General Insurance Flashcards
Insurance
is a contract that transfers the risk of financial loss from an individual or business to an insurer. In return the insurer agrees to cover the individual or business from certain losses if they occur
Risk
is uncertainty about whether a loss will occur. If a loss is certain to occur, it does not involve risk.
Speculative Risk
have a possibility of a loss and also hold the possibility of making a gain - gambling - loss is NOT INSURABLE
Pure Risks
only involve the possibility of experiencing a loss and they can be covered by insurance - car accident - loss IS INSURABLE
How is the insurance premium calculated?
If life insurance rate is $32 per $1000 of death benefit
is the rate multiplied by the number of exposure units.
the premium for a $100k policy would be $32 x $100 = $3200
Exposure
Risks for which the insurance company would be liable
Peril
is a cause of loss. for life insurance the peril is death
Hazard
anything that increases the chance that a loss will occur. Hazards do not cause the loss but they make loss more likely
Three types of Hazard
physical, moral, morale
heart condition is a physical hazard
moral hazards arise from an individuals character - dishonesty
morale hazard are a state of mind or careless attitude - leaving windows and doors unlocked at home
Methods for handling risk - STARR
Sharing Transfer Avoidance Retention - the individual will pay if the loss occurs Reduction
Risks that can be insured have the following characteristics - CANHAM
Calculable Affordable Non-Catastrophic - insurance cannot insure events that cause widespread losses to large numbers of insured such as war Homogeneous Accidental Measurable
Adverse Selection
is the tendency for higher-risk individuals to get an keep insurance more than individuals who represent an average level of risk
Reinsurance
transfers risk from one insurer to another insurer. the company reducing its risk is called the ceding insurer, the company assuming the risk is called the reinsurer
Facultative
the reinsurer evaluates each risk before allowing the transfer
Treaty
the reinsurer accepts the transfer according to an agreement called a treaty
Reciprocal Insurers
unincorporated groups of people that agree to insure each other’s losses under a contract. the members of the reciprocal groups are known as subscribers.
run by an attorney-in-fact
Risk Retention Group
an insurer formed for the sole purpose of providing liability insurance to its policyholders (example car dealers)
Lloyd’s
famous underwriting group. insurance provided by individual underwriters, not insurance companies
Residual Market
insurance from the state or federal government
Domestic insurer
Foreign insurer
Alien insurer
Domestic - the state in which the insurer was formed and is headquartered
Foreign - insurer that writes business in states other than where it is domiciled
Alien - an insurer formed under the laws of any country other than the US and its territories
Certificate of Authority
license to operate business in a state. When a company is licensed it is called admitted or authorized
Surplus lines
sometimes an individual or a business will have an exceptionally large or specialized risk that no authorized insurer can or will cover. In such cases, insurance may be obtained from an unauthorized / non-admitted insurer on a surplus lines basis.
Gaming, casinos and entertainment, mining and skyscrapers are all examples of exposures that might require surplus lines insurance
- insurance sold by unauthorized / non-admitted insurers - if on the states approved list of surplus insurers
- can only be sold to certain high risk insureds
- cant be sold just for a cheaper rate than licensed/admitted insurers
Rate Unsurers
AM Best S&P Moody Duff & Phelps Weiss
Four types of agents: Independent insurance agents exclusive or captive agents general agents or managing partner agents direct-writing companies
Independent insurance agents - sell the insurance products of several companies and work for themselves or other agents
Exclusive or captive agents - represent only one company. these captive or career agents are compensated by commissions
General agents - hire, train and supervise other agents within a specific geographical area
Direct- writing companies - usually pay salaries to employees whose job function is to sell the company’s insurance products from a company office
Agency
insurance agent acts on behalf of the principal (insurance company)
is a relationship in which one person is authorized to represent and act for another person of for a corporation
Agent
the person authorized to act on behalf of the other is called an agent
Principal
the person on whose behalf the agent acts is called the principal
Agent Authority:
Express
Implied
Apparent
express - what the agents written contract with the company states
implied - not written buy are the actions agents normally do to sell insurance
apparent - actions the agent does that a reasonable person would assume as authority, based on the agents actions and statements
Fiduciary
- promptly send premiums to insurer
- knowledge of products
- comply with laws and regulations
- no commingling
To form a valid contract, what four elements must be present
CLOAC
Consideration - giving something of value
Legal purpose - risk transfer doesn’t violate the law
Offer - made by insured
Acceptance - insurer accepts risk as presented
Competent Parties - insured age 18 and sane
Adhesion
policy written by the insurance company
if ambiguous - court will take the side of the insured
Aleatory
value received from the contract by each party may be unequal - small premium for a large amount of coverage
Unilateral
only ONE promise made
- insurance promises to pay for a covered loss
- insured does not promise to pay the premium
Personal Contracts
Cant not be assigned to someone else
Auto and homeowners insurance policies are personal contracts. However assignment can take place with life insurance policies pledged as a security for a bank loan.
Indemnity
restore to the insured original pre-loss condition, no better, no worse
Mis-representation vs. material mis-representation
misrepresentation - information given that is not true - however the correct information would not affect the insurance companies decision- bad address
Material mis-representation - information given not true does affect the insurers decision - DUI
Warranty
If a warranty is not kept it voids the contract - hiring a security guard
- always made by the insurance company - if promise to pay is broken - company could be sued by the insured
- may be made by the insured - if promise is broken - insured may have no coverage
- guaranteed to be true
Fraud and False Statements
fine and or imprisonment (10-15 years)
embezzlement included
