Chapter 1 General insurance Flashcards
Insurance companies (insurers or carriers)
Manufacture and sell insurance coverage in the form of insurance policies or contracts of insurance. They issue policy
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.
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 necessary the insured under the policy, but is responsible for paying the policy’s premium and has various rights as specified in the contract
private vs government insurers
Most insurance is written through
private insurers. however there are instances where the governmental-based insurers step in to offer an insurance alternative when private insurers are unable to provide protection, usually related to the catastrophic nature of the risk, capacity to handle the risk, and lack of desire to engage in a line of insurance where experience to evaluate necessary premium intake to offset potential loss is lacking.
Directors and officers are elected by
stockholders
Traditionally stock insurers issue
non-participating policies, meaning that the policyholder is not entitled to receive any dividends.
mutual insurance company is owned by
policyholders (who may be referred to as members)
A board of trustees or directs is elected by
the policyholders
Policyholders may receive
non-taxable dividends as a return of any divisible surplus when and if declared by the directors
Traditionally, mutual insurers issue
participating policies, meaning that policyholders are entitled to receive any dividends.
Dividends can be paid in
cash, used to reduce premiums, left to accumulate interest, and used to purchase paid-up additional insurance
Dividends represent the favorable experience of the company and result from
excess investment earnings, favorable mortality, and expense savings
Reciprocal insurance company is a
group-owned insurer whose main activity is risk sharing. it is unincorporated and is formed by 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. The exchange of insurance is affected through an Attorney-in-fact who does not need to be insurance licensed.
Self insurers
assume all of the financial risk, dont pay premiums. set aside money greater or equal to the expected loss. if loss are greater than expected, it will require additional funding. some companies will self insure up to a certain amount and then acquire insurance for dollar amounts in excess of that amount
Domestic
foreign
alien insurer
Domestic: insurer organized in 1 state
Foreign: incorporated in one state but does business in another
Alien: insurer incorporated in ontario is alien to New york
Admitted (authorized) insurer
is authorized by this state’s commissioner of insurance to do business in this state and has received a Certificate of Authority to do business in this state.
Non-admitted (unauthorized) insurer
has either applied for authorization to do business in this state and was declined or they have not applied. they are not authorized to transact insurance in this state.
Excess lines insurance can be placed through non-admitted carriers
Surplus lines insurance finds coverage when
insurance cannot be obtained from admitted insurers. However it cannot be utilized solely to receive lower cost coverage than would be avaliable from an admitted carrier
Surplus line requirements
each state regulates the procurement of surplus lines insurance it its state
Can be placed through non-admitted carriers. non-admitted business must be transacted through a surplus lines broker or producer
management:
Executives
oversee the operation of the business
actuarial department
gather and interpret statistical info used in rate making. an actuary determines the probability of loss and stets premium rates
Underwriting department
responsible for the selections of risks (persons or property) to insure and rating that determines policy premiums
marketing/sales department
responsible for advertising and selling
claims department
assists the policyholder, insured, or beneficiary in the event of a loss and processes, and pays the amount of the claims in a timely manner, based upon the contractual provisions and the amount insured.
Insurance agents and producers
Laws of agency
the relationship of a person (called the agent or producer) who acts on behalf of another person, company, or government, known as the principal. The principal is responsible for the acts of the agent, and the agents acts bind the principal. an act of the agent is the act of the principal
Insurer (principal)
the insurer is the source of authority from which the producer must abide. The insurer appoints the producer to act on its behalf in transacting the business of insurance. When acting within scope of authority, the insurer is responsible for the acts of the producer.
Producer (agent)
A person or agency appointed by an insurance company to represent it and to sell policies on its behalf.
A producer acts with one or more of the following types of authority
express: authority that is written into the producers contract
Implied: authority the public assumes the producer has
Apparent: authority crated when the producer exceeds the authority expressed in the agency contract
Producers responsibilities to the insurer
Fiduciary duty to the insurer in all respects. A fiduciary is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person especially when handling premiums for insurance policies or applications. premium funds separate from personal funds
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
Responsible for soliciting, negotiating, selling and canceling the insurance policies with the insurer.
