General Insurance Flashcards
Insurance
The transfer of risk of loss from an individual or business to an insurance company.
Risk
Chance of loss occurring
2 Types of Risk
Pure risk and Speculative Risk
Pure Risk
A situation that can result in loss or no change. No chance for financial gain.
Speculative Risk
A situation that can result in loss or gain, e.g. gambling
Hazard
A condition/situation that increases probability of insured loss occurring
3 Types of Hazards
- Physical- individual characteristics that increase chance, e.g. medical history.
2.Moral- character/reputation of proposed insured, e.g. previously submitted fraudulent claim - Morale- insured’s state of mind that causes indifference to loss, e.g. carelessness, recklessness
Peril
Causes of loss
Loss
Reduction of value of person/property caused by a named peril.
Exposure
Unit of measurement used to determine rates charged for insurance coverage
Methods for Handling Risk
- Avoidance- eliminate exposure to loss
- Retention- planned assumption of risk through deductibles, copayments, or self-insurance.
- Sharing- group with similar exposure sharing loss within group, e.g. reciprocal insurance exchange.
- Reduction- actions to reduce risk, e.g. smoke alarms, preventative healthcare.
- Transfer- move impact loss from self to others, purchase insurance coverage.
Insurable Risk Characteristics
- Due to chance
- Definite and measurable
- Statistically predictable
- Not catastrophic
- Randomly selected
- Large loss exposure
Law of Large Numbers
The larger the number of people with similar exposure to loss, the more predictable actual losses will be.
Adverse selection
A situation where an insurance company may inadvertently incur loss due to offering policies to individuals more prone to risk than usual due to lack of proper information provided by potential insured, i.e. misinformation given
Insurer Classifications
- Government- funded by taxes, e.g, Medicare, National Flood Insurance
- Private- funded by premiums
further classified by: a. Ownership
b. Authority to transact
c. Location (domicile)
d. Marketing
e. Rating
Private Insurer Type-Ownership
Stock Companies: 1. owned by stockholders
2. issue nonparticipating policies,
e.g. policyowners don’t share in profits/losses
3. taxable dividends paid to stockholders
Mutual Companies: 1. owned by policyowners
2. issue participating policies
3. non-taxable dividends (excess premiums) paid
to policyowners
Fraternal benefit society: organization formed to provide insurance benefits for members.
1. sell only to members
2. considered charitable institutions
3. do not service public at large
Self-insurers: when individual/entity develops a formal program identifying, evaluating, and funding its losses. Often used for workers compensation where losses are fairly predictable. Structure program up to a certain limit of loss then purchase insurance (stop-loss coverage).
Reciprocal exchanges: 1. have “subscribers”
2. administered by attorney-in-fact
3. liable for share of loss among all
subscribers
Risk Retention Group (RRG): 1. liability insurance
2. owned by members who belong to
same industry/business
3. may re-insure another risk group
Risk Purchasing Group: entity that offers insurance to group of similar businesses. Policy is based on insured’s loss/expense experience.
Private Insurer Type- Authority to Transact
- authorized/admitted- have Certificate of Authority from the state department of insurance in the state where insurer is doing business.
- unauthorized/non-admitted- insurer has not received Certificate of Authority.
*Approval depends upon company’s capital and surplus.
What are surplus lines?
Type of coverage not readily available on admitted market. Usually marketed through non-admitted insurers who specialize in offering insurance to high-risk market on unregulated basis.
Private Insurer Type- Location of Incorporation/Domicile
- Domestic Insurer- Insurance company that incorporated is said state.
- Foreign Insurer- company incorporated in another state, District of Columbia, or territorial possession.
5 Major US Territories- American Samoa
Guam
Northern Mariana Island
Puerto Rico
US Virgin Islands - Alien Insurer- company that is incorporated outside the US
Private Insurer Type- Marketing System
- Independent (American) Agency- 1 independent agent represents
several companies
Nonexclusive
Commission on personal sales
Business renewal with any
company - Exclusive Agency (captive agent)- 1 agent represents 1 company
Exclusive
Commissions on personal sales
Renewals can only be placed
with appointing insure - General Agency System- General agent- entrepreneur
Exclusive
Compensation and commissions
Appoints subagents - Managerial System- Branch Manager (supervises agents)
Salaried
Agents can be insurer’s employees or
independent contractor - Direct Response Marketing- No agents
Company advertises directly to
customers
Consumers apply directly to company
Private Insurer Type- Rating/Financial Status
Financial strength and stability of company vitally important to customers. Strength is measured by: prior claims, experience, investment earnings, levels of reserves and management.
