Chapter 1: General Insurance Flashcards
Adverse selection
Insuring of risks that are more prone to losses than the average risk.
Agent/producer
A legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer
Applicant or proposed insured
A person applying for insurance
Beneficiary
A person who receives the benefits of an insurance policy.
Broker
An insurance producer not appointed by an insurer and is deemed to represent the client.
Indemnity
Main principle of insurance, meaning that the insured cannot recover more than their loss; the purpose of insurance is to restore the insured to the same position as before loss the.
Insurance policy
A contract between a policy owner (and /or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events
Insured
The person covered by the insurance policy. This person may or may not be the policyowner.
Insurer (principal)
The company who issues an insurance policy.
Law of large numbers
The larger the number of people with a similar exposure to loss, the more predictable actual losses will be.
Policyowner
The person entitled to exercise the rights and privileges in the policy.
Premium
The money paid to the insurance company for the insurance policy.
Reciprocity/reciprocal
A mutual interchange of rights and privileges.
Insurance
Is the transfer of risk of loss. The lost of an insured’s loss is transferred over to the insurer and spread among other insureds.
Risk
Is the uncertainty or chance of a loss occurring.
Pure risk
Refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies ave willing to accept.
Speculative risk
Involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.
What types of risks are insurable?
Pure risks
Define: Hazards
Conditions or situations that increase the probability of an insured loss occurring.
What are Physical Hazards?
Are individual characteristics that increase the chances of the cause of loss.
Why do Physical hazards exist?
Because of a physical condition, past medical history, or a condition at birth such as blindness.
What are Moral hazards?
Are tendencies towards increased risk.
To who do moral hazards refer to?
Refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.
What are Morale hazards?
Similar to moral hazards, except that they arise from a state of mind that cause indifference to loss, such as carelessness.
Define: Peril
Are the causes of loss insured against in an insurance policy.
What does life insurance insure?
Insures against the financial loss caused by the premature death of the insured.
What does health insurance insure?
Insures against the medical expenses and/or loss of income caused by the insured’s sickness or accidental injury.
What does property insurance insure?
Insures against the loss of physical property or the loss of its income-producing abilities
What does casualty insurance insure?
Insures against the loss and/or damage of property and resulting liabilities.
Define: Loss
Is defined as the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril.
What is a risk?
Is a chance that a loss will occur; a hazard increases the probability of loss; a peril is the cause of loss.
Define: Exposure
Is a unit of measure used to determine rates charges for insurance coverage.
In Life insurance what are factors considered in determining rates?
- The age of the insured
- Medical history
- Occupation
- Sex
Define: Homogeneous
A large number of units having the same or similar exposure to loss.
What is the basis of insurance?
Sharing risk among the members and d a large homogenous group with similar exposure to loss.
Define: Avoidance
Eliminating exposure to a loss.
Define: Retention
The planned assumption of risk by an injured through the use of deductibles, co-payments, or self-insurance.
When the insured accepts the responsibility for the loss before the insurance company pays what is it called?
Self-insurance
What is the purpose of retention?
- To reduce expenses and improve cash flow
- To increase control of claim reserving and claims settlements
- To have funds for losses that cannot be insured.
Define: Sharing
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.
If an agent fails to obtain the applicant’s signature on the insurance application, what must the insurer do?
Send the application back to the applicant for signature
In forming an insurance contract, when does an acceptance usually occur?
When the insurer approves a prepaid application
What document is required for an insurance company to transact insurance?
Certificate of Authority
What are the 5 characteristics of an ideally insurable risk?
Loss must be due to :
1. Due to chance
2. Definite and measurable
3. Statistically predictable
4. Not catastrophic
5. Coverage cannot be mandatory
Conditions that increase the chance of a loss are known as what?
Hazards
In insurance, when is the offer usually made on a contract?
When the insurance application is submitted.
Who is responsible for making sure that an applicant receives the new insurance policy once it is issued?
The agent
Insurance is a contract that protects the insured from what?
Loss
When a change needs to be made on the application for insurance, which is the best method for correcting the information?
Complete a new application or ask the applicant to initial the correction on the original application.
An insurance policy paid a nontaxable dividend to the insured one year, and nothing the next. From what type of insurer did the insured purchase the policy?
Mutual
The type of insurance company organized to return any surplus money to its policyholders is known as what?
Mutual company
A situation in which a person can only experience a loss and no gain presents what type of risk?