Duty to only recommend the purchase of suitable policies
Producer responsibilities to insurance applicants or insured
forward premiums to insurer on a timely basis (24 hours of receipt of $)
Seek and gain knowledge of applicant’s insurance needs
Review and evaluate the applicant’s current insurance coverage, limits, and risks.
Serve the best interests of the applicant or insured from possible loss and not the most profitable coverage for the producer
Life and health producers do not issue contracts or binders for life or disability insurance, and should not imply coverage is in effect simply because a person submits an application and payment for the first premium
Broker
a licensed individual who negotiates insurance contracts with insurers on behalf of the applicant. A broker represents the applicant or insured’s interest, not the insurer, and does not have legal authority to bind the insurer. Broker licenses are not applicable in all states.
Fair credit reporting act protects
consumer privacy and protects the public from overly intrusive info collection practices. It ensures date collected is confidential, accurate, relevant, and used for a proper and specific purpose.
When an application is taken, it must inform the applicant a
credit report (from a consumer reporting agency) can be obtained. The purpose of this is to determine the financial and moral status of an applicant (for variety of purpose such as employment screening, insurance underwriting or loan approvals). An applicant has the right to review the report.
USA PATRIOT act and Anti Money laundering (AML) makes it so insurance companies have to
provide anti-money laundering training to their producers. Brokers as well as agents are required to undergo training as insurance products are now being used to give legitimate appearance to money financed by and for illegal activities. expanded the definition of money laundering to include the money’s ultimate purpose as well as its origin. The insurance products being used are mostly single premium payment life insurance and annuity products as they generate cash value.
Patriot act write life policy for right reason, government issue photo id
AML: need checks not just cash,to keep dirty cash out
Red flags are
paying for an entire policy up front with cash
early cancellation of the policy, regardless of cancellation fees
The heavy use of third parties for policy transactions
Strong reliance on wire or electronic fund transfers to foreign accounts
Fraud and False Statements (Fraudulent Insurance Act)
Fraud always involves an
intentional false statement and deceit; it can either be a criminal or civil crime. Federal laws prohibit the commission of fraud. Each state adopted its own Fraudulent Insurance Act. State fraudulent insurance acts to not modify the privacy of any individual; they product producers, brokers, and insurers in the event fraudulent info is provided by consumers.
A fraudulent act involves a
misstatement of material fact by a person who knows or believes that statement to be false. The statement is made to another person who relies on its accuracy to make a decision or to act and is subsequently harmed by relying on the deliberately false statement.
Insurance applications and claim forms must contain a disclosure about
how false statements and fraud will be treated by the insurer.
Gramm-Leach Bliley Act (the Financial Services Modernization Act of 1999)
This repealed parts of the Glass-steagall act of 1933 to allow the
merger of banks, securities companies, and insurance companies. It also established the Financial Privacy Rule and Safeguards Rule for the protection of consumer’s privacy
The financial privacy rule requires financial institutions to provide each consumer with
a privacy notice at the time the consumer relationship is established and annually thereafter. When the policy is issued to the client. App info is confidential and cannot be sued for other purposes without prior notice to the consumer.
The privacy must notice must explain
The info collected about the consumer
where that info is shared
how that info is used
How that info is protected
it must also identify the consumer’s rights to opt out of the info being shared with unaffiliated parties pursuant to the provisions of the Fair Credit Reporting Act. Should the financial institution privacy policy change, the consumer needs to be notified and can opt out
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
Management
the determination of what types of protection are required to
meet an insured needs. risk may be manageable but it cannot be eliminated.
