Chapter 2 Flashcards

1
Q

Insurance

A

Transfers the risk from individuals to a group

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2
Q

Risk

A

uncertainty of loss

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3
Q

Pure Risk

A

Insurable. Chance of loss is present without the potential for a financial gain.

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4
Q

Speculative Risk

A

Chance is taken that may result in a financial gain. NOT insurable

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5
Q

Hazard

A

Increase the chances or frequency or severity of a loss.

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6
Q

Exposure

A

Possibility of a loss caused by surroundings

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7
Q

Peril

A

Causes a loss

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8
Q

Loss

A

reduction of value of an asset

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9
Q

Direct Loss

A

Loss incurred as a direct result of a peril

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10
Q

Indirect Loss

A

Any loss that is a consequence of the direct loss ( example: Hotel and eating expenses)

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11
Q

Methods of Handling Risk (STARR)

A

Sharing: Sharing the exposure to a loss with another person

Transfer: Transferring the financial impact of a loss to another party

Avoidance: Eliminating the risk entirely

Retention: Absorbing all or part of the risk involved with a particular exposure. (deductibles)

Reduction: Reducing the severity of losses that do occur. (Fire extinguishes)

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12
Q

Elements of Insurable Risk (6)

A

Independence: Many people must be independently exposed to the same or similar risk.

Definiteness: Losses must be definite as to cause, time, place, and amount.

Calculability: Losses must be frequent enough and in an amount sufficient to calculate rates equitable to all policyholders.

Accidental: Loss must be a random event over which the insured has no control.

Losses cannot be catastrophic.

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13
Q

Adverse Selection

A

Selecting risks that are against the interest of the insurance company. Poor underwriting.

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14
Q

Law of large numbers

A

The greater the numbers the more accurate the statistics will be to predict the frequency and severity of losses.

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15
Q

Reinsurance

A

Allows insurance company to “sell” part of the risk.

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16
Q

Types of Insurance (9)

A

Stock Companies

Mutual Companies

County Mutual Companies

Farm Mutual Companies

Reciprocal Exchanges

Risk Retention Groups

Purchasing Groups

Lloyds Plan

Self-Insurers

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17
Q

Stock Commpanies

A

Owned by Stockholders

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18
Q

Mutual Companies

A

Owned by the policyholders

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19
Q

County Mutual Companies

A

High risk auto coverage and low value dwelling coverage

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20
Q

Farm Mutual Companies

A

Rural or urban dwellings coverages.

21
Q

Reciprocal Exchanges

A

Owned by Policyholders. Operated by an attorney-in-fact and normally created by stock companies to escape regulation.

22
Q

Risk Retention Groups

A

Entities formed by similar businesses to insure each others commercial and professional liability risks.

23
Q

Purchasing Groups

A

Group policies purchased from a commercial insurance company to cover commercial and professional liability risks.

24
Q

Lloyds Plan

A

Non-regulated rates offered for a full range of property and casualty insurance except life.

25
Q

Self-Insurers

A

Companies choose to self-insure rather than pay premium to an insurance company.

26
Q

Private vs Governmental Insurers

A

Most insurance is covered through private insurers. Some insurance can only be purchased through the federal government.

27
Q

Authorized vs Unauthorized Insurers

A

Listed by the state or not listed by the state.

28
Q

Domestic Insurer

A

Companies initiated in the same state

29
Q

Foreign Insurer

A

Insurance from a different state

30
Q

Alien Insurer

A

Insurance from another country

31
Q

Financial Status

A

Financial rating services to make a reasonable determination of a company’s strength.

32
Q

Institutional Advertisement

A

Promotes an idea, big picture.

33
Q

Invitation to inquire

A

Promotes a type of product.

34
Q

Invitation to contract

A

Promotes a specific product

35
Q

Responsibilities to Insurer (5)

A

Making mistakes

Failure to follow company instructions

Failure to disclose information

Delay in forwarding information

Exceeding the express or implied authority given by a company

36
Q

Responsibilities to the Insured/Customer (5)

A

Misrepresenting Insurance coverage

Failure to procure insurance

Procurement of inadequate coverage

Failure to inform insured of renewal

Failure to investigate an insurer’s financial solvency

37
Q

Law of Agency (4)

A

Independent - represents several insurance on a commission basis

Captive or Exclusive - Represents only one company and is usually on commission basis

Direct Writer - Employee of the insurance company working on a salaried basis

Direct Mail/Direct Response - They sell insurance by mail or internet directly to the consumer.

38
Q

Authority (3)

A

Express Authority - written or oral contract

Implied Authority - Agent assumes based on what he/she has been told

Apparent Authority - Customer’s belief of the agent’s authority

39
Q

Contracts (CLAP)

A

Consideration - Both parties assume responsibility

Legal Purpose - They have to be legal contracts

Agreement - Offer and acceptance

Competent Parties - The incompetence of either party can void coverage

40
Q

Distinct Characteristics of an Insurance contract (5)

A

Contract of Adhesion - Contract prepared by one party on a take-or-leave-it basis.

Aleatory Contract - Equal value is not paid by each party

Personal Contract - The insurer and the policyholder both consider the credit, conduct, and the character of the other

Unilateral Contract - A contract in which only one party make an enforceable promise

Conditional Contract - Both parties must still perform certain acts to make the contract legally enforceable.

41
Q

Legal Interpretations Affecting Contracts (2)

A

Ambiguity of a contract are resolved in the favor of the insured

Doctrine of Reasonable Expectations permits the reasonable and objective expectations of insureds regarding the terms of the insurance contract

42
Q

Indemnity

A

Indemnification is placing the insured back at the same financial position prior to the loss

43
Q

Utmost Good Faith

A

Each party in the contract will assume that the other is acting truthfully

44
Q

Representations

A

Statements made by the applicant to the insurance company during the process of obtaining a policy

45
Q

Concealment

A

Failure to disclose a known truth

46
Q

Fraud

A

Intentional perversion of the truth for the purpose of inducing an insurance company to accept an application

47
Q

Warranties

A

Stipulations in the insurance contract that if breached, may void the contract

48
Q

Waiver and Estoppel

A

Waiver - Relinquishing of a know right

Estoppel - Results of that waiver