Chapters 2-6 Flashcards
Agent/Producer
A legal representative of an insurance company. The classification of producer usually includes agents and brokers. Agents are the agents of the insurer
Applicant or the proposed insured
A person applying for insurance
Beneficiary
A person who receives benefits of an insurance policy
Broker
An insurance producer not appointed by an insurer and is deemed to represent the client.
Indemnity
Main principle of insurance meaning that the insurer cannot recover more than their loss; the purpose of insurance is to restore the insured to the same position as before the loss.
Insurance policy
A contract between a policy owner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for the loss caused by specific events
Insured
The person covered by the insurance policy. This person may or may not be the policy owner
Insurer (principal)
The company who issues an insurance policy
Law of large numbers
The larger the number of people with a similar exposure to loss the more predictable actual losses will be
Policyowner
The person entitled to exercise the rights and privileges in the policy
Premium
The money paid to the insurance company for the insurance policy
Reciprocity/Reciprocal
A mutual interchange of rights and privileges.
Insurance
- Transfers the risk of loss from an individual to an insurer
- Based on the principle of indemnity
- Based on the spreading of risk (risk pooling) and the law of large numbers
Hazards
Conditions that increase the probability of loss occurring
Physical Hazard
A physical condition
Moral Hazard
a tendency toward increased risk
Morale Hazard
an indifference to loss
Risk
Uncertainty regarding financial loss
Pure Risk
insurable because it involves a chance of loss only
Speculative Risk
not insurable because it involves a chance of gain
Methods of handling risk
- Avoidance
- Retention
- Sharing
- Reduction
- Transfer
Insurance risk due to chance
chance of loss beyond insured’s control
Insurance risk that is definite and measurable
loss must have definite time, place and amount
Predictable insurance risk
number of losses must be statistically predictable
Insurance risk that is not catastrophic
there must be limits that the loss can’t exceed
Insurance risk large exposure
insurer must be able to predict losses based on the law of large numbers
Randomly selected exposure insurance risk
insurer must have a fair proportion of both good and poor risks
Stock Insurer
- Owned by stockholders
- Issue nonparticipating policies (nonpar)
Mutual insurer
- Owned by policyowners (policyholders)
- Issue participating policies (par)
- Pay dividends to policyholders which are a refund of excess premiums
Fraternal benefit society
- Not for profit organization
- Not an insurer
- Formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization
Express authority
Powers specifically stated in the contract
Implied authority
Not specifically stated in the contract, but is assumed necessary to conduct insurance business
Apparent authority
The appearance of a relationship between the agent and principal based on words or actions
Domicile
- Domestic - incorporated in this state
- Foreign - incorporated in another state of territory
- Alien - incorporated in another country
Authorized/Admitted
- Approved by the Department of Insurance
- Has a Certificate of Authority
Unauthorized/nonadmitted
-No Certificate of Authority
-Cannot transact business in this state
Elements of a legal contract
Agreement: offer and acceptance
Consideration: premiums and representations on the part of the insured; payment of claims on the part of the insurer
Competent parties: of legal age, sound mental capacity, and not under the influence of drugs or alcohol
Legal purpose: not against public policy
Contract characteristics
Adhesion - one party prepares the contract; the other party must accept it as is
Aleatory - exchange of unequal amounts
Conditional - certain conditions must be met
Personal - between the policyowner and the insurance company
Unilateral - only one of the parties to the contract is legally bound to do anything
Legal interpretations
Ambiguities in the contract are always resolved in favor of the insured
The insured can reasonably expect coverage based on the agent’s words and actions
Utmost good faith - parties rely on each other for information
Material misrepresentations (if intentional), breach of warranties, concealment, fraud - all can void the contract
Waiver - voluntary act of relinquishing a legal right; estoppel - consequence of a waiver
Retention usually results from three basic desires of the insured
to reduce expenses and improve cash flow, to increase control of claim reserving and claims settlements, and to fund losses that cannot be insured.
What is also called “perceived authority?
Apparent authority
Adverse selection
there are more risks with higher probability of loss seeking to purchase and maintain insurance than the risks who present lower probability. Underwriters must guard against this.
fiduciary capacity
An agent acts in a fiduciary capacity, based upon trust and confidence, when handling the financial affairs of their customers, including the handling of premiums.
unilateral contract
the insured is not legally bound to do anything. The insurer, however, must pay losses covered by the policy.
Is reinsurance a marketing system?
No, Reinsurance is a method used by insurers to protect against catastrophic losses