Physical inspections applications or medical exams used in underwriting may help to
manage or raise awareness of risk
Health insurance providers may offer insureds “wellness” programs at
low or no cost for weight loss, smoking reduction, stress, or medical conditions such as diabetes asa means of reducing the company’s future claims exposure
Speculative risk
situations where the is a chance for loss, gain, or neither loss nor gain to occur. speculative risk cannot be insured because you cannot make a gain from a loss
pure risk
situations where there is no chance for gain; the only outcome is for nothing to occur or for loss to occur. pure risk is the only risk that can be insured.
Loss
reduction, decrease, or disappearances of value. A loss is the basis of a claim under the terms of an insurance policy,
Peril
The cause or source of loss (fire, windstorm, death)
hazard
a specific condition that increases the probability, likelihood, or severity of a loss from a peril.
physical hazard
a physical condition that increases the likelihood or probability of loss. Seen, heard, felt, tasted, or smelled
Moral Hazard
Dishonest tendencies that increase the probability of a loss; certain characteristics and behaviors of people. Moral hazards most closely related to some form of lying, cheating, or stealing
Morale Hazard
An attitude or indifference toward the risk of lass that increases the probability of a loss occurring. Driving too fast for condition. 2 losses and your out
loss exposure
The condition of being at risk of loss. simply by existing, property and people are subject to many different risks. To an insurance company, each insured person or their covered property represents the risk of loss and the value of each potential claim is a known loss exposure.
Adverse selection
An imbalance created when risks that are hard to insure (more prone to losses that the average (standard) risk) are the only risks seeking insurance within a specific marketplace. For example, only those living in earthquake prone areas. High risks exposures tend to seek or continue insurance at a higher participation rate than the average risk exposures do
Managing risk
analyzing exposures that create risk and designing programs to minimize the possibility of a loss. Ways of managing risk: Sharing Transfer Avoidance Reduction Retention
Reduction
minimizing the chance of loss but not preventing risk. burglar alarms
Retention
Assume the responsibility for loss
Self insure the entire loss or a portion of the loss. Choosing deductibles is a method of risk retention
The chance of loss must be
calculable: a statistical expectation of loss is used by insurers to calculate premiums
measurable
defined and verifiable in terms of amount, cause, place and time
The loss must be
accidental
catastrophic perils are
not covered: war nuclear hazard.
Insurance contract
a legal contract purchased to indemnify the insured against a loss, damage, or liability arising from an unexpected event. The exchange of a relatively small and definite expense for the risk of lass that if it occurs may be large or small. transfer risk from the insured to the insurer
Principal of Indemnity
insured is intended to be restored to the same financial or economic condition that existed prior to the loss, depending on the amount and type of insurance purchased.
insurability
the ability of an applicant to meet an insurer’s underwriting requirements
underwriting
the process of selecting, classifying, and rating a risk for the purpose of issuing or not issuing insurance coverage
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
All policies
insurable interest must exist in every enforceable insurance contract
requires the potential for an insured to suffer financial or economic hardship in the event of a loss, as well as a valid legal purpose for the contract
Life and health policies
insurable interest must exist at the time of application, but not at time of loss.
The amount of insurance that may be purchase varies, insurance companies limit the amount of life insurance it makes available to any person. Over insure increases the likelihood of a claim
Property
while it is unlikely an insurer will issue a policy if there is no insurable interest at the time of application, insurable interest must specifically exist at the time of loss.
Casualty
Insurable interest must exist at the time of the loss, but need not be continuous.
Insurable interest usually results from property or contract rights and potential legal liability.
contract law
pertains to the formation and enforcement of contracts
tort law
torts are civil wrongs; they’re not crimes or breaches of contract. They result in injuries or harm that constitute the basis of a claim by a third party
Hold Harmless agreement
a contractual agreement that transfers the liability of one party to another party; it is used by landlords, contractors, and others as a way to avoid or reduce risk
Reasonable expectations doctrine
what a reasonable and prudent policy owner would expect; the reasonable expectations of policyowners are honored by the Cours although the strict terms of the policy may not support these epxectations
4 elements of a legal contract.
