Chapter 1 - Insurance 101 Terms and Basics

Question 1

Who are the parties to the insurance contract?

Answer 1

• Insured

* Insurer

Question 2

What are the Insurable Risks

Answer 2

• The Rate of loss must be predictable.
• A Catastrophic loss must be unlikely
• The loss must be definite
• The loss must be uncertain
• The loss must be economically feasible

Question 3

What does the “Law of Large Numbers” say?

Answer 3

With a sufficiently large enough sample of items from a population, you can predict with a fair degree of certainty what will happen to that population.

Question 4

What do we mean by a “Catastrophic Loss?”

Answer 4

The loss is a result of a catastrophic event such as a hurricane, flood, war or nuclear explosion.

Question 5

What doe we mean by “The loss must be definite?”

Answer 5

The insurer must be able to ascertain the potential severity of the loss.

Question 6

What do we mean by “The loss must be uncertain?”

Answer 6

The occurrence of the loss must not be definite. There must be uncertainty as to whether the loss will occur.

Question 7

What do we mean by “The loss must be economically feasible?”

Answer 7

The loss must cause an economic hardship in order to be insurable. ie. it would not be economically feasible to insure a ballpoint pen.

Question 8

What are the 4 requirements for a contract to be legally binding?

Answer 8

CALC

Consideration - Each person or entity involved must have consideration. (insured: deposit, insurer: promise to pay)

Agreement - An offer an acceptance.

Legal Purpose - Must have a legal purpose and cannot be against the law or public interest.

Competent Parties - Of legal contracting age and sound of mind. Cannot be intoxicated.

Question 9

What do we mean by a competent party?

Answer 9

• Legally competent
• Can’t be mentally impaired.
• Can’t be inebriated.
• At least 15 years of age.

Question 10

Who has the “power” in an insurance contract?

Answer 10

The INSURER has the power. They write the contract and the INSURED has to adhere to it.

Question 11

What does Aleatory mean?

Answer 11

An exchange of unequal values. The insured pays a small premium, but the insurer can pay a large amount if there is an occurrence.

Question 12

What does “Conditional” mean?

Answer 12

Insurance is based on conditional events taking place and what will occur if/when they do. If this happens, then the insurer will do this.

Question 13

Utmost Good Faith

Answer 13

The insurer relies upon the statements made in the application as truthful representations.

Question 14

Representation

Answer 14

A statement that when made is assumed or expected to be true.

Question 15

What level of authority do insurance Agents have?

Answer 15

Express

Question 16

What are the 4 levels of Authority of Agents?

Answer 16

Express
Implied
Apparent
Presumption of Agency

Question 17

What is “Express Authority”

Answer 17

The insurer “explicit” states in the agent’s appointment contract, what he/she may do on behalf of the insurer.

Question 18

What is “Implied Authority?”

Answer 18

That which is not explicitly stated in the appointment contract, but that which is necessary in order to effectuate the authority expressly granted

ie. The insurer may not explicitly state that the agent can collect premiums, but in order to bind the contract, the agent must collect the initial premium deposit.

Question 19

What are the different types of “Domiciles of the insurer?”

Answer 19

• Domestic
• Foreign
• Alien

Question 20

Risk

Answer 20

Uncertainty or chance of loss.

Question 21

Loss

Answer 21

Reduction in the value of an asset.

Question 22

Hazard

Answer 22

Increases the likelihood of a loss.

Question 23

Peril

Answer 23

Cause of the loss.

Question 24

Accident

Answer 24

Unplanned, unintended and unpredicted event.

Question 25

What are the types of Risk?

Answer 25

• Speculative - Possibility of a gain.

* Pure - Only possibility is a loss.

Question 26

What are the 5 Risk Management Techniques?

Answer 26

STARR

• Sharing
• Transferring
• Avoiding
• Retaining
• Reducing

Question 27

What are the four types of hazards?

Answer 27

Physical
Moral
Morale
Legal

Question 28

Economic Loss

Answer 28

The total monetary loss

Question 29

Indemnity

Answer 29

The principle of indemnification means “to make whole.”

Question 30

What is a Direct Loss?

Answer 30

The loss directly related to the peril, such as fire.

Question 31

What is an Indirect Loss?

Answer 31

The loss of use.

Question 32

What is the formula for ACV

Answer 32

ACV = RC - Depreciation

The Actual Cash Value is the Replacement Cost minus the Depreciation.

Question 33

Functional Replacement Cost

Answer 33

If the replacement cost outweighs the value or is impossible to replicate; then the asset will be replaced with a functional replacement.

Question 34

What is the lowest minimum coverage for an auto in NC

Answer 34

30/60/25

Question 35

What does 30/60/25 represent?

Answer 35

• $30k Coverage for each individual’s bodily injury.
• $60k Total paid for BI for each occurrence.
* $25k Total paid for Property Damage per occurrence.

Question 36

What is an aggregate limit?

Answer 36

An aggregate limit is usually expressed as a per year maximum, rather than a split limit. ie. The policy will pay for $10,000 in damages per year.

Question 37

What is a Binder?

Answer 37

A written statement for temporary coverage. Valid for 60 days.

Question 38

What can an Endorsement do?

Answer 38

It can add or take away coverage from a policy.

Question 39

DICED is the acronym used for Major classes of policy provisions. What does DICED mean?

Answer 39

• Declarations
• Insuring Agreements
• Conditions
• Exclusions
• Definitions

Question 40

What is Subrogation?

Answer 40

The insurer’s right to recover from a third party that causes the loss to the insured.

Question 41

What is Adhesion?

Answer 41

The insured must adhere to certain things. “Take it or Leave it” policy.