General Insurance Flashcards
Insurance
The transfer of risk. -Transfers the risk from an individual or business to an insurer
Risk
Uncertainty about whether a loss will occur. -if a loss is certain to occur, it is not a risk
Speculative Risk
Chance of loss or gain. Not insurance.
I.e. gambling loss
Pure Risk
Chance of loss only. Can be insured.
Exposure
Risks for which the insurance company would be liable. Risk assumed by insurer. Expressed in units.
Loss
A reduction in the value of an asset
Peril
A cause of loss. The insurer agrees to cover losses caused by a specified peril like death (life) or sickness/accidents (health)
Hazard
Something the increases the chance that a loss will occur
Three types of hazards
Physical, moral and morale
Moral Hazard
Arise from an individual’s character. Dishonesty. A belief that intentionally causing a loss is acceptable.
Physical Hazard
Physically identifiable hazard (a heart condition)
Morale Hazard
A state of mind or careless attitude. I.e. forgetting to lock a door
Methods of handling risk
-Sharing
-Transfer
-Avoidance
-Reduction
-Retention
Sharing of risk
Two or more individuals agree to pay a portion of any loss incurred by any member of the group
Transfer of risk
Insurance. Spreads a risk of loss among many.
Avoidance
Eliminating a particular risk by not engaging in a certain activity
Reduction
Lessening the chance that a loss will occur, or lessening the extent of the loss that does occur
The Law of Large Numbers
The larger the group-the more accurately losses can be predicted
Elements of Insurable Risk
-Calculable
-Affordable
-Non-catastrophic
-Homogeneous
-Accidental
-Measurable
Adverse Selection
Risks that have a greater than average chance of loss
-The tendency for higher-risk individuals to get and keep insurance
Underwriting
An extensive evaluation of information related to a particular risk. Used to avoid adverse selection. Determines level of risk
Reinsurance
Transfers the risk from one insurer to another, like insurance for insurers
Facultative Reinsurance
Reinsurer considers each risk before allowing the transfer to be made from the ceding company
Treaty Reinsurance
The reinsurer accepts all risks of a certain type from the ceding company
Stock insurer
A business formed as a public or private corporation and owned by its stockholders
-if company makes money, a taxable dividend may be paid to the stock/shareholders
-issues non-par policies
Mutual Insurer
Does not have stock or stockholders and is owned by its poly holders/owners. If company is profitable, excess premiums can be returned to its policyholders as non taxable dividends
-issues participating policies
Fraternal Benefit Societies
Exist for the benefit of its members and offers life insurance as one of the benefits of membership
-organized under a lodge system
-operate as nonprofit societies and receive some income tax advantages
-policies are called certificates
Reciprocal Insurer
Incorporated groups of people that agree to insure each other’s losses under a contract
-members are known as subscribers
-members are assessed the amount they have to pay if a loss to any member occurs
-run by an attorney-in-fact
Risk Retention Group
An insurer formed for the sole purpose of providing liability insurance to its policyholders
-owned by the insured or members
-must all be members of the same type of business
Lloyd’s Associations
Insurance provided by individual underwriters, not insurance companies
-insure oddities like hole-in-one contests, quarterback’s arm etc
Self-Insurance
Retaining risk and is a business that pays its own claims with savings set aside to cover losses
Domestic Insurer
The state where a company is incorporated
Foreign Insurer
Operates in any state or U.S. territory other than the state where incorporated
Alien Insurer
Incorporated in any country other than the U.S.
Certificate of Authority
State license for an insurance company
Admitted/Authorized Company
Has a state certificate authority to sell insurance
Non-Admitted, Unauthorized, Nonapproved Insurance Company
Companies allowed to sell insurance to certain types of risks (surplus) without having to have a license
Surplus Lines Insurance
Sold by unauthorized/non-admitted insurers approved by the state
-only be sold to certain high risk insureds
-can’t be sold just for a cheaper rate than licensed/admitted insurers
Independent Insurance Agents
Individuals that sell the insurance products of several companies and are independent contractors, not employees of the insurer
Exclusive or captive agents
Represent only one company. Are independent contractors, not employees.
General Agents (GAs) or Managing General Agents (MGAs)
Hire, train, and supervise other agents within a specific geographical area. Receive overriding commissions on the business produced by agents they manage.
Direct-writing companies
Pay salaries to employees whose job function is to sell the company’s insurance products from the company office. Not usually paid a commission and insurer owns all business produced
Direct response marketing
-no producer/agent
-policies are sold directly to the public by the insurer
Agency
One person is authorized to represent and act for another person or corporation
Agent
Person authorized to act on behalf of the principal (insurance company)
Principal
The insurer, on whose behalf the agent acts
Express authority
The authority made explicit in a producer’s written agency agreement
Implied authority
Not written in the agency contract but is assumed to be granted to an agent in accordance with general business practices
-actions agents normally do to sell insurance like make business cards
Apparent authority
Authority that others believe the agent has
-actions agent does that a reasonable person would assume as authority
Fiduciary
A person in a position of financial tryst. Obligated to act in best interest of trustee.
Commingling
Mixing personal funds with the insured’s or insurer’s funds
Suitability considerations
Agent has a responsibility to make purchase recommendations that are appropriate or suitable, in light of a client’s particular needs, objectives and circumstances
Elements of a Legal Contract
-Consideration
-Legal purpose
-Offer
-Acceptance
-Competent parties
Consideration
Exchange of value. In insurance, applicant provides consideration in the form of information and premium, insurer provides consideration in the form of priories to pay if certain loss occurs
Adhesion
Provisions are written by only one party to the contract, and the other party is required to adhere to them
Aleatory contract
The value received from the contract by each party may be unequal.
-small premium for large amount of coverage
-lots of premium paid with no loss
Utmost Good Faith
The insured and insurance company have a right to expect honesty from each other
Insurance policies are __________, or one-sided, because only one party is legally bound to perform under the contract
Unilateral
Insurance policies are conditional contracts because:
They require certain conditions to be fulfilled in order for performance under the contract to be enforced. Insured must pay the premium for coverage and file a claim if a loss occurs.
Indemnity
Contact is intended to restore the insured to the financial state prior to the loss- no more and no less
Representation
A statement that is believed to be true, to the best of one’s knowledge at the time it is givenm
Misrepresentation
Information that is given that is not true
Material misrepresentation
Information given that is not true and DOES affect the insurer’s decision. False information must have been a determining (material) factor in the insurer’s acceptance of the risk
Warranty
A statement that is guaranteed to be true
Concealment
Intentional failure to disclose known facts
Fraud
An intentional act designed to deceive and induce another party to part with something of value
Waiver
The intentional and voluntary giving up of a known right
Estoppel
A legal doctrine that prevents a party from denying an action if it had been accepted previously
