General insurance Flashcards
Insurance
A contract that transfers the risk of financial loss from an individual or business to an insurer.
Risk
Uncertainty about whether a loss will occur
Types of risk
Speculative- loss or gain could occur (not insurable) EG. Gambling/investments
Pure- only loss can occur (is insurable) EG. Car crash/death etc.
Loss
Reduction of value in an asset
Value before loss-value after loss= total amount of loss
Exposure
Risks for which the insurance company would be liable
Peril
Cause for loss
Death/accidents and sickness
For property fire/lightning etc.
Hazard (and hazard types)
Anything that increases the chance that a loss will occur
Physical- can be seen or determined (heart condition or wet floor)
Moral- intentionally causing a loss (dishonesty etc.)
Morale- carelessness or unintentional behaviors (leaving door unlocked etc.)
Methods for Handling Risk
Sharing Transfer Avoidance Reduction Retention
What is the law of large numbers?
Makes insurance possible
The larger the group- the more accurately losses can be predicted. Can’t predict exactly who will have a loss, but can predict fairly accurately how much they will have to pay out in claims
Risks that can be insured must have the following characteristics
Calculable (calculable based upon prior loss statistics)
Affordable (premium for transferring risk must be affordable)
Non-catastrophic (cannot insure events that cause widespread loss to large numbers of insureds)
Homogeneous (must be similar in odds of loss)
Accidental (if a loss is certain to occur there is no risk)
Measurable (must be possible to have dollar amount)
Adverse selection
Risks that have higher than than average chance of loss
Underwriter
Determines that the risk is higher than average. Insurance may charge more, limit the amount liable, or refuse application all together
Reinsurance
An insurance company paying another insurance company (reinsurer) to take some of the companies risk of catastrophic loss
2 ways reinsurance works
Facultative- the reinsurer evaluates each risk before allowing transfer
Treaty- the reinsurer accepts the transfer according to an agreement called a treaty
Stock insurer
Owned by stockholders and shareholders
Board of directors chosen by the stockholders and shareholders
If the company makes money a taxable dividend from the profits maybe paid to the stock holders and shareholders
Issues non par policies
Mutual insurer
Owned by the policyholders
Board of directors chosen by policy holders
If the company is profitable excess premiums can be returned to its policy holders (non taxable)
Issues participating policies
Fraternal Insurer
Provides insurance and other benefits
Must be a member of the society to get the benefits
Reciprocal insurer
Unincorporated group of people that agree to pay each others losses under a contract
Members are assessed the amount they have to pay if a loss to my member of the group occurs
Run by an attorney-in-fact
Risk Retention Group (RRG)
Liability insurance company created for policy holders from the same industry. Ex. Car dealership RRG- only car dealerships can be policy holders
Lloyd’s associations
Insurance provided by individual underwriters, not insurance companies
Ex. Hole in one contests. Hair of celebrities, etc.
Self insurers
A business that pays its own claims. Retain risk. Set aside funds to cover potential losses
Residual market
Insurance from the state or federal government level
Insurance company location
Domestic (in the state where a company is incorporated)
Foreign (any state or US territory other than the state where incorporated)
Alien (incorporated in any country other than USA)
Authorized vs unauthorized insurers
Certificate of authority (state license for insurance company)
Admitted authorized or approved (state requires the insurance company to have a certificate of authority)
Non-admitted (insurance company not required to have a certificate of authority from the state)
Surplus line
Insurance sold by unauthorized/non-admitted insurers (if on the states approved list of surplus insurers)
Can only be sold to high risk insureds
Can’t be sold just for a cheaper rate than licensed/admitted insurers
4 types of agents
Independent- sales are made by agents who represent more than one company
Exclusive or captive- sells for one company
General agent- recruits other agents in a certain area who actually sell the insurance to the customer
Direct writing- company sells the insurance through salaried employees of the company
Direct response
Policy is sold directly from insurer to consumer. No agent required
Agency
Insurance agent acts on behalf of the principle (insurance company)
3 types of agent authority
Express (what the agents written contract with the company states)
Implied (not written, but are the actions agents normally do to sell insurance)
Apparant( actions the agent does that a reasonable person would assume as authority, based on the agents actions and statements)
Fiduciary
Person in a position of financial trust
Commingling
Mixing personal funds with insureds funds
Sustainability considerations
An agent has the responsibility to make purchase recommendations that are appropriate in light of clients needs/goals/circumstances
5 elements to form a valid contract
Consideration Legal purpose Offer Acceptance Competent Parties
Adhesion
Policy written by the insurance company
If ambiguous court will take side of the insured
Aleatory
Not equal value- small premium for a large amount of coverage
Unilateral
Only one purpose
Insurance company promises to pay for a covered loss
Insured does NOT promise to pay the premium
Personal contract
A contract made with one particular person and no one else
Conditional contract
Require certain conditions to be fulfilled in order for performance under the contract to be enforced
Contract of indemnity
Restore to the insured’s original ore-loss condition, no better, no worse
Representation
A statement that is believed to be true
Misrepresentation- information that is not true, but doesn’t affect insurance company’s decision (one number wrong on address)
Material misrepresentation- information that is not true and does affect decision
Warranty
Statement that is guaranteed to be true
Always made by the insurance company - if promise to pay is broken company could be sued
Maybe made by the insured- if promise is broken insured may have no coverage
Concealment
Intentional failure to disclose known facts
If intention and the info is material coverage could be voided
If NOT intentional coverage cannot be voided
Fraud
Intentional act to cheat another
Voids policy
Waiver
Voluntarily giving up a right
Estoppel
Actions reasonably relied on by one party can’t be denied by the party that accepted previously