Rating services: AM Best
Fitch
Standard and Poor’s
Moody’s
Weiss
Reinsurance
a contract where one insurance company indemnifies another insurer for part or all liabilities. This protects company against catastrophic losses.
ceding insurer
originating company
facultative reinsurance
reinsurance is purchased on a specific policy
assuming insurer/reinsurer
hired insurance company
Reinsurance treaty
automatic reinsurance agreement between 1 company and the reinsurer where reinsurer is bound to accept all risks ceded to it.
Law of agency
Defines relationship between principal and agent/producer.
Nature of relationship between principal and agent /producer
- Agent represents insurer, not insured
- Any knowledge of agent is presumed knowledge of insurer
- Agent working within conditions of contract, insurer is fully
responsible - Payments submitted to agent is same as submitting payment
directly to insurer
Agent Duties
- accurately complete applications
- Submit app to insurer for underwriting
- Deliver policy to policyowner
Types of Agent Authority
Agency contract details authority that agent has within own company.
- Express- Authority principal intends to grant to an agent through
agent contract. - Implied- Authority not expressed or written into the contract but which agent is assumed to have in order to transact the business. (Incidental to and derives from express authority)
- Apparent- also known as perceived authority. Appearance/assumption of authority based on actions, words, or deeds of the principal or because of circumstances the principal created. (i.e. agent using insurer’s letterhead)
Fiduciary Responsibility
Agent is trusted to handle funds of both principal and insurer according to a code of ethics.
Code of Ethics
Agent will avoid or refuse:
1. conflict of interest
2. Request a gift or loan as a business
condition
3. Supplying confidential information
Being Professional
Placing public interest above one’s own in all situation
Legal Contract
Legally enforceable agreement between 2 or more parties
Elements of Legal Contracts
- Agreement- Offer (i.e. applicant submits application) and
acceptance (i.e. insurer’s underwriter approves
application and issues policy) - Consideration- finding force in any contract. Something of value each party gives other. (i.e. insured consideration- representations in application or payment of premium. insurer consideration- promise to pay if loss happens.)
- Competent Parties- parties are of legal age
mentally competent to understand contract
not under the influence of drugs or alcohol - Legal Purpose
Characteristics of Insurance Contract
Adhesion- prepared by insurer; accepted or rejected by insured
accepted “as-is”, no negotiation
ambiguities settled in favor of insured
Aleatory- exchange of unequal amounts/values
(i.e. premiums vs potential amount of loss
Personal- between insurance company and individual
insured cannot be changed without insurer approval
Unilateral- only 1 of the parties legally bound
insured makes no legally binding promises
insurer legally bound to pay losses
Conditional- certain conditions must be met by insured before
insurer pay (i.e. paid premiums, proof of loss)
Ambiguities in contract of adhesion
(Legal Interpretations Affecting Contracts)
Courts interpret ambiguity in favor of insured.
Reasonable Expectation
(Legal Interpretations Affecting Contracts)
If agent implies provision exists, insured could reasonably expect coverage.
Indemnity (reimbursement)
(Legal Interpretations Affecting Contracts)
Insured is only permitted to collect to extent of loss, not to financially gain from loss
Utmost Good Faith
(Legal Interpretations Affecting Contracts)
There will be no fraud, misrepresentation, or concealment between parties.
Representation and Misrepresentation
(Legal Interpretations Affecting Contracts)
Statements made on application are believed to be true to the best of one’s knowledge. Untrue statements made intentionally are considered fraud.
Warranty
(Legal Interpretations Affecting Contracts)
Absolutely true statements upon which the validity of policy depends.
Concealment
(Legal Interpretations Affecting Contracts)
Intentional withholding of information of a material fact that is crucial in making a decision.
Fraud
Intentional misrepresentation/concealment used to induce another party to make or refrain from making a contract, or to deceive a party
Waiver
Voluntary act of relinquishing legal right, claim, or privilege.
Estoppel
Legal consequence of waiver. Legal process used to prevent a party to a contract from re-asserting right after it has been waived.
National Association of Insurance Commissioner (NAIC)
- Resolves insurance regulatory problems.
- Active in the formation and recommendations of model legislation
and regulation (bring uniformity and simplify marketing of i
insurance)
Made of commissioners from all 50 states, District of Columbia, and US territories.
