Chapter 2: General Insurance Flashcards
Risk Management
the process of identifying and managing or treating the loss exposures of an insured
Risk
uncertainty of financial loss
person/property subject of insurance
“peril”
speculative (gain/loss) or pure (loss)
Exposure
circumstances or factors leading to the possibility of a loss to a person or property
*interchangeable with risk
Hazard
specific condition or situation increasing the probability of a loss (frequency) or the extent of a loss (severity)
Peril
cause of loss
Loss (property & liability)
Property- decrease/reduction in the monetary value of some property
Liability- amount of the claim
5 Methods of handling risk
- Avoidance
- Retention (active- knowing how to pay for it or passive- stuck paying out of pocket or lack of awareness)
- Sharing (risk shared among people- homeowners assoc.)
- Loss Control/Prevention/Reduction- not allowing opportunity for loss to happen (warning labels); minimize loss after event (alarms/sprinklers)
Transfer
7 elements insurable exposure/risk
- Definite Loss- definite in time, place, amount
- Accidental Loss- accidental from the viewpoint of the insured
- Financial Hardship- loss is not large/severe enough to cause economic hardship/financial distress
- Not Catastrophic- would bankrupt insurance companies
- Large Group of Similar Exposure Units- large group of exposure units with exposure to the same perils
- Chance of Loss must be Calculatable- probability of loss must be calculable by gathering loss history
- Reasonable Cost to insure
Adverse Selection- application to underwriting
large group of insureds who have a far greater than average number of losses; avoid these
Law of Large Numbers
more risk = more accurate calculation of losses; cannot tell who or when
Stock Company- Insurers
incorporated insurance company owned by its stockholders
Mutual Company- Insurers
*Assessable & Non Assessable
incorporated insurance company owned by its policyholders
- Assessable Mutuals: additional premium for poor loss experience
- Non Assessable Mutuals: cannot asses their policyholders if premiums are insufficient to cover operating costs
Admitted & Non-admitted insurers (authorized)
Admitted- authorized/licensed to do business in the state
Non Admitted- not authorized/licensed to do business in the state (surplus lines)
Domestic, foreign and alien insurers
Domestic- org. under laws of PA and has home office in PA
Foreign- organized and domiciled outside state of PA
Alien- formed and domiciled in country outside of US
Representative of the Consumer & Representative of the Insurer
Consumer- not empowered by insurance company; required to execute a written agreement with the consumer
Insurer- empowered on behalf of the insurance company
3 types of authority
Express (actual), Implied, Apparent (Estoppel)
4 elements of a legal contract
*Remember ACLC
- Agreement- offer by one party and acceptance by the other
- Competent Parties- both parties in contract must meet level of legal competence
- Legal Purpose- contract must not create/encourage unlawful action
- Consideration- an exchange of something of value by each party to the contract (premium)
principle of indemnity
the insured should not be in a better financial position after the loss than they were prior to the loss
Misrepresentations & Material misrepresentations
intentional misstatements of facts regarding the items being insured
Material- misrepresentations that if originally known, the insurance company would not have written the contract
Warranties
statements to be considered a warranty, it must be put in writing
- Affirmative: facts to be true at the time
- Continuing: facts to remain true for policy term
- Implied: unspoken but assumed (ship being sea worthy)
Concealment
intentional deception of a person/organization by failing to disclose complete/correct information or revealing information
Fraud
intentional manipulation of the truth, getting someone to rely on that manipulation of the truth resulting in their detriment
Avoidence
risk of loss is prevented in its entirety by not engaging in activities that present the risk
Retention
the amount of money that you are required to pay, per claim, before the insurance company will start paying
Sharing
The share of costs covered by your insurance that you pay out of your own pocket
Transfer
one party transferring the uncertainty of loss or financial consequences of loss to another party
Adverse Selection
a situation in which the buyers and sellers of an insurance product do not have the same information available (sick- health care)
Express Authority
authority written/orally given by insurer
Implied Authority
not specifically expressed or communicated
Apparent Authority
authority which the producer appears to have to a reasonable person; reasonable belief to a third party that the producer had authority
Contract of Adhesion
a contract is offered intact to one party by another with the stipulation that the second party accept or reject the contract in total without the opportunity to bargain over the wording
