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
