Chapter 2 - General Insurance Flashcards
Agent/Producer
A person who acts for another person or entity known as the principal with regard to contractual arrangements with third parties; a legal representative of an insurance company
Agent/Agency Contract
A contract that is held between an insurer and an agent/producer, containing the expressed authority given to the agent/producer, outlining the duties and responsibilities to the principal.
Applicant or proposed insured
A person who requests or seeks insurance from an insurer
Beneficiary
The person who receives the benefits from the policy of insurance
Insurance Policy
A contract between a policy owner (and/or insured) and an insurance company which agreed to pay the insured or the beneficiary for loss caused by specific events.
Insurer
The company who issued a policy of insurance
Policyowner
The person who is entitled to exercise the rights and privileges in the policy and who may or may not be the insured
Premium
The money paid to the insurance company for the policy of insurance
Risk
The uncertainty or chance of loss occurring
Pure risk
Refers to situations that can only result in a loss or no change. Insureable. Those that involve only the chance of loss with no chance of gain.
Speculative risk
Involves the opportunity for either loss or gain.
Hazard
Conditions or situations that increase the probability of an insured loss occurring. 3 types: physical, moral, morale
Physical hazard
Are those arising from the material, structural, or operational features of the risk apart from the persons owning and managing it
Moral hazard
Refer to those applicants that may lie on the application for insurance, or in the past, have submitted a fraudulent claims against an insurer
Morale hazard
Refers to an increase in the hazard presented by a risk, Arising from the inserts in difference to loss because of the existence of insurance
Perils
Causes of loss incurred against in the insurance policy
Loss
The reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named Peril
Exposure
Units of measurement used to determine rates charged for insurance coverage
Homogeneous
A large number of units having the same or similar exposure to loss
Avoidance
Eliminating exposure to a loss.
Retention
Planned assumption of risk by an insured through the use of deductibles, co-payments or self-insurance.
Purpose of retention
- To reduce expenses and improve cash flow 2. To increase control of claim reserving and claims settlement 3. To fund for losses that cannot be insured
Sharing
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
Reduction
Lessen the possibility or severity of a loss such as installing smoke detectors in our homes
Transfer
Insurance is the most common method of transferring rest from an individual or group to an insurance company
Insurable risk characteristics
- Due to chance - A loss that is outside the insured’s control 2. Definite and measurable - a loss that is specific as to the cause, time, place, and amount 3. Statistically predictable - insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates ex. Mortality tables 4. Not catastrophic - insurers need to be reasonably certain their losses will not exceed specific limits 5. Randomly selected and large loss exposure - 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
Adverse selection
The ensuring of risks that are more prone to losses in the average risk. Insurance companies have an option to refuse or restrict coverage for bad risks, or charge them a higher rate for insurance coverage
Law of large numbers
States that the larger the number of people with a similar exposure to loss, The more predictable actual losses will be
Government vs. private insurance
The major difference between government and private insurance is that the government programs are funded with taxes and serve national and state social purposes, while private policies are funded by premiums.
