Chapter 2: General Insurance

Question 1

Risk Management

Answer 1

the process of identifying and managing or treating the loss exposures of an insured

Question 2

Risk

Answer 2

uncertainty of financial loss
person/property subject of insurance
“peril”
speculative (gain/loss) or pure (loss)

Question 3

Exposure

Answer 3

circumstances or factors leading to the possibility of a loss to a person or property
*interchangeable with risk

Question 4

Hazard

Answer 4

specific condition or situation increasing the probability of a loss (frequency) or the extent of a loss (severity)

Question 5

Peril

Answer 5

cause of loss

Question 6

Loss (property & liability)

Answer 6

Property- decrease/reduction in the monetary value of some property
Liability- amount of the claim

Question 7

5 Methods of handling risk

Answer 7

• 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

Question 8

7 elements insurable exposure/risk

Answer 8

1. Definite Loss- definite in time, place, amount
2. Accidental Loss- accidental from the viewpoint of the insured
3. Financial Hardship- loss is not large/severe enough to cause economic hardship/financial distress
4. Not Catastrophic- would bankrupt insurance companies
5. Large Group of Similar Exposure Units- large group of exposure units with exposure to the same perils
6. Chance of Loss must be Calculatable- probability of loss must be calculable by gathering loss history
7. Reasonable Cost to insure

Question 9

Adverse Selection- application to underwriting

Answer 9

large group of insureds who have a far greater than average number of losses; avoid these

Question 10

Law of Large Numbers

Answer 10

more risk = more accurate calculation of losses; cannot tell who or when

Question 11

Stock Company- Insurers

Answer 11

incorporated insurance company owned by its stockholders

Question 12

Mutual Company- Insurers
*Assessable & Non Assessable

Answer 12

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

Question 13

Admitted & Non-admitted insurers (authorized)

Answer 13

Admitted- authorized/licensed to do business in the state
Non Admitted- not authorized/licensed to do business in the state (surplus lines)

Question 14

Domestic, foreign and alien insurers

Answer 14

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

Question 15

Representative of the Consumer & Representative of the Insurer

Answer 15

Consumer- not empowered by insurance company; required to execute a written agreement with the consumer
Insurer- empowered on behalf of the insurance company

Question 16

3 types of authority

Answer 16

Express (actual), Implied, Apparent (Estoppel)

Question 17

4 elements of a legal contract
*Remember ACLC

Answer 17

1. Agreement- offer by one party and acceptance by the other
2. Competent Parties- both parties in contract must meet level of legal competence
3. Legal Purpose- contract must not create/encourage unlawful action
4. Consideration- an exchange of something of value by each party to the contract (premium)

Question 18

principle of indemnity

Answer 18

the insured should not be in a better financial position after the loss than they were prior to the loss

Question 19

Misrepresentations & Material misrepresentations

Answer 19

intentional misstatements of facts regarding the items being insured
Material- misrepresentations that if originally known, the insurance company would not have written the contract

Question 20

Warranties

Answer 20

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)

Question 21

Concealment

Answer 21

intentional deception of a person/organization by failing to disclose complete/correct information or revealing information

Question 22

Fraud

Answer 22

intentional manipulation of the truth, getting someone to rely on that manipulation of the truth resulting in their detriment

Question 23

Avoidence

Answer 23

risk of loss is prevented in its entirety by not engaging in activities that present the risk

Question 24

Retention

Answer 24

the amount of money that you are required to pay, per claim, before the insurance company will start paying

Question 25

Sharing

Answer 25

The share of costs covered by your insurance that you pay out of your own pocket

Question 26

Transfer

Answer 26

one party transferring the uncertainty of loss or financial consequences of loss to another party

Question 27

Adverse Selection

Answer 27

a situation in which the buyers and sellers of an insurance product do not have the same information available (sick- health care)

Question 28

Express Authority

Answer 28

authority written/orally given by insurer

Question 29

Implied Authority

Answer 29

not specifically expressed or communicated

Question 30

Apparent Authority

Answer 30

authority which the producer appears to have to a reasonable person; reasonable belief to a third party that the producer had authority

Question 31

Contract of Adhesion

Answer 31

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