Chapter 1 (Key concept & terms) Flashcards
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
Insurance policy
a contract between a policyowner (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
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 a ___________ of risk of loss from an individual or a business entity to an insurance company, which, in turn, spreads the costs of unexpected losses to many individuals.
transfer (he cost of an insured’s loss is transferred over to the insurer and spread among other insureds)
The insurance transaction includes what?
1.Solicitation;
2.Negotiations;
3.Sale (effectuation of a contract of insurance);
4. Advising an individual concerning coverage or claims.
Risk
is the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable.
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 are 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.
Only _______ risk are insurable.
pure
Hazards
are conditions or situations that increase the probability of an insured loss occurring
Hazards are classified as _________ hazards, moral hazards, or morale hazards and what are some conditions that classify as that?
physical
Conditions such as lifestyle and existing health, or activities such as scuba diving, are hazards and may increase the chance of a loss occurring.
Physical hazards
are individual characteristics that increase the chances of the cause of loss.
Moral hazards
are tendencies towards increased risk. Moral hazards involve evaluating the character and reputation of the proposed insured.
( refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.)
Morale hazards
are similar to moral hazards, except that they arise from a state of mind that causes indifference to loss, such as carelessness.
Perils
are the causes of loss insured against in an insurance policy.
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. Insurance provides a means to transfer loss.
A risk is a chance that a loss will occur; a hazard __________ the probability of loss; a peril is the cause of loss.
increases
What are the different methods of handling risk?
- Avoidance
- Retention
- Sharing
- Reduction
- Transfer
avoidance
which means eliminating exposure to a loss.
For example, if a person wanted to avoid the risk of being killed in an airplane crash, he/she might choose never to fly in an airplane. Risk avoidance is effective, but seldom practical.
Risk retention
Is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. (also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays)
What is the purpose of retention?
- To reduce expenses and improve cash flow;
- To increase control of claim reserving and claims settlements; and
- To fund for losses that cannot be insured.
Sharing
is 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.
(A reciprocal insurance exchange is a formal risk-sharing arrangement.)
Reduction
attempt to lessen the possibility or severity of a loss.
( such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our lifestyles.)
The most effective way to handle risk is to ________ it so that the loss is borne by another party.
transfer
What are the characteristics of an insurable risk?
- A loss that is outside the insured’s control. (due to chance)
- A loss that is specific as to the cause, time, place and amount. (Definite and measurable)
- Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates (Statistically predictable)
- Insurers need to be reasonably certain their losses will not exceed specific limits. (Not catastrophic)
- There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location. (Randomly selected and large loss exposure)