Stock companies
Owned and by the stockholders who provide the capital necessary to establish and operate the insurance company and see who share in any profits or losses
Nonparticipating
Policies In which policy owners do not share in profits or losses. These policies do not pay dividends to policy owners; however, taxable dividends are paid to stockholders
Mutual companies
Owned by the policy owners to issue participating policies
Participating Policies
Policy owners are entitled to dividends which in the case of mutual companies are a return of excess premiums and are therefore non-taxable
Fraternal benefit society
Organization formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government
Lloyd’s
Is not an insurance company. Provide supports facilities for underwriters or groups of individuals that accepts insurance risk
Social insurance programs
Federal and state governments provide insurance in the areas where private insurance is not available
Certificate of Authority
Before insurers may transact business in a specific state, they must apply for and be granted a license
Authorized or admitted
Insurers who meet the state’s financial requirements and are approved to transact business in the state
Unauthorized or nonadmitted
Those insurers who have it been approved to do business in the state
Surplus lines
Insurance for which there is no readily available admitted market. Such coverages are marketed through nonadmitted insurers who specialize in offering insurance to the high risk market on an unregulated basis under each state’s surplus lines laws
Location of incorporation
Insurance companies are classified according to domicile state
Domestic
Insurer is an insurance company that is incorporated in this state
Foreign
Insurer is an insurance company that is incorporated in another state or territorial possession
Alien
Insurer is an insurance company that is incorporated outside the United States
Various Independent Rating Services
AM Best, Fitch, Standard and Poor’s, Moody’s, and Weiss
Independent agency System / American Agency System
1 Independent agent represents several companies
Nonexclusive
Commissions on personal sales
Business renewal with any company
Exclusive agency System / captive Agents
1 agent represents 1 company
Exclusive
Commissions on personal sales
Renewals can only be placed with the appointing insurer
General agency System
General agent-entrepreneur represents 1 company
Exclusive
Compensation and commissions
Appoints subagents
Managerial system
Branch manager
Salaried
Agents can be insurer’s employees or Independent contractors
Direct response Marketing Systems
No agents
Company advertises directly to consumers (through mail, etc)
consumers apply directly to the company
Reinsurance
Contract under which one insurance company (the reinsurer) indemnifies another insurance company for part or all of its liabilities. The originating company that procures insurance on itself from another insurer is called the ceding insurer ( because it cedes, or gives, the risk to the reinsurer). The other insurer is called is called the assuming insurer, or reinsurer.
Facultative reinsurance
When reinsurance is purchased on a specify policy
Principal (insurer)
An agent/producer is an individual licensed to sell, solicit or negotiate insurance contracts on behalf of the principal
Law of Agency
An agent represents the insurer, not the insured
Express
Is the authority a principal intends to grant to an agent by means of the agent’s contract
Implied
Is authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal
Apparent
Authority ( also known as perceived authority) is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created
Fiduciary responsibility
Is someone in a position of trust. It is illegal for insurance producers to commingle premiums collected from the applicants with their own personal funds
Code of Ethics
Market conduct describes the way companies and producers should conduct their business. Some regulations: conflict of interest, a request of a gift or loan as a condition to complete businesses, and supplying confidential information
Contact
An agreement between two or more Parties enforceable by law
Agreement- offer and acceptance
In insurance the applicant usually makes the offer when submitting the application. Acceptance takes place when an insurer’s underwriter approves the application and issues a policy.
Consideration
Is something of value to each party gives to each other
Competent parties
The parties to a contract must be capable of entering into a contract in the eyes of the law
Legal purpose
The purpose of the contract must be legal and not against public policy
Contract of adhesion
Is prepared by one of the parties (insurer) and accepted or rejected by the other party (insurer)
Aleatory contract
There is an exchange of an unequal amounts of values
Personal contract
It is between the insurance company and an individual. A policy owner can transfer ownership to another person. However the insurer must still be notified in writing
Unilateral contract
Only one of the parties to the contract is legally bound to do anything
Conditional contract
Requires that certain conditions must be met by the policy owner and the company in order for the contract to be executed and before each party fulfills it’s obligations
Indemnity
Aka reimbursement. Is a provision in an insurance policy that states that in the event of loss an insured is permitted to collect only to the extent of the financial loss
Utmost good faith
Implies that there will be no fraud, misrepresentation or concealment between the parties
Representation
Are statements believed to be true to the best of one’s knowledge but they are not guaranteed to be true
Material misrepresentation
A statement that if discovered would alter the underwriting decision of the insurance company. Intentional. Fraud
Warranty
Is an absolutely true statement upon which the validity of the insurance policy depends
Concealment
Is a legal term for the intentional withholding of information of a material fact that is crucial in making a decision. May void a policy
Rescission
The policy owner loses any right to file a claim on the policy and the insurer refund all money paid
Fraud
Is the intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract or to deceive or cheat a party. Grounds for voiding insurance contract
Waiver
Voluntary act of relinquishing a legal right, claim or privilege
Estoppel
Is a legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or privilege has been waived