Pure Risk
What are 3 types of hazards?
- Physical
- Moral
- Morale
A person who does not lock the doors to their house shows an indifferent attitude. This person represents what type of hazard?
Morale
What is a warranty in an insurance contract?
An absolutely true statement upon which the validity of the insurance contract is based.
An applicant conceals relevant health information on the application. The applicant presents what type of hazard?
Moral
For the purpose of insurance, what is risk?
Uncertainty of loss
The requirement that agents must account for and promptly remit all insurance funds collected is known as what type of agent responsibility?
Fiduciary
Wagering on a sporting event is known as what type of risk?
Speculative
What are the strategies used by underwriters to prevent adverse selection?
Restriction of coverage, refusal to accept a risk, and accepting a risk at a higher rate.
When does an insurance policy go into effect?
When the policy is delivered and the premium is paid
What is the best way to handle incomplete insurance applications?
Return the application to the applicant for completion.
In the agent/insurer relationship, who is considered the principal?
Insurer
When risks with higher probability of loss are seeking insurance more often than other risks, this is known as what?
Adverse Selection
What two elements are necessary for a life insurance contract to have a legal purpose?
- Insurable interest
- Consent
An insurance company that is formed under the laws of another state is known as what type of insurer?
Foreign
What do individuals use to transfer their risk of loss to a larger group?
Insurance
What type of insurer is formed under the laws of another country?
Alien
Insurers are classified according to their domicile. What are 3 types of insurers?
- Domestic
- Foreign
- Alien
Who owns stock companies?
Stockholders
The insurer organized to return a profit to the stockholders is what type of insurer?
Stock Company
What agents act within the scope of their contract, their actions will be assumed to be the acts of whom?
Insurer
What entities make up the Medical Information Bureau?
Insurers
When would a misrepresentation on an insurance application be considered fraud?
When it is intentional and material
According to the Law of Agency, a principal is represented by whom?
Agent or producer
The reduction, decrease, or disappearance of value of the person or property insured in a policy is known as what?
Loss
What is the term for the causes of loss insured against in an insurance policy?
Peril
What are the 4 elements of an insurant contract?
- Agreement (offer and acceptance)
- Consideration
- Competent parties
- Legal purpose
An insurance company is domiciled in California and transacts insurance in Nevada. What is this insurer’s classification in Nevada?
Foreign
If an insurer meets the state’s financial requirements and is approved to transact business in the state, it is considered what type of insurer?
Authorized or admitted
What are 3 types of agent authority?
- Express
- Implied
- Apparent
What type of risk is insurable?
Pure Risk
Whose responsibility is it to determine that all the questions on an insurance application are answered?
The agent’s
Who does an insurance agent represent?
Insurance Company
In insurance policies, the insured is not legally bound to any particular action in the insurance contract, but the insurer is legally obligated to pay losses covered by the policy. What contract does this describe?
Unilateral
Which of the following is the basis of a claim against an insurance policy?
Loss
Installing deadbolt locks on the doors of a home is an example of which method of handling risk?
Reduction
An insurance contract requires that the insured and the insurer meet certain conditions in order for the contract to be enforceable. What contract characteristic does this describe?
Conditional
Insurance is the transfer of
Risk
Events in which a person has both the chance of winning or loosing are classified as
Speculative Risk
An individual applies for a life policy. Two years ago he suffered a head injury, so he cannot remember parts of his past, but is otherwise competent. He has also been hospitalized for drug abuse, but does not remember this when applying for insurance. The insurer issues the policy and learns of the insured’s history one year later. What will probably happen?
The policy will not be affected.
All of the following are marking arrangements used by the insurers EXCEPT
Reinsurance System
Which of the following produces evaluations of insurer’s financial status often used by state department of insurance?
AM Best
Contracts that are prepared by one party and submitted to the other party on a take-it-or-leave-it basis are classified as
Contracts of adhesion
The causes of loss insured against in an insurance policy are known as
Perils
Which of the following is NOT an essential element of an insurance contract?
Counteroffer
An individual was involved in a head-on collision while driving home one day. His injuries were not serious, and he recovered. However, he decided that in order to never be involved in another accident, he would never drive or ride in a car ever again. Which method of risk management does this describe?
Avoidance
For the purpose of insurance, risk is defined as
The uncertainty or chance of loss
Which is NOT a goal of risk retention?
To minimize the insured’s level of liability in the event of loss
