General Insurance Flashcards
What is insurance?
Insurance is a contract in which one party (the insurance company) agrees to indemnify (make whole) insured party against loss, damage or liability arising from an unknown event. In life insurance, the policy protects survivors from losses suffered after an insured’s death.
What is risk?
Risk is the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable.
Pure risk refers to situation that can only result in a loss or no change. there is no opportunity for financial gain. Pure risk is the only type insurance companies are willing to accept.
Speculative risk involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.
What is a peril?
Perils are the causes of loss insured against in an insurance policy.
- Life insurance insures against the financial loss caused by the premature death of the insured;
- Health insurance insures against the medical expenses and/or loss of income caused by the insured’s sickness or accidental injury;
- Property insurance insures against the loss of physical property or the loss of its income producing abilities;
- Casualty insures against the loss and/or damage of property and resulting liabilities.
What are the elements of insurable risk?
Not all risks are insurable. As noted earlier, insurers will insure only pure risks, or those that involve only the chance of loss with no chance of gain. Furthermore, even pure risks must have certain characteristics in order to be insurable. Insurable risks involve the following losses:
- Due to chance: a loss that is outside the insured’s control.
- Definite and measurable: a loss that is specific as to the cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.
- Statistically predictable: Insurers must be able to estimate the average frequency and future losses and set appropriate premium rates. (In life and health insurance, the use of mortality tables and morbidity tables allows the insurer to project losses based on statistics.)
What is the difference between an authorized/admitted and unauthorized/non admitted insurer?
Before insurers may transact business in a specific state, they must apply for and be granted a license or Certificate of Authority from the state department of insurance and meet any financial (capital and surplus) requirements set by the state. Insurers who meet the state’s financial requirements and are approved to transact business in the state are considered authorized or admitted into the state as a legal insurer. Those insurers who have not been approved to do business in the state are considered unauthorized or non admitted. Most states have laws that prohibit unauthorized insurers to conduct business in the state, except through licensed excess and surplus lines brokers.
What is the difference between domestic, foreign and alien insurance companies?
Insurance companies are classified according to the location of incorporation (domicile). Regardless of where an insurance company is incorporated, it must obtain a certification of authority before transacting insurance within the state.
A domestic insurer is an insurance company that is incorporate in this state. In most cases, the company’s home office is in the state in which ist was formed - the company’s domicile. For instance, a company chartered in Pennsylvania would be considered a Pennsylvania domestic company.
A foreign insurer is an insurance company that is incorporated in another state or territorial possession (such as Puerto Rico, Guam or American Samoa). For example, a company chartered in California would be a foreign company within the state of New York.
What are three types of agent authority?
Express authority is the authority a principal intends to grant to an agent by means of the agent’s contract. It is the authority that is written in the contract.
Implied authority 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. Implied authority is incidental to and derives from express authority since not every single detail of an agent’s authority can be spelled out in the written contract.
Apparent 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.
What are the four elements of an insurance contract?
Agreement - Offer and Acceptance: There must be a definite offer by one party, and the other party must accept this offer in its exact terms. 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 - The binding force in any contract is the consideration. Consideration is something of value that each party gives to the other. The consideration on the part of the insured is the payment of premium and the representations make the application. The consideration on the part of the insurer is the payment of premium and the representations made in the application. The consideration on the part of the insurer is the promise to pay in the event of loss.
Competent Parties - The parties to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol.
Legal Purpose - The purpose of the contract must be legal and not against public policy. To ensure legal purpose of a Life Insurance policy, for example, it must have both: insurable interest and consent.
What does indemnify mean?
Indemnity (sometimes referred to as reimbursement) is a provision in an insurance policy that states that the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of insurance contract. The purpose of insurance is to restore, but not let an insured or a beneficiary profit from the loss.
What does representation mean and how does it differ from a warranty?
Representations are statements believed to be true to the best of one’s knowledge, but they are not guaranteed to be true. For insurance purposes, representations are the answers the insured gives to the questions on the insurance application.
A warranty is an absolutely true statement upon which the validity of the insurance policy depends. Breach of warranties can be considered grounds for voiding the policy or a return of premium. Because of such a strict definition, statements made by applicants for life and health insurance policies, for example, are usually not considered warranties, except in cases of fraud.
Risk insurance terminology refers to
The uncertainty of financial loss.
Conditions that increase the chances of an insured loss occurring are referred to as
Hazards.
Mutual companies are owned by
Policy-owners.
The insurer must be able to rely on the statements in the application, and the insured must be able to rely on the insurer to pay valid claims. In the forming of an insurance contract, this is referred to as
Utmost good faith.
In an insurance contract, consideration refers to
Exchange of something of value by both parties.
