Involves evaluating the character and reputation of the proposed insured. Ex. Those who lie on their application or who submitted fraudulent claims in the past.
Moral Hazards
Similar to moral hazards except they arise from a state of mind that causes indifference to loss, such as carelessness that may cause physical harm.
Morale Hazards
Agent AKA:
Producer
APPLICANT AKA:
Proposed Insured
A legal representative of an insurance company
Agent/Producer
A person applying for insurance
Applicant/Proposed Insured
An insurance producer not appointed by an insurer and is deemed to represent the client
Broker
A contract bt a policy owner (and/or insurer) 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. May ir may not be the policyowner.
Insured
Insurer (principal)
The company who issues an insurance policy.
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
Reciprocity/Reciprocal
A mutual interchange of rights and privileges
Only ______ risks are insurable
Pure
Opportunity for either loss or gain. Risks of gambling. Not insurable.
Speculative risks
Defined as the reduction, decrease, or disappearance of value of the person or property. Insurance transfers:
Loss
A ______ is a chance that a loss will occur
Risk
A _________ increases the probability of loss
Hazard
A ________ is the cause of loss
Peril
Methods for handling Risks
Hint: STARR
- SHARING
- TRANSFER
- AVOIDANCE
- RETENTION
- REDUCTION
Method for handling risk which means eliminating exposure to a loss. Ex. Not flying on an airplane to avoid dying on an airplane.
Avoidance
Reduces expenses and improve cash flow, fund for losses that cannot be insured and increases control of claim reserving and claim settlements by accepting the responsibility of loss b4 the insurance company does:
Retention
A 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.
Sharing
A reciprocal insurance exchange is a formal ____________ arrangement
Risk-Sharing
Reduction
Actions such as installing smoke detectors, having annual physical exams and making lifestyle changes.
The most effective way to handle risk:
Hint is with life insurance does.
Transfer
Elements of Insurable Risks
HINT:DDSNR
Due to chance
Definite and measurable
Statistically predictable
Not catastrophic
Randomly selected and large loss exposure
Adverse Selection
Insurance companies try to protect themselves from this and have an option to restrict coverage for bad risks or charge them a higher rate for coverage.
Law of large numbers
As the number of people in a risk pool increases, future losses become more predictable.
Owned by stockholders who provide capital necessary to establish and operate the insurance company.
Stock companies
Traditionally stock companies issued ________ policies in which policyowners do not share nonprofits or losses.
Nonparticipating
Nonparticipating (stock) policy
Does not pay dividends to policyowners, however, taxable dividends are paid to stockholders.
Owned by policyowners and issue participating policies.
Mutual companies
Policyowners are entitled to dividends which are a return from over paid premiums and is not taxable. However, dividends are not guranteed.
Participating Policies
Certificate Of Authority aka:
License
Before insurers may transact business in a specific state, they must apply for and be granted a:
License or Certifcate of Authority
Authorized or Admitted
Insurers who meet the state’s financial requirements and are approved to transact business on the state.
Unauthorized or Nonadmitted
Insurers who are not approved to do business in the state.
Defines the relationship between the principal and the agent/producer.
Law of agency
The authority that is written in contract.
Express
Authority that is not expressed or written into contract, but which agent is assumed to have in order to transact the business of insurance for the principal.
Implied
The appearance or the assumption of authority based on actions, words, or deeds of the principal or because of circumstances the principal created. Also know as perceived authority.
Apparent authority
Financial responsibility aka:
Fiduciary responsibility
Someone in a position of trust
Fiduciary
An agreement bt two or more parties enforceable by law.
Contract
Elements of a legal contract
- Agreement
- Consideration
- Competent parties
- Legal purpose
Definite offer by one party and the other party must accept this in its exact terms.
Agreement
Takes place when an insurers underwriter approves the application and issues a policy.
Acceptance
Binding force in any contract. Something of value. The insurer promises to pay for losses and the insured pays the premium and makes truthful statements on the application.
Consideration
Competent Parties
Must be legal age, mentally competent to understand contract and not under the influence of drugs or alcohol
Not against public policy; must have both insurable interest and consent.
Legal purpose for life insurance policy
Unequal values
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
Requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and therefore each party fulfills its obligation.
Ex. Insured pays premium and provides proof of loss and insurer covers claim.
Conditional contract
Somethings referred to as reimbursement. Meaning insured cannot recover more than their loss.
Indemnity
Implies that there will be no fraud, misrepresentation or concealment between parties.
Ex. Insured provider accurate info for application and insurer clearly and truthfully describes the features and benefits of the policy.
Utmost Good Faith
Are statements believed to be true and is the statements the insured put on their application.
Representations
Untrue statements on the application that could Void the contract.
Misrepresentations
A statement that if discovered would alter the underwriting decision of the insurance company; and if intentional are considered fraud.
Material misrepresentations
Gramm-Leach Biley Act
Financial companies must explain sensitive information sharing practices to their customers and safe guard sensitive data.
An absolute true statement upon which the validity of the life insurance policy depends.
Warranty
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 decieve or cheat a party. Is a felony and 4 years in prison.
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-azzerting a right or privilege after that right or privilege has been waived. A legal consequence of a waiver.
Estoppel
An insurance company that is formed under the laws of another state is known as what type of insurer?
Foreign
