Chapter 2 - General Insurance Flashcards
Risk Management
Managing risks rather than just paying premiums to an insurance company.
Right premium for right risk
What is insurance?
Insurance protects people and businesses against certain losses by transferring the risk from individuals to a group.
Risk
The chance of financial loss, or the uncertainty of loss
The 2 types of risk
Pure risk
Speculative risk
Pure risk
Exists when only the chance of loss is present without the potential for a financial gain.
Only pure risk is insurable
Speculative risk
When a chance is taken that may result in a financial gain such as gambling or the stock market.
Hazard
Any condition that increases the chance of loss or increases the frequency or severity of loss
Exposure
The possibility of a loss caused by surroundings
Peril
The event that causes a loss such as a fire, lightning or windstorm
Loss
The reduction in the value of an asset and the financial consequences of a reduction in value of an asset.
What are the 2 types of losses?
Direct
Indirect
Direct Loss
A loss incurred as a direct result of a peril
An example is a house destroyed by a fire, the house would be a direct loss
Indirect loss
Any loss that is a consequence of a direct loss.
Consequential loss
Example is after a house is destroyed in a fire, the owner will have additional expenses such as hotel and eating at restaurants while house is being repaired.
Methods of Handling Risk
STARR
Sharing - sharing exposure to a loss with another person or organization
Transfer - transferring financial impact of a loss to another party (insurance)
Avoidance - eliminating the risk
Retention - absorbing all or part of risk involved with a particular exposure
Reduction - reducing the severity of losses that do occur
Elements of Insurable Risks
Independence
Definiteness
Calculability
Accidental
What element of insurable risk is uninsurable?
A loss must be a random event over which the insured has no control.
Intentional losses are excluded.
Law of Large Numbers
The greater the numbers, the more accurate the statistics will be that permit an insurer to predict frequency and severity of losses and calculate a premium to spread the cost of risk among all policyholders.
Reinsurance
Safety net
Insurance on insurance
Allows an insurance company to sell part of the risk they have assumed from a policyholder and thereby write more insurance and protect the company from any large losses it would not be able to handle on its own.
Stock Companies
Insurance companies owned by stockholders.
Charge non-assessable fixed premiums.
If company creates a profit, they may pay stockholders through dividends.
Mutual Companies
Insurance company owned by the policyholders.
Can pay dividends to policyholders when it makes a profit.
Can assess policyholders to obtain additional funds to keep company solvent.
What types of insurances companies are non-admitted and have no rate regulations?
County Mutual Companies Farm Mutual Companies Reciprocal Exchanges Risk Retention Groups Purchasing Groups Lloyds Plan
Self-Insurers
Some companies choose to self-insure rather than pay premium to an insurance company.
They take risk on themselves.
Private vs Government Insurers
Most insurance is through private insurers
Some insurance can only be purchased through the federal government because private insurers do not want to take on higher risks. Flood insurance is an example of government insurers.
Authorized Insurer
Admitted company
Meets minimum requirements of financial strength and licensing.
Has a certificate of authority.
Unauthorized Insurers
Not regulated
Non-admitted
Surplus lines
Domestic Insurer
Organized under the laws of a particular state where it is housed or domiciled.
GEICO is based in DC, therefore in DC it is considered a domestic insurer
Foreign Insurer
Organized under laws of some other state within the United States
Alien Insurer
Organized under the laws of a county other than the United States.
Responsibilities to Insurer
An agent has a fiduciary responsibility which requires a higher degree of care.
What may you be held liable for?
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.
What items can an agent be reprimanded for in not taking care of the insured?
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
Law of Agency
Agents or producers represent an insurance company or insurer and usually hold a contract with that company.
Independent - usually represents several insurance companies on a commission basis
Express Authority
Derived from a written or oral contract between the agent and the insurance company.
Describes rights and responsibilities.
Issuing of binder
Implied Authority
Arises out of an agent’s express authority. This authority is what the agent assumes based on what he/she has been told.
Advertising for the purpose of selling policies or collecting premiums.
4 Elements of a Legal Contract
Consideration - both parties must assume some sort of responsibility
Legal Purpose - cannot be used for illegal or immoral purpose
Agreement - offer and acceptance. When an applicant for insurance submits an application, this is an offer. The insurance company has the right to either accept or deny the offer which is binding on both parties.
Competent Parties - the incompetence of either party can void coverage.
Is a binder true acceptance.
A binder is not true acceptance.
Contract of Adhesion
A term descriptive of a standard form printed contract prepared by one party on a take it or leave it basis.
Ambiguous language is always found in favor of the insured.
Aleatory Contract
Equal value is not paid by each party. The premium paid does not equal the recovery amount in the event of a loss.
Personal Contract
The insurer and the policyholder both consider the credit, conduct and character of the other.
Unilateral Contract
A contract in which only one party makes an enforceable promise.
The insured pays a premium to the insurance company based on the insurance company’s promise to lay in the event of a loss.
Conditional Contract
In the event of loss, both parties must still perform certain acts to make the contract legally enforceable.
Indemnity
Basis of most insurance contracts.
Placing insured back at the same financial position prior to the loss.
It’s unjust for the insured to make a profit from insurance.
It’s unfair for the insurer not to restore the insured to same financial position they were at prior to loss.
Utmost Good Faith
Regardless of circumstances, each party in contract will assume the other is acting truthfully or in utmost good faith.
Representations
Statements made by applicant to the insurance company during the process of obtaining a policy.
Allow insurance company to evaluate risk.
If representation is untrue, this becomes a misrepresentation.
Concealment
Failure to disclose a known truth.
Hiding truth can have same consequences as lying.
Omission
Fraud
An intentional perversion of the truth for the purpose of inducing an insurance company to accept an application or pay a claim.
Misrepresentation or concealment.
Warranties
Stipulations in the insurance contract that if breeched, may void the contract.
Absolute rules.
Waiver and Estoppel
Waiver is the relinquishment of a known right.
Estoppel is the result of that waiver.
For example if we waive a recorded statement, we cannot later ask for a recorded statement.