4 necessary elements must have existed at the time the contract was executed between the parties
competent parties
Legal purpose
Agreement: offer the offer made to enter into an insurance contract is most commonly an application, accompanied by an initial premium and submitted by the applicant. Acceptance the acceptance happens when the insurance company agrees to issue the insurance applied for, after it receives the initial premium and complete app
Consideration
Indemnity contract
Pays a specified dollar amount for a loss
Parol evidence rule
A written contract may not be altered without the written consent of both parties
Valued contract
a contract that pay a stated amount in the event of loss. A life insurance contract is an example of a valued contract. It has a face value that becomes a death benefit in the event of a loss
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.
Characteristics of an insurance contract
Contract of adhesion
one party writes the contract, without the input from the other party. offers it as a take it or leave it. any ambiguity goes against the writer.
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. only implies to insurance industry
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. The owner and insured cannot be changed without consent of the insurance company. A property and casualty insurance contract is personal since it cannot be assigned. Life is not personal
Unilateral contract
only one party is legally bound to the contractual obligations after the premium is paid to the insurer. The policyowner can cancel the policy at any time and for nay reason. The policyonwer is not required to continue paying future premiums. only insurance industry
condition contract
both parties must perform certain duties and follow rules of conduct to make the contract enforceable. Without premiums being paid on time and in full, the insurer is not obligated to pay the claim if the policy lapses
Legal interpretations affecting contracts
principal of indemnity
the insured is restored to the same financial or economic condition that existed prior to the loss, depending on the amount and type of insurance purchased. The insured should not profit from an insurance transaction
Utmost good faith
both parties bargain in good faith when forming and entering into the contract. The two parties rely upon the statements and promises of the other and assume no attempt to conceal or deceive has been made
representations
statements made by the applicant on the application are considered representations and not warranties. The representations are statements that are believed to be true to the best of the knowledge and belief of the applicant/insured at the time of application. no guarantees.
material vs immaterial representations
statements that impact the acceptance of an insurable risk-whether involving the rating of an acceptable risk, or the decision as to whether to accept or decline a risk- are considered to be material. immaterial representations do not affect the acceptance or rating of the risk.
misrepresentations
a false statement contained in the application usually does not void coverage or the policy, if it is immaterial. If material to the issuance of coverage, meaning the insurer would not have issued a policy had the misrepresentation not been made. a material misrepresentation may void the policy
warranties
statements in the app or stipulations in the policy that are guaranteed true in all respects. If warranties are later discovered untrue or breached (past,present,future) coverage and sometimes the contract is voided. guaranteed to be true, no warranties in life insurance
concealment
the willful holding back or secretion of material facts pertinent to the issuance of insurance (or a claim). Concealment may result in denial of coverage and may void the policy
Fraud
intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right. contains 5 elements
false statement: made intentionally and that pertains to a material fact
Disregard for the victim
Victim believes the false statement
Victim makes a decision and or acts based on the belief in or reliance upon the false statement
the victim’s decision and or actions results in harm
Only law can determine fraud
Waiver
voluntary surrender of a known right, claim, or privilege.
Underwriter
primary responsibilities include the selection of risks by determining insurability. insurable interest is also established at that time. The underwriter also determine the classification, or type of risk and premium rating if a risk is accepted by the insurer.
underwriting protect the insurer against adverse selection and risks that are more likely than average to suffer losses. The field underwriter is the producer
determines: classification, type or risk and premium
Underwriting factors
age gender tobacco use medical history and preexisiting conditions hazardous hobbies and occupations.
premium assumptions
an adequate premium must be charged for the risk based on the same factors used in evaluating the risk. inadequate when they do not cover losses and expenses
rate
the dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance
premium
he total cost for the amount of insurance purchases. $50,000 of coverage= $5 rate X 50 (per $1,000 of insurance) for $250 premium
