General Concepts Flashcards
Risk - Speculative vs. Pure
Risk is the uncertainty with respect to a loss. It is the chance of a loss occurring, not the actual loss itself.
Speculative Risk is the possibility of a loss as well as the possibility of a gain. Think investing
Pure Risk is the possibility of loss or no loss. Insurance is pure risk.
Exposure
The state of being subject to the possibility of a loss. It is the possibility of loss to a risk being caused by its surroundings. It is the condition of being without protection to the effects of harsh situations such as weather. Also referred to as risk of loss
Hazard
A condition that creates or increases the chance of a loss
Peril (Cause of Loss)
The occurrence that causes a loss, such as fire, water, theft, windstorms, etc.
Named Peril policies list the name of specific perils insured against
Open Peril policies provide the most comprehensive coverage by insuring against all direct loss except from the perils specifically excluded in the policy
Loss
The damage or injury or the expense caused during an occurrence. May be caused by peril or illness.
Methods of handling Risk (Avoidance)
Taking steps to remove a hazard, engaging in an alternative activity, or doing what is needed to bring an exposure to an end.
Methods of Handling Risk ( Retention)
“Self-insuring”, is doing nothing to avoid or reduce the risk. It is assuming all or part of a risk rather than purchasing insurance or transferring the risk.
Methods of Handling Risk (Sharing)
When insurance is too costly or unavoidable, companies involved in the same industry may band together and agree to pool their losses. When a loss occurs, the insurers share the loss. This way no individual insurer bears the full impact of the loss.
Methods of Handling Risk (Reduction)
Where a person takes steps to reduce the probability or severity of a possible loss, such as installing a burglar alarm to reduce the risk of loss.
Methods of Handling Risk (Transfer)
Shifting the risk to another party. Purchasing insurance is the most common method of risk transfer.
Elements of an Insurable Risk
A loss must be definite and definable
A loss must be accidental
The chance of loss must be calculable
A loss must create an economic hardship
Insurance must be offered at a reasonable cost
Losses must not be catastrophic
(The law of large numbers): By analyzing a large enough group, insurers are able to accurately predict the amount of losses that will occur and set their premiums at levels needed to cover the losses.
Stock Companies
A stock insurer is an insurer formed through the sale of stock, is owned by the shareholders, and is in the business to make a profit for the stockholders. Stock companies can issue par policies (policies that provide policy dividends) or non-par policies (policies that do not provide for policy dividends.)
Mutual Companies
They are controlled by the policyholders, who vote for a board of directors who directs the affairs of the company. Mutual companies are participating companies and therefore can issue par policies.
Fraternal Benefit Societies
An incorporated society operated solely for its members. They can provide death, annuity, endowment, hospital, medical, and/or disability benefits. They are participating contracts which means they pay out dividends and those may be paid to return excess premiums. Because fraternals are considered charitable organizations and sell insurance policies only to members. They are not considered insurers under the WA code.
Admitted vs. Non-admitted Insurers
An admitted insurance company is an insurer that is entitled to transact insurance in a state.
A Non-admitted insurance company is an insurer that is not entitled to transact insurance in a state.
Insurers must be authorized and licensed in a state to be an admitted carrier. An authorized insurer holds a valid certificate of authority from the state insurance department.
Domestic Insurer
An insurer with its home office located in the state is a domestic insurer
Foreign Insurer
An insurer with its home office located in another state and formed under the laws of any part of the united states.
Alien Insurer
An insurer with its home office located in another country and form under the laws of another country.
The law of Agency
Insurance sales reps are known as agents or producers. The insurance company is known as the principal, which means it employs or contracts with an insurance producer to represent it. The relationship between the principal and the agent is called the agency, and the law of agency establishes guidelines for such a relationship. The formal terms of a specific principal-agent relationship are often described in a contract.
Responsibilities of the producer to the insurer
A responsibility of loyalty to the insurer.
Obeying the instructions and acting in accord with directions received from the insurer.
Acting with care as a prudent and reasonable person would act under similar circumstance
Accounting for all money and property of the insurer and others while in the producer’s control.
Keeping the insurer informed about all relevant matters that are pertinent to the agency relationship.
Since the producer as an agent is a representative of the insurer, his actions are considered to be an act of the insurer. Information given to the producer must be communicated to the insurer.
Responsibilities of the insurer to the producer
Allow the agent to act and fulfill the terms of his/her contract
Recognize all the provisions of the contract
Compensate the producer in a timely manner, including reimbursement for business expenses, where applicable
Communicate with producers about new products developments, marketing methods, and anything that will increase efficiency and sales
Express Authority
The actual authority the insurer gives the producer in his/her contract as a representative of the company.
Implied Authority
Authority not specifically stated in the producer contract but is the authority the public may reasonably believe an agent to have. Ex. If a producer issues policies, it is reasonable to expect the producer to issue endorsements also.
Apparent Authority
The appearance of, or an assumption of authority which may cause applicants or insured to believe the producer has authority, which in fact he may not have.
Responsibilities to the Applicant/Insured
To accurately asses the individual’s need for insurance, the company involved, the type of policy, riders, and other options and endorsements that should be included.
To explain the conditions and requirements under which the policies can be obtained.
To solicit applicants for insurance and accept premiums from applicants and policyholders.
To provide timely service to prospects and policyholders.
Offer and Acceptance
The application is the offer and the policy is the acceptance of the offer when issued as requirested. If a policy is issued other than as requested, the policy is the offer and the applicants acceptance would be a premium payment
Consideration
Something of value must be given. The insured’s consideration is the application and premium payments. The insurer’s considerations are the promise to pay a covered claim.
Competent Parties
All parties must be alive, sane, and authorized to contract.
Legal Purpose
A contract must have a legal purpose. It cannot require either party to perform an illegal act.
Time Element
There is a time limit in a contract. Contracts don’t go forever.
Parties to a Contract
Promisor (the insurer) and Promisee (the insured)
Reasonable Expectations
Each party to a contract is entitled to rely upon the representations of the other, and each party should have a reasonable expectation that the other is acting without attempts to conceal or deceive.
Indemnity
To restore a victim for a loss in whole or in part, by payment, repair, or replacement
Utmost Good Faith
Under law, it is assumed that the insurance contracts are entered into by all parties in good faith, meaning that they have disclosed all relevant facts and intend to carry out their obligations. Where a lack of good faith can be proved, such as a fraudulent application to obtain insurance, the contract may be nullified.
Representations
Ex. statements in the application. These statements are considered to be true, or statements made to the best of one’s knowledge. They are not guaranteed to be true.
Misrepresentations
An inaccurate statement, whether intentional or unintentional.
Warranties
A promise of what will be done
Concealment
The failure to disclose a material fact that should have been disclosed.
