Defining Insurance & Risk Flashcards
Insurance
A social device for transferring risk through an accumulation of funds
Policy
Contract between the policyowner and the insurance company
Premium
Method of compensation a policyowner pays to the insurer
Speculative Risk
Type of risk that involves both the chance of loss and gain
Gambling
Pure Risk
Type of risk that only involves the possibility of loss. Creates a financial loss so it is insurable
Risk Avoidance
The act of avoiding or eluding a risk
Someone afraid of car wreck so they only walk to their destination
Risk Reduction
Reducing risk
Only driving on vacant roads on sunny days
Risk Retention
Retaining the possibility of loss
Driving w/o insurance
Risk Sharing
Pooling the risk with a large number of people
Risk Transfer
Shifting a risk to another
Basis for Insurance
Elements of Insurable Risk
- The loss must be Predictable
- The loss must be definite, can place a price on the loss
- The loss must be due to chance
- The loss cannot be catastrophic, not a result of war or “Acts of God”
- The loss exposure must be large, There must be a large number of people that can potential experience the same loss
Stock Insurance Company
Considered a non-par company because the policyowners do not participate in dividends. Owned by the stock holders of the company
Mutual Insurance Company
Policyowners own the company so they “Par”-ticipate in dividends that are due from overpayment of dividends.
Considered a Mutual Company
Government Insurers
Rely on tax dollars to fund social Insurance programs
ie, SSI, Medicaid and Medicare, Worker’s Comp.
Authorized Company
An insurer licensed to transact insurance in Michigan, admitted to do business in the state
Unauthorized Company
An insurer not licensed to transact business in Michigan
Adverse Selection
When the insurer has a selected a less than average risk that may result in increased claims and reduced profitability
Underwriter
a person who conducts the underwriting process for the insurer to guarantee that all applicants satisfy the company’s minimum insurability and underwriting requirements
Insurable Interest
a financial connection between the policy owner and the insured at the time of inception of the policy.
Mother on child
Husband on wife
Business partner on business partner or key employee
Avocation
An applicants hobbies
Medical Information Bureau
Standard Risk
Average Risk
Substandard Risk
Less than average risk
Preferred Risk
Risk that exceeds the insurers average risk requirements, usually will pay a lower premium than standard risk
Uninsurable
Cannot be insured
Expressed Authority
Written Authority in the agents agreement
Implied Authority
Authority assumed or implied for the agent to do their job
-an agent has the authority to collect payment for the policy
Offer and Acceptance
Constitutes agreement between the parties in the insurance contract.
-a policy owner gives their premium and the insurer provides a policy
Consideration
Something of value that must be exchanged between the parties of the contract
Consideration
Something of value that must be exchanged between the parties of the contract
The insured provides the premium and the insurer provides the policy
Competent Parties
Of legal age, usually 18, and mentally competent. Not under the influence of drugs or alcohol
Personal Contract
Insurance Contracts are personal in nature
Conditional Contract
Certain conditions or losses must be met before a claim can be paid
Aleatory Contract
Equal value is not given to both parties of the contract. A one sided contract
Contract of Adhesion
The contract and its provisions are prepared by one party, the insurer
Ambiguities
vagueness or uncertainties in the contract will be in the favor of that party that did not create the contract, the insured individual
Unilateral Contract
Only the insurer must abide by the terms of the contract
Valued Contract
Pays a specified amount that is stated on the policy
Indemnity Contract
Pays an equal amount equivalent to the loss,
The insured is restored to the same financial condition as before the loss
Waiver
Giving up of a known or legally enforceable right
Estoppel
One party is prevented from asserting a right that would be to the detriment of another party
Warranty
A statement that is guaranteed to be True
Representation
Statement by the applicant that is believed to be true
Concealment
The applicant failing to disclose a known material fact in an application
Considered defrauding the insurer
Fraud
- in the event of fraud the contract is null and void
- the insurer has a limited time, usually 2 years, to challenge fraudulent statements
Entire Contract
Policy, a copy of the application and any policy amendments
Free Look
The right to look/ review the policy for free with a return of premiums paid within a certain period of time
Grace Period
Period of time that the policyowner has to pay the premium after the due date
Other Insurer Provision
Allows insurer to control over insurance with other insurers, prevents over insurance
Other Insurance in this Insurer
Controls over insurance from an insurer through its own policy
Elimination Period
Period of days that must occur after the onset of an illness or occurrence of an accident before benefits are payable
